Industrial Clusters

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Industrial Clusters
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Early contributions

• According to Marshalls 1890 classic, the
  Principles of Economics, amongst the various
  reasons for localization of certain industries
  were
• Physical conditions such as the climate and the
  soil
• Rich folk that demand goods of special quality
• Skilled workmen attracted to the locale
• Existence of industries supplying materials to
  the core firm / industry

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Early contributions (contd)

• Weber (1929)
• Lower production and transportation costs
• Availibility of specific inputs and markets
• Lösch (1954)
• Search for the place of greatest profit
• Existence of economies of scale
• Friedman (1972) Core and Periphery model
• When industrialization begins in a spatial
  location, investments tend to be concentrated in
  that core location at the expense of peripheral
  locations

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Clusters in the world economy

• See examples

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Networks vs. Clusters

• A network is defined as
• A set of high-trust, collaborative relationships
  that are usually contractual.
• Networks are not necessarily tied to the same
  location
• A cluster is situated in a particular geographic
  location.
• Clusters can be seen as localized networks
• Geographically concentrated firms from a
  particular sector with links that can be both
  cooperative and competitive

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Clusters and competitiveness

• Not all clusters are competitive- successful
• Santa Croce in Tuscany vs. Stella in Naples
• Santa Croce is a competitive cluster where
  fashionable leather shoes and bags are made
• Stella is a footwerar cluster in an area with
  high unemployment and poverty
• Most of the characteristics of these clusters are
  the same
• Master craftsmen, flexible production, skilled
  and low cost labour, buyers and sellers of raw
  materials and machinery

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Clusters and competitiveness (contd)

• The shoemakers in Stella are not a locally
  networked system
• Firms in the cluster are isolated from each other
  
• No exchange of ideas and spill-overs
• The clusters ability to integrate both codified
  and tacit knowledge is important
• Importance of social capital and trust for
  cluster competitiveness and innovative potential

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Clusters in the management literature

• Neo-institutional economics
• Clusters for legitimacy
• Organizations in a given institutional
  environment converge in response to similar
  regulatory and normative pressures
• Manhattan hotel industry study
• New hotels are located close to others, but
  differ in size, thus avoiding localized
  competition
• Customer search costs as primary reasons for
  localization

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Clusters in the management literature (contd)

• Networks and interorgl research
• Global Toyotaism vs. Global Fordism
• The former pays attention to location while the
  latter does not
• The JIT supply system in Japanese car makers
• Two different patterns in Japanese car plants in
  North America and Europe
• The impact of institutional pressures (i.e.,
  mimetic isomorphism)

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Clusters in the management literature (contd)

• Geographic proximity reinforces the trust process
  and thereby network identity
• Trust strengthens the group (network) identity
• Clusters represent orgl forms lying between the
  market and the hierarchy
• Lower transaction costs
• Conducive to reputation building (i.e.,
  monitoring behavior)
• Violating local business customs will result in
  social sanctions

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Networks for exploration and exploitation
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Networks for exploration

• A basic proposition is that disintegrated or
  loose structures allow for the flexibility needed
  for exploration
• Uncertainty concerning dominant technology of the
  future
• Focus on gathering, combining and generating
  technical knowledge from a variety of sources and
  experimentations with prototypes (Example The
  Silicon Valley)

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Networks for exploration (contd)

• Need for access to a variety of actors that might
  offer complementary knowledge
• No information on the relevancy of knowledge and
  actors
• Reliance on weak ties to achieve cognitive
  distance
• Maintain linkages which may later turn out to be
  redundant
• Strong and dense ties constraining novel
  ideas through groupthink and norm sets

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What about risks of hold-up and spill-over?

• Size of specific investments limited
• Investments for experimental set-ups for the
  development of prototypes
• No relation-specificity at all
• Knowledge spill-over not a significant risk
• Competition hardly an issue yet
• Tacitness of knowledge
• Rapid knowledge and information change

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How to govern risks?

• Governance by detailed contracts problematic
• Uncertainty in contract conditions and monitoring
• Alternative instruments Mutual dependence
  (reciprocity), reputation, trust
• Although there is no relevant history of
  reputation, it is important to build a good one

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Evolution of trust in exploration networks

• Trust starts from mutual need
• Mutual dependence and trust
• Technical professionals respecting each others
  competence
• Reliance on intermediaries
• If interaction is frequent, knowledge-based trust
  may develop
• Characteristic-based trust may also be seen
• Spatial proximity helps trust building

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Failure conditions for exploration networks

• The network becomes a closed clique
• Reduced variety of people involved, reduced
  cognitive distance, groupthink
• If no dominant technology developed, an ongoing
  chaos may result

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Networks for exploitation

• A dominant design or technology
• Market uncertainty decreased
• Considerations of efficiency are crucial
• Need to utilize economies of scale
• Increased specialization (i.e., specialized
  assets)
• Investments in large-scale production,
  distribution systems
• More durable ties, less cognitive distance
• Codified knowledge (i.e., risk of spill-over is
  high)

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Networks for exploitation

• Increased competitive pressure
• Increased possibility for arms length and less
  personal relations
• Incentive for enlarging the market for enhancing
  growth,reducing competitive pressures and finding
  more efficient contributors
• Risks of spill-over and hold-up increased

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Governance of risks

• Contract specification and monitoring
• More exclusive and stable ties with a small
  number of members
• Cognitive distance and learning decreased
• Trust still needed
• Not every contingency can be handled in a
  contract
• There can be imbalances of dependence between
  members
• Trust gives way to voice rather than exit.

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Revisiting Japanese and American networks in the
car industry

• In the US, buyer- supplier ties are less
  exclusive
• In Japan, suppliers make specific investments if
• Expected duration of relations is long
• The buyer is committed to the relationship

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Exploration vs. exploitation in the US and Japan

• Longer durations of relationships
• Yield specific investments, cooperation, mutual
  understanding, joint development, and trust
• However, if a relationship lasts too long it may
  result in
• Rigidity, reduced cognitive distance, learning,
  and thereby innovation
• Most Japanese keiretsu are being broken down
• Supply across other keiretsu and even boundaries
  is allowed
• It seems that now Japan is learning from the US