Theory of Industry Clusters

Theory of Industry Clusters

by Yudo Anggoro, University of North Carolina at Charlotte

The theory of industry cluster has been receiving wide attention over the past decades from scholars in various backgrounds, such as in economics, regional development, public policy, and industrial organization. Perhaps the most influential scholar in this area is Michael Porter, whose cluster theory has become the standard concept for policy makers to promote national, regional, and local competitiveness, innovation and growth (Martin and Sunley 2003). In his book, The Competitive Advantage of Nation (1990), Porter put forward a microeconomically based theory of national, state, and local competitiveness within the context of global economy.

According to Porter (1990), industry clusters are geographic concentration of interconnected companies, specialized suppliers and service providers, firms in related industries, and associated institutions (such as universities, standard agencies, and trade associations) in particular fields that compete but also cooperate. Another definition of industry clusters is groups of business enterprises and non-business organizations for whom membership within the group is an important element of each member firm’s individual competitiveness (Bergman and Feser 1999). Most of industry cluster participants do not compete directly, but they serve different industry segments. In this respect, they share many commonalities and opportunities, and encounter many constraints and hindrances to productivity.

Industry cluster participants enjoy the benefit of coordination and mutual improvement in areas of common concern without threatening or distorting competition or limiting the intensity of rivalry (Porter 2000). Industry clusters also offer an efficient forum for constructive dialogue among related firms and their suppliers, government agencies, and other institutions. Public and private investments to improve conditions for clusters benefit many firms within the industry clusters.

Advantages of Industry Clusters

Industry cluster are effective in generating economic growth and reducing transportation costs (Krugman 1991). It is because when an industry needs intermediary inputs to produce final goods, it is better to get these inputs from the industries within the same area rather than obtain it from other areas. This argument is consistent with Porter (1990) that clusters not only reduce transaction costs and boost efficiency, but also improve incentives and create collective assets in the form of information, specialized institutions, and reputation, among others. Clusters also enable innovation, speed productivity growth, and ease the formation of new businesses.

Marshall (1920) in Krugman (1991) provides other benefit of industry clusters that allow a pooled market for workers with specialized skills; this pooled market brings benefit both for workers and firms. In term of spillover effect, because information flows locally more easily than over greater distances, industry clusters generate what we would now call technological spillovers or knowledge spillovers. This argument is also in line with Bergman and Feser (1999) who mention three major drivers of industry clusters, which are: 1) strategic business opportunities derived from specific kinds of inter-firm alliances; 2) traditional regional factor market advantages (labor pools and knowledge spillovers); and 3) the role of non-business institutions such as universities, trade unions, and associations.

Policy Implication

The industry clusters theory requires collaboration and mutual dependence between government and business in national productivity. Such collaboration is crucial to remove obstacles, lower unnecessary costs, and create appropriate inputs, information, and infrastructure (Porter, 1990).

• Implication on Government

The theory of industry clusters advocates new, constructive, and actionable roles for government and business in the pursuit of competitiveness and prosperity. Porter (1990) believes that government must strive to create an environment that supports rising productivity. This role implies a minimalist government role in some areas (e.g., trade barriers, pricing) and an activist role in others (e.g., ensuring vigorous competition, providing high-quality education and training). Government must strive to improve the business environment; it must not limit competition or ease standards for safety and environmental impact. Porter (2000) also warns that government should not get involved in the competitive process, its role is to improve the environment for productivity; such as improving the quality and efficiency of business inputs and infrastructure, and creating policies and a regulatory context that stimulate upgrading and innovation.

The reason why industrial policy from government should be rejected is because it seeks to distort competition in favor for a particular location, while the cluster theory attempts to remove barriers for productivity growth. Industrial policy also rests on a zero-sum view of international competition, while cluster theory is based on positive-sum game where productivity improvement will expand the market and where many nations can prosper if they can become productive and innovative.

• Implication on Firm Strategy

The company’s competitive advantages lie outside the firm and are rooted in locations and industry clusters. Alongside government, the industry has a role to play in investing in some of the collective assets or public goods that reside in particular locations. Porter (1990) also argues that the industry clusters theory offers a more proactive role from industrial associations to make investment.

Critics for Industry Clusters

However, even though cluster theory has been receiving praises among scholars, this theory also has not been far from critics. Bergman and Feser (1999) mention that while this theory may seem plausible to be implemented in developed economies; it is difficult to concentrate resources on key industries in less developed countries or regions, due to the lack of sufficient infrastructures in the region. The provision of good infrastructures is essential in industry clusters. As Rosenfeld (1995) in Bergmand and Feser (1999) argues, as industry concentration increases, individual businesses benefit from the development of sophisticated institutional and physical infrastructures tailored to the needs of specific industry. Such infrastructures include highways, local product showrooms, foreign sales offices or distribution centers, supply centers, and common waste treatment facilities.

Another important critic why industry clusters failed more often than they succeeded is that too little attention was paid to the economic and social pre-requisites that are necessary for industry clusters to work (Malizia and Feser 1998 in Bergmand and Feser 1999). In this respect, political and equity considerations often dictated, through a criterion of need rather than potential, the designation of very small and peripheral towns as “growth centers” or industry clusters.

Martin and Sunley (2003) criticize industry clusters theory as vague and highly generic in character. They argue that rather than being a theory to be rigorously tested, the industry clusters idea has instead become accepted largely on faith as a valid and meaningful way of thinking about the national economy. In terms of industry clusters definition, Martin and Sunley (2003) believe that it is the major source of ambiguity of this theory. Porter’s definition on industry clusters is so vague in term of geographical scale and internal socio-economic dynamics. This vagueness has led to many different analysis and interpretations of this concept.

According to the critics from Martin and Sunley (2003), Porter’s concept of industry clusters has stirred confusion among scholars regarding the term “geographical proximity” in the formation, performance, and identification of clusters. It is unclear how Porter (1999) limits his term of geographical proximity in industry clusters.

References

Edward M. Bergman, E.M. and Feser, E.J.(1999). Industrial and Regional Clusters: Concepts and Comparative Applications. Morgantown, WV: WVU Regional Research Institute Web Book.

Krugman, P. (1991). Geography and Trade, MIT Press.

Martin, R., & Sunley, P. (2003). Deconstructing clusters: chaotic concept or policy panacea? Journal of Economic Geography , 3, 5-35.

Porter, M. E. (2000a). Location, Competition, and Economic Development: Local Clusters in a Global Economy. Economic Development Quarterly , 14 (1), 15-35.

Porter, M. E. (2000b). Locations, Clusters, and Company Strategy. In G. L. Clark, M. P. Feldman, & M. S. Gertler, The Oxford Handbook of Economic Geography (pp. 253-274). New York: Oxford University Press.