Ecosystems & Entrepreneurship

Cluster Development is the New Economic Development

01.12.23 | 6 min read | Text by Ryan Buscaglia & Melissa Roberts Chapman

We don’t know if Congress does New Year’s Resolutions like the rest of us, but  it seems like at least one of their goals is to continue ‘Building Regional Innovation Economies.’ We can guess that much from that title – given to a House of Representatives Subcommittee on Research and Technology hearing at the end of December. At the meeting, Committee members from both parties and experts discussed the successes and challenges of the Economic Development Administration’s (EDA) existing programs to create innovation clusters across the United States. There was a clear message from this hearing—one that’s been echoed in action: there’s a new way of doing economic development that is here to stay.

When you look back on it, 2022 was a record year for place-based policies. From the EDA’s  $1 billion Build Back Better Regional Challenge (BBBRC) awards to the NSF’s TIP Directorate and Engines program, it is clear that developing geographically and technically diverse clusters is front of mind. A welcome surprise tucked into the end of year Omnibus spending bill was more than $750 million for the EDA to launch further place-based grant programs that invest in communities across the United States. This includes the Regional Technology and Innovation Hubs program that the Day One Project outlined in April, 2022. 

Region focused programs come in many shapes and sizes

This place-based focus is not just limited to the BBBRC and Regional Tech Hubs. It includes cluster building programs and other grant authorities.

Build Back Better Regional ChallengeGrants awarded to 21 different regional coalition partners$1 billion appropriated in the American Rescue Plan (ARP)EDA
Good Jobs ChallengeGrants awarded to 32 industry- workforce training partnerships$500 million appropriated in the American Rescue Plan (ARP)EDA
Build to ScalePortfolio of national grant competitions to help regions plan and implement innovation ecosystem building strategies – 51 grants totaling $47 million already awarded.$50 million in Regional Innovation Grants Authority in the FY23 Omnibus billEDA
Regional Technology and Innovation HubsPlanning grants to be awarded to create regional technology hubs focusing on technology development, job creation, and innovation capacity across the U.S.$500 million appropriated in the FY 23 Omnibus billEDA
Recompete Pilot ProgramInvestments in communities with large prime age (25-54) employment gaps$200 million appropriated in the the FY23 Omnibus billEDA
Regional Innovation EnginesUp to 10 years of funding for each Engine (total ~$160million per) to build a regional ecosystem that conducts translatable use-inspired research and workforce development.
NSF is encouraged by Congress to coordinate with regional tech hubs program at EDA.
Overall, NSF received a 12% budget increase including $335 million in supplemental funding in the FY23 Omnibus bill to implement CHIPS and Science Act.NSF
Regional Clean Hydrogen Hubs programGrants to establish 6-10 clean hydrogen hubs in communities across the U.S.$7 billion provided by the Infrastructure Investment and Jobs ActDOE
Growth Accelerator FundCompetitive awards to Entrepreneur Support Organizations (ESOs) to increase number of R&D-focused, prospective SBIR companies, innovators, and entrepreneurs.$10 million in the FY23 Omnibus spending billSBA
Regional Innovation ClustersGrants awarded to hubs of small businesses, suppliers, and service providers concentrated in a geographic area. Now includes non-profits as coordinating partners.$10 million in the FY23 Omnibus spending billSBA
Federal and State Technology Partnership program (FAST)Provides funding for state and regional programs to increase the number of SBIR proposals from underrepresented groups.$10 million in the FY23 Omnibus spending billSBA
Defense Manufacturing Community Support ProgramAwards made to build up critical skills, facilities, workforce development, research and development, and small business support to strengthen the defense industrial/innovation base (largely at the state-wide level).$30 million in the FY23 Omnibus spending billDOD
Rural Innovation Stronger Economy Grant ProgramGrants to low-income rural areas to create jobs, develop industry clusters and small businesses, anc connect businesses to local assets and supply chains.$2 million in the FY23 Omnibus spending billAgriculture

As we commented with the passing of the CHIPS and Science Act earlier this year, these investments of time and resources in specific communities support cluster development as the dominant mode of thinking about economic development. Such a view was not always the case, and some regard these investments as a complete revolution in economic policy.

Cluster development is bipartisan

Despite the recent wins, persistent funding for regional cluster development programs is far from certain. A small portion of the funds for EDA’s programs was included in Division B of the recent Omnibus bill, but a majority of it was provided through a supplemental funding provision. That means that if the new Congress passes a continuing resolution (CR) or does not appropriate funding in a spending bill for FY 24, then the programs will go largely underfunded. This would stifle investments we’ve already made, and would deny communities the support they deserve to reinvent and bolster their regional economies over the next decade.

