What are clusters and networks?
Clusters and networks are different yet linked phenomena. Clusters are agglomerations of interconnected companies and associated institutions. Firms in a cluster produce similar or related goods or services and are supported by a range of dedicated institutions located in spatial proximity, such as business associations or training and technical assistance providers. Vibrant clusters are home of innovation oriented firms that reap the benefits of an integrated support system and dynamic business networks.
Networks are alliances of firms that work together towards an economic goal. They can be established between firms within clusters but also exist outside clusters. Networks can be horizontal and vertical.
- Horizontal networks are built between firms that compete for the same market, such as a group of producers establishing a joint retail shop
- Vertical networks, particularly supplier development schemes, are alliances between firms belonging to different levels of the same value chain, such as a buyer assisting its suppliers for upgrading.
Why does UNIDO work with them?
Clusters and business networks have become keywords in the policy debate in industrialized and developing countries. They are regarded as tools to promote poverty reduction and the development of competitive industries. However, several bottlenecks may hamper their performance.
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 They operate outdated, often environmentally hazardous technology.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.
Building on the experience gathered in the field, UNIDO has designed a methodology for the formulation and implementation of cluster development projects.
The UNIDO methodology is based on the following steps:
- Cluster selection, which entails the identification of the cluster(s) to be assisted;
- Diagnostic study, an action-oriented analysis of strengths, weaknesses, opportunities and threats of the cluster(s);
- Vision building and action planning, which refers to the formulation of a vision and a corresponding development strategy shared by the entire cluster;
- Implementation, i.e. the management and coordination of the activities outlined in the action plan, including the establishment of horizontal and vertical networks.
- Monitoring & evaluation (M&E) of the qualitative and quantitative outcomes of the project.
This methodology helps trigger the process of cluster development. To make it sustainable over time, UNIDO works with local institutions strengthening their capacity to assume leadership of the process and support cluster firms in their future endeavors.
Based on this approach, UNIDO offers a range of services to private and public sector institutions engaged in cluster development.