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Business and Society Programme
DP/103/1999
ISBN 92-9014-611-7
First published 1999
Facing the new competition: Business associations in developing country industrial clusters
By
Khalid Nadvi
Institute of Development Studies,
Brighton
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| Facing the new competition: Business associations in developing country industrial clusters |
 Introduction
I.Business associations and collective efficiency
II. Overview of the cluster case studies and the new competition
 II.1 The clusters
II.2 The new competition
III. Business associations and firm upgrading: Is there a relationship?
IV. Case study analysis: New competition and the role of business associations in the Sinos
Valley and Sialkot clusters
IV.1 Associations and supply chain upgrading in Brazil's Sinos Valley shoe cluster
IV.2 Pakistan - Quality assurance pressures and business association initiatives
V. Conclusions and further questions
References
Introduction(Endnote 1)
This paper reviews evidence on the role of local business associations in assisting industrial
clusters in the developing world face new competitive pressures. It draws on studies of small and
medium enterprise (SME) dominated industrial clusters in Brazil, India, Mexico and Pakistan. The
proposition that the paper explores is that cooperation through the local business associations and
support extended by such institutions has been central to the ability of such clusters to upgrade and
face the new challenges posed by liberalization and globalization in the 1990s.
The argument that spatial and sectoral clustering can generate potential benefits for local
producers, especially SMEs, is well rehearsed.(Endnote 2) In addition to the obvious advantages that arise
from the physical agglomeration of a number of firms engaged in a similar activity, advantages that
include external economies and knowledge spillovers (Stewart and Ghani, 1991; Krugman, 1995;
Audretsch and Feldman, 1996), clustering enhances possibilities for local joint action. It is this
prospect that has particularly excited researchers and policy makers concerned with promoting
private entrepreneurship and SME development.(Endnote 3)
The initial interest in industrial clusters arose from the empirical experience of sector specific
industrial agglomerations in parts of Western Europe and the United States.(Endnote 4) These findings
motivated a range of studies that sought evidence of industrial clusters in the developing world.(Endnote 5)
The experience from the developing world has proven to be extremely heterogeneous.(Endnote 6) There are
survivalist clusters, such as those observed in parts of sub-Saharan Africa (see Pedersen et. al.,
1994; McCormick, 1998), and relatively mature clusters that have managed to enter and compete
in international, quality-conscious, fashion-driven and price-sensitive markets (Schmitz, 1995a;
Nadvi, 1999a). What is particularly exciting in this line of research is the suggestion that (despite
the unevenness) developing country small firms need not necessarily be relegated to the informal
sector, but can grow and compete in world markets alongside larger firms.
The proposition has been that the success of developing country industrial clusters lies in the
concept of collective efficiency, namely the external economy and joint action benefits generated
by clustering (Schmitz, 1995b). The focus of much of the recent study of SME clusters in the
developing world has been on the role of local joint action - cooperation both bilaterally and for
the cluster as a whole - in explaining and enhancing competitiveness (Schmitz, 1995a; Rabellotti,
1997; Nadvi, 1999b). In this regard, the European evidence has highlighted the importance of local
collective institutions such as business associations and producer, or "real", services institutes.(Endnote 7)
Local business associations can represent the collective interests of the cluster. They can also
provide a range of key services to local firms and undertake the function of regulating local
competition and mobilizing cooperation. Brusco (1992) emphasized the importance of collective
services provided by local business associations in the development of SME-dominated Italian
industrial districts. Best (1990) also drew from the Italian experience to highlight the influence of
associations such as the national confederation of artisans (CNA) in providing local producers
with a wide range of managerial, financial, business and technical services. Such examples are not
restricted to Italy. For instance, Schmitz (1992) cites evidence of sectoral associations in the
Baden Württemberg industrial district of Germany in delivering technical and legal advice as well
as market intelligence to local SMEs. More recently, Albaladejo (1998) has outlined the positive
role played by sector specific business and technical associations in the development of industrial
clusters in the Spanish region of Valencia. In many of these cases support services developed by
local business associations were developed in conjunction with local or regional government (Best,
1992; Schmitz and Musyck, 1993).
