National Forest Economic Clusters:

A New Model for Assessing 

National-Forest-Based Natural 

Resources Products and Services

Thomas D. Rojas

United States 

Department of 

Agriculture

Forest Service

Pacific Northwest 

Research Station

General Technical

Report

PNW-GTR-703

February 2007
The Forest Service of the U.S. Department of Agriculture is dedicated to the principle of

multiple use management of the Nation’s forest resources for sustained yields of wood,

water, forage, wildlife, and recreation. Through forestry research, cooperation with the

States and private forest owners, and management of the National Forests and National

Grasslands, it strives—as directed by Congress—to provide increasingly greater service to a

growing Nation.

The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and

activities on the basis of race, color, national origin, age, disability, and where applicable, sex,

marital status, familial status, parental status, religion, sexual orientation, genetic information,

political beliefs, reprisal, or because all or part of an individual’s income is derived from any

public assistance program. (Not all prohibited bases apply to all programs.) Persons with

disabilities who require alternative means for communication of program information (Braille,

large print, audiotape, etc.) should contact USDA’s TARGET Center at (202) 720-2600 (voice

and TDD). To file a complaint of discrimination, write USDA, Director, Office of Civil Rights,

1400 Independence Avenue, SW, Washington, DC 20250-9410 or call (800) 795-3272 (voice)

or (202) 720-6382 (TDD). USDA is an equal opportunity provider and employer.

Authors

Thomas D. Rojas was a research economist, U.S. Department of Agriculture, Forest Service, Pacific Northwest Research Station, Alaska Wood Utilization Research 

and Development Center, 204 Siginaka Way, Sitka, AK 99835. Rojas is currently 

with the Department of Planning and Development for the City of Seattle, 700 5th 

Avenue, Suite 2000, Seattle, WA 98124.

Cover Photo Credits

Surf Shop sign, water bottle, and Sitka photos by Maria Stiefel, USDA Forest 

Service. Visitor’s center photo by David Curl, National Park Service. Barge and 

lumber yard photos by David Nicholls, USDA Forest Service. 

The use of trade or firm names is for information only and does not imply 

endorsement by the U.S. Department of Agriculture of any product or service.
Abstract

Rojas, Thomas D. 2007. National forest economic clusters: a new model for 

assessing national-forest-based natural resources products and services. 

Gen. Tech. Rep. PNW-GTR-703. Portland, OR: U.S. Department of Agriculture, 

Forest Service, Pacific Northwest Research Station. 33 p.

National forest lands encompass numerous rural and urban communities. Some 

national-forest-based communities lie embedded within national forests, and 

others reside just outside the official boundaries of national forests. The urban 

and rural communities within or near national forest lands include a wide variety 

of historical traditions and cultural values that affect their process of economic 

development. National-forest-based urban and rural communities participate in 

numerous economic sectors including nontraded industries, resource-dependent 

traded industries, and non-resource-dependent traded industries. These communities represent microeconomic environments. Cluster theory provides an explicit 

framework to examine the microeconomic relationships between national forests 

and their embedded and neighboring communities. Implementation of economic 

cluster initiatives in national-forest-based communities could improve their overall 

social well-being through increased competitive advantage based on innovation 

and higher productivity. This paper proposes establishing an Economic Clusters 

research team within the Forest Service. This team would dedicate its efforts to the 

analysis and improvement of the determinants of competitive advantage affecting 

national-forest-based communities.

Keywords: National-forest-based communities, economic cluster theory, 

innovation, productivity, competitiveness.

National Forest Economic Clusters



Introduction

National forests in the United States occupy 191 million acres of land; an area 

approximately the size of the state of Texas. This area encompasses thousands of 

urban and rural communities with human populations ranging from low double digits to tens of thousands. For example, on the Tongass National Forest, the largest national forest in the U.S. National Forest System occupying nearly 17 million acres, 

there exist 32 urban and rural communities (USDA FS 2005c) with populations 

ranging from 24 inhabitants in Point Baker to 30,966 in Juneau (State of Alaska 

2005). The total population of these 32 communities lying within the boundaries of 

the Tongass National Forest stands at around 73,000 inhabitants. 

Additionally, many urban and rural communities are close to national forests, 

although outside their official boundaries. This proximity to national forests makes 

these communities closely akin to communities residing within the boundaries of 

national forests. 

The issue of rural community proximity to national forest lands proved a key 

concern in Donoghue and Sutton (2006). In their discussion, they characterized 

communities with close connections to forests, both economic and noneconomic, 

as forest-based. While conducting socioeconomic monitoring of 1,314 rural communities in the Northwest Forest Plan region, they defined proximity as within 

5-mile buffers around public lands (i.e., USDA Forest Service and Bureau of Land 

Management lands). Donoghue and Sutton categorized communities as within or 

outside the 5-mile buffer of public lands. Among their conclusions, they found that 

“most of the communities (70 percent in 1990, 71 percent in 2000) with very low 

or low socioeconomic well-being scores in 1990 and 2000” were within the 5-mile 

buffer zone of public lands (Donoghue and Sutton 2006: 32). Clearly, as Donoghue 

and Sutton (2006) indicated, proximity to public lands can represent a substantial 

socioeconomic disadvantage for many communities.1

The urban and rural communities that exist embedded in and close to the 

national forests represent microeconomic environments. These environments 

incorporate the local choices made by individuals, firms, and industries as they 

confront scarcity and incentives in their communities. These national-forest-based 

urban and rural communities participate in numerous economic sectors including 

1 Donoghue and Sutton (2006) did not, however, explicitly examine communities that existed 

within the boundaries of public lands. Recent studies that examined embedded nationalforest-based communities include Mazza and Kruger (2005), which explored the social 

dynamics and trends of forest-based communities in southeast Alaska focusing principally on 

their evolving transition to a tourism- and recreation-based service economy, and Robertson 

(2003), which tested the economic base hypothesis in 15 communities in southeast Alaska 

determining no conclusive evidence for its validity.

The urban and rural 

communities that 

exist embedded in and 

close to the national 

forests represent 

microeconomic 

environments.
General TEchnical REport PNW-GTR-703



nontraded industries (e.g., construction, health services, retailing, and utilities), 

resource-dependent traded industries (e.g., biomass energy, bottled water, fishing 

and fish processing, logging, mining, and recreation tourism) and non-resourcedependent traded industries (e.g., shipbuilding). For example, according to Alaska 

Economic Trends (Alaska Department of Labor and Workforce Development 2006), 

in southeast Alaska, a region in which nearly all the communities are embedded in 

or in proximity to the Tongass National Forest, the “goods-producing” sectors (i.e., 

natural resources and mining, construction and manufacturing) had a monthly average employment in 2005 of 4,100 individuals, while the service-providing sectors 

(i.e., trade; transportation and utilities; information; financial activities; professional 

and business services; educational and health services; leisure and hospitality; and 

federal, state, and local government services) had a monthly average employment in 

2005 of 32,450. Removing government positions would reduce the monthly average 

employment in southeast Alaska in 2005 in the service-providing sectors by 13,450. 

Consequently, one could state that the monthly average private sector employment 

in 2005 in southeast Alaska registered around 23,100 individuals across a wide 

array of economic sectors. 

The individuals living and working within, and in proximity to, a national 

forest experience both its hedonic benefits and its development constraints. The 

national forest lands can present a major challenge to national-forest-based local 

communities as they seek to modify, expand, or upgrade their economic activities. 

Communities seeking to exploit the resources and products provided by national 

forests must contend with a federal agency, the USDA Forest Service, whose mission dictates specific management and multiple-use criteria affecting national forest 

lands. 

Discrete public policy actions can substantially impact the microeconomic 

environment of national-forest-based communities causing strong discontinuities 

in their economic performance. For example, the elimination of the 50-year timber 

contracts on the Tongass National Forest and the related demise of the local pulp 

mills in the small cities of Ketchikan and Sitka in the mid-1990s had a powerful 

negative impact on the production, employment, and general welfare of numerous communities throughout southeast Alaska (Morse 1997). The 40-year legacy 

of southeast Alaska’s integrated forest products industry continues today, with a 

majority of productive sawmills of various sizes operating in different communities 

on Prince of Wales Island (Brackley et al. 2006).

