CLUSTER AND LOCAL DEVELOPMENT

DEFINITION OF CLUSTER (PORTER) A geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities. Clusters encompass an array of linked industries and other entities important to competition. They include: - suppliers of specialized inputs - customers - manufacturers of complementary products or companies related by skills, technology, or common inputs - governmental and other institutions (universities, think tanks, vocational training providers, standard-setting agencies, trade associations)

The economic rationale of clusters and cluster policies  Clusters in the policy literature: what is the rationale?  Bottom line of Porter’s framework: Clusters generate “competitiveness” This requires a complex policy mix that is specific to each cluster

 From an economic policy perspective, there are three problems with Porter's framework 1.It is unnecessarily complicated. All the elements of the model are positively feeding into each other There is no suggestion of a negative feedback somewhere 2.Porter’s model is not fully specified. For example, nothing is said about the mobility of labour: In absence of assumptions about labour supply, how do we know that it makes sense to attract firms form outside the cluster? There is no explicit land market in the framework: What is the role of landowners? 3. There is no clear case made of inefficiency that the policy counter

Modelling clusters We will follow Combes et al. (2005) Three elements: 1. Spatial structure: land, housing, infrastructure, and internal transport 2. Production structure: agglomeration mechanisms (sharing, matching, learning) 3. Mobility of goods and factors: Assume inmobile intermediate goods and services perfectly mobile final goods inmobile land perfectly mobile capital labour may change

Diagrammatically: Productivity curve (instead of a wage curve) Cost curve Net returns curve Supply curve

What should cluster policies do? Two major inefficiencies: 1. Uncompensated externalities E.g.: Sharing implies indivisibilities → only a limited number of players will enter → imperfect competition and market power If these inefficiencies were suppressed, productivity would increase in the cluster at any level of employment Main difficulty is the precise identification of the inefficiencies in production so that the potential productivity curve is reached Resolution → point V

2. Cluster coordination failure Equilibrium V is still inefficient. Too large with respect to optimum N X When labour is rather mobile, existing clusters are too large (low labour mobility implies clusters too small) In that case, employment in any activity concentrates into too few clusters Problem of coordination failure due to indivisibilities It is needed a large enough group of workers and firms to coordinate a move and create a new cluster In absence of policy there is nothing to coordinate this movement Policy conclusion: Existing clusters should restrict their size while empty places should develop new clusters (not always bigger clusters are better) Problem → locate point X (depends on an unknown curve (potential productivity) and a difficult curve to estimate (cost curve))

Low labour mobility New equilibrium at point Z (smaller than Y) Mobility costly → Increase cluster size costly Subsidy to reach point X might be to costly Cluster growth policies not desirable when labour mobility low

More realistic world Congestion and other frictions Let’s look at the cost curve Land markets are subject to significant frictions and are strongly regulated through planning Congestion is pervasive in growing clusters Policies to fix cost curve distortions: Congestion tax → Shift upwards cost curve → Increase of net returns Cluster policies may conflict with other local public policies Scraping local zoning and planning regulations may be harmful → Negative effects on quality of life

Dynamic aspects Can cluster be created from scratch? “There should be some seeds of a cluster that have passed the market test before cluster developments efforts are justified” (Porter) Porter caution warranted Difficulty of replicating clusters can be explained → Cutting-edge knowledge at the technological frontier in most activities is mainly tacit (low mobility)

What should a cluster policy be like if clusters may come and go? New generation of cutting-edge knowledge may happen elsewhere Great cities are great not because they have managed to keep their leadership in one activity since the dawn of time but because the y have managed to periodically reinvent themselves after loosing an important part of their economic fabric Uncertainties about how long an activity can stay in a given cluster Low labour mobility makes the problem worse (risk of specialization) Need to increase labour mobility inside countries

Elements of local economic development policy 1. Pay more attention to the cost curve than the productivity curve Exclusive focus on productivity curve is misplaced: - Policies too hard to design and implement while possible gains elusive - Larger gains can be achieved by improving the policies associated with the cost curve, such as land-use planning (not easy) or transport congestion

2. Growth policy In a world of upward-sloping supply (Europe), most places may be too small Does Make sense “go for growth”? How it should be done? Urbanisation economies (about as large as localization economies) Contribution of size to local productivity and wages larger than that of specialization Much easier to “go for growth” (irrespective of sector) Less risky than increased cluster specialization But trade-off between growth and local amenities Amenities can be improved by local policies

Territorial competition Case against territorial competition: 1. It is at best a zero-sum game if the establishment needs to locate somewhere But also expect large new plants to generate positive local effects With territorial competition, the places for which the external effects are the strongest are expected to bid the most Hence, territorial competition can improve the spatial allocation of plants 2. Places pay “too much” for the plants (redistribution from places to plants) Greenstone & Moretti compare “winner” counties with “runner-ups”. They are very similar ex-ante. Ex-post differences are very likely to be mostly due to winning or losing such contest Comparison of winners and runner-ups, before and after, is suggestive of sizeable local gains associated with the successful attraction of new plants