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Cluster and Cluster-Based Development: A Literature Review and Policy Discussion, Working Paper 042 Open Access

Cluster theory and its application and cluster-based economic development policy, have been in the forefront of regional economic development theory and practice during the past decade. Cluster theory suggests that firms that are part of a geographically defined cluster benefit from being a part of that cluster and that these benefits result in growth in economic output for the region. These benefits accrue as a result of co-location or geographic proximity that, in turn, creates lower input costs for firms through agglomeration economies and facilitates knowledge spillovers that produce innovation and increased productivity. Consequently, firms in clusters that generate these benefits will be more competitive, and regions with effective clusters will experience greater growth. As this suggests, clusters are important for understanding and improving regional economic growth. It is important for policy makers and practitioners to understand how and in what ways they do so and what actions they can take to enhance economic growth through generating additional cluster benefits. In particular, since analysis of and policies based on clusters have become a feature of much modern regional economic development policy, it is critical for practitioners to understand the dynamics of clusters and the limitations as well as advantages of employing cluster strategies.

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