As these studies have shown, business associations can have a positive impact on the
development of industrial clusters. Doner and Schneider (1998) detail the various ways by which
business associations can potentially contribute to economic performance, supporting members
with a range of "market-complementing" and "market-enhancing" functions. These include:
horizontal coordination amongst producers; vertical coordination of upstream and downstream
linkages; the setting and enforcement of product standards; and the provision of information and
technical training (Doner and Schneider, 1998, p. 11). They also underline the need to explore
further the nature of organization within business associations. In this regard, Moore and Hamalai
(1993) call for caution. They claim that business associations, especially at the national level, can
in fact generate political conflict and lead to a waste of resources as associations compete with
each other, rather than stimulate private enterprise and firm cooperation.
Despite the prudence advocated by Moore and Hamalai, interest in business associations, and
in their potential role in accelerating economic development, continues to grow. This is especially
so in the cluster context. According to Porter business associations can "enhance cluster
competitiveness…(and)… institutionalize collective linkages. In addition to providing a neutral
forum for identifying common needs, constraints and opportunities, associations can serve as focal
points for efforts to address them" (Porter, 1998, p. 258). However, while Doner and Schneider
(1998) provide an exhaustive review of business associations in developing countries, evidence
of business associations from developing country industrial clusters is at best sketchy. We know
that business associations exist and matter in this context. In our earlier review of industrial
clusters in developing countries (Nadvi and Schmitz, 1994) we cite examples of business
associations that undertake significant tasks, both in lobbying government in the interests of their
members and in providing a range of producer, technical and advisory services to clustered firms.
Nevertheless, our understanding of how business associations function in developing country
industrial clusters remains relatively weak. Moreover, what we do know is largely of a static
nature. Dynamic concerns remain. For example, how do associations help clusters develop? Can
local associations promote cluster growth? What roles can associations have in assisting clustered
producers face new competitive challenges? What kinds of associations are best suited to assist
the development of such clusters? How do associations that represent the interests of industrial
clusters change as the cluster itself develops? These are some of the questions that this paper seeks
to address, or at least highlight. As the research focus on industrial clusters moves away from
static descriptions of clusters and their attributes to an understanding of how clustered producers
upgrade and grow, the critical concern is to understand the role business associations play in a
dynamic context in developing country industrial clusters.
The search for what Sengenberger and Pyke (1991) refer to as a "high road" growth trajectory,
generating sustainable jobs and incomes as well as moving local producers further up the product
value chain, has become more central to both the policy and academic community. In addition,
to this concern for understanding how sustainable growth trajectories can be achieved, it is also
apparent that clusters are not isolated productive spaces. The recent work on value chains (Gereffi,
1995) has underlined the importance of exploring relationships that clustered enterprises have not
only with local agents but also with external bodies up and down the product value chain. This
implies that the process of upgrading required for sustainable growth trajectories for the cluster,
as one form of industrial organization, requires upgrading at various points within the value chain.
Raw materials need to be linked to production, production to design, and design to marketing.
Achieving sustainable growth using the value chain framework is, as Kaplinsky (1998) has pointed
out, an issue of raising value-added, or rents, at each point of the chain. This calls for greater
awareness of the links within the chain in order to encourage joint action within and between the
various elements of a value chain.
Understanding how joint action can be brought about within clusters, and exploring the role of
external and local institutions in facilitating joint action, has been a core thread in our own on-going research at the IDS (see Schmitz and Nadvi, 1999 forthcoming). In addition, one part of this
agenda is making sense of those cases where joint action does not occur, and answering why there
is collective failure within clusters. In as much as business associations can have a function in
promoting local cooperation and with it industrial upgrading, they can also be a factor behind the
lack, or even breakdown, of cooperation. Distinguishing between success and failure, of how
business associations can become enablers of industrial upgrading in the cluster context and how
they can impede such processes is important both for our broad understanding of business
associations as well as for policy prescriptive purposes.
