"Relative Competitive Position of East European Countries in 2011"

enhancing
prosperity

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

EDITORIAL BOARD

Arturo, Condo Lall, Ashish
Professor of Competitiveness and Strategy, INCAE, Costa Rica Associate Professor Lee Kuan Yew School of Public Policy, Singa-
pore
Dharwadkar, Ravi
Professor of Management, Martin J. Whitman School of Manage- Mishra, Abhishek
ment, USA Professor of Business Policy and Strategy, Indian Institute of Man-
agement- Ahmedabad, India
Doyle, Eleanor
Senior Lecturer in Economics, University College Cork, Ireland Prasad, Ajit
Professor of Strategy International Management Institute, India
Duffill, David
Deputy Dean, Robert Kennedy College, Switzerland Rolfe, Robert
Professor of International Business, Moore School of Business,
Elazar, Berkovitch
USA
Dean, Arison School of Business, Israel
Steinbock, Dan
Hergnyan, Manuk
Research Director of International Research
Professor, Strategic Management Yerevan State University, Arme-
India, China & America Institute, USA
nia
Unger, Michael
Kapoor, Amit
Associate professor of management and international business,
Professor of Strategy and Industrial Economics, Management De-
Sellinger School of Business andManagement
velopment Institute, India

Kini, Ramesh Esposito, Mark
Associate Professor of Management Grenoble School of Manage-
Professor of Automation and Computer Science Department, Ka-
ment Visiting Scholar, Harvard University
zakh British Technical University, Kazakhstan

ADVISORY BOARD, INSTITUTE FOR COMPETITIVENESS
Balaji, G. Kapoor, Amit
Senior Director, Fidelity Business Services India Honorary Chairman, Institute for Competitiveness
Professor of Strategy and Industrial Economics, MDI
Batra, Anurag
MD and Editor-in-Chief, Exchange4-Media Group Ketels, Christian
Principal Associate, Institute for Strategy and Competi-
Doyle, Christopher
tiveness, Harvard Business School
MD, Dynamic Results India, Former Country Manager, In-
dia, Economist Intelligence Unit Verma, Sanjay
Executive Managing Director, South Asia, Cushman &
Ffowcs-Williams, Ifor Wakefield
CEO, Cluster Navigators
Jakhu, Ram S.
Associate Professor, Institute of Air and Space Law, McGill
University

enhancing
prosperity

JOURNAL OF COMPETITIVENESS & STRATEGY

enhancing
prosperity

EDITOR’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.

Creating Shared Value on a Global Scale: Possibilities for the
United Nations’ Engagement*

Michel Rixen1,2,
Ingo Böbel1 and Claude Chailan1

Abstract
The concept of “Creating Shared Value” (CSV) con- judgment of the rest of the world, calling for an
veys 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 the
create economic value for both the company and CSV metric issue to the wider public’s complex
the 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 point
all 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 the
can play a role in CSV through its Global Compact game and adhere to the UNGC principles.
(UNGC) initiative (complemented by the new UN
Sustainable Development Solutions Network). This JEL classification:
initiative offers corporations a platform for com- O19, M14, E01, E6, F5
mitment to sustainable principles by reporting and
exposing 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 about
the 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 on
the 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, Monaco
2
World Meteorological Organization (WMO), 7bis Avenue de la Paix, CH1211 Genève, Switzerland
mrixen@wmo.int
ibobel@monaco.edu (Contact address)
cchailan@monaco.edu

2 Journal of Competitiveness & Strategy January 2013

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prosperity

INTRODUCTION companies often operate their philanthropic redis-
Since its recent inception, the concept of Creating tributive activities through a separate foundation but
Shared Value (CSV) (Porter and Kramer, 2006, 2011) recently, they have been paying increased attention
has gained a lot of attention both in academic cir- to the alignment of these activities with their overall
cles 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 corporation
and interconnectivity between economic activity within the value chain, by redefining products and
and societal advancement. The new CSV definition markets, by re-considering productivity and by
of the role of business in society has emerged with developing the necessary networks and synergies
a clear focus on long-term thinking and aligning around the corporation, hence requiring a sort of
the 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 related
must create value for society alongside creating actors, market participants and stakeholders. The
value for shareholders to be successful in the long- motivation for a corporation to expand its business
term. It intrinsically places societal issues at the core frontier and to adopt the perspectives of CSV might
of 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/or
Value is a transformational dynamic that drives the employees. Porter and Kramer (2011) believe that
relationship 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-based
cal 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 and
that focused on compliance with relevant regulations meeting societal needs. It could, in fact, reshape
and “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 more
its reactive stance to governments’ decisions and the recent contribution to CSV; Conant 2012; Schwarz
regular disconnect between the core activities of the 2010), it would accelerate the potential for societal
business in question and target charities. Strikingly, impacts at a pace and scale far beyond the reach of
1
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.org
2
The most comprehensive topical analysis of Nestle’s CSV-related efforts is available at
http://www.nestle.com/Media/NewsAndFeatures/Pages/what-is-
CSV.aspx?WT.mc_id=InsightCSV_alert_nf_25092012


