A narrative review on the influence of cluster location on firm performance.

• Author: Klumbies, Irene
• Position: Report

1. INTRODUCTION

   The geographical location of a company is of crucial strategic importance as it determines its direct competitive environment. Even with increasing globalization, the local business environment of a company is not losing its significance; on the contrary, the firm's location is rather considered as a central key success factor for the company's competitive position in the world market (Porter, 2000; Audretsch, 1998). The decision of selecting a location is usually made at the earliest stage of a firm's foundation, thus, entrepreneurs need to be aware of potential advantages or disadvantages offered by various locations for their firms' future performance and probability of survival, especially considering the high cost of relocation. With respect to studies investigating the effect of location on company performance, clusters are often shown as a driving force for economic growth, and thus fostering numerous political initiatives (Aziz and Norhashim, 2008). Clusters, defined as "geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions (...) in a particular field that compete but also co-operate" (Porter, 2000: 15), are a global phenomenon and evolved in various industries (Enright, 1995). Worldwide, the desire exists to support or even create profitable and highly innovative, entrepreneurial clusters within different sectors (Aziz and Norhashim, 2008), similar to the role model of Silicon Valley in the United States. Also further examples, like the ceramic tile cluster in Spain (Molina-Morales, 2001) or the aerospace industry cluster in the South East of the United Kingdom (Beaudry, 2001), portend to the existence of agglomeration effects.

   What is so intriguing about clusters that has captivated many scientists to explore agglomeration effects for many decades? Not only politicians and economists, but also sociologist, geographers (Molina-Morales, 2001), and historians (e.g., Medina-Albaladejo, 2010) alike have been debating this topic. The attention drawn to clusters in the academic field and political arena is based on the perception that in those areas many company activities prove to be executed more easily (Enright, 1995), and thus, regional economic growth is enhanced. Pe'er and Vertinsky (2006) assume that cluster locations are especially attractive for entrepreneurial firms, as they can mitigate "liabilities of smallness" (Freeman, Carroll, and Hannan, 1983) and "liabilities of newness" (Stinchcombe, 1965). Successful examples confirm that companies can exploit external economies by settling within a supportive environment (e.g., Baptista and Swann, 1999; Wennberg and Lindqvist, 2010). Thus, firms additionally gain competencies, which they supposedly would never have achieved individually, and which enable them to improve their profitability.

   In comparison to the vast amount of theoretical literature about agglomeration effects, only to a limited extend researchers have begun to analyze empirically the influence of cluster affiliation on firm performance in greater detail (Maine, Shapiro, and Vining, 2010). Besides the articles, which empirically prove positive effects, other studies could not confirm any influence, and some authors even found a negative relationship, and seriously question the existence of positive agglomeration effects (e.g., Buenstorf and Guenther, 2010; Shaver and Flyer, 2000). Only recently, researchers started to identify the contributing factors to performance differences between cluster and non-cluster companies. The results, thus far, appear fragmented and inconsistent, ranging from (1) the absence of a theoretical model as a guiding line for researchers, (2) different methodologies for measuring cluster affiliation and firm performance, to (3) the propensity to analyze only a limited number of variables of many existing influencing factors.

   Despite the great interest in cluster locations, to date a comprehensive overview of the aforementioned empirical results regarding the influence of cluster affiliation on company performance is still missing. Therefore, this article pursues the following two goals: (1) Within the framework of a bibliographical search empirical results of existing studies shall be condensed in order to assess if the significant results of better firm performance at cluster locations dominate or whether the doubts regarding the positive agglomeration effects are justified. (2) Subsequently, underlying mechanisms of potentially influencing factors, which determine the effect of cluster locations on firm performance, shall be identified. The studies are screened for empirical investigations of respective factors, which will be categorized into firm, cluster, and industry characteristics.

