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To cite this article: Michael E. Porter (1994) The Role of Location in Competition,
International Journal of the Economics of Business, 1:1, 35-40, DOI: 10.1080/758540496
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Journal of the Economics of Business, Vol. 1, No. 1, 1994
MICHAEL E. PORTER
In the study of competition, the role of location has been all but absent. Most
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The basis of competitive advantage has shifted from static efficiencies to the
rate of dynamic improvement. I t is not the inputs or scale the firm possesses
today, but its ability to relentlessly innovate and upgrade its skill and technology
(largely intangible assets) in competing. In this form of competition, the role of
location changes profoundly. Firms operate globally to source inputs and access
markets. Competitive advantage, though, comes from the process of innovation
which is heavily localized at the firm's 'home base', or the location of its strategic
management team, core research activities, and critical mass of sophisticated
production, for a particular product line.
The capacity to innovate and upgrade draws heavily on the proximate envi-
ronment in which the firm's home base in a particular business resides. Our
research has begun to highlight those attributes of location that are the most
decisive, among them: the presence of a continually improving pool of skilled
employees, applied technology, tailored infrastructure, experienced sources of
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capital and other factor inputs that are specialized to a particular business; a core
of sophisticated and demanding customers for the product, whose needs antici-
pate these elsewhere; a critical mass of local suppliers of those specialized
components, machinery, and services that significantly influence product or
process improvement in the business, and the presence of other locally based
competitors to motivate progress. These attributes are interacting and are en-
hanced (or atrophy) in a mutually reinforcing, cumulative process in which
causality becomes difficult to di~entangle.~ One of the important manifestations of
these locational influences is the formation and sustained presence of entire
clusters of interconnected industries at particular locations, many of which are
competitive. Regional and national economies are heavily influenced by a rela-
tively small number of such "exporting" clusters, which drive the demand for
purely local i n d ~ s t r i e s . ~
These attributes of location bear not only on static efficiency, the focus of the
agglomeration and urbanization literatures, but more so on the capacity for
dynamic improvement. The presence of local suppliers is important not as much
for low-cost access to inputs or to drive pecuniary external economies (see
Scitovsky, 1963, and others) but to foster information exchange, working relation-
ships, and checks on opportunistic behavior that speed innovation. In a dynamic
theory, the use of proximate outside suppliers is often favored over statically
efficient vertical integration. Demand-side influences of location, ail but absent in
treatments of agglomeration economies except for occasional mentions of the size
of local demand, become crucial to the capacity to innovate. Relative comparisons
with local competitors bode large as corporate goals that motivate improvement in
a dynamic model, versus absolute standards such as cost minimization.
In a world of dynamic competition in which input costs are neutralized as a
competitive advantage and scale economies are continually vulnerable to new
ways of doing things, the flow of specialized information about technology, needs,
and rivals, the nature and effectiveness of relationships among local actors; and
the motivation driving these actors to progress are central. Proximity, in physical,
cultural, and contextual terms, of customers, core suppliers, rivals, and factor-
supplying institutions is valuable in a dynamic model of competition because of
its influence on the flow of information, the nature of interchange, and motiva-
t i ~ nT. h~e need to co-locate 'home-base' activities at a particular location becomes
apparent in order to facilitate cross-functional coordination and to integrate
38 M . E. Porter
ing the homc base entirely (a MNC's home base for a particular business necd not
be in its country of ownership).
T h e new learning on location raises a rich array of questions for future
research. It suggests the need for a renaissance in the study of external economies.
It casts new light on the study of agglomeration economies, regional science, and
indeed of industrial and economic policy. Our research suggests, for csample, that
the relevant economic area is smaller than many nations, that relevant economic
areas can cross state and even national borders, and that the most decisive
economic policy influences are often at the state and local level. All this suggests
that economic geography must move from the periphery to the mainstream. At
the same time, research on trade and FDI must begin to address a dynamic world
and connect more closely to new work on company strategy. Most broadly,
however, the new learning on location raises the ante for a better understanding
of the dynamic processes of competition, and the information, institutional, and
other foundations of choice and motivation. We must begin to understand not
only the balancing mechanisms working towards an equilibrium but also the
cumulative processes of change. Our concern must broaden from optimization
within fixed constraints to encompass the process by which constraints, whether
they be the existing technology or the available factor pool, are altered.
Notes
1. See Porter (1990) and, for example, Crocombc er ul. ( 1991).
2. See, for example, thc literature on Italian industrial districts (e.g. Piorc and Sabel, 1983). See also
Enright (1993a, b).
3. There is a role for chance or historical accident. Contrary to much recent research, ho\vevcr>many
events that look accidental are endogenous, determined by the local environment. T r u e accidents,
in turn, do not translate into competitive outcomes independently of the diamond, as \vc term the
locational attributes. Indeed, inventors today, as has been truc for at least a century, arc prone to
relocate (or sell) their inventions to the nations (location) where it \?ill yield thc highest payoff.
4. T h e generalized aspects of urbanization seem far lcss important to competition than the cluster-
specific aspects. For example, our rescarch suggests that new business formation in a location
appears to emanate from within clusters or thc intcrsticcs hertvccn clusters.
5. T h e geographic distance defining proximity can var! for individual inputs.
References
Crocombe, G. T . , Enright, h,l. J. and Porter, kt. E., Upgrudijg N m Zculund's Coi~rperirizwArlvumuge.
Oxford: Oxford University Press, 1991.
Role of Location i n Con~petitiotz 39