Challenges

The poverty trap

Dynamic clusters are key players of a growing economy. Success stories from developed and developing countries show that clustered firms can achieve high and sustained rates of growth and competitiveness. However, many clusters in developing economies display a sluggish performance and are unable to shift from stagnation to growth. As a result, their development potential remains largely untapped.

Firms within stagnating clusters face severe bottlenecks. They operate outdated, often environmentally hazardous technology. Shortages in infrastructure and basic services limit their ability to improve product quality and capture emerging market opportunities. The labour force is poorly skilled and entrepreneurs lack access to credit and other services to expand business operations. A business culture skewed against dialogue and cooperation prevents firms from specializing in complementary production processes, thus production remains limited to a narrow range of goods or services. Firms’ efficiency and productivity are low, as they are unable to draw on new sources of technology and information.

At the same time, the institutional environment is unresponsive to the needs of the cluster or unable to provide customized services and assistance.  As a result, firms are locked into a path of cutthroat competition based on cutting costs and disregarding environmental and labour standards.

Donors and institutions concerned with local economic development seek to assist clusters in the transition from stagnation to growth. To support their endeavors, UNIDO has formulated an approach to cluster development that provides answers to this challenge. 

To go back to UNIDO's Clusters and Networks Development Programme, click here.