The Clustering of Financial Services in London*

Table A1: Cluster Growth and Decline Factors

Cluster benefits on the demand side include customer proximity. The idea is that the
company may reduce transactions costs by locating close to its customers. However,
benefits may go beyond cost. Sophisticated buyers are more likely to exist in a cluster and
these can encourage innovation by being demanding and by alerting suppliers of new trends
and innovations (von Hippel, 1988). Such knowledge exchange between customers and
suppliers can be problematic because the value of knowledge is difficult for users to gauge
before they have acquired or absorbed it. Accordingly, it is difficult for a market for the
exchange of knowledge to arise (Roberts et al., 2000). Clusters allow for the development
of reputation and of networks of trust between the parties involved and so provide a
solution to this problem. The clustered company may also benefit from reduced consumer
search costs. The idea here is that the firm is more likely to be found by customers when it
is located in a cluster. This is particularly important when consumers have specific
requirements (and so explains why antique shops tend to cluster). Information externalities
on the demand side may also exist, that is, a clusters reputation rubs off on the company
that is located in it.

On the supply side a major benefit is that knowledge spills over in strong clusters and
this is particularly important when valuable industry knowledge is tacit and informally
communicated (Howells, 2002). The effective spilling of tacit knowledge can lead to more
prolific innovation. A second supply side benefit is access to specialized inputs. As a
result, the company benefits from lower search costs because it can easily recruit from a
pool of specialized labor and can tap into a specialized supplier base. Infrastructure

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