Cluster Theory

Theory of economic and industry development most notably described by Professor Michael Porter in his book The Competitive Advantage of Nations. Clusters are geographic concentrations of interconnected companies in a country or region including competitors, suppliers, service vendors, university departments or research groups, and other institutions in a specialized business or technology space.

Clusters develop because of the advantages in terms of recruitment, financing from knowledgeable investors, equipment, services, etc. in the region, which increase the ability of all companies in the sector to operate effectively, but also because companies tend to compete more rigorously with local rivals, improving each other’s effectiveness. The advantages of a cluster often can substantially outweigh cost savings derived from locating elsewhere.

The best-known modern cluster is Silicon Valley. Clusters also exist in many other fields, e.g., printing presses (Germany and Switzerland), banking and finance (New York and London), consumer electronics (Japan’s Kanto-plain), pharmaceuticals (France and Francophone Switzerland), contract software development (Bangalore), aircraft leasing (Ireland), software for mobile devices (southeast England), eyeglass-frames (Belluno Italy, Sabae-City Japan), etc. Building clusters is a major objective of industrial development agencies.

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