Ever since British economist Alfred Marshall wrote about the importance of industry clusters in his 1920 classic, Principles of Economics, academics and policymakers have been trying to understand and cultivate the ingredients that are essential to industrial success. In the late 1990s, business strategist Michael Porter argued that clusters (typically composed of venture capital resources, universities, research centers, employers, highly skilled workers and groups such as chambers of commerce) make businesses more competitive by increasing the pace of innovation and stimulating new business formation. National and regional governments quickly embraced the view that once they seeded a cluster, good things would happen: Businesses would be drawn to the area, attract employees and more employers, and these activities would feed on themselves, leading to economic growth.
There are questions, however, about the nature of the economic benefits knowledge clusters are capable of generating. For example, while Silicon Valley and Boston’s life sciences cluster generate employment for highly skilled engineers and scientists, they do little to address the problem of unemployment among less educated and less trained workers directly. Many economists believe that the manufacturing sector in the West will have an uphill climb competing with developing countries. But there is another type of industrial cluster that has a bright long-term future — one that’s organized around logistics.
Logistics clusters bring together a wide array of logistics services, including transportation carriers, warehousing companies, freight forwarders and third-party logistics service providers. They also include the distribution operations of retailers, manufacturers (for both new products and aftermarket parts) and distributors. Typically, they are positioned in mode-changing locations, such as busy seaports in Rotterdam, Shanghai and Los Angeles, etc.; airport hubs like Hong Kong, Seoul and Memphis; and, major inter-modal yards where freight shipments transfer from railcars to trucks (such as Chicago, Dallas and Kansas City). Some bring together multiple elements at once: mode-changing services, distribution to nearby populations and trans-shipment services.
Logistics clusters generate a self-reinforcing positive loop by virtue of their involvement in a wide array of activities that crisscross the economy. As the flow of goods into and out of the cluster increases, transportation costs decline and the level of service improves. Larger vehicles are more economical to operate on a cost per ton-mile hauled than smaller vehicles. High freight flow allows transportation carriers to operate larger conveyances, reducing operating costs. More freight volume results in more frequent service, which in turn attracts more distribution and logistics operations and more carriers.
Job creation is one of the strongest arguments for logistics clusters and one reason they have received support and funding from regional and national governments the world over. Memphis International Airport, for example, is responsible for 220,000 jobs in the local economy, 95 percent of which are tied to cargo operations. Louisville International Airport, the worldwide air hub for UPS, plays a similarly influential role for greater Louisville, employing more than 55,000 people locally. The logistics cluster that has grown up around the Port of Rotterdam provides direct employment for more than 50,000 workers and indirect employment for another 90,000.
A major distinction between logistics clusters and other kinds of industrial clusters is the range of jobs. In contrast to Silicon Valley, Wall Street and other knowledge-based clusters, which tend to employ highly educated people with starting salaries in the top five to seven percent of U.S. workers, logistics clusters generate a diverse spectrum of employment opportunities. Moreover, many logistics companies, including UPS, prefer promoting either from within the organization or within the industry. In 2010, the average income for logistics workers in Los Angeles was more than $55,000, one of the highest of any sector employing low-skill workers.
The business case for logistics clusters, however, goes beyond the number and quality of jobs. One advantage of logistics jobs is that they are less subject to offshore relocation than jobs in other sectors. Another advantage is that the logistics industry isn’t overly dependent on a narrow set of industries but serves thousands of businesses in multiple industries, thus making it less subject to the vagaries and business cycles of any particular industry.
Copyright © Massachusetts Institute of Technology, 2012. All rights reserved.