Clusters of SMEs(1)

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Henley Business School 2008 www.henley.reading.ac.uk

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February 29, 2012

Entrepreneurship and Small BusinessManagement

Lecture 7: Clusters of SMEs

1 March 2012 Dr Anna Spadavecchia


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Four major sources of disadvantagefor start-ups and SMEs

Shortage of managerial skills and experience

Risk and uncertainty

Shortage of capital

Small size


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Industrial Districts or Clusters

Industrial Districts are geographical concentrations of small and

medium-sized firms producing similar goods, with each firm

specialising in one or more stages of production (Enright, 1995)

Porter (1990) defines clusters as the building blocks of a productive,

innovative economy

Doeringer and Terkla (1995) define an industry cluster as a

geographical concentration of industries that gain performance

advantages through co-location


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Italian Industrial Districts (IDs)by sectors of specialisation


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Clothing clusters or IDs in China

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Clusters or IDs in China

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German IDs, selected industries



Selected IDs in the US



High-Tech IDs in Taiwan



Clusters or IDs in India

http://www.clusterpulse.org/india.htm

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Two elements in the definition ofIndustrial Districts (IDs)

Concentration of firms in the same locality

Fragmentation of the production process among various firms

These two elements are sources of economies that offset SMEs

disadvantages as compared with LSEs

external economies

economies of localisation

economies of specialisation



Anatomy of the California wine cluster


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Fig. 7: Value chain in footwear and related industries

Design services

Leather

Working

Machinery

Processed

leather

Wood-working

equipmentSpecialised

machine tools

Injection molding

machinery

Parts of

footwear

Models Molds

Leatherclothing

Leather

handbags,

glovesLeather

footwear

Athletic

footwear

Apres-ski

bootsSki boots


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External Economies

Economies external to the firm and internal to the industry. These arerelated to the growth of the industry and cluster, rather than theindividual firm;

e.g. development of infrastructure and subsidiary industries in theneighbourhood; concentration of a specialised labour force

Concentration of SMEs attracts investment in subsidiary industry,providing special tools and machinery, and distributing materials andfinished products

Dynamic externalities: technological spillovers

within industries across industries


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Economies of specialisation

Another factor conferring advantage to the aggregation of many

SMEs is the possibility of dividing the production process among

small firms

The division of the production process among firms enables them to

specialise in a small range of work and perform it with little

interruption and maximum economy


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Vertical disintegration

Each firm tends to specialise in just one phase, or a few phases of theproduction process typical to the district

Flexibility allows a quick response to variations in degree and quantity

of final demand and gives a spurt to innovative processes

Final firms in the IDs perform the task of coordinators

Final firms: governance of the deverticalised structure

I. Paniccia, Industrial Districts. Evolution and Competitiveness in Italian Firms (Cheltenham, 2002),chapter 1.


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Competition and cooperation

Constant interfirm rivalry, particularly among those firms specialised inthe same stage of the production process (horizontal competition)

Industry participants know each other and the local press comparesfirms continuously

Cooperation among firms in different stages of the production process(vertical co-operation)

Cooperative agreements in bookkeeping, sponsorship and trade fairs,marketing, bulk purchasing and joint training programmes

H. Schmitz, Collective Efficiency and Increasing Returns,Cambridge Journal of Economics, 1999, Vol.23, pp. 465-483.


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Various types of firms within IDs

Traditional small firms that produce for the local market

Design-dependent firms that subcontract for lead firms, which

shape product design, control critical phases in the productionchain and interface with the market

Design-independent firms that have the ability to refine designs

and thereby shape products and markets

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Various types of IDs

Schumpeter.competition

Design capacity

IDs

dominated

by external

firms

Mixed IDs

Sub & Des.

Independent

Des-Independent

IDs

Source: Own elaboration after M. Best, The New Competition(Cambridge, 1990), chapter 7.


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Entrepreneurial ID

IDs that have a mix of subcontractor and design-independent firms.

The greater the independent design capacity, the greater is the

collective power of an ID to shape rather than react to markets

A fully developed ID would behave like a collective entrepreneur: it

would possess the capacity to redesign process and organisation aswell as product

One in which associations of firms along the production chain can

redesign products collectively and simultaneously. These require closeconsultation along the production chain

M. Best, The New Competition (Cambridge, 1990), chapter 7


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Why and to what extent are IDs competitive?

Global markets, faster transportation and communications should

diminish the role of location in competition

Geographical concentration enhances firms competitivity in three

ways:

increasing the productivity of companies

driving the direction and pace of innovation

stimulating the formation of new businesses

M.E. Porter, Clusters and the New Economics of Competition, Harvard Business Review, November-December 1998, pp. 77-90.


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Clusters and new business formation Individuals easily perceive gaps in products and services around which

they can build businesses

Clusters enable firms to generate a critical mass, to address jointly their

weaknesses (e.g. technology acquisition, marketing etc.) and develop

collaborative projects (bulk buying, sharing freight costs, assistance for

R&D, institutional support etc.) to improve industry competitiveness

Why and to what extent are IDs competitive? (2)


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Are IDs a viable alternative to centralised andvertically integrated firms?

Critical view: SMEs and IDs are unstable patterns of businessorganisation

Decreasing production costs remains the best type of production to

meet limited purchasing power

In some sectors, such as iron, steel and chemicals, economies ofscale are overwelmingly important and SMEs have been wiped out

IDs: specific technological and economic conditions

Emergence of formalised hierarchical structures (holdings, groups,large firms)

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Clusters of SMEs(1)