Background and Recent Literature

The cluster analysis originates from neoclassical economics. The industrial district, as defined by Marshall in his “Principles of Economics” (1920), implies the concentration in a limited geographic area of firms dedicated to production in a specialized sector.

Location is significant, but it should not be the only determinant. In the industrial district approach, non-economic factors, which Marshall termed the “industrial environment”⁵⁴ (culture, sharing of know-how, political and social links, history, and the like), are the “real” motivation for a group of firms to create horizontal and vertical links. Thus, a group of firms develops a framework to achieve common goals and to avoid cheating among cooperating firms, who are simultaneously competitors. As a result, the industrial environment enjoys easier communication and firms can be more specialized. Therefore, the main explanatory variable for the establishment of a cluster in the industrial district approach is access to information.

Schmitz and Nadvi (1999) classify Marshall’s approach as “incidental”, in that firms with similar or related activities locating near one another generate a variety of external

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economies. This lowers costs for the firms involved. In addition to the “incidental”

nature of Marshall’s theory, recent theories include “deliberate” policies for clustering.

Schmitz and Nadvi (1999, p. 1504) integrate incidental and deliberate policies in a concept of collective efficiency defined as the “competitive advantage derived from external economies (incidental/passive) and joint action (deliberate/active)”. Thus, different effects of clusters depend on the emphasis on either incidental or deliberate strategies of clustering.

Based on the framework of Marshall, Chavarria et al. (2000b) wrote a thorough survey on the theoretical fundamentals of clusters. The first theory these authors quote is founded on geographical economics and explains why firms have to be located in a specific place (like Marshall’s industrial district). Location is the only determinant in the formation of clusters. However, to explain the prices of the products within a cluster, transport cost should be included as an explanatory variable. Von Thunen⁵⁵, one of the main representatives of this approach, explains that the geographic distance between production and the marketplace determine the location of clusters. Thus, if products are located near markets, their prices (as a function of transport costs) are lower, and more efficient agents will be located near markets. Although Von Thunen assumes the irrelevance of other factors, his view is very superficial and authors such as Butler (1986) includes environmental variables (weather and geological factors) in the decision of where the agents locate their businesses.

Hirschman (1957 and 1977)⁵⁶ develops another approach to the cluster analysis, based on the vertical and horizontal integration of producer firms. If the returns to economic activity are high enough for firms to expand, they should prefer to make linkages backwards (exploitation of raw materials and other inputs) and forwards (processing of new products) across the value chain. Accordingly, a firm has the highest integration incentive when the technology it uses suits the processes of production both backwards and forwards in the value chain. Nonetheless, firms do not have to locate close to one another to create a cluster (location is not necessarily a determinant) due to the

54 Industrial environment, defined by Marshall (quoted on Chavarria et al. 2000b p. 17) as: “a set of elements difficult to separate and difficult to describe under the traditional economic variables”, can be integrated into the business context in the nine factor model and to the meta-level in the systemic model.

55 Cited in Chavarria et al. (2000b, p. 14)

56 Cited on Chavarria et al. (2000b, p. 16)

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technological advances in transportation and communication (for instance, electronic transactions and virtual services). Instead, the firm’s clustering is dependent on, first, the returns for investment and second, on the similarity of production technologies backwards and forwards in the value chain.

A last approach is based on Porter’s model discussed in Section II.1.1. According to the mainstream, the reasons to develop a cluster are the diversity and intensity of links among firms. Porter’s most important contributions to the cluster analysis are the determinants from the “diamond” of competitiveness, including the influence of random effects and government actions. However, its emphasis on manufacture and services sectors make agriculture seem unimportant. These scholars also argue that in some industries the importance of distance is replaced by virtual means of transport and communication, such as the Internet, electronic transfers, or delivery.

Surprisingly enough, Porter does not emphasize the cluster concept in his book, The Competitive Advantage of Nations (1990). He introduces the cluster merely as a conclusion when he analyzes the determinants of competitive advantage. “Nations succeed not in isolated industries, however, but in clusters of industries connected through vertical and horizontal relationships” (Porter 1990, p. 73). He only links clusters with development concepts in a subtitle in The Competitive Advantage of Nations. Porter makes some comments on the development of clusters, but he does not define them; instead, he argues: “the systemic nature of the diamond promotes the clustering of a nation’s competitive industries… One competitive industry helps to create another in a mutually reinforcing process. Such an industry is often the most sophisticated buyer of the products and services it depends on. Its presence in a nation becomes important to developing competitive advantage in supplier industries”. (Porter 1990, p. 148-149)

A more recent mainstream emphasis on competitiveness, including several case studies, has promoted the cluster concept as the basis of mainstream competitive advantage theory⁵⁷. It has even been used as a framework for governmental policies in developing

57See: Harvard Business School, Institute for Strategy and Competitiveness. Competition and Economic Development. http://www.isc.hbs.edu/econ-clusters.htm (visited in December 2004)

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regions, as in the Andean Community with the Andean Competitiveness Project.

According to the mainstream’s most recent conception:

“Clusters are geographic concentrations of interconnected companies, specialized suppliers, service providers, and associated institutions in a particular field that are present in a nation or region. Clusters arise because they increase the productivity with which companies can compete. The development and upgrading of clusters is an important agenda for governments, companies, and other institutions. Cluster development initiatives are a new direction in economic policy, building on earlier efforts in macroeconomic stabilization, privatization, market opening, and reducing the costs of doing business”. (ISC 2004)⁵⁸

The mainstream’s changing definition of the cluster reflects the evolving aspect of the competitiveness theory. There are two main differences in approach: first, in the earlier conception, the determinants described in the diamond (section II.1.1) promote competitiveness within a cluster, while in later formulations the cluster promotes productivity of the firms in order to compete. In other words, the cluster was initially regarded as the end, and recently became a means. Secondly, perhaps the most important issue for the purpose of this research is the emphasis on vertical integration.

Early definitions included this explicitly, but in the most recent definition the mainstream clarifies that for analytical purposes it is better to talk about different clusters at every stage of a productive process (clusters of production, of marketing services, of transport, etc.) and to integrate these clusters vertically. Porter⁵⁹ states:

“Clusters represent a kind of new spatial organizational form in between arm’s-length markets on the one hand and hierarchies, or vertical integration on the other. A cluster, then is an alternative way of organizing the value chain” (2000, p. 206). Therefore, it is possible to separate the cluster of production from the remaining stages of the productive process. As a result, cluster analysis explains the internal determinants⁶⁰ of

58 See: Harvard Business School, Institute for Strategy and Competitiveness. Competition and Economic Development. http://www.isc.hbs.edu/econ-clusters.htm (visited in December 2004)

59 Porter analyzes the cluster development and its relationship with vertical integration aextensively in his collection On Competition (1998).

60 For a definition of internal and external determinants of competitiveness, see Chapter 1, Section 3.2

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competitiveness for this research. Moreover, in order to explain the interrelation between internal and external determinants it will also be necessary to analyze the value chain⁶¹.

Most of the developments in what can be called “cluster theory” are based on the Marshallian idea of industrial districts. According to Maskell & Kebir (2005) the different contributions to the theory depend on the emphases and agreements about the assumptions, which will be the topic of the following section.