Paper to be presented at the DRUID - DIME Academy Winter 2007 PhD Conference on

“Geography, Innovation and Industrial Dynamics”

in Skoerping (Denmark), January 25 – 27, 2007

Cluster Life Cycles -

Dimensions and Rationales of Cluster
Development

Max-Peter Menzel* and Dirk Fornahl**

January 4, 2007

* Universität Bern, Institute of Geography, Economic Geography and Regional Studies,

Hallerstr. 12, CH-3012 Berne, Switzerland, Phone: +41-31-6318877, Fax: +41-31-6318511,
email: menzel@giub.unibe.ch
** Universität Karlsruhe, Institute for Economic Policy Research (IWW), Waldhornstr. 27, D-
76128 Karlsruhe, Germany, Phone: +49-721-6086042, Fax +49-721-6088429, email:
fornahl@iww.uni-karlsruhe.de
1. Introduction

In recent years, regional clusters have attracted the attention of politicians and researchers.
Increasingly, the existence of one or several regional clusters is regarded as a prerequisite of
regional prosperity (Porter 2003, Bathelt 2001). While many case studies intend to analyse
functioning and growing clusters, there also exist clusters that do not grow, but even decline
or are still at their infancy. Grabher's (1993) story on the coal and steel district in the Ruhr
gives an example of a declining cluster that negatively affects the whole regional economy.
But even the now declining cluster in the Ruhr area was at one time a dynamic, innovative
and growing cluster that fostered firm formations, employment and regional economic
development. Another often neglected type of cluster is the emerging one. Few studies exist
on the emergence of a cluster, mainly because an emerging cluster is hard to detect and can
sometimes only be described ex-post, like in Bresnahan et al. (2001). The few extant insights
on cluster emergence led to the assumption that the processes responsible for the functioning
of a cluster do not explain its emergence (Orsenigo 2001, Bresnahan et al. 2001).

From the existing case studies it can be derived that clusters follow a kind of life cycle with
different phases or stages of emergence, growth and decline that differ in their characteristics.
On the first glance, it seems obvious that the life cycle of clusters follow the life cycle of the
respective industry. But empirical evidence indicates that firms in different clusters develop
differently despite belonging to the same industry life cycle (Saxenian 1994). Additionally,
contributions that compare clustered with non-clustered firms over the industry life cycle
point out that clustered firms outperform non-clustered firms at the beginning of the life cycle
and perform worse at its end (Audretsch and Feldman 1996, Pouder and St. John 1996).

Different research already exists which elaborates on the evolution of clusters and which aims
at explaining their distinct development (Pouder and St. John 1996, Tichy 2001, Audretsch
and Feldman 1996). Feldman et al. (2005) as well as Maskell (2001) give explanation for the
emergence and growth of the cluster, yet leaving unexplored the possible decline of clusters.
In contrast, Pouder and St. John (1996) have developed a model that explains the move of the
cluster through the whole life cycle. However, their model contains a deterministic element as
the movement of a cluster through its whole life cycle inescapable results in its decline,
thereby neglecting a potential new growth phase (see Martin and Sunley 2003). Currently, an
approach is missing that explains the emergence, growth, decline and renewal of clusters and
why the life cycle of clusters differ from that of industries. We intend to fill this gap and
1
present a knowledge-based approach for the life cycle of clusters that can give answers to
these questions. The rationale of cluster evolution in our model is based upon three key
factors. The first is derived from the literature on patterns of industry development (Dosi
1982, Abernathy and Utterback 1978). It states that not the quantitative development
constitutes the stage of the cluster, but the heterogeneity of knowledge and competencies
present in the cluster. Thus, the cluster is not seen as a homogeneous unity, but rather is
described by the technological heterogeneity of its protagonists. The second factor is derived
from the literature on localised learning. Malmberg and Maskell (2006) argue that firms in
the same location learn differently than distant firms, because they are able to exploit a larger
variety of knowledge. This insight is also transferable to the regional cluster. Firms that are in
the same cluster have a larger relative absorptive capacity (Cohen and Levinthal 1990, Lane
and Lubatkin 1998, Maskell 2001) and therefore can bridge larger technological distances
than non-clustered firms or firms in other clusters. The third factor connects the larger
absorptive capacity of the firms in a cluster with approaches from cognitive science (Denzau
and North 1994, Nooteboom 1999) and capability learning (Winter 2003, Teece et al. 1997).
It states that due to the larger absorptive capacity of firms within the same cluster and the
more intense learning effects, firms steadily move their knowledge base towards other firms
of the cluster. This movement of the clustered firms towards each other results in the move
through the cluster life cycle.

The article proceeds as follows. In Section 2 we start with an examination of the different
elements of a cluster. Section 3 analyses the insights of research on industry life cycles and
applies the characteristics identified to the cluster life cycle. Section 4 elaborates the
interconnection between the different elements of the cluster. Section 5 deals with processes
that are particular for the development of a local cluster and which result in a deviation of the
cluster development from the industry development in general. After this synthesis, the
different stages of the cluster are examined and the particular characteristics of the stages are
discussed. Section 7 concludes and gives some suggestions for future research.

2. Elements of Clusters

We start with the question, what regional clusters actually are (Martin and Sunley 2003).
Porter (1998: 78) defines a cluster as follows: “Clusters are geographic concentrations of
interconnected companies and institutions in a particular field”. Although this definition is
very general, it contains the essential elements of a local cluster. First, the cluster consists not
2
only of firms, but also of a specific institutional environment. This institutional environment
comprises beneficial institutions like cluster organizations, but also research and educational
institutions that are the basis for innovation networks and human capital.1 The firms of a
cluster and their institutional environment cannot be seen as separated from each other, since
their respective development is closely connected (Kenney and von Burg 1999, Maskell
2001). Institutions and firms are therefore the basic units of a cluster.