the non-profit sector. It could ideally complement A key question remains then how to explore the
and 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. The
services. But it is probably more the mindset of cor- biosphere, mankind included, is a provider of natural
porations (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 processes
trade-offs and thus determine the amplitude of this which feedback negatively on business activities
innovation wave which ultimately creates opportu- sooner or later. Global societal and environmental
nities for win-win situations. challenges call for an increased integration of inter-
Many of the major societal, environmental and national governance and business practices (Sachs
global development challenges involve all compo- 2012). Another central question relates to what could
nents and actors typically mapped within the tradi- be the potential role of the United Nations system in
tional 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 is
model illustrates the regeneration of labor and organized as follows. In Section 2 we briefly present
manufactured 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 3
However, it is obvious that economic circular flow describes the UN system and associated entities and
models are unable to effectively deal with capturing their relevance for CSV. Based on Section 4 where
societal value (Harris and Codur, 2004) as they are we introduce the UNGC, we then discuss in Section
rather 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 the
circular flow. Another potential model for mapping
the social opportunities within an economy is pro-
MACROECONOMICS AND
vided by an extension of “Porter’s Diamond” (Porter VALUE-METRICS OF CSV
and 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 product
and may be viewed from different impact-angles: (GNP) or gross domestic product (GDP). GDP has
factor (input) conditions, context for firm strategy become the main tool for measuring the success
and rivalry, related and supporting industries and, (or failure) of a country’s economy (see Stiglitz et
finally, local demand conditions set the frame. Note al. 2009 for the most comprehensive study on the
that an industry’s footprint is “glocal”, that is, it measurement of socio-economic performance). It
ranges 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 period
or 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 statistical
ernments 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 it
African Union, and APEC (in the Asia-Pacific region) reflects some of the business sector expenses to the
are examples where countries join forces to increase resource market and investments which generate
the 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 human


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well-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 become
to an increase in welfare. An understanding of what apparent only with a tremendous time-lag (often
GDP 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 been
to 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 damages
ity of life and the environment. Human well-being caused by other economic activities (and thus to be
depends 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 “natural
factors 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 wrote
flow and those which do not. Only the first type is “The Wealth of Nations” in 1776, he was concerned
taken into account in computing wealth and GDP not only about why some nations are wealthier
while 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 of
children and elderly relatives, volunteer community how wealth is allocated among the people living
work, and leisure time activities such as reading, in a nation. Today, many economists are starting
cooking, playing music, going to the beach) are not to realize that a true measure of a nation’s wealth
included in standard economic indicators. The stan- creation should consider distributional aspects of
dard 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 include
effects such as noise and air pollution, loss of wet- human and natural resources. National net savings
lands 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 (taking
and services are deferred until they feed back nega- pollution damages, depletion of natural resources
tively 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 an
ditional 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 of
al. (2004). In the long-run, they may materialize in an indicator of economic well-being and welfare
higher 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 Economic
to include the sphere of human activities, beyond Welfare” (ISEW). Another more recent measure,


