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SME clusters

There is ample evidence that small- and medium scale enterprises (SMEs) operating in the same or in related industrial sectors tend to cluster close to one another. This tendency to bunch in well defined areas has been observed in different environments in both developed and developing countries, and in different historical periods. There are sound economic reasons for this phenomenon. SMEs operating in such clusters derive a clear competitive advantage from:

  • the proximity to sources of raw inputs,
  • the availability of suitably customised business development services,
  • the abundance of clients attracted by the cluster tradition in that industry, and
  • the presence of a skilled labour force.

SME clustering is common in a wide range of countries and sectors. The literature on the so-called Italian industrial districts describes SME clusters that have reached high levels of growth and leadership in profitable niches of world markets (e.g. leather goods, textile, jewelry, ceramic tiles, and spectacle frames). Similar accounts exist from other developed countries such as Germany, the USA, and Japan. Evidence on clusters in Latin America, Asia, and to a lesser extent in Africa,  is also available in these UNIDO documents: "Principles for Promoting clusters and networks of SMEs" (PDF/153KB/39pages) and  "Industrial Clusters and Networks: Case Studies of SME Growth and Innovation" (PDF/490KB/78pages).

Since 1993, UNIDO, through its Private Sector Development Branch, has developed  an approach to help government and the private sector to co-operate in the design and implementation of programmes to promote  the organisation and development of clusters and networks of SMEs. The programme draws lessons from the experience of successful clusters and it implements them through technical cooperation projects in various developing countries. Some of the countries where this approach has been introduced are India, Indonesia, Malaysia, Mexico, Nicaragua, Honduras, Jamaica, Bolivia, Madagascar, Morocco Tunisia.
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Rationale of the UNIDO Programme

The guiding principle of UNIDO’s approach towards SMEs is that these enterprises can play a key role in triggering economic growth and equitable development in developing countries. However, this potential role is often not fulfilled because of a particular set of problems characterising SMEs that are related to  size:

  • Individually, SMEs are often unable to capture market opportunities which require large production quantities, homogenous standards, and regular supply.
  • They experience difficulties in achieving economies of scale in the purchase of inputs (such as equipment, raw materials, finance, consulting services, etc.)
  • Small size constitutes a significant hindrance to the internalisation of functions such as training, market intelligence, logistics and technology innovation - all of which are at the very core of firm dynamism.
  • Small scale can prevent the achievement of specialised and effective internal division of labour that fosters cumulative improvements in productive capabilities and innovation.
  • Because of the continuous and fierce struggle to preserve their narrow profit margins, small-scale entrepreneurs in developing countries are often locked in their routines and unable to introduce innovative improvements to their products and processes and look beyond the boundaries of their firms to capture new market opportunities.

The emphasis of the UNIDO Cluster/Network Development Programme is to provide assistance to SMEs so that they can escape these limitations through co-operative endeavours. For this purpose, UNIDO supports the creation and strengthening of SME networks and the development of existing SME clusters where:

  • the term ‘network’ refers to a group of firms that cooperate on a joint development project - complementing each other and specializing in order to overcome common problems, achieve collective efficiency and conquer markets beyond their individual reach, and
  • the term ‘cluster’ indicates a sectoral and geographical concentration of enterprises which produce and sell a range of related or complementary products and are, thus, faced with common challenges and opportunities.

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Networking

As far as network creation/strengthening is concerned, the UNIDO approach envisages five inter-related phases:

  1. The promotion and motivation phase consists of a set of promotional initiatives that contribute to:
    • the identification of a critical mass of SMEs sharing similar growth constraints,
    • their sensitisation to the benefits of networking, and
    • the emergence of groups and of group leaders.

    This is done by organising large and open meetings to introduce the principles of networking and to indicate their possible applications. As a result of this promotional initiative, entrepreneurs group around issues (problems and/or opportunities) that they have in common.

     

  2. The strategic planning phase involves the following elements:
    • an analysis of common problems and opportunities,
    • the establishment of a common work plan, and
    • an organisational structure for the group.