Second, the cluster concept implies that only certain firms and institutions belong to the
cluster. Therefore, clusters have an outer boundary. The first delimitation refers to the fact
that only firms and institutions “in a particular field” are relevant. A certain technological
proximity or common “theme”, which represents the basis for various exchange processes and
synergies, exists within a cluster. Firms and institutions that deal with other themes are
outside this “particular field”. Therefore, the cluster only forms a part of the regional
production system. But there is also the possibility that several clusters located in one region
show varying developmental logics. Bathelt's (2001) description of the milieu within the
emerging biotechnology industry in Boston for example strongly differs from Saxenian'
(1994) picture of the minicomputer industry in the same region.

Moreover, the firms and their institutional environment are geographically concentrated and
besides the technological boundary of the cluster there is also a spatial one. The spatial
boundary delimits the firms of the cluster from firms that are located elsewhere. Maskell
(2001) points to the different cognitive distances between firms within and between clusters.
He argues that the low cognitive distance inside local clusters enables the firms to cope with
large knowledge asymmetries. At the same time, this low cognitive distance within the cluster
is accompanied by a larger cognitive distance between firms of different clusters. This larger
cognitive distance exists even within the same industry. The cognitive distance between firms
of the same field yet located in different locations points to the fact that there are regional
specificities of the economic sectors. Therefore, the developments of the relevant industries
have an influence on the development of the cluster without determining it because of specific
regional dynamics. While the cluster is detached by its thematic focus from other parts of the
production and innovation system within its spatial range, the spatial boundary delimits the
cluster from its industrial environment.

1
Since the article builds on the cluster definition of Porter (1998), we apply the notion of the institution in
Porter's sense. Social institutions like rules and conventions therefore are not part of the notion “institution” that
is applied in this article.
3
The third and last aspect of Porter's (1998) definition refers to the fact that the firms and
institutions are “interconnected”. These connections refer to the market exchange of goods
and services, to imitation of behaviour as well as to face-to-face interaction and cooperation,
which require a high level of mutual trust, technological proximity as well as horizontal and
vertical complementarities of technologically activities. These connections define the
economic sectors of which the cluster consists and the geographic extension it has (Porter
2003). But the relations and exchange processes are not distributed evenly inside a cluster. A
density of interconnections around specific topics forms focal points of activity (Menzel
2005). Depending on the level of abstraction a cluster can itself be a focal point or consist of
several of these focal points, which in turn may form single clusters in themselves. For
example, the storage media, the software and the semiconductor cluster in Silicon Valley are
focal points (or sub-clusters) of the greater computer cluster. The focus on interconnections
between its different elements abandons a delimitation of the boundaries of the cluster by
standard classification (Becattini 2002). While the boundaries of a cluster are blurred, its
centre is definable. The cluster constitutes itself from a critical mass of formal and informal
exchange processes between firms and institutions, which are thematically focused and take
place in a spatially restricted area.

Space
Cluster Industry/Theme

Firm Thematic boundary

Institution Spatial boundary
Interconnections

Figure 1: Elements of the Cluster

Figure 1 summarises the elements of a cluster, i.e. firms and institutions, interconnections and
a spatial and thematic boundary. For a dynamic approach to clusters, the change of these
elements also has to be considered: how do the spatial and technological boundaries of the

4
cluster change, how do the interconnections change and at least, how do the firms and
institutions change during cluster evolution.

Besides the elements of the cluster, Figure 1 reveals both the major developmental logics that
have to be included in the model and which factors are exogenous. The figure shows four
types of firms: firms that belong to the same thematic field, firms that belong to the same
location, firms that belong both to the same thematic field and the same location and
constitute the cluster, and firms that belong to different industries at different locations. We
confine ourselves to those endogenous factors and processes, which take place within a
cluster and distinguish clustered from non-clustered firms. Factors and processes that
influence clustered firms as well as the development of the other three types of firms are
omitted here. First, we leave out are factors that affect all the four types of firms like the
ongoing process of globalisation or the change of the socio-economic paradigm (Dicken 1998,
Boyer and Durand 1997). Second, we exclude factors that influence all firms in the same
specific geographical context like legislations, regional cultures, social institutions and
conventions as well as regional assets. A regional culture like the one in the Italian industrial
districts or in the Silicon Valley influences all firms to the same extent, whether they are part
of a cluster or not. Third, we omit factors that belong to a particular industry such as
possibilities for division of labour (Steinle and Schiele 2002) or market structure.
Oligopolistic market conditions like in the pharmaceutical industry affect all firms in the
industry. Also different types of clusters like the ones elaborated by Markusen (1996) are
excluded here. Empirical work indicates that the structure and type of the regional cluster is
rather a result of industrial or market development and therefore a result of external
developments than of its internal dynamics (Albino et al. 1999).

The boundaries of the cluster in Figure 1 not only indicate the exogenous elements, but also
its fundamental development dynamics. The cluster is at the interface between industrial and
local dynamics. The elaboration of this interface requires the elaboration of its constituting
rationales, namely industrial and local dynamics.

3. Industry Life Cycles and Clusters

There are several approaches that describe industrial dynamics during different stages of
development. The industry life cycle approach explains industrial change in analogy to the
product life cycle (Vernon 1966). Like a product, also an industry follows cyclical
5
development patterns. Klepper (1997: 148) distinguishes three different stages of an industry
life cycle: embryonic, growing and mature.

In the initial, exploratory or embryonic stage, market volume is low, uncertainty is high, the product
design is primitive, and unspecialized machinery is used to manufacture the product. In the second,
intermediate or growth stage, output growth is high, the design of the product begins to stabilize, product
innovation declines, and the production process becomes more refined as specialized machinery is
substituted for labour. Entry slows and a shakeout of producers occurs. Stage three, the mature stage,
corresponds to a mature market. Output growth slowly, entry declines further, market shares stabilize,
innovations are less significant, and management, marketing, and manufacturing techniques become more
refined.

