Cluster theory *

Governments and institutions have traditionally always focused on the importance of the role played by fiscal and monetary policies in the competitiveness of a region in spite of the fact that it is microeconomic policy that creates prosperity in a region.

A solid macro economic policy only paves the way for productivity, it does not improve it. This first diagram demonstrates how, through the application of micro economic policys, productivity can be improved.(click on a title for more information)

The theory progresses with the introduction of innovation and the importance it has within an industry. The diagram depicts how the level of productivity of a region is mirrored in that regions standard of living, where a steady growth is required to maintain a high standard. In advanced regions, prosperity is influenced by a continuous rate of innovation. (click on a title for more information)

Prosperity in a region is created by the microeconomic foundations of competitiveness, which is based in the sophistication of its companies and industries. However, as the business environment within which the firms operate determines this sophistication, it follows therefore that the focus must be on improving the quality of a regions business environment.

The quality of a region´s business envirnoment is embodied in four broad attributes that affect both current productivity and innovative capacity. Michael E. Porter created the diamond in order to present these four attributes.

The Diamond Approach

The four points of the diamond represent the 4 basic attributes that affect regional productivity and innovation. Each of the four attributes is self-reinforcing, has a unique and important role to play in a regions business environment and they all operate together as a system.

The role that each of the four attributes plays and the influence that each one exerts is explained in detail and can be accessed by clicking on the boxes.

The diamond is unique to each cluster as its structure is affected by the attitude that each region maintains towards business competitiveness.

Clusters

Cluster, the result of improvements in the business environment, "is a geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities" As the sum of its parts is of greater value than each individual company or institution, clusters create synergy.

Clusters improve competitiveness (which results in improved productivity) in three ways;

1. Improve productivity through improved access to specialized suppliers, skills and information.
2. Innovation is given more importance as the need for improvement in processes of production is highlighted. And firms working together can satisfy this need.
3. Once established, clusters will grow as a result of the creation of new firms and the entrance of new suppliers.

• The growing number of people involved in economic-development activities. The decentralization of decision-making processes to the regional and city levels and the renewed importance of international organizations have left many new policy planners with the need to find new tools to define their policies.
• Use of increasingly frustrating traditional industry policies such as providing subsidies for uncompetitive industries, attempting to build new indsutries from scratch and trying to attract uncompatible foreign investments are unproductive.
• The globalisation of international markets. With the reduction in the number of barrieres trade, producers can compete freely in any economy at the global level. Given this, regions realize that they must compete internationally in the industries in which they enjoy an advantage. Globalization is thus leading to a specialization of regional economies. Clusters support this trend by building on local differences, seeking an endogenous growth of regional economies, reinforcing the assets already present in the local economies.

* Theory based on the work done by Michael E. Porter

Sources: Porter M.E., On Competition, HBS Press, 1998
Porter M.E., Clusters of innovation initiative: San Diego, New York 2001