Day 2 Cluster-Based Industrial Development The Advantage of Industrial Cluster for the SME Development

Tetsushi Sonobe Foundation for Advanced Studies on International Development (FASID)

The views expressed in this paper are the views of the author and do not necessarily reflect the views of policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), or its Board of Directors, or the governments they 1 represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

DAY 2-1

1. Introduction
Why are there such geographic concentrations of enterprises that produce similar products and parts? There must be some benefits of being located near each other. Moreover, There are many industrial clusters in both developed and developing economies. Successful industrial development has been cluster-based, not only historically but also at present throughout the world. SME-led development of labor-intensive industries is almost always cluster-based SMEs in industrial clusters can grow into large firms: indeed, many well-known large firms started business in industrial clusters.
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How to make the best use of the benefits of industrial clusters in order to promote industrial development? To answer this question, we will explore what the benefits of industrial clusters are (in DAY 2-1) and how cluster-based industrial development evolves in the long run (in DAY 2-2). We will discuss the appropriate policies promoting cluster-based industrial development

2-1: Advantage of Industrial Cluster for SME Development 2-2: The Process of Cluster-Based Industrial Development 2-3: Asian Experiences: Cases of Wehzhou and Dhaka 2-4: The Role of Government in the SME Development
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2. What is Industrial Cluster?

Definition Geographical concentration of enterprises producing similar and closely related products in a small area (e.g., assemblers and part-suppliers). Type 1 Type 2 - Cluster that characterized by the dominance of SMEs. We focus on the first type, because it is common in developing countries.
Pyramid Type

- Pyramidal type in which there are one assembler, many subcontractors, and so many subsub-contractors (e.g., Toyota).

3. Examples of Industrial Clusters

Traditional handicrafts Furniture Garment (both tailors and ready-made garment producers): NY City, Old Delhi, . . . Footwear (both leather and synthetic): Agra, Wenzhou, Kobe, Sinos Valley (Brazil), Addis Ababa, . . . Garage + car parts + other metal work: RajKot, Kumasi (Ghana), . . . Metal work (scissors & tableware): Solingen, Tsubame Machinery: Birmingham, Ota-ward, Taichung IT: Silicon valley, Bangalore, Dalian

4. Benefits of Industrial Clusters

More than 100 years ago, Alfred Marshall pointed out that, in industrial clusters, enterprise can easily learn from other enterprises (Information spillovers) they can easily transact intermediate goods and service with each other (Division of labor) they can easily find workers with desired skills (and such workers can easily find jobs) (Formation of market for special skills) Industrial clusters can attract customers Industrial clusters can attract material suppliers

5. Benefits Especially for SMEs

These benefits of industrial clusters are more important for SMEs than for large firms. It is more difficult for SMEs to absorb new ideas of production, management, marketing to test new practices to integrate production processes to find good transacting partners (e.g., parts suppliers (or parts buyers), traders, etc) to monitor parts suppliers to find good workers to find customers to find material suppliers to ensure the collection of money 8 to punish betrayers or cheaters

6. SME-Led Development of Labor-Intensive Industry

Industrial clusters dominated by SMEs, i.e., the first type, are more common than the second type. Since SMEs are dominant in labor-intensive industries, the promotion of cluster-based industrial development is often equal to the promotion of labor-intensive industries. The promotion of labor-intensive industries will create ample job opportunity for the poor and hence help poverty reduction. (But even from labor-intensive industries, large firms emerge if the industry reaches a certain stage of development, as we will see in the next session.)
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 In labor-intensive industries, production costs depend much on wage rates. Since developing countries have lower wage rates than developed countries, they have comparative advantage in labor-intensive industries. But labor-intensive industries are not necessarily growing in developing countries. This is because Poor infra: expensive transportation and unstable and too little power supply Poor business environment: underdeveloped law system and dominance of SMEs which face various difficulties in transaction Poor technologies: SMEs face difficulties in absorbing foreign technologies
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 Because industrial clusters mitigate these difficulties, SME-led development of labor-intensive industries is often cluster-based. But not all the industrial clusters in the world have successfully developed. Moreover, a number of clusters have become extinct because of the competition among clusters (including clusters abroad). What will determine the fate of an industrial cluster? A common answer is Without innovation, there will be no successful industrial development.

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7. Innovation and Cluster

A key to successful industrial development is innovation. But little is known about Who innovate (and who imitate) What kinds of innovations are likely to take place in this industry and what about in that industry When, where, and why innovation takes place To find answers to these questions, we have conducted a series of case studies in East Asia, South Asia, and Africa

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Case studies in East Asia

List of Case Studies in East Asia Garment Motorcycle Machinery Japan, China Japan, China Taiwan (Machine tool), Taiwan (Printed-circuit board), China (Printed-circuit board), China (Electric appliances)

Most Important Finding Surprisingly great similarity is observed in the process of industrial development among different industries in different countries
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List of Recent Case Studies

Industry Garment Garment Garment Garment Footwear Metalwork Vehicle repair + metalwork Footwear Garment Metalwork Town/City Dhaka Hanoi suburb Delhi Manila suburbs Manila Colombo Kumasi Addis Ababa Nairobi Nairobi Country Bangladesh Vietnam India Philippines Philippines Sri Lanka Ghana Ethiopia Kenya Kenya

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 Base on these case studies, we have developed a theory of clusterbased industrial development, which will be explained in the next session. Our theory maintains that industrial clusters set a stage for innovations by attracting various human resources, such as engineers, merchants, part suppliers, skilled workers, etc., who will contribute to innovations later.

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8. Agglomeration Economies Reconsidered

1. 2. 3. 4. 5. Information spillovers ( imitation) Specialization and division of labor Development of skilled labor markets Transactions between manufacturers and wholesalers/retailers are also important Accumulation of various human resources such as engineers, merchants, parts-suppliers, that leads to Enlarges Opportunities for Innovation (= a new combination)

Industrial cluster develops market and enlarges innovation possibilities

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