The Cluster Policy Paradox: Externalities vs. Comparative Advantages

The literature on clustering has highlighted several advantages of industrial agglomerations. Persons and firms benefit from the production and innovation activities of neighbouring companies in the same and related industries. Considering such benefits, Michael Porter states that clustering is an important way for firms fulfilling their competitive advantages and for rising regional and national competitiveness. This justification has increasingly driven regional policy towards the cluster promotion. However, the cluster-support policy is in the middle of a controversy, since the traditional optimal-policy perspective recommends providing a subsidy to firms of clusters generating externalities, while Porter’s prescriptions recommend not choosing among clusters. So, we state that cluster policy is involved in a paradox: policy makers use the competitiveness rhetoric inspired in the competitive advantages of Porter but, in practice, they go on using the industrial targeting that was also criticized b Porter. This paper deals with this paradox presenting a model, which proves that despite the extensive amount of externalities is the traditional comparative advantage approach that must guide policy. This finding is congruent with the Porter’s policy prescriptions and has clear implications in regional policy.