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Economics: Urban Areas vs. Areas Outside the City

Introduction

A city as has been defined by Frey & Zachary (1998) as a dense urban agglomeration. Societies have been rapidly transformed from primarily rural to primarily urban and the notion of urban changes from time to time. It is different across political boundaries and is modified over time. There are difficulties in defining urban. These difficulties create barriers to the understanding of phenomena and finding solutions to social problems involving the urban population.

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Clusters can best be described as interconnected companies and institutions in a certain field concentrated in a particular geographic region. They consist of a collection connected industries and various other units which are important to competition. Such units could for instance include suppliers, and infrastructure providers. In addition, clusters could include mediums and clients, manufacturers of other complementary products and other industries related by skill and other inputs.

Porter (1990) argues that clusters have a significant effect on competitiveness in individual nations as well as across borders. Richardson agrees and adds that clusters are therefore a cause for new agendas for organizational administrators across the continent. More often than not, clusters present a fresh perspective on location and challenge the principle wisdom on the way organizations should be understood and how institutions contribute to the competitive success. They also raise the question on how governments can encourage economic growth and development (Richardson 1972).

Clusters

Most existing clusters include institutions owned by the government such as universities, agencies, polytechnics and research institutions among others, as well as non-governmental institutions. Porter gives the example of the California wine cluster. He says that it includes an approximate 680 commercial vineyards and many thousands of independent growers of wine grape. There is an extensive complement of industries that deal with the same product, growing, supplying and processing the grapes. Besides, there are also a number of local institutions that deal with wine in California. Such include the University of California and Wine Institute. This cluster has connections with other clusters in California like the agricultural sector and food and restaurants (Porter 1998).

The boundaries of a cluster are characterized by the connections and complementarities across commercial industries and other companies that make significant contributions to competition. Clusters could be classified as political regions. Clusters may however go beyond national borders. An example is a pharmaceutical company in the U.S. Porter (2000) writes that the company is on both sides of New Jersey and Pennsylvania.

Porter goes on to say that clusters do not always match the standard classification system of industries. He says that the classification systems do not capture the many of the players and connections in the competitive industries. This results in clusters going unnoticed. In Massachusetts, many companies are involved in medical equipment. However, they are hidden within the electronic and plastic product industries.

Cooperation and competition are promoted by existence of clusters. Competitors compete on the grounds to win and retain their clients. Clusters would collapse without the existence of strong competition. Cooperation is often vertical within these clusters. It involves organizations that deal with similar products and institutions in the same field. Both competition and cooperation can coexist as they involve diverse dimensions and players (Baptista 1998).

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From the cluster theory of Michael Porter, clusters are the non-random geographical agglomerations of firms which have comparable or closely matching capabilities (Ellison & Glaeser 1994). In the cluster field, a theory must tackle the question of what, how, why, who, where and when. When these questions are answered, the cluster theory is solidly constructed. The question ‘what’ leads to the identification of factors like variables that might be important for the explanation of the theory.

‘How’, on the other hand, gives links between the factors to form relations. These two questions, when answered form the subject of the theory. ‘Why’ gives the foundation of the theory and justifies the theory. The question why also creates suggestions for the establishment of new approaches, challenges the already well-established views and makes the theory more comprehensive. The way in which this question is answered determines the strength of the cluster theory. The questions where, who and when attach contextual conditions and temporary conditions on the suggestions generated (Whetten 1987).

Michael Porter is one of those scholars who have had little interest in the contributions made towards the cluster literature. His work dwells on the competitive strategy. He predicted that the economic geography would move from the margin to the mainstream. Porter (1994) established a model that is now in use by students studying commerce, strategy, organization or even economic geography. His aim when he came up with the model was to produce a theory of national, state, as well as local competitiveness in the context of global economy. In his theory, he tries to argue in favor of the fact that benefits flow all round.

