Business cluster

A business cluster is a geographic concentration of interconnected businesses, suppliers, and associated institutions in a particular field. Clusters are considered to increase the productivity with which companies can compete, nationally and globally. Accounting is a part of the business cluster.

In urban studies, the term agglomeration is used. Clusters are also important aspects of strategic management.

The term business cluster, also known as an industry cluster, competitive cluster, or Porterian cluster, was introduced and popularized by Michael Porter in The Competitive Advantage of Nations (1990). The importance of economic geography, or more correctly geographical economics, was also brought to attention by Paul Krugman in Geography and Trade (1991). Cluster development relies on the underlying concepts established by Alfred Marshall in 1890. The development of business clusters is supported by three principle factors, which Marshall summarized under the headings labour-market effects, input-output dependency, knowledge spillovers.

Michael Porter claims that clusters have the potential to affect competition in three ways: by increasing the productivity of the companies in the cluster, by driving innovation in the field, and by stimulating new businesses in the field. According to Porter, in the modern global economy, comparative advantage, whereby certain locations have special endowments (i.e., harbor, cheap labor) helping them overcome heavy input costs, has become less relevant. Now, competitive advantage, in which companies make productive use of inputs, requiring continual innovation, is more important. Porter argues that economic activities are embedded in social activities; that 'social glue binds clusters together'. This is supported by recent research showing that particularly in regional and rural areas, significantly more innovation takes place in communities which have stronger inter-personal networks.

The Hollywood film industry has been studied in literature since the mid-1980s as example of cluster with post-Fordist flexible specialization. However, Silicon Valley has been most influential in cluster theory as well as cluster policies and programs. An industry cluster is a production system limited to a geographic region were related industries and colocations interlink customers and suppliers. The cluster region needs to retain a decisive sustainable competitive advantage over other places, or even a world supremacy in that field.

A cluster is most of the time the result of initiatives, since it implies to convince current competitors to work jointly. The initiative usually comes from the political sphere e.g. the different Singaporian clusters, but it can also come from the industry itself. The initiative of Bart J. Groot, the director of Dow Olefinverbund GmbH, a major chemicals complex at the intersection of three Eastern German states Saxony, Saxony-Anhalt, and Thuringia after the German reunification conts as one example. The goal was to "encourage coordination among political and administrative officials" of Mitteldeutschland.

Following development of the concept of inter organizational networks in Germany and practical development of clusters in the United Kingdom; many perceive there to be four methods by which a cluster can be identified:

It is also expected – particularly in the German model of organizational networks – that interconnected businesses must interact and have firm actions within at least two separate levels of the organizations concerned.