The term “economic cluster” at its most basic level refers to a group of firms that profit from their association with one another. These firms share certain types of inputs or outputs (e.g., raw materials, labor force, or customers), and within a cluster some firms will typically have close purchasing and sales links while others may be direct competitors.

The advantages offered by a cluster vary, but are usually linked to what are known as economies of agglomeration in inputs, outputs, and labor markets. Put more simply, if there are lots of firms in a region making, for example, computer processors, then firms selling raw materials to them can take advantage of a big market for their goods, and the processor manufacturers will likely have choices among raw materials suppliers giving them more power to keep prices down. In labor markets, having lots of companies depending on a similar skill set means that a regional labor pool develops with that skill set and workers can move more easily between firms. Less directly, clusters are understood to offer benefits from “knowledge spillovers” and dense networks of relationships that increase the transfer of best practices among firms. The shared labor pool and the inevitable shared social networks that result mean that companies can learn from one another more quickly than they would in isolation.

The geographic scope of economic clusters is a matter of considerable debate. While some definitions focus on geographic proximity as a defining element of cluster functions, other applications of the term see cluster benefits in attenuated value chains with global extents. In practice the geographic extent of clusters is typically defined by the region of interest of a local economic development agency, by expert opinion, by the limitations of data on industry linkages which are rarely collected at scales finer than county-level, or some combination of the above.

Economic clusters have risen to prominence as a focus of economic development efforts because of the perception that they can produce greater returns on investment in terms of jobs created and economic growth than less targeted efforts. Unfortunately, the difficulties in quantifying the relationships that define a cluster have made it difficult to pinpoint their existence, let alone assess their benefits. While there is significant anecdotal support for the efficacy of clusters as economic development engines, their generalized benefits are still hotly contested.

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