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Clusters, economic performance, and social cohesion: a system dynamics approach

Authors:
  • IAE Business School
  • Indiana University Bloomington and Alpen-Adria-Universität Klagenfurt

Abstract

Cluster policies pervade all the regions of the world to promote employment growth, innovation and entrepreneurship. Yet research mostly focuses on cluster economic performance but less on regional social cohesion, which is important when economic growth coexists with deprivation, poverty and inequality. This paper aims to understand both the economic and social dynamics of clusters by developing a theoretical model based on system dynamics. It shows that clusters with positive economic performance do not necessary lead to regional social cohesion. Multiple positive economic-related feedback processes can be mitigated by negative social-related feedback processes. Implications for academics and policymakers are proposed.
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CLUSTERS, ECONOMIC PERFORMANCE, AND SOCIAL COHESION
A SYSTEM DYNAMICS APPROACH
Forthcoming Regional Studies
DOI:10.1080/00343404.2019.1668550
Hector Rocha
IAE Business School – Austral University – Argentina
hrocha@iae.edu.ar
Martin Kunc*
Southampton Business School - United Kingdom
M.H.Kunc@soton.ac.uk
David B. Audretsch
Indiana University - USA
daudrets@indiana.edu

Cluster policies pervade all the regions of the world to promote employment growth, innovation and
entrepreneurship. Yet research mostly focuses on cluster economic performance but less on regional
social cohesion, which is important when economic growth coexists with deprivation, poverty and
inequality. This paper aims to understand both the economic and social dynamics of clusters by
developing a theoretical model based on system dynamics. It shows that clusters with positive economic
performance do not necessary lead to regional social cohesion. Multiple positive economic-related
feedback processes can be mitigated by negative social-related feedback processes. Implications for
academics and policymakers are proposed.
* Corresponding author
Keywords: Clusters, Economic Growth, Economic Development, Social Cohesion, System Dynamics
JEL Codes: R11, L26, M16, M14
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
Interest in the role of spatial clusters –i.e. geographically proximate groups of interconnected firms
and associated institutions in related industries-- has grown in regional studies over the last decades since
the seminal work of Porter (1998; 2003). Hundreds of cluster initiatives have been launched in all the
regions of the world (Porter, 2003; UNIDO, 2009) suggesting that, among other benefits, they promote
employment growth, innovation performance and entrepreneurship (Delgado, Porter & Stern, 2010; 2014;
Pietrobelli & Rabellotti, 2007).
The interest in clusters has been motivated by the goal of enhancing economic performance (Porter,
2003; Spencer et al. 2010) and is grounded in both theory (Romer, 1986; Lucas, 1988; Krugman, 1991;
2000; Audrestch & Feldman, 1996; Massard & Autant-Bernard, 2015) and empirical validation (Delgado,
Porter & Stern, 2010; 2014; Rocha & Sternberg, 2005; Spencer et al. 2010; Uyarra & Ramlogan, 2012).
However, as global interest in Thomas Piketty’s seminal work on Capital in the Twenty-First Century
(Piketty, 2014) and the questioning of place-neutral policies (Barca et al. 2012; Massard & Autant-
Bernard, 2015) reflect, concerns have broadened beyond economic performance to include both income
distribution and social cohesion (Atkinson, Piketty, & Saez, 2011; Novy, Swiatek, & Moulaert, 2012;
Stiglitz, 2012; Cobb, 2016).i
Despite this burgeoning focus on social cohesion, the question of how clusters affect both economic
performance and social cohesion within a region remains unexplored. This question is central to both
academics in the regional studies field and policymakers. In fact, regional studies focuses on research
spanning not only economic performance, but also the social, political and environmental dimensions
influencing subnational change. In terms of policy, the sectoral-regional nature of clusters (Martin &
Sunley, 2003; 2015; Rocha, 2004)) sheds light on the critical evaluation of place-neutral policies, which
assume the translation of sectoral policies to the territory (Barca et al., 2012; Massard & Autant-Bernard,
2015; McCann & Argiles, 2015; Belussi & Trippl, 2018) and focus on economic drivers that ignore social
community and informal institutions (Becattini, 1990; cf. Konstantynova & Wilson, 2017:458).
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This paper aims to fill this important void in the literature by developing a theoretical model to
analyze how and why a cluster affects both economic performance and social cohesion within the region
in which operates.
To this aim, this paper uses system dynamics modelling (Davis, Eisenhardt, & Bingham, 2007;
Sterman, 2000) to theoretically investigate the behavior of a cluster within a region. System dynamics
was developed in the 1950s by Professor Forrester from MIT and it is based on principles of information
feedback theory. It has been successfully applied to model large complex social and economic systems
such as cities (Forrester, 1970) and societies (Forrester, 1971). System dynamics has recently captured the
attention of regional studies’ scholars, especially of those who conceptualize clusters as “complex
adaptive systems” (Martin & Sunley, 2015:1303) and propose formal models to capture the dynamic
interaction between sectors and territories (Fratesi, 2015) to inform place-based policies (cf. Massard &
Autant-Bernard, 2015: McCann & Argiles, 2015).
The novel contribution of this paper is to develop a theoretical model to understand how and why
clusters affect not only the economic performance of regions (Porter, 2003; Delgado, Porter and Stern,
2014) but also social cohesion within a region. In particular, this novel contribution spans theory,
methods, and policymaking in regional studies. As to theory, the model shows that the impact of clusters
on economic performance and social cohesion within a region depends on the degree of integration
between regional socio-economic factors and cluster dynamics to integrate different groups such as
migrant specialized workers and local workers (both, specialized and non-specialized) and embed large
firms within the region. As to methods, this paper uses a system dynamic methodology, which is
employed for the understanding of the behavior of systems with complex causality and timing (Davis et
al, 2007) such as regions and clusters (Fratesi, 2015; Martin and Sunley, 2015). Thus, this paper
contributes to the emergent interest in system dynamics in regional studies by conceptualizing clusters as
“complex adaptive systems” (Martin & Sunley, 2015:1303) and proposing a formal model at the meso
level of analysis to capture the dynamic interaction between sectors and regions (Fratesi, 2015). Finally,
as to policy, this paper shows that promoting sectoral clusters but ignoring regional social cohesion may
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be doomed to failure, or at least fall short of generating the enhanced economic performance of regions.
Thus, our model sheds light on current policy debates such as the place-based vs. place-neutral policies
(Barca et al. 2012) and the Washington-Silicon Valley Consensus vs. new required consensus that takes
into account the time and geographic dimensions of trade and innovation (Piore & Schrank, 2018).
The structure of this paper follows the roadmap of Davis et al (2007) to perform simulation studies.
First, it defines the research question -i.e, how do clusters affect both economic performance and social
cohesion at the regional level and why? Second, it reviews the basic theories to define the concepts and
explain the relationship between clusters, the economic performance, and social cohesion of regions.
Third, it develops the conceptual causal model using system dynamics (Sterman, 2000) to represent the
feedback loops and key constructs described in the literature. Fourth, it runs the simulation with
hypothetical (not real) data and discusses the dynamics to answer the research question. Finally, it
summarizes contributions and lines for future research, focusing on calibrating the conceptual model with
real data. Table 1 summarizes the structure of the paper.
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Insert Table 1 about here.
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
This section defines the key concepts and summarizes the main cluster approaches that help to explain
the relationship between the cluster and the economic and social performance of regions.

