Understand business clusters, understand regional growth opportunities

Money is increasingly being channelled into more regionally focussed projects. In the UK, the government has named South Yorkshire the first UK Investment Zone, focusing on advanced manufacturing. It’s recently earmarked £50m for regional creative clusters and £6.5m for locally-led schemes in the space sector. And it’s committed to developing two carbon capture, usage and storage (CCUS) scheme clusters.

But whether you’re talking about investment zones, regions or clusters, there’s little to define the characteristics which may allow these areas to succeed. And that’s what’s needed to ensure these schemes deliver on their potential.

CBI Economics has helped clients unpick what a cluster really is

The idea of localised industries isn’t anything new – and while there’s no firm definition of “a cluster”, there are common themes and characteristics that emerge from all the research that exists on them. CBI Economics has built a new framework methodology based upon a comprehensive review of this literature, which is designed to help our clients, including businesses and local government stakeholders, identify and understand potential clusters across the country.

Key themes include:

Geographical scale is a critical undefined variable. It’s accepted that clusters are a concentration or agglomeration of activity, but there is no defined size. A cluster could appear within a city, a region, or something in between – and it won’t necessarily fit neatly into traditional administrative boundaries.

Clusters often form across one or a couple of closely related areas, for example Silicon Valley in California or the Cambridge-Oxford life science ‘cluster’. This is typically due to location-specific factors which support those sectors, such as access to natural resources, a skilled workforce, or captive customer base. Supporting and related industries are also often present, e.g.: companies engaged with equipment maintenance and repair within an advanced manufacturing cluster.

Geographical proximity is what helps unlock the additional success: the cluster thrives because its actors are close enough to benefit each other. Due to the complementary nature of activity which develops organically within a cluster, it can be difficult to align clusters to traditional Standard Industrial Classifications (SICs), something which we account for in our methodology.

Concentration is equally important, specifically concentration in the number of businesses and number of employees in the cluster sector(s). Many of the benefits of clusters arise from agglomeration effects, and so a cluster should host a significantly larger amount of activity relative to the national distribution of the industry.

Simply having a large, nationally significant concentration of activity does not necessarily constitute a cluster. Both geography and concentration are intrinsically linked to another key characteristic: comparative advantage.

Productivity is often used as the proxy measure by which to test for the presence of any comparative advantage. It is not enough just to have a lot of activity in a cluster, this activity must be productive enough not just to survive, but thrive, maximising the benefits from agglomeration economies of scale, through additional knowledge transfer, innovation creation and shared resources.

This additional productivity is a large part of the added value created by clusters, and why governments are so interested in promoting their development.

There are also many secondary characteristics discussed in cluster literature, where there is less consensus, or which may only be relevant for specific types of clusters. But these can play a big part in identifying the character of a cluster and provide additional insights into the cluster ecosystem. Understanding themes such as anchor tenants, investment levels, and strength of business community activity allow interested stakeholders to understand how the cluster has developed, and how it might continue to evolve.

CBI Economics’ framework allows us to investigate business activity with the parameters of each of these themes.

Using data from our partners The Data City, we are able to look beyond SIC codes to understand hotspots of activity in both established and emerging sectors.

The economy is changing, and we know that there are highly productive, high-potential sectors which may not align with traditional industry definitions, but which may be forming clusters. We combine this with a large range of other data indicators corresponding to the other primary and secondary characteristics to paint a picture of the activity taking place.

We have experience of helping identify clusters as part of several projects for clients across the country, including for the Midlands Engine, which wanted to look at clusters in the region through the lens of foreign direct investment (FDI) attraction potential. We can apply the framework to look through various different lenses, including high-quality jobs or innovation, allowing for more tailored analysis.

And finally, we work closely with our teams focussed on regional development, including those who led on the CBI Clusters Playbook, to ensure we keep linked in with the most relevant policy developments.

About CBI Economics:

CBI Economics is the CBI’s economic consultancy arm. We develop economic evidence for businesses, policymakers and thought leaders. If you need to evaluate economic benefit, advocate policy change; gauge economic impact or assess risk; learn what businesses are thinking or explore future scenarios, then we’re here to help. Our expertise includes social and environmental impacts, decarbonisation, clean air, innovation, and regional growth. You can find out more about our services here and get in touch here.