Managers of national forests in the United States have indicated a strong 

interest in sustaining the economic feasibility of national-forest-based communities. For example, Dale Bosworth, Chief of the Forest Service, has noted that the 
National Forest Economic Clusters

“Forest Service does have a role in communities and their economies” and that 

“our mission is to ‘sustain’ forests for people, including environmental, social 

and economic components” (USDA FS 2005a: 5). At the regional level, Dennis 

E. Bschor, Alaska Regional Forester, has indicated that one of his main regional 

objectives is to “support and assist in the year-round economic vitality and social 

well-being of the communities in Southcentral and Southeast Alaska and natural 

resource-dependent communities throughout the State” (USDA FS 2005d: 32). At 

the forest level, the leadership team of the Tongass National Forest explicitly stated 

its obligation to help promote the economic viability of the 32 communities and 19 

federally recognized tribes that call the Tongass National Forest home by declaring 

its commitment to enhance “the health, stability, quality of life, economic vitality, 

and adaptability of Tongass communities” (USDA FS 2005b: 2).

The particular ties—cultural, economic, emotional, historical, vocational—that 

compel these communities of individuals, firms, and industries to seek their livelihoods from national forest lands demand a management response from the Forest 

Service that incorporates their local characteristics into the overall management 

plan of the national forests. These national-forest-based communities of individuals, firms, and industries constitute microeconomic environments. One approach 

to enhance the Forest Service’s incorporation of community interests in its overall 

management plan of the national forests could entail explicit partnerships at the 

microeconomic level with local entrepreneurs.

The conceptual framework presented in this paper suggests adopting a clusterbased economic development strategy to upgrade the microeconomic environment 

of national-forest-based communities. For the purposes of this paper, a cluster is 

a group of firms whose linkages mutually reinforce and enhance their competitive 

advantage. The members of a cluster could be competitors, customers, partners, 

suppliers, or research and development contacts. 

The cluster-based economic development strategy would focus on improving the welfare of these communities through microeconomic productivity gains 

principally in resource-dependent sectors. Ultimately, the objective would seek to 

establish national-forest-based economic clusters representing public-private joint 

ventures in urban and rural communities existing both within and close to national 

forest boundaries. The national-forest-based economic clusters, integrating public 

sector objectives with private sector strategies, would provide natural resources 

products and services to local, regional, national, and international markets.

Currently, the Forest Service’s branch of State and Private Forestry, through its 

Economic Action Programs (EAPs), addresses the microeconomic needs of rural 

communities highly dependent on national forest lands for their livelihood. The 

The conceptual 

framework presented 

in this paper suggests 

adopting a clusterbased economic 

development 

strategy to upgrade 

the microeconomic 

environment of 

national-forest-based 

communities.
General TEchnical REport PNW-GTR-703



EAPs are designed to provide seed money and professional expertise to businesses 

dependent on natural resources located in rural communities. State and Private 

Forestry’s Urban and Community Forestry Program (UCFP) addresses the microeconomic needs of urban communities in a fashion similar to the EAPs. However, 

State and Private Forestry does not incorporate a cluster-based economic development approach in its initiatives. 

This paper suggests that a cluster-based economic development approach could 

strongly benefit national-forest-based urban and rural communities by explicitly 

influencing their determinants of microeconomic productivity and competitiveness, 

and clearly identifying the role of the national forest in their microeconomic value 

chains and value systems. The EAPs and UCFP do not make these factors explicit 

when formulating their integration of natural resource management with urban and 

rural community assistance. Additionally, individual national forest land management plans could also adopt an economic-cluster-based appraisal approach when 

assessing the viability of numerous urban and rural microeconomic communities 

embedded in and close to their jurisdictions.2

This paper examines the fundamentals of “cluster” theory and applies this 

theory to the microeconomic characteristics embedded in the national forests. 

This effort will explain how cluster theory could explicitly examine the relationships between national forests and national-forest-based microeconomic environments. The enhancement of these relationships could form a core objective of 

national forest management plans. By doing so, one could expect higher scores in 

the socioeconomic well-being (SEWB) index, formulated by Donoghue and Sutton 

(2006), for national-forest-embedded communities and those within a 5-mile buffer 

zone of national forest lands. The higher scores could emanate from increases in 

the diversity of employment by industry (i.e., EmD) indicator in the SEWB index 

(Donoghue and Sutton 2006).3 These increases could result from economic-cluster2 I contributed research and analysis to the 2006 update of the 1997 Tongass Land Management 

Plan. Among many other elements, this plan incorporates a derived demand model to forecast 

future demand of forest products from the Tongass National Forest. Although an important 

component of the conditions facing local forest product producers on the Tongass National 

Forest, demand conditions represent only part of the microeconomic environment within 

which local producers operate. A more comprehensive analysis adding factor conditions, firm 

strategy, and related industries would provide greater insight into the needs and resiliency of 

local national-forest-based microeconomic environments on the Tongass National Forest.

3 Socioeconomic well-being index (SEWB) = diversity of employment by industry (EmD) + 

percentage of population 25 years and older having bachelor’s degree or higher (Ed) - percentage of the population unemployed (Pun) - percentage of persons living below the poverty level 

(PP) - household income inequality (InIn) - average travel time to work (ATT). SEWB = EmD 

+ Ed - Pun - PP - InIn - ATT. (Donoghue and Sutton 2006: 20).
National Forest Economic Clusters

based initiatives inducing improvements in the microeconomic environments of 

national-forest-based communities, which, in turn, could attract a wider range of 

viable industry-specific investments into these communities.

Literature Review of Economic Agglomeration

Both the analysis of the agglomeration of firms and the importance of geography 

to economic development have formed part of economic theory beginning with the 

classical economists and continuing into the 21st century. Although both Marshall 

(1890) and Weber (1929) represent early classical exponents of issues pertaining to 

industrial agglomeration, this section will focus more on Weber’s pioneering effort 

in location theory and its influence on modern cluster theory.

Marshall (1890) listed three discrete incentives compelling the localization 

of industries. Firstly, he indicated the operational benefits to industry of creating 

a pooled market of specialized workers that can satisfy industry’s particular skill 

requirements. These workers would also benefit by having a number of employers 

to choose from in the case of one firm within the industry becoming idle. Secondly, 

Marshall denoted the development of secondary, or subsidiary, industries adding 

to the functional benefits of the concentration of industries, as these provide specialized nontraded inputs and services to the primary industry. Finally, Marshall 

elaborated on the increasing likelihood of technological innovations occurring in 

industrial agglomerations, given the relative ease of many experienced minds to 

gather and solve shared problems. 

Weber (1929), considered by some experts in economic geography the pioneer 

theorist of industrial location theory, captured both economic agglomeration and 

geographic importance in his research. He focused specifically on the location 

factors affecting industries. He established an analytical framework based on two 

primary regional factors of location: costs of transportation and labor. He then 

proceeded to simplify his model by assuming no labor mobility, an established 

sphere of consumption, and a predetermined geographical source for raw material. 

Weber considered transportation cost the initial and principal factor determining 

the decision to locate industries at specific sites. 

The main complexities added to the transportation cost model have to do with 

the nature of the raw materials and the processing they endure. Fundamentally, 

the higher the weight of the raw material, or the greater the weight-loss of the raw 

material during its processing, the closer the industry would locate to raw material 

deposits. Weber’s initial objective was to minimize the producer’s transportation 

cost of collecting and processing the raw material and delivering the final product 

to consumer markets. 

Both the analysis of the 

agglomeration of firms 

and the importance 

of geography to 

economic development 

have formed part 

of economic theory 

beginning with the 

classical economists 

and continuing into the 

21st century.
General TEchnical REport PNW-GTR-703

Still, Weber recognized that the other location force, the geographical differences in labor costs, would have to be factored in to determine the optimal choice 

of situating the production facility. He determined that geographical differences 

in labor costs become a deciding factor in locating an industry based on minimum 

transportation cost, when the savings from selecting the minimum labor cost site 

exceed the increase in transportation cost from this location.