    An in-depth analysis of the growth constraints of the enterprises and of their causes is required at the beginning of this phase. Furthermore, the definition of group work plans depends upon a consensus being reached with all group members concerning the evaluation criteria to be applied in the short, medium, and long term. During this phase, the group selects its legal status and the rules that govern its internal organisation.

     

  3. The strategic planning phase opens the door for the implementation of a pilot project phase through which cooperation  starts bearing concrete results to the participating enterprises. The aim is to generate visible results (although of a short-term nature) in order to engender optimism and trust and to consolidate the network's willingness for further cooperation. In general, the projects undertaken over this phase are of a commercial and/or promotional kind, such as:
    • joint participation in fairs,
    • joint purchase of raw material,
    • design of a collective catalogue, etc.
  4. Pilot projects are expected to give way to strategic projects focused on specialisation and complementation at the production level. Strategic projects commonly involve one or more of the following components:
    • an increase in the degree of specialization, by process and by product, of the network members,
    • the provision of common facilities also through the creation of new enterprises.

     

  5. The final stage is the self-management phase, which coincides with the group of enterprises gaining greater autonomy and the capability to carry out further joint activities independently.

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Cluster development

The UNIDO approach envisages networking initiatives as components of a broader spectrum of support measures to SMEs. This is because such initiatives are frequently much more effective and sustainable if they involve the entire range of actors with whom the SMEs commonly interact. Among such actors, it is important to single out:

  • Suppliers of raw materials, plant & machinery
  • Consumers of goods and services from the SMEs
  • Testing laboratories (both private and public)
  • Research and development institutions
  • Industrial Associations
  • Technical and management consultancy organisations
  • Training Institutions
  • Regulatory bodies enforcing/monitoring rules and regulations
  • Local Government
  • Financial Institutions

SME clusters constitute ideal targets for a SME support agency. The concentration of largely homogenous enterprises within a relatively limited geographical area:

  • facilitates the intervention because of the similarity of needs and support requirements,
  • speeds up the dissemination of best practices because of the pervasiveness of demonstration effect, and
  • allows for a distribution of the fixed costs of interventions among a large number of beneficiaries.

This is true for under-achieving clusters as well as for the best performing ones.  However, underachieving clusters are characterized by environments where information does not flow easily and where the various actors are not accustomed to talking with one another. In stark contrast with their counterparts in well-performing clusters, especially in developed countries, entrepreneurs in under-performing clusters rarely if ever meet one another, do unot usually have on-going relationshiops with providers of business development services and are not accustomed to presenting articulated calls for action to the local policy makers. As a matter of fact, these clusters are often characterized by extremely fragmented knowledge, latent conflicts, and an absence of discussion fora. As a result, the SMEs in these clusters  have very poor perceptions about the feasibility of joint actions.
The UNIDO cluster approach is an attempt to address knowledge fragmentation, lack of co-ordination and joint action. It is based upon the realisation that the lack of communication among the various cluster actors and their scepticism towards joint endeavours are deeply entrenched within traditional business practices and that the latter cannot be replaced without the investment of significant resources. The activities required to overcome knowledge fragmentation and poor co-ordination are:

  • Awareness- and trust-building initiatives
  • The dissemination of best practices within an audience of scarcely motivated SME owners
  • The creation of suitable discussion fora and ultimately of a governance framework for the cluster as a whole

These are all activities whose outcome is not only subject to a high degree of uncertainty but are also largely indivisible and non-excludable (i.e. once provided are available to all). As a result, profit-motivated agents should not be expected to invest a great deal of their resources for the realisation of such activities.

The UNIDO cluster approach aims to achieve these outcomes by helping the various cluster actors to develop a consensus-based vision for the cluster as a whole and by strengthening their capacity to act upon such a vision.

  • The first component is aimed at reducing the fragmentation of knowledge, but it also provides a valuable opportunity to draw attention to a common and often very innovative agenda, so that each cluster actor (and above all SME owners) has an opportunity to test the reliability and trust-worthiness of its partners on a "fresh" ground.

     

  • The second component of the approach aims at enabling the various cluster actors to overcome traditional practices and put in place a sustainable, autonomous governance framework which will keep dynamising the local economy long after UNIDO will have withdrawn from the cluster.

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