International Discussion

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.

Question:

Identify three different “clusters” in your home city, state/ province, or country. Why did these clusters

develop there?