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To Compete Globally, Cluster Locally

Is globalization fraying the ties that bind? A recent article in the Economist suggests that links between companies in several of Italy’s revered industry clusters—geographic concentrations of interconnected companies—are weakening as the companies shift their market strategy in the face of fierce competition from low-cost rivals in emerging markets like China.

It’s true that globalization has diminished some of the well-documented benefits interconnected companies receive from locating near one another, or “clustering.” Technology and falling trade barriers have enabled resources and ideas to conquer any distance as they move quickly and cheaply across the globe. As Thomas Friedman likes to say, the world is flat.

Flat and slippery. With fewer barriers and less “friction” much of the world’s routine work is flowing out of advanced economies as companies seek lower labor costs. The Economist eagerly points out that the companies in industry clusters are not immune to these growing cost pressures. True. But for clusters, global competitiveness isn’t a race to the bottom.

Rather than chase Chinese competitors, companies in the Italian clusters seem inclined to climb the value ladder. Like their counterparts elsewhere, these companies must reconsider their value proposition. Shifting production upmarket instead of downwind of low-cost rivals has its benefits. But it means developing more advanced and diverse product lines. That can be risky.

Developing new competencies requires expertise and capital. However, investing in such opportunities often means retaining local skills--a win-win for clusters and communities. So it’s usually not hard for companies to find a coterie of local partners, like universities or government and even competitors, eager to aid these competitive shifts and absorb some of their risk.

For example, the Economist mentions a regional bank offering advice (and financing?) to Italian companies responding to global competitive pressures. A jewelry cluster in Valenza formed a trade association to hedge against offshoring and presumably to address other mutual concerns, perhaps by bargaining for lower prices collectively or establishing local job training programs.

So companies in clusters are not alone in navigating our increasingly complex global economy. Indeed, as Michael Porter has pointed out, clusters suggest that real competitive advantage lies outside the company and even its industry, residing instead in the increasingly tight-knit local economies of which they are a part. Thus the similarities between two companies in a cluster are not nearly as important to their survival as the dynamism their proximity creates for the cluster.

The “fragmentation” that this dynamism implies strengthens--not weakens--the links within clusters. With greater industrial diversity come greater opportunities for knowledge spillovers, cross pollination of ideas, and a broader economic base from which to draw competitive advantage. The hope is that policy makers have and use tools to improve the tremendous staying power clusters offer, making them stronger and more resilient as global competition intensifies.