Among the many important contributions made by Michael Porter in The Competitive Advantage of Nations was to call attention to the central role played by industrial clusters in the process of economic development (Porter, 1990a). He was not the first to identify the economic advantages of clustering of firms and industries, what economists refer to as “agglomeration economies”. Here, he followed in the great tradition of Alfred Marshall (Marshall, 1890) and later Jane Jacobs (1961). But what made his work so influential was how he identified these clusters empirically and was able to specify their role in economic development in a way that captured the attention not just of other economists and academics but also of policy makers in the real world.

There is much that is important about his work on industry clusters, but perhaps, the most significant aspect was his differentiation between two key types of them (Porter, 2003). “Traded clusters”, which account for about a third of US employment, are the more important type for economic development. As their name implies, traded clusters are composed of industries that sell to markets beyond their local region and therefore are found clustered together in only a limited number of regions within any country and in only a select number of countries around the world. They not only provide higher wages for their workers, they also are the primary source of innovation and productivity and generate all-important “spillovers” that boost their local economy. Locally dispersed industries (“local industries”), which are found evenly distributed across jurisdictions and serve only their local markets, account for the other nearly two-thirds of US employment. They have lower wages, lower productivity and do not generate spillovers like traded clusters. They are dispersed relatively evenly across all jurisdictions in a country.

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Academic Reference:

Roger Martin , Richard Florida , Melissa Pogue , Charlotta Mellander , (2015) “Creativity, clusters and the competitive advantage of cities”, Competitiveness Review, Vol. 25 Iss: 5, pp.482 – 496.