This research paper focuses on the increasing interest of economic geography in explaining differences in prosperity levels across locations. It discusses the current state of the academic debate on cluster policy, providing an extensive review of the rapidly growing research. The first part of the article summarizes key findings about the existence and impact of clusters, while the second part addresses the issue of cluster policy itself.

Economic geography during an era of global competition involves a paradox. It is widely recognized that changes in technology and competition have diminished many of the traditional roles of location. Yet clusters, or geographic concentrations of interconnected companies, are a striking feature of virtually every national, regional, state, and even metropolitan economy, especially in more advanced nations. The prevalence of clusters reveals important insights about the microeconomics of competition and the role of location in competitive advantage.

This paper evaluates the role of regional cluster composition in the economic performance of industries, clusters and regions. On the one hand, diminishing returns to specialization in a location can result in a convergence effect: the growth rate of an industry within a region may be declining in the level of activity of that industry.

Over the last decades, changes in the global economy and the emergence of Global Value Chains (GVCs) have raised interest in understanding the specific conditions and cross-company interactions within and across locations. For companies, the need to choose the right location for specific activities has moved from an operational to a strategic issue. For countries, regions and cities, competition raised the stakes of understanding how to improve productivity and attract firms in specific fields beyond providing low factor costs and subsidies.

This paper examines the role of regional clusters in regional entrepreneurship, focusing on the distinct influences of convergence and agglomeration on growth in number of start-ups, as well as employment in such new firms in a given region-industry. While reversion to the mean and diminishing returns to entrepreneurship at the region-industry level can result in a convergence effect, the presence of complementary economic activity creates externalities that enhance incentives and reduce barriers for new business creation.

Increasing interest in clusters among researchers and economists is only one aspect of a new approach to economic research and policy, one that supplements the macroeconomic and legal conditions necessary to achieve economic progress with microeconomic foundations. This report presents an overview of the current research on cluster-based economic development. First, it looks at key conceptual foundations of the cluster approach: the definition of clusters, different types of clusters, economic benefits that clusters provide, and factors that influence cluster performance.

This paper examines the regional economic performance, composition of regional economies, and role of clusters in the U.S. economy from 1990 to 2000. 

The performance of regional economies varies markedly in terms of wage, wage growth, employment growth and patenting rate. Based on distribution of economic activity across geography, the paper classifies U.S. industries into traded, local, and resource-dependent categories. Traded industries account for only about one-third of employment, but register much higher wages and rates of innovation and influence local wages.