IntroductionSince tradebegan, proximity has been a key element, bringing suppliers, sellers and buyerstogether within a marketplace.
Philanthropic developments such as Sir Titus Salt’s Saltaire saw the building of residentialareas next to the factory to support his employees. Salt worked tirelessly toprovide all business, employee and population amenities required withinSaltaire, including a connecting train line to Bradford. Thorough planningof this settlement, Saltaire was able to thrive and became highly self-reliant.Clustering firms,industries and sectors together in a close proximity of one another, has beensignificantly seen within economies and in town planning. The process is saidto be advantageous for businesses, who can thus achieve competitive advantagedue to their location. However our world is becoming more globalised andinter-connected than ever before. Technology has allowed for business andsocial interactions across the world to occur within an instant.
With anability to communicate, produce and transport goods and services at a quickerand easier rate than ever before, space has become less important. Globalisationis seen as the “death of geography”. (Cairncross, 1997) Trans-nationalcorporations (TNC) increasingly outsource business activities between multiplelocations around the world within a large and complex supply chain Does thisrender, that even in a more globalised world, location with a close proximitycan be crucial to a firm’s success. This paperwill determine if firms should cluster together and whether competitiveadvantage could be achieved. What is Cluster Theory?The empiricalPorter model of Cluster Theory (Porter, 1990, 1998) suggests that firms benefitfrom a high level of competition generated from a close geographicproximity. Porter identified two differingtypes of clustering; Traded clusters and industrial cluster. Traded clustersare “composed of industries that sell to markets beyond their local region andtherefore are found clustered together in only a limited number of regionswithin any country and in only a select number of countries around the world.
“(Martin et al, 2015) Porter recognised importance in both categorisations ofclusters but focused predominantly on industrial clusters. He noted that quickerflows and of a higher intensity occur between firms in industrial clusters,which in turn can improve a firm’s productivity. However, Porter’s keyobservation is that productivity increases due to the close proximity, which allowsfor a more visible and intimate competition between firms. This drives firms tobecome more productive and innovative. The greater transparency between firmsencourages such a high level of competition that competitive advantage can beutilised. What is Competitive Advantage?Competitiveadvantage “describes the quality needed by a business which can flourish whenthere are many other businesses with competing products… in general competitiveadvantage usually rests on the extent to which the business emphasisesinnovation, the way it exploits relationships with other businesses and itsreputation with customers.” (Wall, 2009, p. 46) Such advantages can be made atany point between a good or service is designed, manufactured, marketed andsold.
Investment and innovation is commonly suggested to yield competitiveadvantage. New technologies can improve quality and design, and can reducecosts in the long-run, which could in-turn be passed onto as a lower and more attractiveprice to customers. Comparativeadvantage is desired by some firms in the long-run, to improve the desirabilityof their products and secure a customer base which generates revenue and can leadto profit maximisation (particularly if cost minimisation have also beenachieved). The Benefits of IndustrialClusteringAgglomerationEconomies (Marshall 1890, 1920) is the acknowledgement of location-specificeconomies of scales. Although it promotes a close proximity of industries andsupply chains like Cluster Theory, it suggests that firms derive many benefitsfrom clustering and not just competitive advantage. Benefits include; knowledgespillovers, non-traded local inputs and local skilled labour poolReducedcosts and increased productivity can occur when factors of a supply chain arelocated near one another. Time andtravel costs within supply chain are reduced due to the proximity.
Costs caninclude tangible transport costs such as; driver’s wages, vehicles, fuel,visas, ferry costs and tolls. Over time, continued reduction of costs andincreases in productivity determining higher output and revenues can allow afirm to achieve economies of scale.A reductionin administration costs might be achieved, as close proximity suggests the samemain language, time zone, and which reduces the time and costs of businessinteractions. This supports Wall’s definition, that businesses can exploitrelationships if they are in close proximity of one another. Thus suggestingthat factors of the supply chain closely located to one another can lead tocompetitive advantage, but not exclusively derived from Cluster Theory. AgglomerationEconomies can successfully lead to knowledge spillovers.
