The Role of Industry Clusters in International Business - Coursework Example

The role of industry clusters in international business Industry clusters have become an important driver in international business. From Silicon Valley to Taiwan, Taiwan to China, they have changed the nature of business relationships. Discuss the role of national clusters and critically evaluate the contribution they make to international business supply chains, collaboration and knowledge management. Executive summary Industry clusters have become an important driver in international business as they have changed the nature of business relationships from pure transactional deals to sustainable long-term business partnership. Industry clusters provide favourable business environment for various types of business entities, including core businesses, supporting businesses, government structures, academic and research institutions, etc. Industry clusters facilitate collaboration among all these members and facilitates innovation within a cluster. Close proximity and direct communication increases trust among firms and commitment. Due to knowledge sharing environment companies gain competitive advantage and stay ahead of rivals, operating distantly. Moreover, while operating within one geographical location, firms are encouraged to collaborate with various players, starting from customers and suppliers, and ending with government and research institutions. As a result, many companies collaborate in terms of R&D, driving thus innovation performance within a cluster. This form of collaboration increases innovation performance and makes companies more competitive on the global market. National legislation and policies play an important role in promoting collaboration and innovation within a specific cluster. Thus, major attributes of industrial clusters (knowledge sharing and collaboration) enable firms to develop long-term relationships with their business partners, and thus to establish more sustainable business model. Concentration of research institutions, universities, think tanks and other industry players facilitates innovation and development. As the research shows, all these aspects help nations to gain and maintain competitive advantages in the international arena. Introduction In the era of globalisation, improved logistics and communication, it may appear that geographical location plays less important role in competitive position of a nation or a country. There are practically no more physical constraints imposed by distance factor as companies may source, supply and provide services/sell products distantly (Porter, 1998). However, there is another tendency, which challenges this position, namely, concentration of critical masses in one location, which are more successful and competitive, for instance: Silicon Valley in Santa Clare Valley, fashion shoe companies in north of Italy, automobiles in Germany, consumer electronics in Japan, movie industry in Hollywood, financial center on Wall Street, etc. (Porter, 1998). Porter (1998) names such concentration of critical masses in one place – clusters. Clusters are not unique in nature but due to local knowledge, culture, relationships, and motivation they can hardly be threatened by distant competitors (Porter, 1998). The aim of this paper is to provide a brief overview of industrial cluster concept and its main features, to discuss how it drives development of international business, and to analyse what role national clusters have played on the international business supply chains, collaborations and knowledge management. Industrial clusters defined and explained Even though the concept of clusters have been formalised and defined long time ago, it is still is the subject to debate and research. There exist many definitions and interpretations of what is the cluster and its main characteristics. However, among a variety of definitions, there are those that are cited more frequently. One of such definitions was given by Porter (2003) who defined clusters as “geographically close groups of interconnected companies and associated institutions in a particular field, linked by common technologies and skills; they normally exist within a geographic area where ease of communication, logistics and personal interaction is possible.” Clusters may have different dimensions in terms of geographical scope, breadth, depth, density, activity base, innovation capacity, growth potential, development stage and level (national, state, regional, local, etc.) (Porter, 1998; Maguire and Davies, 2007). Based on a number and variety of characteristics, there are identified four different types of clusters including the following: Marshallian clusters; hub and spoke clusters; satellite platforms and state-anchored industry (Maguire and Davies, 2007). Marshallian clusters are the clusters imply a concentration of locally owned small and medium-sized businesses operating in high technology, craft-based, or producer services industries (Maguire and Davies, 2007). Hub and spoke clusters are mainly comprised of several large firms and smaller suppliers, taking advantage of the presence of an anchor firm (Maguire and Davies, 2007). Satellite platforms are the industry clusters “dominated by the branch facilities of externally-based multi-plant companies” (Maguire and Davies, 2007: 29). State-anchored industry clusters are the geographical locations, driven by a non-profit or public entity (for instance, university, military base, or government offices). These typologies of industrial clusters also have different economic significance and impact on national economies. A more detailed overview of the role of national clusters is provided in the next section. The role of national clusters Various countries face both threats and opportunities for economy development. As a result, competition is fierce not only among companies and other business entities but also among nations. Prosperity of national economy can hardly be inherited, it should be created and continuously maintained (Porter, 1998). Porter believes that the competitiveness of nation depends highly on the “capacity of its industry to innovate and upgrade (Porter, 1998:73). Highly localised process in specific industry enables the country to gain and maintain its competitive advantage. In addition to high industry specification and excellence, differences in national culture, economic structures, historical heritage, values and social norms contribute to competitive position of a nation (Porter, 1998). While nations can not be competitive in all industries it may definitely gain significant competitive advantage through developing one or more national clusters (Porter, 1998). According to Porter (1998), a nation has four broad attributes, which make up a diamond of national competitive advantage. These four determinants include the following: (1) factor conditions, (2) demand conditions, (3) related and supporting industries, (4) firm strategy, structure and rivalry (Porter, 1998). Factor conditions imply the nation’s position in factors necessary for competing