Aggressive competition in any particular industry is likely to spread to other industries within a particular cluster. Joint problem solving results in faster and more efficient solutions. Suppliers more often than not act as a channel through which information is transmitted and innovation from one organization to the other. This accelerates the pace of innovation within the entire national industry. The benefits are boosted if the suppliers exist within immediacy to organizations where the communication lines are shortened (Porter 1990). Growing clusters attract skill as they offer opportunities to the skilled people.

People with great ideas and skills like entrepreneurs drift to the cluster from all over. This is because the emergent clusters are a sign of growing opportunities and attraction of talent. Within these clusters, organizations observe each other and learn (Porter 1998).

Clusters and competition

Productivity is the foundation for contemporary rivalry. This is in contrast to access to inputs or on individuals in the field. The issue of productivity is based on how and not what the companies compete in. The complexity with which companies compete is however determined by the value of the local environment. Logistical techniques for instance go with high quality infrastructure for transportation (Porter 1998). Complexity also goes with high skills within the workforce. Some of the business environment aspects affect all organizations like the law of a certain country. In the advanced economies though, the determining features of the business environment are related to cluster. They comprise some of the most significant micro-financial establishments for competition within the organizations.

There are mainly three ways through which clusters affect competition as Porter posits. He says that clusters increase the productivity of organizations in a particular region. Secondly, clusters determination the direction and speed of innovation of the organizations which determines the future productivity of those organizations. Finally, clusters motivate formation of new enterprises. This third contribution leads to the expansion and strengthening of the cluster. In a cluster, each member is allowed to benefit without giving up its flexibility.

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Productivity

Belonging to a cluster allows organizations to be more productive in sourcing inputs and accessing information. This is besides the chance to coordinate with other organizations which are related to one as well as evaluating and enhancing growth. Under the aspect of productivity, organizations in a cluster are better able to tap into the available pool of professional and experienced workers (Porter 2000). This reduces the costs incurred in recruitment and search of potential employees. Clusters indicate opportunity and hence reduce the risk of workforce relocation. In addition talented people are attracted to the cluster and therefore make it possible for organizations to tap into the resource.

According to Hoover (1971), when a cluster is well developed, it provides a well-organized way through which other important input can be acquired. This kind of cluster has a good base for supply. The cost of transaction is greatly lowered when the sourcing can be done locally. This is because the need for an inventory is minimized and import costs cut. Proximity contributes a lot to the improvement of communication and other support services are easy to provide. Martin and Sunley (2003) add that close relationships among organizations in a cluster are a good arrangement.

More to these advantages, vertical integration can be substituted by clusters. Outside specialists are more cost effective as compared to in-house units. Porter says that the rapidly changing environment renders integration inefficient. Clusters are of much advantage. When suppliers are trying to penetrate a concentrated market, they are more forceful as they realize that they can take inefficiencies in the service. Organizations can however choose the alternative of outside sourcing from various other locations.

A cluster provides an extensive market, technical information and competitive knowledge. Personal relationships have also been found to promote trust, just like community attachments. This results in improved information flow within the cluster (Frey & Zachary 1998). This is an advantage to organizations as information flows more easily.

On the other hand, connections to other members of the cluster results in a whole that is greater than the sum of its parts. Porter gives the example of tourism, saying that when a tourist visits a country, it is not just the attractions that make the quality of the visit but also the other related industries like hotel and transport. The tourist industry is a cluster in itself but relies in these other industries. Members of the cluster depend on each other and hence the success of one determines the success of the other (Porter 1998). Some products are complementary in their use. Companies that are geographically dispersed are less likely to recognize the links between them.

Complementarities also attract clients as the latter are able to visit different organizations at once. This means that they are provided with alternative suppliers in the same location. The clients are therefore able to switch from one supplier to the other when the need arises (Fesser 1999).

An organization’s productivity is likely to be enhanced by government investments. An example is the ability to take on workers trained at the local programs which lowers the cost of training internally for the organization. Other derivatives of competition include information and technology.

Besides governments, companies also create public goods that are responsible for the productivity of clusters. This is done through private investments in areas like training, infrastructure and quality centers. Private investments like these ones are made collectively. They therefore result in collective benefits (Brenner 2000, Robinson 1908).

