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analysis five forces of framework
versus competing
with a firm in a foreign country. Companies that compete at home are better
prepared to compete with foreign rivals abroad.
2. Positive Externalities: Geographic proximity of rivals generates otherwise
unattainable positive externalities, such as a specialized labor pools,
knowledge spillovers, specialized supplier formation, etc. discussed below.
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The Positive Externalities of Local Rivalry. Competition creates positive externalities for
the local business environment that boost productivity for the entire industry, and often
for related and supporting industries in the same location as well. A group of competing
local rivals tends to spawn a base of local suppliers and providers of specialized support
services. This boosts productivity by reducing transactions costs, facilitating the
exchange of information, increasing flexibility, and speeding innovation. Local rivalry
also works to increase the local availability of specialized skills, infrastructure, scientific
and technical resources, and other assets and institutions that boost productivity and raise
the rate of productivity growth. As these externalities deepen, they can foster new entry
and spinoffs, coming full circle to reinforce local rivalry. Such externalities are what
give rise to what I term clusters, or geographic concentrations of interconnected
companies and institutions in a particular field.
California wine provides a good example of a cluster (see figure 4). There are
hundreds of wineries in California, but also thousands of independent growers of grapes.
All the inputs, production equipment, and services required to grow grapes and produce
wine are available locally. Local universities and other institutions provide ample skilled
labor and technological information. As a result, the productivity of California as a wineproducing
region in terms of yield per acre appears to be the highest in the world, and
firms command high prices per bottle for their premium-quality products. The rate of
productivity growth has been rapid, as California wine companies upgraded from jug
wine to super premium segments.
Figure 4 The California Wine Cluster
Educational, Research, & Trade
Organizations (e.g. Wine Institute,
UC Davis, Culinary Institutes)
Educational, Research, & Trade
Organizations (e.g. Wine Institute,
UC Davis, Culinary Institutes)
Growers/Vineyards Growers/Vineyards Wineries/Processing
Facilities
Wineries/Processing
Facilities
Grapestock Grapestock
Fertilizer, Pesticides,
Herbicides
Fertilizer, Pesticides,
Herbicides
Grape Harvesting
Equipment
Grape Harvesting
Equipment
Irrigation Technology Irrigation Technology
Winemaking
Equipment
Winemaking
Equipment
Barrels Barrels
Labels Labels
Bottles Bottles
Caps and Corks Caps and Corks
Public Relations and
Advertising
Public Relations and
Advertising
Specialized Publications
(e.g., Wine Spectator,
Trade Journal)
Specialized Publications
(e.g., Wine Spectator,
Trade Journal)
Food Cluster Food Cluster
Tourism Cluster Tourism Cluster California
Agricultural Cluster
California
Agricultural Cluster
State Government Agencies
(e.g., Select Committee on Wine
Production and Economy)
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Source: M.E. Porter, On Competition (1998), at ch. 7.
Other well-known examples of U.S. clusters include the Silicon Valley IT cluster, the
Houston oil and gas cluster, and the Boston area biopharmaceuticals and mutual fund
clusters.
The Global Competitiveness Report includes measures of the quality and quantity of
local suppliers and, in the 2000 report the extent of clusters in a national economy. All
three variables have a strong positive association with GDP per capita.
Taking into account the essential benefits of local competition leads to the conclusion
that antitrust analysis should weigh not just the generalized benefits of rivalry for
productivity growth but also the systemic benefits of local rivalry. When local rivalry is
muted, a nation pays a double price. Not only will companies face less pressure to be
productive, but the business environment for all local companies in the industry, their
suppliers, and firms in related industries will become less productive. This demonstrates
in particular the [next page]