Extensive reviews of the evolution and definitions of clusters have been carried out elsewhere (Porter,
1998; Martin & Sunley, 2003; Rocha, 2004), suggesting the distinction between cluster as an economic
phenomenon, cluster policy and cluster organizationsii. In terms of conceptual definitions of the
phenomenon, Porter defined clusters in sectorial terms that is, industries related by vertical and horizontal
links in his first work on clusters (Porter, 1990). In contrast, Porter’s 1998 definition is more
comprehensive and includes three main dimensions: the sectorial, the geographical (pp.227-230), and the
socio-economic network (p.225-7).
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Despite Porter’s new conceptualization of clusters and hypothesized socio-economic impact (Porter
and Kramer, 2011), his methodology remains similar to his 1990 view: it first creates an industrial cluster
template based on industrial interdependencies and, second, it applies this cluster template to different
regional levels (Porter, 2001). Therefore, “the specific causal mechanisms that link spatial and socio-
cultural factors to both the process of clustering and the generation of competitive advantage are not
included in the model” (Rocha, 2004:375). Porter continues this line of reasoning in his latest work,
where he defines clusters as “groups of closely related industries co-located in a region” (Delgado et al,
2014:1785).
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Economic performance is better understood within the context of the concept of development. The
literature suggest three main conceptualizations: economic growth, economic development and
development (Allen & Thomas, 2000; Todaro, 2000). Economic growth is “a continued increase in the
size of an economy, i.e. a sustained increase in output over a period” (Allen & Thomas, 2000: 31) and it is
generally measured as the variation in gross domestic product (GDP) per capita. Economic development
is the enhancement of the productive factors of an economy and is measured as either innovation (R&D
and/or patents) or, more specifically, total productivity factor (Todaro, 2000; Capello & Lenzi, 2015).
Finally, development is the expansion of capabilities (Sen, 1999) and is measured in terms of Human
Development Index or employment (Sen, 1999), given the human, social and economic implications of
being employed.
In this paper, we define economic performance in terms of economic development.

Researchers interested in developing theory in the field of social cohesion are confronted with a
complex body of work that involves various definitions, specialized literatures on particular dimensions,
and lines of inquiry at different levels of analysis (cf. Kearns & Forrest 2000; Friedkin, 2004; Cheong et
al. 2007; Chan, To & Chan, 2006; Novy, Swiatek, & Moulaert, 2012). For example, Novy et al. trace back
the origin of the concept to the work of Durkheim and analyze four approaches to social cohesion:
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socioeconomic, which emphasizes solidarity and social inclusion; cultural, which emphasizes common
values and identity; ecological, which stresses sustainability and ecological justice; and political, with its
emphasis on citizenship and participation (Novy, Swiatek, & Moulaert, 2012).
This plurality of approaches has led some authors to focus on typologies and dimensions of social
cohesion. For example, Kearns and Forrest (2000), after an extensive review of the literature, suggest that
the core dimensions of social cohesion are “the need for a shared sense of morality and common purpose;
aspects of social control and social order; the threat to social solidarity of income and wealth inequalities
between people, groups and places; the level of social interaction within communities or families; and a
sense of belonging to place” (pp. 2128).
In this paper, we define social cohesion as the level of social integration between different groups in a
geographical area (cf. Kearns & Forrest, 2000; Novy, Swiatek, & Moulaert, 2012). These different groups
include, in the context of dynamic clusters within a region, specialised workers, non-specialised workers,
and migrant specialized workers attracted by the growth of the cluster in the region. This definition
captures the potential impact of relevant phenomena such as the capacity of foreign firms to embed
themselves in local networks (Cantwell, 2009), the possible dangers to social cohesion represented by
growing immigration flows and ethnic diversity (Cheong et al. 2007), the embeddedness of innovation
dynamics (i.e. knowledge spillovers and knowledge transfer) within a region (McCann & Argiles, 2015),
the influence of training programmes to develop new required skills and, more generally, the impact of
place-based vs. place neutral policies on “reducing persistent social exclusion” (Barca, 2009: p. VII).