In analysing the role that business associations have played in developing country industrial
clusters this papers draws directly on new empirical evidence from a number of cluster case
studies. These studies use both qualitative and quantitative techniques to analyse the role of local
associations in assisting local clustered enterprises face new competitive challenges. The studies
are dynamic in nature and provide some indication of the ways in which clusters and associations
have developed. The paper does not, however, deal with all the questions raised above. In fact,
reflecting the rather under-researched nature of this subject, it throws up new questions that call
for further, more focused, study.
The paper is structured as follows. The following section discusses the joint action that business
associations can bring about in industrial clusters. This is framed within the concept of collective
efficiency, a model that has now been widely accepted as capturing the potential gains of
clustering. Section 3 briefly describes the four clusters studied, the types of business associations
present within them, and the nature of new competition that they have faced during the 1990s.
Section 4 uses quantitative data to evaluate the proposition put forward that increasing joint action
through the business associations has been a core aspect of the response of these clusters to the
new competition. The findings indicate that in each of these clusters there has been an increase
in cooperation through local business associations. Moreover, there is a positive and statistically
significant association between improvements in firm performance and increases in joint action
through business associations in a number of these case studies. Section 5 turns to qualitative case
study data from two of the clusters to help throw further light on this. This provides a more
nuanced perspective of the ways in which joint action through associations has led to evidence of
both collective efficiency and collective failure. The concluding section identifies the gaps that
remain in our understanding of how associations can motivate a sustainable growth trajectory for
developing country industrial clusters, and raises questions for further research.
I. Business associations and collective efficiency
As numerous observers have pointed out, business associations are abundant, extremely varied
in terms of their composition, scale and organization, and undertake a wide range of tasks (Moore
and Hamalai, 1993; Doner and Schneider, 1998). There are "peak" associations, that bring together
all business bodies, sector-specific and sub-sectoral associations, regional associations as well as
local chambers of commerce. Many of these bodies are well-staffed and undertake a range of
activities. Many others are small in scale and scope, and quite a few exist on paper only. In
addition to providing potential benefits to their members, associations can, as Moore and Hamalai
(1993) observe, act as political platforms for their organizers and office bearers.
Given this wide spectrum it is useful to specify the associations that constitute the focus of this
study. Industrial clusters are defined as being sector specialized and geographically concentrated.
Business associations, as understood in this context, are thus also either local or sector specific.
Usually they are understood as being both. That is to say they have a significant local presence and
they represent the concerns of the specific industrial sector in which the cluster is engaged. The
emphasis on the local is especially important in that the association is considered as the local
collective body articulating local collective interests.
Within this framework, however, local business associations can be both large and small. They
may according to Moore and Hamalai (1993, p. 1897) "perform a wide range of functions
including: political voice; provision of concrete business services such as seminars, information
and library services, exhibitions and trade fairs, foreign contacts, contract adjudication, specialized
legal advice and assistance, and certification of documentation and of product quality; an arena
for social contact between members; an arena and "cover" for cartel arrangements; …and
participation in the framing and/or implementation of public policy, including the performance of
regulatory duties".
In addition to the delivery of such services, what makes local business associations of particular
interest for the industrial cluster is that they represent a key forum for local joint action. We have
argued that collective efficiency provides the basis for cluster competitiveness, and that collective
efficiency gains are likely to be raised where local firms enter into joint action (Schmitz, 1995b;
Nadvi, 1999b; Schmitz and Nadvi, 1999). This raises questions about what kinds of joint action
business associations can engender, the benefits of such collaboration and how such collaboration
can be brought about.
Moreover, such joint action needs to be assessed in a dynamic context to understand how
associations can assist clusters face new competitive challenges. New competition, including the
pressures that have arisen for local producers from the connected processes of liberalization and
globalization, require a "switch in gear" in terms of the ways producers are organized. This, it is
argued, calls for greater local cooperation. The proposition examined in this paper is that increased
joint action through business associations is required for by SME-dominated developing country
industrial clusters to face the challenges of the new competition.
