Explaining Geographic Cluster Success-The GEMS Model

Introduction Business and technology clusters have become the focus of a vast literature on regional and national economic development. They have received considerable attention from scholars, policy makers, city and regional planners, and those in the public policy arena. Though there has been considerable recent work in this area by some of the leading scholars and practitioners, Porter's Diamond model (Porter 1990a, 1990b, 1998a, 1998b) remains the paradigm model for work in this area. This study develops an integrated model of cluster development and success based on recent advances in the understanding of economic development, strategic management, and economic geography. (1) It integrates critical factors that were either underemphasized or neglected in Porter's original framework, especially factors that have been explored in the strategic management, the economics of geography, and the institutional economics literature. We then empirically test the integrated model using data collected from a sample of technology clusters across the world. The second section provides a brief literature review of the major contributions to understanding the formation and success of clusters. This is followed by a third section that develops and details the integrated model, which we call the GEMS (General Economic Management System) model extending Porter's Diamond model. The fourth section discusses the research methodology used to empirically test the model. We discuss the results in the fifth section and present our conclusions and implications for public policy and global corporate strategy in the last section. Theoretical Antecedents in the Cluster Literature Alfred Marshall (1890) provided the early foundations of modern duster theory, focusing on traditional socio-cultural factors that concern the quality of the social milieu of industrial districts, and that only indirectly affect the profits of firms. Among such factors Marshall emphasized in particular: (1) The mutual knowledge and trust that reduces transaction costs in the local production system; (2) The industrial atmosphere that facilitates the generation and transfer of skill and qualifications of the workforce required by local industry; and (3) The effect of both of these aspects in promoting innovations and innovation diffusion among small firms in industrial districts. Marshall advanced the cluster concept in 1890 to explain national economic success in part by the development of localized concentrations of industrial specializations. His concept further explained that industrial specialization in a given geographical location is influenced by the presence of natural resources and materials, by the existence of nearby markets, or simply by an "accident of history." Such geographical specialization tended to become self-reinforcing through the operation of what he termed as "localization economies." Marshall's (1920) subsequent work on industrial districts stressed three reasons for the clustering of industry: (1) Benefits from pooling resources, particularly labor resources; (2) Enhancing information flows between people and firms; and (3) Improved access to specialized inputs. According to him, the existence of these three features in a cluster created a positive feedback loop and agglomeration economies, whereby firm concentration brings additional labor and other inputs that, in turn, attract additional firms, leading to a beneficial spiral of further efficiencies and wealth creation and concentration. Thus, resource pooling, information network effects, and input access or improved factor availability can be seen as underlying cluster success. Following MarshalFs work, an extensive literature on agglomeration economies developed, including the pioneering work of Weber (1929), Losch (1954), Isard (1956), Dicken and Lloyd (1977), Goldstein and Gronberg (1984), and Fujita and Thisse (1996). …