This section summarizes different regional and cluster approaches to discover the different variables
and their relationships leading to the economic and social dynamics within a region (cf. Rocha, 2004).
As to the economic performance literature, two economic theories are relevant to explain the
performance of regions: endogenous growth (Romer, 1990; Lucas, 1988) and endogenous development
(Friedmann, 1979; Garofoli, 1992; Moulaert & Sekia, 2003) theories.
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As to the cluster literature, two streams are relevant to explain the socio-economic dynamics within
regions: the economic stream (Porter, 1990; 1998; Krugman, 1991) and the socio-economic and
innovation stream. The economic stream of clusters focuses on external economies (Marshall, 1920),
competitiveness (Porter, 1990; 1998; 2001) and new economic geography dynamics (Krugman, 1991).
The socio-economic and innovation stream of clusters highlights the territorial, social, institutional, and
cultural factors underpinning cluster dynamics and includes sociological constructs such as embeddedness
(Granovetter, 1985), social networks (Nohria & Eccles, 1992), and untraded interdependencies (Storper,
1997). This stream encompasses several approaches: the Italian School of Industrial Districts (Becattini,
1990; Brusco, 1992); the innovative milieu school (Aydalot, 1986; Camagni; 1991), the Nordic School of
innovation and learning (Lundvall & Johnson, 1994; Malmberg & Maskell, 1997), the geography of
innovation approach (Jaffe, 1989; Feldman, 1994; Audretsch & Feldman, 1996; Asheim & Gertler, 2005;
Massard & Autant-Bernard, 2015), and the cultural-institutional approach (Powell, 1990; Saxenian, 1994;
Ingram & Roberts, 2000).
Given the scope of this paper, we focus on the content of the approaches most closely related to our
conceptual model (for a detailed review see Rocha, 2004 & Gilbert, 2017). Appendix A summarizes the
main variables explained by each approach, which will be part of the system dynamics model.


This section develops the conceptual causal model based on the set of constructs and their linkages
discussed in the literature, which are summarized in Table 2. To this end, it uses system dynamics
modeling (Davis et al, 2007; Sterman, 2000) to represent the feedback loops and key constructs at the
territorial level (Fratesi, 2015) and strives for an endogenous theory of the dynamics among clusters,
economic performance and social cohesion.
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Insert Table 2 about here.
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We proceed as follows. First, we employ the increasing returns to agglomeration theoretical concepts
(Krugman, 1991; Delgado et al, 2014) as our basic Economic Performance theory. Then, we investigate
how the increasing number of firms in a region leading to higher employment rates impact on social
cohesion. Third and finally, we create a theoretical computational representation of the conceptual causal
model to simulate the dynamics of the cluster given the theoretical assumptions. Theoretical simulations
are employed to explore the consequences of theoretically derived processes, e.g. the values of variables
change over time based on theoretical reasoning, even when the outcomes cannot be assessed empirically
(Harrison et al, 2007, page 1232-3). This approach has been employed in computational research (Lomi
and Larsen, 2001; Garavaglia, 2010) with the purpose of adding the temporal dimension to the causal
modelling and evaluate the dynamic performance of systems.

