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Clustering in Strategic Management of Businesses

II. Clusters

A.                 Introduction

Many years after Michael Porter made the concept of clusters popular, geographic concentrations of interconnected firms and supporting or coordinating organizations, they are still important as a key tool for strategic management of businesses as well as for policy making in many economic regions. Clustering is the phenomenon where firms from the same industry gather together in close proximity, for example banking centres in cities such as London and New York (Wall Street), have been present for centuries. A cluster is a geographic concentration of interconnected businesses, suppliers, and associated institutions, such as the Wall Street finance cluster, Silicon Valley hi-tech cluster, Hollywood movie cluster, California wine cluster, Gaziantep carpet cluster, and Denizli textile cluster, etc. The industrial cluster concept has become a subject of intense research studies and economic analysis after Porter’s study (1990) regarding the competitive advantage of nations (Boja, 2011).

In the study, the cluster concept is put in a competitive context where many businesses compete as well as collaborate at the same time in order to gain economic advantages. Clusters are considered to increase the productivity with which companies can compete, nationally and globally (Porter, 2000). Clusters are important for economic development, due to their value creation in regional economies, whether in high-tech or manufacturing sectors, whether in metropolitan or rural areas. The economic advantages of successful clusters are an important reason for the increased attention that this model has received both from the academic community and the governmental organizations. Clustering pheneomena and cluster strategies have the potential to accelerate regional economic growth, help with new business generration, and contribute to nations’ economic restructuring, and thus their importance will continue to grow in the coming era of heightened competitive pressures. Therefore, it is appropriate to explore the cluster paradigm and to consider its relevance to competitiveness.

As clusters foster a business environment in which learning, innovation, and productivity can thrive, cluster development has become a focus for numerous governmental programs in many regions of the globe. This thesis will explore the cluster paradigm —ranging from spontaneous clusters to induced clusters— which is all about synergies and efficiencies. Despite the advances in cluster research, its model remains a complex one and this paper begins by doing a survey of the cluster literature. The objective of the dissertation is to explore the importance and advantages of clusters and also the complexity of the cluster models by examining the nature of networks among local firms in various clusters and investigating the differences of these linkages in spontaneous vs. induced clusters. This study aims to find out whether firms in spontaneous clusters utilize different network dimensions compared to firms in induced clusters in order to be relatively more agile and adept at developing external relationships to promote competitive advantage.

B.                 Theoretical Background on Clusters

Although clusters are studied by a variety of academics from different fields, they are especially important for the science of management and are getting increasing attention from scholars, consultants, and business practitioners from this area. Research regarding the cluster concept has evolved based on the initial studies that were based on firms agglomerations. The research began with some empirical observations (Malmberg, Solvell and Zander, 1996; Marshall, 1890; Krugman, 1991), in time, studies have shown that most of the world’s economic or industrial areas are concentrated in a few regions, that organizations operating in certain sectors tend to locate in same areas. Over the years, it was also observed that the businesses’ locations in economic agglomeration persisted and it was noticed that these firms have a longer lifetime compared to isolated firms, and also that in the cluster environment, innovation process was more evident.

B1. The Marshallian Industrial District

Though the cluster concept is drawing increasing attention recently, its roots can be traced back to Alfred Marshall’s 1890 classic, the “Principles of Economics.” Marshall uses the term ‘industrial districts’ to describe the advantages generated by businesses located in the same geographical areas (Boja, 2011). He analyzed the geographic concentration of specific industries in particular locations and his argument of industrial districts was mainly built on external economies of localized specialization (Ravix, 2014). These specialized industrial districts could be identified by three sources of external economies, “the ready availability of skilled labor, the growth of supporting ancillary trades, and the development of a local inter-firm division of labour in different stages and branches of production, all underpinned and held together by what was referred to as the ‘local industrial atmosphere,’ by which Marshall meant shared knowledge about ‘how to do things,’ common business practices, tacit knowledge, and a supportive social and institutional environment” (Asheim, Cooke and Martin, 2006: p.5-6).

The main characteristics of a Marshallian industrial district are high degrees of vertical and horizontal specialization and a reliance on market mechanism for exchange (Zaratiegui, 2002). Firms usually tend to be small and they focus on a single function in the production process. As these kinds of firms located in industrial districts are highly competitive, in many cases there is little product differentiation. Though also a concept based on a form of organizing where firms concentrating on the production of certain commodities are geographically clustered, Marshall’s form of cluster is different from the concept of urban agglomerations, which includes companies from various fields located in the same urban area, as companies are performing similar or interconnected activities (Malmberg, Solvell and Zander, 1996). According to Marshall, industrial districts presented an alternative model of industrial organization to the large integrated firm with its internal economies of scale (ibid). It can be said that the major advantages of Marshallian industrial districts are due to the geographical proximity of firms, which causes availability of skilled labor and faster exchanges of information through informal channels.

