Interconnected buildings symbolize a thriving business cluster.

The Secret Sauce of Success: How Local Business Clusters Boost Your Competitive Edge

Rhea Morgan in Business & Economy June 2025 • 4 min read.

"Uncover the surprising power of skill-related suppliers and firm-to-firm networks in driving business success and regional economic growth."

In today's interconnected world, global supply chains seem to stretch across continents effortlessly. Yet, a fascinating paradox remains: many businesses still find immense value in clustering together locally. Why is this the case? While technology has made remote collaboration easier than ever, the benefits of physical proximity—especially when it comes to sharing knowledge and skills—continue to drive success for businesses of all sizes.

Think of Silicon Valley. It's not just a random collection of tech companies; it's a thriving ecosystem where ideas, talent, and resources converge. This phenomenon isn't limited to high-tech; it applies to various industries. The key lies in what economists call 'coagglomeration,' where businesses benefit from being near suppliers, customers, and, most importantly, each other.

Recent research from Hungary sheds light on this dynamic. By examining firm-to-firm networks, skill relatedness, and supply chain connections, the study reveals the conditions under which local clusters truly shine. The findings offer practical insights for businesses looking to sharpen their competitive edge and for policymakers aiming to foster regional economic growth.

What is 'Coagglomeration' and Why Should You Care?

Interconnected buildings symbolize a thriving business cluster.

At its core, coagglomeration is about firms strategically positioning themselves near other businesses to tap into shared resources and expertise. Historically, this has meant access to specialized labor, suppliers, and knowledge spillovers. Economist Alfred Marshall pointed this out over a century ago. While the digital age has challenged some assumptions about proximity, the underlying principles remain relevant.

The benefits of coagglomeration include:

Reduced Transportation Costs: Being close to suppliers and customers minimizes shipping expenses and logistical headaches.
Access to Talent: Clusters attract skilled workers, creating a deep talent pool for businesses to draw from.
Knowledge Sharing: Proximity facilitates the exchange of ideas and best practices, driving innovation and continuous improvement.
Stronger Relationships: Local connections foster trust and collaboration, leading to more reliable partnerships.

However, not all clusters are created equal. A successful cluster requires more than just physical proximity; it needs a foundation of shared skills and knowledge.

Turning Insights into Action: Building Your Own Business Cluster

The research from Hungary offers a powerful reminder that location still matters in today's globalized world. By understanding the dynamics of coagglomeration and the importance of skill-relatedness, businesses and policymakers can create environments where innovation thrives and competitive advantages are sharpened. Whether you're a startup looking for the right ecosystem or an established company seeking to optimize your supply chain, focusing on local clusters could be the key to unlocking your full potential.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2405.07071,

Title: Colocation Of Skill Related Suppliers -- Revisiting Coagglomeration Using Firm-To-Firm Network Data

Subject: physics.soc-ph econ.gn q-fin.ec

Authors: Sándor Juhász, Zoltán Elekes, Virág Ilyés, Frank Neffke

Published: 11-05-2024

Everything You Need To Know

What is coagglomeration and how does it benefit businesses?

Coagglomeration is the strategic positioning of businesses near each other to leverage shared resources and expertise. It's a key concept in understanding why local business clusters thrive. The benefits include reduced transportation costs, easier access to a skilled talent pool, opportunities for knowledge sharing and idea exchange, and the development of stronger, more reliable business relationships. All of these advantages contribute to improved performance and a stronger competitive edge, as emphasized by the research focused on firm-to-firm networks, skill relatedness, and supply chain connections.

How does the concept of 'skill-relatedness' impact the success of business clusters?

Skill-relatedness is crucial for successful business clusters, as highlighted by the study of firm-to-firm networks. Clusters with businesses that share similar skills and knowledge are more likely to experience innovation and growth. This shared expertise facilitates better knowledge spillovers, allowing businesses to learn from each other and improve their practices. This environment fosters a deeper talent pool and encourages more efficient resource allocation. The concentration of specific skills within a cluster enhances the overall competitive advantage, as companies can collectively address industry-specific challenges and adapt to market changes more effectively.

In what ways does being part of a local business cluster offer advantages in a global market?

Local business clusters offer several advantages even in a globalized marketplace. The proximity to suppliers, customers, and other businesses within the cluster enables better access to resources, including a skilled labor pool and specialized suppliers. This proximity also allows for more efficient supply chains and quicker responses to market changes. The increased collaboration and knowledge sharing within a cluster help businesses innovate faster and stay ahead of the competition. Businesses can develop stronger relationships that help them navigate challenges, which makes them more resilient. The ability to quickly adapt to new technologies and market shifts is an essential advantage in today's global environment, and a local cluster makes it possible.

What is the significance of firm-to-firm networks in the context of local business clusters?

Firm-to-firm networks are critical to the success of local business clusters. They represent the relationships and collaborations between businesses within the cluster, including suppliers and customers. These networks facilitate the exchange of knowledge, resources, and best practices, fostering a culture of innovation and mutual support. Through firm-to-firm networks, businesses can access specialized suppliers, attract talent, and share expertise, such as the knowledge spillovers highlighted by the research from Hungary. Strong firm-to-firm networks create a more resilient and dynamic business environment that strengthens the overall performance of the cluster and improves its competitive position.

How can businesses and policymakers apply the insights of coagglomeration to promote economic growth and business success?

Businesses can leverage the insights of coagglomeration by strategically locating themselves within existing or emerging business clusters. This involves assessing the skill-relatedness of potential locations and the strength of firm-to-firm networks. They should actively participate in the cluster's knowledge-sharing activities and build strong relationships with other businesses. Policymakers can support the growth of business clusters by creating favorable conditions, such as investing in infrastructure that supports transportation and communication, fostering educational and training programs that develop the required skills for the cluster, and encouraging collaboration between businesses and research institutions. These efforts help to create dynamic and innovative business environments, fostering the economic growth as well as regional development.