Clusters Theory and International Business Management

Introduction

International trade is not a novel phenomenon. For centuries, traders and merchants have wandered across national and regional boundaries to conduct international trade. However, it has never been conducted with such an enormity or with such an impact on national economies, firms and individuals, like it has been done in the past few years (Czinkota et. al. 2005). The widespread trend of globalization is establishing a new world order, in which localized firms, industries and economies are being swept away by the fast moving international corporations. Despite the widespread trend of globalization, some researchers content that local economies and industries will be able to retain their importance and remain competitive through the formation of industrial clusters. The formation of clusters will enable local industries to attain specialization in specific business areas, and subsequently gain competitive advantage. The focus of this essay is to critically evaluate the contribution of cluster theory in international business management.

Globalization and the International Business Management

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The innate characteristic of globalization i.e. the insignificance of geographical boundaries and national borders for conducting trade, has enabled companies to source their capital, goods, information, and technology from around the world, often with the ease of a mouse click (Porter, 1998) . Laudon (2010) describes a Hewlett-Packard (HP) Laptop’s path to market. The laptop computer comprises of components and involves services that are sourced from across the globe. For example its idea and initial design came from United States. Its graphic’s processor is designed in Canada and made in Taiwan. Its LCD display and several integrated chips come from Taiwan and South Korea. Its hard disc drive is manufactured in Japan. China, Japan, Singapore and South Korea and the US all supply several other parts of the machine until it is finally assembled in China (see fig.1) (Laudon, 2010 p. 555). This example illustrates that the open global markets and faster means of transportation and communication have moderated the role of local competition. As Michael Porter contends that globalization has annulled all those sources of competitive advantages that can be efficiently sourced by networked corporation through international trade. With the ever expanding network of a global supply chain, the conventional wisdom about the way in which nations and local industries compete needs to be revamped (Porter, 1998).

Fig.1: An HP Laptop’s Path to Market

(Source: Laudon, 2010 p.555)

Porter’s argues that competition in the modern business world is much more dynamic. He proposes that despite the growing insignificance of geographical distance, location is still valued when it comes to specialized industrial clusters. For instance, the likelihood of finding a top notch mutual fund service in Boston is much higher compared to any other place in the world. Similar is the case in finding a high-performance auto company in South Germany or a fashion shoes company in Italy. All these businesses are industrial clusters operating within a region. Today’s global economy is comprised of ‘clusters’, which are critical masses of businesses whose activities complement each other. The agglomeration of these businesses collectively gains an unusual competitive advantage in particular business fields (Porter, 1998). The Institute for Strategy and Competitiveness defines clusters as “geographic concentrations of interconnected companies, specialized suppliers, service providers, and associated institutions in a particular field that are present in a nation or region” (ISC, 2012). For example, the presence of full range of highly sophisticated financial services within the city of New York is an industrial cluster.

Macroeconomic Stabilization and Cluster

It is widely acknowledged that clusters enhance employment level much quickly than the same industry in the economy having limited presence within a cluster. According to Delgado, Porter and Stern (2011), a cluster enables greater agglomeration of an economy by attracting a large number of skilled employees, specialized suppliers and buyers, connected industries and strong local competition. Through the establishment of clusters, an economy is able to attract the best talent of a particular field in terms of entrepreneurs and individuals with ideas (Porter, 1998). Propinquity of associated industrial activity also reduces transaction costs. Moreover, clusters enhance accumulation of information through research and development in specialized fields and enhance knowledge transfers while speeding up the flow of information. Clusters also influence the facilitation of specialized training and infrastructure development through the provision of educational programs and quality of certification organizations (Delgado et. al, 2011).

These factors combine together to reinforce complementarities across related industries. Complementarities refer to a host of connections amongst members within a cluster. Through the formation of these connections, the “cluster members result in a whole greater than the sum of its parts.”(Porter, 1998) For instance, in a typical tourism cluster, it is the sum of the appeal of a primary attraction and the efficiencies of related businesses such as hotels, transportation, restaurants and shopping areas that result in a superior tourist’s experience. All these businesses complement each other and are mutually dependant, i.e. good performance of a business within a cluster boosts the success of others.

Importance of Cluster for Competition

According to Porter (1998), competition within the modern business world depends upon productivity. The sheer size of an individual firm and its access to goods no longer serves as a sustainable competitive advantage as it is nullified by the advent of globalization. Clusters have a significant impact upon competition as they increase the productivity of industries through the provision of complementarities. They also drive the trend and rapidity of innovation which is important for future productivity. Clusters also stimulate the formation of new complementary businesses which broadens and strengthens the cluster itself.

In order to gain a more pragmatic view to the cluster theory, we now consider the previous example of the HP’s Laptop computer. As it portrays the prevailing phenomenon of globalization and international trade, it also signifies the importance of industrial clusters. HP sourced various components of its Laptops from different location across the globe. Its choice for sourcing its components from those locations was determined by the high efficiency and productivity of those economies in producing particular goods. Thus it was the presence of industrial clusters in Japan, China, Taiwan, Singapore, and South Korea, that attracted specialized global buyers i.e. HP towards them. It signifies the role of productive industrial clusters in international trade, and how they sustain local competitiveness.

Conclusion

Businesses within a cluster share common technologies, knowledge, inputs, and cluster-specific institutions, thus they benefit from complementarities. The presence of a cluster enhances national, industrial and firm level growth by increasing the efficiency of an industry, driving productivity, and creating employment opportunities. It also drives expansion, attracts talent, and fosters innovation (Porter, 1990; 2003). It is through the formation of such industrial clusters that an economy uses its available resources at the most optimal level rendering the optimal development of the national economy.

References

Czinkota, M., Ronkainen, I. and Moffett., H (2005) “International Business”, Wiley.

Delgado M., M.E. Porter, and S. Stern, (2011), “Clusters, Convergence, and Economic Performance,” Journal of Economic Geography, 10 (4), pp. 495-518.

ISN (2012) Clusters and Cluster Development {online} http://www.isc.hbs.edu/econ-clusters.htm (Accessed on 6th May 2012)

Laudon, K. (2010) “Management Information Systems: Managing the Digital Firm”, Pearson Education India

Porter, M.E., (1990), The Competitive Advantage of Nations, Free Press, New York.

Porter. E.M (1998) “Cluster and the New Economics of Competition”. Harvard Business Review November-December 1998 pp 77-90

Porter, M.E., (2003), “The Economic Performance of Regions,” Regional Studies, 37, pp. 549-578.

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