enhancingprosperity                             JOURNAL OF                             COMPETITIVENESS                    ...
EDITORIAL BOARDArturo, Condo                                                     Lall, AshishProfessor of Competitiveness ...
enhancing            prosperityJOURNAL OF COMPETITIVENESS & STRATEGY
enhancing                                                                                         prosperityEDITOR’S NOTE ...
Creating Shared Value on a Global Scale: Possibilities for the                  United Nations’ Engagement*               ...
enhancing                                                                                                                 ...
the non-profit sector. It could ideally complement            A key question remains then how to explore theand leverage g...
enhancing                                                                                       prosperitywell-being, both...
the “Genuine Progress Indicator” (GPI) (Hamilton          Just to pick one point: Economist Susan George1999), resembles t...
enhancing                                                                                                                 ...
ing peacekeeping operations, organizing interna-           states have agreed to try to achieve eight Millen-tional confer...
enhancing                                                                                         prosperityoping nations,...
Fig. 1a: UN Global Compact Differentiation Program on implementing UNGC Principles (UNGC, 2012, p. 8)broader UN goals. The...
enhancing                                                                                                  prosperityFig. ...
LEAD. The approximately 50 companies currently                   Of course, CSV carries its own lot of challenges andparti...
enhancing                                                                                                             pros...
REFERENCES                                                                                                -               ...
enhancing                                                                                   prosperity   and Society. The ...
Financial Agglomerations in the UK: Geographical                   Cluster Size and Firm Performance                      ...
enhancing                                                                                      prosperityEXECUTIVE SUMMARY...
for securities companies. Sources of externalities                     a big part in generating other external econo-lie i...
enhancing                                                                                    prosperity    The issue on fi...
efits of all the external agglomeration economies          cluster, while section 2.4 will introduce the choiceshould be m...
enhancing                                                                                          prosperityagglomeration...
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
"Relative Competitive Position of East European Countries in 2011"
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Zbornik radova, izdat povodom 10 godina postojanja MOC (Microeconomics of Competitiveness) u okviru ISC (Institute for Strategy and Compšetitiveness) Harvard Business School koji obuhvata blizu 60 univeriteta i fakulteta iz celog sveta.
Ukupno je objavljeno 6 izabranih radova iz svih institucija medju kojuima je i rad naših profesora: N. Savića, G. Pitića i S. Konjikušić pod naslovom: "Relative Competitive Position of East European Countries in 2011".

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"Relative Competitive Position of East European Countries in 2011"

  1. 1. enhancingprosperity JOURNAL OF COMPETITIVENESS & STRATEGY ISSN 2250-3587 January 2013, Volume 3 Creating Shared Value on a Global Scale: Possibilities for the United Nations’ Engagement Michel Rixen, Ingo Böbel and Claude Chailan Financial Agglomerations in the UK: Geographical Cluster Size and Firm PerformanceRelative Adrian Kuah, Terence Tse, Mark Esposito Relative Competitive Position of East European Countries in 2011 Nebojsa Savic, Goran Pitic and Snezana Konjikusic The formation of clusters as an alternative to the development and strengthening of SMEs in Mexico Sergio Garcilazo Lagunes Transforming Mindsets creating Innovative Business Models In Emerging Markets Mark T. McCord, Amit Kapoor, Sandeep Goyal, M P Jaiswal Creating Shared Value in the Brazilian context: The ideology of WEG Electric Corporation Siqueira de Morais Neto, Maurício Fernandes Pereira January 2013 Journal of Competitiveness & Strategy 1
  2. 2. EDITORIAL BOARDArturo, Condo Lall, AshishProfessor of Competitiveness and Strategy, INCAE, Costa Rica Associate Professor Lee Kuan Yew School of Public Policy, Singa- poreDharwadkar, RaviProfessor of Management, Martin J. Whitman School of Manage- Mishra, Abhishekment, USA Professor of Business Policy and Strategy, Indian Institute of Man- agement- Ahmedabad, IndiaDoyle, EleanorSenior Lecturer in Economics, University College Cork, Ireland Prasad, Ajit Professor of Strategy International Management Institute, IndiaDuffill, DavidDeputy Dean, Robert Kennedy College, Switzerland Rolfe, Robert Professor of International Business, Moore School of Business,Elazar, Berkovitch USADean, Arison School of Business, Israel Steinbock, DanHergnyan, Manuk Research Director of International ResearchProfessor, Strategic Management Yerevan State University, Arme- India, China & America Institute, USAnia Unger, MichaelKapoor, Amit Associate professor of management and international business,Professor of Strategy and Industrial Economics, Management De- Sellinger School of Business andManagementvelopment Institute, IndiaKini, Ramesh Esposito, Mark Associate Professor of Management Grenoble School of Manage-Professor of Automation and Computer Science Department, Ka- ment Visiting Scholar, Harvard Universityzakh British Technical University, KazakhstanADVISORY BOARD, INSTITUTE FOR COMPETITIVENESSBalaji, G. Kapoor, AmitSenior Director, Fidelity Business Services India Honorary Chairman, Institute for Competitiveness Professor of Strategy and Industrial Economics, MDIBatra, AnuragMD and Editor-in-Chief, Exchange4-Media Group Ketels, Christian Principal Associate, Institute for Strategy and Competi-Doyle, Christopher tiveness, Harvard Business SchoolMD, Dynamic Results India, Former Country Manager, In-dia, Economist Intelligence Unit Verma, Sanjay Executive Managing Director, South Asia, Cushman &Ffowcs-Williams, Ifor WakefieldCEO, Cluster NavigatorsJakhu, Ram S.Associate Professor, Institute of Air and Space Law, McGillUniversity
  3. 3. enhancing prosperityJOURNAL OF COMPETITIVENESS & STRATEGY
  4. 4. enhancing prosperityEDITOR’S NOTE Celebrating the Harvard Business School MoC program’s anniversary is more than just a joyful recurrence of these past successful 10 years. The network has provided wealth of inspiration, support and conceptual framework to many of us in these past years, allowing for the regionalization and localization of Competitiveness, as a result of a strong belief in a model of economic development, nurtured through cluster initiatives across regions and continents. As a sign of our gratitude, this special issue is populated by intellectual contributions with research papers coming from each corner of the network. With its emphasis on the role of policy in the process of competitiveness, this special issue of the Journal of Strategy and Competitiveness has experienced ample evidence, empirically and conceptually, that when policies are set up to facilitate the natural dynamism of cluster initiatives, competitive regions emerge, driven by strong innovative orientation and output, regardless of the industry and the genesis of the cluster, but more important, regardless of any macroeconomic indicators. During these times of turbulence, knowing that clusters are able to provide those answers to the instability of the current global economic apparatus, it is reassuring of something that, less respondent and dependent on classic economic theory, can still enhance the state of the world. With this reinforcing evidence in mind, our call for action wants to be advocate for more policies that look at the development of competitive environments rather than fear-driven with austerity, protectionism and redistribution. Our contributing authors have enlarged the spectrum of our current knowledge on the relationship of policy vis a vis of the enabling factors that accelerate clusters formation while improving the parity of those regions. Their representation in this special issue, adds more critical purposefulness to the impact of the MoC network and its seminal investigation in this field. If the financial crisis is being cited and remembered as a true black swan to the alleged order of the already flawed economic system that used to run the mechanism of development, we would like to invite for a reflection on the post-traumatic opportunities of growth and learning ahead of us. In light of that retrospection, our special issue wants to voice its presence. On a conclusive note, If we hold for true that each original investigation plays a role in the formation of the “wall of knowledge”, then the “brick” that our MoC affiliates have added to it, has particular significance, as we witness an emerging shared impact we pride ourselves of, since 10 years. With the hope of an ever inspiring continuity of our network, as we look forward to serving our community even further, onwards, we remain yours attentively. Dr. Mark Esposito & Dr. Amit Kapoor Co-Leaders, Institute Council & Affiliate Faculty Microeconomics of Competitiveness Program Harvard Business School To submit your papers for double-blind review, email submissions@competitiveness.in.January 2013 Journal of Competitiveness & Strategy 1