However, it is important to note that Marshall’s study also pointed at the risks associated with clustering. “A district which is dependent chiefly on one industry is liable to extreme depression, in case of a falling-off in the demand for its produce, or of a failure in the supply of the raw material which it uses” (Oz, 2004: p. 2). Despite the risks, benefits of clusters due to the competitiveness are also present according to the study, “the mysteries of the trade become no mysteries; but are as it were in the air” (Marshall, 1927: p. 225). Thus, the sources of advantage form a system that is hard to imitate elsewhere, which increases the odds of the sustainability of the advantage (Oz, 2004). It is important to note that Marshall has theorized a model that does not take into account the social relations between cluster members and this fact was noted by economists such as Sforzi (2002) and Becattini (2001) based on the analyses of clusters of small workshops in rural Emilia-Romagna region of Italy. The clusters’ success in this Italian region is widely explained by the social relations among the economic actors. Becattini (1990) and his colleagues had a different way of defining industrial districts, although their work was built on Marshall. Rather, they defined an industrial district as a socio-cultural as well as an economic entity. According to Asheim et al., “This socio-economic reconceptualization of Marshall’s industrial district has strengthened the non-economic, socio-territorial dimension of the concept and has provided valuable insights into the role of trust and co-operation as mechanisms of risk reduction and economic (relational) governance amongst local firms, and how a supportive form of social capital aids the formation and success of industrial districts” (Asheim, Cooke, and Martin. 2006: p.6).

B2. New Economic Geography

As trade theory of Paul Krugman suggests, trade is mainly shaped by economies of scale. Therefore, economic regions with the most production will be more profitable and will in turn attract even more production. Thus, Krugman (1991) explains geographical concentration through the effect of increasing returns that comes from economies of specialization and scale at the level of the firm. These economies of scale, based on Marshall’s external economies, have an impact on all kinds of firms and result in enterprises specializing and concentrating geographically. New economic geography (NEG), built on new trade theory, also developed by Krugman, uses the monopolistic competition model developed by Dixit and Stiglitz (1977) and applies it to the international trade model with respect to the increasing returns in new trade theory. The ‘home market effect’ represents agglomeration “as the outcome of the interaction of increasing returns, trade costs, and factor price differences” (Behrens and Robert-Nicoud, 2009). Thus, according to the theory, instead of being diversified, production concentrates in a few regions which become more populated as well as reach higher levels of income. “Once a region develops a comparative advantage against other regions, favorable conditions lead to uneven, self-reinforcing patterns of economic activity, market dominance and specialization” (Saric, 2012: p. 32). Consequently, producers tend to locate close to demand and supply markets in order to reduce transport costs. Krugman (1998) discusses that increasing returns is the main reason that pushes producers to come together in a location, as otherwise, markets would have to be supplied from various local plants. According to Krugman (1998: p.3), the ‘centripetal forces’ that lead to geographical concentration are the same three Marshallian dimensions of external economies as listed above; namely, market size effects, thick labor markets, and pure external economies. “These geographical promotion forces are involved in a ‘tug of war’ with the ‘centrifugal forces’ that oppose localizations, such as immobility in some factors of production, land rents, and ‘pure external diseconomies’” (Becattini, Bellandi and De Propris, 2009: p. 99). Otherwise, as Krugman argues, “we would all live in one big city” (1998: p. 8). Although Krugman explains with mathematical models why production and labor clusters in some regions, he deliberately overlooks technological spillovers among firms, since he describes them as being “invisible; they leave no paper trail by which they may be measured and tracked” (Krugman, 1998: p. 53). It has to be mentioned that Krugman’s and other international economics scholars’ work in geography is criticized by economic geographers who question whether Krugman’s study contains anything that is original or valuable for economic geographers (Martin and Sunley, 1996: p. 285).

B3. Porterian Clusters, Diamond Framework, and Competitive Advantage

Michael Porter wrote the book “The Competitive Advantage of Nations” in 1990, which is based on the study of ten nations, with information from over a hundred case studies. Porter conducted a four-year study to investigate why a nation gains competitive advantage in particular industries, where he identified attributes that caused domestic firms gain and sustain competitive advantage in the global arena. He proposed (1990) the ‘Diamond Framework,’ a mutually-reinforcing system of four factors that determine national advantage; namely, factor conditions, demand conditions, related or supporting industries, and lastly, firm strategy, structure and rivalry. Porter also proposed two external variables, government and chance, that influence the diamond system. Below is a figure of the diamond model.

