Discuss the advantages and disadvantages of cluster location for the participating companies. Reflect on the consequences of a London location for the resident businesses. 

Answer: Advantages of the clustering of firms can be summed up as follows:

  • specialised infrastructure
  • industry-sector-specific factors of production/services
  • skilled labour
  • information and knowledge synergies
  • access to appropriate or superior inputs
  • advanced communication and exchange of cost saving ideas.

On the one hand, clusters are able to create a beneficial value proposition for their region. On the other hand, there might some developments occur that lead to a weakening in terms of reduced competitiveness or stagnation. At the worst, these factors can even lead to a downfall of the whole cluster. Disadvantages of clusters can be summarised as follows:

  • Specialisation as a weakness: Technological discontinuity and changes in technology, respectively, can lead to massive drawbacks. In addition, changes in the economy as well as changes in customer needs may require new ways of specialisation.
  • There is the threat of a long-term inflexibility of a cluster, which is often supported by slow reaction times to changes in the cluster’s environment.
  • Complacency might occur in a cluster, e.g., due to success of companies within the cluster, which might lead to blindness with regard to a need for adaptation.
  • Lock-in effects might act as disadvantages of a cluster. For example, an excessive focus on local relations with other firms might lead to a neglect of external connections. Additionally, the coexistence of competition and cooperation might lead to decreasing competitive pressure due to the cooperative relations between the partners which, in the long run, could affect innovation negatively.
  • If existing companies in a cluster start building up entry barriers for newcomers, this could result in various inefficiencies.
Transferring these arguments on the diverse advantages and disadvantages of the London region, resident businesses might expect the following consequences from being located in Great Britain’s’ capital:
  • Geographical concentration enhances improvement and innovation.
  • Many companies support educational institutions close to their London headquarters.
  • Collaboration of companies with universities accelerates basic research and product innovation.
  • Since there are more head offices of banks located in London than in any other city in the world, this enables them to benefit from a wide range of highly skilled labour.
  • “Newcomers”, such as smaller financial service providers benefit from the outstanding infrastructure as well as from a large supply of skilled labour and geographical proximity to all major players of the financial sector.
  • Cooperation between competing companies leads to both, further advantages, but also disadvantages (co-opetition).