Urbanophile on microclusters as an economic development concept

I write from time to time about "agglomeration economies" which is a concept from urban economics.  The Geography of Transportation webpage at Hofstra University defines them thusly:

Agglomeration economies are a powerful force that help explain the advantages of the "clustering effect" of many activities ranging from retailing to transport terminals. There are three major categories of agglomeration economies:

• Urbanization economies. Benefits derived from the agglomeration of population, namely common infrastructures (e.g. utilities or public transit), the availability and diversity of labor and market size.
• Industrialization economies. Benefits derived from the agglomeration of industrial activities, such as being their respective suppliers or customers. This favors the emergence of industrial clusters.
• Localization economies. Benefits derived from the agglomeration of a set of activities near a specific facility, let it be a transport terminal (logistics parks), a seat of government (lobbying, consulting, law) or a large university (technology parks).

Often, we think that these clusters have to be extremely large--like DC and the federal government; MIT and Draper Laboratories and military-related tech industry; what Michigan, in particular the Detroit area used to be, for the automobile industry; Houston and oil; Calgary and Edmonton and oil; Pittsburgh's former role vis-a-vis the steel industry; NYC and finance; the SF Bay area-Silicon Valley and technology; but also Seattle and Austin as big technology centers as well; etc.--not unlike Jack Welch's desire for General Electric to participate in industries where it was the preferably the #1 player but maybe #2.

In his Urbanophile blog post "The Magic of Microclusters," Aaron Renn makes the argument for "microclusters." After giving an example of a tech start up in Des Moines Iowa, seemingly a backwater (but I note, historically an important center for the US insurance industry), he writes:

... in a sense everybody can play right now. At some point though, there will inevitably be another shakeout of sorts. If you want to be a long term survivor, have a claim to fame that will make you stand out from the crowd, generate above average returns, etc., you need to have something that makes you distinct.

One way to do that is to be sub-specialized. “High tech” is an extremely broad category. A city could have a large number of nominally high tech companies that are totally unalike, and which do not form any type of real ecosystem, integrated supply chain, etc. This is a cluster in name only.

One way to stand out is a concept I’ve called “microclusters”. That is, rather than simply saying “We’re high tech”, you have some specialty within the broader tech industry where you can be a real national leader.

He goes on to give a couple of examples of micro-clusters in Indianapolis, in e-commerce marketing and motorsports, to illustrate his concept.  Another would be how Pittsburgh still has a number of smaller innovative businesses focused on steel manufacturing processes and improvements, even though the area now has few steel production operations of any scale.  See "Government financial incentives and business evolution and maintenance."

I think he makes a very good point that microclusters are about being able to compete on the national, but really, global scale, because now most business sectors function as part of one global market, but you don't necessarily have to be in Silicon Valley to do it.

Soft infrastructure is necessary to foster microcluster development

 

But one element that he doesn't discuss is the kind of infrastructure you need to have in order to support the development of microclusters. 

1.  At least one or two anchor firms.  Which usually grow out of connections to other businesses or

2.  Universities: it helps to have some universities with some decent academic departments that attract talented professors, researchers, and students.  For example, I mentioned Des Moines has had a strong cluster in insurance.  In part this derives from Drake University having a strong actuary program, or maybe the actuary program developed in response to the development of an insurance firm or two in Des Moines.

3.  Flexible buildings/office spaces that are cheap to rent.  This goes back to the point Jane Jacobs made in Death and Life of Great American Cities about the need for a large stock of old buildings to support innovative uses.

4.  Money that can be tapped for investment capital.  Detroit became an auto center developing out of the carriage industry.  Great forests in Michigan provided raw material for Grand Rapids-based furniture companies and carriage manufacturers in Eastern Michigan.  But the lumber companies generated high financial returns which they had available to invest in other industries.

Because capital is mobile and global, you can get money from a wide variety of places that aren't necessarily local.  An article I read recently on the Sweetgreen food chain demonstrated that capital connections transcend place.  Until that time all of the articles on the firm highlighted it as a super special example of a startup.  It turns out one of the founders is from a family of prominent restauranteurs and they used those connections to raise money. 

But it helps to have local money around to support business development.  cf. the idea of the lean startup

5.  Networking-capacity building organizations.  Organizations and media that connect people across the cluster and to support the various nodes within the cluster are important, help to brand the microcluster and to stabilize and built it up.  Business incubators are an example of such organizations focused on individuals  Social-business-commerce organizations and events are another.  

In the DC area, the Washington Business Journal and the Capital Business supplement of the Washington Post, along with various website and trade media are media examples.  There are a bunch of technology councils and angel investor groups like Angel Venture Forum DC, etc.

Why the microcluster concept is important

1.  It's pretty simple.  If you think that you can only compete if you are Silicon Valley, why bother getting into the game as the leading clusters are already so far ahead?  Alternatively, the microcluster concept provides an entree into the field and framework for understanding how smaller clusters fit into the overall ecosystem of a business sector.

2.  It's also important that the rise of the e-commerce and Webubiquity has trumped to some extent the absolute dominance of the dominant cluster within an industrial sector--ten years ago, you had to be in Silicon Valley to make a tech business work.  

The example of DC's Fundrise/Popularise, a platform for gathering community input and funding for real estate projects (crowdsourcing/crowdfunding) is but one example.  So is CoStar, a real estate information firm developed by the son of one of DC's leading architects.

Although using Aaron's concept of microclusters, I would argue that both Fundrise (developed by scions of a prominent real estate developer) and CoStar are products of DC's microcluster in real estate development and finance.  

This cluster has developed around the strength of the "local" real estate market, which over the years has been integrated into the national-global real estate development and finance market, as key companies from around the country (e.g., Hines Interests) and globe (Skanska USA, a division of a Swedish firm) have come here to take advantage of big opportunities, as "local" real estate firms have been merged into national companies (like Charles C. Smith into the Vornado Companies) and as all of these firms, including local firms, tap national and international financing to build their projects.

Microclusers and recommendations for local policy

I think it's probably more important to not have cities focus on providing tax incentives to individual businesses (something that DC has been big on, both to CoStar and to Living Social), although I suppose there are always exceptions to the rule (CoStar definitely didn't need a tax break, and Living Social isn't really a tech firm as much as it is a marketing firm), as much as it is to focus attention to building, strengthening and extending the value and quality of the soft infrastructure that supports specific microclusters.

Typically, tax incentives and local industrial policy are focused on providing payments and tax breaks to specific firms.  While that can be successful with certain examples, mostly it's a zero sum game.  See the New York Times series, "As Companies Seek Tax Deals, Governments Pay High Price."  Links to other stories in the series are embedded in the article.