Agglomeration Theory and Entrepreneurship
Cluster Theory: Why Startups Flock Together
Why do technology firms congregate in Silicon Valley? Why are movie studios in Hollywood and finance firms on Wall Street?
For decades, researchers have debated the Cluster Theory of Entrepreneurship. The central question is: Do clusters form because of entrepreneurship, or do clusters create entrepreneurs?
What is a Business Cluster?
A cluster refers to a geographic concentration of interconnected businesses, suppliers, and associated institutions in a particular field. According to Delgado, Porter, and Stern (2010), these clusters are not just random collections of companies; they are engines of economic efficiency.
[Image of Porter's diamond model]The "Spinout" Mechanism
How do clusters actually grow? The primary mechanism is the Employee Spinout.
Spinouts occur when employees leave an existing firm to start a complementary or competing independent venture. Berchicci, King, and Tucci (2011) found that half of all spinouts choose to stay in the same geographic cluster as their parent firm.
They stay because:
- They rely on their existing professional networks.
- They need access to the same specialized talent pool.
- They require the same specialized suppliers.
Policy Implications: The California Effect
The growth of a cluster is heavily influenced by local laws. Cordes et al. (2014) argue that clusters thrive in places where there are fewer barriers to leaving a job.
A famous example is California, which refuses to enforce non-compete agreements. This legal environment allows employees to leave tech giants and start new ventures without fear of litigation, creating a massive "agglomeration" of startups. In contrast, regions with strict non-compete laws often struggle to build dynamic startup ecosystems.
The "Cluster Effect" (Agglomeration)
Why would a shoe store want to open right next to another shoe store? It seems counter-intuitive to be so close to a competitor.
This is known as Agglomeration Economics. When firms cluster, they create more value together than they could alone by:
- Drawing Customers: A street full of shoe stores becomes a "destination" for shoe buyers, increasing foot traffic for everyone.
- Labor Pooling: Specialized workers move to the area, reducing hiring costs.
- Knowledge Spillovers: Ideas flow freely between firms (often over drinks or coffee), accelerating innovation.
Video: Michael Porter on Competitiveness
References
Berchicci, L., King, A., & Tucci, C. L. (2011). Does the apple always fall close to the tree? The geographical proximity choice of spin-outs. Strategic Entrepreneurship Journal, 5(2), 120–136.
Cordes, C., Richerson, P. J., & Schwesinger, G. (2014). A corporation’s culture as an impetus for spinoffs and a driving force of industry evolution. Journal of Evolutionary Economics, 24(3), 689–712.
Cusmano, L., Morrison, A., & Pandolfo, E. (2015). Spin-off and clustering: a return to the Marshallian district. Cambridge Journal of Economics, 39(1), 49–66.
Delgado, M., Porter, M. E., & Stern, S. (2010). Clusters and entrepreneurship. Journal of Economic Geography, 10(4), 495-518.
