A business cluster is a geographic concentration of interconnected businesses, suppliers, and associated institutions in a particular field. Clusters are considered to increase the productivity with which companies can compete, nationally and globally. Accounting is a part of the business cluster.[1][2] In urban studies, the term agglomeration is used.[3] Clusters are also important aspects of strategic management.
The term business cluster, also known as an industry cluster, competitive cluster, or Porterian cluster,[4] was introduced and popularized by Michael Porter in The Competitive Advantage of Nations (1990).[5] The importance of economic geography, or more correctly geographical economics, was also brought to attention by Paul Krugman in Geography and Trade (1991).[6]Cluster development has since become a focus for many government programs. The underlying concept, which economists have referred to as agglomeration economies, dates back to 1890, and the work of Alfred Marshall.
Michael Porter claims that clusters have the potential to affect competition in three ways: by increasing the productivity of the companies in the cluster, by driving innovation in the field, and by stimulating new businesses in the field. According to Porter, in the modern global economy, comparative advantage, whereby certain locations have special endowments (i.e., harbor, cheap labor) helping them overcome heavy input costs, has become less relevant. Now, competitive advantage, in which companies make productive use of inputs, requiring continual innovation, is more important.[3] Porter argues that economic activities are embedded in social activities; that 'social glue binds clusters together'.[7] This is supported by recent research showing that particularly in regional and rural areas, significantly more innovation takes place in communities which have stronger inter-personal networks.[8]
Put in another way, a business cluster is a geographical location where enough resources and competences amass reach a critical threshold, giving it a key position in a given economic branch of activity, and with a decisive sustainable competitive advantage over other places, or even a world supremacy in that field (e.g. Silicon Valley and Hollywood).
A cluster is most of the time the result of initiatives, since it implies to convince current competitors to work jointly. The initiative usually comes from the political sphere (e.g. the different Singaporian clusters [9]), but it can also come from the industry itself[10] (e.g. the initiative of Bart J. Groot, the director of Dow Olefinverbund GmbH, a major chemicals complex at the intersection of three Eastern German states (Saxony, Saxony-Anhalt, and Thuringia after the reunification. The goal was to "encourage coordination among political and administrative officials" of Mitteldeutschland.)[11]
Types
By composition
Following development of the concept of inter organizational networks in Germany and practical development of clusters in the United Kingdom; many perceive there to be four methods by which a cluster can be identified:
Geographical cluster – as stated above e.g. the California wine cluster[12] or the flower cluster between Rotterdam and Amsterdam in the Netherlands.[13]
Horizontal cluster (interconnections between businesses at a sharing of resources level e.g. knowledge management, machinery, lab and test tools, material supply, professional employment)
It is also expected – particularly in the German model of organizational networks – that interconnected businesses must interact and have firm actions within at least two separate levels of the organizations concerned.
By type of comparative advantage
Several types of business clusters, based on different kinds of knowledge, are recognized:
Historic know-how-based clusters – These are based on more traditional economic activities that maintain their advantage in know-how over the years, and for some of them, over many centuries. They are often industry-specific. An example is London as financial center.
Factor endowment clusters – They are created because a comparative advantage they might have linked to a geographical position. For example, wine production clusters because of sunny regions surrounded by mountains, where good grapes can grow. This is like certain areas in France such as Burgundy and Champagne, as well as Lombardy, Spain, Chile and California.