  5. 5. Creating Shared Value on a Global Scale: Possibilities for the United Nations’ Engagement* Michel Rixen1,2, Ingo Böbel1 and Claude Chailan1AbstractThe concept of “Creating Shared Value” (CSV) con- judgment of the rest of the world, calling for anveys the idea that a business must do two things indirect feedback from all potential stakeholders,simultaneously to be successful in the long-term: not just shareholders. The UNGC hence defers thecreate economic value for both the company and CSV metric issue to the wider public’s complexthe society. Current economic well-being indicators cost function and the resulting companies’“beyond GDP” integrate some CSV elements but are financial statements.lacking a holistic two-way approach to expose busi- This framework is not exempt of challenges. Corpo-ness practices and engagement in CSV principles to rations may not agree to a single CSV reference pointall stakeholders. such as the UNGC. This goes then back to the eternal We investigate whether the United Nations (UN) debate of regulated versus free markets and the extent(which is at the heart of CSV on all fronts of society) to which nations would then enforce the rules of thecan play a role in CSV through its Global Compact game and adhere to the UNGC principles.(UNGC) initiative (complemented by the new UNSustainable Development Solutions Network). This JEL classification:initiative offers corporations a platform for com- O19, M14, E01, E6, F5mitment to sustainable principles by reporting andexposing their engagement to the feedback of the Keywords: Role of International Organizations,public at large (for example through social media). Social Responsibility, Creating Shared Value, Macro-The UNGC public reporting exposes the effective economics, Macroeconomic Policy, United Nations,implementation of CSV strategy to the review and Global Compact*We would like to thank Duncan Pollard, Sustainability Advisor to the Executive Vice President of Operations at Nestlé, for useful discussions and inputs aboutthe CSV concept from a corporate perspective.The designations employed in this publication and the presentation of material in this publication do not imply the expression of any opinion whatsoever onthe part of WMO concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundar-ies. Opinions expressed in this article are the sole authors’ opinions and do not necessarily reflect those of WMO or its Members.1 International University of Monaco, 2 Av. Prince Albert II, MC-98000 Monte Carlo, Monaco2 World Meteorological Organization (WMO), 7bis Avenue de la Paix, CH1211 Genève, Switzerlandmrixen@wmo.intibobel@monaco.edu (Contact address)cchailan@monaco.edu2 Journal of Competitiveness & Strategy January 2013
  6. 6. enhancing prosperityINTRODUCTION companies often operate their philanthropic redis-Since its recent inception, the concept of Creating tributive activities through a separate foundation butShared Value (CSV) (Porter and Kramer, 2006, 2011) recently, they have been paying increased attentionhas gained a lot of attention both in academic cir- to the alignment of these activities with their overallcles and in various sectors of the economy, especial- business philosophy and possible indirect returns.ly within large corporations. Whilst the early stages CSV would hence be a sort of “optimized CSR” or “op-have seen the initiative been championed by some timized philanthropy” whereby the business entities’major multinational private companies, CSV aware- activities performed in the value chain are symbioti-ness is now starting to spill over to smaller private cally articulated with their beneficiaries through posi-entities and is gaining attention even in the public tive feedback loops (McManus 2012).sector and civil society as well1. Shared value can be created in many ways by Therehasalwaysexistedadeepinterdepen¬dence tapping into several activities of a corporationand interconnectivity between economic activity within the value chain, by redefining products andand societal advancement. The new CSV definition markets, by re-considering productivity and byof the role of business in society has emerged with developing the necessary networks and synergiesa clear focus on long-term thinking and aligning around the corporation, hence requiring a sort ofthe interests of shareholders and societies for mu- holistic approach to a corporation’s overall environ-tual benefits. CSV carries the idea that – in order to ment (Bockstette and Stamp 2011). In other words,overcome the profound and harmful disconnect be- the corporate system combines its broadest foot-tween the needs of society and business - a business print extension and potential symbiosis with relatedmust create value for society alongside creating actors, market participants and stakeholders. Thevalue for shareholders to be successful in the long- motivation for a corporation to expand its businessterm. It intrinsically places societal issues at the core frontier and to adopt the perspectives of CSV mightof the companies’ strategy and operations. Corpora- comprise the inclusion of external and internal fac-tions create shared value when they simultaneously tors, such as an energy crisis, a change in leadership,generate economic and societal value by address- a new business opportunity, a change in the imme-ing social and environmental challenges. “Shared diate business environment, its customers and/orValue is a transformational dynamic that drives the employees. Porter and Kramer (2011) believe thatrelationship of humanity with business and thus widespread adoption of the CSV approach could re-creates continual broad shoulders for broader glo- shape current business practices and market-basedcal outcome” (Tse and Esposito 2012, p. 7) economies. It would carry along a major innovation The CSV approach differs in many ways from the wave and associated growth by simultaneously tap-traditional “Corporate Social Responsibility” (CSR) ping unexplored ways of conducting business andthat focused on compliance with relevant regulations meeting societal needs. It could, in fact, reshapeand “philanthropy”, aiming primarily at improving a capitalism (Kramer et al. in Forbes India 2012).corporation’s reputation (Kitzmueller and Shimshak As major corporations join the initiative (see, e.g.,2012). Obvious limitations of the CSR approach lie in Nestlé’s long-term CSV initiative2 or Campbell’s moreits reactive stance to governments’ decisions and the recent contribution to CSV; Conant 2012; Schwarzregular disconnect between the core activities of the 2010), it would accelerate the potential for societalbusiness in question and target charities. Strikingly, impacts at a pace and scale far beyond the reach of1 See the invaluable work and publications on CSR and CSV that FSG (a non-profit consulting firm) has made available on its website at www.fsg.org2 The most comprehensive topical analysis of Nestle’s CSV-related efforts is available athttp://www.nestle.com/Media/NewsAndFeatures/Pages/what-is-CSV.aspx?WT.mc_id=InsightCSV_alert_nf_25092012January 2013 Journal of Competitiveness & Strategy 3
  7. 7. the non-profit sector. It could ideally complement A key question remains then how to explore theand leverage governments’ actions towards qual- impact of CSV in order to get a more thorough pic-ity of life and the provision of public goods and ture of its relationship with economic activity. Theservices. But it is probably more the mindset of cor- biosphere, mankind included, is a provider of naturalporations (and corporate leaders) rather than their resources and also the receptor of various undesir-size which will dismantle and break the mentality of able costs of the production/consumption processestrade-offs and thus determine the amplitude of this which feedback negatively on business activitiesinnovation wave which ultimately creates opportu- sooner or later. Global societal and environmentalnities for win-win situations. challenges call for an increased integration of inter- Many of the major societal, environmental and national governance and business practices (Sachsglobal development challenges involve all compo- 2012). Another central question relates to what couldnents and actors typically mapped within the tradi- be the potential role of the United Nations system intional Macroeconomic Circular Flow Model (Gärtner the context of this growing CSV awareness?2009, p. 10). Such (an open- or closed economy) In order to answer these questions the paper ismodel illustrates the regeneration of labor and organized as follows. In Section 2 we briefly presentmanufactured capital goods along with provision relevant macro-economic aspects of CSV and limita-of basic stuff (such as food and other necessities). tions of current metrics of economic value. Section 3However, it is obvious that economic circular flow describes the UN system and associated entities andmodels are unable to effectively deal with capturing their relevance for CSV. Based on Section 4 wheresocietal value (Harris and Codur, 2004) as they are we introduce the UNGC, we then discuss in Sectionrather represented by totally self-contained, static 5 some opportunities and challenges given the mar-entities operating through flows of equally sized ket forces at play in the global economy.pairs of leakages and injections into and out of thecircular flow. Another potential model for mappingthe social opportunities within an economy is pro- MACROECONOMICS ANDvided by an extension of “Porter’s Diamond” (Porter