Joint action through the business association is one aspect of the potential for local cooperation
that clustering provides. This calls for deliberate and active cooperation at a multilateral level
between local agents engaged in similar activities. Elsewhere I have defined this as one element
of the "active" dimension of collective efficiency in contrast to the passive gains associated with
external economies that accrue to local agents purely by virtue of their location within the cluster
(Nadvi, 1999b). Joint action through the association, such as the formulation of local standards
that result in a reputation for quality for the locale, can also lead to externality gains for other
agents within the cluster. These "externalities of joint action" can often be a core benefit for the
cluster as a whole.
Promoting joint action through the association, however, may be difficult given that in many
clusters local producers are often also local rivals. While local competition can, it is argued,
promote local development (Porter, 1990), the possibilities of external economies and free rider
gains can also discourage cooperation between local agents. A key conceptual issue for
understanding the dynamics of clusters has been explaining how the potentially conflicting pulls
of local competition and cooperation are mediated. Some studies have suggested that social ties
can be a critical element in ensuring effective coordination and reducing the transaction costs
associated with inter-firm ties in clusters.(Endnote 8)
Analysing the specifics of social influences on economic coordination in clusters lies outside
the scope of this paper. Nevertheless, it needs to be noted that local associations within the context
of industrial clusters not only provide a potential arena for collective coordination and local
cooperation, but also have a social dimension. At the very least associations can provide a social
forum, allowing local producers to meet and collectively discuss their problems. Moreover, the
legitimacy and effectiveness of local associations in providing real services to their members and
successfully undertaking regulatory functions can be influenced by the dynamics of local social
ties and affective relationships. Thus, the business association, insofar as it represents an element
of the landscape of an industrial cluster, is both an aspect of local "institutional thickness" and,
in Granovetter's sense, a socially embedded institution.
The functions undertaken by local business associations within the cluster context can be
broadly categorized under the following types of activities:
- coordination and regulation;
- representation of the cluster's interests to various levels of government; and
- provision of "real" services.
These are in large part interconnected. The effective delivery of services to local members and
the representation of the cluster's interests to the state all call for coordination within the cluster
and through the association. Coordination by the association can be both at the horizontal level,
between local producers, and at the vertical level in terms of backward and forward links that local
producers have within their supply chains. Through horizontal coordination producers can, for
example, regulate capacity, ensuring that prices for their products are not allowed to decline due
to cluster-wide overproduction. They can also regulate local business practices, determining the
boundaries of what may be considered as acceptable local competition. This, however, demands
a high level of local collaboration. As mentioned earlier, mediating local competition and
cooperation can be a difficult task within the cluster. This demands authority and legitimacy for
the association within the cluster. Such authority can arise from the influence of local social and
affective ties. It can also emerge through on-going business relations.
Lobbying government has tended to be the most common activity undertaken by associations
within developing country industrial clusters (Nadvi and Schmitz, 1994). Through lobbying
activities, associations seek to defend the interests of their members, to influence the policy
making process to the benefit of their cluster by providing informed intervention at various levels
of government. This function also provides an intermediary between the state and local producers.
Thus, at a more mundane level, local associations can be institutions for local producers to
negotiate on their behalf with local government agencies on individual problems.
Lobbying has often been viewed as a rent-seeking objective wherein business associations
primarily seek fiscal and trade benefits from the state for their members. In an era of trade
protection, lobbying functions possibly helped strengthen the consensus for protectionist measures
for local producers. Such measures also privileged particular associations, and their office bearers,
as trade bodies became conduits for lucrative trade licenses and managers of restrictive quotas
(Moore and Hamalai, 1993).
Trade liberalization and the new competitive pressures exhibited in the global economy have,
however, raised new pressures on business associations. These pressures require associations to
extend their activity beyond lobbying, as well as focus more strategically within their lobbying
function. Business associations are thus no longer simply rent seeking institutions, but potentially
also rent-generating institutions for their members. That is not to suggest that lobbying functions
are no longer important. On the contrary, they may continue to be significant. Nevertheless, a
larger range of service provisions, information sourcing, and strategic networking by associations
that allows local firms to develop capabilities as well as link themselves to key external agents that
provide access to higher value markets may become increasingly more critical.