In this model, there are few firms and employees in the embryonic stage, an increasing
number in the growth stage that again declines in the mature stage. But neither the age, nor
the quantitative development of firms and employees describe sufficiently the development of
an industry. The dominant design (Abernathy and Utterback 1978, Suarez 2004) and the
technological trajectory (Dosi 1988) point out that the development of industries and firms is
characterized very strongly not only by quantitative, but also by qualitative factors. During the
emergence of a new technological trajectory alternative concepts compete with each other.
Therefore, the technological field is very heterogeneous and the uncertainty over the future
direction of the technology path is very high. Over time certain alternatives or development
directions crystallize as the most promising ones, while other possibilities are rejected. By the
cessation of possibilities that are considered to be inferior and by the fact that incumbent and
newly formed firms orient themselves towards the most promising development approaches,
the technology path increasingly focuses and the heterogeneity declines. The uncertainty
about the further development of the industry is reduced due to the increasing stabilization
and focusing of the technology path. This stage is accompanied by a growth of the respective
industry (Suarez 2004). However, if the technological diversity cannot be maintained within
the technological trajectory, the trajectory increasingly narrows. By such processes the firms,
respective the firms linked to this trajectory, can loose their ability for renewal and adaptation.
The result is a negative lock-in that leads to a process of decline in the corresponding
industry. Therefore, there is a quantitative development of the industry described by the
number of firms, employees or turnover and a qualitative development that comprised the
diversity of knowledge and competencies in the industry.

Cluster development resembles the development of the industry life cycle in several aspects.
As a rule, the stage is described by the age and the growth of the cluster in analogy to the
industry life cycle (Enright 2003, Dalum et al. 2005, Maggioni 2002). The similarity holds not

6
only for the quantitative development of industries and clusters, but also for their qualitative
development. Even if concepts like technological trajectory and dominant design cannot be
assigned one to one to clusters, they nevertheless point to a connection between diversity and
growth that can also be found in clusters. Grabher and Stark (1997) explain the sustainable
growth of industrial districts in the Third Italy with the variety of firms’ organisational forms
that enables continual adaptation. Audretsch and Feldman (1996) emphasise the significance
of technological diversity for the development of regional clusters. The retention of diversity
seems to be difficult especially in older clusters. Grabher (1993) puts forward a too low
variety of organisational forms and technologies as one of the reasons for the negative
development of the coal and steel industry in the Ruhr district. Tichy (2001) points to a
“cluster paradox”. On the one hand, a narrow specialization of the cluster increases the
possibility to utilize technological synergies between the firms. On the other hand, this strong
similarity of the firms decreases the probability for more radical innovations, which would
lead to a widening of a development path as well as to an increased ability of the cluster to
adapt to changing external conditions. Therefore, a large diversity enables the cluster to adapt
to changing environmental conditions or even to leave the previous development path. But a
too large heterogeneity of the firms can also prevent an exploitation of synergies between the
firms. Orsenigo (2001) describes this process for the failed biotechnology cluster in
Lombardy where their heterogeneity prevents firms to exploit technological synergies.

The diversity and variety of the existing and applied knowledge in the cluster is therefore a
factor that has an effect on cluster development. However, the diversity of firms has to be
examined in relation to the number of firms located in the cluster. Large clusters like the
computer cluster in Silicon Valley consist of thousands of firms. Such clusters can dominate
whole industries. But also the industrial districts of the Third Italy represent clusters albeit
smaller and in a very specific form. For example, the firms of the industrial district in Carpi
are strongly specialised by their focus on woollens. In contrast to this, the Silicon Valley
example shows a very large diversity of technologies and firms. Nevertheless, both cases are
regarded as positive examples of regional clusters. The size and the technological diversity of
clusters must therefore be in certain corresponding relations to each other. Large clusters can
contain a larger diversity than small clusters and nevertheless generate sufficient synergies
between firms because of their size. Accordingly, smaller clusters must be focussed to be able
to make use of the location advantages generated by the existence of firms from the same
industry.

7
This ratio of diversity to size is described by the terms focused and heterogeneous. A small
cluster that covers the same technological areas as a large cluster is therefore technologically
more heterogeneous than the large cluster. Figure 2 may clarify this relation. The figure
pictures the firms and institutions of three clusters within a technology space. The distances
between the firms and institutions describe their variety. For reasons of simplification, every
firm has the same size. Cluster C has the largest diversity, measured by the different
knowledge existing in its firms and institutions. Cluster A and B bear the same diversity of
knowledge as both clusters consist of the same number of firms and institutions. In contrast,
the heterogeneity of Cluster B is smaller than that of Cluster A as the firms in Cluster B are
technologically more focussed. Although the firms of cluster C cover wider thematic areas
than cluster A, both clusters exhibit the same heterogeneity of firms, because of their size.

