Industry clusters can help companies to find the right location in Europe.

Industry clusters, defined as geographic concentrations of companies and other organizations from the same sector, have been around for a long time. Their role in economic development was explored by Michael Porter, who may even have come up with the term “cluster”. Some of the oldest clusters in Europe date back to the 17th century and they play a significant role in many European economies.

Of course, clusters exist in other parts of the world too – just think of IT in Bangalore, electronics in Penang, life sciences in Boston, automotive in Detroit or even plastics in northeast Ohio – but nowhere are there as many clusters in such a relatively concentrated geographical area as in Europe. According to the European Union, there are about 2000 “statistical clusters” in Europe, covering every imaginable industry and sector.

Some of these clusters developed organically over time, often around a major company that created or attracted the suppliers, service providers and educational resources that it needed to be successful. Good examples are the chemical industry clusters that grew up around companies like Bayer, BASF or AkzoNobel.

More recently, governments have tried to build clusters by promoting the development of industries in specific locations. Examples include the more than 70 “pôles de compétitivité” in France or new initiatives such as the many cleantech and fintech “hubs” that are being established throughout Europe. Clusters have also developed in the “new” states of Central and Eastern Europe in industries such as automotive and aerospace as well as for certain types of operations like shared services centers.

While some clusters may be bigger or more established than others, they typically all have a central organization that coordinates the cluster’s activities and promotes the cluster nationally and internationally.

Advantages of clusters

For companies planning to set up new operations in Europe, locating in a cluster can provide a range of advantages:

  • An existing base of employees with relevant skills and experience;
  • Specialized educational and training facilities that provide a source of qualified employees;
  • Suppliers and service providers that understand the needs of the industry;
  • Potential customers and partners from the industry;
  • Research institutions that provide opportunities for joint research projects;
  • Sites that cater to specific industry requirements such as building specs or utility supplies;
  • Economic development programs and incentives geared to promoting the growth of the cluster;
  • Governments and inhabitants that appreciate the importance of the cluster;
  • A cluster organization that can provide information and help with various aspects of setting up a new operation, such as recruiting and finding a suitable site.

As part of location analysis in Europe, it can therefore make sense to focus on existing clusters in a company’s industry as locations that already fulfill key requirements. In some cases, using a list of existing clusters as a starting point can serve as a short-cut to identifying the right location and site.

One challenge to this approach is that some clusters in Europe are relatively unknown outside of their borders. For example, the town of Tuttlingen in Germany (population 35,000) and the surrounding region is one of Europe’s leading medical technology clusters, home to over 500 companies including global players such as Karl Storz and Aesculap (part of the B. Braun group) as well as numerous small and medium-sized companies.

Finding existing clusters has been made easier by databases and projects such as the European Cluster Observatory, which lists the main clusters for different industries. Industry associations and economic development agencies should also be able to point out the main clusters for a certain industry in their country or region.

What to watch out for

Despite the many advantages of locating in a cluster, they may not always be the best solution. Depending on the type of operation, some companies may prefer to locate in a more diversified economic setting or in a more remote location that does not have a specific industry concentration.

Even in cases where a cluster seems like the right option, additional research is needed to determine whether the cluster provides a match for a specific project. Important factors that companies should consider include:

  • Is the cluster suited to a particular type of activity? A “life-sciences” cluster may be focused on a specific sector such as vaccines or medical devices and not on other areas of life sciences. Similarly, a cluster focused on pharmaceutical innovation or R&D may not necessarily be the right location for a pharma manufacturing plant.
  • How healthy is the cluster? Although current data might indicate that a cluster is large and successful, trends might show a different picture. Has employment in the cluster grown or declined? Have existing companies in the cluster expanded their activities and has the cluster attracted new investment?
  • How real are the benefits of the cluster? Some clusters may exist mainly on paper while in reality there are limited linkages and cooperation between different players in the cluster. In some clusters, for example, companies may be competing with one another for employees whereas in other clusters they may be collaborating on workforce development initiatives to create a sufficiently large and qualified talent pool for everyone, often with the help of local educational and training organizations.
  • Is the cluster dominated by one big player? How much influence does this player have on employment and other activities of the cluster? Conversely, some clusters may be geared mostly towards SMEs and may not meet the needs of a larger company.
  • How “local” is the cluster and how welcome would you be there? Some clusters consist mostly of local companies that have been there for a long time and share common interests. How open would these companies be to an outsider setting up in their location? Would they perceive this as a threat?

In summary, clusters can offer clear benefits for companies planning to establish a new operation in Europe. They can be used as a guide or starting point to finding the best location as part of the location analysis process. However, detailed analysis and on-the-ground research is needed to ensure that the cluster provides genuine benefits and really meets a company’s location requirements.

By Andreas Dressler, ©Location Decisions