WorldCity Business Magazine

Location still counts

by Jerry Haar

Mention the term “cluster” and two definitions come to mind:

1) gravitationally bound concentrations of up to 1 million stars, spread over an area of 10 to 30 light years in diameter or

2) chocolate-covered peanut candies.

Having studied astrophysics in college and consumed the other incarnation of clusters in grade school, I was amused the first time that term was applied to business.

That was seven years ago when Michael Porter, a Harvard Business School professor, published a seminal article, “Clusters and the New Economics of Competition.”

Since then, the impact of economic clusters geographical concentrations of companies and institutions that collectively generate competitive advantages has surged in both developing and developed countries. Originally known as “industrial districts,” a term coined by the late British economist Alfred Marshall in 1920, clusters have grown worldwide from Bangalore, India; Guadalajara, Mexico; and Castelln, Spain, to Emilia-Romagna, Italy; and the Silicon Valley in California.

In an era marked by globalization and technological advances, it is ironic that economic geography continues to play such an important role in the world economy. But location does still matter, and Florida provides an excellent example. It has tourism clusters in South Florida, Orlando and on both coasts; a Latin media and entertainment cluster in Miami Beach; and plans for a small life-sciences cluster in Palm Beach County.

The prevalence of clusters reveals important insights about the microeconomics of competition. Even as old reasons for clustering have diminished in importance with globalization, new purposes have gained momentum in an increasingly complex, knowledge-based and dynamic economy. Clusters represent a new way of thinking about national, state and local economies. They also necessitate new roles for companies, government and other institutions in enhancing competitiveness.

Harvard’s Porter said clusters affected competition in three broad ways: by increasing the productivity of companies based in the area; by driving the direction and pace of innovation; and by sparking the formation of new businesses within the cluster.

Geographic, cultural and institutional proximity provides companies with special access, closer relationships, better information, powerful incentives and other advantages that are difficult to tap from a distance. The more complex, knowledge- based and dynamic the world economy becomes, the truer this is.

Increasingly, competitive advantage lies in local things knowledge, relationships and motivation that distant rivals cannot replicate.

Brazil has been one of the most successful laboratories for the development of clusters and innovation enclaves. There is the footwear and leather cluster in the Sinos Valley, the aerospace and avionics cluster supporting jet maker Embraer in So Jos dos Campos, the textile and apparel cluster in the Itaja Valley and the furniture cluster in So Bento do Sul.

Brazilian clusters run the gamut from micro- and small firms involved in low technology to higher value and higher skill sets. These operations supply larger companies, often in the area of export production. Brazil’s ceramic tile clusters in Cricima and Tubaro in Santa Catarina State provide great insight into how other locales can develop and expand their unique arrays of competitive assets. These clusters account for about a third of Brazil’s tile production and 90 percent of its tile exports.

The collapse of the construction market and a surge in interest rates in 1989 and 1990 dealt a devastating blow to the tile clusters. Yet, they all survived. They accomplished this by vigorously adjusting to market forces, becoming competitive in the face of Italian and Spanish imports and incorporating new management techniques. They also engaged in benchmarking identifying the top players and standards and how to reach that level.

Intra-industry cooperation was key. Companies exchanged information and shared new production techniques while their industry associations lobbied local, state and federal governmental agencies for help in creating a supporting environment.

Education also played a major role in the resurgence of the ceramics clusters. The industry stepped up to the plate and invested in training. This ran the range from employer sponsorship of secondary and vocational education for workers to in-house quality management training and statistical process controls. The companies also kicked in funding for a university center focused on ceramics technology.

There were lessons learned from the Brazil example the same lessons that have sprung from South Florida’s Latin media and entertainment cluster, the state’s tourism clusters and the fledgling biotechnology cluster. There must be trust among companies in the clusters. There must also be continuous upgrading of human resources, activist business associations, access to venture capital, angel investors and other capital and, above all, there must be synergy among businesses, government and academic and research institutions.

Jerry Haar is a professor of management and international business at Florida International University. As a visiting fellow at Oxford University last summer and Columbia University this summer, he researched and lectured on industrial clusters, national innovation systems and business competitiveness.