the “Genuine Progress Indicator” (GPI) (Hamilton Just to pick one point: Economist Susan George
1999), 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 World
suggest that economic growth is coming at the ex- constituents to exploit natural resources in the most
pense of other contributors to well-being, such as profitable but least sustainable way, with further
environmental quality or leisure time. ISEW or GPI consequences on global warming and depleted
have 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 for
ISEW for Sweden closely follows the growth in GDP Refugees estimates that – because of war - about
for the period from 1950 up to 1980. The divergence 43 million people are displaced in the world today
between 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, another
dur, 2004), probably linked to the different degrees striking example is climate change and its plausible
to which these countries invest in environmental impact on the world economy. Climate change
and 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 price
new 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 the
of its work to the final development of the Inclusive global economy. The most comprehensive work on
Wealth Report 2012 (UNU-IHDP and UNEP 2012). The the subject is the “Stern Review on the Economics of
report (which was introduced during the Rio+20- Climate Change”, a 700-page report published in 2006
Conference in Brazil in June 2012) presents a prom- for the British government (Stern, 2006a). The report
ising economic index which offers a comprehensive discusses the effect of global warming on the world
analysis 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 costs
assesses changes in a country’s productive base, in- of no-action. It points to the potential wide-ranging
cluding produced, human, and natural capital over impact of climate change on natural hazards, water
time. Most importantly, as the IWI takes a holistic ap- resources, agriculture, health, and the environment
proach to calculating a country’s wealth, it provides (Sachs 2012). According to Stern, the overall costs of
national 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 Stern
and to determine if investments are targeted towards Review proposed a 1% investment of global GDP per
increasing 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 global
economy), the financial market plays a key role in warming as these estimates are also supported by
shaping the multidimensional macro-economic cir- numerous similar national reports in many countries
cular flow model (see Shiller 2012 for an excellent (Stern 2008; The Guardian, 2008; on the mitigation of
analysis 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).


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From a historic point of view it is interesting to markable qualities, they cannot stand on their own
remember that already back in 1971, James Tobin to fully measure the interaction between economic
suggested to levy a tax (“Tobin tax”) to penalize activity and societal advancement. For this reason, a
short-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 the
last decades by various non-governmental commu-
nities to finance development and environmental
DESCRIPTION OF THE
programs but has never been put into practice so UN SYSTEM
far. 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 League
hostile 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 principal
implement its mandate on all economic, social and (political) mission was to maintain world peace, was
environmental challenges. Governments are at the replaced by the UN in 1945, which currently comprises
heart of maintaining an appropriate equilibrium be- 193 nations. It aims at achieving world peace through
tween 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 CSV
or steer national economies’ sustainability. Most of efforts worldwide.
these indicators are closely related to the “Human The UN structure3 is composed of five principal
Development 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 UN
ria. Measures of human well-being and shared value headquarters is based in New York with other main
require subjective multi-dimensional judgments offices in Geneva.
about what to include and how to value different im- The General Assembly is the main deliberative
pact variables. Room exists for disagreement about body of the United Nations and is composed of
how 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 by
important insights beyond GDP. However, if each a staff of international civil servants worldwide. It
of 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.pdf


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 regarding
various initiatives. ECOSOC assists the General As-
sembly in promoting international economic and
social cooperation and development.
The United Nations Charter stipulates that each
primary organ of the UN can establish various spe-
cialized agencies to fulfill its duties. Many UN organi-
zations and agencies have been established to work
on particular issues and benefit from some decision- These MDGs can serve as examples of how CSV
al 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 developed
economic, social and development work. Several of countries as well. The UN estimated that the share of
those subsidiary organizations have an explicit eco- the world population living in extreme poverty fell
nomic or financial mandate such as the World Trade from 42% in 1981 to 20% in 2008 (Böbel 2007). This
Organization (WTO), the International Monetary was rather stimulated by fast economic growth and
Fund (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 sustainable
cation (United Nations Education, Scientific and Cul- growth, but, interestingly, it is usually impossible to
tural 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 developing
Industrial Development Organization - UNIDO), de- countries because development aid partially leaks to
velopment (United Nations Development Program non-monetary sectors in the economy. Similar con-
- UNDP), environment (United Nations Environment clusions can be drawn for philanthropy. However, at
Program – UNEP), food and agriculture (Food and the micro level, donor agencies regularly report the
Agriculture Organization – FAO, World Food Pro- success of most of their projects and programs. This
gram - WFP), health (World Health Organization), contrast is known as the micro-macro paradox and
meteorology (World Meteorological Organization) illustrates the issue of current economic indicators
or climate (e.g. United Nations Framework for Cli- and questionable economic return at larger scale
mate 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 debt
contributions of its member states. The UN General relief. It is estimated that if only a quarter of the
Assembly 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 trailing
butions are based on the relative capacity of each to leading other developing regions in terms of
country 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 current
erned 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-


