The tendency of firms related to a particular industry to cluster together geographically is a long established feature of the economic landscape. However, in recent years, the existence of economic clusters has become a renewed focus for study and debate. This renewed interest reflects the observation that the clustering of economic activity in particular localities and regions appears to be an integral and significant feature of a globalising economy; a factor noted by a number of prominent economists (e.g. Porter, 1990; Krugman, 1991). Whilst this new found interest in spatial agglomeration of certain economists tends to re-emphasise traditional explanations of the key role of external economies in the creation of clusters (e.g. reduced transaction costs and specialisation, labour market pooling, availability of specialist suppliers and infrastructures, technological knowledge spillovers etc.), in economic geography and other social sciences, engagement with empirical examples of contemporary economic clusters has led to increasing emphasis on the socio-cultural basis to economic activity.

From the 1970s it was apparent that some traditional industrial districts were being revived and new economic clusters emerging. These included: technology based districts (e.g. Cambridge, Silicon Valley (Saxenian, 1994)); districts based on traditional industries but employing modern production techniques of flexible specialisation (e.g. Third Italy (Brusco, 1982); customer-supplier clusters based on JIT production (e.g. Toyota City); and informal economic districts (e.g. East End clothing).

Explaining the basis and evolution of these new economic clusters and their theoretical and political significance became the focus of much research in economic geography in the 1980s and 1990s. Most recent discussion has argued that a focus merely on external economies which are largely related to economies of scale, fail to capture more intangible external economies which Storper (1995) refers to as untraded interdependencies and elsewhere as relational assets (Storper, 1997). The notion of untraded interdependencies emphasises the importance of the ‘atmosphere’ which exists within economic clusters, pointing to the importance of socio-cultural factors (e.g. conventions and trust, shared values, face to face contact, innovation and learning) within which economic activity is embedded and which provide the vital frameworks for economic action. This has given rise to notions such as: institutional thickness; the networked region; the intelligent region; the learning region and the associational economy. Within a globalising economy where many factors of production are increasingly mobile, it is argued that these territorially rooted, immobile untraded interdependencies are of increasing importance in providing competitive advantage.

Successful examples of these types of regions share a number of common features: (see also Hudson 1998; Amin & Thrift, 1994; Storper, 1995):

• ‘institutional thickness’: strong institutional presence of diverse local institutions (both state and non-state) and high levels of interaction between institutions. This institutional presence enables and facilitates co-operation, associationalism and self-regulation and permits labour market conditions suitable to the development of flexible production strategies
• responsive government institutions and range of intermediary institutions between business and government to pass on and act on information: these underpin local competitiveness through enabling learning and sharing intelligence
• distinctive local systems of governance and regulation which are embedded in local and regional cultures

• conventions and trust: economic activity proceeds though the existence of often taken for granted rules and routines which reduce uncertainty and enable collective action. These conventions will develop rules of behaviour in a manner which is specific to sectors and locations and permit the development and maintenance of trust.
• the networked region: the existence of co-operation and trust within firms networks (often dominated by SMEs) facilitates learning, innovation and enhanced economic performance
• inter-firm co-operation enable firms to compete effectively in national and international markets
• intensive division of labour between firms spanning across the boundaries of manufacturing and services with business service firms often particularly important

• awareness of common enterprise: shared cultural norms and values which underwrites/legitimises local activity and permits the extension of trust and reciprocity enabled by proximity permitting face to face contact.
• collective representation of individual interests (e.g. via sectoral organisations)
• co-operative forms of industrial relations and flexible working arrangements; co-operation between trades unions and employers via shared understanding of the needs of cohesion and competitiveness
• culture of commitment to social cohesion and inclusion via networks of co-operation and trust (cohesion as a pre-condition for economic success, not just a product of it)

• local knowledge often in the form of ‘tacit knowledge’ (non-codified knowledge built up and embedded within the locality/region over time). Such knowledge creates an environment in which local firms and other actors are highly aware of what is needed for competitive success
• learning/intelligence capability: reflective socio, cultural and institutional capability which enables the monitoring and evaluation of performance; ability to learn and develop new ways of doing things through anticipating change (e.g. the intelligent/learning region)

The above analysis presents a number of challenges for the development o local economic policy. It points towards a focus on the endogenous building up of local wealth through upgrading the:

• supply base (e.g. skills, education, innovation, communications)
• institutional base (e.g. development agencies, autonomous political groups)
• relational assets ((e.g. strengthen firm interdependencies, trust, reciprocity)

The promotion of such endogenous processes of local economic development indicate the importance of contextually rooted strategies which promote the building up locally based social capital in a number of ways, for example:

Socially inclusive forms of entrepreneurship and employment: a central role for policies which combat social exclusion and stimulate job creation as a means of building up the social economy (e.g. support for targeted community based groups, labour market programmes targeted at vulnerable groups, use of informal sector as bridge to formal sector)

Broadening and mobilising the local institutional base: sponsoring the development of democratic and interactive pluralism alongside strong sub-national authorities and new institutional arrangements and practices. Social inclusion and social empowerment can be seen as an important way to encourage economic creativity

Building clusters and strengthening local learning and innovation: promotion of relations of trust and mutuality in order to strengthen local networks which support the development of economic clusters and a reflexive rationality geared towards learning, adaptation and anticipating change.

More generally, local economic development which is supportive of a bottom-up, locally specific, long term and pluralistic approach draws upon various principles of economic governance (such as networks of association, plurality and decentralised and autonomous organisations, co-operation between institutions, active citizen participation, reflexive practice) which require both the presence and strengthening of local social capital.

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