An Interdisciplinary and Multilevel Analysis of Local Economy Determinants and Their Impact on Firm Performance—Considering Porter’s Diamond Model, Clusters, and Industry

Abstract

Industrial Organization, the Resource-Based View, and the Relational View are some classical, well-established, and widely accepted theories in the strategic management domain regarding the understanding, explanation, and prediction of competitive advantage of firms and above-average firm performance. Recent evidence of economic geography and regional economics added to this stream of research new perspectives like cluster theory and microeconomic competitiveness. Despite the high enthusiasm with which companies and policymakers embraced the new advancements, there is some contradictory evidence regarding the positive effect of local conditions on firm performance. Thus, in this paper, we aim to empirically test some aspects of a modern regional development theory, proposed mainly by Michael Porter and collaborators, and the impact of these aspects on firm performance. External determinants considered at three levels of analysis (local economy, local clusters, and industry) will be investigated in relation to firm performance. We will analyze empirical data through detailed correlational analyses and by building multilinear regression models. After the statistical analysis of the answers provided directly by 67 medium and large manufacturing companies operating in Romania, we will provide empirical support for some external determinants, while for other determinants, we will show that the data rejected the proposed associations. The main conclusion derived from this study is that different combinations of external determinants, considered at all three levels of analysis, have a positive and significant effect on different measures of firm performance. The findings in our paper are important for both regional economics and the strategic management literature, suggesting the importance of creating local or urban conditions depending on the type of performance that the firms in the local economy are underperforming.

Keywords

• economic development
• strategic planning
• urban economics
• urban competitiveness
• strategic management
• local economy determinants