Cluster based economic development theory is based on the premise that a firm can realize higher levels of competitiveness when it looks beyond its own capabilities and strategically partners with other companies and supporting institutions. This approach emphasizes the role of government in identifying specific industries within a particular geographic region and formulating policy which will help these firms cooperate and be more innovative.
What are some of the limitations to this approach?
I think an easy and short (and maybe a little bit unsatisfactory, we should develop it) would be that the government cannot have the precise, adequate, right and enough knowledge to guide clusters of development processes led by companies. Besides, there might be a problem of incentives: government would tend to help more to their friends. Market incentives would change towards perverse paths. That is, entrepeneurs would have the incentive to ask for government for grants and put pressure on it, instead of having the incentive to look for new and better ways to satisfy consumers.
So, knowledge and incentives problems.
The cluster concept is very sound. For example, the site selection strategies of many retailers involve locating close to a WalMart and most tier 1 and tier 2 automobile parts manufacturers find it advantageous to be located near a major automobile manufacturing plant (that is, one that isn't effectively in bankruptcy, which is why they are all movng to the southern states). The problem with government involvement in this process is one of calculation, as detailed in Mises' book Socialism. Each individual company in the private sector can accurately forecast the profitability of joining such a cluster but the government can't forecast how many jobs will be created (which is generally their criteria for sucess). They attempt such forecasts but these are generally way off. In addition, they can never calculate how many jobs would have been created but weren't because of the higher taxes that were used to fund the government assisted economic development.
There's this too.
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martinf: I think an easy and short (and maybe a little bit unsatisfactory, we should develop it) would be that the government cannot have the precise, adequate, right and enough knowledge to guide clusters of development processes led by companies. Besides, there might be a problem of incentives: government would tend to help more to their friends. Market incentives would change towards perverse paths. That is, entrepeneurs would have the incentive to ask for government for grants and put pressure on it, instead of having the incentive to look for new and better ways to satisfy consumers. So, knowledge and incentives problems.
Governments alway fail to build their own silicion valley anyway.
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Regulus:Cluster based economic development theory is based on the premise that a firm can realize higher levels of competitiveness when it looks beyond its own capabilities and strategically partners with other companies and supporting institutions. This approach emphasizes the role of government in identifying specific industries within a particular geographic region and formulating policy which will help these firms cooperate and be more innovative.
Really?? I've heard good things about "clustering" which seem reasonable for many kinds of entrepreneurs.
But where does "the role of government" enter the issue? Who says that clustering couldn't take place, or would be less efficient, without the government forcing the participants to follow their orders? To me, it sounds just like the brute force gov agents have just smacked their gov label unto a buzz-word they were getting afraid of during the early IT-bubble and claimed: "This cannot be done without following our orders, or else we'll MAKE SURE that it won't be done without following our orders..."
It's not fascism when the government does it.
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