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Additionally, rivalry within clusters is a motivating factor. Pressure among the companies intensifies pressure to compete within these clusters. This is coupled with pride and the desire to outdo other organizations and look reputable in the local community. This triggers the desire to attempt outdoing each other between the existing institutions and companies.

Clusters make it effortless to assess and make comparisons between companies since local companies experience the same kind of circumstances like costs of labor and access to the local market. Within clusters, companies share information on the costs of suppliers and are also able to compare the performance of employees between the various individual companies. Porter (1998) says that financial institutions are in a position to accumulate knowledge concerning the cluster which they can use in examining performance among the companies.

Clusters encourage innovation. This is according to Ellison & Glaeser (1994). They say that some of the aspects that re responsible for encouraging productivity also contribute to innovation in a cluster. A cluster often consists of classy clients.

This means that companies in a cluster often have a better view of the market than isolated companies and competitors. In such clusters, it is possible for companies to plug into the needs of clients with a speed that cannot be matched elsewhere. The interrelationship between companies in a cluster also makes it possible for companies to learn of new technologies and changes in the global market. In addition, information on changes in machinery, servicing and marketing concepts among other things is easily exchanged. This is especially enhanced by face to face contact between organizations.

The opportunities provided by clusters for innovation are actually very visible. Clusters, moreover, provide the ability and suppleness needed to act quickly in any given situation. Companies in a cluster are able to source what they need in order to innovate at greater speed. The local suppliers in these clusters are often involved in the process of innovation and this ensures that the needs and requirements of clients are matched.

It is also evident that companies within a cluster are able to experiment at a much lower cost than geographically dispersed companies. They can also delay an implementation until they are sure that it will work. This is not the same for companies that have to rely on distance suppliers. Porter (2000) explains that these ones have to face the greater challenge in all activities they undertake, especially if they involve other organizations.

They have to follow long procedures in, for instance, securing delivery or obtaining other kinds of support form distant organizations. In vertically integrated companies, innovation might prove even more difficult. This is so especially if the kind of innovation has an effect on the values of assets or where the ongoing processes have to be maintained while the new processes are being implemented.

Clusters, as one might notice, are more likely to have many new companies growing within them than is possible in isolated locations. New suppliers prefer to take their risks in a place where the concentration of clients in intense which is the kind of environment provided by a cluster. Suppliers are also able to recognize market opportunities when they arise. There is an extended opportunity in clusters where there are related industries which usually deal with common inputs. This is what the suppliers have an advantage of.

With this kind of environment, there is a conducive environment for new business ventures in clusters. People in this kind of environment have a chance to perceive gaps in the market and take advantage of these gaps to build their businesses. The barriers to new ventures are also less than in isolated environments.

Besides all the advantages of clusters, the most significant is the availability of assets needed by the individual organizations and skills and inputs. Workers are readily available within the location of the cluster. They are only waiting to be integrated into the enterprises. Moreover, the local financial institutions that are already familiar with the cluster might need a lesser risk payment on capital. The cluster is a good local market for company products. Any industrialist is likely to benefit form the easily established local relationships. These factors reduce significantly the apparent risks of access or departure of the business enterprise at any time.

Clusters in undeveloped economies

In poor or developing countries, clusters or cities are not very well developed. In the face of the global market, they compete with cheap human as well as natural resources. If these nations are to progress beyond this stage, then they have to develop well-functioning clusters. Clusters, especially well developed ones are the means through which nations drift from middle income to an advanced economy. This is applicable even where there are high wages within the economy. Porter (1998) explains that the wealthier the economy, the more it is in need of innovation which aids in supporting the ever increasing wages and replacing jobs abolished by improved efficiencies.

In order to promote the formation and growth of clusters, nations have to start at the root. This means the most basic stage. The basic level involves such aspects as the education system, skill levels, technology and access to capital markets. Besides, the available institutions have to be improved before other investments are made. At this basic level, the internal trade among a nation’s cities has to be expended. Trade with other neighboring countries should also be enhanced as this is the basic stepping stone to building global competition skills. Trade between the cities as well as across borders enhances the development of clusters. In this regard, the types of goods that developed economies and developing nations can trade in are limited to those sensitive to costs of labor.

