America Must Realize Its "Cluster Moment"

September 29, 2010 | Devon Swezey,

As new reports confirm a stark decline in long-term U.S. economic competitiveness, the United States needs a new economic paradigm to refocus economic policy and rebuild its damaged economy. That new paradigm should focus on strengthening America's "regional innovation clusters," according to a new report authored by Mark Muro and Bruce Katz of the Brookings Institution Metropolitan Policy Program.

First defined by Harvard Business School professor Michael Porter twenty years ago, clusters--geographic concentrations of interconnected firms, suppliers, educational institutions and other supporting organizations--have staged a comeback in economic policymaking at different levels of government and are now widely viewed as important to accelerate innovation and therefore economic growth. According to the new study, The New Cluster Moment: How Regional Innovation Clusters Can Foster the Next Economy, clusters offer an attractive new economic paradigm for three particular reasons.

First, empirical evidence suggests that regional clusters provide major economic benefits, such as fostering innovation, encouraging entrepreneurship, and generating higher incomes. Clusters can produce highly efficiency "learning environments" that make firms and inventors significantly more inventive. The knowledge spillovers associated with industrial clusters are critical to innovation. Research also shows that new start-ups and employment increase with the density of local employment in a particular industry.

This animated video of a speech by Author Steven Johnson explains how these knowledge spillovers are critical to innovation:

Second, economic clusters simply reflect the reality that the national economy is actually composed of many different regional economies that power growth. Writing in the Atlantic, author Richard Florida breaks down the "density of innovation" and shows that the greatest amount of patenting and the greatest number of high-tech workers exist in a small number of metropolitan areas around the country. According to Muro and Katz, the most salient spatial feature of the modern economy is its "spikey concentration in a relatively small number of places."

Third, given that clusters reflect the regional reality of the national economy, they provide an important new framework for refocusing economic policy to stimulate innovation and growth. Until recently, economic policymaking has tended to focus only on the macro scale (such as interest rates, federal tax policy, and monetary policy) and the micro scale of individual firms (loan guarantees, technical assistance, worker training). These policies generally ignore what Muro and Katz call the "missing middle" of places, local institutions, and groups of firms that drive regional dynamics and account for the majority of economic activity in this country.

For too long, conventional economic policy has ignored the importance of regional innovation clusters and the economic benefits that they provide. According to Muro and Katz, the predominant thinking on innovation policy operates within the "black box" model of growth, which asserts that if the government just provides the right combination of R&D funding and other economic inputs, new technologies will result. Unfortunately, technology commercialization does not happen so easily. According to innovation experts Rob Atkinson and Howard Wial, the technology commercialization process is defined by information breakdowns, infrastructural inertia, and coordination problems. Yet, more often than not, effective R&D requires collaboration among many disparate actors and organizations that may have different interests.

Clusters can thus have a powerful impact on the innovation process by coordinating economic activities, strengthening key institutions, and aligning disparate regional assets to solve market problems and accelerate innovation.

Fortunately, government officials at the regional, state, and federal level have taken a renewed interest in the cluster paradigm. One example at the federal level is the Department of Energy's Energy Efficient Building Systems Regional Innovation Cluster (E-RIC), which connects various federal agencies and coordinates federal, state, and private sector resources to catalyze clean energy innovation and drive regional economic growth.

In a research brief released in June, the Breakthrough Institute, Information Technology and Innovation Foundation (ITIF) and Brookings Institution Metropolitan Policy Program recommended that Congress provide competitive grants to strengthen clean energy clusters throughout the country, responsive to the needs and capabilities of each region.

It is clear that such efforts are gaining traction as a new organizing paradigm for economic policy. Under the leadership of groups like Brookings Metro, America's "cluster moment" may be realized soon enough.