Clusters and the New Economics of Competition

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CLUSTERS AND THE NEWCLUSTERS AND THE NEWECONOMICS OFECONOMICS OFCOMPETITIONCOMPETITION

By: Virgilio B. Arzadon

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S ource Out ItemsS ource Out Items

CapitalGoodsInformationTechnology

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D iminishing the Role of LocationD iminishing the Role of Location

S ourcing out through technology - internetMore open global markets and faster

transportationLocation factor as competitive advantageis being nullified

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D o location matters less now?

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F amous Business LocationsF amous Business Locations

S ilicon ValleyHollywood

Las Vegas or MacauHongkong

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W hat is a Cluster?W hat is a Cluster?

Geographic concentrations of interconnected companies and institutionsin a particular field

Encompasses an array of linked industriesand other entities important to competitionCritical masses-in one place- of unusual

competitive success in particular fields ±Porter

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They includeS uppliers of specialized inputsProviders of specialized infrastructureExtend downstream to channels

CustomersManufacturersGovernmental institutions

Academe ± universities, training centersResearch and technical providers

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Anatomy of the California W ine

Cluster

Growersand

vineyards

S tate gov¶t agencies

W ineriesand

processingfacilities

Educational, research,and trade organizations

W ine-making equipment

Barrels, bottles, caps,corks, labels

Public relations andadvertising

S pecialized publications

Grape harvestingequipment

F ertilizers, pesticides,herbicides

Grape stock

Irrigation technology

California agricultural clusters Tourism cluster

F ood and restaurantcluster

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Clusters affect competition by:Increasing the productivity of companies

based in the areaD riving the direction and pace of innovationwhich underpins future productivity growthS timulating the formation of new businesseswhich expands and strengthens the cluster itself

W hy clusters are critical toW hy clusters are critical tocompetition?competition?

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Clusters and ProductivityBetter access to employees and suppliers ± Tap existing pools of specialized and

experienced employees ± It offers deep and specialized supplier base

± Minimizes the need for inventory ± Eliminates importing cost and delays ± Lowers the risks that suppliers will overprice ± Proximity improves communications and it

makes easier for suppliers to provide supportservices ± Clusters increases the demand of specialized

inputs but also their supply

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Access to specialized information ± Extensive market, technical, and competitive

information accumulates within a cluster

Complementarities ± A host of linkages among cluster members will

result in a whole greater than the sum of itsparts

± Good performance by one can boost thesuccess of the others

Clusters and ProductivityClusters and Productivity

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Access to Institutions and Public Goods ± Investments made by government or other

public institutions can enhance productivity

Better motivation and Measurement ± Local rivalry is highly motivating ± Peer pressures amplifies competitive

pressure; executives¶ pride

Clusters and ProductivityClusters and Productivity

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Cluster and InnovationCluster and InnovationLearning early about evolving technology,components and machineries, service andmarketing concepts, and so on.

Provides the capacity and the flexibility toact rapidlyCompanies within a cluster canexperiment at lower costCompetitive pressure causes executivesto set their companies apart from theothers

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Clusters and New BusinessClusters and New BusinessF ormationF ormation

Concentrated costumers base lowers risks andeasy to spot market opportunities for newsuppliersIndividuals working within a cluster can perceivegaps on products or services that can createbusiness opportunitiesNeeded assets, skills, inputs and staff oftenreadily available waiting to be assembled intonew enterprise.F ormation of new business within a cluster is apositive feedback loop.

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F our Issues to S trategic AgendaF our Issues to S trategic Agenda1. Choosing locations

± Cluster input savings vs non-cluster location costadvantages (lower tax, wages, utility costs)

± Role of location in innovation

2. Engaging locallyPersonal relationships to access important resourcesand information

3. Upgrading the cluster

Health of business environment affects health of thecompany

4. W orking collectively ± Collective actions ± trade associations

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W hat¶s wrong with IndustrialW hat¶s wrong with Industrial

Policy?Policy?Governments target ³desirable´ industriesand intervene ± subsidies and imposerestrictions on foreign competitors

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W hat should be done?W hat should be done?

Government should create environment tosupport rising productivityA sound macroeconomic policy withmicroeconomic foundations for competition

leading to productivity and competitivenessA new government role ± Ensure supply of hi-quality inputs ± manpower and

infrastructure ± S et rules for competition ± Promote cluster formation and upgrade public or

quasi-public goods

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Model Clusters

High- value Vegetable Cluster of NorthernMindanao ± regional model cluster Furniture Cluster of Cebu ± provincial model ± key players are manufacturers, subcontractors and

dealers, direct and indirect exporters, or acombination of these businesses.

± Support industries include the wood and lumber industry, hardware, and the metal sector.

Food processing Cluster of Caraga andregional clusters of Davao ± emerging regionalcluster

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National Priority Clusters(F rom Export D evt Council at website www.edc.net.ph )

MicroelectronicMotor Vehicle Parts and Compenents

W earablesCoconut and coconut Products

Aquatic and Marine Products ( Tuna, Bangus, Tilapia,S eaweeds)F ood products ( F resh and processed fruits)Home furnishings

Holiday Dé cor and GiftwaresOrganic and Natural Products and ICT Enabled S ervicesConstruction Materials and S ervicesBiotechnology

Machinery parts and Engineered Products

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