VALUE-METRICS OF CSVand Kramer 2006) which may be applied at various Economists measure the economic output of a soci-levels of analysis (both micro- and macroeconomic) ety using indicators such as gross national productand may be viewed from different impact-angles: (GNP) or gross domestic product (GDP). GDP hasfactor (input) conditions, context for firm strategy become the main tool for measuring the successand rivalry, related and supporting industries and, (or failure) of a country’s economy (see Stiglitz etfinally, local demand conditions set the frame. Note al. 2009 for the most comprehensive study on thethat an industry’s footprint is “glocal”, that is, it measurement of socio-economic performance). Itranges from local to global, from a family business refers to the market value of all final goods and ser-to a large multinational corporation (like Coca-Cola vices produced within that country in a given periodor Nestlé). Governments act at local, regional, na- of time. GDP per capita (adjusted for PPP – Purchas-tional or an international scale. Supranational gov- ing Power Parity) is mainly considered as a statisticalernments such as the European Union, MERCOSUR indicator of measuring a country’s standard of liv-(in South America), NAFTA (in North America), the ing. GDP may serve as a zero-order CSV metric as itAfrican Union, and APEC (in the Asia-Pacific region) reflects some of the business sector expenses to theare examples where countries join forces to increase resource market and investments which generatethe influence to steer the societal system in their de- household consumption. While it is widely recog-sired organizational direction. nized that such measures do not quantify human4 Journal of Competitiveness & Strategy January 2013
  8. 8. enhancing prosperitywell-being, both economists and policy makers of- purely monetary activities. One realizes the diffi-ten “assume” that an increase in GDP corresponds culty to quantify these activities, as some becometo an increase in welfare. An understanding of what apparent only with a tremendous time-lag (oftenGDP includes, and excludes, however, suggests that decades). It also highlights the need for a cumula-the relationship between economic production, tive approach to measure CSV (taking into consid-economic success and welfare is more complex eration that you have to be committed to CSV for(Stiglitz et al. 2009, p. 13; Rustin 2012). the long term). There are many limitations to using GDP as a way Many alternatives beyond GDP have beento measure social impact through shared value. GDP proposed so as to include these hidden expendi-does not include a quantitative estimate of qual- tures which eliminate, mitigate or avoid damagesity of life and the environment. Human well-being caused by other economic activities (and thus to bedepends on household income and consumption deducted from GDP or GNP). For example, adjust-of goods and services, but on many other objective ing GDP to account for the depreciation of “naturalfactors as well. Such activities can be divided in two capital” yields “Environmentally-adjusted Net Do-broad categories: those which imply a monetary mestic Product” (EDP). When Adam Smith wroteflow and those which do not. Only the first type is “The Wealth of Nations” in 1776, he was concernedtaken into account in computing wealth and GDP not only about why some nations are wealthierwhile other (often more subjective) operations than others in terms of physical and financial as-(such as domestic and family tasks, taking care of sets. He was also concerned about the question ofchildren and elderly relatives, volunteer community how wealth is allocated among the people livingwork, and leisure time activities such as reading, in a nation. Today, many economists are startingcooking, playing music, going to the beach) are not to realize that a true measure of a nation’s wealthincluded in standard economic indicators. The stan- creation should consider distributional aspects ofdard circular flow model does neither consider how income and consumption as well as more sophis-hard people work when they produce nor the quan- ticated types of capital. The World Bank has ex-tity of affordable leisure time available. Harmful side panded the measure of national wealth to includeeffects such as noise and air pollution, loss of wet- human and natural resources. National net savingslands and biodiversity, family breakdown, unequal rates are calculated as the amount of total domes-gender income, automobile accidents, commuting tic saving less the depreciation of produced capi-time, and other non-economic aspects of peoples’ tal. “The World Bank’s Genuine Saving Indicator”life are not included in GDP statistics either. These (Everett and Wilks, 1999) adds a social and envi-“externalities”, not reflected in the cost of goods ronmental element to national saving rates (takingand services are deferred until they feed back nega- pollution damages, depletion of natural resourcestively to the system with some latency, for example, and capital depreciation as well as education ex-in terms of sanitation or costs for medical care. Ad- penditures into account. Consequently, such anditional negative feedback mechanisms of deplet- indicator may even become negative!).ing resources have been stressed by Meadows et An ambitious effort to reform the calculation ofal. (2004). In the long-run, they may materialize in an indicator of economic well-being and welfarehigher taxes, investments or expenses. At a national has resulted from the partnership between an econ-level, GDP would need to be adjusted to take these omist, Herman Daly, and a theologian, John Cobb.effects into account. A more reliable measure of so- Daly and Cobb (1989) named their proposed sub-cial performance would require a broader approach stitute for GDP the “Index of Sustainable Economicto include the sphere of human activities, beyond Welfare” (ISEW). Another more recent measure,January 2013 Journal of Competitiveness & Strategy 5
  9. 9. the “Genuine Progress Indicator” (GPI) (Hamilton Just to pick one point: Economist Susan George1999), resembles the ISEW but includes additional perfectly illustrated the “debt boomerang effect”factors such as the cost of underemployment, the of externalities and its detrimental impact on de-loss of leisure time, and the loss of virgin forests. A velopment, conflicts and the environment (George,divergence of the GPI and GDP would consequently 1992). Debt-induced poverty causes Third Worldsuggest that economic growth is coming at the ex- constituents to exploit natural resources in the mostpense of other contributors to well-being, such as profitable but least sustainable way, with furtherenvironmental quality or leisure time. ISEW or GPI consequences on global warming and depletedhave been calculated for a number of countries bio-diversity. Such debt may create social unrest(Costanza et al, 2009). For example, the growth in and war. The United Nations High Commissioner forISEW for Sweden closely follows the growth in GDP Refugees estimates that – because of war - aboutfor the period from 1950 up to 1980. The divergence 43 million people are displaced in the world todaybetween GDP and the GPI for the United States is (UNHCR, 2012).more extreme over the same period (Harris and Co- At the global and long-run time scale, anotherdur, 2004), probably linked to the different degrees striking example is climate change and its plausibleto which these countries invest in environmental impact on the world economy. Climate changeand social priorities. should be treated as an externality, i.e. a cost-to-the- Just recently, in response to this urgent need for environment component not reflected in the pricenew methods of wealth accounting, the International paid for goods or services. There have been numer-Human Dimension Program (IHDP) devoted much ous studies on the impact of climate change on theof its work to the final development of the Inclusive global economy. The most comprehensive work onWealth Report 2012 (UNU-IHDP and UNEP 2012). The the subject is the “Stern Review on the Economics ofreport (which was introduced during the Rio+20- Climate Change”, a 700-page report published in 2006Conference in Brazil in June 2012) presents a prom- for the British government (Stern, 2006a). The reportising economic index which offers a comprehensive discusses the effect of global warming on the worldanalysis of a nation’s progress, well-being, and long- economy and concludes that the benefits of strong,term sustainability. “The Inclusive Wealth Index” (IWI) early action on climate change far outweigh the costsassesses changes in a country’s productive base, in- of no-action. It points to the potential wide-rangingcluding produced, human, and natural capital over impact of climate change on natural hazards, watertime. Most importantly, as the IWI takes a holistic ap- resources, agriculture, health, and the environmentproach to calculating a country’s wealth, it provides (Sachs 2012). According to Stern, the overall costs ofnational governments and planning authorities with no-action would be equivalent to losing at least 5%a valuable tool to support macroeconomic planning of global GDP each year, now and forever. The Sternand to determine if investments are targeted towards Review proposed a 1% investment of global GDP perincreasing society’s well-being and sustainability. annum to avoid the worst effects of climate change Considering the global scale and the interac- (Stern 2006b). In June 2008, Stern increased the esti-tions between developed and developing countries mate for the annual cost of achieving stabilization to(which comprise our $70-trillion-per-year global 2% of GDP to account for faster than expected globaleconomy), the financial market plays a key role in warming as these estimates are also supported byshaping the multidimensional macro-economic cir- numerous similar national reports in many countriescular flow model (see Shiller 2012 for an excellent (Stern 2008; The Guardian, 2008; on the mitigation ofanalysis of finance as one of the most powerful po- climate change see IPCC 2011 and the “Better Life In-tential tools for increasing the general well-being.). dex”, OECD 2011).6 Journal of Competitiveness & Strategy January 2013