In seeking to make his analytical framework more applicable to industrial reality, Weber added secondary agglomerative factors to his theory on the location of 

industries. His interest lay in addressing the external economies of scale that result 

from the agglomeration of industries in a particular location. As Marshall did, 

Weber specifically noted the benefits of industry-specific labor pools and specialized auxiliary industries that enhance the value of industrial concentration. Weber 

also discussed the problems eventually arising from agglomeration, such as the 

increased expenses resulting from greater demand for local factors of production. 

The balance between agglomerative and deglomerative forces, the latter mostly 

arising from increasing land values, determines the effectiveness of the particular 

industrial concentration.

Weber remained very keen on relaxing his theoretical assumptions in order to 

explain the forces underpinning actual industrial concentration. In particular, he 

discussed some of the externalities associated with evolving industrial concentrations such as new points of consumption and new uses of material deposits, which 

would attract additional industries to the location. Finally, his discussion on the 

stratification of industrial concentration addressed the notion of interrelated layers 

of “locational” distribution. He identified five interrelated strata: the agricultural 

stratum, the primary industrial stratum, the secondary industrial stratum, the 

central organizing stratum, and the central dependent stratum. For Weber, the 

agricultural stratum functions as the primary force determining the “locational” 

structure of the economic system.

Scholars interested in industrial agglomeration, industrial location, and economic development continue to reference or paraphrase Marshall (1890) and Weber 

(1929). Tsournos and Haynes (2004: 8-9) included the following “Marshallian” 

perspective when assessing development paths in southeast Alaska:

As many firms agglomerate, as a group they may be able to realize lower 

input prices that may shift or lower cost curves. This is because when many 

firms within an industry locate within a concentrated area, it is advantageous 

for other firms to specialize in providing services to the concentrated industry and to locate near the concentrated industry. Interdependency between 
National Forest Economic Clusters

the industry and intermediate or input firms may develop. Concentration of 

several firms within an industry also offers a pooled market of workers with 

industry-specific skills. 

Tsournos and Haynes (2004: 23) ultimately focused their examination of 

development paths on the dynamics of socioeconomic change occurring at the 

community level. Their conclusion remains very much in line with earlier research 

pertaining to rural communities along the Columbia River basin (Harris et al. 

2000). However, the “Marshallian” view in Tsournos and Haynes (2004) of how 

firms agglomerate and their focus on community dynamics prove insufficient to 

provide any explicit guidance in formulating competitive economic development 

paths for national-forest-based communities. What is missing from their assessment 

is an explicit evaluation of local microeconomic conditions and how they relate 

to the management of national forests (i.e., how does the management of national 

forests influence local microeconomic conditions), and how national-forest-based 

firms respond when these conditions change. 

This paper seeks to understand the role that the management of national forests 

plays in promoting the microeconomic mechanisms for innovation and entrepreneurship that could allow national-forest-based firms and communities to prosper. 

It proposes a model that explicitly outlines the interdependent microeconomic 

determinants affecting the performance of firms operating in national-forest-based 

communities. By facilitating the assessment of conditions in the microeconomic 

environment of these communities, the model would complement the existing work 

on the dynamics of socioeconomic change occurring at the community level. 

Cluster Theory

Over the last 15 years, a growing amount of economic research has focused on 

understanding the geographic context affecting the microeconomics of competitiveness in the private sector. Building on the work of Marshall, Weber, and many other 

scholars in economic development and economic geography, Porter (1990) set the 

tone for a reexamination of the conditions necessary for global economic prosperity with a particular emphasis on the strategies of private firms and how these are 

influenced by, and have an influence on, public policy. 

Porter has led a major worldwide effort to understand the fundamental attributes that characterize successful clusters of firms. His work includes and promotes 

elaborate case studies of nations, regions, states, and firms that assist in clarifying 

the powerful attributes of his competitive advantage theory. Bresnahan et al. (2001) 

in their discussion of clusters of information and communications technology firms 

This paper seeks to 

understand the role 

that the management 

of national forests 

plays in promoting 

the microeconomic 

mechanisms for 

innovation and 

entrepreneurship that 

could allow nationalforest-based firms 

and communities to 

prosper.
General TEchnical REport PNW-GTR-703

cited Porter as a classical reference for current agglomeration economies. Munnich 

et al. (2002) in their work on rural knowledge clusters referred to Porter as having 

meaningfully extended theories of economic development by bringing together 

theories of business strategy, institutional economics, and the significance of social 

relationships and social capital.

Porter’s seminal work on clusters represents an upgrading of agglomeration 

theories with business strategy. This section focuses on Porter’s work in cluster 

theory, given his emphasis on understanding and assessing the mechanisms affecting the competitiveness of microeconomic environments. Porter’s focus on the 

microeconomic determinants of competitiveness makes his model very compelling 

for public agencies, such as the Forest Service, committed to regional prosperity 

based on the economic revitalization of local communities embedded in and close 

to their jurisdictions. 

A cluster, in Porter’s framework, is a critical mass of companies in a particular 

location. Explicitly, Porter’s model examines three interdependent systems: the 

primary and secondary activities of firms and how firms marshal these activities to 

secure a profit; the microeconomic system in place that details the chain of events 

from the supplier of factors of production to the retail sale of a finished good or 

service; and the systemic determinants of competitive advantage that encompass 

factors of production, firm strategy, related and supporting industries, and demand 

conditions.

Value Chain

In the microeconomic environment of market-based economies such as the United 

States, firms organize to provide a product or service that generates value for a 

buyer. Firms compete within an industry to provide their products or services to 

customers. The competitive advantage of a firm emanates from its relative ability 

to organize its internal activities so as to maximize its profits while providing value 

to its customers. The key to a firm’s profitability in a competitive environment lies 

with its management of what Porter defined as the “value chain.” The management 

of a firm’s value chain defines the firm’s strategy. Each element or combination 

of elements of the value chain—either among the primary activities, the support 

activities, or both—could generate a competitive advantage for the firm relative 

to its competitors. All elements contribute to the firm’s profit margin. As Porter 

noted, “firms gain competitive advantage from conceiving of new ways to conduct 

activities, employing new procedures, new technologies, or different inputs” (Porter 

1990: 41). A firm’s cost advantages could originate anywhere in the value chain 

(fig. 1).
National Forest Economic Clusters

Value System

A firm’s value chain is one of many in its industry. As such, it forms part of a much 

larger set of activities. Porter denoted this larger stream of linkages the “value 

system.” It includes suppliers, producers, distributors, and buyers (fig. 2).

This second tier of linkages that connects a firm’s value chain to the larger 

value system requires additional management skills to foster a competitive producer. The firm must optimize management of both its internal value chain and 

external value system. Management of the external value system implies understanding the interdependencies among a firm and its suppliers, distributors, and 

buyers. The relationships of a firm with the different components of its external 

value system represent opportunities to improve the firm’s competitive advantage 

within an industry.

Firm infrastructure (e.g., finance, planning)

Human resources management

Technology development

Procurement

Primary activities

Support 

activities

Inbound 

logistics

Operations

(manufacturing)

Outbound 

logistics

Marketing 

and sales

After-sale

recovery

Profit

margin

Firm infrastructure (e.g., finance, planning)

Human resources management

Technology development

Procurement

Primary activities

Support 

activities

Inbound 

logistics

Operations

(manufacturing)

Outbound 

logistics

Marketing 

and sales

After-sale

recovery

Profit

margin

Figure 1—The value chain. Source: Porter 1990.

Supplier

value chains

Firm 

value chain

Channel 

value chains

(distributors 

or retailers)

Buyer 

value chains

Supplier

value chains

Firm 

value chain

Channel 

value chains

(distributors 

or retailers)

Buyer 

value chains

Figure 2—The value system. Source: Porter 1990.
General TEchnical REport PNW-GTR-703

10

Fundamental Determinants

Perhaps Porter’s most recognizable figure (fig. 3) depicts the “determinants of 

national advantage” (Porter 1990: 72). Chance and government influence the determinants of competitive advantage but are not considered determinants; chance has 

a unilateral influence on the determinants, whereas government is both influenced 

by and influences the four determinants. Choosing this configuration of Porter’s 

“diamond of advantage” facilitates understanding the application of Porter’s cluster 

theory to this paper’s proposed interest of enhancing the microeconomic environment of national-forest-based urban and rural communities.

