Ever since his 1990 book The Competitive Advantage of Nations, Harvard Business School professor Michael Porter has been regarded as a leading authority on the economic development of nations, regions, and cities. Both as an academic and consultant, Porter is best known for his work on the importance of developing a specialty in industrial clusters—high concentrations of companies in a sector such as semiconductors, cars, or textiles. In an interview with Senior Writer Pete Engardio, Porter explains why he believes globalization has actually made industry clusters and local advantages even more important, rather than weakened them.
If globalization means that work, technology, and money can now move anywhere over the Internet, does the physical location of an industry still really matter?
I call it the location paradox. If you think of globalization, your first reaction is to think that location doesn't matter any more. There are no barriers to investment. But the paradox is that location still matters. The U.S. is still the most important space in the world, for example, and regions have tremendous specialization. Anything that can be easily accessed from a distance no longer is a competitive advantage. But the more there are no barriers, the more things are mobile, the more decisive location becomes. This point has tripped up a lot of really smart people.
As a result, the bottom half of U.S. locations are facing more stress. Many cities used to have a natural advantage just become they were in the U.S. But that is not such an advantage any more. We are finding a tendency for the rich regions to get richer.
How has globalization affected the idea of regional clusters?
Now that globalization continues to power forward, what has happened is that clusters must become more specialized in individual locations. The global economy is speeding up the process by which clusters get more focused. There is a footwear cluster in Italy, for example, where they still produce very advanced products. The design, marketing, and technology still are in Italy. But much of the production has shifted to Romania, where the Italians have developed another cluster. All of the production companies actually are Italian-owned. Taiwan has done the same by shifting production to China. The innovation is in Taiwan, but its companies are moving aspects of their cluster that don't need to be in Taiwan.
What are the big differences in the way communities approach development today compared to 1990, when you wrote The Competitive Advantage of Nations?
There has been tremendous change in the last 15 or 20 years. Before Competitive Advantage was published, the dominant view was that you need to get costs down, offer incentives, and have a development department that hunts for investment. I think the level of sophistication has risen at the state and local level. They now understand that competitiveness does not just mean low costs.
Another big change from 20 years ago is that the notion of industry clusters is now pretty much ubiquitous. Many regions now look at development in these terms, and have identified hundreds and hundreds of different clusters. I think that the fact that productivity growth has risen dramatically shows that economic development has been a big success over the past few years.
If every community is developing the same industry clusters, how do they stand out?
I think it's very important to understand that the bar has risen substantially. Everything matters now. The schools matter. The roads matter. You have to understand this is a marathon. Also, you can't try to built clusters across the board and be into everything. You have to build on your strengths.
Many local officials in the U.S. talk a lot about collaboration among universities, companies, and governments across an entire region. Is this new?
There is a growing recognition that the interaction between one region or metropolitan area and its neighbors is important. The overlap between clusters is very important in stimulating growth. Isolated clusters are less powerful than integrated clusters. That's because new clusters often grow out of old clusters. I also think there is more recognition that you need a lot of cross-company collaboration in a region. Companies realize they have a lot of shared issues. Meanwhile, universities used to be seen as standalone institutions. Now, more regional economies see universities as players and are integrating them into industrial clusters.
So does the U.S. have a competitiveness problem?
I think the U.S. is facing some very serious challenges. But the most important drivers of competitiveness are not national. They are regional and local. National policies and circumstances explain about 20% to 25% of why a regional economy is doing well. What really matters is where the skills and highly competitive institutions are based. Some of these assets take a very long time to build. But competitiveness essentially is in the hands of regions.