Introduction key element, bringing suppliers, sellers and buyers

Introduction

Since trade
began, proximity has been a key element, bringing suppliers, sellers and buyers
together within a marketplace. Philanthropic developments such as Sir Titus Salt’s Saltaire saw the building of residential
areas next to the factory to support his employees. Salt worked tirelessly to
provide all business, employee and population amenities required within
Saltaire, including a connecting train line to Bradford.  Thorough planning
of this settlement, Saltaire was able to thrive and became highly self-reliant.

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Clustering firms,
industries and sectors together in a close proximity of one another, has been
significantly seen within economies and in town planning. The process is said
to be advantageous for businesses, who can thus achieve competitive advantage
due to their location. However our world is becoming more globalised and
inter-connected than ever before. Technology has allowed for business and
social interactions across the world to occur within an instant. With an
ability to communicate, produce and transport goods and services at a quicker
and easier rate than ever before, space has become less important. Globalisation
is seen as the “death of geography”. (Cairncross, 1997)

Trans-national
corporations (TNC) increasingly outsource business activities between multiple
locations around the world within a large and complex supply chain Does this
render, that even in a more globalised world, location with a close proximity
can be crucial to a firm’s success.

This paper
will determine if firms should cluster together and whether competitive
advantage could be achieved.

 

What is Cluster Theory?

The empirical
Porter model of Cluster Theory (Porter, 1990, 1998) suggests that firms benefit
from a high level of competition generated from a close geographic
proximity.  Porter identified two differing
types of clustering; Traded clusters and industrial cluster. Traded clusters
are “composed of industries that sell to markets beyond their local region and
therefore are found clustered together in only a limited number of regions
within any country and in only a select number of countries around the world.”
(Martin et al, 2015) Porter recognised importance in both categorisations of
clusters but focused predominantly on industrial clusters. He noted that quicker
flows and of a higher intensity occur between firms in industrial clusters,
which in turn can improve a firm’s productivity. However, Porter’s key
observation is that productivity increases due to the close proximity, which allows
for a more visible and intimate competition between firms. This drives firms to
become more productive and innovative. The greater transparency between firms
encourages such a high level of competition that competitive advantage can be
utilised.

 

What is Competitive Advantage?

Competitive
advantage “describes the quality needed by a business which can flourish when
there are many other businesses with competing products… in general competitive
advantage usually rests on the extent to which the business emphasises
innovation, the way it exploits relationships with other businesses and its
reputation with customers.” (Wall, 2009, p. 46) Such advantages can be made at
any point between a good or service is designed, manufactured, marketed and
sold. Investment and innovation is commonly suggested to yield competitive
advantage. New technologies can improve quality and design, and can reduce
costs in the long-run, which could in-turn be passed onto as a lower and more attractive
price to customers.  Comparative
advantage is desired by some firms in the long-run, to improve the desirability
of their products and secure a customer base which generates revenue and can lead
to profit maximisation (particularly if cost minimisation have also been
achieved).

 

The Benefits of Industrial
Clustering

Agglomeration
Economies (Marshall 1890, 1920) is the acknowledgement of location-specific
economies of scales. Although it promotes a close proximity of industries and
supply chains like Cluster Theory, it suggests that firms derive many benefits
from clustering and not just competitive advantage. Benefits include; knowledge
spillovers, non-traded local inputs and local skilled labour pool

Reduced
costs and increased productivity can occur when factors of a supply chain are
located near one another.  Time and
travel costs within supply chain are reduced due to the proximity. Costs can
include tangible transport costs such as; driver’s wages, vehicles, fuel,
visas, ferry costs and tolls. Over time, continued reduction of costs and
increases in productivity determining higher output and revenues can allow a
firm to achieve economies of scale.

A reduction
in administration costs might be achieved, as close proximity suggests the same
main language, time zone, and which reduces the time and costs of business
interactions. This supports Wall’s definition, that businesses can exploit
relationships if they are in close proximity of one another. Thus suggesting
that factors of the supply chain closely located to one another can lead to
competitive advantage, but not exclusively derived from Cluster Theory.

Agglomeration
Economies can successfully lead to knowledge spillovers. Although competitive
between one another, firms are increasingly recognising that some form of
cooperation or networking can benefit one another. This can be achieved within
formal or informal events, such as a coffee shop catch up with another firm’s
employee, sharing ideas and failures always for more innovative firms. Such
cooperation can provide a level of transparency, leading to competitive
advantage improvements.

Transparency
can be improved by the labour force. Labour turnover allows for firms to
benefit from new ideas and skills of employees that may have been gained from within
a cluster. However a retention of staff, can vitally hold tacit knowledge which
associated with long-term growth of a firm. New developments of clustering, are
commonly a more aesthetically pleasing and environmentally considerate
environment. The clusters can contain also contain complimentary amenities,
such as coffee shops, grocery stores and gyms. This incentivises the employees
with high human capital to aim to work for firms within the cluster so they can
enjoy the facilities. Here firms benefit from the higher human capital of their
employees. Such levels of high human capital suggests a demand from territory
and quaternary firms, offering high wages for more complex roles. Higher wages,
leads to a higher tax revenue for the government.