Cluster B
Cluster A

Cluster C

Firm Institution Thematic boundary

Figure 2: Diversity and Heterogeneity of Clusters

Concluding, regional clusters are distinguishable from one another by a quantitative and a
qualitative dimension. The quantitative dimension describes the economic development of the
cluster in terms of the number of active firms and employees. Because of the possible shift of
the cluster into new industries, a description of the cluster by its development is more
appropriate than a description by its age, as old clusters can grow as well when they move
into new fields. In analogy to the industry life cycle (Klepper 1997) we distinguish the cluster
into the following stages of development: emergence with only few firms, growth with a
growing number of firms and employees, and declining with decreasing number of firms and
employees. With the sustaining stage, we add a fourth stage that accounts for the fact that a
cluster can be able to sustain itself on a high level of economic activity. In this case changes
in number of firms and employees are more of a cyclical than a structural nature. In addition

8
to this quantitative account, the qualitative dimension describes the cluster inherent
heterogeneity of firms’ competencies available in the different stages. Figure 3 clarifies this
connection between the two dimensions. During the emergence of the cluster, only few firms
exist and the heterogeneity increases strongly because every new firm ventures in new
technological areas of the cluster. In the growth phase the technology path focuses
increasingly. The heterogeneity shrinks until the cluster has matured and a distinct
development path has taken shape. However, if the cluster is focused too narrowly, it loses its
ability of renewal and declines.
heterogeneity of knowledge
# firms and employees and

Emergence Growth Sustaining Decline

Maturity
Number of firms and employees
Heterogeneity of knowledge

Figure 3: Quantitative and Qualitative Elements of the Cluster Life Cycle

The heterogeneity of the competencies available in the cluster is fundamental for its
development. The cluster declines, if its heterogeneity cannot be sustained. The cluster moves
“back” in the cycle and enters a new growth stage, if the heterogeneity increases again.
Therefore, the development of the cluster is not a deterministic move from the left to the right,
but a steady movement between the left and the right side of the figure. It is assumed that the
movement of the most successful and established clusters takes place within the sustaining
stage, in which they incrementally but steadily achieve to sustain their heterogeneity again
and again.

Beside the similarities and interconnections between cluster and industry development, there
exist some differences as well. These differences refer to both the quantitative and the
qualitative dimension. Within the same or resembling industry life cycle, both clusters that
grow and shrink can exist. Perhaps the best-known example of this is the comparison of the
booming computer industry in Silicon Valley with the shrinking computer industry in the

9
Boston region in the middle of the nineties as reported by Saxenian (1994). Additionally, the
quantitative development alone gives no insights in the condition of the cluster. The condition
of a growing cluster can be disadvantageous for the firms, if the cluster growth slower than
the industry. In contrast, a stagnating cluster can be in a good condition, because of its
productivity in a declining industry. Therefore, the effects that clustering has on firm
development can be only measured in an appropriate way with respect to the development of
the respective industry. The contributions that compare clustered firms with the whole
industry indicate differences between clustered and non-clustered firms during their
development. Audretsch and Feldman (1996) and Pouder and St. John (1996) point to the fact
that the development of clustered and non-clustered firms differ during different stages of
industry development. Clustered firms perform better at the beginning of the life cycle while
they are outperformed by non-clustered firms at the end.
# firms and employees

time
Clustered firms
Industry life cycle
Non – clustered firms

Figure 4: Development of Clustered and Non-Clustered Firms during the Industry Life Cycle

Figure 4 describes the different development of clustered and non-clustered firms through the
industry life cycle. The figure also reveals that the cluster dynamics only work positively
between two points. The first point is after the emergence when there are a sufficient number
of firms to reach a critical mass and cluster dynamics start to work. The second point is when
the cluster dynamics cease to work or have a negative effect on the firms in the cluster which
results in a relative decline compared with the rest of the industry. Thus, there is a cluster
inherent component that has an effect on growth and decline of a cluster independent of the
particular industry life cycle. The growth in both the industry life cycle and the cluster life
cycle is connected to the diversity and heterogeneity of knowledge. However, this diversity
seems to be differently utilised in the cluster than the whole industry. Therefore, the

10
distinguishing factor is the different utilisation of the diverse competencies that differs
between clustered and non-clustered firms.

4. The Systemic Dimensions of Cluster Development

The diversity of competencies in industries and clusters only takes effect if it is utilised by the
firms economically. Nothing else describes Granovetter (1973) with his winged notion of the
"strength of weak ties" in that networks work primarily by making the variances between
actors economically utilisable. Saxenian (1994) shows in her comparative study of the
computer industry in Boston and Silicon Valley that (at the time of the study) the advantage
of the firms in Silicon Valley lays in the constitution of the local networks that enables the
firms to make use of the diversity of the available competencies. Longhi (1999) describes, at
the example of the technology park in Sophia Antipolis, the transformation of a “satellite
platform district” (Markusen 1996) into an operating cluster. The original branches were not
connected to each other. Only by spinoff processes they were embedded in regional network
structures. A large diversity of competencies existed all the time, based on the satellite
platform firms. But this diversity could only be exploited due to the different network
connections of the spinoffs. The newly available diversity of competencies also has given new
growth impulses to the existing firms. Therefore, not only the diversity of competencies is of
importance, both for the cluster and the industry life cycle, but also how these specific
competencies can be utilised by other firms and, in turn, how single firms influence the
processes of innovation of other firms. These effects, which arise by the mutual influence of
different elements, are called “systemic effects” in the following. The systemic effects
accounts for the fact that firms and institutions are part of a complex production and
innovation system. As such they are connected to other firms and institutions of the cluster by
various exchange relations and mutual interdependences and affect the complete cluster
system. In turn, the single firm and institution is affected by the actions and the behaviour of
other elements of the cluster. Therefore, the quantitative and qualitative dimensions not only
work directly, they also have a systemic dimension that stems from the interplay between its
different elements.

The systemic effects, however, are not only present for the qualitative dimensions. While the
qualitative systemic effects work through the interconnection of knowledge and capabilities,
the quantitative systemic effects exert their influence through the number of firms and
employees. The size of the cluster affects, for example, the perception of the cluster by other
11
actors. Larger clusters are more likely to be perceived by various economic agents while
smaller clusters are ignored easily. A stronger perception can lead to better supports from the
political side. Prevezer (1998) describes, for example, that an incubator was set up in a
biotechnology cluster in North-Carolina after the cluster already contained over one hundred
firms. Feldman et al. (2005) show for the capital region around Washington, D.C. that the
venture capital has not initiated the development of the cluster but attained importance only in
its later development. In addition, the regional universities have offered cluster-related
teaching curricula only after the emergence of the cluster in the region. Longhi (1999) gives a
similar example of Sofia Antipolis. A university with a cluster-related education was set up
there only after the first growth phase of the cluster. These cases show how important the
perception of a cluster is and that the perception depends on the size of the cluster.

