Industry's small and medium sized enterprises (SMEs) typically suffer from a lack of access to finance, technology and product markets, especially in developing countries. Lacking local suppliers, they often find it hard to obtain raw materials and components. And lacking political leverage, they rarely get much official support. Recent Institute of Development Studies research reports probe cases where SMEs have been able to vigorously compete in world markets, and technically progress, by drawing on the advantages of clustering and networking.

A cluster is a group of firms concentrated in one location and working in the same sector. A network is a collection of firms working in cooperation, though not always in the same place. Both types of grouping can give firms extra edge. Clusters can boost local economies by attracting local suppliers and creating a local pool of skilled workers. Joint action, where networks of firms join forces, can be beneficial both by increasing partners' bargaining power with government and also by enabling them to capture distant markets. "Collective efficiency" is the key to these interlocking gains.

The concept of collective efficiency is used in one of the IDS studies to analyse the international success of the surgical instrument industry in the town of Sialkot, Pakistan. Here some 300 SMEs have made Pakistan a leading global player in the manufacture of stainless steel medical, dental and surgical instruments. Far from dulling their competitive edge, clustering encourages rivalry to gain inclusion. Such rivalry can, however, discourage local cooperation. Results of a questionnaire survey of 57 firms and 72 sub-contractors, and case studies of a cross-section of enterprises and informants interviewed in 1993 and 1994, also show that the potential gains of clustering are not evenly distributed within the cluster. Nevertheless, clustering advantages help small firms compete.

What lessons can policymakers draw from these insights? In Italy, Brazil, Pakistan and other countries where impressive examples of the benefits of collective efficiency have begun to emerge, the process has been largely spontaneous. But governments can assist the process by, for example, launching strategic interventions that reward SMEs for undertaking joint operations. To be effective, such initiatives must be:

• driven by the needs and demands of the consumer, rather than the supply side
• cumulative and continuous, not geared to short-lived or one-off improvements
• aware of market forces and the need for firms to be able to adapt to rapid change
• directed at groups of enterprises, rather than at individual sites or businesses.

The latter aim can be achieved by working with business associations and producer groups. Where they do not currently exist, governments should encourage the formation of such groups, say the IDS researchers. Policy frameworks are only now beginning to take shape that consciously build on the gains that clustering and networking can offer SMEs. The signs, however, are that firms that work in harness with the group effect can continue to grow and to compete in the global marketplace.

Source(s):
1. Collective Efficiency: a way forward for small firms. IDS Policy Briefing #10, (1997) Full document.
2. The cutting edge: collective efficiency and international competitiveness in Pakistan. IDS Discussion Paper #360, K. Nadvi (1996)
3. The Triple C Approach to local industrial policy. World Development, Vol 24, #12, J. Humphrey, H. Schmitz (1996)

Funded by: Department For International Development (1993-1997), Leverhulme Trust (1993-1995)

id21 Research Highlight: 1997-Nov-28

Further Information:
K. Nadvi, H. Schmitz, J. Humphrey
IDS
University of Sussex
Brighton
BN1 9RE
UK

Tel: +44 (0)1273 606261
Fax: +44 (0)1273 621202
Contact the contributor: ids@sussex.ac.uk

Institute of Development Studies (IDS), UK

Other related links:
Collective efficiency and the growth of small firms (IDS Industry Group Report 1997)

The advantages of clustering: the case of Sialkot (IDS Industry Group Report 1997)