Business Clusters and Why They Are Important

Definition of business clusters

Business clusters are a set of interrelated, specialized business enterprises that exploit geo-economics that is, interrelated businesses networked and consolidated in a single location. A set of companies providing the same services are located in the same area, street, city or business blocks. Sectoral business clusters are the most common type of business clusters.

business clusters
definition of business clusters

Structuring businesses on this model increases visibility of the products, improves perception of brands and pushes volumes to sustainable levels.

Overview of business clusters in different parts of the world

Creating business clusters makes it easy for clients to identify the products. Many times the quality of products is associated with where they come from. Shanghai and Hong Kong for instance were the manufacturing hubs in the 80s and almost every product was written “made in Hong Kong” or “made in Shanghai”.

Nowadays, they have diversified and upgraded to more lucrative businesses in the service sector. These are now mainly based in Taiwan, a country that was given semi-autonomous status so it could regulate its functions with little interference from mainland China

Developing countries face hurdles when it comes to the way they do business. The input costs are usually high, it is difficult to break-even and the organization of the business environment is unpredictable, unstructured, volatile and incomprehensible. Comparing African countries to the rest of the world, it’s the way we do business that discourages a foreign investor.

Michael Porter in 1990 invented the economics of clustering businesses. Paul Kurgman had the same idea much earlier which was later re-invented. All developed nations have clustered most of their business environment.

There are also countries especially in Eastern Europe who are catching up fast, especially those that wish to join the European Union market. Countries like Georgia and Poland advertise in global media on why investors should establish business enterprises there.

As we invest in county governments top on priority should be how these counties can cut a niche in the market and how easily investors can do business in the counties. We can even organize our own Ease of Doing Business Index for the counties in the country/

When an investor from Singapore or Dubai goes to a developing country to invest in say, the beef industry, he wants a one stop shop where he’ll get a business license, branded suppliers, agency lawyers, labor outsourcing firms, management consultants and clearing and forwarding consultants. That’s what happens in business economies like Dubai that don’t have any viable assets to depend on.

One would ask, why have the same business like your rival on the same block instead of moving far away to be with unrelated businesses? The theory of clustering disapproves this. It suggests that businesses with similar concepts and uniformity should be grouped alongside each other.

The economic idea behind this concept is that when similar businesses converge it is cheaper and faster to introduce collaborative networks and sharing platforms. The theory favors concentration of similar businesses that are interrelated and interdependent, at particular locations to increase cost effectiveness and competitive advantage.

International examples of business clusters:

  1. The famous Silicon Valley (USA)
  2. The Wall Street (USA)
  3. Hsinchu (Taiwan)
  4. Hollywood (USA)
  5. Macau City (China)

Hsinchu in Taiwan is best known for its concentration of hundreds of companies specializing in high-tech production of telecommunication, semiconductors, computers and electronic equipment. It’s the home of Acer Computers. We know Hollywood for movie production and Macau city as a gambling and recreation capital. From the listed businesses they all started small but their reputation of being associated with particular products is what expanded the businesses.

Counties can start by first setting up a business/industrial park which is a site that accommodates similar businesses so as to enhance planning and sharing of resources then graduate to a business cluster which is more strategic and entrepreneurship focused.

The main characteristics of a business cluster are:

  1. Specialization around a major activity. The core business can be easily identified.
  2. Geographic concentration of activities in a particular region. Businesses can exploit the benefits of geo-economics such as get specialized labor, improved procurement structures or link with other partners more easily. The highest chance that one is working in Silicon Valley is that he is an IT specialist. If working in Las Vegas, he could be an entertainer.
  3. Organized supply chain that encourage economies of scale in outsourcing and procurement.
  4. Complementary services. Presence of interrelated services. In case of vehicle assembly cluster, we expect a viable busy port. We also expect agency services like law firms, insurance and executive training.
  5. Autonomy or semi-autonomy supported by a mini-government or professional bodies.


The classification of clusters is not standardized. It can be grouped as follows:

  • Geographical business clusters
  • Sectoral business clusters
  • Horizontal business clusters
  • Vertical business clusters
business clusters
stronger together

1. Geographical clusters

Though all clusters are concentrated at a particular point, the motive to establish them might not be because of their location. However, in the case of agro-based clusters like the rice farming firms in India, location is pivotal to the performance of a cluster. The region is known in the world as the rice bowl with over 22,000 species of indigenous rice.

A geographic position that increases accessibility to markets and services or exploits the economic advantage like lowering the cost of production through unique and easy access to subsidized resources enhances production advantages.

2. Sectoral business clusters

They are the most common. The concept of sectoral clusters is based on the fact that establishing a business enterprise that is similar alongside each other will eventually lead to:

Benefits of sectoral business clusters

  • Competition to produce and sell better products.
  • Enforcing standards to products and services.
  • Economies of scale.
  • Exploit collaboration systems more effectively
  • Innovation in the way of doing business.
  • Expertise and professionalism
  • Horizontal clusters

Partners seek to benefit from expertise and services offered at the same level. It is easier for instance, to get a professional to work in that organization from a rival firm more easily. Horizontal clusters are common with service delivery firms such as education, legal services and other agency services. Horizontal can also focus on the same business format which aims at availing the best product by having a variety of choices for clients.

3. Vertical clusters

The partners benefit from distribution chains and levels. For instance a construction firm can network with different parties in ensuring consistency in construction process. The firm can link with suppliers of bitumen, equipment, suppliers, labor suppliers and engineering consultancy firms.

Strengths of a vertical business cluster

  1. Convergences of interrelated services that minimize duplication hence increase efficiency in service delivery.
  2. Joint service delivery.
  3. Professionalism through enforcement of common standards.
  4. Collaboration that improves networking and linking the business to complementing partners.
  5. Creativity, competition and innovation of processes.
  6. Competition that increases the efficiency in products and processes.
  7. Knowledge management systems that are easily created due to collaboration.
  8. Specialization achieved through dedication to a specific function.

Though the cluster may be focusing on a particular venture, complementary services can co-exist giving the cluster an advantage on reducing the cost of service due to accessibility to these resources.

The principle of Entropy as applied in vertical business clusters

The principle of entropy assumes that the natural state of things is usually in chaos. Energy in form of redesigning, supervising, budgeting, planning and other management practices is required to ensure that the firm maintains its original level of performance.

Entropy focuses on relationships of existing system components since it is said that the processes in the business set-up are complex and uniquely intertwined. Small businesses can take advantage of learning and discovering the benefits obtained from these relationships.

Vertical clusters are common with manufacturing, construction, agriculture and supply intensive businesses.


On our part we can change the way we do business to influence business growth, create employment as well as create consumer markets. Innovative ways to minimize the cost of production will help us get a better selling price. Now that the African governments are investing in entrepreneurship activities aggressively, it is an opportunity to exploit the growth resources available and what a better way than business incubation and business clustering.


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