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oping nations, which the UN is watching carefully As social, political and economic challenges (and
in terms of economic and social development and opportunities) — whether occurring at home or
associated geopolitical consequences. elsewhere — affect business more than ever before,
many companies recognize the need to collaborate
UN GLOBAL COMPACT (UNGC) and partner with governments, civil society, and the
United Nations. This ever-increasing understanding
AND CSV-CERTIFICATION is reflected in UNGC’s rapid growth. With more than
Multiple UN entities have traditionally engaged with 8700 corporate participants and other stakeholders
civil society, that is, external stakeholders, the pri- from over 130 countries, it is the largest voluntary
vate 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 business
ally 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 world
tainable development of agriculture, food, fisheries and by catalyzing actions in support of broader
and forestry sectors. To that effect, FAO mobilizes UN goals, including the Millennium Development
CEOs of companies of the agro-industrial sector Goals (MDGs). The initiative seeks to combine the
from 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 expertise
the 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 is
through the (a) UN Sustainable Development a complement to regulatory regimes, rather than a
Solutions Network (Sachs 2012) and (b) the UN substitute for them. It incorporates a transparency
Global 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 a
aligning their operations and practices with uni- COP is an important demonstration of a participant’s
versally accepted principles in the areas of human commitment to the UN Global Compact and its
rights, 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 transparency
driver 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 change
in 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 1a
complex 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 their
embed markets and societies with universal prin- level of disclosure on progress made in integrating
ciples and values for the benefit of all. the Global Compact principles and contributing to


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 themes
nies 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 geographic
a description of plans to meet 24 criteria in their an- context. They perform increasingly important roles in
nual 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 and
principles into further granularity. collective action. Whilst the “GC Active”-level bears
4
The ten principles are: Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; Principle
2: make sure that they are not complicit in human rights abuses. Principle 3: Businesses should uphold the freedom of association and the
effective recognition of the right to collective bargaining; Principle 4: the elimination of all forms of forced and compulsory labor; Principle
5: the effective abolition of child labor; Principle 6: the elimination of discrimination in respect of employment and occupation. Principle
7: Businesses should support a precautionary approach to environmental challenges; Principle 8: undertake initiatives to promote greater
environmental 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.


enhancing
prosperity

Fig. 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 agenda
due to the required long-term seamless and almost
symbiotic relationship between the company and locally.
the environment (partners, region, customers, pro- COPs are disseminated to Financial Markets
viders, 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 order
with a more visible platform to declare their higher- to mainstream the use of environmental, social and
level commitment to the Global Compact and dem- governance (ESG) information in financial analysis. It
onstrates advanced sustainability performance and is expected that this will generate further incentives
disclosure, 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 Compact


LEAD. The approximately 50 companies currently Of course, CSV carries its own lot of challenges and
participating in LEAD have been invited because is not immune to issues. Opportunities for growth in
they have a history of engagement with UN Global the noblest sense of CSV will by definition attract
Compact – 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 distribution
and reach new levels of performance, engagement clusters, etc). CSV is a way to differentiate products
and 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, and
for 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 and
rations deal with the Global Compact criteria. These has now become wide-spread and adopted by the
progress 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 increase
CONCLUSIONS AND competitiveness and enhance the robustness of the
business portfolio by adopting a holistic approach,
PERSPECTIVES integrating all potential risk factors and committed
Current economic value indicators clearly ignore im- stakeholders into the analysis and long-term strategy
portant 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 on
the long-term because hidden costs will feedback CSV (like Nestle, Cisco Systems, HP, and IBM; see Kania
negatively 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 to
sociated 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 in
have shown their limits in terms of relevance, sus- the case of SMEs. Large corporations might face less
tainability and efficiency. Nevertheless, certain overhead on managing UN Global Compact admin-
countries have succeeded to gain some return istrative matters with hence greater returns. Whilst
from 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 might
Sustainable Development Solutions Network. be offered by the angle of a global game concept


