Adam Smith and the Role of Limited Government

Adam Smith, the father of economics taught us in his book The Wealth of Nations, that laissez-faire approaches to the market encourage the highest levels of growth. Government is limited in its role and provide the greatest freedom to business without unnecessary restriction. As we experienced during the advent of globalization, companies regularly choose nations with lower input costs and fewer restrictions. Newly formed clusters will need to offer something more than simply "cheap" costs and instead push for maximum growth opportunities through cultivating environments that supersede advantages of low cost manufacturing localities.

The market system will determine where companies will invest in operations, where they will hire employees, and how they will contribute to the global economy. Low cost copycats will be drawn to cheaper locations, while innovators will be attracted to places that spark the greatest opportunities for the development of new services and products.

One seeks to to focus on a low cost strategy that uses available technology. The other seeks to dominate the market by leading it through transitions with new products and services. Companies that seek innovative strategies will inherently look for locations that have the right elements that foster knowledge accumulation and intellectual capital.

A cluster exists within a local economy with inherent benefits that allowed these clusters to form in a one location over another. Governments create market conditions by attracting or deterring business investments through government policy making. Business-minded global companies do not invest locally out of patronage or loyalty but because they believe they can achieve the greatest advantages by doing so.

Adam Smith states, "Its not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from the regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages (Smith, 1776)."

As a profit oriented enterprises, governments should move beyond traditional approaches to economics by thinking from the perspective of would be corporate interlopers. What are they looking for, what type of environment are we providing and how do we provide it are essential questions to strong cluster management.

Of course we have choices, and one of them is to not change or adjust our governance to a global marketplace. We can use the same methods, continue to lose corporations, and watch our national debt rise and incomes decline. The role of government is to create polices that are in the best interest of their citizen stakeholders and thus have a responsibility to adjust their thinking when necessary.

Proper cluster management offers opportunities for government to be an environment creator but not seek to fight against the forces that allow are swirling through the global economy. Fighting these forces leads to greater decline. However, they can create local advantages by rethinking some policies that are hurting the ability of business to flourish while at the same time still protecting the needs of citizens.

Nationalism and loyalty are powerful motivators for local businesses but international companies have options where countries are often seen more as tax and cost incentives than believing in a particular national causes. While it is difficult to calculate the amount gained or lost due to corporations moving operations overseas, the amount is likely in the trillions of dollars in tax revenue. Creating strong market driven clusters helps to draw these businesses back to the U.S. because it is their best interest to do so to maintain their profit margins.

Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations. London: W. Strahan. Book 1, Chapter 2.

Buttom-up National Cluster Policies

Each country managers their clusters in different ways depending on their cultural and economic backgrounds. A study in the Administrative Sciences analyzes six biotech clusters in Japan, Germany, and France helped to determine which approaches each uses (Okamuro & Nishimura,2015). What they found was that clusters typically take a bottom-up versus top-down approach to management that leads to different costs and benefits.

Bottom-up driven clusters are initiated, driven, and financed mainly by local firms that seek self gain within the system. Top-down clusters are publicly funded and pushed by policy makers.  Cluster management can run the whole range between these two approaches.

Bottom-up clusters appear to be more cost effective for countries that seek to develop homegrown skills based on previous businesses within the region. It doesn't require high amounts of excess capital to "force" these clusters to emerge but instead uses policies that seek to set in place the right conditions that lead to organic growth.

1. Government incentives in terms of tax breaks and research funding support are positively associated to private-driven clusters.

2. Private-driven clusters tend to support private-driven bottom-up management styles.

3. High-incentive cluster policies is consistent with private-drive bottom-up cluster management.

The study helps us understand that the development of clusters doesn't need to be an expensive proposition but that government should put in place appropriate incentives to create the right environment that supports cluster growth. Government has a significant place in passing pro-cluster policies and supporting research that comes out of such clusters. They should pave the way through tax breaks and better city management that leads to attracting and locating businesses in close proximity to each other based on shared similarities.

Okamuro, H. & Nishimura, J. (2015). Local management of national cluster policies: comparative case studies of Japanese, German and French Biotechnology Clusters. Administrative Sciences, 5 (4).

Data Infrastructure Investment Leads to GDP Growth

The internet has led to economic growth within the country and will continue to do so if investment in data infrastructure is made. According to a study conducted in the International Economics & Economic Policy Journal, the expansion of the internet leads directly to increased goods and services a country produces (Welfens & Perret, 2014). The greater the integration of the internet and its networking capabilities, the higher the growth of national production leaving one to conclude that focusing on developing stronger information and data sharing systems can have significant benefits for regional development.