‘Factor conditions’ consist of natural resources, such as climate, location, labor, skilled employees, capital, infrastructure, and university and research institutes, etc. Factor conditions are “The nation’s position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry” (Porter, 2008: p.182). According to Porter (1990: p. 74-78), factor endowments of a country are five types; namely human resources, physical resources (nation’s land, water, mineral, hydroelectric power sources, climatic conditions), knowledge resources, capital resources, and infrastructure. Porter proposes that the factor conditions have two categories: basic vs. advanced factors and generalized vs. specialized factors (1990). The basic factors are natural resources, climate, location, unskilled and semi-skilled labor, and debt-capital. The advanced factors include “modern digital data communications infrastructure, highly educated personnel such as graduate engineers and computer scientists in sophisticated disciplines” (Porter, 1990: p. 77). The second typology is made according to the ‘specificity.’ The generalized factors may be “the highway system, a supply of debt capital, or a pool of well-motivated employees with college educations” and specialized factors may be resources such as “narrowly skilled personnel, infrastructure with specific properties, knowledge basis in particular fields, and other factors with relevance to a limited range or even to just a single industry” (Porter, 1990: p.78).

Factor conditions that are most important for competitive advantage are advanced and specialized factors. According to Porter (1990), basic factors tend to be inherited or require low investment, thus they do not represent a non-imitable resource for the nation, whereas advanced factors require higher investments and are more difficult to accomplish. For example, natural resources and cheap labor are not distinctive sources for competitive advantage as they do not sustain forever, however, in contrast, advanced factors create a substantial value for the nation compared to other nations. Similarly, compared to generalized factors, specialized factors are more useful in gaining competitive advantage as they are less available globally. According to Porter, “the stock of factors that a nation enjoys at a particular time is less important than the rate and efficiency with which it creates, upgrades, and deploys them in particular industries” (2008: p.188). Porter also argues that selective disadvantages in the more basic factors can turn into advantages if they cause a firm to innovate and upgradei but only if they can “send companies proper signals about circumstances that will spread to other nations, thereby equipping them to innovate in advance of foreign rivals” (Porter, 2008: p.189). However, it should be noted that for disadvantages to become advantages, favorable circumstances elsewhere in the diamond should also exist. In conclusion, it should be mentioned that factor creation demands constant investments in supporting mechanisms like educational and research institutes, thus, private as well as public investment is essential according to Porter’s model.

‘Demand conditions’ are “the nature of home-market demand for the industry’s product or service” (Porter, 2008: p.182). According to Porter (1990), due to proximity, home demand is much more important for competitive advantage than foreign demand. He emphasizes three attributes of the demand conditions that are significant for the competitive advantage of a nation; namely, nature of buyer needs, size and pattern of growth of the home demand, and internationalization of domestic demand (Porter, 1990). The nature of domestic buyers is essential because, “A nation’s companies gain competitive advantage if domestic buyers are the world’s most sophisticated and demanding buyers for the product or service” (Porter, 2008: p. 191). Demanding buyers play an important role in urging the industry towards upgrading, as, in order to serve sophisticated buyer needs, firms are continuously under pressure for innovation, which is a source of advantage. In addition, the structure of demand is also critical as industries that have global advantage get more benefit from home demand conditions compared to industries that are less important for other nations. Thus, the size and pattern of growth of home demand can reinforce competitive advantage in an industry as “Demand conditions help build competitive advantage when a particular industry segment is larger or more visible in the domestic market than in foreign markets” (Porter, 2008: p.190). Size of the home demand can be significant in the kinds of industries with high R&D costs or substantial economies of scale or high levels of uncertainty because the home market can be a comfort zone when making investment decisions. The industries that have greater demand in a country causes its companies to focus on and invest in products and services offered to these sectors.

Lastly, anticipatory buyer needs, where needs of home based buyers reflect those of other nations,’ play a positive role in gaining competitive advantage, as “Local buyers can help a nation’s companies gain advantage if their needs anticipate or even shape those of other nations- if their needs provide ongoing “early-warning indicators” of global market trends” (Porter, 2008: p.191). If early home demand can anticipate the needs of the buyers in global markets, it pressures firms to move faster and get established sooner in a certain industry. The number of independent buyers in the nation and rate of growth of home demand can be also be significant factors as these elements also encourage innovation. Finally, early saturation of home demand forces firms to improve and upgrade processes and products, while there is still potential in foreign markets. Regarding internationalization of domestic demand, Porter (1990) states that if domestic demand becomes global, it can pull a nation’s products and services abroad through mobile or multinational buyers. Thus, as domestic needs get transferred into foreign buyers, home demand influences foreign needs and end up creating a source of advantage for the nation.