  10. 10. enhancing prosperity From a historic point of view it is interesting to markable qualities, they cannot stand on their ownremember that already back in 1971, James Tobin to fully measure the interaction between economicsuggested to levy a tax (“Tobin tax”) to penalize activity and societal advancement. For this reason, ashort-term financial transactions and to dissuade pragmatic meta-approach, shared by all, is required.speculators active on highly volatile and irrespon- This is where the UN could step in.sible markets. This idea has been relayed during thelast decades by various non-governmental commu-nities to finance development and environmental DESCRIPTION OF THEprograms but has never been put into practice so UN SYSTEMfar. During the current economic crises, the Euro- The major international institution established to rep-pean Union has envisaged to implement such a tax resent nations of the world is the United Nations Orga-to sanitize the market and protect the Euro from nization (UN). It was build on the grounds of the Leaguehostile speculations on its weakest member coun- of Nations, a precursor intergovernmental organiza-tries. By matching the resources with the ambition, tion founded in 1919 as a result of the Paris Peace Con-a worldwide implementation of such a tax could ference that ended the First World War. This first per-act as a force-multiplier for the UN system so as to manent international organization, whose principalimplement its mandate on all economic, social and (political) mission was to maintain world peace, wasenvironmental challenges. Governments are at the replaced by the UN in 1945, which currently comprisesheart of maintaining an appropriate equilibrium be- 193 nations. It aims at achieving world peace throughtween stabilizing forces within a country. Dedicated international cooperation on security, human rights,taxes may offset some of these unaccounted costs and economic and social development.ignored in the GDP (see Weaver et al. 2003 for an Because of the UN’s wide-ranging (global) foot-extensive discussion). print on all societal sectors, our study examines a Traditional monetary, fiscal and trade policies possible unique role for the organization in facilitat-rely on various indices and indicators to regulate ing, or even maybe streamlining and leading CSVor steer national economies’ sustainability. Most of efforts worldwide.these indicators are closely related to the “Human The UN structure3 is composed of five principalDevelopment Index” (HDI), a summary measure organs - the General Assembly, the Security Coun-that aggregates averages across objective domains cil, the Economic and Social Council (ECOSOC), the(Stiglitz et al., 2009, p. 16). Adopting alternative in- Secretariat, and the International Court of Justice -dices (such as the novel “Happy Planet Index” 2012) each of which comprises a complex series of insti-results in scenarios that lead to different (local and tutionalized bodies, commissions, programs, spe-global) glocal macro- and micro-economic equilib- cialized agencies, departments and offices. The UNria. Measures of human well-being and shared value headquarters is based in New York with other mainrequire subjective multi-dimensional judgments offices in Geneva.about what to include and how to value different im- The General Assembly is the main deliberativepact variables. Room exists for disagreement about body of the United Nations and is composed ofhow to construct a relevant CSV-index-measure and all United Nations member states. The United Na-associated governing and control mechanisms. Yet tions Secretariat is headed by the Secretary-Gen-the information provided by these measures gives eral (currently Mr. Ban Ki-Moon) and assisted byimportant insights beyond GDP. However, if each a staff of international civil servants worldwide. Itof these indicators has outstanding virtues and re- helps resolving international disputes, administer-3 The UN structure is available at http://www.un.org/en/aboutun/structure/pdfs/un_system_chart_colour_large.pdfJanuary 2013 Journal of Competitiveness & Strategy 7
  11. 11. ing peacekeeping operations, organizing interna- states have agreed to try to achieve eight Millen-tional conferences, gathering information on the nium Development Goals (MDGs) by the year 2015,implementation of Security Council decisions, and which include:consulting with member governments regardingvarious initiatives. ECOSOC assists the General As-sembly in promoting international economic andsocial cooperation and development. The United Nations Charter stipulates that eachprimary organ of the UN can establish various spe-cialized agencies to fulfill its duties. Many UN organi-zations and agencies have been established to workon particular issues and benefit from some decision- These MDGs can serve as examples of how CSVal autonomy to fulfill their UN mandate. It is through may materialize into societal benefits, for both de-these agencies that the UN performs most of its veloping countries (in particular) and developedeconomic, social and development work. Several of countries as well. The UN estimated that the share ofthose subsidiary organizations have an explicit eco- the world population living in extreme poverty fellnomic or financial mandate such as the World Trade from 42% in 1981 to 20% in 2008 (Böbel 2007). ThisOrganization (WTO), the International Monetary was rather stimulated by fast economic growth andFund (IMF) and the World Bank (WB). Others have a development in emerging countries than by devel-clearly defined mandate in the following fields: edu- opment aid. Development indeed favors sustainablecation (United Nations Education, Scientific and Cul- growth, but, interestingly, it is usually impossible totural Organization - UNESCO), labor (International establish any significant correlation between for-Labor Organization - ILO), industry (United Nations eign aid and the growth rate of GNP in developingIndustrial Development Organization - UNIDO), de- countries because development aid partially leaks tovelopment (United Nations Development Program non-monetary sectors in the economy. Similar con-- UNDP), environment (United Nations Environment clusions can be drawn for philanthropy. However, atProgram – UNEP), food and agriculture (Food and the micro level, donor agencies regularly report theAgriculture Organization – FAO, World Food Pro- success of most of their projects and programs. Thisgram - WFP), health (World Health Organization), contrast is known as the micro-macro paradox andmeteorology (World Meteorological Organization) illustrates the issue of current economic indicatorsor climate (e.g. United Nations Framework for Cli- and questionable economic return at larger scalemate Change Convention – UNFCCC, Intergovern- (Boone, 1996).mental Panel for Climate Change - IPCC). Benefits from repatriation funds are large and The UN is financed by assessed and voluntary dominate those from other sources such as debtcontributions of its member states. The UN General relief. It is estimated that if only a quarter of theAssembly approves the regular budget and deter- stock of capital flight was repatriated to Sub-mines the assessment for each member. Contri- Saharan Africa, the region would go from trailingbutions are based on the relative capacity of each to leading other developing regions in terms ofcountry to pay, as measured by their gross national domestic investment, thus initiating a ‘big-push’-income (GNI), adjusted for external debt and per led sustainable long-term economic growth (Fo-capita income. UN entities are represented and gov- fack and Ndikumana, 2009). Ironically, the currenterned by their member states or a subset of them. global economic crisis in developed countries has In September 2000, 192 United Nations member triggered the first migrations to the former devel-8 Journal of Competitiveness & Strategy January 2013