Beside the effects that work external and contribute to pull external actors into the cluster, the
systemic quantitative dimension also has an internal affect that becomes apparent by the
ability of the firms in the cluster for joint and collective actions to put through their concerns.
The larger the number of firms and employees in a cluster, the larger is the collective
influence these firms have and the more likely it is that they succeed in satisfying their
specific needs. An example is given by Saxenian (1994): in the forties a large portion of the
national defence spending of the USA went to companies at the East coast. This relationship
deteriorated further when firms of the west coast lost some orders. In 1943, an association was
formed by Californian companies of the electrical industry with the aim “to promote their
industry, particularly by lobbying for a share of defence contracts that were going to eastern
companies" (Saxenian 1994: 21).

Quantitative Qualitative
direct Size (number of firms and institutions Diversity (knowledge, competencies and
number of employees) organisational forms)
systemic Utilisation of the size (perception of Utilisation of diversity (exploitation of
the cluster, capabilities for collective synergies, networks and value chains)
actions)

Figure 5: Dimensions of Clusters

The dimensions of a cluster are summarized in Figure 5. The quantitative dimension consists
of the number of firms and employees while the qualitative dimension integrates their specific
knowledge and competencies into the model. Both dimensions do not only have a direct effect

12
but also influences other parts of the cluster. This aspect is taken into account by the systemic
dimension. The systemic quantitative dimension describes the perception of the cluster by
external agents as well as the ability of the firms and institutions for collective actions. In
addition, the systemic qualitative dimension describes the effect that the utilisation of the
competencies of the individual firms and institutions has on the whole cluster.

The systemic dimensions mark also the boundaries of the cluster. As the cluster in our
definition constitutes itself from the interplay between its different elements, the simple
existence of firms and organisations as described by the direct quantitative and qualitative
dimension is necessary but not sufficient to depict a cluster’s boundaries. Exchange processes
are both accompanied by and the basis for institutions. Maskell (2001) defines the boundaries
of the cluster as the “fit between the economic activities carried out by the related firms of the
cluster on the one hand and the particular institutional endowment developed over time to
assist these activities on the other” (Maskell 2001: 936). Therefore, institutions are important
elements in defining the boundaries of a cluster. Fundamental for the plain capability to build
institutions is the quantitative systemic dimension of the cluster. The building of formal
institutions is the manifestation of capability or the cluster to utilise its size. Therefore, the
institutional endowment of the cluster is expression of the systemic quantitative dimension.
This implies that larger clusters are able to influence the institutional setting on larger scales.
In contrast, the qualitative systemic dimension affects the thematic orientation of the
institutions.

5. Local Dynamics and Rationales of Cluster Development

The previous sections served to elaborate the elements and the dimensions of the cluster.
However, the different dimensions alone can neither explain the different development
between clustered and non-clustered firms, nor the movement of the cluster through different
stages. The cause for these differences lies in the utilisation of the diversity of the cluster’s
competencies through local dynamics or, as Malmberg and Maskell (2006) put it, “localized
learning”. Localised learning, in their notion, depends on two factors. The first one is local
capabilities that are “some forms of knowledge creation and exchange that are still very much
rooted in the cultural, institutional, and social structures of particular places” (Malmberg and
Maskell 2006: 3). Local capabilities explain that economic activity is not evenly distributed in
space, because some kinds of knowledge are only available at particular places and therefore
are a kind of scarce resource. These features, however, refer to regional characteristics that
13
apply to all firms in the respective region and belong to the catalogue of factors that are
outside our model (see section 2). Therefore, the second aspect of localised learning is more
relevant. This aspect generally refers to knowledge exchange in spatial proximity that can
take several ways. One is by direct interaction. Firms collaborate and learn from each other.
But there is no necessity of direct interaction to learn. It is sufficient that firms monitor each
other and see what they are doing. Firms assess the behaviour and results of their competitors’
activities and combine their ideas with their own knowledge. Additionally, firms can learn by
social interaction of their employees.

The difference between localised learning and learning between actors at different locations
lies not in the transaction cost or the efficiency of knowledge transfer. It is rather the kind of
knowledge and information that is transferred and the different knowledge sources that actors
have access to. Storper and Venables (2004) describe with the word “buzz” the informal,
often diffuse but steady and pervading information stream within the region or a cluster.
Grabher (2002) terms the same effect “noise”. Steady interaction, informal knowledge
exchange, monitoring, and collaboration decreases the cognitive distance between actors.
Malmberg and Maskell (2006: 5) describe this as follows:

All kinds of inter-firm learning are enhanced because spatial proximity provides them with an arsenal of
instruments to obtain and understand subtle and complex information of possible relevance. The ability to
benefit fully from knowledge heterogeneity among firms or individuals is, consequentially, closely
related to spatial proximity through cognitive correspondence, but also by sharing a common history,
identical jurisdictional order and equivalent factor costs.

