The role of social networks and institutional support in cluster formation

The formation of industrial clusters has rarely been studied, especially in places without any related industries in the first place, largely due to the paucity of information in the incipient stage. Based on primary interviews of all the business owners of a nascent outdoor furniture cluster relocated from the coast to central China, we develop a conceptual framework and dissect the process of cluster formation. The decision of firm entry depends on both discovery and external costs which vary by the stage of cluster formation. Social networks are more conducive to reducing the discovery cost in the incipient stage, while institutional support plays a more prominent role in reducing the increasingly larger external cost in the growth stage, which is beyond the capability of individual firms.