About Clusters

Overview of Clusters

Michael Porter, pictured left, an American researcher in economics, defines business clusters as "geographic concentrations of interconnected companies, specialised suppliers, service providers, firms in related industries and associated institutions (for example universities, standards agencies, and trade associations) in particular fields that compete but also co-operate" (Porter, 1998).

This is similar to the definition used by BERR - "Clusters are groups of inter-related industries. They have two key elements. Firstly, firms in the cluster must be linked. Secondly, groups of inter-linked companies locate in close proximity to one other" (DTI, A Practical Guide to Cluster Development, 2004).

The benefits of business clusters are:

• Increased expertise;
• Drawing together of complementary skills;
• Potential for economies of scale (e.g. joint purchasing, bulk discounts);
• Strengthened social links, ideas generation;
• Improved information flows;
• Development of professional, legal, financial and other specialist services; and
• Inward investment.

Three ‘critical success factors' for business clustering are:

• The presence of functioning networks and partnerships;
• A strong innovation base, with supporting R&D activities where appropriate; and
• The existence of a strong skills base.

However, other factors which are seen to contribute to successful cluster development include:

• An adequate physical infrastructure;
• The presence of large firms;
• A strong entrepreneurial culture; and
• Access to sources of finance.

The key players in a successful business cluster are:

• Public and private sector companies and organisations involved and business leaders;
• Educational institutions;
• Financial intermediaries (e.g. venture capital firms); and
• Regional Development Agencies / Local Authorities.
  

Links between organisations in a cluster can be vertical (e.g. supply chains), or horizontal (e.g. complementary products and services).

To read more about business clusters, please view BERR's guide to cluster development.