How do we encourage innovation through clusters?

It is in cities, not clusters, where policy can help firms locate in one place, this paper looks at how policy can encourage this.

With the revival of industrial policy over the last year, it is unsurprising then that the question of developing industry clusters has too emerged.

Clusters refer to the gathering of businesses in the same industry in the same area and have been a popular focus of policy since Michael Porter’s work. But while policy has been in pursuit of creating clusters for many years, actually creating them has been far more elusive.

This briefing looks at how and why industry clusters might occur. It shows that while some firms locate close to a natural asset – such as oil and gas in Aberdeen – other examples of clusters, such as the Motorsport Valley in Oxfordshire and the Midlands are less clearly defined and more elusive in their nature.

Yet, policy has made many attempts to nurture and form such clusters in different places, whether the tech industry in London or by trying to encourage specific ‘winning’ industries to locate in different places.

Future clusters policy should recognise however that cities themselves operate as successful clusters – but they house multiple industries which all benefit from co-location. This paper describes how the industrial strategy and relating cluster policy should concentrate on encouraging innovation in cities by encouraging density and knowledge-spillovers.

Implications for the industrial strategy and cluster policy

National policy

  • Use the £23 billion Productivity Fund to increase density in city centres, with the aim of encouraging innovation and information sharing to occur. Specifically it should be used to fund projects set out as part of a detailed local authority-led plan for improving city centres through upgrading office space, public realm and transport connections.
  • Do not subsidise out of town office space, as has been done in the past for example through enterprise zones. Some innovative businesses will of course prefer out of town locations to a city centre base and policy should not actively stop this. But they won’t need a subsidy to be encouraged to locate there either.
  • Encourage investment in innovation through R&D grants and tax credits and evaluate their outcomes to improve the impact of such policies in the future.

Local policy

  • Put a spatial plan in place that understands and reflects the roles that different parts of a local economy play and how they link together, particularly focusing on increasing density in city centres.