Low-cost manufacturing clusters – These clusters have typically emerged in developing countries within particular industries, such as automotive production, electronics, or textiles. Examples include electronics clusters in Mexico (e.g. Guadalajara) and Argentina (e.g. Córdoba). Cluster firms typically serve clients in developed countries. Drivers of cluster emergence include availability of low-cost labor, geographical proximity to clients (e.g. in the case of Mexico for U.S. clients; Eastern Europe for Western European clients).[17]
Knowledge services clusters – Like low-cost manufacturing clusters, these clusters have emerged typically in developing countries. They have been characterized by the availability of lower-cost skills and expertise serving a growing global demand for increasingly commoditized (i.e. standardized, less firm-specific) knowledge services, e.g. software development, engineering support, analytical services.[citation needed] Examples include Bangalore, India; Recife, Brazil; Shanghai, China. Multinational corporations have played an important role in "customizing" business conditions in these clusters.[18] One example for this is the establishment of collaborative linkages with local universities to secure the supply of qualified, yet lower-cost engineers.[citation needed]
Process
The process of identifying, defining, and describing a cluster is not standardized. Individual economic consultants and researchers develop their own methodologies. All cluster analysis relies on evaluation of local and regional employment patterns, based on industrial categorizations such as NAICS or the increasingly obsolete SIC codes. Notable databases providing statistical data on clusters and industry agglomeration include:
The Cluster Mapping Project (for the USA), conducted by the Institute for Strategy and Competitiveness at Harvard Business School
The European Cluster Observatory (for Europe), managed by the Center for Strategy and Competitiveness at the Stockholm School of Economics
An alternative to clusters, reflecting the distributed nature of business operations in the wake of globalization, is hubs and nodes.
The Silicon Valley case
In the mid- to late 1990s several successful computer technology related companies emerged in Silicon Valley in California. This led anyone who wished to create a startup company to do so in Silicon Valley. The surge in the number of Silicon Valley startups led to a number of venture capital firms relocating to or expanding their Valley offices. This in turn encouraged more entrepreneurs to locate their startups there.
In other words, venture capitalists (sellers of finance) and dot-com startups (buyers of finance) "clustered" in and around a geographical area.
The cluster effect in the capital market also led to a cluster effect in the labor market. As an increasing number of companies started up in Silicon Valley, programmers, engineers etc. realized that they would find greater job opportunities by moving to Silicon Valley. This concentration of technically skilled people in the valley meant that startups around the country knew that their chances of finding job candidates with the proper skill-sets were higher in the valley, hence giving them added incentive to move there. This in turn led to more high-tech workers moving there. Similar effects have also been found in the Cambridge IT Cluster (UK).[19]
The Digital Media City case
In the late 1990s, the Seoul Metropolitan Government in South Korea developed the Digital Media City (DMC), a 135-acre complex, four miles outside of the city's central business district in the Sangam-dong district. With Seoul's rapidly growing cluster of multi-media, IT, and entertainment industries, the Digital Media City, through its vibrant agglomeration, helped to promote these industries and companies whose core business required use of information, communication, and media technologies. DMC grew and prospered as a global business environment, raising Seoul as an east-Asian hub of commerce. The cluster of its digital media-related, high-tech firms spawned partnerships which in turn leveraged both human and social capital in the area. Eventually, DMC fed the innovation of more than 10,000 small-scale Internet, game, and telecommunication firms located in Seoul.[20]
In development of DMC, the Seoul government leveraged initial funding by private technology partners and developers. It is also provided ITbroadband and wireless networks to the area as well as needed infrastructure. The Seoul government even provided tax incentives and favorable land prices for magnet tenants who would attract other firms to the area due to established business relationships and through their presence which would in turn promote DMC as a prime location.[20]
With such a concentration of these entities, Seoul has become a major nexus of high-technology and digital media. It is home to digital media R&D firms across a range of types including cultural media creation, digital media technologies, digital broadcasting centers, technology offices, and entertainment firms. Just outside the DMC complex include international firm affiliates, schools, moderate to low income housing, commercial and convention facilities, entertainment zones, and the city's central rail station.[20] The cohesive connection of industry, cultural centers, infrastructure, and human capital has fostered Seoul as a strong metropolitan economy and South Korea, the Miracle on the Han River, as a storied nation transitioning from a manufacturing to an innovation economy.
Cluster effect
The cluster effect can be more easily perceived in any urban agglomeration, as most kinds of commercial establishments will tend to spontaneously group themselves by category. Shoe shops (or cloth shops), for instance, are rarely isolated from their competition. In fact, it is common to find whole streets of them.
