Empirical Cases of Industrial Clusters - Literature review Example

Business Introduction Collaboration among firms has become the new source of competitive advantage in the contemporary world. The forms of relationships range from joint ventures that are mutually beneficial to framing of manufacturing and marketing contracts that can be helpful for all the partners. The theoretical foundation of this concept lies in the works of Alfred Marshall and his proponents mainly from the Cambridge School. This school of thought had strongly supported the idea that industrial clusters are quite beneficial for businesses as they add value to the activities in the value chain (Kramer and Tyler, 1995). Economists have discovered that inter-firm relationships and cooperation improves sharing of risk, provides better access to markets, enhances the learning of the individuals and complements the existing skills of an industry (Kramer and Tyler, 1995). The purpose of this paper is to explore the idea that superiority in economic performance is not only determined by competitive relations but also by promotion and co-operation between the firms. Empirical studies relating to the topic will help in determination of the validity of the idea promoted by Marshall. Industrial Districts: Theoretical Background Marshall had explained that the concept of industrial districts relates to the concentration of industries in a particular geographical location. Marshall had identified that there were a number of factors that had promoted the cooperation between firms including geographical factors, concentrated demand for products and existence of a locality (Belussi and Caldari, 2009). The advantages of such clustering are bountiful like creation of subsidiary trade, development of a skilled workforce and fostering of innovation. The idea developed by Marshall was later expanded by Porter who had also confirmed that industries in a particular geographical location are connected by complementarities and commonalities. The theory of spatial economics asserts that such geographical clusters are also beneficial for enhancing the well-being of the cluster and the society as a whole in locations where these operates. The works of researchers like Geyskens, et al. (1996) had shown that firms in an inter-dependent relationship tend to take actions which are complimentary. The unique feature about the Marshallian industrial districts is the unique amalgam of competition and cooperation. According to Marshall, in a particular industrial cluster individual firms only specialize in certain phases of the productive process. In this way, existing firms in a particular district not only competes with one another but also cooperates when they need to exchange information. Conventional economic theories have stated that the growth of the industries is only conditioned on the extent of competition between them. Extensive competition between firms can be detrimental as it leads to exclusion of the organization. In such a scenario the association between firms are very helpful as it creates a favourable atmosphere for further growth. A host of studies points to the opportunities of industrial clusters. Accumulation of skills in the industrial districts is one of the most important benefits as has been pointed out by researchers. Industrial districts have high degree of division in labour force allowing them to develop complex production process (Han, 2009). The quality of the products automatically improves as a result of division of this labour force. Researchers have also documented the link between industrial clusters and supply chain. Close connection between firms helps in the formation of a functional linkage in the supply chain and enterprises can realize the benefit of coordinated actions in the supply chain (Han, 2009). Enterprises in the industrial clusters act as nodes in the supply chain resulting in the reduction of the costs of the supply chain management. Empirical cases of industrial clusters Recently numerous scholars have shown increasing interest in the concept of “New Economic Geography” following the works of Marshall. However, two important changes have been observed in the approach that was adopted by them (Gilson, 1999). First, there is an increasing focus on advanced technology industries and second the causes of existence of these industries rather than the nature of their equilibrium. Researchers of the economic geography has pointed out that development of districts is largely dependent on the initial conditions that are present in the district. The development of Silicon Valley can be considered as a classic case of the industrial district as has been developed by Marshall (Gilson, 1999). According to the research of Felzensztein, Gimmon and Aqueveque (2012) it was found that certain factors were responsible for the development of this high technology cluster. Firstly, knowledge as a major input acts as a source of externality. Secondly, agglomeration of the technological inputs and finally the reliance on history were also major determinants. Life cycle of the district is a new factor indentified by the researcher as a major determinant of successful industrial district. A close comparison between the Silicon Valley and Route 128 shows that why some of the clusters are successful while others fade away. Silicon Valley was the creation of Stanford University campus whereas Route 128 grew around MIT and Harvard (Saxenian, 1990). The works of Saxenian (1990) had emphasized on the role of inter-firm knowledge transfer as the main factor behind the historic rise of the Silicon Valley. According to Saxenian (1990), the overall business culture of the Silicon Valley was superior compared to that of Route 128 which had resulted in its decline. The work environment of Silicon Valley was highly mobile where new engineers could easily penetrate into the local firms with innovative and fresh ideas. The rigid structure of vertical integration was not supported