Manufacturing clusters not a solution to Canada’s productivity problem: Study

There is no strong link between the clustering of Canada’s manufacturing industries and their economic performance on a sector-wide basis, according to a report released today by the C.D. Howe Institute.

In “Strength in Numbers? The Weak Effect of Manufacturing Clusters on Canadian Productivity,” author Kristian Behrens finds instead that increases in trade, whether imports or exports, have a stronger effect on industry productivity and should be the focus of policymakers.

“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,” said Behrens in a statement. “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.”

Using detailed business location data, Behrens measures the degree of clustering in Canadian manufacturing industries. He 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.

The report’s main takeaways for regional policy in Canada are:

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, there is little evidence that more clustering has 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 changes in the spatial distribution of Canada’s manufacturing industries. The policy message is 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.

To read the full report, visit the C.D. Howe Institute website.