Local Competitors

The standard economic textbook treatment of competition gives the impression that production and consumption take place on the head of a pin, as if space did not matter. In reality, of course, space does matter, in ways that constrain the boundaries of competitive domains and the intensity of competition in those domains. The resources for which firms compete are not evenly distributed in space, but are geographically clustered, often independent of political-administrative boundaries. Agglomerations such as the wine industry in Southern California, the financial district of the City of London, the Indian film cluster in Mumbai, the surgical instruments cluster in southern Germany, or the boat building cluster in northern New Zealand all conjure images of highly localized business activities, supported by locally specific institutions and social structures.

Local competition may be understood from two perspectives, with different predictions for the nature of business transactions. Standard economic theory suggests that within a given locale barriers to entry are lower than elsewhere to the extent that labor skills, material and financial assets, information, and other inputs are more readily available locally. The presence of a large number of firms in the region is predicted to increase business entry rates into the region because potential business founders will view a large local business population as an indicator of market and investment opportunities. By contrast, the ecological approach to competition highlights the crowding effects of business populations. A large population of firms, which all draw on the same or similar resources, is predicted to depress firm entry [Page 1022]rates. The more firms' market domains overlap, the more strongly they compete. The addition of a firm to an existing population has stronger competitive effects on firms in the same domain than on firms in more distant domains, reducing founding rates and increasing failure rates.

One way to reconcile these theoretical predictions is to consider the definition of competition that they assume. Economic theory views rivalry more as a form of competition among a narrowly defined population of firms, focusing on the social and cognitive aspects of competition. Local competitors, from this perspective, tend to orient their activities toward those firms they perceive as rivals. The ecological perspective, by contrast, subscribes to a less-social definition of competition. It highlights the more diffuse and indirect interdependence between firms that may or may not be directly aware of each other. Of course, economic rivalry and ecological competition may operate jointly in a given setting. For example, firms may compete globally in product markets, but locally in factor-input markets.

Research

Our understanding of local competition draws on substantial academic research that typically falls in one of three categories. One line of research focuses on the geographic distribution of resources. A second body of literature studies the flow of information across space. And a third body of research focuses on the level at which economic aggregates can develop competitive advantage. While each of these literatures has a distinct focus, they share the argument that the optimal location of a firm depends on the locations chosen by the firms with which it interacts. Local competitive processes reflect the resource interdependence of firms.

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