The Cluster-Value Chain Model of Competitiveness

II.3.2 The Cluster-Value Chain Model of Competitiveness⁷⁰

As a result of the discussion in the first chapter, the model is analytically located at the meso- and micro-levels and divided between internal and external determinants of competitiveness. Cluster analysis is used to examine the internal determinants, while the value chain analytically links internal and external determinants⁷¹. In other words, the cluster refers only to the production stage; the value chain covers the remaining flow from “harbor of origin” (FOB) to the final consumer.

Regarding the private economic actors in the model, it is useful to separate TNCs from independent agents. TNCs are included in both the cluster and the value chain, but independent private firms are treated as either internal bodies (supply-side firms) or as external bodies (demand-side firms), depending on the geographic location.

Building on Porter’s diamond model, four factors of competitiveness are enhanced with additional elements. These are extracted from the discussions of previous sections.

- Factor conditions

Included in Porter’s approach, the factor endowments that form the basis for comparative advantage also form the basis for competitive advantage. Labor, land, and capital are essential to developing competitiveness; and competitiveness theory adds to these innovation and technology.

- Firm strategy, structure, rivalry, and meso-level institutions

Firms are analyzed according to their presence inside and/or outside national boundaries. This makes firm strategies recognizable through value chain analysis. Many TNCs are vertically integrated and perform all the stages of the value chain, including the production within national boundaries. Domestic companies, meanwhile, cannot perform activities beyond of the production stage of the value chain and should be interested in forming clusters with international activities. Thus, the model uses the structure of TNCs and domestic firms to predict their interactions and strategies (cooperation or/and competition). Furthermore, according to the systemic model, some

70 See Graph II.8

71 In business literature, the value chain is also called a value system or a supply chain.

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meso-level institutions can help link and support firms. For this reason, meso-level institutions are included as additional determinants in this analysis.

- Related and supporting industries

Porter uses this determinant exclusively within a firm’s national boundaries. However, a broader analysis of international aspects of competitiveness forces the researcher to do as Rugman does and also include related and supporting industries as external determinants of competitiveness.

- Demand conditions

As with related industries, demand conditions are exclusively local in Porter’s approach—that is to say, they are internal determinants. For the banana case, it is assumed that this product is traded exclusively for export⁷², making demand conditions external determinants of competitiveness⁷³. In order to make the use of the model for other products possible, in graph II.8 local demand conditions are differentiated from foreign demand conditions. The effect of the local demand conditions on competitiveness is defined by Porter (1990) with the sophistication of local customers as a basis to enhance the products which in a later stage of trade development should compete in international markets. On the foreign demand side, the whole process is analyzed by means of a value chain analysis. The standards of quality and prices can affect the producers’ decision on which specific markets to achieve. In addition to the governmental standards, there are also particular private labor, environmental and quality certifications (e.g SA 8000, Eurep-Gap) that traders and retailers are often using.

According to them, certifications are expected to protect food security for final consumers. On the supply side, producers do not receive premium prices (except for organic production-environmental certifications) and instead think that certifications are only additional trade restrictions (Fruitrop, 2004).

72 In fact, the variety of bananas for export (e.g. Cavendish,) are not the same variety as those for the local demand

73 Value added is taken out of the model because the banana is treated as a fresh fruit and no value is added to the product itself.

Graph II.8. Cluster-Value Chain Model of Competitiveness

Source: Author’s elaboration

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In contrast to Porter’s model, this paper accepts governmental intervention as an instrumental factor of competitiveness. It is included as an additional determinant of competitiveness called meso-level policies. Although most government policies are national “blanket” policies (at the macro-level), they are thought to marginally affect the competitiveness of single products. Thus, these policies should only be included marginally in the analysis. It is important to take this seriously. For example, as explained in the first chapter, exchange rates affect the trends of prices and can lead to wrong conclusions.

Meso-level policies can have different effects according to the units of analysis (whether internal or external). Internal, domestic meso-level policies directly influence a specific sector or product, as explained by the systemic model. However, an external perspective includes and absorbs these sector or product-specific policies. They are imposed by foreign governments of competing markets in order to protect their producers (using, for example, subsidies or tariffs) or to promote market access (as in preferential agreements). Meso-level policies are then included as one of the determinants of demand conditions. Of course, trade policies are of central concern in this research, and they are investigated in a separate chapter.

The last determinant in the mainstream view is chance. As in Porter’s model, chance cannot be controlled by other determinants and will be included as an exogenous factor.

This whole model is presented in Graph II.8, which shows the determinants of competitiveness according to location and divides them between external and internal determinants. It includes the cluster and the value chain and puts the agents of trade (TNCs or independents) in their appropriate stages of the cluster and value chain.

As shown in this section, many determinants have an influence on competitiveness, but only trade policies are highlighted from a dynamic perspective by means of a partial equilibrium model. Thus, the measurement of market share is used to show trade policies’ effects on competitiveness.

In summary, this model is a comprehensive construction that uses traditional and new analytical tools to explain competitiveness. Cluster analysis structures the case study in developing countries. Value chain analysis guarantees the inclusion of external

II. THE MODELS OF COMPETITIVENESS

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determinants of competitiveness, and market share analysis allows measurement of the effects of trade policies on the competitiveness of single products.

II.4 Towards an Empirical Study of Competitiveness: The Case of the