The good news for these landmark programs is that they enjoy bipartisan support. Members of Congress from both parties want to develop strong innovation economies and support small businesses, with an especially strong focus on rural and underserved minority communities. House Subcomittee Chairwoman Haley Stevens (D-MI) remarked on this in the December hearing during her opening statement at the recent hearing. Ranking Member Randy Feenstra (R-IA) mirrored this in his statement as well,  calling out the success of the recent Metropolitan Areas Protection and Standardization Act of 2021. There’s clearly an appetite for novel place-based economic development strategies on both sides of the aisle.

The White House also views clusters as central to its economic policy. President Biden lauded the 21 winners of the Build Back Better Regional Challenge back in September. The President’s National Economic Council Chair, Brian Deese, highlighted the importance of such programs to implementing a modern American industrial strategy in a speech in Cleveland last October. He said, “our plan to build will focus on place and equity—on where and how we build—because this helps us unlock more of our nation’s economic potential.” So how exactly do these plans unlock this growth?

Place-based economic development focuses on communities

Place-based economic development is any form of intervention that endeavors to improve the economic potential of a community, taking into account the circumstances and realities of that community. Place-based policies intervene in specific locales to boost employment and productivity. Simply put, they try to make discrete geographical areas globally competitive. 

One form of such policy is the promotion of cluster development: the co-location of firms in a given geographic area. These groups, or clusters, of companies and workers in a particular industry share equipment, space, and talent in ways that maximize regional efficiency and increase firm productivity.  As we’ve written before, this idea was pioneered by Michael Porter.  “A cluster,” Porter said, “allows each member to benefit as if it had greater scale or as if it had joined with others without sacrificing its flexibility.” Modern cluster development engages universities, government, national labs, corporations, capital providers, and entrepreneurs as stakeholders to create comparative advantages for the local ecosystem. 

These gains come from knowledge spillovers, development of local supply chains, and access to capital, among other factors. That firms gain such massive benefits when they are located next to each other seems intuitive—just look at Silicon Valley or Boston, MA. What is more, there is evidence that the creation of certain innovative high tech jobs leads to a multiplier effect that creates more jobs in adjacent services and industries. 

New programs move beyond the coast

However, a core tenet of recent legislation is that such agglomeration effects should not be limited to the coast or to traditional hubs. Other cities and communities across the United States can and should benefit from the development of technologically advanced clusters. 

As the National Sciences Board has written, we need to ‘expand the geography of innovation’ so that all people have the opportunity to benefit from advancements in science and technology. Expanding this geography requires us to think about ways to increase STEM education and career development as well, but to do so policies must meet communities where they are and capitalize on their existing strengths. 

For communities that have received historically low levels of federal grant funding, it can be hard to know where to start with strategy development. That’s why another key part of the EDA’s approach are communities-of-practice that help grantees and mentor organizations learn from each other.

A proactive, inclusive community-wide approach to economic development isn’t a nice-to-have feature; it’s critical to putting together proposals that win. As one BBBRC awardee from the Detroit Regional Partnership testified: “Two things: inclusiveness and transparency were the two keys to doing this … five years ago the EDA would have received 5 different proposals from our region, and none of them would have talked to each other.” Other cities/regions should follow their lead. While there’s no one recipe for success, we’ve seen that the best proposals for clusters come from communities that:

  1. Proactively and intentionally develop multi-year strategies.
  2. Include a diverse array of community stakeholders.
  3. Rely on evidence rather than political influence to form their strategy.
  4. Avoid framing federal grants as transactional funding opportunities.
  5. Research what choices peer communities are making and predict which choices might improve their comparative advantage, relative to this “competitive set.”

Agencies should have regionally-focused missions fit for today’s industries

The impact that the EDA and NSF can have with their Regional Tech Hubs and Engines programs is massive. Especially given that Congress has explicitly stated they should cooperate. One way to boost the investments we’ve already made is by reauthorizing the EDA with a mission fit for today’s industries and challenges. The EDA has not been reauthorized in 17 years—an action that Assistant Secretary of Commerce for EDA Alejandra Castillo has repeatedly stated is critical.

Secretary Castillo’s remarks in December demonstrate not just a deep commitment to helping communities, but a depth of expertise and responsible stewardship at EDA when it comes to acting on these bold initiatives. We should empower the EDA to expand their capacity to help communities grow into the industries of the future.

The new Congress should look for ways to continue supporting agencies’ efforts to promote regional development. These programs and the recent hearings signal the seriousness with which Members of Congress and the Executive Branch are treating their responsibility to support regional economies. The idea that “innovation comes from everywhere” is no longer a hot take. Innovation ecosystems across the country are building our shared future in what amounts to a modern approach to industrial policy: inclusive innovation ecosystem building.