Aftershocks: Exploring Cluster Heterogeneity and Agglomeration Dynamics After the Internet Bust

Prior work suggests that agglomeration economies associated with industrial diversity and related industrial diversity both promote new firm formation regardless of a technology-focused cluster’s evolutionary state. However, we find that the type of diversity-based economies that matter in the pre-shock period, matter less in the cluster’s post-shock period and vice versa. After a shock, economies based on industrial diversity support a cluster’s recovery whereas to the contrary, the number of firms in related industries corresponds to a reduction in foundings. Prior to the shock when the cluster’s competitive landscape is more certain the pattern is reverse: related-diversity economies maintain a positive influence on the rate of foundings but industrial diversity is insignificant. Our data cover all industries operating in Silicon Valley in California from 1993 to 2007. The time period allows us to explore the progression of a technology-focused cluster, Silicon Valley, before and after a major shock (the Internet bust) and thus, sets the stage for a natural experiment.