What makes a local (or regional) economy competitive? Three factors can be identified:
- The strength of the competitive advantage of the firms within tradable clusters which make up the local economy. Since competitive advantage implies greater profitability, if local firms have strong competitive advantages, this will translate through to strength in the local economy.
- The presence of scarce resources within the local region. Firms within local economies may derive their competitiveness from an endowment of scarce resources within their region. These “scarce resources” may not just be tangible assets such as natural resources, but may consist of intangible assets of a strategic nature such as specialized skills, learning, and knowledge.
- Network effects derived from tradable clusters. Clusters are geographically concentrated and supportive networks of producers, suppliers, and associated organizations such as academia, etc. The very presence of a cluster within a region can lead to the creation of a critical mass of economic activity with associated spillover effects which accrue to cluster members.
Just like a competitive firm, competitive advantage in a local economy is derived from distinctiveness – non-reproducible capabilities in one or more of the tradable clusters or sectors that makes up the region’s economy. This distinctiveness may be derived from the capabilities of individual firms comprising the cluster, the network effects which the cluster enjoys, or special access to strategically important assets that the cluster enjoys.
The challenge for local governments is to identify the sectors or clusters in their local economies where existing distinctiveness can be either exploited, or new distinctiveness developed. In this sense, governments should pick winners – clusters or sectors whose competitiveness is derived from distinctiveness, which will further benefit from access to economic development initiatives and resources.