Cluster structure
5.2 Internal competition
Competition fosters efficiency and is an important engine for growth and change19. With regard to clusters, the distinction between internal competition (competition between firms located in the same cluster) and external competition (competition between a firm in the cluster with other firms outside the cluster) is relevant. Porter has strongly emphasized the
18 The balance between these forces is partially caused by developments in the environment of the clusters. We do not take these effects into account, since these are not cluster specific but
‘industry specific’ (for instance changes in the minimum efficient size of production) or the result from changing policies (such as international trade regulations (see Krugman, 1995) or changing trade costs (including transport costs). These effects are not caused by the cluster structure, but by the cluster environment.
19 Competition and cooperation can co-exist in a cluster. Competition in clusters is discussed in this section, cooperation in a cluster in the next chapter.
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effect of internal competition ‘Among the strongest empirical findings from our research is the association between vigorous domestic20 rivalry and the creation and persistence in an industry’ (Porter, 1990, p. 117). Porter’s argument is that internal competition leads to dynamism in the cluster:
The nature of economic competition is not ‘equilibrium’ but a perpetual state of change. Improvement and innovation in an industry are never ending processes (…). Today’s advantages are soon superseded or nullified. At the core of explaining national advantage in an industry must be the role of the home nation in stimulation competitive improvement and innovation (Porter, 1990, p. 70).
Porter bases this conclusion on a variety of case studies, but does not provide quantitative empirical results. He focuses on the effects of internal competition on innovation. We develop three arguments for the positive effects of internal competition on cluster performance, one of which is Porter’s ‘vibrant environment argument’.
The first argument for the positive effect of internal competition is that internal competition lowers ‘switching costs’ for customers. Internal competition allows firms to shift to an alternative supplier in the same cluster. In general, these switching costs are lower than switching costs to a supplier outside the cluster, because of higher transaction costs. The importance of switching costs varies between industries. Relatively high switching costs give firms in the cluster the opportunity to appropriate ‘economic rents’, by charging higher prices. This threat by itself reduces the attractiveness of a cluster for potential customers.
Second, internal competition fosters specialization (see Baptista, 2000 p. 516). Internal competition is competition on a perfect level playing field (or to put it differently: cost curves are similar). Competitors face the same regulation, have the same labor market conditions, the same trade costs and the same supplier base. In such a competitive environment specialization of products and services is more likely to develop than when competitors operate in a different environment, because specialization reduces competition and
20 Porter generally speaks about domestic rivalry and the home nation because he does not pay attention to the issue of delimiting the relevant cluster region. This is not problematic for small countries but it is problematic for large countries. In such countries, competition between firms in different locations cannot be termed internal competition.
therefore can lead to a higher profitability21. This argument can be related to the work of Hotelling (1929) who argues that competition between services provided at different locations is by nature ‘oligopolistic’ because of the importance of transport costs. The location itself is a ‘source’ of specialization.
Differentiation and specialization enhance the performance of the cluster as a whole because in a cluster with internal competition customers can purchase products and services that match their specific demand.
Third, internal competition enhances cluster performance because it provides a firm with a
‘vibrant environment’ (see Porter, 1990). Porter argues that:
‘Pride drives managers and workers to be highly sensitive to other companies (…). Domestic rivals fight not only for market share but for people, technical breakthroughs and, more generally, ‘bragging rights’ (Porter, 1990, p. 119).
Porter claims that internal competition has a positive effect on the performance of firms because domestic rivalry is highly visible and ‘in the air’ (see also Marshall, 1890). As a consequence, it fosters innovation. Therefore, the presence of a vibrant environment adds to the performance of a cluster22.
For these three reasons internal competition contributes to the performance of a cluster.
Internal competition is likely to arise as a result of market forces in most cases. Two special conditions can prevent internal competition. First, a small market size relative to the minimal efficient scale (MES) can prevent internal competition. Internal competition can only exist in clusters with a large market size relative to the MES. Second, regulations can prevent internal competition, for instance because the right to provide services is tendered to one firm.
21 Porter (1990), stresses the effect of local competition on internationalization. This is explained by the drive to create economies of scale, when the domestic market is not sufficiently large.
Expansion helps in this case to increase competitiveness locally.
22 Some scholars have argued that fierce internal competition leads to shared mental maps (see Pouder and St. John, 1996). This is not a convincing argument. Shared mental maps can perhaps result from dense local interaction, not from fierce internal competition. Instead, competition generally leads to specialization and the development of distinctive capabilities.
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The presence of internal competition in a cluster can be analyzed with the concentration ratio. An analysis of the MES, the regulatory regime and the level of switching costs provides insight in the effects of the absence of internal competition and opportunities to increase internal competition.