   The important implications for both science and business practices include: Scientifically, this study presents a framework for future theory building, especially regarding potential moderators influencing the effect of cluster location on firm profitability. Practically, we draw important conclusions for mainly managers but also politicians. For entrepreneurs it shall be clarified if established clusters are the preferred locations to settle within, and in this respect, which conditions have to be fulfilled in order to generate the desired positive effect. Additionally, a more comprehensive knowledge of the influences which determine agglomeration effects on firm performance, while considering industrial, cluster specific, and firm specific circumstances, may encourage politicians to shape cluster initiatives more effectively, and thereby, enhance regional growth.

2. THEORETICAL BACKGROUND

   The foundation for discussing agglomeration effects was laid out by Alfred Marshall (1920) in his work "Principles of Economics". According to Marshall, co-location results in external effects due to knowledge transfer as well as pooling of specialized employees and suppliers, and this, in turn, creates competitive advantages for resident companies. In the past twenty years, much attention has been given to the phenomenon of regional agglomeration effects, with varying terminology (Martin and Sunley, 2003). Particularly, the nomenclatures cluster and industrial district frequently surface in literature. Both concepts are quite similar and some studies use them interchangeably (e.g., Quintana-Garcla and Benavides-Velasco, 2005). To clarify, industrial districts are not only characterized by the geographical concentration of numerous firms, which are active in related fields, but they focus on the agglomeration of small companies and on the social community of resident people (Sengenberger and Pyke, 1992; Boix and Galletto, 2009). Nevertheless, the basic principles of those concepts are the same (Molina- Morales, 2001) and industrial districts may be regarded as a special form of clusters (Parrilli, 2009).

   Within business and politics, the contemporary popularity of the debate about the utilization of agglomeration effects is mainly predicated by Porter's (1990, 1998) work. The high interest across a range of disciplines, including regional economy, strategic management, and sociology, has led to the development of numerous theories (Kukalis, 2010). However, most empirical studies, which investigated the influence of cluster location on firm performance, did not built their work upon a distinct theoretical basis. The authors usually refer to the literature of Marshall (1920), Krugman (1991), Saxenian (1994), or Porter (1998) as important scholars in the field of agglomeration effects (Audia and Rider, 2010), and summarize the advantages and disadvantages of cluster locations under the broad term of cluster or agglomeration theory. While explaining the concept of clusters and developing the specific hypotheses for their studies, they allude to many theories, like the resource-based view and its derivatives, the network theory, etc. without making a clear theoretical distinction. Only a minority of the studies refer to clear theoretical frameworks for deriving their research questions or hypotheses. Table 1 summarizes the theoretical perspectives used in the aforementioned studies.

   The empirical studies refer frequently to two popular approaches, the Resource- based View (RBV), and the Knowledge-base View (KBV), which is a derivative of the RBV. Therefore, it is prudent to elucidate these two perspectives in greater detail.

   According to Barney (1991), the RBV is traditionally based on the fundamental idea that individual combinations of physical and intangible resources create competitive advantages for firms. These resource combinations have to be strategically valuable, rare, non-imitable, and non- substitutable in order to guarantee the sustainability of the competitive advantage. Applying the RBV to the cluster concept suggests that not only the own resources and capabilities of a firm are relevant, but also the strategic shared resources (Molina-Morales, 2001) within the business environment of the cluster. Cluster locations can offer resident companies advantages for the following resource categories, as defined by Hofer and Schendel (1987): (1) physical, (2) financial, (3) human, (4) organizational and (5) technological resources, and extended by Grant (1991) with (6) reputational resources. Examples of cluster advantages for these six resource categories are detailed, with the corresponding numeration as depicted above.

   (1) The presence of a large local supplier base provides easy access to manifold inputs (Marshall, 1920). (2) Obtaining financial support, as in loans, is more attainable as resident bankers are more familiar with the dominant industry in their business surrounding (Paniccia, 1999), and social networks, as well as personal relationships to capital providers, yield more favorable conditions, as the study of Uzzi (1999) demonstrates. (3)...