  12. 12. enhancing prosperityoping nations, which the UN is watching carefully As social, political and economic challenges (andin terms of economic and social development and opportunities) — whether occurring at home orassociated geopolitical consequences. elsewhere — affect business more than ever before, many companies recognize the need to collaborateUN GLOBAL COMPACT (UNGC) and partner with governments, civil society, and the United Nations. This ever-increasing understandingAND CSV-CERTIFICATION is reflected in UNGC’s rapid growth. With more thanMultiple UN entities have traditionally engaged with 8700 corporate participants and other stakeholderscivil society, that is, external stakeholders, the pri- from over 130 countries, it is the largest voluntaryvate sector and non-governmental organizations corporate responsibility initiative in the world.- to better align their mission with the growing UNGC is a practical framework for the develop- challenges of the global economy and ment, implementation, and disclosure of sustain-- to secure additional resources not covered by ability policies and practices, offering participants a member-nations’ contributions. wide spectrum of management tools and resources, The private sector, for example, is an important all designed to help advance sustainable businessally for FAO in the fight against hunger. A thriving models and markets by mainstreaming its (ten)private sector is key to economic growth and sus- principles in all business activities around the worldtainable development of agriculture, food, fisheries and by catalyzing actions in support of broaderand forestry sectors. To that effect, FAO mobilizes UN goals, including the Millennium DevelopmentCEOs of companies of the agro-industrial sector Goals (MDGs). The initiative seeks to combine thefrom around the world during some of its high level strengths of the UN, such as its global dimension,events. Another example is WHO which manages moral authority and convening power, with the pri-specific health related projects directly funded by vate sector’s innovation, agility, and the expertisethe Bill & Melinda Gates Foundation. and capacities of a range of key stakeholders. Recently, two more systematic approaches UN Global Compact is “glocal” (global and local),to UN-private partnerships have been adopted private and public, voluntary and accountable. It isthrough the (a) UN Sustainable Development a complement to regulatory regimes, rather than aSolutions Network (Sachs 2012) and (b) the UN substitute for them. It incorporates a transparencyGlobal Compact (UNGC). Both are strategic policy and accountability policy known as the “Communi-initiatives for businesses that are committed to cation on Progress” (COP). The annual posting of aaligning their operations and practices with uni- COP is an important demonstration of a participant’sversally accepted principles in the areas of human commitment to the UN Global Compact and itsrights, labor, environment and anti-corruption principles. Participating companies are required to(UNGC 2012). By doing so, business, as a primary follow this policy, as a commitment to transparencydriver of globalization, can help ensure that mar- and disclosure is critical to the success of the initia-kets, commerce, technology and finance advance tive. Failure to communicate will result in a changein ways that benefit economies and societies in participants’ status and even possible expulsion.everywhere. We focus on UNGC as it assists the The “Global Compact Differentiation Program”private sector in the management of increasingly (represented as a general overview in Figure 1acomplex risks and opportunities in the environ- and as a close-up of the Leadership-level in Fig.1b)mental, social and governance realms, seeking to categorizes business participants based on theirembed markets and societies with universal prin- level of disclosure on progress made in integratingciples and values for the benefit of all. the Global Compact principles and contributing toJanuary 2013 Journal of Competitiveness & Strategy 9
  13. 13. Fig. 1a: UN Global Compact Differentiation Program on implementing UNGC Principles (UNGC, 2012, p. 8)broader UN goals. The various categories imply vari- The UN Global Compact establishes local net-ous levels of engagement and benefits for compa- works, which cluster participants on specific themesnies and stakeholders. and priorities in order to advance the Global Com- The “GC Advanced”- level, for example, requires pact and its principles within a particular geographica description of plans to meet 24 criteria in their an- context. They perform increasingly important roles innual COP in the following areas: rooting the Global Compact within different national, cultural and social environment scenarios. Their role is to facilitate the progress of companies (both local firms and subsidiaries of foreign corporations) en- gaged in the UNGC with respect to the implementa- tion of ten specific principles4 , while also creating op- These criteria decline the Global Compact key portunities for multi-stakeholder engagement andprinciples into further granularity. collective action. Whilst the “GC Active”-level bears4 The ten principles are: Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; Principle2: make sure that they are not complicit in human rights abuses. Principle 3: Businesses should uphold the freedom of association and theeffective recognition of the right to collective bargaining; Principle 4: the elimination of all forms of forced and compulsory labor; Principle5: the effective abolition of child labor; Principle 6: the elimination of discrimination in respect of employment and occupation. Principle7: Businesses should support a precautionary approach to environmental challenges; Principle 8: undertake initiatives to promote greaterenvironmental responsibility; Principle 9: encourage the development and diffusion of environmentally friendly technologies. Principle 10:Businesses should work against corruption in all its forms, including extortion and bribery.10 Journal of Competitiveness & Strategy January 2013
  14. 14. enhancing prosperityFig. 1b: Close-Up of the UN Global Compact Differentiation Program on implementing UNGC Principles (UNGC, 2012, p. 8)some similarity to Corporate Social Responsibility(CSR), the “GC Advanced”-level (in its most extensive and share global best practices and continued ad-interpretation) would be a clear CSV engagement vancement of their sustainability agendadue to the required long-term seamless and almostsymbiotic relationship between the company and locally.the environment (partners, region, customers, pro- COPs are disseminated to Financial Marketsviders, etc) in which it is operating. thanks to a collaboration with Bloomberg L.P, making The “GC Advanced”-level provides companies COPs available to the financial community in orderwith a more visible platform to declare their higher- to mainstream the use of environmental, social andlevel commitment to the Global Compact and dem- governance (ESG) information in financial analysis. Itonstrates advanced sustainability performance and is expected that this will generate further incentivesdisclosure, including: for companies to increase transparency and disclo- sure. Global Compact database This envelope has been pushed even further. In January 2011, UNGC launched a new platform for Global Compact website corporate sustainability leadership – Global CompactJanuary 2013 Journal of Competitiveness & Strategy 11
  15. 15. LEAD. The approximately 50 companies currently Of course, CSV carries its own lot of challenges andparticipating in LEAD have been invited because is not immune to issues. Opportunities for growth inthey have a history of engagement with UN Global the noblest sense of CSV will by definition attractCompact – locally and/or globally (UNGC, 2010). This potential competitors. If one does not cease an op-new platform is a reflection of the essential role that portunity to capture some value, somebody else will.leading UNGC-participants have already played in Thus, the traditional “Five Competitive Forces” (Porter,the field of corporate responsibility and sustainabil- 2008) are constantly at play. CSV will not remove com-ity. At the same time, Global Compact LEAD responds petition because the various CSV elements are inher-to the critical need for leading companies to step up ently competitive as well (for ex., through distributionand reach new levels of performance, engagement clusters, etc). CSV is a way to differentiate productsand impact in order for the world to meet today’s so- against competitors. The value chain may exploit le-cial, environmental and economic challenges. verage elements such as brand equity, customer loy- The UN Global Compact hence provides a means alty, employee solidarity, distribution channels, andfor CSV-like certification. COPs reporting process re- many more. This has been the case for fair-trade al-quires a fair level of details on how involved corpo- ready, which was marginal and confined to NGOs andrations deal with the Global Compact criteria. These has now become wide-spread and adopted by theprogress reports are then available to the general big global companies as part of their branding strat-public. egy (see Nestlé’s CSV initiative described in Schwarz 2010). CSV is also a fantastic approach to increaseCONCLUSIONS AND competitiveness and enhance the robustness of the business portfolio by adopting a holistic approach,PERSPECTIVES integrating all potential risk factors and committedCurrent economic value indicators clearly ignore im- stakeholders into the analysis and long-term strategyportant elements of the value chain, which in turn of a corporation (Tse and Esposito 2012).may impact brand equity and economic activity on Companies embarking since their inception onthe long-term because hidden costs will feedback CSV (like Nestle, Cisco Systems, HP, and IBM; see Kanianegatively into the system. Alternative indices take and Kramer 2011 for a more extensive list of compa-some of these elements into account but it is recog- nies) may have a first mover advantage. For others,nized that there is always a degree of subjectivity as- the investment necessary to catch-up and adhere tosociated with them. it might be beyond the typical time scale of the busi- One-way development aid and philanthropy ness or beyond a reasonable break-even, especially inhave shown their limits in terms of relevance, sus- the case of SMEs. Large corporations might face lesstainability and efficiency. Nevertheless, certain overhead on managing UN Global Compact admin-countries have succeeded to gain some return istrative matters with hence greater returns. Whilstfrom the development aid. Yet, appropriate means some executives have embraced the CSV concept,for ensuring shared value creation are required some remain stuck on a balance to be achieved be-with their associated metrics. tween social needs and corporate profitability. The The UN system has been at the heart of creating CSV approach is scalable to some extent, but the re-shared value on all fronts of society. It has also engaged gional dimension requires a customized implemen-recently in building wide partnerships with both pub- tation to best match the many factors such as culture,lic and private sectors, locally, regionally and glob- markets, history, and climate.ally through both its Global Compact Initiative and the Another promising perspective on CSV mightSustainable Development Solutions Network. be offered by the angle of a global game concept12 Journal of Competitiveness & Strategy January 2013