‘Related and supporting industries’ for a sector under competitive advantage analysis are also vital. These consist of “The presence or absence in the nation of supplier industries and other related industries that are internationally competitive” (Porter, 2008: p.182). If there are industries that are sharing the same technology, inputs, distribution channels, customers, skills, or that are providing complementary products, this particular sector becomes more competitively advantageous (Oz, 1999). Internationally competitive suppliers are a source of competitive advantage for subsequential industries for several reasons. First, the local related and supporting industries have close working relationships that produce “short-lines of communication, quick and constant flow of information, and an ongoing exchange of ideas and innovations” (Porter, 2008: p. 192). Second, “They deliver the most cost-effective inputs in an efficient, early, rapid, and sometimes preferential way” (Porter, 2008: p. 192). Additionally, as information gets transferred among firms, new business opportunities appear and knowledge spin-offs occur. Consequently, firms from related competitive industries bring on new businesses which, in turn, prompt the existing firms to upgrade and advance their sources of competitive advantage, thus, it can be said that new comers bring a different angle to competing. Moreover, pull-through effects may happen when international success in one industry creates demand for complementary products or services (Oz, 1999). Competitive advantage in supplier industries causes potential advantages on a nations’ firms because they produce inputs that are widely used and are essential for innovation and/or globalization. Competition in related industries is no less significant because related industries are those firms that can coproduce or share activities within the value chain or those that supply complementary products. As these industries provide opportunities for information flow and technological development, success in one industry can cause an increase in demand the products of complementary industries.

‘Firm strategy, structure, and rivalry’ is the final attribute of the framework, which includes “The conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry” (Porter, 2008: p.182). According to Porter, there is no universal management system that fits every nation. There are different goal setting patterns, various strategies and ways of organizing among nations and the fit between these arrangements and the needs of the industry plays a critical role in attaining competitive advantage for that sector of the nation. For example, in Germany, hierarchical structures and more technical practices dominate the business environment, so, industries which fit these standards have advanced, such as automotive and machinery. Whereas, in Italy, small and medium sized firms which are privately owned and managed dominate the business environment and thus Italy became successful in industries that fit these standards, such as furniture and footwear. Furthermore, manager-employee relation styles, as well as cultural priorities are also factors that are different among various nations, as the ability to compete globally can be affected by management attitudes, cultural expectations, willingness to be adaptable, etc. Moreover, capital markets and compensation practices do not have the same characteristics in all nations and organizational structures are not always same among countries. Organizational goals, which are affected by ownership structure, motivation of management and holders of debt, as well as personal goals, which are reflected in reward systems, social values, and attitudes to wealth, are considered important factors for nations’ competitive advantage in a particular industry. The presence of strong rivals is also crucial for competitive advantage, as rivals encourage firms to continuously innovate and improve for further advancement. In addition, it is important to note that, an industry of a country can only succeed when goals and motivations of firms, managers and employees are in sync with the sources of competitive advantage as, “Competitiveness in a specific industry results from convergence of the management practices and organizational modes favored in the country and the sources of competitive advantage in the industry” (Porter, 2008: p. 194).

Porter asserts that domestic rivalry is a very important determinant in the Diamond Framework since it is a powerful boost for all other elements. Resuts of his study showed that the relationship between intense domestic rivalry and the emergence and sustainability of competitive advantage in an industry was strong, as it was seen that nations are more likely to lead in industries where strong local rivals are present. These findings are opposite to traditional views of economies of scale and national champions. According to Porter (1990), domestic rivalry generates a potent pressure to innovate, pushes firms to lower costs as well as improve product and service quality. Domestic rivalry also urges companies to export in order to develop, particularly if economies of scale are important, as well as forcing firms to upgrade sources of competitive advantage because lower level resources are available to all firms in that particular industry of that nation. Domestic rivalry acts as an intensifier for integration of all the other determinants and geographic concentration “elevates and magnifies the interaction of the four separate influences” (Porter, 2008: p. 198). As geographic concentration intensifies all these effects, afterwards, this factor was renamed by Porter as the ‘context for firm strategy and rivalry.’ Since Porter considers the diamond to be a self-reinforcing system, domestic rivalry, particularly, has the power to transform the diamond into a system.