Economic growth in a cluster facilitates the creation of new firms and the entry of large firms, which
accumulate over time expanding the existing market, which positively affects the location of upstream
and downstream producers in the same location (Krugman, 1991; 2000). The resulting impact on demand
benefits the creation of new firms because customers located within close geographic proximity not only
increase the likelihood of sales but also minimize transportation costs. In addition, Porter (1990) stresses
the importance of the competitive environment within industrial clusters, providing lower entry and exit
barriers because of reduced uncertainty in terms of prices, costs, and way of doing business, all of which
foster the creation of firms.
In turn, the agglomeration of firms within clusters leads to economies of scale and scope that further
enhances the economic performance of the cluster, creating a positive reinforcement process which is
depicted as increasing returns to agglomeration in Figure 1 (see R1). The literature has tended to contrast
two potential types of agglomerating forces: localization (increasing returns to activities within a single
industry) and urbanization (increasing returns to diversity at the overall regional level). As to localization,
assuming that upstream and downstream producers are subject to increasing returns and barriers to trade
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are reduced, backward and forward linkages tend to concentrate firms in a single location (Krugman,
2000: 55). Krugman explains the reasons for localization of industries in terms of Marshall’s sources of
external economies –that is, local pool of specialized labor, local subsidiary industries, and technological
spillovers (Krugman, 1991: 36). The existence of increasing returns to scale means that individual
producers are motivated to concentrate their production geographically in order to benefit from the
resulting economies, leading to reinforcing processes. This agglomeration leads to knowledge spillovers
and knowledge spillovers attract new firms (see R2a-b in Figure 1). As to urbanization as a catalyst of
agglomeration of economic activity, it is argued that interdependencies across complementary activities
give rise to increasing returns and, thus, to agglomeration through economies of scope. Porter and
colleagues have moved beyond the trade-off between localization vs. urbanization and found that both
are present within clusters of related industries, therefore positively affecting economic performance
(Delgado et al, 2014).
Moreover, the creation of new firms and the entry of large firms creates new knowledge, further
expanding the stock of knowledge existing in the region, which leads to spillovers and new innovation
processes. This agglomeration leads to knowledge creation, spillovers and innovation in Figure 1 (see
R2a, R3, and R4). According to endogenous growth theory, technological change or innovation explains
not only the growth of output or economic growth, but also the rate of growth or economic performance.
Technological change, in turn, is based on innovations fostered by investments in R&D (Romer, 1990),
existing knowledge and knowledge spillovers, which tend to be spatially restricted (Audretsch &
Feldman, 1996).
One important consequence of large firms in the region is their financial capacity to invest in R&D
which fosters new innovations and, in turn, augments the stock of innovations in the region leading to
even better economic performance, a process of agglomeration which leads to innovation in Figure 1 (see
R3). According to endogenous growth theory, technological change is conducive to imperfect
competition, which can enhance the incentive to invest in new technologies, given that investment is
partially excludable by intellectual property rights such as patents. In this scenario the firm will invest to
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improve technology and therefore innovation is determined within the model. The innovations generated
from investments in R&D produce both an absolute increase in the stock of technology and a change in
the rate of technological progress, therefore positively affecting the rate of growth (cf. Solow, 1994) or
economic performance.
In turn, investments in R&D increase the level of knowledge and technology not only directly through
capital investment (in a broad sense including not only physical but also human and R&D capital) but
also indirectly through spillover effects on the rest of the economy, agglomeration processes that lead to
knowledge creation and knowledge spillovers in Figure 1 (see R2a and R4). Spillover effects imply that
knowledge is a non-rival good, and therefore it generates increasing returns at the aggregate level –that is,
Marshallian external economies (Romer, 1994: 14). Therefore, investments in R&D increase the level of
public knowledge fostering new innovations, adding to the accumulation of a pool of innovations which
contribute to the economic performance of the region. Figure 1 depicts the processes discussed within the
Economic Performance Model and the Social Cohesion Model we describe below.
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Insert Figure 1 about here.
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The social cohesion model is based on two main assumptions. First, economic performance is driven
by economic factors rooted in spatial, social and cultural characteristics reflected by local embeddedness
(Granovetter, 1985), social networks (Nohria & Eccles, 1992), informal ties, and untraded
interdependencies (Storper, 1997). Second, these factors operate mainly at the regional rather than at the
industry and sectoral levels. Therefore, the main unit of analysis is the region rather than the industry or
the region-industry as in the case of the Economic Performance Model.
Social cohesion, territorial embeddedness of agglomerated firms and inter-organizational networks
among firms and institutions reinforce each other at any given level of social cohesion (R5, R6 and R7 in
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Figure 1), creating a symbiotic relationship among these factors for both new firms and existing large
firms.
In the case of new firms, people usually start businesses at the location where they were born, have
worked or already reside (Cooper & Dunkelberg, 1987), which goes some way towards explaining why
nascent entrepreneurs are very well established in their careers, lives and communities (Reynolds &
White, 1997). Also, economic activities by new firms embedded in their specific environment are shaped
by local history and institutions (Aldrich, 1999). Established relationships such as existing networks of
colleagues or relationships from previous work contexts provide the credentials to overcome the lack of
history of new businesses. In addition, links to formal institutions which enhance legitimacy and provide
access to resources, are important and result in a positive relationship between links to formal institutions
and entrepreneurial activity (Baum & Oliver, 1996). Finally, local embeddedness cements established
relationships and inter-organizational networks, facilitating the economic and non-economic resources to
start and sustain new businesses.
In the case of existing large firms, their degree of regional embeddedness and inter-organizational
networks are key factors related to social cohesion within the region. Both positive and negative examples
illustrate this point. For example, on the positive side, large local firms in the Irish medical technology
cluster (Giblin, 2011) and MNCs in Malaysia (Malecki, 1997: p.229) and Costa Rica (UNCTAD, 2004;
Oxfam, 2002) enabled the upgrading of the local industry and the participation of the relevant
stakeholders in the distribution of the value created. On the negative side, the Irish software cluster
(Giblin, 2011), the Brazilian car industry, the maquilas and blue jean cluster in Mexico, the Dominican
Republic and China (cf. Malecki, 1997; Oxfam, 2002; UNCTAD, 2004; McCann & Argiles, 2015) are
examples of lack of embeddedness and capturing of value mainly by MNCs.
Therefore, the effect of new large firms on social cohesion is a function of both the way they are
integrated in inter-organizational networks and embedded in the region. In particular, clusters of few
dominant MNCs (Chinitz, 1961; Duranton & Puga, 2001; cf. McCann & Argiles, 2015), especially those
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with hierarchical governance structures combined with lack of embeddedness in the region (Rocha, 2015)
are a potential source of socio-economic divides.
Therefore, clusters including both new firms and existing large firms, especially local ones, show a
positive feedback process between embeddedness, inter-organizational networks and social cohesion at a
given initial level of social cohesion, leading to reinforcing processes (R5, R6, and R7).
Inter-organizational networks have a positive impact on economic performance both directly and
indirectly through knowledge spillovers. The direct effect is based on explanations from both the cultural-
institutional approach and the endogenous development theory. The former argues that the social,
institutional, and cultural factors underlying the interdependence of economic actors, when they are
embedded in a web of relationships among them, are conductive to local economic development (cf.
Saxenian, 1994). In fact, ties embedded in social relationships enhance collaboration, mitigate
competition, and foster information exchange. Additionally, in clusters with a strong division of labor, the
differentiation among clustered firms leads to functional complementarities that create mutualistic effects
and therefore neutralize the negative effect of sourcing from the same resource pool. For example, as
endogenous development theory suggests, inter-organizational networks such as subcontracts between
new and established large firms through quasi-vertical integration improve the economic performance of
clusters, not only through the reduction of transaction costs (Storper & Scott, 1989) but also through
innovation diffusion (Garofoli, 1992) or knowledge spillovers.
As to the indirect impact, inter-organizational networks are conductive to knowledge spillovers, which
are key processes for innovation and economic performance according to the geography of innovation
approach, given that knowledge spillovers are important to innovation and tend to be spatially localized
within close geographic proximity to the knowledge source (Jaffe, 1989; Feldman 1994;Audretsch &
Feldman, 1996.
Marshall’s sources of external economies include not only knowledge spillovers (Figure 1) but also
local pools of specialized workers, and both factors lead to a reinforcing process named agglomeration
that leads to employment and knowledge creation (see R9). Preliminary evidence suggests a positive
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impact of clusters on job creation both in developed and emerging countries (cf. OECD, 2002; Porter,
2003; Spencer et al. 2010; EC, 2010; Temouri, 2012; Rocha, 2015; Delgado et al, 2014).
The pool of specialized workers in the region, which includes both local and migrant workers, also
increases the attractiveness of the region for new and large firms, processes identified as specialized
workers attract firms (R11 in Figure 1). In the medium term, the creation of firms and the growth of
existing firms attracted by the pool of specialized workers (R11) will increase the migration of specialized
workers to the region if there is a paucity of specialized local workers, not only fostering employment
(R9) but also changing the mix of non-specialized workers-specialized workers.
Economic growth generates a process of integration of existing workers in the region when there is a
common vision (Forrest & Kearns, 2001) or a sense of community (Sen, 2009) among local actors
supporting training and skills upgrading. Such processes influence economic growth along with a
common vision, which leads to social integration in Figure 1 (see R10) By contrast, economic growth
hinders integration when a common vision, especially among specialized and non-specialized workers, is
lacking, because it creates strong cohesive groups that “could be in conflict with one another and
contribute to a divided and fragmented city” (Forrest & Kearns, 2001:2128). In fact, economic growth
driven by economic activities that reshape occupational structures and opportunities could drive different
groups toward opposite economic poles (Castells, 1998), which lessens integration.
Summing up, we have described the integrated Economic Performance and Social Cohesion model,
depicted in Figure 1. Clusters are dynamically complex systems because of the many feedback loops
driving their behavior, e.g. ten reinforcing or positive feedback loops and one balancing feedback loop.
Inherently, cluster dynamics originate from strong agglomeration forces and positive returns to scale
leading to continuous economic growth and employment (loops R1 to R9). However, the impact of social
forces embedded in, and fostered by, a balancing feedback loop (B8) can curtail the strong economic
positive feedback loops. Positive economic performance generates economic growth which attracts new
firms and has a positive impact on the growth of existing firms, thereby enhancing economies of scale
and economic performance. A short term potentially divisive dynamic is generated by new firms and the
14
entry of firms in the regional cluster, which import technology and human resources, as they may recruit
workers from other regions. An unbalanced employment process weakens the integration of the workers
belonging to the cluster in the region, which leads to reducing social cohesion and hurting informal ties
(Figure 1, B8). Declining informal ties and inter-organizational networks can affect knowledge spillovers
and innovation, limiting future economic performance. The ultimate result can be the stagnation and
withering of the cluster.

