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By Özlem Öz (auth.)

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In other words the microeconomic quality of the local business environment determines the sophistication with which companies compete. Clusters affect competition in three broad ways: by increasing productivity, by driving the direction and pace of innovation (which means future productivity growth) and by stimulating the formation of new businesses (Porter, 1998). Local rivalry boosts productivity since the presence of successful rivals puts pressure on firms to innovate and break their dependence on less sustainable sources of advantage – say, basic factors – to which their rivals also have access.

In a related work, Steinle and Schiele (2001) argue that clustering is more relevant for industries with a divisible production process and a transportable product. Another interesting piece of research is that by Saxenian (1994), who provides a historical analysis of the development of Silicon Valley and Route 128. This comparison of the two clusters shows that Silicon Valley has exhibited resilience when facing challenges, whereas Route 128 has been rather slow to respond. The main reason for this, according to Saxenian, is related to industrial organization.

Storper argues that a region can be seen as ‘a nexus of untraded interdependencies’ among three systems: the labour market, the input – output system and the knowledge system. , p. 213). The same logic can be extended to explain why some clusters persist and maintain their competitiveness over time. That is, there are webs of user– producer relations and untraded interdependencies, and localization of these is frequent. , p. 214). The literature, however, is inconclusive about the conditions that lead to the emergence of an innovative milieu or untraded interdependencies in a locale (see Chapter 2 for the management literature’s view on how clusters foster innovation).

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