Associations can play a more significant function in assisting local clustered producers to ease
their internal constraints. In addition, this more interventionist and supportive role is also likely
to involve a greater understanding of market drivers that the cluster faces and developing
responses that help the cluster as a whole to compete. In this context, there is a range of enabling
activities that associations can deliver. These include the provision of:
- "real" services such as technical and managerial advice, information services that help link
local producers with distant markets, including data on markets, prices, competitors, trade
policies and as well as general trade information;
- technology support that help local producers upgrade, both in process and product
technologies as well as moving up the value chain into areas such as design and research
and development;
- the linking of local producers to local and global trade fairs that provide exposure to local
firms and brings external buyers to the cluster;
- benchmarking services that help local producers compare their performance with global best
practice;
- technical assistance to meet new global standards and the development of local quality
labeling.
Not all business associations are positioned to provide such services. In addition, exploring the
possibilities of associations to enter into such activities requires further understanding of how
associations are organized within the cluster. This raises questions on how the associations
function, the nature of their leadership, how representative are they, who elects the leadership,
what is the basis of their financing arrangements etc? It also raises questions of their capacity to
provide such services. Do they have a secretariat with skilled, experienced and professional
expertise? Is the secretariat sufficiently empowered? Can it effectively regulate the cluster and
dissuade destructive local competition?
Business associations are, by their very nature, not autonomous from the membership that they
represent. Inasmuch as they are embedded in the local milieu of their members, their effectiveness
as a body is a reflection of the broader capabilities of the cluster. That is to say, in an environment
where local competition is intense, where the structure of the industry is highly skewed, and where
practices are such that the cluster as a whole is geared to moving towards a "low road" trajectory,
an association is unlikely to function effectively in promoting joint action and cluster-wide
upgrading. Nevertheless, dynamic competitive pressures also imply that associations are dynamic
institutions. The pressures of the new competition are forcing local clustered producers to
upgrade. Under such conditions, associations can change and can potentially play a catalytic role
in enabling the process of industrial upgrading.
In some cases such competitive pressures are directly linked to the process of trade
liberalization, opening up formerly protected markets to lower priced imports. In other cases, the
competition has been marked by the entry of new and more competitive producers. In still others,
the competition has been sparked off by the closure or the loss of former markets. And in some
cases this has been directly linked to the need to upgrade, to meet global quality standards, new
designs or more efficient production organization.
Clustered firms need to upgrade in order to compete. The hypothesis in exploring the response
of developing country industrial clusters to new competition has been that greater joint action, both
bi- and multi-lateral, is required. A key aspect of this is the role of local business associations in
providing a collective, cluster-wide, basis for greater local cooperation, and thereby generating
cluster-wide advantages. The association can be a critical instrument in initiating and fostering the
cooperation and upgrading required by clustered firms to continue to compete in a sustainable
fashion. However, such forms of cooperation are far from guaranteed, and the joint action they call
for not uncontested.
II. Overview of the cluster case studies and the new competition
This paper focuses on evidence from four cluster case studies, each of which has faced a
qualitatively more competitive environment during the 1990s. This has raised doubts on their
ability to grow. A key aspect in analysing how the clusters have responded to the new competition
has been an examination of the role of local trade associations and other local self-help and
support institutions in the response to the new competition. The case studies are of the shoe
manufacturing clusters of Brazil's Sinos Valley, Guadalajara in Mexico and Agra in India, and the
surgical instrument cluster of Sialkot in Pakistan.
II.1 The clusters
Small and medium-sized firms dominate these clusters, although there is an increasingly
significant presence of large firms in each. The Pakistani and Brazilian clusters, in particular, are
highly export-oriented while the Indian and Mexican clusters have begun to make inroads into
export markets. In many respects these case studies are considered some of the more remarkable
and dynamic examples of industrial clusters in the developing world. They display features
observed in the classic industrial districts of the Third Italy. In addition, each of these clusters has
found global competition in the 1990s to be qualitatively more challenging than before, demanding
substantial restructuring and reorganization of production. While the challenges posed are specific
to each case, the critical need for collective joint action is common to all. Business associations
have been a central element in accounting for the collective collaboration, or the lack of it.
