Clusters and New Economics of

Competition

Faheem ul Islam
faheemui@hotmail.com

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 New Economics of Competition

In the sophisticated industries that from the

backbone of any advanced economy, a nation
does not inherit but instead creates the most
important factors of production such as skilled
human resources or a scientific base.
Moreover, the stock of factors that a nation
enjoys at a particular time is less important than
the art and efficiency with which it creates,
upgrades, and deploys them in particular
industries.
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 New Economics of Competition

The most important factors of production are those that

involve sustained and heavy investment and are
specialized. Basic factors, such as a pool of labor or
local raw-material source, do not constitute an
advantage in knowledge-intensive industries. Companies
can access them easily through a global strategy or
circumvent them through technology.
To support competitive advantage, a factor must be
highly specialized to an industrys particular needs a
scientific institute specialized in optics, a pool of venture
capital to fund software companies. These factors are
more scarce, more difficult for foreign competitors to
imitate and they require sustained investment to 3
create.
 New Economics of Competition
Nations succeed in industries where they are particularly
good at factor creation. Competitive advantage results from
the presence of world-class institutions that first create
specialized factors and then continually work to upgrade
them. Denmark has two hospitals that concentrate in
studying and treating diabetes and a world-leading export
position in Insulin. Holland has premier research institutes in
the cultivation, packaging, and shipping of flowers, where it
is the worlds export leader.
A disadvantage is a static model of competition (shortage of
a factor) can become an advantage in a dynamic one as
companies innovate and upgrade to compete. Favorable
circumstances elsewhere in the diamond help transform 4
disadvantage in advantage.
 New Economics of Competition

The composition and character of the home market

usually has a disproportionate effect on how companies
perceive, interpret, and respond to buyer needs. Nations
gain competitive advantage in industries where the home
demand gives their companies a clearer or earlier picture
of emerging buyer needs, and where demanding buyers
pressure companies to innovate faster and achieve more
sophisticated competitive advantages than their foreign
rivals.
National circumstances and context create strong
tendencies in how companies are created, organized,
and managed, as well as what the nature of domestic
rivalry will be. 5
 Context for
Strategy and Other
Rivalry (Chance,
Government)
Open and vigorous
competition among locally
based rivals
A local context that
Factor encourages investment and
sustained upgrading Demand
(Input)
Conditions
Conditions

High quality, specialized inputs A core of sophisticated and

available to firms:
- human resources
- capital resources
- physical infrastructure
- administrative infrastructure
- information infrastructure
- scientific and technological
infrastructure
- natural resources
demanding local customer(s)
Unusual local demand in
Related and specialized segments that can
be served nationally and globally
Supporting Customer needs that anticipate
Industries those elsewhere
Availability of capable, locally
based suppliers and firms in
related fields
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 Clusters are Critical to
Competition
Modern competition depends on productivity, not on
access to inputs or scale of individual enterprises.
Productivity rests on how companies compete, not
on particular fields they compete in.
Companies can be highly productive in any industry
if they employ sophisticated methods, use advanced
technology, and offer unique products and services.
The sophistication with which companies can
compete is strongly influenced by the local business
environment.
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 Economic Map of the World

Todays economic map of the world is dominated by

critical masses in one place of unusual
competitive success in particular fields; called
clusters.
Clusters are a striking feature of virtually every
national, regional, state/provincial, and even
metropolitan economy especially in more
economically advanced nations.
The enduring competitive advantages in a global
economy lie increasingly in local things
knowledge, relationships, motivation which the
distant rivals cannot match. 8
Cluster Dynamics

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Three Types of Capital and Their
Mobility

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 Social Foundation of Clustering

An industry cluster is a group of companies that rely

on an active set of relationships among themselves
for individual efficiency and competitiveness
These relationships have four prominent
characteristics:
Buyer-Supplier Relationships.
Competitor and Collaborator Relationships.
Shared-Resource Relationships.
Critical Mass of Competitiveness Factors.
The common assumption underpinning these
relationships is the premise that such relationships
benefit from geographic proximity.
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 The Santa Cruz surfboard cluster
Surf Surf
shops clothing
Competitions
Foam & Local Festivals
fiberglass surf
heroes
Surf Clubs
Wax
Surfboard Surf Schools
makers
Manu-
facturing
Chemicals Association

Media
Lobby Groups

Skateboards Museums
and Local Other local
Snowboards university education
Cluster as an Efficient
Innovation System

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 Advantages of Clustering
Geographic proximity helps firms:
enhance productivity through better access to
resources, relevant information and other factors of
production,
strengthen firms capacity for innovation by
diffusing technological knowledge, facilitating new
developments and by increasing environmental
pressures, and
increase rates of new business formation.

A cluster allows each member firm to benefit as if it

had greater scale or as if it had joined with others
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without sacrificing its flexibility.
 Cluster as an Efficient Spatial
Organization
Dynamic industry clusters represent an efficient
spatial organizational form
Conditions in the diamond shape the potential for
productivity and innovation at a location
Innovation is deemed greatly important for
generating the potential benefits of clusters.
Innovative clusters are critically powered by three
driving forces:
i) New firm creation and technological diversification;
ii) Inter-actor network creation; and
iii) Agglomeration formation critical mass, specialization,
competition & collaboration

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The National Environment in which
Firms Emerge and Develop, Consists
of Four Levels

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 Industry Public bodies

University
Finance

Media Organizations
for collaboration
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 Legacy and culture
Geographic position
General institutions and legal framework
Macroeconomic environment

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Micro policy:
Regional policy
Science policy
Industry policy
Cluster policy and programs

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Cluster initatives:
HR upgrading
Cluster expansion
Business development
Commercial collaboration
Innovation and technology
Business environment and policy
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 Entrepreneurship
Innovative strategies
and business models
Entry of new firms
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 Broader set of
industries

Public-private Regional
collaboration perspective
Productivity
Focus

Demand-
Enhancing
driven
own strength
approach
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Successful Clusters are Linked to
Distant Markets

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Cluster Initiatives

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Number of
organisations
started per year

Source: GCIS 2005

Source: European Cluster Organisation Directory
Five Sets of Key Actors in a
Cluster

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Clusters offer a constructive
way to change the nature of
the dialogue between the
public and the private
sectors

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Target Public Policy at Clusters

Business Attraction Education and Workforce Training

Export Promotion Science and Technology

Infrastructure
(e.g., centers, university
Market Information Clusters departments, technology
and Disclosure transfer)

Specialized Physical
Setting standards
Infrastructure
Natural Resource Protection Environmental Stewardship

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Clusters and cluster initiatives do
not only consist of firms, but also
involve public authorities,
academia, members of the
financial sector, and institutions
for collaboration

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Create Platforms for Joint Action

Upgrading of company Upgrading of cluster-

operations and specific business
strategies across a environment
group of companies conditions

Strengthening of networks
to enhance spill-overs and
other economic benefits of
clusters
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THANK YOU

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