Clusters and the Development of Competitive Advantage

Clusters and 

the Development of Competitive Advantage 

Professor Michael E. Porter 

Harvard Business School 

Presentation at the 

StartUp Jerusalem Conference 

Jerusalem, Israel 

October 18, 2004 

This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free 

Press, 1990), “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report 2004, (World Economic 

Forum, 2004), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 

1998), and the Clusters of Innovation Initiative (www.compete.org), a joint effort of the Council on Competitiveness, Monitor Group, and Professor 

Porter. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, 

mechanical, photocopying, recording, or otherwise - without the permission of Michael E. Porter. 

Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu 

StartUp Jerusalem Cluster Theory 10-18-04 CK 

1 

Copyright © 2004 Professor Michael E. Porter

What is Competitiveness? 

• Competitiveness is determined by the productivity with which a nation, region, or 

cluster uses its human, capital, and natural resources. Productivity sets a nation’s or 

region’s standard of living (wages, returns on capital, returns on natural resources) 

– Productivity depends both on the value of products and services (e.g. 

uniqueness, quality) as well as the efficiency with which they are produced. 

– It is not what industries a nation or region competes in that matters for 

prosperity, but how firms compete in those industries 

– Productivity in a nation or region is a reflection of what both domestic and foreign 

firms choose to do in that location. The location of ownership is secondary for 

national prosperity. 

– The productivity of “local” industries is of fundamental importance to 

competitiveness, not just that of traded industries 

– Devaluation does not make a country more “competitive” 

• Nations or regions compete in offering the most productive environment for 

business 

• The public and private sectors play different but interrelated roles in creating a 

productive economy 


2 


Real GDP per Capita 2002, 

PPP-adjusted, $-US (1990) 

25,000 

Prosperity 

Selected Countries 

20,000 

15,000 

Germany 

Israel 

France UK 

Italy 

Taiwan 

Portugal 

Finland 

New Zealand 

Spain 

Slovenia 

Greece 

South Korea 

Estonia 

10,000 

Czech Republic 

Malaysia 

Slovakia 

Latvia 

5,000 

Jordan 

0 

0% 1% 2% 3% 4% 5% 6% 7% 8% 

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1999-2002 

Source: Groningen Growth and Development Centre and The Conference Board (2004), authors’ calculations 


3 


Patenting Growth and Prosperity Growth 

Selected OECD Countries 

Compound annual 

growth rate of USregistered 

patents, 

1990 - 2003 

35% 

30% 

Singapore 

25% 

South Korea 

20% 

15% 

Taiwan 

R 2 = 0.60 

10% 

Denmark 

Israel 

Finland 

New Zealand 

Ireland 

Sweden 

Norway 

5% Japan 

Australia 

US 

Italy 

Netherlands 

Switzerland France UK 

0% 

0% 1% 2% 3% 4% 5% 6% 7% 8% 

-5% 

Source: EIU (2004), US Patent and Trademark Office (2003) 


Compound annual growth rate of real GDP, 

1990-2003 

4 


Specialization of Regional Economies 

Select U.S. Geographic Areas 

Seattle-Bellevue- 

Everett, WA WA 

Aerospace Vehicles and and 

Defense 

Fishing and and Fishing 

Products 

Analytical Instruments 

Denver, CO CO 

Chicago 

Leather and and Sporting Goods 

Communications Equipment 

Oil Oil and and Gas Gas 

Processed Food 

Aerospace Vehicles and and Defense 

Heavy Machinery 

Wichita, KS KS 

Pittsburgh, PA PA 

Aerospace Vehicles and and 

Construction Materials 

Defense 

Metal Manufacturing 

Heavy Machinery 

Education and and Knowledge 


Creation 

Boston 


Education and and Knowledge Creation 


San Francisco- 

Oakland-San Jose 

Bay Area 

Communications 

Equipment 

Agricultural 

Products 

Information 

Technology 

Raleigh-Durham, NC NC 


Information Technology 

Education and and 

Knowledge Creation 

Los Angeles Area 

Apparel 

Building Fixtures, 

Equipment and 

Services 

Entertainment 

San San Diego 

Leather and and Sporting Goods 

Power Generation 

Education and and Knowledge 

Creation 

Houston 

Heavy Construction Services 


Aerospace Vehicles and and Defense 

Atlanta, GA GA 

Construction Materials 

Transportation and and Logistics 

Business Services 

Note: Clusters listed are the three highest ranking clusters in terms of share of national employment 

Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School 


5 


Specialization of Regional Economies 

Commonwealth of Massachusetts 

12% 


Percentage 

of Share 

National 

Cluster 

Employment 

in 1999 

10% 

8% 

6% 

4% 

Education and 

Knowledge Creation 

Information Technology 

Business Services 


Jewelry and Precious Metals 

Medical Devices 

Financial Services 

Distribution Services 

Aerospace Engines 

(7.4, 89.9) 

Massachusetts’ Average 

Share = 2.68% 

2% 

Pharmaceuticals and Biotechnology 

(2.4, 103.6) 

Aerospace Vehicles and 

Tobacco (0.9, 82.7) 

Defense (0.0, -97.7) 

0% 

-75 -25 25 75 

Percentage of Change, 1990–1999 

= 0–24,999 = 25,000–49,999 = 50,000–99,999 = 100,000- 

Note: Data points that fall outside the graph are placed on the borders with their values given in parentheses (share, change) 

Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School 


6 


The Boston Life Sciences Cluster 

Health and Beauty 

Products 

Teaching and Specialized Hospitals 

Cluster Organizations 

MassMedic, MassBio, others 

Surgical Instruments 

and Suppliers 

Medical Equipment 

Dental Instruments 

and Suppliers 

Biological 

Products 

Biopharma- 

ceutical 

Products 

Specialized Business 

Services 

Banking, Accounting, Legal 

Ophthalmic Goods 

Specialized Risk Capital 

VC Firms, Angel Networks 

Diagnostic Substances 

Containers 

Research Organizations 

Specialized Research 

Service Providers 

Laboratory, Clinical Testing 


Educational Institutions 

Harvard University, MIT, Tufts University, 

Boston University, UMass 


7 


Public Relations & 

Market Research 

Services 

The Cairns Tourism Cluster 

Travel agents 

Tour operators 

Local retail, 

health care, and 

other services 

Food 

Suppliers 

Property 

Services 

Restaurants 

Attractions and 

Activities 

e.g., theme parks, 

casinos, sports 

Local 

Transportation 

Souvenirs, 

Duty Free 

Maintenance 

Services 

Hotels 

Airlines, 

Cruise Ships 

Banks, 

Foreign 

Exchange 

Government agencies 

e.g. Australian Tourism Commission, 

Great Barrier Reef Authority 

Educational Institutions 

e.g. James Cook University, 

Cairns College of of TAFE 

Industry Groups 

e.g. Queensland Tourism 

Industry Council 

Source: Research by HBS Student Team, 2003 


8 


Clusters and Competitiveness 

• Clusters Increase Productivity / Efficiency 

– Efficient access to specialized inputs, services, employees, information, institutions, 

and “public goods” (e.g. training programs) 

– Ease of coordination and transactions across firms 

– Rapid diffusion of best practices 

– Ongoing, visible performance comparisons and strong incentives to improve vs. 

local rivals 

• Clusters Stimulate and Enable Innovations 

– Enhanced ability to perceive innovation opportunities 

– Presence of multiple suppliers and institutions to assist in knowledge creation 

– Ease of experimentation given locally available resources 

• Clusters Facilitate Commercialization 

– Opportunities for new companies and new lines of established business are more 

apparent 

– Commercializing new products and starting new companies is easier because of 

available skills, suppliers, etc. 

Clusters reflect the fundamental influence of externalities / linkages 

across firms and associated institutions in competition 


9 


Productivity, Innovation, and the Business Environment 

Factor 

(Input) 

Conditions 

• Presence of high quality, 

specialized inputs available 

to firms 

–Human resources 

–Capital resources 

–Physical infrastructure 

–Administrative infrastructure 

–Information infrastructure 

–Scientific and technological 

infrastructure 

–Natural resources 

Context for 

Firm 

Strategy 

and Rivalry 

• A local context and rules that 

encourage investment and 

sustained upgrading 

–e.g., Intellectual property 

protection 

• Meritocratic incentive system 

across institutions 

• Open and vigorous competition 

among locally based rivals 

Related and 

Supporting 

Industries 

• Access to capable, locally based suppliers 

and firms in related fields 

• Presence of clusters instead of isolated 

industries 

Demand 

Conditions 

• Sophisticated and demanding local 

customer(s) 

