Clusters

Every area of the country wishes to decrease the unemployment rate and increase wages.  Companies are always looking to cut costs and do this partially through tax incentives from governmental agencies.  However, as often happens when cities and states compete with each other is a race to the bottom in order to attract these new jobs.  If communities would work in conjunction rather than competing with each other, all areas would be better off (in a sort of prisoner’s dilemma).  Perhaps the best way to attract jobs to an area is to make them want to come to the area without tax incentives; this would be by creating a cluster industry.

Industry clusters are derived from David Ricardo’s theory of comparative advantage in 1817, and developed formally into business clusters by Michael Porter in 1990.  The basis of these theories is that specialization in a narrower aspect of the economy leads to economies of scale and higher levels of efficiency.  Silicon Valley, Wall Street, and Detroit were symbols of efficiency in their respective fields and were able to develop their products at more efficiency than other areas that did not have the geographic relationships.  However, as is the case with Detroit, stagnation and lack of innovation can reduce the efficiencies gained by the cluster and send portions to other areas.

Clusters can be based around many different aspects by attracting a workforce to the area to engage in the type of production, research, or supplier.  The separation and specialization of the area further attracts more firms to the area and raises the chicken or egg question in regards to Silicon Valley – did the technology boom occur there because the people were there or the firms were there?  The likely answer is that there were feedback effects that brought more workers to the area which brought more firms, which brought more workers, etc.  Technology firms did not need tax incentives to locate to Silicon Valley, but rather were pulled by the amenities (workers, infrastructure, etc.) available. 

A wise strategy for a community looking to increase the number of jobs would be to determine which industries or activities have the greatest competitive advantage and leverage them.  In the early stages, there may be a necessity for tax incentives, but if properly implemented, the cluster should provide more jobs and higher wages for every community.