  16. 16. enhancing prosperityfollowing John Nash’s idealized model (Nash, 1950) A revised and comprehensive Economic Circularwhere participating players are individuals, corpo- Flow Model which includes a UNGC-CSV frameworkrations, governments, NGOs, etc. In short, Nash’s should include feedback-loops and links with all actorsmodel solves the question about a player’s optimal involved: governments, (profit and not-for-profit) cor-move knowing that the opponent “knows that he porations, NGOs, households, universities and manyknows that he knows that he knows, etc”. This may more. It may act through international governance onprove useful, for example, in the CSV framework. all – finance-, trade-, environment-, and development-Should a corporation engage and invest in CSV to related - aspects of today’s global economy. Corpora-gain some first-mover or strategic advantage over tions may, however, not agree to a single CSV referencecompetitors? How will the market react if a corpo- point such as the UNGC. This goes then back to theration ignores the CSV principles? Can corporations eternal debate of regulated versus free markets andcreate strategic alliances around CSV agreements the extent to which nations would enforce the rules ofor is competition also inherent to CSV? Nash’s the- the game or adhere to the UNGC principles.ory has been re-visited and extended to comprise a CSV is not a new approach or a new reality percompetitive force canvassing the reasoning behind se (in fact, CSV-activities – then called “blended value”the formation of strategic alliances such as govern- - go back to the 1960s). It is what economic reality al-ments or pressure groups which are driving forces ways should have been in the best of all worlds. CSVon the world market (e.g. boycotts of certain com- is a new way of framing the fundamental role of eco-panies’ products following environmental disasters) nomic activity in society – to create mutual value. CSV(Brandenburger and Nalebuff, 1995). The increased offers a framework for an original approach to createrole of social media such as Twitter and Facebook has the conditions for a long-term strategy and businessde-multiplied the leveraging effect of these pressure sustainability. Historically, governments have been atgroups. They represent serious threats and oppor- the heart of creating shared value because they usu-tunities for businesses nowadays. The UNGC public ally have some ‘constitutional mandate’ to meet dem-reporting exposes the effective implementation of ocratic and social standards, with their competitivetheir CSV strategy to the review and judgment of advantage to implement them (Porter 1998). How-the rest of the world, calling for an indirect feedback ever disparities between nations have created socialfrom all potential stakeholders, not just sharehold- and environmental imbalances, creating business op-ers, which will impact the companies’ financial re- portunities, which corporations, especially large ones,sults5. The UNGC hence would defer the CSV metric can more easily benefit from, for example throughissue to the wider public complex cost function and outsourcing, delocalization and market power.the resulting companies’ financial statements. Most The UN system is, and will probably remain, thesustainability work, such as reducing CO2/energy, only world-wide entity which may address systemicwater and waste actually saves money. CSV, prag- imbalances on a global scale and guide and direct amatically, is about optimizing the value chain, the CSV approach if it has to be embraced by the globalside-benefit of it being environmental sustainability market (as being envisioned by Porter). The UN Glob-and social development. CSV hence should not be al Compact – complemented by The UN Sustainableviewed as a short-term cost, (which is contradictory Development Solutions Network - may be the rightto the definition of CSV itself), but as a long-term universal tool to manage it if its oversight indepen-investment. dence can be guaranteed.5 A complementary institution is “The Global Reporting Initiative” (GRI) (a non-profit organization) which promotes economic, environmentaland social sustainability. It provides companies and organizations with comprehensive sustainability reporting guidelines. See https://www.globalreporting.org/Pages/default.aspxJanuary 2013 Journal of Competitiveness & Strategy 13
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  18. 18. enhancing prosperity and Society. The Link Between Competitive Ad- Available at: http://www.stiglitz-sen-fitoussi.fr/ vantage and Corporate Social Responsibility, en/index.htm Harvard Business Review, December (Reprint R0612D) climate change has doubled, warns Stern. Pub- lished 26 June 2008. Available at of nations, Free Press, New York, 1990. http://www.guardian.co.uk/environment/2008/ jun/26/climatechange.scienceofclimatechange that shape strategy, Harvard Business Review, as of 19 August 2008 January pp. 79–93. – Does Competitiveness Build Future or Just The Guardian (July 20) GDP?, Singapore Management Review, Vol. 34 No.2 pp. 1-7 Project Syndicate (Aug. 22, 2012). Available online at: http://www.project-syndicate.org/ Blueprint for Corporate Sustainability Leader- commentary/a-global-solutions-network-by- ship, 14pp jeffrey-d--sachs Comprehensive guide: communication on Nestle – a Portrait: Creating Shared Value. Bern: progress and differentiation, 38pp. Available at: Stämpfli Verlag AG http://www.unglobalcompact.org/docs/com- munication_on_progress/Tools_and_Publica- Princeton: Princeton University Press. tions/COP_Comprehensive_Guide.pdf Change: The Stern Review, London: H. M. Trea- Refugees) (2012), Statistical Online Population sury, U.K. Database, available at http://www.unhcr.org/ - statistics mate Change? World Economics, Vol. 7(2), pp. 1-10 Report 2012, Available at: http://www.ihdp. unu.edu/article/iwr Change, American Economic Review, Papers - and Proceedings, Vol. 98 (2), pp. 1 -37 bating the Tobin Tax – New Rules for Global - Finance, Washington, D.C. Available at http:// port by the Commission on the Measurement www.new-rules.org/storage/documents/oth- of Economic Performance and Social Progress. er/debatingthetobintax.pdfJanuary 2013 Journal of Competitiveness & Strategy 15
  19. 19. Financial Agglomerations in the UK: Geographical Cluster Size and Firm Performance Dr. Adrian Kuah1, Dr. Terence Tse2, Dr. Mark Esposito3AbstractThis paper reinforces the premise that cluster were used and notably many still consider finan-size has beneficial influence on performance by cial performance as key measures. By segregat-using data of 17,535 UK financial services com- ing a cluster into its competing and related sec-panies. The research issue is whether having a tors, I find they work in opposite directions onclosely related industry cluster is truly beneficial promoting firm growth prospects and financialto member firms’ profitability, as recent studies performance. I argue related sectors in a clusteralleged that a large cluster creates congestion allow the firm to draw pecuniary benefits to bet-and has negative implications for performance. ter its financial performance, while the compet-However, a myriad of performance measures ing sector promotes its growth prospects.1 James Cook University, Singapore, adrian.kuah@jcu.edu.au2 ESCP Europe, London Campus, ttse@escpeurope.eu3 Grenoble Ecole de Management & University of Cambridge, CPSL, mark.esposito@grenoble-em.com16 Journal of Competitiveness & Strategy January 2013