• Local customer needs that anticipate 

those elsewhere 

• Unusual local demand in specialized 

segments that can be served 

nationally and globally 

• Successful economic development is a process of successive economic upgrading, in which 

the business environment in a nation evolves to support and encourage increasingly 

sophisticated ways of competing 


10 


Institutions for Collaboration 

Selected Massachusetts Organizations, Life Sciences 

Life Sciences Industry Associations 

• Massachusetts Biotechnology Council 

• Massachusetts Medical Device Industry 

Council 

• Massachusetts Hospital Association 

University Initiatives 

• Harvard Biomedical Community 

• MIT Enterprise Forum 

• Biotech Club at at Harvard Medical School 

• Technology Transfer offices 

General Industry Associations 

• Associated Industries of of Massachusetts 

• Greater Boston Chamber of of Commerce 

• High Tech Council of of Massachusetts 

Informal networks 

• Company alumni groups 

• Venture capital community 

• University alumni groups 

Economic Development Initiatives 

Joint Research Initiatives 

• Massachusetts Technology Collaborative 

• Mass Biomedical Initiatives 

• Mass Development 

• Massachusetts Alliance for Economic 

Development 

• New England Healthcare Institute 

• Whitehead Institute For Biomedical 

Research 

• Center for Integration of of Medicine and 

Innovative Technology (CIMIT) 


11 


Patents by Organization 

Commonwealth of Massachusetts 

Organization Patents Issued from 1997 to 2001 

1 MASSACHUSETTS INSTITUTE OF TECHNOLOGY 518 

2 MASSACHUSETTS GENERAL HOSPITAL CORP 296 

3 EMC CORPORATION 269 

4 DIGITAL EQUIPMENT CORPORATION 261 

5 POLAROID CORPORATION 213 

6 ANALOG DEVICES, INC. 167 

7 MILLENNIUM PHARMACEUTICALS, INC. 165 

8 HARVARD UNIVERSITY 150 

9 COMPAQ COMPUTER CORPORATION, INC. 147 

10 SUN MICROSYSTEMS, INC. 143 

11 BOSTON SCIENTIFIC CORPORATION 135 

12 ACUSHNET COMPANY 130 

13 GENETICS INSTITUTE, INC. 127 

14 GILLETTE COMPANY 112 

15 BRIGHAM AND WOMEN'S HOSPITAL 107 

16 RAYTHEON COMPANY 101 

17 GENERAL ELECTRIC COMPANY 99 

18 HEWLETT-PACKARD COMPANY 96 

19 CHILDREN'S MEDICAL CENTER CORPORATION 93 

20 QUANTUM CORP. (CA) 93 

21 COGNEX CORPORATION 90 

22 DANA-FARBER CANCER INSTITUTE 90 

23 JOHNSON & JOHNSON PROFESSIONAL INC. 90 

24 BOSTON UNIVERSITY 84 

25 SEPRACOR INC. 84 

Note: Shading indicates universities, research institutions, and other government agencies 

Source: US Patent and Trademark Office (www.uspto.gov). Author’s analysis. 


12 


U.S. Patenting by Organizations Based in Israel 

Organization 

1997 1998 1999 2000 2001 

2002 

Patents Issued 

1997-2002 

YEDA RESEARCH AND DEVELOPMENT CO., LTD. 

14 

29 

35 

23 

23 

18 

142 

YISSUM RESEARCH DEVELOPMENT COMPANY OF THE HEBREW 

UNIVERSITY OF JERUSALEM 

19 

23 

28 

20 

29 

18 

137 

MOTOROLA, INC. 

19 

35 

32 

18 

22 

10 

136 

INTEL CORPORATION 

15 

31 

21 

22 

9 

16 

114 

INTERNATIONAL BUSINESS MACHINES CORPORATION 

12 

22 

12 

15 

19 

34 

114 

RAMOT UNIVERSITY AUTHORITY FOR APPLIED RESEARCH AND 

INDUSTRIAL DEVELOPMENT LIMIT 

8 

15 

12 

14 

14 

15 

78 

ISCAR LTD. 

10 

13 

10 

12 

11 

5 

61 

STATE OF ISRAEL, MINISTRY OF DEFENSE, RAFAEL-ARMAMENT 

DEVELOPMENT AUTHORITY 

17 

10 

7 

5 

9 

8 

56 

NATIONAL SEMICONDUCTOR CORPORATION 

18 

9 

8 

7 

4 

3 

49 

ORMAT INDUSTRIES, LTD. 

