The methodology behind Industry Clusters
Updated over a week ago

If the intention is to understand the economic diversity of a region, grouping industries together according to their economic links with one another would seem to be a sensible approach. After all, in today’s connected economy, it is not isolated product and process that matter, but the connections from supply to demand. As Delgado et al. (2016) argue, “the agglomeration of related economic activity is a central feature of economic geography”.* But how can this be done in practice?

Back in 2016, a major project was undertaken at Harvard Business School’s Institute for Strategy and Competitiveness, with the aim being to define a benchmark set of clusters. But rather than looking at similarity of activity – for example, grouping manufacturing industries together as the SIC classification system does – they instead grouped sectors together based on a number of criteria that link them together economically. These include:

  • Industries which tend to co-locate in the same areas

  • Industries that share a similar workforce

  • Industries which tend to have supply chain connections

Lightcast has applied a similar methodology to industries in the UK. Beginning with the 563 4-digit SIC industries, we have identified those that are most economically linked according to the criteria established by the Harvard study. This has resulted in a set of 49 ‘coherent’ industry clusters.

In addition, we have then divided these clusters into two distinct groups, in order to offer really rich insights into the forces driving local economic development. You can see how each of these clusters are defined HERE.

*Classic references to agglomeration are Marshall (1920) and Krugman (1991). For the role of clusters in measuring agglomeration, see inter alia Ellison and Glaeser (1997), Porter (1998) or Delgado et al. (2014).

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