Synthesis Documents

The Cluster Approach to Economic Development: USAID Technical Brief no. 7, 2008

    Authored by: Amy Cogan Wares with contributions by Stephen J. Hadley

    The increase in the number and variety of 'cluster' and 'competitiveness' projects in USAID programs since the late 1990s has been accompanied by considerable confusion about concepts and terms. This paper attempts to clarify cluster theory and summarize research on USAID-supported cluster activities. It explains the different uses of the term competitiveness and distinguishes between cluster initiatives and broader efforts to increase the competitiveness of firms, industries and countries. It suggests some guidelines for cluster development in order to help assure the most appropriate use of cluster development approaches in USAID programs.

    Clusters are geographic concentrations of interconnected companies, with linkages to related organizations such as trade associations, government agencies, and research and educational institutions. Related economic activity tends to agglomerate naturally for a variety of reasons, such as the presence of unique natural resources, proximity to markets and reduced transaction costs. Entertainment in Hollywood and fashion in Milan are common examples of clusters. An example of a world-class cluster in a developing country is information technology in Bangalore, India.

    Clustering of economic activity has been observed for over a century. In his 1890 book Principles of Economics, economist Alfred Marshall noted the positive spillover effects that occur when related economic activity co-locates. "Agglomeration" economies have been recognized by economists since at least that time. For the hundred years after Marshall‟s book, research on clusters was dominated by economic geographers studying the formation and growth of cities. In 1990, Harvard Professor Michael Porter brought the cluster concept into mainstream discussions of business strategy and economic development with his extensive study of clusters, The Competitive Advantage of Nations.

    The existence of clusters is well accepted, but the ability to influence their formation and growth through purposeful action remains controversial. There are indications that cluster development efforts may have positive economic impacts in places like Scandinavia and the United States, but there has not been sufficient research conducted to make this determination in developing countries, where clusters are at a weaker starting point. Anecdotal evidence indicates that it is possible to facilitate successful clusters in the developing world, but questions remain about whether these cases are models that can be followed or if they are simply the result of a coincidence of fortunate conditions. As there has been no conclusive evidence yet that cluster approaches do or do not work, cluster development remains an option (albeit still experimental) for stimulating economic growth in developing countries. Whether it is the best approach in any particular circumstance requires full consideration of alternatives such as macroeconomic reforms, business climate improvements, and financial sector development, among others.

    Whether or not cluster development is the best choice for an economic development program, it is important to understand cluster dynamics for the insight they provide into how industries develop and economies grow. Assessing and analyzing clusters is valuable for identifying constraints, relative strengths, and potential for future growth of an economy.

    Associated Activities and Documents
    »The effective use of volunteers in USAID Economic Growth Programs, 2009
    Synthesis Documents
    »Shareholder loan funds for SMEs in developing markets: USAID Technical Brief no. 8, 2009
    »Supporting buyer-supplier relationships: USAID Technical Brief no. 1, 2007
    »When Should the ICT Sector be a Target for Private Sector Competitiveness Work? USAID Technical Brief no. 3, 2007
    »Business Environment and SME Exports: The case of Chile. USAID Technical Brief no. 2, 2007
    »Case studies in enterprise development in post-conflict situations: USAID Technical Brief no. 4, 2008