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'Cluster' co-operation gives small firms a global punch

In today's globalised economy small companies, especially in developing countries, have to compete twice as hard to survive.

A recently released policy briefing from the Institute of Development Studies at Sussex University in Southern England suggests that by working together through ''cluster'' co-operation and networking such firms can challenge larger competitors and break into both national and global markets.

In the last 20 years small and medium enterprises have become one of the main targets of policies aimed at creating growth and employment in developing countries.

Constraints like limited marketing experience, limited access to technology and raw materials, poor financing due to banking prejudice and limited political bargaining power have historically weighed against SMEs.

But the IDS says it is not the size of the firms but their isolation that is the biggest problem, having to operate alone in a competitive environment. This is where clustering and networking can help.

A cluster is a group of firms concentrated in one geographical location, working in the same sector which may or may not be co-operating. Networks are collections of companies which cooperate but are not necessarily based in the same place. Both types of groupings bring competitive advantages and are characterised by a combination of co-operation and fierce rivalry, which keeps the firms competitive.

Clustering attracts local suppliers, giving better access to raw materials and inputs while creating a pool of skilled labour. Networking firms who consciously co-operate or join business associations can gain numerous benefits including better access to government support services and the strength to open up overseas product markets.

''If you have a division of labour you can become a specialist in one small job. If you are making shoes and you want to start exporting them, if you're in a cluster all you have to do is be good at doing one small part of that job,'' said John Humphrey, an IDS research fellow.

''If you are isolated you have to make the whole shoe and you have to find your buyers and suppliers, but in a cluster all of those things are available.''

Successful examples include the Brazilian shoe industry which raised its share of world exports from 0.5 per cent to 12.3 per cent between 1970 and 1990. Largely responsible is the cluster of firms in the Sinos valley in Southern Brazil. By 1991 it was exporting 100 million pairs of shoes a year worth some $ 900 million in foreign exchange.

The cluster now consists of around 500 shoe manufacturers and over 1,000 suppliers of specialised inputs and services, as well as a range of self-help support institutions.

Another successful example is Pakistan's surgical instruments industry. A cluster of 300 firms operates around the town of Sialkot. They farm out work to over 1,500 smaller enterprises which specialise in particular stages of the production process. Alongside these are around 200 suppliers of inputs and 800 units providing subsidiary services.

Although workshop conditions in the smaller enterprises are poor and wages low this does not explain the cluster's success. It is the connections between the firms which is critical, say the IDS.

Over 90 per cent of Sialkot's output is exported, mostly to North America and Europe. It is estimated that the cluster accounts for 20 per cent of world exports in this field, making Pakistan the second largest exporter of surgical instruments after Germany.

These examples came about largely spontaneously, but governments wanting to assist SMEs have a role to play too.

''Governments can't create a cluster of 1,000 firms like the shoe industry in Brazil, but they can create a network of 20 or 30 firms. And if you do have a network of 1,000 firms then the government can help to increase the quality of interaction,'' said Humphrey.

''We know of clusters of firms in the developing world that aren't particularly efficient -- so just being together isn't enough. But the state can promote business associations, provide technical assistance, start to inject dynamism into non-dynamic clusters and make their interaction more efficient,'' he said.

In North East Brazil a public procurement scheme was used to stimulate a new cluster producing school furniture in the town of Sao Joao Do Aruaru.

When the cluster started there were only four saw mills in the town with 12 workers. Five years later there were 42 saw mills with 350 employees and a further 1,000 people employed in related industries. Most importantly, the customer base has been diversified, with over 70 per cent of the output now going to the private sector.

In 1990, the Chilean government agency Serotec introduced a networking scheme for SMEs. Although it is still small scale, results have been encouraging with the networks becoming self- sustaining and both competitiveness and efficiency rising.

The concept of simultaneously cooperating and competing seems strange, but it can work out well if managed properly.

''To give the example of Sialkot in Pakistan, there are firms there who are trying to export to Germany and the United States, so they are competing,'' Humphrey said.

''But they all got together and realised that one of the things that would be really useful was to have a 'dry port' as they are 1,000 miles away from the sea and wanted all the export and customs processing on the spot.

''So they clubbed together and financed that. Remember, because they are in export markets, the market is large enough to accommodate them all.''

Outside agencies have also played a role in encouraging clustering. Trade fairs are crucial for product marketing but can be prohibitive for small firms due to the expense and scale of the events. Clustering allows groups of companies to afford exhibitions as well as providing a more impressive show.

The United Nations Industrial Development Organisation and other donor agencies have started to help developing country manufacturers to exhibit at such fairs. The German development agency, GTZ also helps through its 'Protrade' scheme, which provides financial and technical assistance to firms wanting to share stands at European trade fairs.

But clustering is not a cure-all or a magic solution, and the IDS warns that if not managed properly it can have negative results.

''There is the question about how quickly clusters can respond to market changes. There is the negative argument called 'the weakness of strong ties,' which says that if everyone is tied up closely together it's very difficult for a firm to strike out in a new direction, and if something goes wrong you could all go down together,'' Humphrey said.

''But many developing countries do not have that much variety in their industries anyway. But the need to focus on your customers and be aware of what the competitive issues are is very important.''

UNI