Enterprise Clusters and Networks in Developing Countries

Meine Pieter van Dijk, Roberta Rabellotti

• Publisher: Routledge
• Year: 2005
• eBook ISBN: 9781135777500
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Enterprise Clusters and Networks in Developing Countries analyses the functions and advantages of clusters and networks for small enterprises in developing countries.
In the opening chapter the editors describe different types of clusters and networks and compare the diverse forms of external economies and co-operation effects derived from them. Taking a multidiscplinary approach, they point out it is trust that is the social basis for positive effects of clustering and networking, which are often sources of co-operation and technology diffusion for small enterprises in developing countries.

1: Clusters and Networks as Sources of Cooperation and Technology Diffusion for Small Enterprises in Developing Countries

MEINE PIETER VAN DIJK and ROBERTA RABELLOTTI

I. INTRODUCTION

After discussing alternative industrialisation strategies¹ and flexible specialisation,² the EADI working group on industrialisation in the Third World decided during the EADI conference in Berlin (September 1993) to delve more deeply into the factors determining the success of certain small enterprise clusters and networks. The underlying issue has always been how to increase employment and economic growth through small enterprise development.³

Most chapters in this collection look at the functions and advantages of clusters and networks. Different types of clusters and networks are described, and the diverse forms of external economies and co-operation effects derived from them are compared. The approach adopted in this volume is multidisciplinary. Economists use their microeconomic tools to analyse the economic advantages of clustering, geographers stress the importance of space, while, from a sociological perspective, interactions are analysed mainly as personal relationships based on trust. The integration of these different perspectives makes this volume an interesting witness of the fruitfulness of an interdisciplinary discussion.

In this introductory chapter we will define clusters and networks in a small enterprise context. The social basis for the positive effects of clustering and networking is trust, which is the central term used in Chapter 8 of the volume. The economic results of clustering and networks can be analysed in terms of external economies and co-operation effects, which are central in Chapters 2, 3 and 4. The concepts of trust, different types of economies and co-operation will be discussed in this chapter before the structure of the book is explained.

II. CLUSTERS, DISTRICT AND NETWORKS

In institutional economics a cluster of small enterprises is considered as a way of industrial organisation embracing both geographical and sectoral specialisation, competing with large and medium-scale enterprises. The spatial proximity of a group of firms specialised in making the same or similar products does bring benefits. More importantly, it is a major factor facilitating the division of labour among specialised producers, the emergence of suppliers, buyers and institutions aimed at providing specific services, the circulation of information about technology, the market and so on. The density, quality and type of these linkages are crucial to explaining the real economic advantages of clustering.

According to Marshall [1890], if a cluster is effectively characterised by, at least, some degree of division of labour, then it can be defined as an industrial district. Following the definition given by Rabellotti (in Chapter 3), a cluster matches the ideal-type of industrial district as described in the literature if the following key elements are satisfied:

1. – there is a strong, relatively homogeneous cultural and social background linking economic agents and creating a common and widely accepted behavioural code, sometimes explicit but often implicit;
2. – there exists an intense set of backward, forward, horizontal and labour market linkages, based both on market and non-market exchanges of goods, services, information and people;
3. – there is a network of public and private local institutions supporting the economic agents acting within the clusters.

Industrial districts and, sometimes, also geographical clusters of enterprises have as their social complement a network of entrepreneurs. Such a network (for example, of entrepreneurs from a similar region, tribe or profession) is often based on trust of one kind or another. The interesting thing is that networks may exist independently from physical clusters. Economic interaction can also take place in personal rather than spatial networks. The case studies presented in this book show that there are very different types of networks linking small entrepreneurs. Subcontracting networks are different from ethnic networks, which are again different from trader-run networks. In trader-run networks brokers and middlemen play an important role in organising small enterprise networks. They often take care of the financing, transport, insurance and distribution of the goods. They may be tied to suppliers through credit arrangements. These traders can also function in the transfer of new ideas about product design, quality and technologies to the producer.