in a specific industry (for instance, availability of infrastructure, skilled labour and other). Demand conditions determine the demand level for the industry’s services or products, while related and supporting industries help to determine the availability or lack of supplier/supporting industries which will make industry more complementary in nature and thus, more competitive (Porter, 1998). Finally, firms strategy, structure, and rivalry is a factor, which determines the conditions “in the nation governing how companies are created, organized, managed, as well as the nature of domestic rivalry” (Porter, 1998: 77). Every attribute of a diamond of national advantage often depends on other attributes and therefore, all four attributes should be taken into consideration. Contribution of clusters to collaboration From the definition of clusters given above it is clear that clusters drive cooperation and collaboration among industry players. Collaboration in clusters can take different forms and approaches. The scope of collaboration and cooperation can vary from regional and national to international levels (Schiele and Ebner, 2013). The collaboration can take place between firms whose products/services are not directly competitive but rather supplementing in its nature (Porter, 1998). The firms and other suppliers are interested in developing complementarities within a cluster, as all benefit in result. One company hardly can cover all range of services and business operations, while customers more likely want to receive a “one-stop service”, buying everything they need in one location. This model is attractive for both bigger and smaller companies, which may offer comprehensive service to customers by joining efforts (Porter, 1998). A common ideal of regional allegiance common socialisation and common socialisation environment driver collaboration within cluster (Schiele and Ebner, 2013). Institutional networks also impact on cluster dynamics, promoting knowledge-based cooperation and innovation. As a result, many companies collaborate in terms of R&D, driving thus innovation performance within a cluster. The fact that firms operate in the same industry and within one location makes it possible for cluster operators to collaborate with each other not only in terms of adding value to other business and offering more comprehensive service, but also in terms of creating new products and services (Porter, 1998). This form of collaboration increases innovation performance and makes companies more competitive on the market. At the national level, governments also may encourage more direct cooperation in R&D field. Thus, for example, in Europe there was introduced an information-technology project called ESPRIT (Porter, 1990). This megaproject brought together firms and organisations from several countries for collaboration in IT sphere. The US government has facilitated R&D cooperation among firms by modifying antitrust laws (Porter, 1990). The Ministry of International trade and Industry (MITI) of Japan has invited Japanese firms for collaboration through participation in cooperative projects (Porter, 1990). In this case, Japanese companies took part in MITI projects in order maintain their corporate images and positive reputation, to have good relationships with government, and to hedge the risk that rivals could get from these projects (Porter, 1990). Thus, either voluntary or being forced, companies tend to participate in various collaboration projects at national/regional levels. Contribution of clusters to knowledge management One of the major advantages of clusters is greater information circulation and knowledge spillover (Maguire and Davies, 2007). Concentration of companies and specialised institutions in proximity to each other encourages cooperation and collaboration among the cluster members. Due to close interrelationships between firms and their customers/suppliers/partners, firms gain better understanding of the specific needs of various stakeholders. Such close and open communication enables firms to get feedback from their customers and to indicate the areas for improvement for their suppliers/partners (Schiele and Ebner, 2013). This is one of the major ways of how clusters contribute to knowledge management. Close proximity to each other and strong ties among cluster members also enables organisations to access information about new developments more quickly and efficiently than other organisations and business entities (Porter, 1998; Belso-Martinez, 2015). As clusters encourage formation of strategic partnerships and alliances, parties in these alliances inevitably share information and expertise with each other. This factor leads to increased trust and reliability among firms and other institutions, and naturally drives knowledge spillovers. While physical distance is often a barrier to the transfer of knowledge and technology, geographical clusters enable firms to overcome this barrier as knowledge sharing process becomes easier and more effective. Decreased institutional and knowledge distances make organisational learning more effective (Connel, Kriz, and Thorpe, 2014). Thus, close proximity of various market players and stakeholders within an industry also encourages external knowledge sharing and stimulates innovation (Porter, 1998). Firms gain access to specialised industry information and updates due to direct access to necessary technology, partners, industry experts, etc. Greater access to industry-specialised information helps the firms to make more effective and rapid business/operational decisions (Porter, 1998). Besides close proximity of business entities to each other, clusters are characterised by a concentration of highly-specialised and professional employees. Thus, skilled individuals and competent organisations also drive knowledge and expertise exchange within the cluster (Maguire and Davies, 2007). All these aspects facilitate organisational learning and innovation performance among cluster members. In addition to the above mentioned factors, there is another feature of industrial clusters, which contributes to information and knowledge sharing process. In well-developed industrial clusters there are often present specialised institutions such as universities, research centers, think tanks, trade associations, standard-setting agencies, vocational training providers and other educational facilities (Belso-Martinez, 2015; Porter, 1998). These organisations and institutions usually serve as new knowledge-hub centers that share their external knowledge with cluster participants at moderate cost (Belso-Martinez, 2015). These institutions offer specialised training, information, technical, and research support to cluster members (Porter, 1998). Moreover, concentration of universities, research firms and other institutions may constitute a separate knowledge cluster within a given industry, which also encourages and facilitates organisational learning among cluster participants (Evers, 2008). The government and institutional set-up of a national economy also plays an important role