The clusters do differ in scale. For example, the Brazilian cluster, the largest of the four in
terms of sales volume, has exports of over US$ 1 billion annually. In contrast the wholly export-oriented surgical instrument cluster of Sialkot recorded annual export volumes of over US$ 100
million during the mid-1990s.
Nevertheless, each has a critical mass of specialized producers, suppliers and other ancillary
agents. For example, the Sinos Valley cluster in Brazil has over 400 shoe producers and some
1,300 other enterprises which provide raw materials, manufacture components, undertake process-specific tasks, or deliver a varied range of managerial and export-related services to the local shoe
industry (Schmitz, 1995a). Similarly, the shoe cluster of Guadalajara in Mexico has 1,200
enterprises, accounting for 26 per cent of all shoe producers in the country (Rabellotti, 1995). A
critical mass is also found in the Agra cluster, with "around 5,000 mostly informal small-scale
manufacturing units" employing approximately 60,000 production workers (Knorringa, 1995, p.
49). The Sialkot cluster, for its part, has 300 manufacturers and exporters of surgical instruments,
over 1,500 process specialized sub-contracting workshops, some 200 suppliers of inputs and raw
materials and over 500 service providers (Nadvi, 1999a).
Most of the clusters have at least one key local trade body. The Surgical Instrument
Manufacturers Association (SIMA) represents all manufacturers and exporters within the Sialkot
cluster, although not the ancillary units or the process subcontractors. In addition, there is the
Sialkot Chamber of Commerce and Industry (the SCCI) which includes all manufacturers and
traders within Sialkot. The Guadalajara shoe cluster has two local sector-specific trade bodies.
The Camera del Calzado represents some 500 local shoe producers, while APICEJ serves the
interests of the shoe components sector (Rabellotti, 1995, pp. 156-157). In the Brazilian cluster,
business associations are more specialized, with a wider range of sub-sector specific trade bodies.
Thus, in addition to the local chamber of industry (ACI) and the shoe manufacturers association
(ABICALÇADOS), there are independent associations for component suppliers (ASSINTECAL),
tanners (ABICOURO), leather and shoe machinery manufacturers (ABRAMEQ), and export
agents (ABAEX).
The range of services provided by each association differs in each of the case studies, and their
level of activity varies. While the functions of each of these associations are broadly similar, and
a focus on lobbying of government agencies a common feature, the effectiveness of the
associations are far from uniform. For example, Rabellotti's 1993 survey of 30 shoe manufacturing
firms found "a rather positive evaluation of the activities of the Camera in Guadalajara: 83 per cent
of the firms interviewed judged the organization of trade fairs, 63 per cent of the lobbying activity,
56 per cent the diffusion of information and 34 per cent the training activity as very good"
(Rabellotti, 1995, p. 155). However, I observed that the Sialkot cluster's surgical instrument
manufacturers association was, according to local producers in 1994, "not felt to be sufficiently
proactive in representing the cluster's collective interests" (Nadvi, 1999b, p. 97).
What is common is that at various points in the evolution of the respective clusters, trade
associations have played important functions. I explore this, and the distinctions between the
various trade bodies, further below. The point to note here is that each cluster has within it sector
specific, and in some cases sub-sector specific, trade bodies as well as local chambers of industry.
In a few of these clusters these trade bodies are also ostensibly national associations, but they
retain the nature of a local institution given the concentration of that sector within the cluster.
Some of these associations are themselves component members of national apex bodies. However,
it is their role and function as sector and cluster bodies that is of concern.