 

 

Clustering in the UK

Cluster
theory is widely accepted in the UK, to promote business and economic activity.
Economic geographers predominantly use ‘highly specialized economic spaces such
as Porter-type business clusters, industrial districts and high-technology
localities’ as a path dependence for regional economics and planning policy. (Martin
and Sunley, 2006, Ch.4) The UK government primarily encourages clustering with
the use of zoning. Enterprise zones initiated in (###) and aimed to attract
particular industries to a specific area. This level of planning can lead to externalities
such as reduced congestion within an area, influence land prices and can reduce
pollution for residents in other areas. These externalities are often welcomed
by 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.

Increased
productivity from achieving competitive advantage can lead to improvements in
the regional and national economy, which is why clustering is supported by the
planning policy and government business policies.  Increased productivity provides higher level
of outputs. Gross Domestic Product is a standardised measure of an economy, and
is calculated by the total value of everything produced within the country.
Therefore a higher level of productivity and output increases GDP of the UK. A
higher output level can lead to increases in the components of Aggregate Demand
(AD). The components consumption and exports could rise. Government investment
may also rise in the long-run, as the firms produce more their profits may rise
allowing for a higher tax revenue that the government can spend.

Silicon Fen
is a highly successful cluster in Cambridge, UK. Silicon Fen is the name given
to the region around Cambridge, England, which is home to a large cluster of
high-tech businesses focusing on software, electronics and biotechnology. Many
of these businesses have connections with the University of Cambridge. The
region is a large high-tech cluster focusing software,
electronics and biotechnology. The cluster is an example of benefiting from knowledge
spill-over and labour pool, with many firms here closely linked with the University
of Cambridge, on research, funding, scholarships and graduate schemes.

Martin et
al. stated that “clustered diversity”, numerous clusters of highly specialised
clusters, within an economy can promote and boost competitive advantage whilst
increasing “resilience to cluster-specific shocks”. (Martin and Sunley, 2006,
Ch.4) With the collapse of economy in 2008, Governments should focus on
creating and maintaining clusters and promoting competitive advantage, to
protect and stabilise the economy from national and international economic
busts. However the high degree of interrelatedness created within clusters may
cause structural unemployment if a specific industry is unable to protect
itself from shocks and begins to decline. Such decline can lead firms closing
and leaving the cluster, causing the area and economy to essentially become
derelict. This type of structural decline was seen in Detroit in the later quarter
of the 20th century, when the automotive industries retracted from
the area. Thus causing huge levels of structural unemployment and the rise in
poverty, “Detroit was at or near the top of US unemployment, poverty per
capita, and infant mortality throughout the 1980’s” (Chafets,1991EB1 ).
 A brain drain occurred with Detroit migrants
becoming economic migrants relocating for work, “Detroit’s population
today is only half of what it once was, and its most productive people have
been the ones who fled”. (Sowell, 2011EB2 )
The city is still recovering from such structural economic turmoil.

The case of
Detroit highlights that despite firms achieving competitive advantage from
clustering, they are not protected from economic decline. Therefore
governments, planners and businesses need to disperse some economic activity
into less concentrated areas and sectors, as an attempt of implementing
low-level protectionism into the private sector.

 

Disadvantages of Clustering

For a firm
disadvantages can be limited to their business choices and activities, and the receptiveness
of the economy, however their actions can have knock-on effects on the economy
and the government. If a key firm in a supply chain folds, then firms may
struggle 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 AD
within an economy. Unemployment usually leads to higher benefit claimants,
draining the resources of the government.

Additionally
to the vulnerability of structural unemployment, clustering isn’t always a
guaranteed nor is it always positive. Initially competitive advantage is only
achievable if a number of factors are in place such as; transparency, funds for
innovation, skills to utilise the environment and an allowing economic and government
climate. Therefore, competitive advantage isn’t a given from industrial
clustering and relies on “an element of chance” (Sloman, #).

Additionally
to competitive advantage, comparative advantage exists. Comparative advantage
is achieved when firms within a nation are able to produce a good or service
with a lower opportunity cost than another country.  If a firm or region holds comparative
advantage, they could achieve competitive advantage more easily. This was seen
within “analysis of the emergence of high technology clusters has emphasized
the importance of pre-existing comparative advantages in shaping new increasing
returns effects (Bresnahan et al., 2005)”. (Martin and Sunley, 2006, Ch.4)

Frenken et
al. (2005), argues that agglomerated or clustered firms of related sectors
leads to faster competitive advantage, whereas an agglomeration of unrelated
sectors can lead to rapid declines in productivity.