The cluster effect is similar to (but not the same as) the network effect. It is similar in the sense that the price-independent preferences of both the market and its participants are based on each one's perception of the other rather than the market simply being the sum of all its participants actions as is usually the case. Thus, by being an effect greater than the sum of its causes, and as it occurs spontaneously, the cluster effect is a usually cited example of emergence.
Governments and companies often try to use the cluster effect to promote a particular place as good for a certain type of business. For example, the city of Bangalore, India has utilized the cluster effect in order to convince a number of high-tech companies to set up shop there. Similarly, Las Vegas has benefited through the cluster effect of the gambling industry. In France, the national industrial policy includes support for a specific form of business clusters, called "Pôles de Compétitivité", such as Cap Digital. Another good example is the Nano/Microelectronics and Embedded Systems" or in short "mi-Cluster" that was facilitated by "Corallia Cluster Initiative" in Greece. Corallia introduced a bottom-up, 3-phase programme framework for facilitating cluster development, and was short-listed among the final classification (finalists) for the DG REGIO's RegioStars 2009 Awards in the category "Research, Technological Development and Innovation".[21]
Clusters, were proved to boost the innovative activity among firms of the same industry. One of the main causes that might be highlighted is the competition between the companies. Moreover, except of stimulating a favorable conditions for the exchange of ideas, industry-specific regional concentrations, also create a thick labor market input. Hence innovations increase the accumulation of the knowledge in the region which influences on the local internal economies.[22]
The cluster effect does not continue forever though.[23] To sustain cluster performance in the long term, clusters need to manage network openness to business outside the cluster while facilitating strong inter-organisational relationships within the cluster.[24] Its relative influence is also dictated by other market factors such as expected revenue, strength of demand, taxes, competition and politics. In the case of Silicon Valley as stated above for example, increased crowding in the valley led to severe shortage of office and residential space which in turn forced many companies to move to alternative locations such as Austin, Texas and Raleigh-Durham, North Carolina even though they would have liked to stay in the valley.
Sometimes cluster strategies still do not produce enough of a positive impact to be justified in certain industries. For instance, in the case of Builders Square, the home improvement retailer could not compete with industry leaders such as Home Depot when it could not realize the same low costs and contracts. As a result, it was presented with an option to form a merger with another home improvement retailer, Hechinger to better improve their business clusters and compete with Home Depot and other industry leaders. However, when it failed to do so, it slowly began to fail and eventually fell into bankruptcy. Although the merger attempted to create geographic clusters to compete with the low costs of other firms, costs were not lowered enough and eventually the plan failed, forcing Hechinger into Chapter 7 liquidation and Builders Square out of the industry.[25][26]
Clusters can also fail if the regional economy does not adapt with the times. In Detroit, when the automotive industry declined, the cluster and the city declined with it. Clusters can fail if they do not use their position to reinvent themselves and move into other industries before the tipping point is reached.[27]
In terms of the level of cluster members' innovation performance this type of a system can be usually characterized by a low level of uptake of different technologies due to the limited contacts that actors have with industrial companies focusing mainly on the same areas of interests.[28]
Innovation is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a new or changed entity, realizing or redistributing value". Others have different definitions; a common element in the definitions is a focus on newness, improvement, and spread of ideas or technologies.
Economic geography is the subfield of human geography that studies economic activity and factors affecting it. It can also be considered a subfield or method in economics. There are four branches of economic geography.
The knowledge economy, or knowledge-based economy, is an economic system in which the production of goods and services is based principally on knowledge-intensive activities that contribute to advancement in technical and scientific innovation. The key element of value is the greater dependence on human capital and intellectual property as the source of innovative ideas, information and practices. Organisations are required to capitalise on this "knowledge" in their production to stimulate and deepen the business development process. There is less reliance on physical input and natural resources. A knowledge-based economy relies on the crucial role of intangible assets within the organisations' settings in facilitating modern economic growth.