Because of the manifold formal, informal, direct and indirect exchange processes within a
specific location, a larger variety of actors is perceived within than outside the this location. It
is even reasonable to assume that the absorptive capacity of firms not only depend on their
investment in R&D (Cohen and Levinthal 1990) or their similarities in organisational
structures and knowledge base (Lane and Lubatkin 1998), but also in their location. Maskell
(2001) points to the smaller cognitive distance between firms in the cluster. Phene et al.
(2006) found out with the example of the biotechnology industry in the U.S. that
technological distances are easier bridged with firms in the U.S. than with partners abroad.
While different locations within the U.S. are not taken into consideration in their study, these
findings nevertheless point to a geographical factor of the relative absorptive capacity
between firms. Therefore, firms within the same place have a larger absorptive capacity
towards each other than to other firms As a result, firms can learn with and from more

14
heterogeneous actors in larger technological distance within the same place than with other
actors.2 The larger absorptive capacity between firms in the same location is illustrated in
Figure 63. The larger absorptive capacity accounts for all firm in the same location,
independent from their belonging to a cluster. However, clustered firms are technologically
more proximate than non-clustered firms in the same location and learning is further enhanced
by a concentration of activities within the thematic boundary of clusters. Cluster specific
institutions further facilitate and intensify learning processes (Maskell 2001). Both the
technological proximity and the larger absorptive capacity of clustered firms are responsible
for the dynamics of regional clusters.

Locality Cluster

Industry

Firm/Institution Thematic boundary

Absorptive capacity Spatial boundary

Figure 6: Absorptive Capacity of Co-localised and Distant Firms

The difference in absorptive capacity and learning between clustered and non-clustered firms
results in a dissimilar qualitative development. Firms do not remain static in a particular field,
but move through the technological space during their development (Stuart and Podolny
1996). The extent of this qualitative movement is limited by past experiences and path
dependencies (Dosi 1988). In contrast to the factors that delimit the extent of movement, the
direction of the movement depends on external factors, namely the source, where knowledge
for the learning process emanates. When firms learn, they combine their existing knowledge
and their resources with the new knowledge from the external source. In doing so, they adjust
their knowledge to the sender of the new knowledge and move towards its direction (Denzau
and North 1994). While this adjustment takes place to all of their collaboration partners

2
An important point to mention here, and to come back later to, is that for learning from heterogeneous actors
these actors even must exist in the cluster.
3
For reasons simplification and to illustrate the main argument, we omit different sizes of firms and different
absorptive capacities.
15
independently of their location, the specific character of local adjustment is that it happens
over larger technological distances and a larger technological variety because of the larger
absorptive capacity between firms in a cluster compared with non-clustered firms (Maskell
2001). As a result, the extent of this movement is larger towards firms and institutions of the
same cluster than towards other actors.

Consequently, the evolution of clusters is marked by a continual bridging of technological

distances between its firms and subsequent adjustment towards each other. When firms move
rather in the direction of other firms within the cluster, especially towards success stories and
the cluster’s dominant design (Abernathy and Utterback 1978), everything else being equal,
technological distances between firms and, thereby, the heterogeneity of the cluster decrease.

6. Stages of the Cluster Life Cycle

The crucial aspect for the transition between the stages in this article is the heterogeneity of
competencies, as direct qualitative dimension, and the utilisation of the heterogeneity, as
systemic qualitative dimension. The larger absorptive capacity between the firms within a
cluster and the subsequent adjustment processes have the following effects on the cluster life
cycle: during the emergence of the cluster, the larger absorptive capacity between the
clustered firms enables them to exploit technological distances earlier and utilise more
synergies compared to the non-clustered firms. In doing so, they create the actual cluster.
During the growth of the cluster, the firms further adjust to each other and generate optimal
technological distances. The implicit tendency to adjust to each other would lead to a
suboptimal and to small technological distance with a subsequent decline of the cluster. An
optimal technological distance can only be balanced in the sustaining cluster by steady
implementation of external knowledge or firm formations that always deviate from the
existing knowledge (Almeida and Kogut 1997). If the clustered firms cannot achieve this
balance, they develop worse than the non-clustered firms and the cluster declines. This
balance effect by external knowledge is not necessary for non-clustered firms as they always
rely on external knowledge sources.

It can be difficult to assign a cluster to a concrete stage if it is in a transition. A cluster

consists of many diverse protagonists who develop differently. Only the sum of all these
independent developments represents the development of the cluster. However, this
heterogeneity also implicates that the cluster does not develop evenly and as a whole. Parts of
16
the cluster can stay in an earlier stage while others already are in a later one. We assume,
however, that the cluster as a whole will enter in a new stage after this transitional phase.

Emerging clusters (Figure 7). It is difficult to exactly define the phase in which a cluster
arises. The main reason for this is that the emerging cluster is not a cluster actually. A spatial
concentration of firms of a specific economic sector hardly exists. A specific institutional
environment of the cluster misses, too. The corresponding economic activity in regions with
an emerging cluster can almost not be distinguished from regions without an emerging
cluster. Therefore, it is very probable that an emerging cluster is not perceived at all. The
stage of emergence can often only be described ex post (for example in Bresnahan et al.
2001).

Space
Cluster Industry/Theme

Firm/Institution Thematic boundary

Absorptive capacity Spatial boundary

Quantitative Qualitative

Direct few firms and employees Quite

heterogeneous
Systemic hardly perceivable, few Scarce possibilities
possibilities for collective actions for interaction

Figure 7: The Emerging Cluster

The few firms of the cluster are scattered technologically over wide areas. Although these
firms can already represent the future technological orientation of the cluster, the cluster is
very heterogeneous due to the low number of firms. This heterogeneity aggravates exchange
processes between the firms. Therefore, networks and customer-supplier relations only exist
in parts of the emerging cluster. Co-operations between firms within the emerging cluster take
place only partially because of the high variability of the few firms. For that reason, mainly
synergies between firms and the scientific infrastructure are relevant in this stage (Shohet
1998). There are, however, two aspects in which a region with an emerging cluster differs
17
from regions without clusters. Firstly, there exist one or several firms which offer a lasting
vision for a new local technology path. Secondly, certain conditions are given in the location,
for example a strong scientific base or political support, by which the emerging cluster has a
potential to reach a critical mass.

