Cluster Development as an Economic Driver for Inner Cities

11.24.2011 |  “Latch on to any cluster you have and upgrade it. There is no bad cluster.”

—Michael Porter, professor, Harvard Business School, CEO ICIC.

When casting about for ways to spark innovation and economic growth, many metro areas opt to poach from neighboring states or court a certain industry with tax breaks and other incentives. Rather than looking at one’s neighbors as competitors, metros should look across state or local lines to their region’s strengths, legacy industries, and population, and band together instead.

At a recent conference of the Initiative for a Competitive Inner City, founder and chairman of  Michael Porter, spoke of such cooperation in the form of clusters and their power to spark development. Clusters are a critical mass of firms in a given location in a given field. A food cluster, for example, would include wholesale providers, inspection firms, distribution firms, machinery, and so forth. As a critical mass, clusters promote efficiencies that individual businesses or industries cannot. They take advantage of pools of employees or suppliers or other economies of scale.

“You don’t do skills training for just one firm, for example,” Porter said. “You can do it for a cluster.” The same is true for export promotion or attracting business. In other words, working collaboratively with neighboring regions is beneficial to all.  “If there’s a similar cluster in a neighboring region, both clusters do better,” Porter finds.

Clusters come in three forms: local, business, and traded clusters.

  • Local clusters exclusively serve local markets (e.g., retail). There is very little trade across regions or across clusters in these forms.
  • Traded clusters, in contrast, trade across regions and countries. They might be biotech clusters or auto clusters, for example. Traded clusters often offer much higher average wages, innovation is greater, and there is much higher trade.
  • Business-to-business clusters are like local clusters but serve businesses. They include local commercial services, real estate, utilities, and the like. If an area is weak in these b-to-b clusters, the environment is eroded for traded clusters.

Clusters can also benefit inner cities—with some tailoring. (ICIC defines inner cities as continuous census tracts that are continually distressed based on higher poverty and unemployment rates relative to the metropolitan statistical area and lower median household income).

Inner cities have a different rhythm and different drivers from other areas in the metro region, Porter says. Often, in fact, growth in the regional economy does not signal growth in the inner city. ICIC has found a weak correlation—only 20%—between regional growth and inner-city growth.

“In this tremendous movement to think regionally, we can’t lose sight of this weak correlation,” Porter says. “Inner cities need their own distinctive strategy to complement the regional strategy.”

ICIC is examining 100 cities to identify which are growing and which are lagging in the various types of clusters. Most inner cities, they find, have local clusters—and those cluster have bled jobs. Inner cities also have traded clusters, often in hospitality and tourism, transport logistics, processed food, universities, and apparel and footwear. However, they lack business-to-business clusters.

Lyneir Richardson, CEO of Brick City Development Corporation, Newark’s economic development corporation, offered an example of how they formed regional business-to-business clusters. Newark’s issue, he said, was how to compete as a legacy city in a regional plan. They identified transportation as their competitive strength given the nearby airport, a seaport, and a good hub system.

With that, they focused on food distribution and manufacture, and spent one-on-one time with particular firms. One firm from Jamaica, Queens, for example, which delivered coffee and paper products to grocery stores, was in the market for new facilities. The Newark planners helped the firm identify its traffic patterns and workforce availability, among other elements. The company eventually bought a warehouse in Newark and hired 180 workers.

The city planners took a similar tack other firms, and then company by company, they identified those firms that could benefit from Newark’s regional transportation and workforce advantages. The result was 800 new jobs in food-related distribution.

These are just some of the examples of regional and inner-city cluster development. But, warns Porter, there is no one-size-fits-all. “We need a clear image of what inner-city businesses and residents are like, and we should not be fooled by oversimplified notions,” Porter says.

ICIC is crunching the numbers to bring clarity to the profile of inner cities, and they will roll out a series of charts and data sources over the next several months.

In the meantime, here’s several great resources:

The SICE database (State of the Inner City Economy) provides information about the economies in many cities.

ICIC research library offers a wealth of resources

Presentations at the October conference are now available:

Also, seven inner-city companies in Chicago were recently honored for their achievements.

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