Although a
firm within an industrial cluster can flourish, Overman states that the
surrounding area can suffer. “As economic activity concentrates, the prices of
scarce resources, such as land, increase; firms face more competition; roads
and public transport become more congested; pollution increases.” (Overman, #)
These negative externalities really question whether clustering industries is
worth it. Do the positives outweigh the negatives? One way to attempt to do
this, would be to create a fairer tax system, enforce higher minimum wages and
create environmental protective demands. A higher tax rate, allows governments
to recuperate finances to amend and prevent transport difficulties. A higher
wage rate, increases the purchasing power of workers to compensate for the
higher land prices, which will eventually lead to higher house prices and
inflation effects on goods and services. Protective environmental demands, help
to protect the environment and human wellbeing. With this in mind, the UK gives
tax breaks for firms within new cluster zones, and withdraws from the European
Union, and it’s strong environment protective measure.

Silicon
Valley is a famous industrial cluster for technology, media and marketing firms
and is “is perhaps the most productive and
innovative land mass in the world with 99
listed technology companies with market values of over $1 billion in
the area”. (The
Economist, 2015EB3 ) Technological firms crowd into the
Californian area, thriving off their environment. The increase in demand for
properties for business and residential for workers, has caused prices to rise
drastically in Silicon Valley and in neighbouring areas. A former housing
director for local town stated that the neighbouring areas “are already feeling
the effects of Silicon Valley’s boom, as house prices rise.” (Financial
TimesEB4 ,
2017). As prices rise, the area becomes achievable for larger firms who can
provide workers with larger earnings, which can gentrify an area.

 

Alternatives to Clustering

Not all
firms need, want or can benefit from clustering. Cluster Theory can be industry
specific. For example, a logging firm, needs to be located near a forest, which
due to industrialisation is usually far away from urban areas. These urban
areas may contain a large proportion of their consumer base, but the resources cannot
be moved closer to consumers. Furniture shops, fuel shops, printers will not relocate
to near the forest, they will remain amongst the urban population. Facilities
that may process the wood, need lots of space for their operations. Distancing
themselves away from urban areas, lowers land prices and reduces production
costs for the firm. Although they may not achieve competitive advantage,
reduced costs from location can be more important to such a firm. Therefore it
is up to the isolated firms, to use a quick and low-cost process to get their
wood to their customers. This is an example of how co-location will not be
achieved within all industries, particularly primary industries.

Isolated
firms can benefit from a lack of competition, all though this may lead to lower
quality and higher prices for customers, the threat of competitive global
imports , can regulate the geographically monopolistic market.

New
Economic Geography stresses the importance of proximity (Lovering, 1999). Yet
the world is becoming more globalised. TNCs situate business operations across
the world to benefit from reduced costs, simpler bureaucracy and the labour
pool.

The
successes of globalisation suggests that co-location is now redundant.
Interestingly however, TNCs locate different operations within clusters across
the globe, to benefit from all aspects of agglomeration economies.  Meaning firms are both allowed to benefit from
clustering together as well as being a TNC, if they have the resources to do
so.  For example, Dyson relocated its
manufacturing factory to Malaysia in the early 2000’s, the owner, James Dyson stated
that along the many advantages of this move that “the biggest benefit has
been that all our suppliers are within a ten miles of the factory”, (Dyson,
2004) thus enabling opportunity to reduce costs and become more productive and
perhaps achieve competitive advantage. However, Dyson, the British firm, retained
research and development activity within the UK stating that “At this
stage, 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 is
here UK… it generates money for the British economy.” (Dyson, 2004)

Dyson noted
the trend for other TNC’s taking advantage of industrial clustering globally: “Thousands
of other companies are doing what we were forced to do…they were failing to
make things competitively in their home markets, and moved there production to
China…Because countries such as China have already mastered low-cost
production.” (Dyson,
2004).EB5 
This can rise a moral debate over the gentrification of job roles in the UK and
encouraging low-cost labour in other countries that can be dangerous
environments for workers.

 

Conclusion

Many firms,
but not all, can benefit from clustering, regardless of achieving competitive
advantage. These business benefits such as lowered cost; innovation, higher
rates of production, higher profits and higher wages, can have a multiplier
effect and benefit the wider communities and economy. Thus clustering opportunities
should be encourage and/or provided by the government. However provisions must
be in place to maintain and reduce the level of negative externalities achieved
and promote positive externalities.

Recognition
of the successes and failures of clustering across the world allows for strategic
provisions to guide successfully industrial clustering, which enhances regions
as 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 Stanford
University. LewRockwell.com (accessed on 21/01/2018 via
https://www.lewrockwell.com/2011/03/thomas-sowell/whites-and-blacks-flee-california/)

 EB3The Economist (2015) 28/07/2015
Silicon Valley’s
fortunes; What a PErformance

Accessed on 21/01/2018 via https://www.economist.com/blogs/graphicdetail/2015/07/silicon-valleys-fortunes

 

 EB4Financial
Times (24/08/2015) Waters, R., the
Great Silicon Valley Land Grab

 

Accessed on 21/01/2018 via https://www.ft.com/content/82bc282e-8790-11e7-bf50-e1c239b45787

 EB5

Dyson, J. (2004) the Richard Dimbleby Lecture-Engineering
the Difference by James Dyson, BBC Press Release