Although competitivebetween one another, firms are increasingly recognising that some form ofcooperation or networking can benefit one another. This can be achieved withinformal or informal events, such as a coffee shop catch up with another firm’semployee, sharing ideas and failures always for more innovative firms. Suchcooperation can provide a level of transparency, leading to competitiveadvantage improvements.Transparencycan be improved by the labour force. Labour turnover allows for firms tobenefit from new ideas and skills of employees that may have been gained from withina cluster. However a retention of staff, can vitally hold tacit knowledge whichassociated with long-term growth of a firm. New developments of clustering, arecommonly a more aesthetically pleasing and environmentally considerateenvironment. The clusters can contain also contain complimentary amenities,such as coffee shops, grocery stores and gyms.
This incentivises the employeeswith high human capital to aim to work for firms within the cluster so they canenjoy the facilities. Here firms benefit from the higher human capital of theiremployees. Such levels of high human capital suggests a demand from territoryand quaternary firms, offering high wages for more complex roles. Higher wages,leads to a higher tax revenue for the government. Clustering in the UKClustertheory is widely accepted in the UK, to promote business and economic activity.Economic geographers predominantly use ‘highly specialized economic spaces suchas Porter-type business clusters, industrial districts and high-technologylocalities’ as a path dependence for regional economics and planning policy. (Martinand Sunley, 2006, Ch.4) The UK government primarily encourages clustering withthe use of zoning.
Enterprise zones initiated in (###) and aimed to attractparticular industries to a specific area. This level of planning can lead to externalitiessuch as reduced congestion within an area, influence land prices and can reducepollution for residents in other areas. These externalities are often welcomedby local residents and therefore clusters are more easily passed by planners.
Tax breaks were used to incentivise firms to relocate to Enterprise Zones,which reduces a firm’s costs. Increasedproductivity from achieving competitive advantage can lead to improvements inthe regional and national economy, which is why clustering is supported by theplanning policy and government business policies. Increased productivity provides higher levelof outputs. Gross Domestic Product is a standardised measure of an economy, andis calculated by the total value of everything produced within the country.Therefore a higher level of productivity and output increases GDP of the UK. Ahigher output level can lead to increases in the components of Aggregate Demand(AD).
The components consumption and exports could rise. Government investmentmay also rise in the long-run, as the firms produce more their profits may riseallowing for a higher tax revenue that the government can spend. Silicon Fenis a highly successful cluster in Cambridge, UK. Silicon Fen is the name givento the region around Cambridge, England, which is home to a large cluster ofhigh-tech businesses focusing on software, electronics and biotechnology.
Manyof these businesses have connections with the University of Cambridge. Theregion is a large high-tech cluster focusing software,electronics and biotechnology. The cluster is an example of benefiting from knowledgespill-over and labour pool, with many firms here closely linked with the Universityof Cambridge, on research, funding, scholarships and graduate schemes. Martin etal. stated that “clustered diversity”, numerous clusters of highly specialisedclusters, within an economy can promote and boost competitive advantage whilstincreasing “resilience to cluster-specific shocks”.
(Martin and Sunley, 2006,Ch.4) With the collapse of economy in 2008, Governments should focus oncreating and maintaining clusters and promoting competitive advantage, toprotect and stabilise the economy from national and international economicbusts. However the high degree of interrelatedness created within clusters maycause structural unemployment if a specific industry is unable to protectitself from shocks and begins to decline. Such decline can lead firms closingand leaving the cluster, causing the area and economy to essentially becomederelict. This type of structural decline was seen in Detroit in the later quarterof the 20th century, when the automotive industries retracted fromthe area. Thus causing huge levels of structural unemployment and the rise inpoverty, “Detroit was at or near the top of US unemployment, poverty percapita, and infant mortality throughout the 1980’s” (Chafets,1991EB1 ). A brain drain occurred with Detroit migrantsbecoming economic migrants relocating for work, “Detroit’s populationtoday is only half of what it once was, and its most productive people havebeen the ones who fled”.