There are two different possibilities for the end of this phase. The first possibility is the
transition into a growing cluster when the firms manage to exploit synergies between them
and create network externalities. This can occur due to shifts of existing firms towards the
centre of the cluster or a closure of competence gaps by further firm formations. The growth
of the first formations and subsequent spin-off processes, often from one single firm, are
regarded as responsible for the first growth of a cluster (Klepper 2001). One explanation for
this is that the superior routines of the successful firms are inherited to its spin-offs that thus
also grow above average. But it is not only the inheritance of successful routines that makes
spinoffs crucial for the emerging cluster to reach a critical mass. When the spinoffs stem from
the same origin, they are not only technologically close, but also connected by various social
networks that further decrease the cognitive distance. The same origin enables collaboration
and synergies between the firms that would not count for firms from different origins.
Because of their ability to generate synergies, “incubator networks” (Menzel 2005) that are
formed by firms that base upon the same origin are crucial for the emergent cluster to reach a
critical mass to reach the growing stage. Although an endogenous and continual transition
from the emerging stage to the growing stage is possible, mainly during the growth of markets
in which the incumbent firms are well positioned, often the crucial push stems from single
events and a sudden change in some exogenous factors. In the Capitol region around
Washington, D.C. (USA), for example, a bundle of events, e.g. new regulations and
government intervention, led to the growth and take off of the cluster (Feldman 2001). Also in
Sofia Antipolis a changing economic environment caused the restructuring of the incumbent
firms, including dismissals of highly qualified employees, that in the end led to the transition
from a so-called “satellite platform” (Markusen 1996) to a growing RIC in software and
telecommunications (Longhi 1999).

The second possibility to end the stage of emergence is when the emerging cluster loses its
potential to become a functioning one. This happens when the possibilities for exploiting
synergies between the firms vanish. Decisive for this are two reasons. One is the loss of the
common focal point of the emerging cluster. The firms develop in different technological

18
directions and the technological distance between them extends. Orsenigo (2001), for
example, describes an Italian case in which the biotechnology firms in the analysed region in
fact tended to cluster, but this (emerging) cluster failed to reach a critical mass because,
among other reasons, of its heterogeneity. The second reason is the disappearance of existing
firms from the emerging cluster. These ‘lost’ firms leave competence gaps in the emerging
cluster and this also diminishes possibilities for regional co-operation. In the end the firms of
the formerly emerging cluster might completely disappear.

Growing clusters (Figure 8). A strong increase in employment resulting from the strong
growth of incumbent firms and a high number of new firm formations indicates a growing
cluster. Unlike in the case of the emerging cluster the boundaries are now definable. Both the
incumbent firms and the firm formations orient themselves at the growth centres of the
cluster. This movement narrows the boundaries of the cluster and the cluster becomes more
focussed. The arrows in Figure 8 illustrate the move of the thematic boundary. The growing
density of firms and institutions within the boundaries of the cluster increasingly creates
possibilities for innovation networks and customer-supplier relations. The continuous arising
of new potential network partners avoids an isolation of single networks. An economic
utilization of these possibilities leads to further growth of the firms. The growth of the cluster
generates a milieu, which has a positive effect on existing firms and firm formations.
Examples are the early semiconductor industry in Silicon Valley (Saxenian 1994) or
biotechnology in Boston (Bathelt 2001).

The growing stage ends when the quantitative development of cluster’s firms adjust to the
development of the rest of the respective industry (Pouder and St. John 1996) and the cluster
gets, at least for a short time, to the sustaining stage. The main reason for this adjustment is
the exploitation of the diversity and a more focussed orientation of the cluster that led to a
distinct manifestation of a kind of “dominant cluster design”. An example for this is Detroit.
After the growth stage with extensive firm formations, the finally construct with Chrysler,
Ford and General Motors emerged in the cluster (Klepper 2001).

19
 Space
Cluster Industry/Theme

Firm/Institution Thematic boundary

Absorptive capacity Spatial boundary

Quantitative Qualitative

Direct Growing number of firms and Focussing

employment
Systemic Growing perception, possibilities Open and flexible
for colllective action, institution networks
building

Figure 8: The Growing Cluster

Sustaining clusters (Figure 9). The sustaining cluster is a deviation in the typology. This stage
describes a kind of equilibrium state. A sustaining cluster shows neither large growth nor a
remarkable decrease in the number of firms or employees. Fluctuations are rather of a more
cyclical than structural nature. Nevertheless, the transition from a growing to a sustaining
cluster can be accompanied by a decreasing number of firms (Klepper 2001). The various
competencies of the firms are exploited by dense and established networks. The connections
of the firms of the cluster to the outside firms and institutions bring new knowledge inside the
cluster and keep the networks open. The thematic boundaries of the cluster incrementally
move, as new technologies are integrated into the cluster. During its development, the cluster
has shaped its regional environment. The development of the region is even equated with the
development of the cluster if one cluster is very dominating (Bresnahan et al. 2001).
Examples are car production in Baden-Württemberg or the industrial districts of the Third
Italy.

There are two factors that end the sustaining stage. The first follows the cluster cycle. A
decreasing diversity and a too narrowly focussed cluster in an exhausted trajectory leads to
the decline of the cluster. The second possibility is a step back in the cluster life cycle and a
new growth phase. This new growth can result from the generation of new diversity that is

20
also accompanied with the entering of new markets, like for example in the Silicon Valley of
the 80s. A threatening decline of the semiconductor industry due to increasing rigidity of the
large chipmakers and fierce competition from Japanese manufacturers resulted in a new wave
of firm formations in the form of spin-offs from engineers discontented with the prevailing
conditions. These new firms extended the variety of the cluster and led to new growth
(Saxenian 1990). Yet, the altering and renewal of the development path often takes place in
the cause of a substantial crisis and therefore follows subsequently after a stage of decline
(Martin and Sunley 2006, Meyer-Stamer 1998).