We create a computational representation of the conceptual causal model depicted in Figure 1 based on
the constructs and operational definitions used in the literature (Table 2). This representation uses a set of
integral equations to compute the state of the different variables comprising the cluster over time (Davis
et al 2007, Sterman, 2000). The integral equations are the mathematical representation of feedback
processes where the state of the cluster at time t-1 is the basis for calculating endogenously the state of the
cluster at time t. Then, we use logical data for the simulation -e.g. values that resemble the results that can
be obtained from collecting real data- to run and calibrate the model (Lomi and Larsen, 2001; Garvaglia,
2010). Logical data is obtained from the evaluation of the empirical literature to identify a minimal set of
values that explain observations related to the state of the cluster (Boros et al, 2000). For example, a
meta-study of more than 500 clusters in US, Germany, other OECD countries, and Latin America
concludes that, on average, inter-organizational linkages are higher in clusters of developed countries
than in Latin American countries, which leads to a higher impact of clusters on economic performance in
the former countries (Rocha, 2013). Based on this empirical result, our model considers the value of the
variable 'Inter-organizational Networks" with an initial value of 4 in a scale between 1-7, and a direct
relationship with the variable 'Economic Performance', using a weight of 0.33iii. Thus, a decrease in the
value of inter-organizational networks in one unit will reduce the economic performance of the cluster by
0.33”. Figure 1 depicts the theoretical causal modelling without the temporal dimension; Figure 2 shows
the dynamics between economic growth, economic performance and social cohesion for a period of 14
15
years after running the simulation with hypothetical data. Appendix B includes the detailed steps we
follow to create the computational model and run the simulation; the next section discuss the dynamics
between clusters and socio-economic performance.
---------------------------------------
Insert Figures 1 and 2 about here.
------------------------------------------

