Location Quotient – Session 2

This is part 2 of a 5-part, self-guided series on cluster identification.

Location Quotient

Session 2: Unpacking the primary tool for quantitative cluster analysis

Session Agenda

Calculating and interpreting Location Quotients
Data sources for LQs
Problems with relying on LQ alone for cluster IDs

Session Slides

View the embedded slides or use the link below to download them as a pdf.

Download the slides [pdf].

Terms & concepts

Concentration – The density of a factor’s presence. In cluster analysis, concentration of industry and related economic activity is a signal that a cluster (which also involves connectedness among businesses, assets, and institutions) may be present.
Data Suppression – Information that is masked or made unavailable from a dataset. In public economic data sources, suppression is often applied for privacy reasons, such as when the data for a region only applies to a few companies and may therefore reveal proprietary information even if the data is technically anonymous. Another common reason for suppression is when the publisher suspects there may be a quality issue with the underlying data source. Most publishers provide explanations of their suppression policies.
Establishment – A specific location of a firm, which may have one or more establishments. For example, ACME firm may have two establishments in County A, and one each in County B, County C, and County D. Each establishment can have its own industry code, such as when one location conducts research, one houses administration, and another manufactures products.
Location Quotient – A standard measure of industry concentration. LQ is a ratio of ratios that compares an industry’s local concentration to that industry’s concentration in a reference geography (usually the nation). The formula is LQi = ( ei / e ) / ( Ei / E ) where LQi is the location quotient for the industry, ei is the economic activity of that industry in a region divided by the region’s total economic activity, divided by the reference’s economic activity of that industry divided by the reference’s total economic activity.
NAICS – The North American Industry Classification System (NAICS) is the standard used by Federal statistical agencies to classify business establishments for economic data.
MSA – Metropolitan Statistical Areas (MSA) are coded by the U.S. Office of Management and Budget based on Census Bureau data. As of 2020, each MSA has at least one urban area with 50,000 or more residents.

Next session

Session 3 covers Qualitative Assessment:

Hard-to-measure sectors
Community & Stakeholder engagement