‘Government’ and ‘chance’ factors indirectly effect the impact of the above listed four major elements. Government has a role of reinforcing the determinants of national advantage rather than trying to create one itself (Oz, 1999). Governments should create an environment favorable for cluster establishment and development and its role is rather more indirect than direct. Porter thinks that governments’ “proper role is as a catalyst and challenger; it is to encourage−or even push−companies to raise their aspirations and move to higher levels of competitive performance, even though this process may be inherently unpleasant and difficult” (Porter, 2008: p. 200). In the diamond model, the government is not treated as a determinant, but rather as an element effecting the determinant and is said to have the power to increase or lessen national advantage. Porter perceives the nation as a platform that facilitates the international success of its firms, this implies that governments have a direct impact on competitive advantage. According to Porter (1990: p. 681), “government is a pusher and challenger.” Therefore, it should be noted that Porter suggests that governments have an outright role in countries that are in the early stages of development. Furthermore, only enterprises themselves can gain competitive advantage, by recognizing industry change, through pressures for innovation and also by influencing government policy (Porter, 1990: p. 619). Aside from government, the other external variable in Porter’s framework, the ‘chance’ factor is defined to explain the factors that are beyond the control of firms. ‘Chance’ is used to describe events such as inventions, oil shocks, and wars (Oz, 1999) and these events may affect the diamond system by creating situations that can alter the structure of the industry, such as foreign political developments or major shifts in international market demand, etc. These chance developments may result in changes that can cause a shift in industry structure and provide opportunities for competitive advantage.

B4. Role of Clusters for Competitive Advantage

As the cluster represents a business environment in which learning, innovation and productivity can thrive, cluster thinking, and seeing clusters as the main drivers of a firm’s and also a nation’s competitiveness, prompted companies and policy makers to adopt this new paradigm into their strategies. Clusters, being critical masses of unusual competitive success in specific industries are a striking feature of essentially all regional and national economies, especially the economically developed nations like the US. Clusters are seen as the main drivers of organizations’ as well as nations’ competitiveness, thus prompting organizations and policy makers to adopt new strategies. As Oz says, there’s a ‘gold mine’ in applying management concepts to the analysis of locations’ competitiveness (2004). Porter theorized that clusters appear to affect competition in three broad ways. First, they increase the productivity of companies in the region. Second, they drive the direction and pace of innovation. Third, they stimulate and trigger the genesis of new businesses within the cluster (Porter, 1990). As outlined above, the diamond framework outlines four broad attributes of a nation that help shape the local environment of firms relative to competitive advantage. Factor conditions, demand conditions, related and supporting industries, firm strategy, structure and rivalry, and two additional factors, chance and government, can affect the system. In the diamond model, all factors are present on their own, but also act as a mutually reinforcing system. For instance, favorable demand conditions will not necessarily cause competitive advantage, unless rivalry is sufficient to cause firms to respond to competition. Competitive advantage based on one or two factors of the diamond is possible, but is usually unsustainable in the long run because of competitive reaction. Therefore, countries should try to achieve and maintain advantage in all components of the diamond model for sustainable competitiveness in the long run.

Despite the claims that, due to great advancements in information technology, in a highly connected world, geographic location is no longer a significant competitive factor, the reverse appears to be valid according to Porter’s theory. “Paradoxically, the enduring competitive advantages in a global economy lie increasingly in local things — knowledge, relationships, and motivation that distant rivals cannot match,” Porter has noted (1998: p.77). He made a very important contribution to the concept of clusters, as contrary to the general tendency to see location as diminishing in importance, Porter highlighted location as the source of national competitiveness with his diamond theory. For example, the success of Silicon Valley and other high-tech clusters underlines what Porter calls the ‘paradox of location.’ He argues that geographic proximity will continue to be important for competitive advantage in the upcoming era of global economy. He explains that, in a time when globalization has decreased the importance of comparative advantages in resources such as labor and capital, innovation and productivity growth, instead, the main sources of competitive advantage for firms and even nations is the locale. In contrast to the resource-based view of the firm, the cluster concept suggests that competitive advantage lies outside the firm, instead existing in the location due to externalities and linkages. According to Porter, “the sophistication and productivity with which companies compete in a location is strongly influenced by the quality of the business environment” (Porter, 2008: p. 226). A cluster consists of organizations and is portrayed by the many types of interdependencies and networks that gain value due to their regional character. Proximity results in easy access to specialized suppliers, services and human resources, reduced transaction costs, information spillovers, increase capacity of innovation by diffusing organizational and technological knowledge (Asheim and Isaksen, 2000; Competitiveness Group, 2002).

As Porter claims, clusters have the potential to affect competition in three ways; by increasing the productivity of the companies in the cluster, by driving innovation in the field, and by stimulating new businesses in the field (Porter, 1998). What happens inside firms is important, but the cluster effect indicates that the proximate business environment plays a critical role in the success of the firm as well. No model, even Porter’s, is an explanation for all economic and/or strategic phenomena as always new problems and different needs arise, still, Porter brought a fresh perspective on competitive advantage and was able to propose a useful framework for both policy makers and practitioners. While the clustering phenomenon has been explored in a wide range of studies, gaps still exist in location and cluster theory. Porter, Swann and others have only recently provided some relevant insights on how clusters enhance the value chain and promote innovation. The potential of positive feedback in order to enhance clustering has been suggested in numerous studies, but Swann’s (1998) model has advanced the concept and shows how clustering, through the entry of new firms and the growth of existing firms, would lead to a positive feedback loop and induce further growth. In management research, attention to location has been very limited or geography has been studied in terms of cultural and other differences in the international business environment. This minimal focus on globalisation, has created a tendency to regard location as diminishing in importance. However, this current thesis suggests that relationships and linkages are still vital in managing the value chain and competitiveness, thus the cluster environment has been chosen for the context of this study.