Trade associations, defined as forms of collaboration between small entrepreneurs active in a similar branch, appear particularly to play a very clear role in countries such as Ghana and Kenya. Different forms of co-operation can be distinguished in Indonesia and Zimbabwe and, indeed, the role of traders in these networks is stressed by several authors in this book. Sandee [1995] provides a classification of clusters developed during his fieldwork in Indonesia. He distinguishes between clusters organised by traders, by institutions, by producers and by consumers. Sandee shows that different types of clusters also need different types of assistance, if the government wishes to develop these clusters.

The importance of networks and trust can particularly be observed in cases of credit and technology diffusion (see Bagachwa and Sverisson in Chapters 8 and 9). These are the most concrete examples of how a cluster can benefit a small entrepreneur. Dorothy McCormick (Chapter 6) notices that when quality becomes important, the relationship between producers and traders becomes more collaborative and personalised. It involves more elements of trust and stability. The same phenomenon has been documented in two Mexican footwear clusters by Rabellotti [1995].

III. TRUST

Trust is difficult to define in a scientific way. As stated by Gambetta [1988], in spite of the profusion of material emerging on the subject, trust still remains an ‘elusive notion’. It can be described as a positive attitude towards somebody else, based on past experience, a common relation or background. The point that will be made is that trust is very important in all the networks and clusters. What is the basis for trust and how can trust be built? Going back to Sahlins’ [1972] theories of exchange, economic relations may be placed at various points on a spectrum of reciprocities, including social and moral relations, and usually not regarded as economic at all. An industrial district then becomes a moral community ‘where the limits to trust and self-interest are understood and backed up by public opinion, as they apply to different kinds of relationships: contracts, informal cooperation, competition’ [Holmstrom, 1994].

Industrial districts, when looking at the relationships going on within them, can be seen as rather stable systems. They are characterised by well-established and accepted social norms, by frequent, long-term interactions among a large number of economic actors who know each other very well, and by the rapid and pervasive dissemination of information [Rabellotti, 1995]. In industrial districts one usually finds institutional arrangements, such as long-term trading relationships, long-lived organisations and well-functioning communication networks, through which the self-enforcement of co-operation takes place more easily [Wilkinson and You, 1992]. Within districts a reputation for fairness is highly valued, while the sanctions for enforcing the limits of commonly accepted business behaviour may be very heavy, the final sanction being social exclusion from the community. Ultimately, in industrial districts, economic actors tend to value long-term benefits (duly discounted) more than short-term ones, and it is therefore credible that they may commit themselves to honesty and trustworthiness [Platteau, 1994].

Spatial proximity, an essential prerequisite for good information transmission and, consequently, for trust in industrial districts, is not a characteristic of networks. The question is therefore how can trust be built within networks? In the contributions to this volume, a number of networks based on family, friends, relatives, religions, ethnic origins are documented, providing a partial answer to this question.

However, as Platteau [1994] has remarked, the scale of these relationships is restricted by spatial proximity in the case of districts and by cultural, ethnic or religious proximity within networks. Therefore, if it is admitted that, outside clusters and networks, economic actors are normally opportunistic and information is imperfect, a problem of a lack of trust arises. This is typically a field where interdisciplinary research could help to gain more insight.

IV. EXTERNAL ECONOMIES AND CO-OPERATION EFFECTS

In a cluster, increasing flexibility within firms can be observed and increasing linkages with other firms often described [Van Dijk, 1994]. The result is a more pronounced division of labour and a simpler technology diffusion. Schmitz [1992] introduces the term ‘collective efficiency’ for the positive effects of working in a cluster, distinguishing between unplanned or incidental effects and planned or consciously pursued collective efficiency. Different types of economies and co-operative effects need to be distinguished to explain collective efficiency.

First of all, within clusters, economies of scale and scope are achieved by the participating enterprises. Economies of scale, as is well known, occur when the percentage increase in production is higher than the percentage increase in factors of production. Economies of scope are related to the advantages of producing several products at the same time, while using the same facilities (such as marketing, transport and financial services).