enhancing
prosperity

following John Nash’s idealized model (Nash, 1950) A revised and comprehensive Economic Circular
where participating players are individuals, corpo- Flow Model which includes a UNGC-CSV framework
rations, governments, NGOs, etc. In short, Nash’s should include feedback-loops and links with all actors
model 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 many
knows that he knows that he knows, etc”. This may more. It may act through international governance on
prove 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 reference
competitors? How will the market react if a corpo- point such as the UNGC. This goes then back to the
ration ignores the CSV principles? Can corporations eternal debate of regulated versus free markets and
create strategic alliances around CSV agreements the extent to which nations would enforce the rules of
or 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 per
competitive 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. CSV
on 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 create
role of social media such as Twitter and Facebook has the conditions for a long-term strategy and business
de-multiplied the leveraging effect of these pressure sustainability. Historically, governments have been at
groups. 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 competitive
their 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 social
from 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 through
issue 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, the
sustainability work, such as reducing CO2/energy, only world-wide entity which may address systemic
water and waste actually saves money. CSV, prag- imbalances on a global scale and guide and direct a
matically, is about optimizing the value chain, the CSV approach if it has to be embraced by the global
side-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 Sustainable
viewed as a short-term cost, (which is contradictory Development Solutions Network - may be the right
to 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, environmental
and social sustainability. It provides companies and organizations with comprehensive sustainability reporting guidelines. See https://www.
globalreporting.org/Pages/default.aspx


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Financial Agglomerations in the UK: Geographical
Cluster Size and Firm Performance

Dr. Adrian Kuah1, Dr. Terence Tse2, Dr. Mark Esposito3

Abstract

This 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 coming a cluster into its competing and related sec-
panies. The research issue is whether having a tors, I find they work in opposite directions on
closely related industry cluster is truly beneficial promoting firm growth prospects and financial
to member firms’ profitability, as recent studies performance. I argue related sectors in a cluster
alleged 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.au
2
ESCP Europe, London Campus, ttse@escpeurope.eu
3
Grenoble Ecole de Management & University of Cambridge, CPSL, mark.esposito@grenoble-em.com


enhancing
prosperity

EXECUTIVE SUMMARY externalities, in particular, influence the financial
Cluster 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 services
and 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 sectors
erature: (a) by providing a more precise measure- in recent studies. We investigated the regional UK
ment 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 strong
solvency; 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 in
efits, which can be reflected in the bottom line. Leeds (Yorkshire), Manchester (North West) and
Our findings support the need for related sectors Bristol (South West). The veracity of beneficial
to agglomerate in a geographical cluster, despite agglomeration effects is therefore an important
the arguments of rising congestion costs in ear- question, not lest because many governments
lier models of cluster growth. Policy makers must and regional development agencies are expend-
now concertedly plan for regional development ing vast resources supporting the development
through 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 financial
specific 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 financial
firm 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 observations
geographically 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 lifetime
to member firms’ profitability, as recent studies al- growth is extended to consider a firm’s financial
leged that a large cluster creates congestion and performance. The model is appropriate because
has 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 positive
ation of the industry and to varied non-financial effect while another may have a gross negative
measurements, including survival and patenting contribution. This model makes use of the total
rates. However, a lower level of disaggregation is employment size in one’s own sector and the total
achieved with en-bloc considerations. This does employment size of related sectors of the region
not 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 as
of different agglomeration externalities at play, the localised activities represent different benefits
mostly which are clearly identified, except to other related sectors. For example, localisation
the enigmatic pecuniary externalities. Pecuniary of banks would not create localisation economies


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 could
occur at the employee level and between skilled attenuate firm growth.
workers in an agglomeration. Employment size is Whether clustering is beneficial then becomes
particularly important for financial services as its an important question, as many governments
output is based upon specialised labour, knowl- and development agencies are expending vast
edge 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 sees
in clusters are more likely to leave, or companies much of London’s success in financial services as
with marginal performance are more likely to a result of clustering. It becomes an important
close down. It is clear from this study that most question to regional planners as an empirical link
financial services sectors in banking, leasing, trust between financial development and economic
funds, 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 activities
pendent and their transactions intertwined. within a financial cluster (Cook et al., 2007). Many
studies ignore sources of external economies, in
INTRODUCTION 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 and
prove 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 to
cial 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 scope
a common and persistent benefit to companies is and complexity, with their net effect being more
debateable, see Shaver and Flyer (2000) and Folta, relevant to the member firm’s performance, see Parr
Cooper, and Baik (2006). These studies argue that (2002). In particular, it is the pecuniary externality
Marshall’s (1920) sources of external economies, that remains quite enigmatic; see Parr (2002) and
with varied performance measures used, result Autant-Bernard and Massard (2005). This paper
in 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 demonstrate
true cluster size should include competing sector, that agglomeration creates pecuniary benefits that
as 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 if
the profits of a firm depend not only on its own activity but also on the activities of other firms in upstream and lateral industries that
has the effect of lowering the market price of inputs. Due to the indirect interactions of related industries, Antonelli (2008) argued that
member firms are also able to exploit pecuniary externalities to innovate on new products due to market knowledge of production
factors available to them at prices below their marginal productivity.


