Michael Porter, a professor at Harvard Business School, recently addressed a full house of primarily business leaders at the Toronto Board of Trade’s 2012 Toronto Region Economic Summit. In his presentation, “Regional Competitiveness:  The Role of Clusters,” Porter argued that clusters are critical enablers of competitiveness.

He started off by remarking that this meeting would not have occurred 20 years ago because the focus would have instead been on what governments should do to create competitiveness.

In light of the austerity budgets at the provincial and federal levels, Porter’s message is timely: Businesses must work together to enhance regional competitiveness.

But what does he mean by the term “competitive”? Porter considers companies competitive when they can compete globally and when they can support the raising of wages and living standards. This message certainly resonates with us at SiG@MaRS. Businesses should not be engaged in a race to the bottom to try to reduce wages and appear competitive; rather businesses should realize that competitive companies mean prosperous citizens.

We need well-developed clusters for startups to flourish

What we need—and what MaRS has been promoting—are well-developed clusters: collections of like firms in close proximity to one another and supporting each other’s success. For example, when you visit a city, you find hotels, sightseeing companies, restaurants, souvenir shops, foreign exchange services and other services needed by tourists, all clustered together within walking distance of one another.

So what happens when you apply this same strategy to startups? Research shows that startups emerge more quickly within a cluster and that they succeed longer. Other outcomes include faster job growth, higher wages, more patents, new business formations, more rapid growth and longer survival.

But there are other factors that affect competitiveness. At the national level there are issues of tax policies and intellectual property, and there are similar policies at the provincial level. Interestingly enough, Porter argues that policies at the municipal level are key drivers of competitiveness. By municipal level, he does not necessarily mean cities; rather he means “regions,” as “economics does not care about borders.” Porter argues we should follow the natural patterns of trade.

The strength of regions depends on the strength of clusters

The strength of regions depends on the strength of clusters, and each region needs its own strategy, including effective policy co-ordination. Our own regions don’t currently collaborate particularly well.

Porter outlined the Massachusetts biopharmaceutical cluster as an example of success:

Support services

  • Health and beauty products
  • Diagnostics
  • Medical devices

Products

  • Hospital (teaching)
  • Biological products
  • Biopharmaceutical products
  • Research
  • Organizations

Specialized business services

  • Risk capital
  • Services
  • Labs

This creates opportunities for venture capital to congregate.

Porter encouraged the audience to think differently about competition, to try to attract more companies to their cluster, to create a more vibrant community and to not try to keep competition out of the region.

Not that this will happen overnight—it can take a long time to build clusters and competition. For example, it took the Australian wine industry 20 to 30 years to become a leading exporter.

So what are Toronto’s high-potential clusters?

  • Financial services
  • Logistics
  • Hospitality
  • Education/knowledge
  • Biopharmaceutical/medical devices
  • Information technology
  • Entertainment

However, the type of cluster is not as important as achieving scale in any one cluster. Developing clusters can provide an opportunity for collaboration with unusual stakeholders, including government, educational institutions and firms of all sizes, and clusters can facilitate investment.

The point is, businesses can take action. Creating competitiveness is not up to government alone—it’s an opportunity available to all of us.

Watch the video below for highlights from the Toronto Region Economic Summit, including keynote speaker Dr. Michael Porter.

Allyson Hewitt

Allyson is the JW McConnell Family Foundation Senior Fellow, Social Innovation at MaRS, where she has been leading the SiG@MaRS program; advising social entrepreneurs; building the social innovation ecosystem; and incubating successful programs such as the MaRS Centre for Impact Investing, the MaRS Solutions Lab and Studio Y. See more…