Governments around the world are fostering industrial ‘clusters’, hoping to create agglomeration economies. Using the political division of Germany in 1949, this column argues that heightened firm density can raise costs for incumbent firms in addition to the often-cited agglomeration benefits. This is important for policymakers contemplating efforts to promote their local areas by targeted cluster initiatives and bidding to attract large firms. Policy efforts that are neutral in orientation – such as physical infrastructure investments or improving the generation and dissemination of knowledge – may be more effective alternatives.

The World Bank's Indermit Gill recently argued that economic growth will naturally be spatially unbalanced and that to try to spread it out – too thinly or too soon – would discourage it. This column responds by pointing out that economic concentration is neither necessary nor sufficient for growth.

Why do local policymakers fight so hard to attract research and development labs to their area? This column provides a possible explanation. Using patent data, it finds a strong link between R&D and growth caused by knowledge spillovers between firms.

Agglomeration effects are important but difficult to measure. This column uses a new database with precise geographical information to investigate the locational interdependence of multinational firms. Knowledge spillovers and capital- and labour-market externalities exert a significant effect on the co-agglomeration of multinational headquarters, while input-output linkages also play a significant role in the case of subsidiary co-agglomeration.

Gains from agglomeration may explain why investors choose the same location when going abroad, but why do firms from the same country cluster together? This column examines evidence from South Korean firms investing in China and finds that investors of the same nationality benefit from stronger forward and backward linkages with each other.

Paul Krugman suggests that his Nobel-prize-winning “core-periphery” model was perhaps more relevant a century ago than today. This appears to be true in terms of overall manufacturing concentrations in Europe and North America, which are unravelling. Large-scale agglomeration forces, however, are alive and well in the developing world, as are localised sectoral clustering phenomena in industrialised countries.

This column traces the economic evolution of France’s regions over the last 140 years to test the predictions of new economy geography. Both manufacturing and services experienced a bell-shaped curve of spatial development, in which spatial concentration initially increased and then decreased. While transport costs played a key role, positive spillovers are an increasingly important source of agglomeration gains.

Many academics, policy makers, and business leaders stress the importance of local conditions for explaining spatial differences in entrepreneurship and economic development. This column assesses the importance of various forces for agglomeration. The empirical evidence suggests that market effects, such as proximity to input suppliers and labour market pooling, play a big role, while there is less support for factors like entrepreneurial culture and industrial diversity.

Governments spend heavily on industrial clusters. They are wasting their money if firms naturally cluster to reap agglomeration gains. This column presents evidence from France that questions policymakers’ enthusiasm for promoting clusters.