Economics

for Planners

Session xx
Cluster analysis

Department of Physical Planning

School of Planning and Architecture, Delhi

Instructor: Dr. Chandrima Mukhopadhyay
Visi@ng Faculty
 Outline

•  What is Schumepeter’s theory ?

•  What is Sectoral approach?

•  What is cluster? How is it different from agglomera@on?

•  Cluster-based city economic development

 Schumpeter’s theory of economic development

•  Paramount role to the entrepreneur and innova@ons introduced by him in the process
of economic development.
•  The process of produc@on is marked by a combina@on of material (land and labour)
and immaterial produc@ve forces (technical facts and facts of social organisa@on).

Q (Output) = ƒ [k (Schumpeterian concept of “produced means of produc@on”), r

(natural resources), I (employed labour force), u (society’s fund for technical
knowledge), ν(facts of social organisa@on)) …(1)

•  Two components:
•  The growth component: Brings about gradual, con@nuous and slow evolu@on due to
the changes in the factor availability. (Altera@on I supply of produc@on factors).

•  The development component: Brings about spontaneous and discon@nuous change
in the channels of output flow due to changes in the technical and social
environments. (Impact of technological and social change).

•  The growth of output is geared to rate of innova@on.

 What is Sectoral approach?
(used in Economic Development, Climate change miDgaDon etc.)
 DefiniDon of Cluster

“Geographic concentraDons of interconnected companies and ins@tu@ons in a

par@cular field, linked by commonali@es and complementari@es”
(Porter, 1998, p. 78)

Regional clusters expansively to consist of firms in a region producing similar or

related products, using similar processes, or engaging in similar funcDons
(headquarters; research and development). These clusters also include
related actors and enDDes, such as the regional suppliers and customers of these
firms, pools of specialized labor (occupa@ons) in the region employed by these
firms, public, and public–private programs that provide services to cluster
members (e.g., customized training by community colleges) and ins@tu@ons (e.g.,
universi@es, community colleges, industry and trade associa@ons, public and
private sector organiza@ons). The presence of these clusters is posited to produce
cost-savings to firms or knowledge spillovers, or both, that generate product or
process innovaDons. (Wolman and Hincapie, 2015).

“What is the added value of the cluster approach to exis@ng theories of

agglomera@on?” MacKinnon (2004, p. 960)
 How is cluster different from agglomeraDon?

•  First, based on pure economies of agglomera@on. Agglomera@on economies neither

presume nor require any coopera@on among actors.

•  Second, “Social Network Model” of clustering. Similar to Knowledge spillover.

Network of individuals across firms result in transmission of tacit knowledge. Based
on interpersonal rela@onship and trust. Nothing inherently spa@al about social
network model, however, has explicit spa@al implica@on.
 How does clustering foster economic growth?

•  Labour market pooling

•  Input sharing/ Supplier specialisa@on

•  Market aggrega@on

•  Knowledge spillover
Effect of cluster on Economic policy: Empirical evidence
What Are the ImplicaDons of Cluster Theory and Research for Regional Economic
Development PracDce?

•  A conceptual framework through which a regional economy can be analyzed and

understood.

•  A cluster framework thus suggests that economic development policy makers

and prac@@oners should focus not solely on individual export sectors but on the
wider set of firms, actors, and ins@tu@ons that form a cluster and help
determine the cluster’s compe@@veness, including export industry supply
chains.

•  Regional economic development prac@@oners should work with groups of

firms rather than with individual firms. He also argues that use of a cluster
framework “will shih analysis from firm-level rent-seeking (subsidies, tax
breaks) to more widely shared compe@@ve problems”.
•  Focus on clusters for which the region has exis@ng assets, as evidenced by some
exis@ng concentra@on.

•  Focus on clusters for which the region has a compe@@ve advantage rela@ve to
other regions. Focus on clusters that are growing na@onally.

•  Focus on clusters for which an interven@on strategy is possible and for which
interven@on will make a difference in terms of affec@ng economic development
objec@ves.

•  Focus on clusters whose impacts or externali@es par@cularly serve public
purposes (e.g., employ more entry-level labor or promote energy).
 OECD definiDon of Cluster

•  Networks of produc@on of strongly interdependent firms (including specialized

suppliers) linked to each other in a value adding produc@on chain.

•  Cluster may have strategic alliances with universi@es, research ins@tutes, knowledge
intensive business services, bridging ins@tu@ons and customers. Dynamic of
knowledge-based economy and learning economy.

•  Advantage over tradi@onal sectoral approach in analyzing innova@on and innova@on

network.

•  InnovaDon: Interac@on between different agents involved in innova@on is important

for successful innova@on. Firms almost never innovate in isola@on. Networks of
innova@on are rule rather than excep@on. Most innova@ve ac@vity involves mul@ple
actors. Innova@on is not an ac@vity of a single company (Not a Schumpeterian
entrepreneur). (Rate of specializa@on is rising.)

•  The concept of “capital alliance” indicates shih by firms towards value chain. Co-
existence of compe@@on, influenced by globalisa@on and liberalisa@on, with an
increasing number of network rela@ons, and strategic alliances. Interna@onal
Strategic alliances and Knowledge sharing alliances.
 OECD definiDon of Cluster

•  Networks of produc@on of strongly interdependent firms (including specialized

suppliers) linked to each other in a value adding produc@on chain.

•  Focuses on linkages and interdependencies amongst actors in the value chain in

producing product, services and innova@ng.

•  Cluster is different from other forms of coopera@on, in the sense that it involves
actors in a value chain.

•  Clusters go beyond horizontal network of firms opera@ng in the same industry,

cooperate on aspects as R&D. Clusters ohen involves cross-sectoral network, made up
of dissimilar and complementary firms, specializing around a specific link.
Sectoral approach Cluster approach

Groups with similar network posi@on Strategic group with mostly complementary and
dissimilar network posi@on
Focus on end product industries Include customers, suppliers, service provider and
specialised ins@tu@on

Focus on direct and indirect compe@tors Incorporate the array of interrelated industries

Hesitancy to cooperate with rivals Most par@cipants are not direct compe@tors

Dialogue with government is mostly on subsidies, More construc@ve forum and efficient business-
protec@on, and limi@ng rivalry government dialogue

Search for diversity in exis@ng trajectories Search for synergy and new combina@on.


Level of analysis Cluster concept Focus of analysis

Na@onal level Industry group linkage in the -Specialisa@on palern of a
economy as a whole regional economy
-Need for innova@on and
upgrading products and
processes

Industry level Inter and Intra-industry linkage SWOT and benchmark analysis
in the different stage of
produc@on chain

Firm level Specialised suppliers around one -Strategic business development
or more core enterprises -Chain analysis and chain
management

 Cluster methodologies

•  Input-output analysis (interdependency of trade)

•  Graph analysis

•  Correspondence analysis (Factor analysis, Principal Component Analysis etc.)