Clusters and the New Economics of Competition
From the Magazine (November-December 1998)
Now that companies can source capital, goods, information, and technology from around the world, often with the click of a mouse, much of the conventional wisdom about how companies and nations compete needs to be overhauled. In theory, more open global markets and faster transportation and communication should diminish the role of location in competition. After all, anything that can be efficiently sourced from a distance through global markets and corporate networks is available to any company and therefore is essentially nullified as a source of competitive advantage.
But if location matters less, why, then, is it true that the odds of finding a world-class mutual-fund company in Boston are much higher than in most any other place? Why could the same be said of textile-related companies in North Carolina and South Carolina, of high-performance auto companies in southern Germany, or of fashion shoe companies in northern Italy?
Today’s economic map of the world is dominated by what I call clusters: critical masses—in one place—of unusual competitive success in particular fields. Clusters are a striking feature of virtually every national, regional, state, and even metropolitan economy, especially in more economically advanced nations. Silicon Valley and Hollywood may be the world’s best-known clusters. Clusters are not unique, however; they are highly typical—and therein lies a paradox: the enduring competitive advantages in a global economy lie increasingly in local things—knowledge, relationships, motivation—that distant rivals cannot match.
Although location remains fundamental to competition, its role today differs vastly from a generation ago. In an era when competition was driven heavily by input costs, locations with some important endowment—a natural harbor, for example, or a supply of cheap labor—often enjoyed a comparative advantage that was both competitively decisive and persistent over time.
Competition in today’s economy is far more dynamic. Companies can mitigate many input-cost disadvantages through global sourcing, rendering the old notion of comparative advantage less relevant. Instead, competitive advantage rests on making more productive use of inputs, which requires continual innovation.
Untangling the paradox of location in a global economy reveals a number of key insights about how companies continually create competitive advantage. What happens inside companies is important, but clusters reveal that the immediate business environment outside companies plays a vital role as well. This role of locations has been long overlooked, despite striking evidence that innovation and competitive success in so many fields are geographically concentrated—whether it’s entertainment in Hollywood, finance on Wall Street, or consumer electronics in Japan.
Untangling the paradox of location in a global economy offers insights into how companies continually create competitive advantage.
Clusters affect competitiveness within countries as well as across national borders. Therefore, they lead to new agendas for all business executives—not just those who compete globally. More broadly, clusters represent a new way of thinking about location, challenging much of the conventional wisdom about how companies should be configured, how institutions such as universities can contribute to competitive success, and how governments can promote economic development and prosperity.