in the Silicon Valley which was however common for Route 128. Gilson’s (1999) research had rather focused on the legal differences between the two places and established it as the main factor causing difference in performance. The rules governing the movement of labour from one firm to another were the main factor which had led to the disparity between the regions. There were special covenants in Route 128 which artificially restricted employees to work in other institutions after their employment was terminated from their current organizations. As a result of this policy new business could not be set up in Route 128 leading in its overtime decline. The continual success of the Silicon Valley emanated from the culture of design and innovation. The research of Saxenian (1990) had shown that the medium of cooperation of the firms in the Silicon Valley took a number of forms which ranged from cross-licensing to patent agreements and joint ventures. The study conducted by Porter (1998) had also supported the basic premise of Saxenian’s thesis. Porter (1998) had pointed out that development of successful clusters require effective input linkages like presence of superior quality suppliers near the main industry. This feature was also available to both Silicon Valley and Route 128 during their period of rise. However, the situation had become grim for both the clusters during 1980’s. The small size of the firms and the flexible work environment had actually orchestrated the rise of the Silicon Valley particularly when Route 128 was struggling. The research of Baptista and Swann (1998) had also confirmed that the smaller size of the firms in the Silicon Valley allowed them to maintain better working relationships with their partners. Researchers had also shown that a second stage agglomeration economics had emanated in the Silicon Valley from intra-district and intra-firm knowledge spillovers. This knowledge spillover could be attributed to the laws of employment in the district. Knowledge spillover, one of the most important attribute of Marshallian externalities had actually resulted in the growth of the Silicon Valley. Another good example of decline of an industry districts is the Birmingham jewellery quarter. The decline of this industrial district could be closely related to the works of De Propris and Lazzerett (2009) that had shown that the cluster had peaked up till a certain point before it began to decline. The Quarter had experienced a steady growth till the early 1900’s and the cluster had reached its carrying capacity. Since the 1970’s the cluster began to face decline on account of weak domestic demand and the inability to enter into new markets. The supply side of the cluster had also faced certain changes like oblivion of some jobs and import of alternative and cheap products. However, researchers in favour of the Marshallian districts are of the opinion that the decline of the cluster does not relate to its rejection altogether. This finding is also consistent with the works of Gilson (1999) who had shown that the strength and decline of a cluster is strongly related to the lifecycle. The districts of Emilia-Romagna can be used to explore the notion that interrelationships between firms and cooperation between them can create a thriving business atmosphere. The industrial structure of this cluster is build upon a number of reinforcing factors like local capitalism, social cohesion and highly efficient system of local regulatory institutions. Currently there are thirteen industrial districts that have been developed in Emilia-Romagna (Cainelli and Zoboli, 2004). The research conducted by Bianchi and Giordani (1993) had shown that the policy makers of the region had followed a top down approach so that the individual firms can reach their goals and objectives. Soon these local institutions became self-sufficient financially and the clusters of Emilia-Romagna became stronger. The informal linkages between the firms created internal economies of scale for the firms that had helped in their development. The small business units of these countries have been very important in establishing a robust network based on trust and mutual help. These micro firms had actually fostered industrialization pushing the growth rate of the economy above the normal value (Anderson and Narus, 1990). Conclusion Marshallian economics provides a highly plausible explanation for the development of any particular industry based on mutual trust and inter-firm relations. Since the inception of the idea it has been widely researched. The example of successful clusters like the ones in Silicon Valley and Emilia-Romagna has shown that interdependence between firms and network relationships have resulted in their success. One of the major factors in the success of the industrial clusters is the life cycle. For example, the experience of Birmingham jewellery quarter has shown that the success of the industrial clusters can be attributed to its stage in the life cycle. This study has also shown that the mere existence of a cluster does not guarantee its survival in the long-run. This is because though Silicon Valley and Route 128 had similar industrial structures, the later could not suffice the competition on account of the working culture created by the local legal institutions. Reference List Anderson, C. and Narus, A., 1990. A model of distributor firm and manufacturing firm working relationships. Journal of Marketing, 54(1), pp. 42-58. Baptista, R. and Swann, P., 1998. Do firms in clusters innovate more? Research Policy, 27(5), pp.525-540. Belussi, F. and Caldari, K., 2009. At the origin of the industrial district: Alfred Marshall and the Cambridge school. Cambridge Journal of Economics, 33(2), pp.335-355. Bianchi, P. and Giordani, M.G., 1993. Innovation policy at the local and national levels: The case of Emilia‐Romagna. European Planning Studies, 1(1), pp.25-41. Cainelli, G. and Zoboli, R., 2004. 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