Growth Strategies

This Kind of Cluster Could Actually Help Your Business

This Kind of Cluster Could Actually Help Your Business
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Senior Entrepreneurship Writer at CNBC
5 min read

Want to create more jobs and grow revenue? Maybe all it takes is a little strategic networking. A pilot program from U.S. Small Business Administration did just that, according to a third-party analysis.

Rates of employment and revenue growth were higher in the program's business "clusters" than in comparable numbers of unaffiliated businesses, according to analysis of the SBA's two-year pilot Regional Cluster Initiative. The SBA invested $6 million a year into 10 groups of businesses for two years starting in 2010 and commissioned economic policy analysis research-and-consulting firm Optimal Solutions Group to perform an independent review.

Related: A Cluster of Clusters: Where the SBA Is Investing in Regional Economies

"Clusters" are groups of large and small businesses, universities, research labs, trade groups and expert mentors, working in a similar industry and in mostly the same region. A formally organized cluster meets periodically to discuss ways to work together to win government contracts, share knowledge and network.

In the initiative, selected "clusters" ranged from a group of Northern Alabama small businesses focused on defense and space technologies to a group of businesses specializing in the new science of flexible electronic components in Ohio and startups focused on cyber-security, unmanned air vehicles and renewable energy in San Diego.

The results of the recently released analysis add momentum to a growing body of research into the economic benefits of joining forces in business groups, says Mark Muro, a senior fellow and policy director at the Metropolitan Policy Program at the Brookings Institute, an arm of the Washington, D.C.-based think tank dedicated to studying the impact of economic, social and demographic changes on U.S. cities.

Related: How Industry Clusters Can Spur Small-Business Growth (Video)

"We think [clustering] is a fundamentally sound approach to growing U.S. competitiveness," Muro says. Businesses are directly and indirectly related each other: Formally, if they are part of the same supply chain, and informally, if they use the same resources or labor pool in a region, he says. Investing in a regional group of businesses is "a really powerful way to not just help one firm or two firms -- not just a one off -- but to bolster the whole ecosystem."

Total employment in small businesses included in the SBA's initiative grew at a rate of 8.7 percent on an annualized basis between 2010 and 2012, according to the nearly 200-page report prepared by the College Park, Md.-based Optimal Solutions Group. That's greater than the 2.3 percent rate of employment growth measured in a comparison group of small, non-clustered businesses based on U.S. Census data. It's also greater than the 3.4 percent rate of employment growth measure in a comparison group of small, non-clustered businesses based on Dun & Bradstreet data. Optimal Solutions Group ran two comparison groups for greater accuracy.

Total revenue of small businesses included in the initiative grew at 10.8 percent on an annualized basis between in the two years studied, according to the report. The Dun & Bradstreet comparison group showed revenue growth of 6.2 percent. There was no comparison group for revenue growth based on U.S. census numbers because the firm-level data is either not available or not made public.

Related: Illinois Sparks an Electricity Efficiency Cluster

While the SBA's pilot program turned promising results, taxpayer money should not be indiscriminately thrown at business groups, says Muro. Only the most competitive "clusters" were invited to be part of the program and given funding. That's how it ought to work for future taxpayer investments, he says.

"States and the federal government should invest only in initiatives that have strong national benefit and in areas that have high potential for U.S. competitiveness. There is a bar, we should always be selective and not all clusters and not all regions will be good investments," says Muro.

What makes business grouping so valuable? In particular, they serve as a "one-stop-shop" for entrepreneurs, says Alexandre Monnard, an author of the report. Also, "clusters" are valuable for being neutral, unbiased "brokers" of information and networking, Monnard says.

Related: The Carolinas Concentrate on Nuclear Energy

Small businesses that had access to the resources of regional business networks found them nearly irreplaceable, the research by Optimal Solutions Group found. Only 13 percent of the small-business owners surveyed say the services and activities, which range from one-on-one mentoring to lessons on how to win government contracts, could be obtained anywhere else, according to the report.

The individually tailored, "concierge" services that groups of related businesses offer small businesses ultimately made the SBA's initiative successful, says Mark Turner, president and CEO of Optimal Solutions Group. "When you find a good concierge, it is about the ability to recognize what your needs are and then to help facilitate the acquisition of the services. And that really is what effective clusters are attempting to do," says Turner.

Related: Small Business Person of the Year Helps Veterans Take Flight

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