(Photo source: iStock)Economic cluster theory has been used to describe the growth of many industries, including the automotive business around Detroit, high tech in Silicon Valley, and digital media in Seoul. These regions benefit by a concentration of complementary resources that might include leading research universities, low cost or highly trained labor, and geographic bounty. Understanding how clusters work can help governments develop effective policies for creating them, as well as direct entrepreneurs to the best locations to build their businesses.
Now, a new research paper suggests that economic clusters—usually used to explain development in local economies—have had a much wider impact on world economics than generally recognized. Harvard-Newcomen Fellow Valeria Giacomin calls clusters “the building blocks of the global economy.”
Giacomin notes that clusters have been around long before they had a name, showing up in the development of colonial-era industries and earlier. In her working paper A Historical Approach to Clustering in Emerging Economies, Giacomin takes advantage of this fact, proposing a longer, broader view of clusters and the role they play in developing economies and globalization at large.
“The cluster concept is often used to consider local factors,” Giacomin says, “but there’s a growing awareness that many clusters are also driven by external forces, such as foreign direct investment and multinational corporations, which results in a connection that occurs through knowledge exchange on the local level or across wider cluster networks.”
In that sense, she says, clusters become platforms for development, which has present-day implications for corporations, governments, and individual actors, especially in emerging economies.
Analyzing palm oil and ecotourism
Giacomin draws on two very different cases to analyze that phenomenon, first examining the evolution of the rubber and palm oil plantation clusters in Southeast Asia from 1900 to 1970 and then reviewing recent research on the rise of Costa Rica’s ecotourism cluster from 1940 to 2000.
As an exploitative plantation industry, the rubber and palm oil industries in Indonesia and Malaysia couldn’t be considered a civilizing force, at least initially, Giacomin says. Yet, after rubber clusters based on foreign-invested estates had developed in the region, entrepreneurial smallholder farmers capitalized on existing infrastructure to farm rubber around the edges of established groves, creating a rubber supply parallel to that produced by the foreign direct-invested estates. This increase in supply drove down prices on the international markets, eventually leading multinationals to move into palm oil—a much more capital intensive crop to process, with higher barriers to entry for small farmers.
Geopolitical forces also played a part in the palm oil industry’s development, Giacomin says. After World War II, Indonesia’s Communist-backed government cracked down on colonial business interests, while Malaysia’s government took a softer approach, allowing companies to continue operations in exchange for training and development programs that helped smallholder farmers switch from rubber—which, with the introduction of synthetics, was no longer as profitable and secure an investment as it once was—to palm oil. Unilever, the largest private holder and buyer of palm oil (an ingredient used in its famous “Sunlight Soap” and other products), diversified its holdings from the crop’s native West Africa to the Malaysian cluster. In the 1950s and 1960s, Giacomin writes, the two locations shared knowledge of palm oil production even as they competed for market share—a contest that Malaysia eventually won thanks to its more stable political climate and higher quality of institutions.
“Because the Malaysian government was good at creating policies that fostered the transition from the rubber to the palm oil industry, the local population was able to take advantage of a situation that initially wasn’t so positive,” says Giacomin.
With that said, she acknowledges, it can be argued that the palm oil industry today is a major source of deforestation in Southeast Asia, and not always at the forefront of sustainability practices. “It can take a while to improve these processes, and I think the industry is moving in that direction. But, during the 1960s and 70s, the palm oil cluster was a huge engine of growth and infrastructure for rural areas. There are ways to change an industry that starts as extractive to producing externalities that foster development.”
In the case of Costa Rica’s ecotourism industry, Giacomin reviews earlier analysis by HBS history Professor Geoffrey Jones and research associate Andrew Spadafora. Their research details how educational institutions gathered and disseminated knowledge about the country’s biodiversity, an effort that, with government support, led to the creation of national reserves and parks.
As with Malaysia, Costa Rica’s relative political stability, compared to neighboring Guatemala and Nicaragua, created competitive business conditions. Foreign tourists from Europe and North America, drawn by the promise of a pristine environment, relocated to Costa Rica and launched startups offering lodging and guided tours in protected areas, an effort that was so successful it created a detrimental snowball effect.
“This movement built a reputation for Costa Rica as a natural paradise and conservation hub,” Giacomin observes. “At the same time, local actors took advantage of this brand identity to build mainstream tourist facilities that weren’t in line with conservation and sustainability efforts. Some of those businesses diluted the concept of sustainability that created the cluster in the first place.
Considering the historical perspective
“The historical perspective is important, because you rarely have a linear story,” Giacomin continues, citing the involvement of universities, government actors, and entrepreneurs. “It’s never a one stakeholder story.”
Taking this longer view, she says, makes it easier to see beyond clusters as self-contained and localized to their more nuanced role as interactive spaces that foster communication and collaboration between foreign and local organizations and individuals and enable the integration of developing countries into the global economy.
It’s an understanding that can be useful in the here and now, too.
“This could be a good way for multinational corporations and business practitioners to consider the relative merits of competing cluster locations,” Giacomin says. “If I’m an organic wine producer with available resources and people, where is the best place to set up production? Where will the political risk be lowest in terms of regulations for that specific enterprise and industry? Which locations will allow more possibilities to introduce innovative practices or foster sustainability?”
Giacomin sees a number of other research opportunities for studying clusters. Most of the world’s lithium—now in high demand because it’s used in so many electronic products and electric car batteries—is mined in Bolivia and Chile, for example.
“That’s a concentration not available anywhere else,” she says. And those particular conditions—of government, industry, corporations, and the local populations—will no doubt yield new perspectives on the very old reality of clusters.
“Clusters have been there forever, right?” Giacomin says. “This is just a way of thinking ‘glocally’ about a concept that’s everywhere.”
Related Reading:
Globalization Hasn’t Killed the Manufacturing Cluster
Why Immigrant Workers Cluster in Particular Industries
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