Business & Finance homework help. Venturing Abroad
Birds of a Feather Flock Together
Although important for the development of trade theory, Porter’s theory of national
competitive advantage also explains the existence of another phenomenon of international
business activity, the regional clustering of firms within an industry resulting from
agglomeration economies. Agglomeration economies occur when a firm’s costs of production
decline as the number of firms in that industry increase within a given area. Such growth
attracts additional input suppliers to the areas, which then increases price competition and
innovation among those suppliers. As their customer base increases, suppliers can specialize,
developing unique abilities that benefit the cluster as a whole. Clusters also promote innovation
and entrepreneurship. Competition is intense, and firms must continually improve their
products and productivity to survive. Entrepreneurs can tap into sophisticated local knowledge
networks. Moreover, local bankers and financiers understand the ins-and-outs of the local
industry and thus are better able to recognize good ideas when entrepreneurs request loans or
capital. Firms within the cluster thus enjoy significant advantages when competing with a firm
from outside the cluster. Map 6.1 depicts some key industrial clusters in Western Europe.
Consider three California industries, filmed entertainment, centered in Los Angeles; premium
wines, centered in Napa and Sonoma counties; and Internet software services, centered in the
Silicon Valley. Each industry no doubt started and benefited from supportive factor
endowments and demand conditions. But as area firms began to prosper, other firms within
the same industry were attracted to the region seeking to replicate the pioneering firms’
success. The expanding number of customers then induced supplier firms to relocate as well.
Over time, the cluster becomes so strong that firms not in the cluster are at a significant
disadvantage. Film studios requiring the best directors, cinematographers, screenwriters,
casting agents, and such are likely to find them in Hollywood. Suppliers of specialized services
like pyrotechnics, animal wrangling, special effects, and set design are readily available as well.
Similarly, firms seeking the latest vineyard management techniques or viniculture science are
likely to find them in Napa or Sonoma counties or at the nearby University of California at
Davis. Firms specializing in making or supplying wine-making and grape-harvesting equipment,
barrels, corks, bottles, and label design have proliferated there as well, benefiting and
strengthening the area’s vineyards. Or consider the move of Facebook from Cambridge,
Massachusetts, to the Silicon Valley as portrayed in the movie The Social Network. There are
plenty of smart people in Cambridge. However, Facebook founder Mark Zuckerberg realized
that Facebook needed to access the specialized resources and talent that the Silicon Valley
could best provide if it were to dominate the social networking market.
Porter argues that clusters play an important role in promoting international competitiveness.
Such competition is being transformed from a firm-versus-firm basis to a cluster-versus-cluster
basis. In wine, for example, we often think of competition as being between a French vineyard
such as Chateau Lafite Rothschild or a California grower like Chateau Montelena. From a cluster
perspective, however, the nature of competition changes: California’s Sonoma and Napa Valley
vintners compete against vintners from France’s Burgundy and Champagne provinces and from
growers in Australia’s Barossa Valley. In Porter’s view, a wise government institutes policies
that allow the cluster to flourish, perhaps by funding research at local universities or providing
infrastructure improvements that benefit the cluster as a whole.
Sources: Based on Harvard Business School, “Global Wine War 2009: New World versus Old,” Case number 9-910-405 (2009); Harvard Business
School, “Finland and Nokia: Creating the World’s Most Competitive Economy,” Case number 9-702-427 (2008); Michael Porter, “Clusters and
the New Economics of Competition,” Harvard Business Review, November–December 1998, pp. 77–90; Michael Porter, “The Competitive
Advantage of Nations,” Harvard Business Review, March–April 1990, pp. 73–93.
Identify three different “clusters” in your home city, state/ province, or country. Why did these clusters
develop there?

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