Cluster Development as an Economic Driver for Inner Cities

Earlier today, our friends at UC Berkley’s Network on Building Resilient Regions posted a blog entry on their website that looks at how cluster-based economic development can be used to drive inner city growth. The entry draws on a recent presentation by Harvard Business School professor, and ICIC founder, Dr. Michael Porter, at ICIC’s Inner City Economic Forum earlier this month. Here is an excerpt from the blog: 

“Latch on to any cluster you have and upgrade it. There is no bad cluster.” 

                             —Michael Porter, professor, Harvard Business School, [founder] ICIC

When casting about for ways to spark innovation and economic growth, many metro areas opt to poach from neighboring states or court a certain industry with tax breaks and other incentives. Rather than looking at one’s neighbors as competitors, metros should look across state or local lines to their region’s strengths, legacy industries, and population, and band together instead.

At a recent conference of the Initiative for a Competitive Inner City, founder and chairman of  Michael Porter, spoke of such cooperation in the form of clusters and their power to spark development. Clusters are a critical mass of firms in a given location in a given field. A food cluster, for example, would include wholesale providers, inspection firms, distribution firms, machinery, and so forth. As a critical mass, clusters promote efficiencies that individual businesses or industries cannot. They take advantage of pools of employees or suppliers or other economies of scale.

“You don’t do skills training for just one firm, for example,” Porter said. “You can do it for a cluster.” The same is true for export promotion or attracting business. In other words, working collaboratively with neighboring regions is beneficial to all. “If there’s a similar cluster in a neighboring region, both clusters do better,” Porter finds.

Clusters come in three forms: local, business, and traded clusters.

• Local clusters exclusively serve local markets (e.g., retail). There is very little trade across regions or across clusters in these forms.
   
• Traded clusters, in contrast, trade across regions and countries. They might be biotech clusters or auto clusters, for example. Traded clusters often offer much higher average wages, innovation is greater, and there is much higher trade.
   
• Business-to-business clusters are like local clusters but serve businesses. They include local commercial services, real estate, utilities, and the like. If an area is weak in these b-to-b clusters, the environment is eroded for traded clusters.

Clusters can also benefit inner cities—with some tailoring. (ICIC defines inner cities as continuous census tracts that are continually distressed based on higher poverty and unemployment rates relative to the metropolitan statistical area and lower median household income).

Inner cities have a different rhythm and different drivers from other areas in the metro region, Porter says. Often, in fact, growth in the regional economy does not signal growth in the inner city. ICIC has found a weak correlation—only 20%—between regional growth and inner-city growth.

“In this tremendous movement to think regionally, we can’t lose sight of this weak correlation,” Porter says. “Inner cities need their own distinctive strategy to complement the regional strategy.”

To read the entire blog entry, click here.

BY Steven Pedigo on October 25th, 2011

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