Coordination Failures, Cluster Theory and Entrepreneurship: A Critical View

Abstract

Development policy has been energized in the last decades by a number of contributions emphasizing a new positive role the state can and should play in fostering economic growth. The central pillar of this literature is Michael Porter and his theory of clusters. A number of economists have attempted to anchor the appetite for clustering initiatives in a solid theoretical bedrock. They have pointed out an interesting market failure that may prevent the emergence of profitable clusters and thus jeopardize overall economic development: the failure of individuals to coordinate changes in their actions in order to reap the benefits of a better situation. This paper intends to provide a refutation of the idea that coordination failures as manifested in the inability of clusters to emerge can serve as a ground for government intervention. It uses mainly Porter, Rodrik and Rodriguez-Clare thesis as an example of this approach and criticizes the claim that coordination externalities prevent the market process to allocate resources optimally.Coordination, Market failure, Economic development