The Role of Cluster Theory for Economic Development: Does Porter’s Competitive Diamond Fail to Explain Dubai’s Financial Cluster?

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THE ROLE OF CLUSTER THEORY FOR ECONOMIC DEVELOPMENT: DOES PORTER’S COMPETITIVE DIAMOND FAIL TO EXPLAIN DUBAI’S FINANCIAL CLUSTER?

Klaus U. Zumbach

A Thesis Submitted to the Graduate College of Bowling Green State University in partial fulfilling of The requirements for the degree of

MASTER OF ARTS August 2010 Committee: Dr. Michael C. Carroll, Advisor Dr. Kevin J. Quinn

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© 2010 Klaus Ulrich Zumbach All Rights Reserved

iii ABSTRACT Dr. Michael C. Carroll, Advisor The current financial crisis has had significant global impact. Even Dubai, with its constant high growth rates is not exempt from the economic recession. Surprisingly, Dubai’s hit was delayed but still with the full impact of the crisis. This study examines the case of the development of Dubai’s financial cluster and determines which of its problems are self-induced and which can be explained by Porter’s (1998) competitive diamond. With support of the existing literature provided by Krugman (1991), Sölvell et al. (2003), and Weber (1929) and the examination of three financial and IT clusters, it was possible to develop nine characteristics essential for the success of cluster formation that could have reduced the likelihood of an economic failure. The model of nine characteristics serves as a comparison to Porter’s (1998) competitive diamond which was applied aggressively through Dubai’s cluster initiative. Consequently, the nine characteristics exposed significant weaknesses of Porter’s diamond explaining Dubai’s financial problems as an emerging cluster. This paper seeks to explain the current economic situation of Dubai in combination with Porter’s competitive diamond concept.

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“My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel.” (Sheikh Rashid, 1977)

“Change brings opportunities. On the other hand, change can be confusing.” (Porter, 2001)

“I have spent my whole professional life as an international economist thinking and writing about economic geography, without being aware of it." (Krugman, 1991)

v ACKNOWLEDGEMENTS

I would like to express my gratitude to those who were responsible for the composition throughout the entire thesis process:

To Dr. Michael Carroll and Dr. Kevin Quinn for their support, guidance, and encouragement during the entire writing process. Their interest and ideas made this project very special to me. To Dayna Herrington who encouraged me to improve my writing and was a great support in the compilation of this thesis. To my family, friends, and members of the German-American Clubs, who supported me in the experience to study in the United States at Bowling Green State University.

Thanks and Danke!

vi TABLE OF CONTENTS Page INTRODUCTION ..... ........................................................................................................... Definition of a cluster ................................................................................................ CHAPTER ONE. LITERATURE REVIEW ....................................................................... Michael E. Porter and the competitive diamond ....................................................... Cluster initiatives: Sölvell, Lindquist, and Ketels (2003) ......................................... Location theory by Weber (1929) ............................................................................. Geography and trade by Krugman (1991)................................................................. Summary ........................................................................................................... ................................................................. 1 2 4 4 8 11 15 19 20 20 20 21 22 22 22 23

CHAPTER TWO. THE SIX CLUSTERS IT cluster

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Silicon Valley...
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