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Clusters and conglomerates the New Economics of Competition

In economic parlance, a cluster is a dense geographical concentration of interconnected businesses, suppliers and associated organizations in a particular field. Clusters are believed to increase productivity and enhance a company’s potential to compete at the national and global level and are important aspects of strategic management. The underlying concept of clusters dates back to 1890 when Alfred Marshall propounded the theory of Agglomeration Economies.

Nowadays, however, businesses can source capital, technology, information, and goods from anywhere in the world, merely by the click of a mouse. In such a globalized world, it is then logical to think about what the competitive advantage of a particular geographic location is? Theoretically, it should be the other way round. Open global markets, faster communication and transportation should result in the minimized role of location in business competition. But then why do we find all the world-class investment companies based in Boston, or why do fashion shoe companies thrive in Northern Italy, or why is Scotland the hub of scotch whiskey?


If we study the World Economic and Industrial map, we will find that critical masses of enterprises that are concentrated in a well-marked geographic locality play a dominant role and occupy a position of eminence and unusual competitive success in a particular field. Today, clusters are present as a striking feature of virtually every national, state and regional economy across the world. Economically developed and advanced nations such as the US boast of clusters: Hollywood and Silicon Valley are perhaps the best-known examples.

According to Michael Porter, an American economist and the leading authority in the field, clusters have the potential to influence and affect competition in three distinct ways:
1) By increasing the productivity of the competing companies in the cluster
2) By driving innovative ideas of the entrepreneurs
3) By enticing new businesses into the cluster.


According to Porter, the old world idea of Comparative Advantage, that is, how certain locations have special features like ports, cheap labour, etc. has become obsolete and insignificant in the modern global economy. The concept of Competitive Advantage, that is, how enterprises make the best productive use of inputs, through a continuous process of innovation, is now considered much more important. Human economic activities are deeply rooted and embedded in social activities and Social Glue binds clusters together. Researchers suggest that there is greater scope for innovation where strong interpersonal networks exist, as in the regional or rural areas.

The competitive advantage in the global economy depends increasingly on local factors like knowledge, the relationship between companies and institutions in the cluster, motivation for increasing productivity and competitiveness that the distant rivals cannot hope to match. In creating competitive advantage, what takes place inside companies is important, but clusters reveal that the immediate business environment outside also plays a vital role. We find that innovative ideas and competitive successes are geographically concentrated, like finance in Wall Street, entertainment in Hollywood, consumer electronics and toys in China.


Clusters represent a new organizational form which lies in between arm’s length markets (where parties involved in a transaction have no relationship or contact with each other except the transaction in hand) on the one hand and vertical integration (when a company owns its own raw material supply chain) on the other. Thus clusters, without imposing the inflexibilities of vertical integration, help diminish the problems inherent in arm’s length relationships. Hence, a cluster of informally linked but independent companies and institutions represent a strong organizational form with clear advantages in efficiency, competence, effectiveness and flexibility.

Both rigorous competition and vertical cooperation are needed for the success of a cluster. Cooperation and competition can coexist because they occur on different dimensions and among different players.


Clusters represent a novel way of thinking about geographic locations, which challenges the traditional wisdom about how companies should be configured or how the government or universities can contribute to competitive success, financial prosperity and economic development. They encompass an array of connecting industries and other entities important to competition. Suppliers of specialized inputs and providers of specialized infrastructure are found in specific geographic locations. Clusters may often extend to distribution channels and customers as well as to manufacturers of complementary products and to other companies interlinked by specialized skills, technologies or common inputs. If we study the World Economic map, we will find that governmental and other institutions like think tanks, universities, and trade associations are often components of a cluster.
As local outsourcing is always a better option than distant outsourcing, the proximity which improves communications and coordination plays a vital role in bringing about the success of a cluster.
Competitive pressure, peer pressure and constant comparison also help to give an edge to the competitiveness of all the firms in that cluster. New businesses are encouraged to join the cluster as requisite inputs are easily available.
The California wine cluster is a good example of this geographic concentration. It includes 680 commercial wineries, as well as several thousand independent wine-producing grape farmers. An extensive complement of supporting industries, which include irrigation and harvesting equipment, barrel, labels, advertising and public relations firms; The University of California, the Wine Institute and the Special Committee of the California Senate and Assembly provide the necessary technical and educational support.


We have discussed and tried to establish a link between clusters and competitiveness, but basic questions like whether all the clusters universally promote competitiveness are not clearly answered by empirical evidence. In my opinion, there is no guarantee that clustering will automatically provide a competitive advantage or success in business.

The importance and beneficial aspects of clusters and their contribution to the economic development of a country cannot be over-emphasized. The significance of clusters and their competitive advantage has not been fully explored until now. Governments, especially those of developing countries, think-tanks and management consultancy firms should delve more deeply into the advantages and disadvantages of economic clusters and customize them according to the suitability of specific countries. We can conclude that despite all the technological advancements and ease of procuring inputs from different parts of the globe, economic clusters play and will continue to play a vital role in the growth of business and industry, and help enhance the competitive advantages of the business enterprises.

By Krittika Chowdhury
Second Year Undergraduate Student
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