C.                 Defining Clusters

In management literature, a major source of ambiguity in cluster research is that of definition, although there have been several attemps to define geographical concentrations of localized activity. Martin and Sunley (2003) oppose the vague characterization of the concept of clusters, although numerous studies, as well as research have been carried out to examine the concept. In spite of the criticisms regarding the broadness of the approach, there are widely accepted facts regarding clusters. Asheim, Cooke, and Martin (2006) comment, “Industrial districts of the so-called Third Italy were one of the earliest prominent types to attract discussion” (Asheim, 2000; Becattini, 1989,1990; Brusco, 1989, 1990; Paniccia, 2002). Krugman’s and Porter’s analyses built on to the analysis of economic relations and flows of goods in Marshall’s study as the more recent cluster studies conducted by Porter (Porter,1990) and Krugman (Krugman, 1991) highlighted and added new dimensions to the observations of Marshall. The process of innovation that takes place inside the cluster through transfer of information, know-how and experience and the positive effects and results of clustering tendency (Marshall, 1890; Krugman, 1991), such as reduced financial, time and transport costs, a larger labor pool of specialized workforce, easier and faster transfer of information have been observed. Despite the numerious theoretical or empirical studies on the analysis of clusters, there has not yet been a generic model that has been accepted, however, the advantages of clustering is widely recognized and is one of the main reasons for the current focus on clusters (Baptista and Swann, 1998; Carlino, 2001; Maskell, 2001; Morosini, 2004; Krugman, 1991; Porter, 1990; Porter, 1998; Sölvell et al., 2003).

According to Krugman, “Clusters are not seen as fixed flows of goods and services, but rather as dynamic arrangements based on knowledge creation, increasing returns and innovation in a broad sense” (Krugman, 1991). However, the most popular neologism was Porter’s concept of industrial or business clusters, and according to Porter (1998), clusters are critical masses in one place of unusual economic success in particular fields. Porter later defines clusters as “geographic concentration of interconnected companies, specialized suppliers, service providers, firms in related industries and associated institutions (ex. universities, government agencies, and trade associations) in particular fields that compete but also cooperate” (Porter, 1998: p. 197). Porter redefines the cluster concept in a later analysis, concentrating on the type of relations that exists between cluster members, which are “a geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities” (Porter, 2000).

Morosini approaches the concept from a more social perspective, defining a cluster as a, “socioeconomic entity characterized by a social community of people and a population of economic agents localized in close proximity in a specific geographic region” (Morosini, 2004). There have been other attempts to explain and define clustering and the focus was varied. For instance, Scott, highlights the rise of new industrial spaces (Scott, 1988), whereas others choose to focus on local production systems (Crouch et al., 2001). Some concentrate on localized agglomeration of high-technology activity, using terms such as local high-tech milieux (Keeble and Wilkinson, 2000), local and regional innovation systems (Asheim and Gertler, 2005; Cooke, 1998, 2001), or even learning regions (Asheim, 1996, 2001; Florida, 1995; Morgan, 2007: p.2). Rosenfeld (1997: p. 4) has described clusters as, “concentration of firms that are able to produce synergy because of their geographical proximity and interdependence,” while Roelandt and den Hertog (1999: p. 9) portrayed clusters as “networks of producers of strongly interdependent firms linked to each other in a value-adding production chain.” Swann (1998: p. 1) has explained clusters as a large group of firms in related industries at a particular location and has also defined two main cluster strengths as the agglomeration sizes of similar-firms and related-firms in the region in a specific industry. Further adding on to this description, Feser (1998: p. 26) claimed that “economic clusters are not just related and supporting industries, but rather related and supporting institutions that are more competitive by virtue of their relationships.” Based on these descriptions, in sum, the cluster concept can be characterized by:

  • regional economic activity located at all levels, such as community, geographic area, as well as global,
  • limited to a specific industry,
  • firms’ proximity generates social and trust relations,
  • includes firms in identical or interrelated business fields,
  • involves firms in competition, but through specialization, that contribute to the overall cluster development,
  • includes both vertical links as supplier-manufacturer-dealer-customer chain or horizontal production links as in sectors of the same industry,
  • indicates a common infrastructure used in innovation by rapid transfer of knowledge and because of the support offered by academic institutions and research centres.