(Sowell, 2011EB2 )The city is still recovering from such structural economic turmoil.The case ofDetroit highlights that despite firms achieving competitive advantage fromclustering, they are not protected from economic decline. Thereforegovernments, planners and businesses need to disperse some economic activityinto less concentrated areas and sectors, as an attempt of implementinglow-level protectionism into the private sector. Disadvantages of Clustering For a firmdisadvantages can be limited to their business choices and activities, and the receptivenessof the economy, however their actions can have knock-on effects on the economyand the government. If a key firm in a supply chain folds, then firms maystruggle to find a replacement resulting in a loss in output and rise in costs.
Lay-offs could be used to reduce such losses. Using the Phillips Curve (Phillips),higher unemployment relates to higher inflation which lowers consumption and ADwithin an economy. Unemployment usually leads to higher benefit claimants,draining the resources of the government. Additionallyto the vulnerability of structural unemployment, clustering isn’t always aguaranteed nor is it always positive. Initially competitive advantage is onlyachievable if a number of factors are in place such as; transparency, funds forinnovation, skills to utilise the environment and an allowing economic and governmentclimate. Therefore, competitive advantage isn’t a given from industrialclustering and relies on “an element of chance” (Sloman, #).
Additionallyto competitive advantage, comparative advantage exists. Comparative advantageis achieved when firms within a nation are able to produce a good or servicewith a lower opportunity cost than another country. If a firm or region holds comparativeadvantage, they could achieve competitive advantage more easily. This was seenwithin “analysis of the emergence of high technology clusters has emphasizedthe importance of pre-existing comparative advantages in shaping new increasingreturns effects (Bresnahan et al.
, 2005)”. (Martin and Sunley, 2006, Ch.4)Frenken etal. (2005), argues that agglomerated or clustered firms of related sectorsleads to faster competitive advantage, whereas an agglomeration of unrelatedsectors can lead to rapid declines in productivity. Although afirm within an industrial cluster can flourish, Overman states that thesurrounding area can suffer. “As economic activity concentrates, the prices ofscarce resources, such as land, increase; firms face more competition; roadsand public transport become more congested; pollution increases.” (Overman, #)These negative externalities really question whether clustering industries isworth it.
Do the positives outweigh the negatives? One way to attempt to dothis, would be to create a fairer tax system, enforce higher minimum wages andcreate environmental protective demands. A higher tax rate, allows governmentsto recuperate finances to amend and prevent transport difficulties. A higherwage rate, increases the purchasing power of workers to compensate for thehigher land prices, which will eventually lead to higher house prices andinflation effects on goods and services. Protective environmental demands, helpto protect the environment and human wellbeing. With this in mind, the UK givestax breaks for firms within new cluster zones, and withdraws from the EuropeanUnion, and it’s strong environment protective measure.SiliconValley is a famous industrial cluster for technology, media and marketing firmsand is “is perhaps the most productive andinnovative land mass in the world with 99listed technology companies with market values of over $1 billion inthe area”. (TheEconomist, 2015EB3 ) Technological firms crowd into theCalifornian area, thriving off their environment.
The increase in demand forproperties for business and residential for workers, has caused prices to risedrastically in Silicon Valley and in neighbouring areas. A former housingdirector for local town stated that the neighbouring areas “are already feelingthe effects of Silicon Valley’s boom, as house prices rise.” (FinancialTimesEB4 ,2017). As prices rise, the area becomes achievable for larger firms who canprovide workers with larger earnings, which can gentrify an area.
