Innovation and Economic Activity: An Institutional Analysis of the Role of Clusters in Industrializing Economies

Article excerpt

The current use of "cluster" is often closely associated with Michael Porter's (1990; 1994; 1997; 1998; 2000a; 2000b; 2003a; 2003b) reconceptualization of the foundations of modern capitalist economies as varying and dynamic mixtures of cooperative arrangements and competitive relationships. Porter's use of "clusters" owes significant intellectual debt to Alfred Marshall's notions of "industrial districts" and "industrial atmospheres" and Piore and Sabel's (1984) "flexible specialization." In contrast to the Fordist mode of (mass) production, agglomerations of firms based on flexible specialization are said to be better prepared to deal with supply related shocks and changes in consumer preferences. The emphasis is on product quality, market segmentation, and economies of scope through the use of adaptive machinery and higher skilled workers or craftspersons.

Hundreds of articles have been written on clusters over the last few years. The increasing interest in clusters is a reflection of the broader change of approach in economic policymaking toward the microeconomic foundations of prosperity and growth (Ketel 2003, 2), a change whose legitimacy has been questioned by the more critical scholars such as Harrison (1992), Harrison, Kelly and Grant (1996), and Martin and Sunley (2003). Also, according to the latter, the notion of "cluster" has been applied largely arbitrarily and continues to remain fuzzy as a concept. The key premise in this paper is that a significant part of this fuzziness is attributable to insufficient attention to "the institutional arrangements" that are said to structure cluster dynamics.

To advance work on cluster studies, and in efforts to contribute "the institutional turn" in Economic Geography (Amin 2001), and Regional Studies (Hayter 2004), we need a fuller understanding of the elusive "institutional arrangements" that structure cluster dynamics and define a given cluster's mode of governance. To this end, the paper outlines a frame of analysis to capture the full range of formal and informal institutions, account for evolutionary change in cluster characteristics, and serve as a first step toward developing a generic institutional approach to cluster studies capable of generating policy-relevant insights for industrializing economies.

This paper is structured as follows. The next section provides a synthesis of some of the literature on clusters to highlight the key determinants (section three) of cluster formation and sustenance. The fourth and fifth sections describe the framework used in the analysis of data on two clusters in Egypt and South Africa (sections six and seven). (1) The eighth section highlights the main findings from this study and concludes with recommendations for policy and future research on economic clusters.

What are Clusters?

Clusters have been studied in sociology, economics, political science, economic geography, and regional studies as groupings of interrelated firms that innovate and generate economic growth. In these studies attention is paid to alternative models of industrial organization and the development of new concepts such as "collective efficiency" (Schmitz and Nadvi 1999). These studies have further spawned the debate on knowledge externalities and spillovers (Audretsch and Feldman 1999; Burt 1992; Coleman 1990; Jaffe, Trajtenberg and Henderson 1993), and the dynamic nature of interactive learning necessary for innovation (Asheim 1999; Becattini 1990; Kline and Rosenberg 1986; Maskell 1999; and Maskell and Malmberge 1999). Many commentators view clusters as a main breeding ground for innovation and therefore economic growth. This view has not gone unchallenged, however.

For example, Chandler (1990) argues that historically, economies of scale and scope have been achieved mainly by large private and public enterprises including large public corporations charged with infrastructure building. Chandler (1990) argues against one of the main orthodoxies in economics that large hierarchies and oligopolistic market structures are inherently undesirable and potentially impede competition and optimal growth by stifling innovation at the firm level. …