The main advantages of clustering can be identified as:

  • a significant local market for products and services cause a high concentration of firms generating a larger market and, in turn, the opportunity to reach more customers,
  • lower transport costs and fuller supply chains,
  • easier and wider access to resources,
  • higher degree of specialization in products and services,
  • intensely competitive environment that increases motivation,
  • many opportunities for new firms looking to establish themselves in the prosperous environment,
  • greater cooperation between cluster members as the proximity increases interaction between firms and facilitates communication,
  • better access to skilled employees,
  • concentration of firms with activities in the same field of production create a workforce pool that has specialized experience in the sector,
  • proximity of firms in the same industry allows an exchange of knowledge and ideas through direct contact and free movement of labor, in other words, MAR spillovereffect

According to the Marshall-Arrow-Romer (MAR) spillover view, the proximity of firms within a common industry often affects how well knowledge travels among firms to facilitate innovation and growth (Carlino, 2001). It is argued that, the closer the firms are to one another, the greater the MAR spillover effect (ibid). The exchange of ideas between employees from different firms in an industry result in flow of knowledge about new products and new ways to produce goods. The opportunity to exchange ideas that lead to innovations is the key to new products and improved production methods (ibid). MAR spillover benefits firms through high pace of innovation and higher productivity (Baptista and Swann, 1998). This advantage emerges by the existence of a homogeneous environment in terms of knowledge, the proximity to other companies, and direct contact with other people in the same field that reduce risks and time of the innovation process because of direct or informal information transfer between partners, companies, and their clients or between firms and research institutions (Malmberg, Solvell, and Zander, 1996).

To sum up, from all this analysis of clusters, three main elements seem to be essential. First, a cluster must consist of groups of associated and interconnected firms that are linked vertically and/or horizontally through their similar and complementary products, services, inputs, technologies, or outputs activities. Second, clusters are physical proximate groups of interlinked companies which encourage the formation of new business and enhance the value creating benefits via interaction. Lastly, co-location itself does not imply clustering when the associated clustering benefits such as innovation, productivity, growth or competitiveness do not appear. Thus, the justification for the definition of clusters used in this paper is that, a cluster is a geographical agglomeration of competing firms and related industries where there is evidence of superior performance such as growth or profitability resulting from this concentration of firms in a region.

D.                Spontaneous Clusters vs Induced Clusters

The Grand Bazaar (Kapalicarsi), located in the heart of the Istanbul, can be described as one of the world’s oldest and largest jewelry agglomerations. Having been a center of craft and trade activity for more than five centuries, it deserves to be studied in detail. Jewelry clusters have been a part of cluster discussions in related literature with various cases from different geographies, such as Los Angeles Jewelry Cluster, Bangkok Jewelry Cluster, Italian Jewelry Clusters (Arezzo, Valenza, Vicenza), etc. The vast majority of jewelry industry firms in Istanbul are concentrated in and around the Grand Bazaar. As seen from the history of the Grand Bazaar and some other studies on clusters, it is evident that historical events played an important part in the emergence of clusters (Oz, 2004). In the Ottoman Empire Era, the jewelry artisanship had been initiated and developed especially by Armenian masters in and around the Grand Bazaar area. As specialized artisanal production organization of the jewelry sector is highly suitable for clustering, in time, knowledge of production spread and the Grand Bazaar transformed into a jewelry cluster with the help of its strong historical and cultural roots. The evolution of the Grand Bazaar as a jewelry cluster provides clues about the functions of this historic cluster. Today, life in this area of Istanbul, is  a hub of activity and business transactions, and the central joint of an elaborate network of formal and informal social institutions. Grand Bazaar for the purposes of this study comprises the concept of spontaneous clusters. Below is a picture of the from the historic Grand Bazaar.

Koroglu, Eceral, and Ugurlar focused on the characteristics of Grand Bazaar as a jewelry cluster in a 2009 study. They located the advantages and disadvantages of the area as a production and trade center of the jewelry sector. The advantages are listed as; the combination of unique historical characteristics with a great potential of tourism around the area, proximity of the customers and the market, the mastery of centuries of production and culture of trade. The disadvantages of the location are listed as; environmental pollution, the need for protection of the historical heritage, transportation problems, infrastructure problems, the decreasing quality of the labor, as well as security and some legal problems. An important point when analyzing a cluster is to understand how the production relations in the cluster are organized. The results of the study suggest, on average, that the respondents purchased nearly all of their input from other firms in the Grand Bazaar and from Istanbul. While the input demand of the sector is met mostly by local markets, the Grand Bazaar, is able to take place in the global markets with its output as a considerable amount of the production is exported. The results of the research related to the organization of the production in the Grand Bazaar suggest, the conditions which negatively effect the competitive power of the Grand Bazaar are the underdeveloped design procedures and the lack of creative labor, both essential components of the jewelry sector (Koroglu, Eceral, and Ugurlar, 2009).

