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Clusters and Value Chains: How they can help in the development of

SMEs in Abu Dhabi

Prof. Roberta Rabellotti roberta.rabellotti@eco.unipmn.it

http://sites.google.com/site/robertarabellotti/home

Università del Piemonte Orientale Italy

Abu Dhabi – 28 September 2010 1

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A 4 Points Agenda ①  SMEs upgrading to compete in the

changing international productive context;

②  SMEs in clusters and collective efficiency;

③  SMEs in value chains; ④  Policy implications.

•  Increasing geographically fragmentation (across many countries) & functionally integration (with large global players having a leading role within Global Value Chains - GVC);

•  At the same time, forms of local productive

agglomeration of SMEs also persist (cluster); •  Enterprise competitiveness both in GVC and in clusters is

increasingly depending on the relationships/linkages among economic actors: - the concept of “governance” (coordination), at global, national and local level, is central; - the impact of governance on the opportunities of upgrading for firms is also key.

How is the international productive context changing?

① Upgrading

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UPGRADING = Innovation to increase value added

Innovation is not necessarily a breakthrough into a product or a process that is new to

the world.

In most cases, it is rather a story of marginal, evolutionary improvements of products and

processes, that are new to the firm, and that allow it to keep up with

an international (moving) technological frontier.

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4 types of UPGRADING

Ø  1. Process Ø  2. Product Ø  3. Functional Ø  4. Intersectoral/inter-

chain

Upgrading

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1. Process Upgrading •  Achieving a more efficient transformation of

inputs into outputs by reorganizing the production system and introducing superior technology;

•  Matching standards that are set by buyers (e.g. in the food processing to enter in hotel market);

•  Doing things more competently (matching strict logistics and lead times and delivering supplies reliably and homogeneously time after time).

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2. Product Upgrading •  Moving into more sophisticated products with

increased unit value; •  Producing a large range of products with different

specifications that cover the whole range of quality; •  It is sometimes difficult to distinguish product and

process upgrading (e.g. in agro-food products, the introduction of new processes generates new categories of products: organics, ‘‘sustainable” products).

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3. Functional Upgrading

• Changing the mix of activities within the firm and acquiring new, functions that increase the skill content of activities (for example from manufacturing to design).

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4. Intersectoral/Inter-chain Upgrading

•  Applying competences acquired in one function of a chain and using them in a different sector/chain (eg. from TV set to PC screen);

•  Learning what is taking place in one strand of a value chain (domestic market) applying to another (export market).

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How can small & medium enterprises face the challenge of upgrading?

Exploiting the opportunities offered by two different and complementary forms of industrial organization:

1. Clusters

2. Global Value Chains

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Global Value Chains: the focus is on the linkages with external actors.

Clusters and Global Value Chains

Clusters: the focus is on local linkages generating competitive advantages and sustaining the

upgrading of SMEs

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② Clusters

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The 5 pillars of clusters 1  Clusters are geographically bounded; 2  There is a critical mass of actors; 3  Clusters are specialized in one core activity; 4  There are intensive vertical (with suppliers and

buyers) and horizontal linkages; 5  There is a strong and relatively homogeneous

cultural and social background facilitating interactions.

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The 4 main categories of cluster actors

1  Large and small firms;

2  Governments; 3  Universities and

PROs; 4  Financial and

other supporting institutions

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Specialisation •  The specialisation may

span numerous sectors, branches and industries (manufacturing and services);

•  Effective clustering is likely to entail a strong element of complementarities between actors.

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There are many different types of clusters

Marshallian ID Hub-and-spoke Satellite Platform

Local SME

Headquarters of large parent company

Local branch or division of a large corporation

suppliers customers

The Hub-and-Spoke Cluster •  A single large firm or several large firms may act as

hubs, surrounded by smaller suppliers and related activities, spreading around it like spokes of a wheel;

•  The large hub-firms often also have substantial links to suppliers, competitors and customers outside the district;

•  These ‘long arms’ enable the transfer of new ideas and technology to the home region;

•  Inter-firm relationships occur between the hub firm and their (often long-term) suppliers, but always on the terms set by the former.

The state-anchored cluster •  When industrial activities are ‘anchored’ to a region by

a public entity, such as a state-owned enterprise, a defence plant, a university or a concentration of government offices;

•  Industrial policy play a central role in the development of such a form of clusters;

•  Many examples of ‘business parks’, ‘science parks’ or the like, being set up through a government initiative fall within this category.

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The role of anchor firms in clusters •  They facilitate the emergence of new SME: supplying

incubation space to employees, financing their own start ups, providing technical expertise and initial markets;

•  They provide a critical mass of trained people and experienced managers which small innovating firms can hire;

•  They provide a customer and supplier base; •  They have multiplier effects and they can generate

cost savings in terms of the local economy for materials and services (these can range from university graduates to business supply services to raw materials’ production).

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The benefits of clustering for small firms

Spontaneous Advantages/

Spillovers (External

economies)

Collective (Joint) Actions

Collective Efficiency

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External economies: spontaneously developing in clusters

•  Availability of a pool of specialized labour

force; •  Cheap and ready available supply of

specialized inputs; •  Easy access to specialized technical

knowledge and rapid dissemination of information;

•  Improved market access: the concentration attracts customers.