Porter (1990) sought to design a model that improved our understanding of 

a nation’s competitive advantage. He examined the business world and tried to 

decipher the ingredients that permit some countries to become the hosts for successful firms. He has selected four fundamental interdependent determinants that 

help explain most of what creates a state’s, a region’s, or a nation’s competitive 

advantage: factor conditions; demand conditions; related and supporting industries; 

and firm strategy, structure, and rivalry. 

Firm strategy, 

structure, and 

rivalry

Related and 

supporting

industries

Factor

conditions

Demand

conditions

Government

Chance

Firm strategy, 

structure, and 

rivalry

Related and 

supporting

industries

Factor

conditions

Demand

conditions

Government

Chance

Figure 3—Diamond of advantage. Source: Porter 1990.

Chance and 

government influence 

the determinants of 

competitive advantage 

but are not considered 

determinants; chance 

has a unilateral 

influence on the 

determinants, whereas 

government is both 

influenced by and 

influences the four 

determinants.
National Forest Economic Clusters

11

Factor conditions—Factor conditions encompass the state of available factors of 

production. The widely held definition of factors of production essentially lists them 

as the productive resources used to produce goods and services (i.e., land, labor, 

capital, and entrepreneurship).4 Porter agreed that a state’s, region’s, or nation’s 

endowment of factors of production has a role in determining competitive advantage. However, he elaborated that the role of factors of production is “different and 

far more complex than is often understood” (Porter 1990: 74). He claimed that the 

most vital factors are created within the state, region, or nation and not inherited. 

Additionally, Porter noted that the process of creating factors of production differs 

substantially among states, regions, and nations. Consequently, the stock of factors 

of production proves less important for Porter’s model of competitive advantage 

than the rate at which the host site creates and upgrades them.

In exploring the role of factors of production across nations and to address the 

particular concerns of industry competition, Porter broadened the definition of 

factors of production into five major categories: human resources (quantity, skills, 

and cost of personnel); physical resources (abundance, quality, accessibility, and 

cost of the land, water, mineral, timber, fishing grounds, and other physical traits); 

knowledge resources (stock of scientific, technical, and market knowledge); capital 

resources (amount and cost of available capital); and infrastructure (type, quality, 

and user cost of infrastructure available including transportation, communications, 

financial, and health care). 

Still, according to Porter, a nation’s firms acquire competitive advantage not 

solely by securing low-cost or high-quality factors that prove vital to the competitiveness of a particular industry, but by deploying them in a particular fashion. 

Choices on how nations mobilize their factors and the technologies used to do so 

play an important role in the competitiveness of an industry. Furthermore, moving 

from dependence on inherited basic factors (i.e., natural resources, unskilled and 

semiskilled labor) to one based on created advanced factors (i.e., modern communications infrastructure, highly educated personnel, research institutes) represents 

a vital step in enhancing competitiveness. States, regions, and nations decide which 

advanced factors to create or upgrade. The specific ones identified respond to the 

interdependence of the other fundamental determinants in the model.

Porter highlighted the dynamic benefits of what he termed “selective factor 

disadvantages” (Porter 1990: 81-85). He noted that a jurisdiction’s disadvantage in 

4 Many contemporary economic textbooks list entrepreneurship as a fundamental factor of 

production. They treat entrepreneurship as the human resource that organizes land, labor, and 

capital. Without entrepreneurship the other factors of production would remain unorganized in 

a productive, economic sense.
General TEchnical REport PNW-GTR-703

12

factor endowment (e.g., labor shortages, lack of domestic raw materials, a harsh 

climate) can result in a competitive advantage if firms innovate to overcome the 

disadvantage. Moreover, according to Porter, the need for certain basic factors (e.g., 

semiskilled labor) can often be mitigated or made obsolete through innovation. 

Competitive pressure compelling firms to innovate in order to overcome their 

microeconomic environment’s disadvantages represents a major theme in Porter’s 

work. The remaining fundamental determinants in the model play an important and 

powerful role in inciting firms to innovate so as to remain competitive players in 

their industries.

Demand conditions—Demand conditions in Porter’s model represent the “home” 

(i.e., local)5 demand for an industry’s product or services. For purposes of competitive advantage, Porter proved more interested in the quality impact of local demand 

conditions on firms (i.e., the dynamic demand for product innovation) than in the 

quantity impact (i.e., the static demand for product volume).

According to Porter, firms primarily respond to local buyer needs. Competitive advantage in a state, region, or nation arises when local demand provides 

local firms with a “clearer or earlier sense of buyer needs than foreign rivals can 

have” (Porter 1990: 86). Local buyers can also pressure local firms to innovate 

quicker than foreign rivals. The differences among nations in terms of the nature 

of local demand helps account for their dissimilarities in competitive advantage. 

Porter noted that despite increasing globalization of competition, the local market 

usually has a “disproportionate impact on a firm’s ability to perceive and interpret 

buyer needs” (Porter 1990: 86). This is primarily due to the proximity and cultural 

similarity of product management and development teams, which are usually based 

in the firm’s local market. 

Proximity to local market plays a key role in potentially increasing a firm’s 

competitive advantage. Timeframes tend to be shorter for responding to local 

demand pressures, and the firms tend to be more confident in understanding and 

satisfying local demand requests. Porter mentioned three segments of local demand 

that represent core forces in a firm’s effort to strengthen competitive advantage: 

segment structure of demand, sophisticated and demanding buyers, and anticipatory buyer needs. These core forces tend to reinforce each other and provide initial 

and continuous impetus for investment and innovation.

The segment structure of demand plays an important role in focusing the 

attention and determining the priorities of a firm. According to Porter, segmented 

Competitive pressure 

compelling firms 

to innovate in order 

to overcome their 

microeconomic 

environment’s 

disadvantages 

represents a major 

theme in Porter’s work. 

5 The term “local” is used here to convey both geographically focused and nationally oriented 

characteristics.
National Forest Economic Clusters

13

demand exists in most industries. The segmented demand is a function of product 

variations (e.g., range of aircraft sizes appealing to different route structures). An 

important implication of segmented demand is that a state, region, or nation can 

prove competitive in segments representing a large share of local demand but a 

small share elsewhere. Having a large range of segments in the local demand structure can assist in securing competitive advantage by providing firms with greater 

exposure to diversified markets for products and services.

Sophisticated and demanding local buyers provide a powerful incentive to local 

firms to innovate and upgrade their products and services. The presence of such 

buyers proves just as important to sustaining competitive advantage as to creating 

it. Buyers tend to prove particularly demanding when their local circumstances are 

especially stringent and challenging.

Firms can further gain competitive advantage if their local buyers anticipate the 

needs of buyers from other countries. Such anticipatory tendencies can result from 

having sophisticated and demanding local buyers. Early warning indicators stemming from sophisticated local buyers can spur firms to upgrade old products and 

create new ones that could facilitate entry into emerging local demand segments. 

For example, given Japan’s large dependence on imported petroleum, Japanese 

automobile manufacturers early on faced extremely demanding energy-conscious 

local buyers. This particular “home advantage” has helped increase international 

market share for Japanese cars as foreign buyers became increasingly energyconscious with rising gasoline prices worldwide. 

