Strength in Numbers? The Weak Effect of Manufacturing Clusters on Canadian Productivity

In the wake of the recent financial crisis, clusters – the spatial concentration of interrelated industries, specialized services, and customers – have again captured the attention of economists, policymakers, and consultants. Clusters are viewed by many as vital to the national economy, and a possible fix to stagnating productivity and incomes. Economic research has shown, however, that most clusters do not live up to these expectations. There is little solid evidence that clusters make regions – let alone nations – prosperous. Does this also apply to Canada? Using detailed business location data, this Commentary measures the degree of clustering in Canadian manufacturing industries. It then documents changes in the spatial concentration of those industries between 2001 and 2009, and investigates whether those changes are positively associated with aggregate industry performance as measured by value added per employee or wages. Four key results stand out. First, Canada’s manufacturing industries are less strongly clustered than those of other developed countries. High-tech sectors are not, in general, more strongly localized than other sectors. Second, between 2001 and 2009, the spatial concentration of industries became slightly weaker, despite the stability of the overall spatial distribution of manufacturing. Third, there is little evidence that more clustering had significant effects on average productivity or wages in manufacturing industries. The changes in clustering that would be needed to significantly boost productivity and wages nationwide are large and arguably beyond the reach of regional or even national policy. Last, international trade has a much stronger impact on productivity than small changes in the spatial distribution of Canada’s manufacturing industries. The policy message is therefore that looking at trade – and at tax policy – might provide better and cheaper solutions to improving productivity than focusing on clusters, however tempting the latter might be.