Alternatives to ClusteringNot allfirms need, want or can benefit from clustering. Cluster Theory can be industryspecific. For example, a logging firm, needs to be located near a forest, whichdue to industrialisation is usually far away from urban areas. These urbanareas may contain a large proportion of their consumer base, but the resources cannotbe moved closer to consumers. Furniture shops, fuel shops, printers will not relocateto near the forest, they will remain amongst the urban population.
Facilitiesthat may process the wood, need lots of space for their operations. Distancingthemselves away from urban areas, lowers land prices and reduces productioncosts for the firm. Although they may not achieve competitive advantage,reduced costs from location can be more important to such a firm. Therefore itis up to the isolated firms, to use a quick and low-cost process to get theirwood to their customers.
This is an example of how co-location will not beachieved within all industries, particularly primary industries. Isolatedfirms can benefit from a lack of competition, all though this may lead to lowerquality and higher prices for customers, the threat of competitive globalimports , can regulate the geographically monopolistic market.NewEconomic Geography stresses the importance of proximity (Lovering, 1999).
Yetthe world is becoming more globalised. TNCs situate business operations acrossthe world to benefit from reduced costs, simpler bureaucracy and the labourpool.Thesuccesses of globalisation suggests that co-location is now redundant.Interestingly however, TNCs locate different operations within clusters acrossthe globe, to benefit from all aspects of agglomeration economies. Meaning firms are both allowed to benefit fromclustering together as well as being a TNC, if they have the resources to doso. For example, Dyson relocated itsmanufacturing factory to Malaysia in the early 2000’s, the owner, James Dyson statedthat along the many advantages of this move that “the biggest benefit hasbeen that all our suppliers are within a ten miles of the factory”, (Dyson,2004) thus enabling opportunity to reduce costs and become more productive andperhaps achieve competitive advantage.
However, Dyson, the British firm, retainedresearch and development activity within the UK stating that “At thisstage, the benefits are obvious. Our engineers and scientists are in Wiltshire.For a company that depends on innovation, that’s what counts. The know-how ishere UK… it generates money for the British economy.” (Dyson, 2004)Dyson notedthe trend for other TNC’s taking advantage of industrial clustering globally: “Thousandsof other companies are doing what we were forced to do…they were failing tomake things competitively in their home markets, and moved there production toChina.
..Because countries such as China have already mastered low-costproduction.” (Dyson,2004).EB5 This can rise a moral debate over the gentrification of job roles in the UK andencouraging low-cost labour in other countries that can be dangerousenvironments for workers.
ConclusionMany firms,but not all, can benefit from clustering, regardless of achieving competitiveadvantage. These business benefits such as lowered cost; innovation, higherrates of production, higher profits and higher wages, can have a multipliereffect and benefit the wider communities and economy. Thus clustering opportunitiesshould be encourage and/or provided by the government.
However provisions mustbe in place to maintain and reduce the level of negative externalities achievedand promote positive externalities. Recognitionof the successes and failures of clustering across the world allows for strategicprovisions to guide successfully industrial clustering, which enhances regionsas well as allowing nations to achieving competitive advantage. EB1Chafets,Z. (1991) Devil’s Night: And Other True Tales of Detroit.
Vintage EB2Sowell,T. (2011) Whites and Blacks Flee California, Institution at StanfordUniversity. LewRockwell.com (accessed on 21/01/2018 viahttps://www.
lewrockwell.com/2011/03/thomas-sowell/whites-and-blacks-flee-california/) EB3The Economist (2015) 28/07/2015Silicon Valley’sfortunes; What a PErformanceAccessed on 21/01/2018 via https://www.economist.com/blogs/graphicdetail/2015/07/silicon-valleys-fortunes EB4FinancialTimes (24/08/2015) Waters, R.
, theGreat Silicon Valley Land Grab Accessed on 21/01/2018 via https://www.ft.com/content/82bc282e-8790-11e7-bf50-e1c239b45787 EB5Dyson, J. (2004) the Richard Dimbleby Lecture-Engineeringthe Difference by James Dyson, BBC Press Release