in encouraging learning and innovation performance within industries. At the national level government may introduce national laws, policies, standards, to reduce uncertainty, and thus to intensify collective learning and innovation processes within specific industries (Schiele and Ebner, 2013). Thus, national government plays an important role in the way in which knowledge is accumulated within a cluster and how it is further disseminated (Schiele and Ebner, 2013). Contribution of clusters to international business supply chains In addition to contribution to collaboration and innovation performance clusters have strong impact on international business supply chains. Supply chain is “a group of organisations (involved in product development, manufacturing, production, procurement, and distribution) that are working together to profitably provide the right product or service to the right customer at the right time” (Geunes, and Pardalos, 2005: 1). This definition of supply chain is quite similar to the definition of industrial cluster, however, these two concepts are not the same (Sureephong et al. 2008). Industry cluster is more macro-economic concept, where the major focus is made on collaboration and knowledge sharing among cluster participants. Supply chain management is micro-economic concept, where the major efforts are concentrated on collaboration and information sharing among companies operating within the same production chain (Sureephong et al. 2008). The supply chain is an integral part of the core business operating within the industry cluster (Sureephong et al. 2008). Both these elements enable firms to gain and maintain their competitive advantage and be ahead of those firms, operating outside the cluster (Sureephong et al. 2008). Collaboration within clusters result in more interdependent and complex supply chains (Sharma & Bhat, 2014). Due to institutional network established within a cluster, industry clusters support supply chains, enhance knowledge sharing and innovation performance in supply chains (Sureephong et al. 2008). Moreover, well-developed clusters help firms and nations to achieve economies of scales by sharing various resources, including: IT platforms, labour, vehicles, etc. Sureephong et al. (2008:2) have graphically illustrated how industrial clusters contribute to supply chains development (see Figure 1). Figure 1: Cluster map and supply chain (Source: Sureephong et al. 2008: 2). As the graph illustrates, the presence of government agents, academic institutes, associations, and supporting industries within a cluster also influence supply chain development. Thus, even though industry clusters and supply chains operate at different economic levels, they both have common objectives and goals (Sureephong et al. 2008). In addition to a more favourable environment for developing supply chains, industry clusters “can improve the capability of companies to select their supply chain partner, improve knowledge and information sharing between partners in the supply chain (Sureephong et al. 2008). In terms of international business context, it is possible to say that industry clusters create a knowledge sharing environment within an industry (discussed in the previous sections). Due to this aspect, supply chain operators gain better chances to find good and reliable partners and develop effective relationships (Sureephong et al. 2008). Moreover, Sureephong et al. (2008) explain that Cluster Development Agent performs the role of a Supply Chain Facilitator, whose role is to “favour collaboration in the supply chain by connecting the enterprise according to their strategic goals and opportunities” (Sureephong et al. 2008:3). Clusters offer supply chains environment with improved knowledge exchange practice, better communication, information about reliability of potential partners, and easies communication. All these aspects enable firms to find partners in more efficient way with a focus made on long-term relationships (Sureephong et al. 2008). Conclusion With the development of IT, logistics and increased globalisation, practically all geographical boarders have been removed, enabling firms to do business distantly. While all these developments have significantly contributed to international business development, there is another important elements, which have added value this process – industrial clusters. Nowadays, the international arena is overwhelmed with various business activities, however, these business activities are well-structured geographically. As it has been explained in the report, geographical concentration of critical masses in one place is one of the major characteristics of industrial clusters. Due to close proximity of businesses, specialised institutions, and other agents, industrial clusters enable companies to gain and maintain competitive advantage through continuous knowledge sharing process and enhance innovation performance. As the firms and other industry operators are located in one geographical area, communication and information flow is much more simplified. Companies gain the most recent news and updates within a specific industry, and are capable to make more rational and effective decisions. Due to knowledge sharing environment companies gain competitive advantage and stay ahead of rivals, operating distantly. Moreover, while operating within one geographical location, firms are encouraged to collaborate with various players, starting from customers and suppliers, and ending with government and research institutions. As a result, many companies collaborate in terms of R&D, driving thus innovation performance within a cluster. The fact that firms operate in the same industry and within one location makes it possible for cluster operators to collaborate with each other not only in terms of adding value to other business and offering more comprehensive service, but also in terms of creating new products and services. This form of collaboration increases innovation performance and makes companies more competitive on the global market. National legislation and policies play an important role in promoting collaboration and innovation within a specific cluster. The countries, which have introduced necessary changes to legislation and launched special programs facilitating collaboration and innovation, are more likely to gain national competitive advantage. In addition to contribution to collaboration and innovation performance clusters have strong impact on the development of international business supply chains. The major attributes of industrial clusters (knowledge sharing and collaboration) enable firms to develop long-term relationships with their business partners, and thus to establish more sustainable business model. Moreover, trust and commitment common for players within industrial clusters enable firms to find partners more effectively and promote collaboration among firms. Concentration of research institutions, universities, think tanks and other industry players facilitates innovation and development. 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