Firms engaged in clustering typically show comparative advantage in three key areas:

• Business productivity: Companies operating in a cluster operate more efficiently by taking better advantage of economies of scale and shared resources
• Innovation and knowledge transfer: As part of a cluster, companies can better source new knowledge and pursue innovation opportunities through stronger links with institutions, service providers and educational establishments
• Market awareness: Clustering allows companies to serve existing markets better and to respond to future market changes, through the establishment of closer links with local clients and markets.
  Companies in a cluster can also act co-operatively in sourcing market data.

Clusters provide benefits to individual firms and differentiate regions. They take time to establish but, when they are fully functioning, provide a vital and dynamic engine for growth and productivity.

An often cited example of a successful cluster is the High Technology Cluster in Cambridge. A brief summary of the ‘Cambridge Phenomenon’ is provided below.

High Technology Clustering in Cambridge, UK

The high-technology cluster centred around Cambridge serves as a model of how successful clustering activity has led to a world-renowned competence. Growth in output and employment has been sustained since the mid-1980s and, in a highly dynamic and competitive sector, the cluster continues to develop and evolve.

By 1998 there were 1,350 high-tech firms employing some 32,500 people in the area. As well as development of established specialisms, such as in software, there has been significant penetration of new markets in pharmaceuticals and biotechnology. The success of high technology companies in Cambridge corresponds with many facets of the classic clustering model. As well as hosting offices of leading multinational companies (e.g. Microsoft) there is a significant group of go-ahead independent companies. New firm spin-outs, often with high-growth ambitions, continue to be a feature of the Cambridge scene, with founders coming from both existing high-tech firms and the research community.

Cambridge University, regarded as the UK’s leading university for teaching and research, has actively sought to engage with front-ranking science-based companies. Within the Cambridge locality, a significant support infrastructure now exists following a proliferation of specialist incubators and science parks.

Technology consultancies, a distinctive element of the cluster, have continued to prosper and are evolving into more rounded technology houses, acting as a major source of spin-outs and providing seed and venture capital. Legal specialists on intellectual property rights and related issues operate from Cambridge. Also, financial and professional services companies and the local investor community have increased their scale and have focused on the needs of high-tech businesses.