Finally, a sizeable local demand does not necessitate a driving urge for investment and innovation among local firms if the abovementioned core elements of local demand prove weak. A large local demand, though important for economies of 

scale, could generate less product upgrading and innovation than a relatively small 

local demand that compels firms to compete in foreign markets. Porter indicated 

that local market size is most important for enhancing competitive advantage in industries with substantial research and development requirements, major economies 

of scale in production, or significant generational leaps in technology (Porter 1990: 

93). As important as, or possibly more important than, the size of the local demand 

is the rate of growth of local demand. A rapidly growing local demand provides 

firms with the incentive to incorporate new technologies faster and to upgrade or 

expand their capacity with the necessary conviction that they will be used. This 

pulling force for innovations from the demand side has its complementary pushing 

force located among related and supporting industries.
General TEchnical REport PNW-GTR-703

14

Related and supporting industries—Related industries refers to firms that provide complementary products or services to one another (e.g., computers and application software). While competing on the basis of their value chain management 

within their product- or service-specific industry, they might share or coordinate 

certain activities such as distribution, technology development, manufacturing, 

or marketing (e.g., pharmaceuticals and flavorings, chocolates and herbal candy) 

(Porter 1990: 105). Competitive related industries can provide opportunities for 

technological exchanges and, possibly, accelerate the development of competitive 

local supplier industries serving both. However, close working relationships among 

related industries do not happen automatically. Related industries must explicitly 

seek to forge alliances that will add to their competitive advantage.

Supporting industries include those firms that support or supply downstream 

companies. For example, supporting industries for the Oregon wine sector would 

include grape growers/vineyards, manufacturers of grape harvesting equipment, 

irrigation technology companies, and grapestock producers. The more innovative 

and competitive these industries are in a state, region, or nation, the better they 

can assist the respective local downstream firms in gaining competitive advantage 

through superior tools or inputs. Access to competitive supporting industries with 

the most cost-effective inputs proves crucial for firms seeking competitive advantage. Firms that secure access early, or through preferential agreements, to innovative inputs should remain ahead of the competition. 

However, the real key to leveraging industry-specific innovations emanating 

from competitive supporting industries is through coordination between downstream companies and their local input providers. Close working relationships 

between downstream firms and local input suppliers can facilitate the process of 

innovation and upgrading (Porter 1990: 103). Such symbiotic relationships could 

manifest themselves with downstream firms operating as test sites for new technologies or innovative intermediate inputs and suppliers benefiting from downstream ideas explicitly focused on solving supplier bottlenecks or enhancing input 

performance. Again, close working relationships between supporting industries and 

downstream firms do not happen automatically. Both sides must explicitly seek to 

make this happen. This is where the fourth fundamental determinant, firm strategy, 

structure, and rivalry, plays such an important role

Firm strategy, structure, and rivalry—Firm strategy, structure, and rivalry 

refer to the various approaches to a firm’s inception, organization, and management 

that establish the context for local rivalry and competitive advantage. The strategy 

and structure of firms contain the cultural and socioeconomic idiosyncrasies of 

their state, regional, and national settings. Their local advantage results from 

The more innovative 

and competitive these 

industries are in a 

state, region, or nation, 

the better they can 

assist the respective 

local downstream firms 

in gaining competitive 

advantage through 

superior tools or 

inputs.
National Forest Economic Clusters

15

synchronizing these idiosyncrasies with the attributes of available competitive advantage in particular industries. Local rivalry assumes a key role in the process of 

innovation, as well as local and foreign commercial success.

State, regional, and national conditions impact the manner in which firms are 

managed and how they choose to compete. Management styles and choices differ 

across localities and are readily recognizable (Porter 1990: 108). There is no universal recipe for the management of firms that can be applied to guarantee commercial 

success.6 Differences in management systems and organizational structure offer 

opportunities for establishing competitive advantage. Relationships between labor 

and management represent a particularly important element for the firm given their 

powerful impact on the process of innovation and improvements.

One of the most important empirical findings from Porter (1990: 117-122) established a powerful link between local firm rivalry and the creation and persistence of 

competitive advantage. Additionally, Porter established that rivalry with domestic 

firms proved more beneficial in terms of innovation and improvements than rivalry 

with foreign firms. Local rivals compelled one another to seek effective cost-cutting 

measures, product/service innovations, and organizational improvements. Local 

competitive pressure led to commercially successful firms, which in turn, lured 

new firms to the industry. Porter noted that direct cooperation among competitors 

tends to weaken competitive advantage: it reduces diversity, incentives, and the rate 

of innovation. The place for firm cooperation lies in trade associations and other 

independent organizations accessible to many firms.

Chance and government—The four elemental determinants of Porter’s “diamond 

of advantage” establish the microeconomic environment within which firms operate. Nevertheless, as indicated in figure 3, the roles of chance and government have 

a very powerful influence on the system. 

Chance events play an important role in determining microeconomic environments. These events are largely outside the control of firms, states, regions, or 

nations. Some prominent examples are wars and natural disasters (i.e., hurricanes, 

earthquakes, mudslides, drought, flooding). Other examples include major shifts in 

global financial markets (e.g., “irrational” exuberance and crises), in input prices 

(e.g., supply shocks in commodity markets), in global demand (e.g., satisfaction of 

“pent-up” industrial and consumer demand in China and India), and major technological breakthroughs.

6 Particularly, the training, background, and orientation of leaders; group versus hierarchical 

style; the strength of individual initiative; the tools for decisionmaking; the nature of the 

relationship with customers; the ability to coordinate across functions; the attitude toward 

international activities; and the relationship between labor and management.
General TEchnical REport PNW-GTR-703

16

Chance events create disruptions, discontinuities, and opportunities. They 

can affect firms, states, regions, and nations asymmetrically. Some firms will fail 

in their attempts to adapt to the chance events while others will succeed. Porter 

(1990: 124-125) noted that competitive firms operating in the microeconomic 

environments with the most resilient determinants of advantage should demonstrate 

superior odds for rebounding from the negative consequences related to chance 

events and, possibly, gain new competitive advantages. 

Porter (1990: 126) argued that neither entrepreneurship nor invention, core 

characteristics defining competitive advantage, are random events. Rather, a state’s, 

region’s, or nation’s differing determinants of advantage play a fundamental role in 

defining the location where specific industries could experience greater invention 

and entrepreneurship. Microeconomic environments differ in terms of the relative 

attributes of their systemic determinants of advantage. For example, demand conditions generate clearer signals to firms in some areas than in others, factor conditions 

prove more resilient for firms in some areas than in other areas. Which firm will 

generate innovations proves harder to predict. Nevertheless, according to Porter, 

the determinants of advantage of a particular area have a substantial influence over 

whether a singular invention will ever become a competitive industry.

The role of government in figure 3 differs from that of chance. Government 

influences and is influenced by the four fundamental determinants, whereas chance 

has a unilateral impact on the determinants. For example, government influences 

factor conditions through subsidies and policies affecting education and capital 

markets. Government regulations affect product standards that determine demand 

conditions. They also affect related and supporting industries, for example, through 

limitations on advertising. Government tax policies and antitrust laws have a powerful influence on firm strategy, structure, and rivalry. Finally, government has a 

direct impact on the fundamental determinants of competitive advantage as a buyer 

of products and supplier of inputs.

The interdependent determinants or diamond of competitive advantage, along 

with the influences of chance events and government policies, represent a complex 

system that configures the competitiveness of state, regional, and national microeconomic environments. The interdependent determinants of competitive advantage influence each other and evolve together in a dynamic manner. According to 

Porter (1990: 131), two elements have particularly powerful effects on generating 

the systemic dynamism: domestic rivalry and geographic industry concentration. 

Domestic rivalry compels innovative operational, strategic, and commercial approaches among competitive firms. Geographic industry concentration incorporates 

the “Marshallian” attribute of many experienced minds gathering and solving 

shared problems. In other words, clusters of firms offer the best opportunity to 

The interdependent 

determinants or 

diamond of competitive 

advantage, along 

with the influences 

of chance events and 

government policies, 

represent a complex 

system that configures 

the competitiveness 

of state, regional, 

and national 

microeconomic 

environments.
National Forest Economic Clusters

17

promote industrial upgrading and to magnify the interactions among and within the 

state, regional, or national determinants of advantage.

Clusters

As mentioned earlier, a cluster in Porter’s framework is a critical mass of companies 

in a particular location. As the cluster’s microeconomic determinants of advantage 

evolve, certain relationships between the fundamental determinants prove more 

important than others. General infrastructure development provides the foundation 

for advanced factor conditions. Elements that usually differ between successful and 

unsuccessful industrial locations are the rate of investment and the management 

quality of the institutions involved in the investment process. Sustained investment 

at a rate that upgrades factor creation assists clusters in gaining competitive advantage.

