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analysis five forces of framework
relationship between the
extent of market share fluctuations [a
measure of local rivalry] and trade
performance
Contrary to some popular views, our
results suggest that Japanese
competitiveness is associated with
home market competition, not
collusion, cartels, or government
intervention that stabilize it.”
Source: M. Sakakibara & M.E. Porter, “Competing at Home to Win Abroad: Evidence from Japanese
Industry”, 83 Review of Economics and Statistics 310, 318, 319 (May 2001).
II.3. Importance of Local Competition13: Externalities, cluster theory, and the link
between clusters and innovation
The Japanese research and other evidence suggest that, contrary to popular belief,
local competition matters in global industries. Even where firms compete across borders,
the configuration of locally based competitors and the vitality of competition in the local
market are crucial to productivity and competitiveness. Local competition creates
numerous positive externalities for industries and industry clusters, thus explaining its
significant impact on firm competitiveness.
Many industries can be considered global in competitive scope, which is often taken
to imply that a firm’s location is of no importance to the health of competition. Yet the
actual distribution of firms belies this view. We observe a strong tendency for successful
12 See, e.g., K. Ewing, “The Soft Underbelly of Antitrust,” Antitrust Report, Sept. 1999 at 2; B. Harris &
D. Smith, “The Merger Guidelines v. Economics: A Survey of Economic Studies,” Antitrust Report,
Sept. 1999 at 23; C. Weller, “An Evolution of the Merger-JV Guidelines: The Productivity Paradigm
As A Positive Antitrust Policy for Competitiveness and Prosperity,” American Bar Association,
Perspectives of the Task Force on Fundamental Theory (forthcoming, 2001).
13 It should be noted that the term local can apply to geographic areas ranging from a small county to a
group of neighboring countries. The relevant economic area depends on geographic distance and the
scope of local externalities.
DRAFT VERSION: 07/22/02
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firms in a particular industry to cluster in particular countries, often along with firms in
related industries. The schematic map of the U.S. clusters in figure 3 shows that
geographic clustering can occur even in sub-national regions within countries. This
ubiquitous phenomenon reveals powerful insights into the role of location in healthy
competition.
Figure 3 Selected Regional Clusters of Competitive U.S. Industries
Omaha
Telemarketing
Hotel Reservations
Credit Card Processing
Wisconsin / Iowa / Illinois
Agricultural Equipment
Detroit
Auto
Equipment
and Parts
Rochester
Imaging
Equipment
Western Massachusetts
Polymers
Boston
Mutual Funds
Biotechnology
Software and
Networking
Venture
Capital
Hartford
Insurance
Providence
Jewelry
Marine Equipment
New York City
Financial Services
Advertising
Publishing
Multimedia
Pennsylvania / New Jersey
Pharmaceuticals
North Carolina
Household Furniture
Synthetic Fibers
Hosiery
Dalton, Georgia
Carpets
South Florida
Health Technology
Computers
Nashville /
Louisville
Hospital
Management
Baton Rouge /
New Orleans
Specialty Foods
Southeast Texas
/ Louisiana
Chemicals
Dallas
Real Estate
Development
Wichita
Light Aircraft
Farm Equipment
Los Angeles Area
Defense Aerospace
Entertainment
Silicon Valley
Microelectronics
Biotechnology
Venture Capital
Cleveland / Louisville
Paints & Coatings
Pittsburgh
Advanced Materials
Energy
West Michigan
Office and Institutional
Furniture
Michigan
Clocks
Carlsbad
Golf Equipment
Minneapolis
Cardio-vascular
Equipment
and Services
Warsaw, Indiana
Orthopedic Devices
Colorado
Computer Integrated Systems / Programming
Engineering Services
Mining / Oil and Gas Exploration
Phoenix
Helicopters
Semiconductors
Electronic Testing Labs
Optics
Las Vegas
Amusement /
Casinos
Small Airlines
Oregon
Electrical Measuring
Equipment
Woodworking Equipment
Logging / Lumber
Supplies
Seattle
Aircraft Equipment and Design
Boat and Ship Building
Metal Fabrication
Boise
Sawmills
Farm Machinery
Firms cluster in particular locations not because of traditional comparative advantages
stemming from natural resources or pools of cheap labor. Rather, they obtain competitive
advantages by locating in areas benefiting from the strong presence of other firms in the
industry, firms in related industries, and the presence of specialized inputs, information,
and institutions. The explanation for geographic clustering is that local competition
provides an exceptional stimulus to productivity growth that is extremely valuable to
firms. The two major contributions of local competition are:
1. Incentive and Informational Benefits: The immediate presence of a rival
stimulates greater comparison, improvement, and upgrading versus [next page]