Then there are external economies which can be defined as unpaid, outside the market, side-effects of the activity of one economic agent on other agents. Formally, a production externality is a situation where the production function of a firm is not only directly affected by its market activities but also by the activities of other economic agents.⁴ External economies therefore imply that market prices in a competitive market economy will not reflect marginal social costs of production. Hence a ‘market failure’ arises, meaning that the market economy cannot attain a state of efficiency on its own. Specifically, in an otherwise ‘perfect’ market economy, an economic agent producing external economies (positive external effects) for other agents would not extend his externality-generating activity to the point where marginal cost of production equals marginal social benefits of production.

The concept of external economies was first introduced by Marshall [1890] when he analysed industry production costs as a function of output:

We may divide the economies arising from an increase in the scale of production of any kind of goods, into two classes—firstly, those dependent on the general development of industry; and secondly, those dependent on the resources of individual houses of business engaged in it, on their organisations and the efficiency of their management. We may call the former external economies, and the later internal economies [1890:266].

Marshall described several examples of external economies: the increased knowledge about markets and technology accompanying the expansion of industrial output, the creation of a market for skilled labour, for specialised services and for subsidiary industries, the possibility of splitting the production process into specialised phases and, finally, the improvement of physical infrastructures such as roads and railways.

For individual firms, external economies essentially turn into cost reductions as a consequence of industry growth, that is, economies external to the firm, but internal to the industry. The analysis of these externalities remains firmly within the framework of a static analysis, as they refer to the allocative efficiency of given resources and express collective efficiency as a positive function of the district’s size and of the density of interactions which occur within the cluster.

Remaining in a static framework, the Marshallian aggregation of a large number of small firms into one district also favours the reduction of transaction costs among economic actors operating therein. In situations characterised by high uncertainty, complexity and opportunism, transaction costs tend to be very high. In industrial districts, the reduction in transaction costs can be explained by geographical proximity and socio-cultural homogeneity. Economic actors tend to interact mainly with partners who are located in their own area, with whom they can have ‘face-to-face’ contacts. The stability of many of these relationships and the importance of building a reputation decrease the risk of opportunistic behaviour. In the districts a delay in delivery or bad quality production immediately becomes common knowledge and a bad reputation negatively influences future relationships. Moreover, in industrial districts, firms facing some problems with their partners may easily find a new enterprise able to satisfy their needs. This is possible because of the large concentration of similar firms in a small geographical area and the intense diffusion of information which reduces costs involved in finding a suitable replacement partner.

A particularly emphasised sub-type of external economies are agglomeration economies. A distinction can be made between two types of agglomeration economies: localisation and urbanisation economies. Localisation economies are the advantages deriving from the spatial concentration of enterprises belonging to the same industry or sector; while urbanisation economies derive from the localisation in an urban area, typically endowed with generic infrastructures, information and labour market, available to every economic agent located there. Furthermore, cities are large markets, easily accessible to local enterprises, enjoying savings on transport and transaction costs.

The importance of urbanisation economies is stressed, for example, by Sullivan [1990], who writes that ‘most of the clusters are not isolated from other activities, but are typically in cities’. Ernste [1992:9] stresses that these ‘spatial agglomerations of linked production and service plants can develop over time into full fledged Marshallian districts’. Cities generate substantial external agglomeration economies and are considered as incubators for new economic activities. Space and a certain infrastructure are required and environmental measures should be taken collectively [Van Dijk, 1995].

Moving from static to dynamic external economies, reference may again be made to Marshall [1890]. Some of his examples allude to the dynamic effects of industrial growth, which promote a kind of ‘industrial atmosphere’, capable not only of reducing the cost disadvan...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Notes on Contributors
• 1: Clusters and Networks as Sources of Cooperation and Technology Diffusion for Small Enterprises in Developing Countries
• Part I
• Part II
• Part III