12 Oct 1999  Research & Ideas

Porter’s Perspective: Competing in the Global Economy

Clusters — critical masses, in one place, of unusual competitive success in particular fields — is one of the key concepts of HBS Professor Michael Porter's seminal book The Competitive Advantage of Nations. Porter's ongoing research into clusters confirms that, even in an age of increasing globalization, these local centers of knowledge, relationships and motivation are a vital source of competitive advantage for advanced and emerging countries alike. Porter talks about competition in the global economy and other topics in this recent interview.

 

Editor's Note— Competitive advantage. Corporate strategy. The competitive advantage of nations. All over the world these terms quickly bring to mind the groundbreaking work of HBS professor Michael Porter, whose two decades of research on these and related topics have resulted in more than fifteen books and sixty articles. Much of Porter's thinking originally appeared in the pages of the Harvard Business Review. Eleven of those seminal articles are collected in On Competition, a book published by the Harvard Business School Press. In addition, Porter has contributed an introductory overview and two new articles, "Clusters and Competition: New Agendas for Companies, Governments, and Institutions" and "Competing Across Locations: Enhancing Competitive Advantage through a Global Strategy."

Jim Aisner of HBS spoke with Professor Porter in his office on the HBS campus.

Aisner: Why did you decide to put together this collection of articles?

Porter In retrospect, my work divides into three major areas. The first has to do with how firms compete in industries and gain competitive advantage. The next focuses on locations and why some cities, states, or nations can be more competitive and prosperous than others. And the third, which arose from the second, examines how you can take competitive thinking and apply it to social problems such as the environment, inner cities, and health care. Most of my readers have tended to focus on only one of my areas of research. Those who know my work in strategy, for example, don't know much about my findings in competitiveness. This book lays out the range of my work in an accessible way and shows the connections.

Q: You first presented your thinking on the importance of clusters (defined as "geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions in particular fields that compete but also cooperate") in your 1990 book The Competitive Advantage of Nations. In this new volume, you literally add another chapter to your research on this subject. What are some of your findings?

A:In The Competitive Advantage of Nations, I articulated the phenomenon of clusters as part of an overall effort to grapple with the enormous question of how a nation can improve its prosperity. Immediately, the notion of clusters resonated with practitioners and academicians alike. As I started doing further studies with countries and states, the cluster component became a significant stream in my research. In this new chapter, I try to draw together almost a decade of further learning to examine in more depth why clusters are so important to modern competition; how they arise and decline; how they affect productivity, new business formation, and economic growth; and the roles both the private and the public sectors can have in developing them.

Q: So, even in an age of globalization, local economic circumstances like a cluster still matter?

A: Absolutely. It's a very interesting paradox. In a global economy where it's easy to move goods and information around the world, these things become givens available to any enterprise. As a result, they are no longer a source of competitive advantage. The decisive, enduring advantages, therefore, become unique local centers of innovation for the likes of mutual funds, venture capital, and biotechnology in Greater Boston or aircraft equipment and design, boat and shipbuilding, and metal fabrication in Seattle. The list of clusters goes on and on, both in this country and abroad. With the proximity that clusters provide, companies can do things together without formal ownership or legal relationships. And this kind of flexibility opens up more possibilities for change and dynamism, which are crucial ingredients in a modern economy, where prosperity depends on innovation.

Q: Although clusters are most prevalent in advanced economies, you say that they're one of the essential steps for countries moving in that direction. How are clusters nurtured in emerging nations?

A: Many developing countries have free-trade zones that are exempt from the onerous rules and infrastructure problems that hold back the rest of their economy. The problem is, isolated zones for processing foreign inputs and exporting all these outputs are the antithesis of cluster development. Emerging nations must create programs and incentives that encourage enterprises in free-trade zones to build linkages with the local economy.

Another approach to cluster development is to attract multinationals that will become demanding customers of local suppliers. After that, it's essential to create specialized training programs in the local educational system and make sure infrastructure needs are met. Costa Rica, for instance, with a long history of investing in education, began developing a cluster in information technology some years ago and eventually convinced Intel to build a plant there. Related actions followed, including supplier upgrading programs and modernization of the airport. Building a true cluster in Costa Rica will take decades to complete, but I'm confident that it will be sustainable because the country offers some unique qualities that are a source of competitive advantage — among them, the highest computer usage in Latin America. Without these, all the intervention in the world won't help.

Q: You write in this book that "earlier thinking about global strategy, which focused only on globalness and networks, was clearly too simple." How so?

A: Facing the global economy, many companies made the logical deduction that globalization meant that they should widely disperse their activities to capture the opportunities and cost advantages of doing business around the world. Yet sourcing the low-cost inputs and building assembly plants in low-wage nations do not make a global strategy. Instead, companies must create a clear locational "home base" for each distinct product area, where strategy is set, core product and process technology are maintained, and a critical mass of sophisticated production and service activities reside. A clear locational core, combined with selective activities in other locations, proves far more productive than a fragmented network of units that are hard to integrate.

Q: You mentioned earlier the application of your ideas to social problems. How has your understanding of domestic and international competition given you insights into these matters?

A: When I was working on The Competitive Advantage of Nations, it became clear to me that seeing economic and social issues as separate agendas was not only wrong but counterproductive. To have a productive economy, you need people who feel safe at work, who are healthy, and who have a sense that if they work hard, they'll have the opportunity to do better. Productivity is also consistent with a clean environment. Environmental pollution normally is a sign of inefficient and unproductive use of resources and is almost always a reflection of inadequate technology. Countries with toughening environmental regulations, then, are not necessarily at an economic disadvantage; in fact, the opposite can be true. Finally, an independent national organization has grown out of my 1995 HBR article "The Competitive Advantage of the Inner City," which is included in this collection. I find that the only sustainable solution to our distressed communities is to improve their economic competitiveness by building on their competitive advantage. We must shift from a poverty-reduction mentality to one of creating income and wealth through the market economy.

Q: Thank you, Professor Porter.