A Combined Scale-and-Scope Theory of IT Industry Cluster Growth

Most information technology (IT) clusters are characterized by a heterogeneous mix of IT industries employing different technologies and producing a wide range of hardware, software and services. We study how collocation of one IT industry influences innovation and growth in another IT industry. We examine whether scale and scope effects can explain how collocation, the act of placing potential complementary assets together in geographic space, influences innovation and growth even though use of IT has been expected to lead to greater geographic dispersion of industry. Economies of scale effects (or MAR externalities) suggest collocation of many companies with similar activities. Economies of scope effects (Jacobs externalities) suggest that heterogeneous activities placed in proximity lead to the greatest levels of value creation. From this, we propose a combined scale-and-scope theory of IT industry cluster growth. Our perspective emphasizes the amplifying effects of scale-size on scope effects across industries. We study the growth patterns of four IT industries: computer and peripheral manufacturing, semiconductor and other electronic components manufacturing, software publishing and data processing and what effect collocation of one industry has on others. Our data covers firms in 170 counties of 17 states in the United States in a longitudinal study spanning 1998 to 2002. Using econometric analysis, we find that different IT industries are affected differently by collocation. The software industry does not experience significant collocation externalities. In contrast, the semiconductor industry experiences significant scale-size effects, as well as scope effects from the software industry, which enhance its scale-size effects. We also find that computer manufacturing experiences economies of scope effects from semiconductors, while data processing feels scope effects from the computer and software industries.