Space
Cluster Industry/Theme

Firm/Institution Thematic boundary

Absorptive capacity Spatial boundary

Quantitative Qualitative

Direct Stagnating number of Focussed competencies,

firms and employment on strong regional bias
a high level
Systemic Cluster shapes the Open networks contribute
region to utilise existing synergies
and external knowledge

Figure 9: The Sustaining Cluster

Declining clusters (Figure 10). A declining cluster is defined by a decrease in the number of
firms and employees due to firm exits, mergers and rationalizations. Hardly any new firms are
set up at the same time. A region containing a shrinking cluster is labelled by a strong cluster-
oriented bias of economic activities. This bias works by a specific knowledge base, highly
qualified and specialised employees and firms strongly focussed on specific markets and
technologies. The competencies of such a cluster are contained only in a few firms. Despite
the decline, competitive pressure can lead to high innovation rates (e.g. in Grabher 1993,
Graham 1956). These innovations, however, arise within the existing and exhausted

21
development path. Due to the former success, the cluster is aligned with the further
development of the formerly successful development path. A reason for this lies in the long
existing, closed and homogeneous networks in which uniform knowledge flows (Granovetter
1973). A declining cluster has therefore lost the ability to sustain its diversity of competencies
and to adjust to changing environmental conditions as well as the potential for an independent
renewal.

Space
Cluster Industry/Theme

Firm/Institution Thematic boundary

Absorptive capacity Spatial boundary

Quantitative Qualitative

Direct Decline in number of firms Strong focus on a

and employment
Systemic Negative sentiments with
respect to the cluster, partly
strong possibilities for
collective action
narrow trajectory
Closed networks result
in an insufficient
adaptability of the cluster

Figure 10: The Declining Cluster

There are three possibilities to end the declining stage of the cluster. The first, again, follows
the cluster cycle and the cluster simply diminishes. The other two possibilities sign a new
growth phase. One of them is a qualitative change of the existing development path through
the implementation of new and different technologies. An example for this is the accordion
cluster in Marche that transformed from traditional towards electronic music instruments
(Tappi 2005). The other possibility to end the declining stage is structural change towards
completely different fields. Such a shift took place in the declining coal and steel industry of
the Ruhr area towards environmental technologies. The firms of the steel and coal complex
acquired the respective competencies during the correction of environmental damages that
even originated from that industry (Grabher 1993).

22
7. Conclusion

The paper presented a cluster life cycle model to explain the evolution of regional clusters.
We started with the findings that clusters move through different developmental stages and
that these developmental stages differ from the development of the respective industry. The
development of the cluster through the different stages is not only quantitatively described by
a growth and decline in numbers of firms and employees, but also qualitatively by the
diversity and heterogeneity of knowledge. Additionally, there is a systemic dimension that
accounts for the fact that firms and organisations in a cluster are part of a complex production
and innovation system and by various interconnections both influence, and are influenced by,
other firms and organisations. The quantitative systemic dimension illustrates the perception
of the cluster by external actors and the capability of the firms for collective actions. The
qualitative systemic dimension describes the innovation and learning processes of firms.

Additionally, the systemic dimensions point out that the difference between cluster and
industrial development lies in the particular learning processes within clusters. The larger
absorptive capacity of firms within the cluster enables them to bridge larger technological
distances and utilise more diverse knowledge. This continual bridging of technological
distances results in a steady adjustment of the firms towards each other. This adjustment both
creates additional synergies, but also narrows the thematic boundaries of the cluster.

The model shows that clusters are only advantageous for firms between two particular points.
The first point is after the emergence, when the cluster reaches a critical mass. Then, the
cluster enters the growth stage and clustered firms outperform non-clustered firms. The
second point is when the cluster has exploited its heterogeneity and clustered-firms develop
worse than non-clustered firms. These findings suggest that policy support has to consider the
stage of the cluster. Two different major strategies are necessary to adequately support cluster.
The first is a focussing, the second is a widening of the cluster’s diversity. During the
emergence of the cluster, the aim must be to focus the often thematically scattered firms on
particular points. These focal points generate first synergies within the cluster and enable it to
enter the growth stage. After the growing stage, the intention must be to steadily sustain a
certain heterogeneity of the cluster to avoid a decline and possibly enter new growth path.
Measures to enforce these strategies are for example the selective promotion of firm
formations that either would lead to a widening of the thematic boundaries of the cluster or to
its focussing, dependent on the stage of the cluster.
23
The aim of this paper was to elaborate in the processes that are endogenous to the cluster. But
a lot of research still has to be done, including deeper theoretical analyses of the underlying
processes and closer consideration of the external environment, as well as more empirical
studies to test the model. The life cycle model consists of four dimensions that each requires
distinct empirical methods and data. Köhler and Otto (2006) for example, tested the direct
quantitative dimension of the cluster during different stages with respect to firm formations
with quantitative data on firm survival rate, number of startups and number of closures with
respect to employment growth on different clusters at different stages. Appropriate data to test
for the development of the direct qualitative dimension would be patent data. The change of
classification of patents could give information on the development of the diversity of the
cluster over time. Another possible measure is the evolution of business areas of clustered
firms over time.

More difficult to measure are the systemic dimensions as their influence becomes most
probably apparent only with in deep case studies. There still exists a lot of literature that
independently describes the systemic dimensions of the cluster at different stages. The task at
hand is to combine different kinds of studies within a single framework. Therefore, further
empirical work on the cluster life cycle model would require both quantitative and qualitative
research. The necessity to apply both types of research shows that neither case studies, nor
econometric analyses can contribute alone to understand the evolution of clusters and
indicates the complexity of the evolution of regional clusters. The cluster life cycle model
could contribute to order this complexity in a meaningful way.

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