Domestic rivalry, a key feature of successful clusters, directly stimulates levels 

of innovation and improvement. According to Porter (1990: 143), it compels firms 

to maximize the benefits of the other determinants of competitive advantage. It also 

elevates the profile of the cluster by drawing attention to its activities. Domestic 

rivalry encourages additional investments by existing firms, their suppliers, and the 

local institutions, thereby improving the local microeconomic environment. These 

new investments lead to greater diversity of firms and enhance the rate of innovation within the cluster.

In response to domestic rivalry, clustered firms invest in advanced factor 

creation. Alone, or through trade associations, they develop skilled human resources, requisite technologies, specialized infrastructure, and market-specific data. 

The presence of strongly competitive local firms compels public officials to take 

notice. Many times local efforts focusing on factor creation are joint public-private 

initiatives to establish special programs in local schools and universities, research 

institutes, technical training centers, mentoring programs, and other projects that 

enhance local factor development. The more successful the cluster, the greater the 

demand by job seekers for advanced training in industry-specific skills and knowledge. Finally, advanced factor creation facilitates the spawning of start-ups in a 

cluster, as the centers for innovation become sources of entrepreneurship.

Domestic rivalry leads competitive firms to upgrade demand conditions by 

educating buyers to become more demanding in terms of the sophistication of the 

products they purchase. Buyers become accustomed to a high degree of attention 

from clustered firms competing for their business. Demand conditions, in turn, 

enhance domestic rivalry as buyers search for alternative sources and, thereby, 

encourage entry of new firms.
General TEchnical REport PNW-GTR-703

18

A cluster of domestic rivals encourages the formation of more specialized suppliers and related industries. The geographic proximity in the cluster between rival 

firms and their suppliers and related industries facilitates research exchanges and 

collaboration. This broadens the depth, breadth, and specialization of the cluster, 

thereby inducing further investment in advanced infrastructure and factor creation. 

Suppliers and related industries may establish specialized divisions to serve their 

clustered clients. As these clustered firms compete aggressively for markets, local 

suppliers must improve and innovate or possibly suffer replacement with competitors eager to expand their client base.

With the formation of a cluster, the entire constellation of industries mutually 

reinforces its evolution. The fundamental determinants of advantage affect one 

another through horizontal, upstream, and downstream industrial relationships. 

Rivalry in one part of the cluster tends to spread to other parts through bargaining 

negotiations within the value system, the development of company spinoffs, and 

other diversification efforts within the cluster. New entrants assist in upgrading and 

diversifying the cluster through innovative research and development approaches, 

operational strategies, and management skills. The competitive nature of the cluster 

begets expansion into new, related industries serving both broader and ever more 

specialized segments of the state, regional, national, and international markets. The 

success of the cluster will draw resources toward it and away from isolated industries that are not as effective or productive in deploying them.

Perhaps one of the most outstanding features of the domestic rivalry characterizing successful clusters lies in the degree of information exchanges taking place 

among buyers, suppliers, and related industries (Porter 1990: 152). Although 

initially it might appear somewhat counterintuitive, the purpose behind these cooperative exchanges has to do with improving competition. Fluid information flows 

among and within the cluster’s determinants of advantage prove vital to the cluster’s 

competitiveness. Consequently, the formal and informal mechanisms that facilitate 

these exchanges represent an important characteristic of successful clusters. Some 

examples of such mechanisms are local trade associations, personal relationships 

through education, and community links through geographical proximity.

Geographic industry concentration bestows tremendous proclivities toward the 

success of clusters. Porter’s research found that many successful industries across 

a wide spectrum of nations are concentrated in a single town or region within a 

country (Porter 1990: 154-159). The principal reason accounting for this, according 

to Porter, has to do with the manner in which geographic proximity heightens the 

influence of the determinants of advantage: rivals are more competitive, formal and 

informal cooperative exchanges between suppliers and buyers are more frequent, 

The competitive 

nature of the cluster 

begets expansion 

into new, related 

industries serving 

both broader and 

ever more specialized 

segments of the state, 

regional, national, and 

international markets. 
National Forest Economic Clusters

19

sophisticated customers are more accessible, and research/training centers are more 

responsive. The impact of geographic concentration on industrial improvements 

and innovations underscores the importance of location. Locational advantages, 

embodied in skilled people and effective institutions, thus influence the successful 

evolution of clusters. 

A fully-functioning diamond of advantage rarely exists at the incipient stage of 

an industry (Porter 1990: 159). Usually, the establishment of a local industry owes 

its start to one of three determinants in the diamond of advantage: factor of production, related and supporting industries, or demand conditions.

Abundant natural resources, which are factors of production, could provide the 

original momentum for establishing an industry. Their presence might also have 

enticed a predecessor industry to the location, thereby creating the initial framework for a subsequent industry. Related and supporting industries could drive the 

creation of an industry through spinoffs, serving a particular market that is outside 

the realm of another local industry. Finally, demand conditions can stimulate an 

industry through local demand for a product that proves viable in regional, national, 

and international markets.

The ability for an incipient industry to evolve from one determinant of advantage into a competitive industry has to do with the presence and quality of the other 

determinants. Rivalry is the key element to compel the initial industry to become 

a competitive one through upgrading and innovation. Chance events—a surge in 

demand, an input price shift, or a major technological shift—can also play a role in 

accelerating the evolution of a competitive industry. They can eliminate a competitive advantage of traditional industry leaders allowing smaller competitive firms to 

leap ahead to a more advanced industry.

Once a successful diamond of advantage—a competitive cluster—has evolved 

and established the conditions for higher order advantages, Porter (1990: 163) 

believes that it is very hard to replicate. In other words, once a locality has nursed 

the cluster through its competitive growth, the cost of entry into the particular 

industry has risen substantially. The possibility of building a competitive cluster 

from existing firms, or from existing competitive advantages, in a particular locality is the focus of the next section where this paper examines the potential creation 

of national-forest-based clusters.

National-Forest-Based Clusters

National forest lands produce a variety of factors of production. These include 

timber, fresh water, thermal water, nontimber forest products, wildlife, and 

metals (e.g., gold, zinc, platinum, molybdenum). Local, regional, national, and 
General TEchnical REport PNW-GTR-703

20

international demand exists for all these natural resources. As mentioned earlier, 

managers of national forests have publicly articulated their commitment to sustain 

the economic vitality of national-forest-based communities. Cluster theory provides 

these managers with an explicit framework to help facilitate improvements in the 

microeconomic environments of national-forest-based communities; improvements 

that could translate into innovative national-forest-based products and services 

serving local, regional, national, and international markets.

The urban and rural communities within or near national forest lands encompass a wide variety of historical traditions and cultural values, which affect the 

process of economic development. Chance events, federal legislative changes, and 

judicial challenges (e.g., litigation) can have powerful impacts on the nationalforest-based microeconomic environments of local communities.

Nevertheless, these communities can gain competitive advantage if they and 

the Forest Service jointly adopt a new approach to competing. First of all, availability and interpretation of information are central to perceiving opportunities for 

improvement and innovation. Finding, understanding, and creating appropriate data 

sources can assist in exploiting a factor advantage, discovering an underserved market segment, creating new products and product features, or enhancing the process 

by which a product is made or marketed. Secondly, sustaining advantage requires 

additional improvement and innovation.

National forest lands can allow for a diversity of industries to prosper from the 

products offered by national forests. National-forest-based economic clusters could 

turn lessons learned from history, different cultural traditions, environmental litigation, and hard science into products and services that fully meet the interests of 

local, regional, national, and international markets. Plaintiffs who would otherwise 

oppose a manufacturing, processing, or service-oriented endeavor within or near 

the boundaries of national forest lands might assist in furthering a nationalforest-based economic cluster that embodies the highest environmental standards 

for forest management.

The Forest Service, in turn, could directly assist in improving the economic 

welfare of its national-forest-based communities by fostering investment and 

innovation in these localities across a wide diversity of natural resource sectors. In 

essence, the Forest Service could step into the diamond of advantage through its 

involvement as a local supplier of raw material (i.e., factor conditions), seed capital 

(e.g., grants), and specialized human capital.