The location of clusters is also a matter of concern. In developing nations, most of the economic activities are centered on capital cities. The reason is that the rural or surrounding areas lack in improved infrastructure, institutions or even suppliers. The central government could also be intrusive on the same activities. They could be involved in the control of competition and influencing the companies to establish businesses nearer the agencies and political foundations.

Conclusion

Clusters can be traced to historical events. Some clusters are the result of research such as the clusters in Massachusetts. These can be traced to research in Harvard and MIT. The origin of clusters can be unusual complex demand of the local community like attributes to agriculture. When a cluster starts forming, self-strengthening series of events promote the growth of that cluster. This is especially so when other local institutions give their support and the competition at local level is intense. As clusters grow, their influence with the government also increases as well as that with other private sectors.

Any cluster that is growing indicates a lot of opportunities. It attracts the best talent from all locations. Individuals with their ideas and business-minded entrepreneurs migrate to these new locations in search of the apparent opportunities. Suppliers surface as information flows. Local institutions grow in their training capacity. At the end, the cluster expands and covers other industries related to its original function. Sometimes it takes a long time for the clusters to develop competitive advantage.

Clusters are in constant evolution as new industries and organizations emerge, decline, and local institutions grow and change. Clusters possess such assets as skilled labor, supplier bases and technological expertise. External and internal forces could result in clusters losing their competitive advantage. In the global competitive economies, productivity is the most important characteristic of clusters.

Globalization and the accompanying ease of transportation have led to movement of many companies to locations with low wages and costs of utility. However, with the knowledge of clusters, is obvious that locations chosen because of the low costs of utility could lack in good infrastructure, stylish suppliers and other benefits only available in clusters. Such benefits could offset savings from lesser costs of input. From the theory of clusters, it is better to move organizations with similar or connected activities to the same location than spreading them over wide geographic regions.

Reference

Baptista, R. 1998. ‘Clusters, Innovation and growth: A survey of the Literature’. In: Swann, P.G.M., Prevezer, M. and Stout, D., (Eds.) The dynamics of industrial clustering. International comparisons in computing and biotechnology pp. 13-51. Oxford: Oxford University Press.

Brenner, T. 2000. The evolution of localized industrial clusters: identifying the processes of self-organization, Papers on economics & evolution, no 0011, Max Plank-Institute Jena.

Ellison, G. and Glaeser, E. L. 1994. Geographical Concentration in the US Manufacturing Industries. A Dartboard Approach. Working Paper no.:4840, Cambridge, Mass.: National Bureau of Economic Research (NBER).

Feser, E. J. 1999. ‘Old and new theories of industrial clusters’. In: Steiner, M., (Ed.) Clusters and regional specialization. On geography, technology and networks. pp. 19-40. London: Pion.

Frey, William H., and Zachary, Zimmer. 1998. “Defining the City and Levels of Urbanization.” PSC Research Report No. 98-423.

Hoover, E. M. 1971. An introduction to regional economics, New York: Alfred A. Knopf.

Martin, R. and Sunley, P. 2003. ‘Deconstructing clusters: chaotic concept or policy panacea? Journal of Economic Geography 3:5-35.

Porter, M. E. 1990. The Competitive Advantages of Nations, London: Macmillan.

Porter, M. E. 1994. The role of location in competition. Journal of the Economics of Business (1): 35-39.

Porter, M. E. 1998. On competition, Boston: Harvard Business School Publishing.

Porter, M. 2000. Location, competition and economic development: local clusters in a global economy, Economic Development Quarterly 14 (1): 15-34.

Richardson, G. B. 1972. The organization of industry. Economic Journal 82: 883-896.

Robinson, E. van Dyke 1908. Economic Geography: An Attempt to state what it is and what it is not. Papers of the 21st meeting. American Economic Association.

Whetten, D. A. 1989. What Constitutes a Theoretical Contribution? Academy of Management Review 14 (4): 490-495.

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