  20. 20. enhancing prosperityEXECUTIVE SUMMARY externalities, in particular, influence the financialCluster size, measured by two established cluster performance of firms resulting in improved prof-strength attributes, is found to work in opposite its.directions in promoting the growth prospects Much of London’s success in financial servicesand financial performance of member firms. This is attributed to clustering and there are reported-study addresses three identifiable gaps in the lit- ly intense interactions amongst its related sectorserature: (a) by providing a more precise measure- in recent studies. We investigated the regional UKment of cluster size; (b) by employing financial financial services clusters as financial agglomera-measurement of returns to capital employed and tions exist in many UK regions, such as a strongsolvency; and (c) by demonstrating that agglom- asset management cluster in Edinburgh (South-eration of related sectors creates pecuniary ben- ern Scotland) and regional financial centres inefits, which can be reflected in the bottom line. Leeds (Yorkshire), Manchester (North West) andOur findings support the need for related sectors Bristol (South West). The veracity of beneficialto agglomerate in a geographical cluster, despite agglomeration effects is therefore an importantthe arguments of rising congestion costs in ear- question, not lest because many governmentslier models of cluster growth. Policy makers must and regional development agencies are expend-now concertedly plan for regional development ing vast resources supporting the developmentthrough achieving critical mass in selective types of clusters.of related sectors in creating pecuniary externali- We used data on 17,535 UK companies found-ties, as well as ensuring there is critical mass in ed between 1900 and 2001 that classifies financialspecific sector to promote the growth prospects services as their primary activity under the Stan-of firms. dard Industry Classification (SIC 1992). By using The relationship between cluster size and a cross-sectional frame of companies in financialfirm performance is central to the agglomeration services, this important industry can be mod-theory, which suggests that the performance of elled through a larger number of observationsgeographically clustered firms improves with and would cater for macroeconomic fluctuations,cluster size. The research issue is whether having which affect all business segments.a closely related industry cluster is truly beneficial An established cluster model on lifetimeto member firms’ profitability, as recent studies al- growth is extended to consider a firm’s financialleged that a large cluster creates congestion and performance. The model is appropriate becausehas negative implications for performance. the net benefits of all the external agglomeration Previous empirical evidence of firm perfor- economies can be measured, as a certain exter-mance in clusters is limited to en-bloc consider- nality facing a company may have a gross positiveation of the industry and to varied non-financial effect while another may have a gross negativemeasurements, including survival and patenting contribution. This model makes use of the totalrates. However, a lower level of disaggregation is employment size in one’s own sector and the totalachieved with en-bloc considerations. This does employment size of related sectors of the regionnot advance the development of agglomeration in investigating the thirteen UK geographical re-theory, as it does not promote the understanding gions. Different financial sectors are controlled asof different agglomeration externalities at play, the localised activities represent different benefits mostly which are clearly identified, except to other related sectors. For example, localisationthe enigmatic pecuniary externalities. Pecuniary of banks would not create localisation economiesJanuary 2013 Journal of Competitiveness & Strategy 17
  21. 21. for securities companies. Sources of externalities a big part in generating other external econo-lie in the workers, as knowledge spill-overs and mies. However, Beaudry and Swann (2001) con-externalities that are more difficult to measure, tend related sectors add to congestion and couldoccur at the employee level and between skilled attenuate firm growth.workers in an agglomeration. Employment size is Whether clustering is beneficial then becomesparticularly important for financial services as its an important question, as many governmentsoutput is based upon specialised labour, knowl- and development agencies are expending vastedge and new knowledge acquisition transferred resources supporting the development of clus-through the workforce. ters, see McDonald, Huang, Tsagdis, and Tusleman Firm financial performance is an important (2007). More particularly, within financial services,consideration, as key employees of new ventures Gieve (2007) points out, the Bank of England seesin clusters are more likely to leave, or companies much of London’s success in financial services aswith marginal performance are more likely to a result of clustering. It becomes an importantclose down. It is clear from this study that most question to regional planners as an empirical linkfinancial services sectors in banking, leasing, trust between financial development and economicfunds, life insurance, and securities benefit most growth is developed, see Levine (1997; 2003).from being located with other financial services In spite of evidence that financial clusters dis-sectors. Competitive sectors form competitive play important agglomeration effects (Pandit et al.,clusters, especially so if the sectors are inter-de- 2001) and reported interdependencies of activitiespendent and their transactions intertwined. within a financial cluster (Cook et al., 2007). Many studies ignore sources of external economies, inINTRODUCTION particular, the sources of pecuniary externality1 with an influence to the performance of member firms.Agglomeration, or clustering, is believed to im- In fact, the good working of a financial centre andprove the performance of companies, see Marshall the performance of its incumbents is a central ques-(1920); Porter (1990); and Krugman (1991a) and tion to many venture capitalists, bankers, and even(1991b); and is a key feature of the global finan- smaller firms. Agglomeration effects are believed tocial services industry (Sassen, 1991; Reed, 1981). arise from not only from Marshall’s external econo-However, the extent to which clustering provides mies of scale, but also external economies of scopea common and persistent benefit to companies is and complexity, with their net effect being moredebateable, see Shaver and Flyer (2000) and Folta, relevant to the member firm’s performance, see ParrCooper, and Baik (2006). These studies argue that (2002). In particular, it is the pecuniary externalityMarshall’s (1920) sources of external economies, that remains quite enigmatic; see Parr (2002) andwith varied performance measures used, result Autant-Bernard and Massard (2005). This paperin diseconomies as the cluster becomes too large mainly contributes to the identifiable gaps in empir-and benefits are disproportionate. We argue that ical studies, which, at this point, fail to demonstratetrue cluster size should include competing sector, that agglomeration creates pecuniary benefits thatas well as, the lateral and vertical sectors that play can be reflected in the bottom line.1 Tibor de Scitovsky (1954) highlighted that technological externalities (knowledge spillovers that result from non-market interactions)and pecuniary externalities are two main agglomeration forces in the new economic geography. Pecuniary Externality is said to exist ifthe profits of a firm depend not only on its own activity but also on the activities of other firms in upstream and lateral industries thathas the effect of lowering the market price of inputs. Due to the indirect interactions of related industries, Antonelli (2008) argued thatmember firms are also able to exploit pecuniary externalities to innovate on new products due to market knowledge of productionfactors available to them at prices below their marginal productivity.18 Journal of Competitiveness & Strategy January 2013
  22. 22. enhancing prosperity The issue on firm’s increased revenue, prof- as a performance measure, while the cluster size isitability or performance as a main outcome to measured by plant counts of the industry. Chungclustering is rather important, see Parr (2002) and Kalnins (2001) also describe Marshall’s locali-and Folta et al. (2006). For example, older estab- sation economies of the Texan lodging sector, tolished firms, with a greater accumulation of in- which they find that similar traits or similar firmsternal corporate resources, could be less reliant result in localized benefits, such as heightenedon the external economies of scale and scope demand, that improves firm performance. Like-offered in the cluster. While clustering may offer wise, Folta et al. (2006) combines the number ofyounger firms parasitic opportunities to feed off firms in 12 related biotechnology sectors in theirthe knowledge, skilled labour and infrastructure quest for the relationship between cluster sizeof its leading competitors. Conversely, older firms and firm performance, measured through ratesmay be capable of engineering a more symbiotic of patenting, alliances partnering and private eq-relationship with their lateral and vertical sectors uity partnering in the biotechnology industries.by offering new ideas, enterprise and additional These studies investigated the cluster size mainlydepth in skill and service support within the through the lens of localisation economies, whilstcluster. Evidence has suggested that there are hugely ignoring other agglomeration economies.rampant interdependencies of activities within a Beaudry and Swann (2001) examine an array offinancial centre. They highlight an important yet UK industries and find that firm growth is positivelyfundamental gap to the agglomeration theory - related to the total employment of the same sectorin understanding the relationship between ag- in the cluster. At the same time, firm growth is at-glomeration effects and firm performance. This tenuated by the total employment of related sec-paper generally follows Porter’s (1990) termi- tors (through SIC codes at the broad 1 digit level).nology of industrial clusters, which are “critical They interpret the latter as indication of conges-masses of competing sector and related sectors tion and competition in the supply market. Thein a geographical region that competes and col- result does not support the need for related firmslaborate, but where evidence of improved per- to cluster. The exclusion of small and young firmsformance can be demonstrated”. from this study inhibited inferences on how small This paper examines over 17,000 UK financial firms benefit from larger clusters, while the mix ofservices companies across eight sectors and thir- industries made it difficult to identify how serviceteen regions in the UK. The discussion will pro- industries benefit from cluster membership.ceed in section three with a review of agglomera- Parr (2002) distinguishes internally based ag-tion externalities and the range of empirical work glomeration economies and external agglomera-so far. Section four details the model and method. tion economies. While it may be possible for firmsThe discussion presents the data and results in in an agglomeration to benefit from more thansection five, which then followed by conclusions one internally based dimensions (scale, scope orin the last section. complexity), most cluster studies focus on exter- nal economies in scale and scope, or externalities.Review of Empirical Literature Firms are motivated to locate near one anotherShaver and Flyer’s (2000) study on a broad array of because of external agglomeration economies,industries’ investments in the US looks at localisa- which Arthur (1990) defines, as the net benefitstion economies, but point out those agglomera- of being in a location together with other firms in-tion economies have the potential to enhance firm creasing with the number of firms in the location.performance. They use firm survival (after 8 years) Parr (2002: 724-725) points out that the net ben-January 2013 Journal of Competitiveness & Strategy 19