By developing national-forest-based economic clusters, national forests could 

further their congressionally directed mandate of providing for multiple uses of 

Plaintiffs who would 

otherwise oppose 

a manufacturing, 

processing, or serviceoriented endeavor 

within or near the 

boundaries of national 

forest lands might 

assist in furthering a 

national-forest-based 

economic cluster 

that embodies the 

highest environmental 

standards for forest 

management.
National Forest Economic Clusters

21

national forest lands. Figure 4 represents only some of the potential natural resource 

sectors and opportunities possibly available to firms operating within and close to 

national forest lands. 

Fulfilling this vision requires incorporating innovative elements from the 

cluster model into the management of our national forests. If national forests supply 

factors of production to firms, then the Forest Service could explicitly incorporate 

elements of the value chain and value system into its management plans. The Forest 

Service could help identify the most competitive firms within or near the national 

forests to form part of a national forest economic cluster. The Forest Service could 

establish an Economic Clusters research team. If economic clusters exist embedded 

in or close to national forests, having a Forest Service Economic Clusters research 

team would spur the formal documentation of economic cluster activity on national 

forest lands and facilitate the creation of a microeconomic database of such activity. It would also add to the literature on economic cluster research by examining 

clusters embedded in and close to public lands. This team would dedicate its efforts 

to the analysis and improvement of the determinants of competitive advantage 

affecting national-forest-based urban and rural communities. The Forest Service 

Figure 4—National-forest-based economic clusters.

USDA Forest

Service 

(supplier)

Technology / 

innovation

centers

Mining

Hydropower

Nontimber 

forest

products

Fishing and

seafood 

processing

Recreation

and 

tourism

Biomass 

energy

Bottled water

Wood

products

USDA Forest

Service 

(supplier)

Technology / 

innovation

centers

Technology / 

innovation

centers

Mining

Hydropower

Nontimber 

forest

products

Nontimber 

forest

products

Fishing and

seafood 

processing

Fishing and

seafood 

processing

Recreation

and 

tourism

Recreation

and 

tourism

Biomass 

energy

Biomass 

energy

Bottled water

Wood

products

Wood

products
General TEchnical REport PNW-GTR-703

22

Economic Clusters research team would have to think and act as a competitive firm, 

incorporating the dynamically interdependent determinants of advantage into the 

factor supplier function of the national forests (fig. 5).

Other public sector agencies have applied cluster theory to their economic 

development strategies. The U.S. Department of Commerce Economic Development Administration and the U.S. Agency for International Development, as well as 

the European Union, have researched and implemented cluster initiatives. 

In 2005, the USDC Economic Development Administration facilitated the 

preparation of Measuring Regional Innovation: A Guidebook for Conducting Regional Innovation Assessments (Council on Competitiveness 2005). This guidebook 

discussed the economic-cluster framework used to determine the results of regional 

innovation assessments undertaken in six U.S. regions by the Economic Development Administration and the nonprofit Council on Competitiveness.

In 2003, the U.S. Agency for International Development (USAID) funded the 

report Promoting Competitiveness in Practice: An Assessment of Cluster-Based 

Approaches (Mitchell Group, Inc. 2003). This report assessed the performance of 

USAID-funded cluster-based initiatives in Mexico and Mongolia, in addition to 

carrying out a comprehensive review of USAID’s efforts to enhance competitiveness in 26 developing countries.

The European Union’s Thematic Network ACENET represented an intercluster 

initiative that sought to facilitate cluster-building methodology and relationships 

among 11 European regions. It published its final report in 2003 (European Union 

Thematic Network ACENET 2003). The long-term goals of ACENET included 

Figure 5—National-forest-based diamond of advantage.

National-forest-based 

cluster firms

Related and supporting

industries

Factor conditions Demand conditions 

National-forest-based 

cluster firms

Related and supporting

industries

Factor conditions Demand conditions 

Other public sector 

agencies have applied 

cluster theory to their 

economic development 

strategies. 
National Forest Economic Clusters

23

implementing a monitoring system to document the progress and benefits emanating from the regions’ cluster initiatives.

A Forest Service Economic Cluster research team, by explicitly analyzing the 

individual determinants of competitive advantage impacting national-forest-based 

microeconomic environments, could assist in identifying partners to form specific 

natural resource cluster initiatives within or near national forest lands. These firms 

could then leverage whatever value is associated with the quality of the raw material managed by the national forest for their commercial purposes.

Adhering to the banner statement “Healthy Communities in Healthy Forests,” 

national-forest-based economic cluster firms could then seek branding opportunities by possibly placing a national forest cluster logo on their product label. Environmentally oriented venture capital firms, investment funds, and other financial 

intermediaries would consider national-forest-based economic cluster firms as 

targets for investment and further innovation (i.e., spinoffs).7 The creation of 

national-forest-based economic cluster firms could, thereby, facilitate equity/bond 

participation in the local economy by residents and nonresidents. 

Finally, the creation of national-forest-based economic cluster firms would 

not only help satisfy the mandate for multiple uses of national forest lands, but 

also assist in upgrading and diversifying the National Forest System’s numerous 

microeconomic environments, as well as its private-sector-oriented policies and 

institutions. Donoghue and Sutton (2006: 32) concluded that their assessment of 

socioeconomic status and change in the Northwest Forest Plan region between 

1990 and 2000 did not allow them to ascertain the degree by which public forests 

contribute to the socioeconomic variation they monitored in the region’s 1,314 rural 

communities. Nevertheless, by incorporating an economic-cluster-based strategy in 

the management plans of national forests, the Forest Service could achieve higher 

SEWB scores for communities embedded in and near national forests (see footnote 

2). Most of these communities scored low or very low in the SEWB index. By 

inducing improvements in the microeconomic environments of national-forestbased communities, economic-cluster-based initiatives by the Forest Service 

could eventually prompt higher SEWB scores. The higher scores could result 

from increases in the diversity of employment by industry (i.e., EmD) indicator 

in the SEWB index. Gains in the EmD indicator could stem from the enhanced 

microeconomic environments of national-forest-based embedded and neighboring 

7 For example, see the Goldman Sachs portfolio strategy report of August 26, 2005, on the 

growing interest in environmental issues among socially responsible and fundamental investors. (Goldman Sachs Group, Inc. 2005)
General TEchnical REport PNW-GTR-703

24

communities, which would have attracted a wider range of viable, industry-specific 

investments into these communities.

Tongass National Forest Wood Products 

Cluster Initiative8

Cluster initiatives (CIs) have become increasingly popular to spur economic growth 

and competitiveness within targeted regions through partnerships involving government, private sector firms, and research institutes. Solvell et al. (2003) identified 

more than 500 CIs worldwide and obtained survey data from over 230. They created the Cluster Initiative Performance Model (CIPM) to assess the implementation 

of CIs. Their CIPM uses three driving forces to evaluate the performance of a CI: 

the social, political, and economic setting of its geographic context (e.g., the business environment), its objectives (e.g., research and networking), and the process by 

which it develops (e.g., initiation and planning). Improvements in competitiveness 

and economic growth are fundamental factors in the CIPM’s determination of 

successful CIs. Among the results from the 238 respondents to their global cluster 

initiative survey (GCIS) they found that government initiated 32 percent of the CIs 

and that a majority of the CIs (54 percent) primarily received government financing. 

The survey also suggested that the failure of CIs was strongly linked to a lack of 

consensus among the partners and “the absence of an explicitly formulated vision 

for the CI” (Solvell et al. 2003: 51).

The Tongass National Forest has the potential to establish national forest CIs 

across a wide range of economic sectors. Some of these could occur in traditional 

resource-dependent sectors (e.g., fishing and seafood processing), whereas others 

might occur in newly emerging sectors (e.g., biopharmaceuticals). These Tongassbased initiatives would represent partnerships among a public land management 

agency, local private sector firms, nongovernmental organizations, and local institutions of higher learning. For example, the Tongass National Forest could formulate 

a CI fusing its combined wildlife habitat restoration/second-growth9 program 

(USDA FS 2005b: 44) with local wood products manufacturers. Essentially, as a 

byproduct of the wildlife restoration efforts, the Tongass National Forest would provide second-growth material to local wood products manufacturers for milling into 

value-added products (e.g., house logs and related accessories; fig. 6). This CI could 

8 On August 2, 2006, the Tongass National Forest leadership team invited me to give a presentation and lead a discussion entitled “National Forest-Based Economic Cluster Initiatives.” 