14 

7 

6 

4 

9 

5 

45 

3COM CORPORATION 

3 

1 

2 

5 

19 

18 

44 

BIOSENSE, INC. 

1 

4 

1 

5 

16 

15 

42 

SCI TEX CORPORATION LTD. 

12 

6 

13 

6 

3 

4 

40 

TOWER SEMICONDUCTOR LTD. 

1 

2 

2 

4 

18 

13 

38 

TEVA PHARMACEUTICAL INDUSTRIES, LTD. 

4 

5 

6 

1 

8 

11 

35 

APPLIED MATERIALS, INC. 

0 

1 

1 

3 

13 

17 

34 

MEDINOL LTD. 

2 

7 

5 

7 

4 

9 

34 

INDIGO N.V. 

2 

6 

9 

6 

4 

5 

32 

HADASIT MEDICAL RESEARCH SERVICES & DEVELOPMENT CO., LTD. 

0 

3 

7 

4 

9 

9 

32 

TECHNION RESEARCH AND DEVELOPMENT FOUNDATION, LTD. 

6 

4 

2 

2 

7 

7 

28 


Source: US Patent and Trademark Office 

13 


Shifting Responsibilities for Economic Development 

Old Model 

New Model 

• Government drives economic 

development through policy 

decisions and incentives 

• Economic development is a 

collaborative process involving 

government at multiple levels, 

companies, teaching and 

research institutions, and 

institutions for collaboration 


14 


Cluster-Based Economic Development 

Types of Activities 

• Upgrading of company strategy and operations 

– Developing market intelligence and operational benchmarks 

– Program to diffuse best practices (e.g. Quality certification) 

• Strengthening of cooperation among companies and with universities on 

joint obstacles to competitiveness 

– More knowledge sharing across companies 

– Creation of cluster-specific initiatives and institutions 

– Government or external consultants as facilitators 

• Improvements of the cluster-specific business environment 

– Joint identification of barriers to productivity growth 

– Mounting joint public-private action initiatives to upgrade weaknesses 

• The appropriate mix of activities for a given cluster depends on the key 

weaknesses that hinder further productivity growth 


15 


Public / Private Cooperation in Cluster Upgrading 

Minnesota’s Medical Device Cluster 

Context for 

Firm 

Strategy 

and Rivalry 


Factor 

(Input) 

Conditions 

• Joint development of vocationaltechnical 

college curricula with the 

medical device industry 

• Minnesota Project Outreach exposes 

businesses to resources available at 

university and state government 

agencies 

• Active medical technology licensing 

through University of Minnesota 

• State-formed Greater Minnesota Corp. 

to finance applied research, invest in 

new products, and assist in technology 

transfer 

• Aggressive trade associations 

(Medical Alley Association, High 

Tech Council) 

• Effective global marketing of the 

cluster and of Minnesota as the 

“The Great State of Health” 

• Full-time “Health Care Industry 

Specialist” in the department of 

Trade and Economic Development 

Related and 

Supporting 

Industries 

16 

Demand 

Conditions 

• State sanctioned 

reimbursement policies 

to enable easier adoption 

and reimbursement for 

innovative products 


Appropriate Roles of Government 

in Cluster Development 

• A successful cluster policy builds on sound overall economic 

policies 

• Government should support the development of all clusters, not 

choose among them 

• Government policy should reinforce established and emerging 

clusters rather than attempt to create entirely new ones 

• Government’s role in cluster initiatives is as facilitator and 

participant. The most successful cluster initiatives are a publicprivate 

partnership 


17 


Role of the Private Sector in Cluster Development 

• A company’s competitive advantage is partly the result of the local 

environment 

• Company membership in a cluster offers collective benefits 

• Private investment in “public goods” is justified 

• Take an active role in upgrading the local infrastructure 

• Nurture local suppliers and attract new supplier investments 

• Work closely with local educational and research institutions to upgrade 

quality and create specialized programs addressing cluster needs 

• Provide government with information and substantive input on 

regulatory issues and constraints bearing on cluster development 

• Focus corporate philanthropy on enhancing the local business 

environment 

• An important role for trade associations 

– Greater influence 

– Cost sharing 


18

Clusters and the Development of Competitive Advantage

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