  23. 23. efits of all the external agglomeration economies cluster, while section 2.4 will introduce the choiceshould be measured, as a certain externality facing of financial performance measures.a company may have a gross positive effect whileanother may have a gross negative contribution. Larger Agglomeration due to More Com- Although there are suggestions on the use of peting Firmsfinancial measures in addressing firm performance The agglomeration of similar firms creates localisa-in clusters, see Folta et al. (2006) and Shaver and tion economies, which Parr (2002) terms as an ex-Flyer (2000), few studies have examined this (with ternal economy of scale. The sources according toexception to Nachum, 2003). More importantly, the Marshall (1920) are several: labour market pooling,literature reveals that empirical studies so far have creation of specialised suppliers, and the emer-failed to quantify the determinants at play in terms gence of technological knowledge spillovers. Weberof pecuniary externalities that can benefit firm eco- (1929), Hoover (1937), and Rosenthal and Strangenomically when firms agglomerate, see Parr (2002) (2005) suggest using the specific industry size (e.g.,and Autant-Bernard and Massard (2005). employment or output) as measures, while Hender- Empirical findings of agglomeration effects son (2003) and Shaver and Flyer (2000) suggests us-carry a mixed message in disproportionate ben- ing the count of plants of the specific sector.efits. Baptista and Swann (1998) caution against External economy of scale is possible in an ag-congestion in established clusters; and Shaver and glomeration as firms can benefit from the pool ofFlyer (2000) show that for the US biotechnology resources (e.g. technology, human capital, supplierssector, returns to clustering are not homogenously and distributors). This would be more likely if moredistributed across firms, benefiting only younger competing firms co-locate, also drawing more op-firms with weaknesses in technology, human capi- portunities to collaborate for the entrepreneurs.tal, suppliers and distributors. Folta et al (2006) fur- It has been reported that many young companiesther point out that marginal benefits decrease with profit from informal communications and collabora-cluster size and McDonald et al. (2007) show that tive practices in Silicon Valley, see Saxenian (1994).clusters may not promote growth or performance The entrepreneurs can exploit the environment inacross a variety of UK industries. creating new organisations, SMEs and innovation; While previous studies focus on how localisa- see Rocha and Sternberg (2005). Krugman (1991b)tion affects firm performance, it is only the works also argue that the localised industry can increase aof Swann et al. that look at industrial clusters firm’s returns. Labour market pooling benefits bothwith reference to its competing sector and re- workers and firms on the supply side since a largelated sectors. This model has been established labour pool helps smaller and younger firms copein numerous industries like high tech, computer, with the uncertainty related to individual firm busi-biotechnology, media and financial services in- ness cycle. An instance would the agglomerationdustries (e.g. Baptista and Swann, 1999; Beaudry, effects observed in London Financial Centre, whereCook, Pandit, and Swann, 1998, Cook et al, 2001; there are a large number of contract workers, whoPandit et al, 2001). However, they failed to relate are very mobile (Kuah, 2008). As a strong localisedto agglomeration externalities, with the simplis- industry can support a greater number of specia-tic suggestions that related sectors only add to lised suppliers, the suppliers in turn lowering theircongestion effects. Most importantly, the use of supplies costs and increasing its variety can estab-financial measures has been limited. The next two lish economies of scale and scope.sub-sections will define the externalities arising Many studies on the cluster model therebyfrom groups of competing and related sectors in a known as related studies, demonstrate that the20 Journal of Competitiveness & Strategy January 2013
  24. 24. enhancing prosperityagglomeration of workers (or cluster strength) in industries, and bring about better infrastructureone’s own sector is an exogenous factor positively brought about by diversity of industries in urbaninfluencing the size of incumbents. This measures concentration. Rosenthal and Strange (2005) sug-the extent of localisation economies, as knowl- gest that urbanisation economies may be measurededge spill-overs and externalities occur at the by the total employment in a city.employee level and between skilled workers in an More closely associated to related sectors is theagglomeration. external economy of complexity (Parr, 2002), arising Hypothesis 1: Total employment is one’s own when several related sectors benefit from the pres-sector in an industry cluster has a positive influence ence of each other. For example, the nature of in-on incumbents’ growth performance. surance and reinsurance processes involves a chain In contrast, Baum and Mezias (1992) find that of insurance firms and private equity holders in thecompetitors with similar traits in the Manhattan London financial centre to spread the risk acquiredhotel industry are greater threats to each other, to of a profitable venture, and therefore may bring netthe point of affecting their survival. As the cluster pecuniary benefits to all involved. Banks and finan-grows, there will be greater competition for work- cial leasing companies also often transfer (or sell)ers, for land and for utility services, leading to short- their acquired loans as financial assets. Furthermore,ages and increase costs (Folta et al., 2006: 223). Hav- within proximity, cost savings would arise from com-ing many similar firms in an agglomeration creates munication flows to reduce input-output problems.congestion costs on the demand side, resulting in A pecuniary externality is said to exist if the profitsincreased competition in the output markets, which of an incumbent depend not only on its own activ-can detract a company performance. An increase in ity but also on the activities of other companies inthe number of competitors in one’s own industry at vertical and lateral sectors. There are known inter-a location may reduce per-firm sales, prices, per-firm dependencies of financial services activities withinprofits and per-firm growth (Cook et al., 2001; Pandit the London cluster, with profuse lateral relationshipset al., 2001). Competition is seen as an exogenous in the banking industry and the insurance industry,force affecting firm performance (Tallman et al., while fund management and investment banking2004). maintain strong vertical relations to the commercial Hypothesis 2: Total employment is one’s own banks (Cook et al., 2007; Pandit et al., 2001). Anothersector in an industry cluster has a negative influence source lies in the transfer and cross-fertilisation ofon incumbents’ financial performance. skilled labour between related sectors, hence train- ing provided by one may eventually benefit another.Larger Agglomeration due to More Related With workers crossing between related sectors, inno-Firms vation may be more prolific and new entrepreneurs Although more firms in an agglomeration may may emerge. Employment is a good substitute forlead to congestion, there are benefits of having the pecuniary externality as skilled labour and knowl-competitive supporting and related sectors in a edge transfer takes place amongst the workers.cluster, see Porter (1990). Urbanisation externalities, The cluster strength in related sectors, measuredwhich Parr (2002) terms as external economies of by the level of employment, is found to be an ex-scope, arise from the diversity of industries in a city ogenous force attenuating the firm’s lifetime growthor region and would be associated with the benefits in related studies. The availability of the labour poolthat arise irrespective of the firm’s activity, see Ja- in a cluster concerns with what a firm experiencescobs (1969, 1984). Thriving industries at a location whilst being in the cluster, and is thus an exogenousdraw a more diverse labour pool, more supporting influence to the firm.January 2013 Journal of Competitiveness & Strategy 21

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