The study found that the amount of time people spent on the internet in meaningful searches led to an increase in gross domestic product (GDP). A 10% relevant share of time budget use of the internet led to 2k-5% increase in gross domestic product. At 20% usage this would increase GDP to 4.7-10.4%.

Meaningful searches and web based activities leads to greater knowledge, job exploration, purchasing products, or interacting in a way that produces a meaningful output for society. As people spend more time engaging in these useful activities, they also increase their knowledge and commerce in a way that improves national output.

Governments should consider the benefits of increasing their data infrastructure investments to ensure products, information, and resources are moving quickly throughout local regions. For businesses and professionals that rely heavily on information and financial transactions, an increase in communication abilities has significant influence on their firms performance.

From a GDP demand side perspective, investment in data infrastructure has an impact on companies production capacity. A formula helps us understand this relationship. Y real output = C consumption + I Investment + G Government Consumption + Xnet Current Account.

Y=C+I+G+Xnet

As private and public resources are allocated to network creation, the economy begins to expand as more people use that system to accumulate new knowledge. This change becomes more apparent in educational opportunities, research, business networking, and purchasing behavior. It also has tertiary benefits for society based on idea sharing and household productivity.

Increases in communications infrastructure, like the internet and business networks, creates advantages for personal and commercial activities that lead to economic growth. Development of data infrastructure will also have a significant impact on the growth and development of clusters within a region that rely heavily on personal and business information sharing. Restructuring and enhancing local telecommunications infrastructure can be an important component for expanding future business development opportunities.

Welfens, P. & Perret, J. (2014). Information & communication technology and true real GDP: economic analysis and findings for selected countries. International Economics & Economic Policy, 11 (1/2).

Does Expanding the Internet Open Possibilities for Economic Growth?

The Internet has led to remarkable growth in global commerce in ways that are slowly shifting society toward a highly competitive environment. The way in which companies connect to each other has fundamentally changed as information moves from one to other parts of the world quickly. According to a study in the  International Economics and Economic Policy, the Internet matched with Openness leads to the most economic growth (Meijers, 2014). 

The Internet is an important mechanism by which open cultures connect with the world, share ideas, engage in commercial activities and develop economic momentum. When cultures are open in terms of being open to new ideas, concepts, sciences, cultures, religions and engagement they can use the Internet to enhance their commerce.

Economic growth without openness to new ideas is stunted. While it may allow for transfer of information, the use of that information to develop new opportunities is limited. Having the right mindset supported by the information gathering abilities of the Internet can lead to significant economic expansion for countries.

The study found that the internet lent to international trade and economic growth. The internet allowed for more connections with other companies that resulted in the development of new ideas. International trade ushered in economic growth and the Internet further influenced the volume of that international trade.

"The internet facilitates the generation and spread of knowledge and new ideas tremendously which allows for an increased productivity of the research process and an increased diffusion of its products and outcomes"

The researcher reviewed data from 213 countries, collected from the World Bank in 2010, on World Development Indicators from 1990 to 2008. They also included information from the International Telecommunication Union. They two sources of data helped to create a more comprehensive review.

The more countries became "connected", the more they grew. A 10% increase in per capital Internet led to a 3.9% increase in openness ration that in turn led to a .17% increase in economic growth. There was a direct relation between the growth of the Internet and the economic strength of a country.

The study helps us understand that while economic booms slowed when internet expansion reached saturation in wealthier nations, it is still a catalyst for improving international growth. Saturation is based on internet use but further network development can lead to new spurts of growth. Having faster internet and stronger networking raises opportunities to engage in international trade.

Clusters offer the ability to reduce transaction costs and increase connectivity among people and businesses. Moving to higher developed methods of clustering businesses through electronic means could lead to a new level of economic growth. Matched with openness and the right resources, the possibilities of using the Internet and its growing network capabilities to push economic growth within local economic clusters increases.

Meijers, H. (February, 2015). Does the internet generate economic growth, international trade, or both? International Economics and Economic Policy, 11 (1-2).

Foreign R&D Investment Spurs Cross Firm Innovation

Foreign investment and development of firms within clusters creates higher levels of learning and adaptation for domestic firms. According to a study of intra-industry knowledge spillovers in the Review of Development Economics, the R&D stock of foreign-owned firms had a positive impact on the productivity of domestic firms within the same industry creating significant knowledge spillovers that led to  faster adaptation (Todo, Zhang, & Peking, 2011). Encouraging foreign R&D investment can improve local growth through the creation of a greater product knowledge.

The study used firm-level panel data from a Chinese science park, known locally as China's "Silicon Valley". What they found was that R&D activities of foreign investment had a significant impact on the innovative abilities of domestic firms through knowledge sharing. Local firms quickly adjusted and changed after introduction to new technologies and information.

