More Than the Sum of Its Parts: Cluster-Based Policies

Abstract

In a market economy, firms constantly interact in a variety of market transactions with other firms and organizations. They buy and sell goods and services as well as production factors in markets where prices convey essential information. In the course of doing business, they forge linkages that may yield important benefits to themselves, other firms, the economy, and even society at large.1 These benefits may include reducing information asymmetries, generating knowledge spillovers, strengthening economies of scale, and facilitating the generation of public goods. However, these linkages do not occur at random; firms located in a given geographic area or within a specific value chain or cluster are more likely to interact. And even within these geographic and production neighborhoods, linkages are not automatic and may lack the depth to reap all the benefits.