In business, a competitive advantage is an attribute that allows an organization to outperform its competitors.
Porter's Five Forces Framework is a method of analysing the operating environment of a competition of a business. It draws from industrial organization (IO) economics to derive five forces that determine the competitive intensity and, therefore, the attractiveness of an industry in terms of its profitability. An "unattractive" industry is one in which the effect of these five forces reduces overall profitability. The most unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit levels. The five-forces perspective is associated with its originator, Michael E. Porter of Harvard University. This framework was first published in Harvard Business Review in 1979.
One of the major subfields of urban economics, economies of agglomeration, explains, in broad terms, how urban agglomeration occurs in locations where cost savings can naturally arise. This term is most often discussed in terms of economic firm productivity. However, agglomeration effects also explain some social phenomena, such as large proportions of the population being clustered in cities and major urban centers. Similar to economies of scale, the costs and benefits of agglomerating increase the larger the agglomerated urban cluster becomes. Several prominent examples of where agglomeration has brought together firms of a specific industry are: Silicon Valley and Los Angeles being hubs of technology and entertainment, respectively, in California, United States; and London, United Kingdom, being a hub of finance.
In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or have not had to incur. Because barriers to entry protect incumbent firms and restrict competition in a market, they can contribute to distortionary prices and are therefore most important when discussing antitrust policy. Barriers to entry often cause or aid the existence of monopolies and oligopolies, or give companies market power. Barriers of entry also have an importance in industries. First of all it is important to identify that some exist naturally, such as brand loyalty. Governments can also create barriers to entry to meet consumer protection laws, protecting the public. In other cases it can also be due to inherent scarcity of public resources needed to enter a market.
A technopole, commonly referred to as a high-technology cluster or tech hub, refers to a center of high-tech manufacturing and information-based quaternary industry. The term was coined by Allen J. Scott in 1990 to describe regions in Southern California which showed a rapid growth in high technology fields. This term now has a broader scope to describe regions worldwide dedicated to technological innovation. Such regions can be centers of rapid economic and technological growth as a result of agglomeration effects.
Cluster development is the economic development of business clusters. The cluster concept has rapidly attracted attention from governments, consultants, and academics since it was first proposed in 1990 by Michael Porter.
Within international business, the diamond model, also known as Porter's Diamond or the Porter Diamond Theory of National Advantage, describes a nation's competitive advantage in the international market. In this model, four attributes are taken into consideration: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry. According to Michael Porter, the model's creator, "These determinants create the national environment in which companies are born and learn how to compete."
Silicon Gorge is a region in South West England in which several high-tech and research companies are based, specifically the triangle of Bristol, Swindon and Gloucester. It was ranked fifth of such areas in Europe in 2002, and is named after the Avon Gorge.
Innovation economics is new, and growing field of economic theory and applied/experimental economics that emphasizes innovation and entrepreneurship. It comprises both the application of any type of innovations, especially technological, but not only, into economic use. In classical economics this is the application of customer new technology into economic use; but also it could refer to the field of innovation and experimental economics that refers the new economic science developments that may be considered innovative. In his 1942 book Capitalism, Socialism and Democracy, economist Joseph Schumpeter introduced the notion of an innovation economy. He argued that evolving institutions, entrepreneurs and technological changes were at the heart of economic growth. However, it is only in recent years that "innovation economy," grounded in Schumpeter's ideas, has become a mainstream concept".
Knowledge spillover is an exchange of ideas among individuals. Knowledge spillover is usually replaced by terminations of technology spillover, R&D spillover and/or spillover (economics) when the concept is specific to technology management and innovation economics. In knowledge management economics, knowledge spillovers are non-rival knowledge market costs incurred by a party not agreeing to assume the costs that has a spillover effect of stimulating technological improvements in a neighbor through one's own innovation. Such innovations often come from specialization within an industry.
