In the introduction to Economics we typically teach students that it is all about unlimited wants and scare resources and the key questions that we need to answer are WHAT, HOW and FOR WHOM to produce. Another aspect is WHERE production and consumption happens and Porter (1998) provided an intuitive explanation of the importance of the clustering of economic activity.
A cluster can be any town of city where you find a critical mass of producers in a particular field located together. This is the result of so-called localisation economies that affect the business environment, competition, and growth. Firstly, factors of production influence the location of firms. These range from basic inputs such as physical infrastructure, to information. In clusters, the fact that firms are close to one another lead to spillovers that improve the flow of information and the success of innovation. This is also true for related and supporting industries. They provide specialised inputs and information, and facilitate sharing among firms. Materials, components, machinery and services are supplied more efficiently and at lower cost when producers are concentrated in a particular town or city. Location also plays a role in firm strategy and rivalry. If you are closer to your competitors, you imitate and learn from each other, everyone tries to make their product slightly different and better and this leads to growth. In the final instance, the demand conditions in a locality may also influence the business environment, competition, and growth. Sophisticated and demanding customers at home press firms to improve and differentiate and a cluster may provide such a group of customers. Thus, Porter (1998) saw the enduring competitive advantages in a global economy as localised. Proximity allows for relationships, better information and other advantages in productivity and productivity growth.
Now these things are not only discussed in academic circles. Yesterday evening saw a lively Twitter discussion on the future of cities. The participants did not really mention localisation economies or spillovers, but these concepts are there behind some interesting comments on drivers of growth, innovation, the environment, institutions and communities. Have a look at our Storify summary of the discussion: