Local Economic Development and Clusters

Cities pursue firms that can increase tax base and fund local public goods. Related firms, or clusters, gravitate to dense urban areas in order to achieve the agglomeration benefits of co-location within a small geographic area. This mutual interest of cities and clusters explains local economic development. But market dynamics constrain the capacity of cities to attract clusters, and municipal efforts such as targeted subsidies have limited effect on firms’ locational decisions or city economic growth. Much of the relevant literature suggests that the best strategy for local economic development involves investment in infrastructure that would serve firms’ interests generally rather than efforts targeted at particular firms or industries. Even cities that successfully attract a cluster without targeted subsidies, however, tend to alter that strategy once the cluster enters a period of decline. That is the case even though decline is a function of external forces rather than the policies of the host city, and even though local efforts to buttress the cluster offer little chance of success. One explanation for municipal efforts on behalf of a declining cluster involves the capacity of member firms to coalesce, exercise political influence, and exploit fragmented municipal decision making to preserve the status quo, maintain or increase municipal subsidies for the cluster, and deter entry by competitors for city resources. That strategy is likely to impede the city’s transition to a more productive economy in the face of impending cluster decline. This Article first explains how agglomeration benefits underlie city economic development, the limitations on city initiatives to attract clusters that would generate those benefits, and the theory behind city reactions to cluster decline. The Article then turns to the history of the garment industry in New York City to illustrate the evolution and decline of clusters. The garment industry evolved in New York City in a manner that generated significant agglomeration benefits for member firms that concentrated in and around what became known as the Garment District. This process involved little in the way of targeted city policies or subsidies. After several successful decades, however, the benefits of agglomeration decreased due to forces beyond the control of New York City, and member firms exited the Garment District for more productive jurisdictions. Nevertheless, in recent decades the city intervened to preserve manufacturing and deter or prohibit alternative uses within the manufacturing area. Those efforts continued even as the garment industry continued to shrink. The explanation for the city’s strategy appears to be predicated on local decision making processes in which incumbents had an organizational and political advantage over newcomers and fragmented city governance provided incumbents with multiple points at which to veto policies that would alter the status quo or to enroll political champions to support entrenched positions