Clustering is an idea that has been transferred from economics to man-agement and business. It is the phenomenon (and the explanation for it) whereby firms from the same industry gather together in close proximity. Clustering is particularly evident in industries like banking. Banking centres in cities such as London and New York have thrived for centuries. Some hundreds of banks have clustered there, close together and within easy walking distance of each other. This makes it easier for customers to choose between them, and might be thought to act against the banks’ best interests.
Economists explain clustering as a means for small companies to enjoy some of the economies of scale usually reserved for big companies. By sticking together they are able to benefit from such things as the neighbourhood’s pool of expertise and skilled workers; its easy access to component suppliers; and its information channels (both formal ones like trade magazines and informal ones like everyday gossip in the neighbourhood bars).
Modern high-tech clusters often gather around prestigious universities on whose research they can piggyback. Silicon Valley is near Stanford University, and there are similar high-tech clusters around MIT near Boston in the United States and around Cambridge University in the UK.
An isolated greenfield site in a depressed region where government grants are plentiful may bring a young company immediate benefits. But in the longer term, strange though it may sound, the young company may be better off squeezing itself on to an expensive piece of urban real estate in close proximity to a significant number of its competitors.
One of the most famous clusters of all is that of the film industry in Hollywood. When the big studio system broke up in the 1930s it fractured into a large number of what were essentially small specialist firms and freelances. The Hollywood cluster allows each of these small units to benefit as if it had the scale of an old movie studio, but without the rigidities of the studios’ wage hierarchy and unionised labour.
In some cases, the ancillary services that grew up to service industrial clusters have remained in position and developed into vibrant new industries long after their original client industry has faded. Near Birm-ingham, in the UK, for instance, the cluster of car-industry service firms that grew up when that city was a force in the car industry has become an important element in the development of Formula One and other specialist vehicle businesses.
Evidence that clustering is not a phenomenon whose time has passed is provided by California’s Silicon Valley. New it and Internet firms continue to gather there in spite of the high prices of local property and the dangers of earthquakes. Ironically, they find that much of the most valuable information they obtain comes not electronically but from face-to-face meetings.
Michael Porter, a professor at Harvard Business School whose insights into the nature of competition between firms were highly influential in the 1980s and 1990s, has turned his attention to this seemingly paradoxical revival of industrial clusters. In theory, he says, location should no longer be a source of competitive advantage in an era of global competition, rapid transport and high-speed communications. The world’s increasingly global businesses should by now be above and beyond geography. Yet there are as many instances of a critical mass of firms with a common thread clustering together as there ever were.

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