The process is similar among domestic firms, but doesn't create as much adaptation as compared to when highly developed companies invest in the area. It is a little like playing "catch up" after a student has fallen behind. The new international knowledge drastically changes the playing field for local firms that need new ideas and information to compete.

Firms don't operate in isolation but share information through the hiring and movement of employees, working with suppliers, and obtaining needed resources. Knowledge transferred from more advanced firms, to less advanced firms, in a way that increased productivity through innovative development.

When administrators foster cluster creation, it is helpful to consider attracting foreign firms, specifically firms with advanced technologies, into the cluster to keep local firms growing and changing. While it is helpful to attract firms in the same industry, it is also beneficial to attract firms in similar industries that share related products and knowledge.

The study originated in China but does highlight the need to encourage foreign investment as an important catalyst for local cluster growth. Attracting national and international firms into a cluster with varying degrees of sophistication can lead to growth for related industries that share similarities. There is an inherent value for firms to move their operations into a cluster in order to maintain their competitive offerings, while those that do not, may be limited by a lack of knowledge sharing.

Todo, Y., Zhange, W. & Zhou, L. (2011). Intra-industry knowledge spillovers from foreign direct investment in research and development: evidence from China's 'silicon valley'. Review of Development Economics, 15, (3).

Encouraging Trade and Fighting Intellectual Property Theft

Intellectual property theft, hacking and lack of regard for other ideas is becoming a concern. Even more alarming is the amount of theft that occurs across international borders as some nations have developed cultures of stealing where the rights of the producers are not respected. Precisely why some countries, and the companies within, engage in intentional acts of intellectual theft is discussed in Trade Liberalization, Corruption and Software Piracy published in the Journal of Business Ethics.

Culture of Corruption:
Cultures that have more corrupt governments also engage in more theft. They have little oversight and lack a healthy respect for the rights of their citizens as well as the rights of those from other countries. Within develops a culture of corruption where theft is part of everyday business and there are few ethical qualms about it.

Economic Freedom:
Countries that have more restrictions on economic activities also have more corruption. Free trade countries seem to have less corruption while those that have more governmental barriers to movement of goods and money have more. Part of the reason could be associated with a lack of competitiveness within isolated nations.

Countries can be highly innovative by seeking new solutions and products to compete within the global economy. Some countries may suffer from a lack of competitiveness and therefore seek to copy others work as a cheaper alternative to making money. When new products hit the market, they are willing to steal their information in an effort to create profits.

This makes trade more difficult when international intellectual rights and laws are not appreciated. Most international companies engage in a level of risk management that determines approximately how much of their products will be stolen. Ensuring copy write and intellectual protection guarantees and potential damage compensation when passing treaties is helpful in combating these activities. Another option is to shun and isolate high theft countries leaving their economies weaker until their government enforces international standards.

Robertson, C., Gilley, K., & Crittenden, W. (2008). Trade Liberalization, Corruption and Software Piracy. Journal of Business Ethics, 78 (4).

Aspects of Successful Cluster Management of the Seventh District's Largest Cities

Cities that become hubs for regional economic expansion share some similar traits. There are benefits to opening businesses within existing clusters that lead to overall development of profitable opportunities. To understand this is beneficial to look at a district and how the cities are fostering their economic development. A study within the Economic Perspectives Journal offers insight into benefits of clusters within the U.S.'s seventh districts largest cities (Matton & Wange, 2014).

Wages, patents, and economic growth are often associated with hub oriented cities that support the development of strong industry clusters. Each of the regions appears to have their own competencies such as automotive, technology, aerospace, rubber, transportation, as well as other market driven activities. When enough of these industries exist and work in collaboration they have formed a meaningful cluster.

Each city tries to actively manage these clusters with varying degrees of success often based on how well they target growth sectors. Those that are successful, regularly find greater advantages in terms of the upswing in wages, patent creation and ultimately economic growth. These cities become known for their investment opportunities and products based on their capacity to produce quality products and services.

There are advantages for professionals who work within these clusters, in terms of wages and lifestyle. While the costs often rises, so does the income of the labor force that work within these clusters. Other benefits to lifestyle increase as educational and cultural organizations arise to support the budding skilled and professional classes.

When clusters are successfully managed the following five aspects seem to be present:

1. Lower Tax Rates
2. Strong Transportation Structure
3. Well trained workforce
4. Global investment appeal
5. Educational and cultural organizations

Clusters work well when products and services are moved around quickly. Knowledge development appears to be a main criteria for success as skill levels and wages arise. Development is catalyzed when costs, such as taxes are lower, and investments improve to keep these industries expanding. Educational and cultural organizations foster growth of new innovation and support the education of the skilled workforce.

Matton, R. & Wang, N. (2014). Industry clusters and economic development in the seventh districts largest cities. Economic Perspectives, 38 (2).