Cluster Theory & Competition

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hnstown; shoes, in several cities in the northeastern part of Massachusetts; silk goods, in Paterson, New Jersey; jewelry, in and around Providence, Rhode Island; and agricultural machinery, in Chicago. (1900 Census Monograph ‘The Localization of Industries’ in Krugman 1991, p. 61.)


LOCALISATION ECONOMICS: A HISTORICAL PERSPECTIVE

What do a pin factory in Scotland, cotton mills in Manchester and footwear manufacturers in Italy have in common?

Adam Smith (1723-1790), the father of classical economic theory, studied factors of production in his ten-man pin factory in Scotland, and extrapolated on a national scale to lay the foundations of economics around the notions of specialization within enterprises, specialization across countries, and the power of unencumbered competition. In his book The Wealth of Nations (1776) he proposes that comparative advantage resides in the factor endowments that a country inherits, including labour, land, resources, capital, and infrastructure. The belief in a positive linear relationship between factor endowment and the level of economic activity and trade was later affirmed by David Ricardo (1772-1823) in The Principles of Political Economy and Taxation (1817), and has since become integral to classical economic theory. In reaction to the notion of advantage by factor endowments, Harvard Business School Professor Michael Porter (1990) stated, “this doctrine… is at best incomplete and at worst incorrect”, and suggests that in many cases selective disadvantage in basic factor leads to competitive advantage as firms are forced to innovate and produce advanced factors (Porter’s views will be elaborated in greater depth shortly).

Adam Smith’s notion of comparative advantage (resulting from factor endowments) was somewhat qualified by John Maynard Keynes (1883-1946) who despite believing that free trade and specialisation in comparatively competitive industries was “technically s...