My presentation included a proposal and action plan to establish a Tongass National Forest 

Wood Products Cluster Initiative. The Tongass leadership team and The Nature Conservancy 

participated in the discussion.

9 Second-growth refers to timber that has regrown after a virgin stand was logged or burned.

Cluster initiatives have 

become increasingly 

popular to spur 

economic growth 

and competitiveness 

within targeted regions 

through partnerships 

involving government, 

private sector 

firms, and research 

institutes. 
National Forest Economic Clusters

25

explicitly seek to partner the Tongass’ restoration/second-growth program with 

local private sector firms, nongovernmental conservation interests, and universityaffiliated researchers. 

Conservation groups, such as the The Nature Conservancy, have indicated a 

strong interest in supporting such a CI. This support could generate “branding” 

opportunities for participating mills in the CI seeking niche markets catering 

to consumers desiring to purchase wood products endorsed by well-established 

conservation entities. 

Local wood products manufacturers (fig. 7) in this CI could harness the discrete 

values of the Tongass wildlife restoration/second-growth program and the official 

endorsement of conservation groups to adopt innovative marketing programs for 

their wildlife restoration/second-growth sourced value-added products. Additionally, a Tongass National Forest wood products CI could attract the attention of 

environmentally oriented venture capital firms and other financial intermediaries 

seeking directly—through equity partnerships—or indirectly—by providing 

public and private offerings of bonds, stocks, and financial derivative instruments 

linked to the CI—to finance economic CIs based on sustainable environmental 

management. 

Figure 6—Wildlife restoration of young-growth stands could offer a reliable source of material for 

local wood products manufacturers. 

Robert Deal, USDA Forest Service
General TEchnical REport PNW-GTR-703

26

Figure 7—Viking Lumber Company, Inc. in Craig, Alaska. 

Many of the necessary ingredients for the formal creation of a Tongass National Forest wood products CI currently exist on Prince of Wales (POW) Island in 

southeast Alaska (fig. 8):

• Prince of Wales hosts a relatively large concentration of competitive sawmills of different capacities (Brackley et al. 2006: 3) that could operate in a 

complementary manner. 

• Potential private sector leadership for the CI exists within the POW 

Chamber of Commerce Forest Products Task Force (fig. 9).

• A well-maintained road network (i.e., 105 miles of paved road, 155 miles 

of improved gravel roads, 2,000 miles of shot-rock logging roads) connects 

sawmills located on POW, and a new (2006) inter-island ferry service 

offers an additional transportation link to mills in the nearby towns of 

Petersburg and Wrangell.

• A technology center, the Ketchikan Wood Technology Center,10 currently 

provides a laboratory in southeast Alaska for testing traditional and innovative wood products (fig. 10).

10 The Ketchikan Wood Technology Center is a nonprofit research and development lab 

operating in partnership with the Forest Service and the University of Alaska. David Nicholls, USDA Forest Service

Many of the necessary 

ingredients for the 

formal creation of 

a Tongass National 

Forest wood products 

CI currently exist on 

Prince of Wales Island 

in southeast Alaska.
National Forest Economic Clusters

27

Figure 8—Prince of Wales Island in southeast Alaska.
General TEchnical REport PNW-GTR-703

28

A Tongass National Forest wood products CI would offer the opportunity 

to create an explicit and official partnership among national forest management, 

conservation groups, university research centers (i.e., through the Ketchikan Wood 

Technology Center) and local private sector firms to enhance the microeconomic 

environment of Tongass National Forest-based communities. If successful, other 

national forests could replicate the Tongass CI in their respective jurisdictions.

Figure 9—Prince of Wales Chamber of Commerce Forest Products Task Force conducting a field trip 

to a local mill. 

Figure 10—Bending and tension testers at the Ketchikan Wood Technology Center.

Karen Peterson, University of Alaska-Fairbanks David Nicholls, USDA Forest Service
National Forest Economic Clusters

29

Successful wood products CIs already exist and could provide guidance in 

formulating one within the National Forest System. For example, the Scottish 

Forest Industries Cluster was initially established in September 2000 as an official 

partnership between the Forest Industries Development Council (a Scottish private 

trade association) and Scottish Enterprise (a government economic development 

agency) (Scottish Forest Industries Cluster 2000). Its first action plan includes creating over 1,000 jobs within the timeframe of the plan, the stimulation of an extra 

1 million pounds sterling of investment in processing capacity, and an increase in 

market penetration from 9 to 15 percent. Regular annual reports provided online 

narrate the process behind the successful evolution of the Scottish Forest Industries 

Cluster since its inception.

The Tongass National Forest management team could modify existing models of successful wood products CIs to fit its own goals and objectives. A Forest 

Service Economic Cluster research team could assist national forest managers in 

formulating the most viable structure for a successful wood products CI by carefully assessing the microeconomic determinants of competitive advantage of the 

initiative and the potential for cooperation among the participating partners.

Conclusion

In this paper, I have discussed and proposed the use of cluster theory as a tool to 

analyze and upgrade the microeconomic environments of national-forest-based 

communities. Despite publicly stating its interest in promoting the economic 

vitality of national-forest-based communities, the Forest Service currently lacks 

an explicit framework to assess the determinants of competitive advantage affecting these microeconomic environments. A cluster-based economic development 

approach could strongly benefit national-forest-based urban and rural communities by explicitly influencing their determinants of microeconomic productivity 

and competitiveness and clearly identifying the role of the national forest in their 

microeconomic value chain and value system. Cluster-based economic development 

strategies could form part of individual national forest land management plans to 

assist the viability of urban and rural microeconomic communities embedded in 

and close to their jurisdictions. By creating national forest economic clusters, the 

Forest Service could help identify the most competitive firms within or near the 

national forests to form part of its CIs. A Forest Service Economic Clusters research team could assist the Forest Service in its efforts to analyze and improve the 

determinants of competitive advantage affecting national-forest-based urban and 

rural communities. This research could facilitate the implementation of economic 

CIs in national-forest-based communities to improve their overall social well-being 

The Tongass National 

Forest management 

team could modify 

existing models of 

successful wood 

products CIs to fit 

its own goals and 

objectives. 
General TEchnical REport PNW-GTR-703

30

through increased investment and microeconomic diversity. Finally, I envision 

establishing a wood products CI on the Tongass National Forest that would partner 

national forest managers, conservation groups, university affiliated researchers, and 

local wood products manufacturers.

Still, this paper represents only a small first step to incorporating economic 

cluster research as an important component in the Forest Service’s overall research 

program. Subsequent steps would involve identifying and analyzing other existing and potential national-forest-based economic clusters throughout the National 

Forest System. This research would include data collection on economic cluster 

sectors (i.e., size and impact, linkages within, resource assessment, available tools 

for marketing and financing) and SWOT (i.e., strengths, weaknesses, opportunities, 

threats) analysis of possible cluster initiatives. Additionally, comparative studies 

could be undertaken to examine and learn from the economic CIs undertaken by 

other U.S. government agencies, such as the Department of Commerce Economic 

Development Administration and the U.S. Agency for International Development, 

as well as foreign government agencies such as the European Union Thematic 

Network ACENET and Scottish Enterprise.

The microeconomic environments of the urban and rural communities embedded in and close to the 191 million acres of land occupied by the national forests 

need an explicit framework to facilitate innovation and spur competitiveness if 

they are to remain sustainably competitive. By adopting a cluster-based economic 

development strategy in the land management plans of individual national forests, 

the Forest Service could assist in enhancing the social well-being and prosperity of 

national-forest-based communities.

Metric Equivalents

When you know: Multiply by: To find:

Acres 0.405 Hectares

Miles 1.609 Kilometers
National Forest Economic Clusters

31

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