Figure 2 shows that the economic performance of clusters does not necessarily lead to social cohesion
within the region where the cluster operates, which questions the assumption of an expected linear
relationship between the number of firms and employment, so that more firms will hire more people
leading to a decline in poverty and improving social cohesion. Cluster dynamics are inherently driven by
strong agglomeration forces and positive returns to scale leading to continuous economic growth and
employment. However, the impact of social forces can curtail the strong economic positive feedback
loops in the middle term. As firms expand and new firms enter the cluster, the limited number of
specialized people in the region will attract people from other regions (since firms cannot wait to train the
local workers). When non-resident employees are attracted, the ratio between local and migrant workers
changes and the social cohesion tends to decline, compensating for the initial impact on local workers
employment. When social cohesion declines, informal ties, embeddedness, social proximity and inter-
organizational networks also decline, which reduce knowledge spillovers and innovation, hurting future
economic performance. Firms subsequently stop coming to the region, leading to stagnation or even
deterioration due to the diminished social cohesion.
In sum, the final balance between economic performance and social cohesion is a function of three
factors. First, the initial levels of integration and social cohesion among specialized and non-specialized
workers within the region; second, the factors harmonizing growth in employment and social cohesion
16
(such as cluster governance mechanisms, the integration of economic sectors within the region, and
internal training programmes for non-specialized workers); third and finally, the degree of embeddedness
of migrant workers and new firms within the region. This conclusion is in line with previous studies in
which factors such as the embeddedness of MNC and their degree of foreign ownership, the initial level
of regional development, and the degree of diversification and integration among sectors in the region are
important for the dynamic interaction between economic performance and social cohesion in Latam
(Rocha, 2015; Birkinshaw and Hood, 2000), USA (Porter, 2003; Cobb, 2016), and Europe (Fratesi, 2015;
Konstantynova and Wilson, 2018).
Both economic and sociological approaches explain the dynamics of clusters, economic performance
and social cohesion. From an economic perspective, agglomeration exerts a countervailing force on
regional performance. In the presence of agglomeration economies, growth is increasing in the level of
economic activity (Glaeser et al, 1992), which can increase inequality across regions over time (Dumais,
Ellison & Glaeser, 2002). Also, agglomeration of economic activity leads to the clustering of economic
activity and the concentration of development in specific areas creating center-periphery patterns, which
produce regional divergence due to a process of cumulative causation and inflexibility (Arthur, 1989;
Krugman, 1991). Therefore, both a strong economic performance and a low degree of social cohesion
could potentially co-exist within a given region. From a sociological perspective, the arguments
developed for the interaction between neighborhoods and cities could be used to explain the integration
between migrant specialized workers and local workers (both, specialized and non-specialized). A
cohesive cluster could contribute to unite a divided and fragmented region because actors will have a
strong sense of place attachment and loyalty to their respective location: “thus, whether society is said to
face a crisis of social cohesion depends upon what spatial scale one is examining and the relative strength
of the countervailing forces operating at each scale.” (Forrest & Kearns, 2001:2128).
These economic and social explanations are in line with both regional studies and economic
geography literatures. First, as to regional studies, our model shows that regional change requires the
harmonization of innovation, growth in employment and social cohesion, which is in line with recent
17
studies in regional economic development (Fargerberg et al. 2013; Barca et al. 2012) and the geography
of innovation (Feldman, 1994; Masard & Autant-Bernard, 2015; McCann & Argiles, 2015). In this
harmonization process, initial conditions are key, given that the innovation and economic dynamics could
negatively affect less-developed regions –i.e. those with low initial conditions. Our model sheds light on
previous findings on the need to consider both technological and social capabilities (Fargerberg et al.
2013), innovation and embeddedness (McCann & Argiles, 2015), as well as historical-institutional factors
(Barca et al. 2012) for regional change. For example, research suggests that the embeddedness of
information and communication technologies across different sectors could affect the balance in
employment leading to social cohesion. In most OECD countries the “adoption, adaptation and
application of information and communication technologies across a wide range of industries appears to
have exacerbated the differences between core and none-core regions” (McCann & Argiles, 2015:1294).
Therefore, the economic performance of a region that results from innovation and new occupational
structures may negatively affect social cohesion when the diffusion of ICTs is not linked to “tailored skills
training or actor-networking related to ICTs” (McCann & Argiles, 2015:1299).
As to economic geography, which pays special attention in explaining how regional disparities arise
and why they persist over time (Armstrong & Taylor, 2000), our model shows potential threats to social
cohesion represented by growing immigration flows and innovation dynamics neither integrated nor
embedded within a region. For example, the growth of the IT cluster has been concomitant with a growth
in social cohesion while the demise of the aerospace cluster has been associated with a decline in social
cohesion in the region (Storper et al. 2015). These divergent results among sectors could be explained by
the different initial levels of integration and the embeddedness of specialized and non-specialized workers
and firms. In other words, our model highlights the relationships among immigration, innovation and
geography and the role of integration, embeddedness and inter-organizational networks or, in terms of
economic geography, “embeddedness, relatedness and connectivity” (McCann & Argiles, 2015:1296).
18

