The Clustering of Financial Services in London*

benefits can go beyond access to a good transport network to include institutions that
coordinate activities across companies in order to maximize collective productivity, for
example, trade associations which set standards and/or conduct marketing for the cluster as
a whole (Porter, 1990). Better motivation and measurement can also exist within a cluster
as local rivalry can act as a powerful spur (Porter, 1998). Also, it can be easier to measure
performance against local rivals as they share a similar context leading to lower monitoring
costs. Another important supply side benefit is that it can be easier to try out new ideas in a
cluster since it is possible to gain instant feedback and all of the inputs (including
sympathetic venture capital) required for experimentation are likely to be present in the
cluster. Finally, a clustered company may benefit from informational externalities on the
supply side: The firm enjoys lower risk by observing successful production at a location.

Cluster costs on the demand side are as follows. Other things equal, as the number of
competitors increases, we would expect prices and so profits to fall. Also, a cluster
specialized in a particular technology can go into decline if that technology is substituted.
Finally, changes in tastes and preferences can lead to cluster decline. On the supply side,
congestion and competition in input markets can lead to higher wages and rents which in
turn could lead to movement out of the center of a cluster. Cartels and over-consolidation,
powerful trade unions and stagnant local infrastructure are all potential decline factors as
they can restrain competition and innovation and slow down productivity improvements.
These potential supply side decline factors provide an agenda for government industrial
policy.

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