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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
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Selected IDs in the US
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High-Tech IDs in Taiwan
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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
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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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