enhancing
prosperity

The issue on firm’s increased revenue, prof- as a performance measure, while the cluster size is
itability or performance as a main outcome to measured by plant counts of the industry. Chung
clustering 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, to
lished firms, with a greater accumulation of in- which they find that similar traits or similar firms
ternal corporate resources, could be less reliant result in localized benefits, such as heightened
on 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 of
younger firms parasitic opportunities to feed off firms in 12 related biotechnology sectors in their
the knowledge, skilled labour and infrastructure quest for the relationship between cluster size
of its leading competitors. Conversely, older firms and firm performance, measured through rates
may 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 mainly
depth in skill and service support within the through the lens of localisation economies, whilst
cluster. Evidence has suggested that there are hugely ignoring other agglomeration economies.
rampant interdependencies of activities within a Beaudry and Swann (2001) examine an array of
financial centre. They highlight an important yet UK industries and find that firm growth is positively
fundamental gap to the agglomeration theory - related to the total employment of the same sector
in 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. The
in a geographical region that competes and col- result does not support the need for related firms
laborate, but where evidence of improved per- to cluster. The exclusion of small and young firms
formance 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 of
services companies across eight sectors and thir- industries made it difficult to identify how service
teen 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 firms
The discussion presents the data and results in in an agglomeration to benefit from more than
section five, which then followed by conclusions one internally based dimensions (scale, scope or
in 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 another
Shaver 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 benefits
tion 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-


efits of all the external agglomeration economies cluster, while section 2.4 will introduce the choice
should be measured, as a certain externality facing of financial performance measures.
a company may have a gross positive effect while
another may have a gross negative contribution. Larger Agglomeration due to More Com-
Although there are suggestions on the use of peting Firms
financial 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 to
exception 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. Weber
of pecuniary externalities that can benefit firm eco- (1929), Hoover (1937), and Rosenthal and Strange
nomically 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 of
Flyer (2000) show that for the US biotechnology resources (e.g. technology, human capital, suppliers
sector, returns to clustering are not homogenously and distributors). This would be more likely if more
distributed 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 companies
ther 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 in
across 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 a
of Swann et al. that look at industrial clusters firm’s returns. Labour market pooling benefits both
with reference to its competing sector and re- workers and firms on the supply side since a large
lated sectors. This model has been established labour pool helps smaller and younger firms cope
in 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 agglomeration
dustries (e.g. Baptista and Swann, 1999; Beaudry, effects observed in London Financial Centre, where
Cook, Pandit, and Swann, 1998, Cook et al, 2001; there are a large number of contract workers, who
Pandit et al, 2001). However, they failed to relate are very mobile (Kuah, 2008). As a strong localised
to 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 their
congestion 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 thereby
from groups of competing and related sectors in a known as related studies, demonstrate that the


enhancing
prosperity

agglomeration of workers (or cluster strength) in industries, and bring about better infrastructure
one’s own sector is an exogenous factor positively brought about by diversity of industries in urban
influencing 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 measured
edge 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 the
agglomeration. 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 the
competitors with similar traits in the Manhattan London financial centre to spread the risk acquired
hotel industry are greater threats to each other, to of a profitable venture, and therefore may bring net
the 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 profits
increased 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 in
the 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 within
profits and per-firm growth (Cook et al., 2001; Pandit the London cluster, with profuse lateral relationships
et 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 banking
2004). maintain strong vertical relations to the commercial
Hypothesis 2: Total employment is one’s own banks (Cook et al., 2007; Pandit et al., 2001). Another
sector in an industry cluster has a negative influence source lies in the transfer and cross-fertilisation of
on 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 for
lead 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, measured
which 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 growth
or region and would be associated with the benefits in related studies. The availability of the labour pool
that arise irrespective of the firm’s activity, see Ja- in a cluster concerns with what a firm experiences
cobs (1969, 1984). Thriving industries at a location whilst being in the cluster, and is thus an exogenous
draw a more diverse labour pool, more supporting influence to the firm.


"Relative Competitive Position of East European Countries in 2011"

"Relative Competitive Position of East European Countries in 2011"

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