Is clustering beneficial to small-scale producers? Does it help producers cope better with tough international competition? Sales figures in 1993 for clustered firms in the Peruvian clothing industry in Lima were significantly higher than those for producers outside the cluster. And the smaller the firm the better the result. Research at the University of Amsterdam coordinated by the UK Institute for Development Studies, examined this gap in performance, in the light of different entrepreneurial approaches to cooperation. Liberalization in the 1990s forced producers to compete internationally, highlighting the need to find innovative responses to market forces.

How sustainable is the superior performance of clustered firms within the new macro-economic framework? What effect will liberalization, expanded domestic markets and international competition have long term? Between 1993 and 1994 clustered firms suffered a 27 percent sales loss although they were still doing significantly better than non-clustered firms.

Advantages of clustering identified by the research include:

• Better diffusion of knowledge between firms leading to increased competence, flexibility and efficiency through direct observation of market trends and competitors' products.
• Cost savings on the basis of lower prices of some key intermediary products combined with relatively easy trading of inputs and outputs. Fierce competition subsequently ensures the lowest possible prices for traders and consumers of the final product.

However, local information spillovers accrue to everyone in the cluster and the information is often out of date with limited market relevance. Moreover, cost advantages are insufficient to outdo outside competitors who may be gaining from superior technology enhancing their product quality and market flexibility. Most co-operation between firms is passive; pro-active cooperation is noticeably absent in both production and transaction activities implying a dearth of linkages further afield within Lima, in the provinces, or abroad. Traders thus often miss out on useful external information and knowledge that could provide high-quality input into decision-making and strategic planning.

Change in order to succeed seems to be hampered by a local but very powerful model of what is perceived to be the best way to run a clothing business. The evidence suggests that:

• Transformation and transaction behaviour is characterized by self-reliance, individualism and quick but standard reactions - attitudes long associated with the passive advantages of clustering.
• Faced with a drastically new competitive environment, producers continue to rely on solid but outdated reflexes and are locked into models of best business practice that have not stood the test of foreign competition.
• Dispersed producers also face problems competing internationally but clustering may produce an additional problem by counteracting the much-needed renewal of best business practice.

Growth prospects for clustered producers depend on the extent to which they can alter the course of local habit and practice. Clustering enables firms to overcome certain resource disadvantages at the initial stages of industrialization thus enhancing their capacity to compete and generate employment. However, at subsequent stages of industrialization and especially in a liberalized context, better and more cooperative linkages are thus essential where clustering is a mechanism for enhancing local competitiveness alone. For cooperative networks to fully succeed common obstacles such as very large and indivisible investments and some well-known problems of market failure such as externalities, non-excludability and non-rival consumption need to be removed. This could be done by:

• trust and competition-generating mechanisms such as simple licensing schemes, quality requirements, advisory services for suppliers, the provision of information on supplier performance and so on.
• providing key services such as training and information through public channels
• making use of positive externalities, target group participation and public-private partnerships

Source(s):
'A Comparison of Clustered and Dispersed Firms in the Small-Scale Clothing Industry of Lima', in World Development 27 (9) by Evert-Jan Visser September 1999

Funded by: Department of Development Economics, University of Amsterdam, The Netherlands

id21 Research Highlight: 25 January 2000

Further Information:
Evert-Jan Visser
Netherlands Economic Institute
Postbus 4175
3006 AD Rotterdam
The Netherlands

Tel: 00 +31 20 4688388
Fax: 00 +31 20 4686008
Contact the contributor: e.jvisser01@freeler.nl

Netherlands Economic Institute

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