Concepts and data sources explained

 Concepts and data sources explained

What are clusters?

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Clusters are regional concentrations of activities in groups of related industries. Clusters emerge natu- rally in market processes, because local spill-overs among such activities enhance performance at the firm and regional level. Examples of such positive effects – that usually grow with the critical mass in a given location – are a labour market with specialised skills, local supplier networks with specialised capabilities, and a local knowledge pool driven by the research and innovation activities of local firms and knowledge institutions.

The evolution of clusters is driven by the benefits of agglomeration. Some of these are the automatic result of market forces, such as firms growing faster or choosing to locate in clusters, while others de- pend on purposeful action, e.g. collaboration among firms that enhances spill-overs or government ac- tion that improves the cluster-specific business environment. But the evolution of clusters is also affected by economic forces encouraging dispersion: as clusters become larger, there are increasing ‘congestion costs’ that emerge as disadvantages of the agglomeration effect. For instance, firms bidding up prices for scarce inputs in clusters, such as wages for specialised workers. There is also the potential risk of a ‘lock-in’ effect in the face of technological change, i.e. all firms in a cluster opting for one technology that might get disrupted by innovation in other locations. The interplay between these forces of agglomera- tion and dispersion shapes the evolution of clusters over time,

Clusters differ from cluster organisations, which are the organisations that manage the networks of firms and other entities within a given cluster. Cluster organisations can help firms to better engage with other local actors within their cluster and to organise collective action to strengthen the local context. And they can reduce the transaction costs for firms, especially SMEs, in building linkages to firms and collabora- tion partners in other locations. The stronger the local cluster, the higher the potential for building suc- cessful international linkages.

Clusters are also different from both narrow specialisation in individual industries and broad agglomer- ation of economic activity in cities: clusters reflect the positive spill-overs among a set of related indus- tries, neither driven only by economies of scale in one industry nor by the economy-wide benefits of economic density across all industries.

Clusters have a distinct geographic dimension, reflecting the dynamics of local spill-overs. They are also deeply embedded in a broader geographic context: they serve markets elsewhere and are connected to other clusters with complementary strengths in regional, interregional or global value chains. This mirrors the role of location for firms: while local conditions provide the unique context for building distinct capabilities and strategic positions, national and international linkages are critical to access other mar- kets, suppliers, and collaboration partner.

More explanations can be found in the Smart Guide to Cluster Policy3 that was published in June 2016 to give guidance on how to make better use of clusters for promoting regional industrial modernisation, supporting the growth of SMEs and encouraging smart specialisation.




3 The Smart Guide explains what cluster and cluster policies are and what not, what makes them successful and why they matter. It presents eight Do’s and Don’ts and many cluster programme examples and practical instru- ments. See



European Cluster Panorama 2016



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