The Offshoring Research Network is an international network of researchers and practitioners studying organizations in their transition to globalizing their business functions, processes and administrative services. The ORN conducts annual surveys tracking global sourcing strategies, drivers, concrete implementations and plans across all business functions and processes.
Cluster theory is a theory of strategy.
John A. Mathews is an Australian professor of competitive dynamics and global strategy. He currently holds the Eni Chair of Competitive Dynamics and Global Strategy at LUISS Guido Carli University, in Rome, and concurrently holds a Chair of Strategy at the Macquarie Graduate School of Management, Macquarie University, in Sydney.
A metropolitan economy refers to the cohesive, naturally evolving concentration of industries, commerce, markets, firms, housing, human capital, infrastructure and other economic elements that are comprised in a particular metropolitan area. Rather than the definition of distinct urban and suburban economies that evolve and function independently, a metropolitan economy encompasses all interdependent jurisdictions of particular regional clusters. This type of economy has all its units functioning together in a trans-boundary landscape that often crosses city, county, state, province, and even national lines. Metropolitan economies expand from the parochial view taken in urban economics which focuses entirely on a city's spatial structure, and broadens it into a metropolitan's spatial and social/economic structure.
Innovation districts are urban geographies of innovation where R&D strong institutions, companies, and other private actors develop integrated strategies and solutions to develop thriving innovation ecosystems–areas that attract entrepreneurs, startups, and business incubators. Unlike science parks, innovation districts are physically compact, leverage density and high levels of accessibility, and provide a “mash up” of activities including housing, office, and neighborhood-serving amenities. Districts signify the collapse back of innovation into cities and is increasingly used as a way to revitalize the economies of cities and their broader regions. As of 2019, there are more than 100 districts worldwide.
Clusters of Innovations (COI) have been defined in 2015 as "global economic hot spots where new technologies germinate at an astounding rate and where pools of capital, expertise, and talent foster the development of new industries and new ways of doing business."
References
↑ JANUŠKA, M. Communication as a key factor in Virtual Enterprise paradigm support. In Innovation and Knowledge Management: A Global Competitive Advantage. Kuala Lumpur: International Business Information Management Association (IBIMA), 2011. s. 1-9. ISBN978-0-9821489-5-2
↑ Term used, for example, by Eleanor Doyle and Connell Fanning in "The Role for Clusters in Irish Economic Development Policy", chapter 16 in Aylward, C. and O'Toole, R. (2007), Perspectives on Irish Productivity: A Selection of Essays by Irish and International Economists, published by Forfás.
↑ Porter, M.E. (1990). The Competitive Advantage of Nations. New York: The Free Press. 1–857 pgs.
↑ Krugman, P. (1991). Geography and Trade. MIT Press. 1-142pg.
↑ Altenburg, Tilman; Meyer-Stamer, JÖRG (September 1999). "How to Promote Clusters: Policy Experiences from Latin America". World Development. 27 (9): 1693–1713. doi:10.1016/S0305-750X(99)00081-9.
↑ Manning, Stephan (1 July 2008). "Customizing Clusters: On the Role of Western Multinational Corporations in the Formation of Science and Engineering Clusters in Emerging Economies". SSRN1655502.{{cite journal}}: Cite journal requires |journal= (help)
↑ Huber, F. (1 February 2011). "Do clusters really matter for innovation practices in Information Technology? Questioning the significance of technological knowledge spillovers". Journal of Economic Geography. 12 (1): 107–126. doi:10.1093/jeg/lbq058.
1 2 3 Frenchman, Dennis; Joroff, Michael. "Digital Media City". MIT Center for Real Estate. Archived from the original on 2021-09-17. Retrieved 2020-08-11.
↑ Eisingerich, Andreas B.; Bell, Simon J.; Tracey, Paul (March 2010). "How can clusters sustain performance? The role of network strength, network openness, and environmental uncertainty". Research Policy. 39 (2): 239–253. doi:10.1016/j.respol.2009.12.007. hdl:10044/1/17881.
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