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Joint actions deliberately taking place among cluster actors

•  Joint action within vertical linkages: backward with suppliers and forward with traders and buyers;

•  Joint action within horizontal linkages: purchasing of inputs, appointment of trade agents in foreign markets, negotiation of shipping or air cargo rates;

•  Joint action within horizontal multilateral linkages (business associations): trade fairs, export consortia, collective provision of business services, political lobbying.

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Clusters are increasingly involved in Global Value Chains

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③ Global Value Chains

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A simple value chain •  The value chain

describes the full range of activities which are required to bring a product or service, thorugh the different phases of production, delivery to final consumers and final disposal after use;

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Why the concept of GVC is useful? •  Emphasis on non-production activities (e.g.

marketing; design, product development) in the creation of value added: some activities are more lucrative than others;

•  Emphasis on global buyers (e.g. IKEA) and global producers (e.g. Toyota) as key drivers in the formation of globally dispersed production and distribution networks;

•  Emphasis on external linkages as key channels of knowledge for SMEs;

•  Emphasis on the nature of the relationships (governance and power asymmetries ) within the chains.

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Barriers to entry and rents •  Some activities add more

value than others and therefore it becomes crucial to identify which activities are providing higher rents along the value chain;

•  These differences among activities are relevant in order to understand opportunities open to firms’ competitiveness and upgrading.

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Who captures value in Made in China Apple’s iPod?

•  Apple captures most of the value (224 $ over 299$);

•  Suppliers of key inputs also gain a good share of value: •  7 key inputs: 83 $; •  444 remaining inputs: 28$;

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Some calculations about the disaggregation of the value added in the IPod chain

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Who is governing the chain? •  At any point in the chain governance and

coordination is required about: – What is to be produced (design of products); – How is to be produced (definition of the

production process: technology, quality standards);

– How much has to be produced; •  The type of interactions (arms length,

cooperative, hierarchical) and the distribution of decision power within the chain are key issues in determining the upgrading of opportunities for the SMEs involved in the GVC.

④ Policy actions to support SMEs in clusters and value

chains: ‘what works’

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3 key areas at the heart of an industrial strategy based on clusters and value chains

1  Supporting networks and linkages;

2  Developing a strong skill base; 3  Supporting innovation and R&D

capacity.

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1.Supporting networks and linkages •  Networks can vary in size from a handful of companies

working together to associations with a hundred or more members;

•  Fostering linkages is key: this may consist in bringing firms together or developing new institutional formats (i.e. business associations);

•  All members should gain something from their participation in networks: ‘networking with a purpose’ (i.e. joint marketing, training, learning)

•  SMEs may receive (temporary) compensation for some of the costs of their network participation;

•  Network can be accelerated by brokers, facilitating netwoking eventss;

•  Anchor firms can be key leaders in networks; •  Networks should also be international for accessing new

knowledge and ideas.

2. Developing a strong skill base •  Emphasis on cluster specific training and

knowledge needs; •  Creating Skills Centres for training new entrants

and re-entrants and for broadening and deepening the skill base;

•  Creating strong links between Higher Education Institutions and businesses for developing specific curricula, skill standards and certifications.

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3. Supporting innovation and R&D capacity

•  Public and private universities and PROs are catalysts for research and innovation and they are key for attracting research-oriented businesses in innovative clusters;

•  Promote strong linkages between researchers and local firms and facilitate technology transfer from scientific research to commercial ideas;

•  Attract researchers from abroad, facilitate international research collaborations and promote excellence in domestic universities.

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4 contributory factors for successful cluster development

1  The presence of large firms: actively involve lead firms in the design and implementation of policies;

2  Adequate infrastructure: in clusters there are economies of scale in the provision of infrastructures;

3  Access to financial and non-financial services; 4  A supportive policy environment:

–  improving contract enforcement and property rights; –  simplifying bureaucratic rules; –  setting up efficient standards, testing and quality

assurance systems.

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Strengthen the local supply of financial and non-financial services

•  In clusters, the common specialization and the geographical concentration of firms generate economies of scale in the provision of services;

•  Creation of local Business Development Service (BDS) Center which also have a role in stimulating firms’ demand of new services;

•  SMEs’ access to capital: commercial banks need to develop specific skills for lending to SMEs;

•  Financing policies can be used to encourage particular types of activities (e.g. tax incentives for R&D projects; access to venture capital).

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To conclude 4 rules for effective strategies

1  Long term perspective; 2  Policies need to adopt a dynamic approach

and evolve over time; 3  Mobilisation: building interest and

participation, involving the main stakeholders in the identification of the actions to implement;

4  Assessment: Evaluation and monitoring are areas where little has been done so far.

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The life cycle of clusters Clusters are dynamic and the intervention that are appropriate at an early stage (e.g. network brokers) are likely to differ from those appropriate at later stages (e.g. encouraging innovation and openess).

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Assessment •  Establish a set of metrics capable of tracking the

performance of a cluster over time and the success of the different interventions;

•  Clusters are multi-faceted and measurement should recognise this;

•  Indicators are needed for measuring: networks, innovation, skills, economic performance at firm and cluster level;

•  Multi-source information: official statistics, commissioned survey work, qualitative understanding based on discussion with cluster members;

•  Measure additionality: what would have been observed in the absence of the intervention?

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Thank you!

roberta.rabellotti@eco.unipmn.it

For related works visit: http://sites.google.com/site/robertarabellotti/home

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