A rich and important literature has emerged focusing on the links between clusters and their impact on
economic performance of both firms and regions. However, the extant literature has not analyzed how
clusters affect both economic performance and social cohesion i.e. the level of social integration
between different groups in a geographical area- at the regional level. This oversight is striking, because
social cohesion has recently emerged as a priority for both scholars as well as policymakers. In addition,
even as scholars and thought leaders in public policy highlight the potential for cluster policies to enhance
economic performance, ignoring the impact of clusters on social cohesion is fraught with peril and may
ultimately undercut the economic impact of policies. Only by explicitly analyzing the impact on social
cohesion as well as economic performance can the overall impact of such policies be fully analyzed and
understood.
This paper is one of the first studies to investigate how clusters affect both economic performance and
social cohesion at the regional level. This novel contribution is particularly important to the regional
studies literature, which is concerned on the dynamics of economic, social and political factors to
understand how and why regions evolve. Clusters involve both sectoral and territorial dimensions (Martin
& Sunley, 2003; 2015; Rocha, 2004) and, therefore, understanding the co-evolution of economic
performance and social cohesion in regions in which clusters operate could contribute to understanding
how and why regions evolve.
This novel contribution spans across theory, methods, and policymaking in regional studies. As to
theory, it answers the How and Why questions: the impact of clusters on economic performance and social
cohesion within a region depends on the interaction of regional and cluster factors to integrate different
groups such as migrant specialized workers and local workers (both, specialized and non-specialized) and
embed new and large firms within the region; the reason is the differential causal dynamics and pace
between sectoral-economic-driven factors such as large firms, technology and innovation and regional-
social-driven factors such as a common vision, embeddedness and local inter-organizational networks. As
to methods, this paper uses a system dynamic methodology, thus contributing to the recent interest of
19
regional studies scholars that conceptualizes clusters as “complex adaptive systems” (Martin & Sunley,
2015:1303) and propose formal models at the meso level of analysis to capture the dynamic interaction
between sectors and regions (Fratesi, 2015). Finally, as to policy, by showing that promoting sectoral
clusters with the goal of convergence could not only lead to lower economic performance but also social
exclusion within regions, this paper contributes to current policy debates such as the place-based vs.
place-neutral policies debate (Barca et al. 2012) and the Washington-Silicon Valley Consensus vs. new
required consensus that takes into account the time and geographic dimensions of trade and innovation
(Piore & Schrank, 2018).
Economic development policies could lead to social exclusion at both inter and intra-regional levels
(cf. McCann & Argiles, 2015; Barca et al 2012:139) if their focus is solely on the sectoral (Massard &
Barnard-Autant, 2015; Konstantynova & Wilson, 2017), innovation or (McCann & Argiles, 2015),
technological (Fargerberg et al. 2013) dimensions and/or core agglomerations in the territory (Barca et al.
2012; Belussi and Trippl, 2018) with the goal of convergence. By contrast, our conceptual model shows
that policies creating the conditions for a common vision (Forrest & Kearns, 2001) or a sense of
community (Sen, 2009) among specialized (both migrant and local) and non-specialized workers could
foster both economic performance and social cohesion in the medium term. Therefore, our model is
aligned with policy recommendations that acknowledge the importance of places, embeddedness and
informal institutions (Uyarra and Ramlongan, 2012; Barca et al. 2012), focusing on place-based policies
(Barca et al. 2012; Massard & Autant-Barnard, 2015; McCann & Argiles, 2015; Konstantynova &
Wilson, 2017) and partnerships between different levels of governance (cf Barca et al. 2012:148) for
sustainable and social development (Barca et al. 2012).
This paper opens opportunities for further research such as to calibrate the model using real data and
evaluate it in different industries. First, the conceptual model requires calibration using real data to test
the relationships, evaluate policy impact and create more precise paths to economic performance and
social cohesion in regions. Appendix B includes the units of measurement of each variable and real data
can be collected using both statistical sources and surveys of experts as it is standard in cluster research
20
(cf. Porter, 2003; Pietrobelli and Rabellotti, 2007; Delgado et al. 2014; Rocha and Sternberg, 2005;
Rocha, 2013). In particular, our model could complement the much needed evaluation of the impact of
cluster policies and institutions (cf. Uyarra & Ramlogan, 2012; Fratesi, 2015; Konstantynova and Wilson,
2018; Aranguren et al. 2014).
Second, the model is general enough to evaluate the dynamic behavior of different industries using
sensitivity analysis with industry data for variables such as size of firms, availability of workers, speed of
creation of new enterprises, economies of scale and initial level of social cohesion. For example, social
imbalances seem to occur more in high-technology than in other sectoral clusters. It is possible to expect
some displacement effects when the fast growth of a cluster is not linked to the growth of other industries
and places within the same regions. Empirical studies show that, although high-growth technology
clusters contribute to the wealth of the region, they also create social divides (Keeble & Wilkinson, 2000),
as in the case of Bangalore (OECD, 2002), and Silicon Valley (Harrison, 1994; Rose, Ciechanover, &
Modi, 2015; Forbes, 2015). Porter has found that high-technology clusters only contribute to less than 3
per cent of the employment in the US economy (2001: p.25; 2003: p.564) but have an average wage
almost three times higher than that provided by local industries (2003: p.560; 564). These benefits do not
trickle down to people employed in the local industries. In effect, the correlation between high-tech
employment and local wages is only 14.4 per cent (2003: p.564), and the correlation between regional
innovation and employment growth is negative (2003: p.557). Research in Latin American countries is in
line with these results, given that clusters in natural resource-based and specialized services have a
positive impact on collective efficiency, but clusters in traditional manufacturing and complex products
do not (Pietrobelli & Rabellotti, 2007; Rocha, 2015).
These lines of future research will improve the understanding of the economic performance and social
cohesion in regions advanced in this paper.
21
22
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26
Figure 1. Economic Performance and Social Cohesion Causal Model
Employment
Specialized
local
workers
Specialized
migrant
workers
Social cohesion
Territorial
embeddedness Social
Proximity
Interorganizational
networks
Informal ties
Integration
Non-specialized
local workers
Economic growth
New firms and
existing firms' growth
Knowledge
spillovers
Knowledge
+
+
+
+
+
+
+
+
+
+ -
-
+
+
+
+
+
+
+++
Economic
performance
+
+
+
+
R9 -
Agglomeration
leads to
employment
and knowledge
creation
R7 - Social
cohesion leads
to inter-
organizat ional
networks
B8 - Unbalanced
employment
leads to reducing
social cohesion
hurting informal
ties
R5 - Social
cohesion leads
to
embeddedness
R10 - Economic
growth together
with a common
vision leads t o
social
integration
innovation
+
+
<R&D>
+
Common
vision
+
+
R6 -
Embeddedness
to inter-
organizat ional
networks
+
+
R11 -
Specialized
workers
attract firms
to the cluster
Economies of
scale
+
R&D
+
+
R& D
+
R3 -
Agglomeration
leads to
innovation
R2a -
Agglomeration
leads to
knowledge
spillovers
R4 - Agglo m
eration l eads
to kno wledg
e creation
R1 -
Increasing
returns to
agglomeration
R2b -
Knowledge
spillovers
attract new
firms
27
Figure 2. Economic growth, employment and social cohesion
Table 1. Structure of the Paper and System Dynamics Modelling
Step Section of the paper Associated Appendix, Table
and Figure
Formulate the research question Introduction -
Review the basic theories Clusters, Economic
Performance and Social
Cohesion
Appendix A
Develop the causal theoretical model
using system dynamics modelling
Causal Modelling Table 2
Figure 1
Create the computational representation
of the model and run the simulation
using hypothetical (not real) data to add
the temporal dimension and evaluate the
dynamics of the model
Causal Modelling –
Computational
Representation of the
causal model and
calibration
Appendix B - Tables 3 and 4
Appendix B - Figures 3 to 6
Discuss the dynamics of the Model Discussion Figures 2
Appendix B - Figures 3 to 6
Collect real data and calibrate the model Conclusion (future
research)
-
28
Table 2. Constructs and relationships considered in the causal model
Construct Description Refere
nce
Verbal Description of the Equation
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/
0
(%/0
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!"
/0%00
%0/0
'
/