The authors say the sector has initiated a new project ‘Kuyumcukent’ (Jeweler’s City) with the help of government and some chambers (mainly the Istanbul Chamber of Jewelers) after taking the above-mentioned disadvantages into consideration and also because of some legal imperatives. With the establishment of Kuyumcukent,  an alternative location process for the jewelry sector of Istanbul began. Kuyumcukent can be described as a modern jewelry market, meant to be a contemporary version of the Grand Bazaar. Kuyumcukent does not attempt to compete with the historic structure of the Grand Bazaar, rather, it is a complex where production, marketing, and sales functions are integrated in a new environment. “Istanbul Jewelry Artisans’ Complex Building Cooperative,” which brings together the members of the jewelry sector with vision and entrepreneurial spirit, aims to enable the Turkish jewelry sector to develop in modern premises equipped with a state of-the-art technological infrastructure and to render it competitive in the world markets (www.kuyumcukent.com.tr). Although there are advantages to moving to Kuyumcukent, some problems were also mentioned in the study, such as the high cost of relocating, the risk of not reaching the customer potential in the new location, the higher costs of production (as there are some illicit usage of electricity, water, tax in Grand Bazaar) etc. (Koroglu, Eceral, and Ugurlar, 2009). Kuyumcukent, for the purposes of this study comprises the concept of induced clusters, due to government induced initiatives.

Findings of the study (Koroglu, Eceral, and Ugurlar, 2009) suggest that there seems to be an institutional atmosphere in the organization of the Grand Bazaar in terms of both formal and informal institutions, even though the contemporary structure of the Grand Bazaar shows that the social links are weakening over time. However it is valuable to sustain solidarity and a collaborative production environment for the continued success of a jewelry cluster, as in cluster literature, there is concensus regarding the importance of a social environment characterized by strong family ties, sense of community, and ethnic identities (Schmitz, 1995). It is also worth discussing that social links are weakening over time due to increasing differentiation within the clusters or rapid growth (Ozelci, 2002). Thus, the development of a new induced jewelry cluster, Kuyumcukent, and the transformation that the historic and spontaneous cluster, the Grand Bazaar, is experiencing requires deeper analysis, one that probably includes production networks and social relations. Further research should be conducted on how the functioning of the jewelry cluster Grand Bazaar will change with the ongoing transformation process and on the differences between the two clusters in terms of production, organization, institutional atmosphere, networks and the social relations.

The Grand Bazaar and Kuyumcukent were compared above in order to gain a provisional picture of the comparative cluster types; the Grand Bazaar depicting a spontaneous cluster and Kuyumcukent an induced cluster. Porter (1998) argues that there are four reasons responsible for the clusters’ genesis. Clusters can occur because of historical circumstances, because of geographical circumstances (industries already located in a certain place), because of innovations and accidentally. When depicting clusters, whereas Marshall (1949) emphasized the ‘atmosphere,’ Markusen (1996) described clusters as ‘sticky places’ including ‘learning regions’ and ‘innovative mileus’ (Brusco, 1996; Storper, 1997). Studies have been pointing towards the possibility of different paths in a cluster’s emergence, from ‘special inputs’ in a particular location to ‘historical accidents’ (Krugman, 1991), which cause unusually ‘sophisticated local demand,’ and/or prior existence of ‘related industries,’ and/or the presence of one or two ‘innovative companies’ (Enright, 1990; Porter, 1998). What we find interesting to investigate in this thesis is if there might be any differences in the cluster synergy if a cluster emerges because of spontaneous occurances and or if a cluster is established by direct initiatives. What is meant by a spontaneous cluster is a cluster emergence that occurs naturally, mainly due to chance events or as explained above, ‘historical accidents,’ as in the case of the Grand Bazaar example. In contrast, what is meant by an induced cluster is a cluster that has been set up on purpose in an appointed location by government support, cooperative developments, or through collaboration with public and/or private enterprises and/or institutions. Kuyumcukent, explained above, is an example, but also technoparks and industrial zones (as is in the case study in this research) which are all artifically set up for clustering purposes of related industries. Therefore, we wonder if and how the genesis of a cluster being natural vs. induced will effect the synergy of the cluster networks and how these would relate to competitive advantage. In this thesis, we investigate this interesting issue in the context of a developing country in a relatively low-tech manufacturing sector, the two hosiery sector clusters in Istanbul. In the research of the induced (Ikitelli Zone) and spontaneous (Yesildirek) networks, especially entrepreneurial networks seem to be of key importance. Therefore, below is a survey of the related entrepreneurship literature and than entrepreneurial networks and network literature respectively.



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