0
/0
@0'
!"#!"#
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$0(/0'
:.
/
0
:060
%%'
!"#!"#
!"
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(;
(

;%
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

/0
%
/./
0('
!" $/0;
/0%0'
.
/
:0
&(
.(/'B
@(('
!"#!"#

2*++*3
7./0;%
'
7

1((
%;'
!0"#!" 7$;
$0

(
1(&
(
!" 7'
29
(;
/0'
 $(
(.
/0'
!" C./0%%'
(((
Reference: [a] Delgado et al (2014); [b] Temouri (2012); [c] Porter (2001); [d] Porter (2003); [e] Forest and Kearns (2001); [f] Wennberg & Lundqvist (2010); [g] Pietrobelli&Rabellotti (2007); [h] Audretsch and
Stephan (1996); [i] Ingram and Roberts (2000) Ingram and Roberts (2000); [j] Becattini (1989); [k] Becattini (1990); [l] Saxenian (1994); [m] Aydalot (1986); [o] Keeble and Wilkinson, (2000)
i Social cohesion is defined as the level of social integration between different groups in a geographical area (cf. Kearns &
Forrest, 2000; Novy, Swiatek, & Moulaert, 2012).
ii
iii Economic Performance is the result of Inter-organizational networks (weight 0.33), economies of scale (0.33), and
innovation (0.33). See Appendix B, Table 2.
... In this cluster, entrepreneurial education [23,[52][53][54][55][56][57][58][59][60][61][62] and performance appear because a well-formed entrepreneur has a higher performance level [6,[63][64][65], which reinforces his or her empowerment [21,66]. This cluster also includes the social entrepreneurship keyword [31,[67][68][69], an area distinguished from sustainability [24,44,52,53,70,71], although it has some common points regarding socio-economic interdependence [54,72]. ...
... In this cluster, entrepreneurial education [23,[52][53][54][55][56][57][58][59][60][61][62] and performance appear because a well-formed entrepreneur has a higher performance level [6,[63][64][65], which reinforces his or her empowerment [21,66]. This cluster also includes the social entrepreneurship keyword [31,[67][68][69], an area distinguished from sustainability [24,44,52,53,70,71], although it has some common points regarding socio-economic interdependence [54,72]. ity 2022, 14, x FOR PEER REVIEW 8 of 18 ...
... In line with the Community Psychology Paradigm [43][44][45], Entrepreneurship Education could reinforce concern for Sustainability and Social Impacts with regard to the territory, developing a sense of empowerment among citizens and Entrepreneurial Organizations, which could foster a functional attitude with a spontaneous initiative and/or through Institutional Intervention provided by the Government, which could encourage people, services and communities to adopt social functions, as represented in Figure 10. It suggests that organizational change for entrepreneurs comes from the top, via direct Statal-Institutional intervention, combined with change at the bottom. ...
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... Results can be applied to agile IT project management as well. Rocha et al. [10] focused their research on economic performance using cluster policies. A theoretical model based on SD principles was developed. ...
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System dynamics, as a methodology for analyzing and understanding various types of systems, has been applied in research for several decades. We undertook a review to identify the latest application domains and map the realm of system dynamics. The systematic review was conducted according to the PRISMA methodology. We analyzed and categorized 212 articles and found that the vast majority of studies belong to the fields of business administration, health, and environmental research. Altogether, 20 groups of modeling and simulation topics can be recognized. System dynamics is occasionally supported by other modeling methodologies such as the agent-based modeling approach. There are issues related to published studies mostly associated with testing of validity and reasonability of models, leading to the development of predictions that are not grounded in verified models. This study contributes to the development of system dynamics as a methodology that can offer new ideas, highlight limitations, or provide analogies for further research in various research disciplines.
... This can attract more talent, capital, and cargo clustering to promote innovation, which would form a sustainable mechanism and enhance the competitiveness of the port city. According to the above modeling ideas and referring to Rocha et al. (2019), Fu and Jiang (2019), and Uriona and Grobbellar (2019) on the system dynamics modeling method, the specific port city model is as Figure 5. ...
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... Therefore, designing artificial ICs by copying the" interaction "theoretically described in the models presented above, is nothing more than a "fake" of specific ICs in a certain territory. It seems more likely that the government can create economic zones promoting the high business activity, and then forming ICs will be possible if there are appropriate historical and cultural characteristics, a high level of the local population entrepreneurial activity, and the necessary resources' availability [13]. Artificial forming ICs is a complex, individually creative process that cannot be fully based on one of the existing theories. ...
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