II.2 The new competition
Before analysing the specific roles of these business associations consider first the challenges
that each of these cluster has faced in recent years. This raises the issue of the specific types of
responses called for from local producers, and from the cluster as a whole. In the three shoe
clusters, various aspects of trade liberalization have made competition more intense. For the
Brazilian cluster, aggressive penetration by lower waged shoe producers from China in their main
export market, the United States, has resulted in a significant decline in sales. Competing with the
Chinese has led to a need for improvements in production organization, with faster delivery
schedules and lower stock costs through just-in-time production. It has also required upgrading,
particularly in developing design capabilities, improving quality and accessing new, higher value
added markets that have yet to be targeted by low waged producers. A similar experience is
observed in the Mexican shoe cluster where the lifting of trade barriers has opened their traditional
domestic market to cheap East Asian imports. This has again required both an improvement in
product quality and a lowering of manufacturing costs. It has also provided an impetus for local
producers to consider upgrading and exports.
For the Agra shoe cluster, the 1990s have been marked by the loss of their main and quite
undemanding export market in the former Soviet Union, alongside a rapid rise in consumer
expectations and demand for higher quality and design in the domestic market. Again, these
changes have led to the need for local producers to consider more carefully design and quality
concerns and to improve production capabilities. For some elements of the cluster, these changes
have spelt doom. For others, particularly those who draw on a capability built on competing in
the ever more demanding local market, opportunities are arising for exports through major
European and North American retail chains.
The nature of the new competition faced by the Pakistani surgical instrument cluster is
somewhat different to the liberalization pressures observed in the Brazilian, Mexican and Indian
shoe producing clusters. Since the mid-1990s, the cluster has been confronting pressures to
conform to internationally accepted quality assurance standards in its leading markets in the
United States and Western Europe. Global standards are increasingly gaining importance in
international trade (Stephenson, 1997; Maskus, 1997). These are in many ways the new non-tariff
barriers. Certainly for the Sialkot cluster, failure to conform to such standards has meant that
access to key markets is restricted. Compliance with international quality assurance standards
requires greater monitoring of process activities and calls for upgrading of inter-firm linkages in
vertical ties. New forms of managerial knowledge and organizational practices are required to
successfully meet such standards. The costs to individual SMEs of acquiring such know-how and
soft technology can be prohibitive.
The nature of the new competition, while distinct across the four case studies, place similar sets
of demand of upgrading in intra-firm organization and in inter-firm relations. They call for greater
joint action and increased coordination in both horizontal and vertical relations of production. The
next two sections explore specifically whether such joint action has occurred through the cluster's
business association. They examine the relationship between improved cooperation at the level
of the associations and overall performance, and in more detail, the actual process of upgrading
brought about through the intervention of the business association.
III. Business associations and firm upgrading: Is there a
relationship?
This section reviews the quantitative evidence from the four cluster studies. It explores the links
between cooperation through the business association, firm performance and the ability of the
cluster to face new challenges. The findings clearly suggest a relationship between support through
the association and a cluster's overall competitiveness. However, the evidence is far from
uniform. Moreover, it only provides part of the story. To get a sense of the dynamic processes
associated with business associations and the new competition, the next section turns to qualitative
evidence from two of the case studies, the Brazilian shoe cluster and the Pakistani surgical
instrument cluster.
The research carried out on the four case studies used similar methodologies to explore the
hypothesis that greater joint action is necessary to meet the challenges posed by the new
competition. For each cluster, the primary researcher had undertaken earlier survey-based
investigations at various points during the early to mid 1990s (see Rabellotti, 1997; Schmitz,
1995a; Knorringa, 1995; Nadvi, 1996). This helped to provide a baseline for the current research.
Sample surveys of approximately 60 manufacturing enterprises, coupled with in-depth
interviews with local key informants, were conducted in each cluster during 1996 and 1997. In
each survey, firms were differentiated by firm size and a similar set of questions posed. These
included, inter alia, questions on whether respondents had increased their use of services provided
by the business association following the onset of new competition pressures, and if so what
particular types of services were called upon. Alongside questions on changes in inter-firm
cooperation in backward and forward linkages and in ties with other producers, information was
also gathered on changes in firm performance following the new pressures. For each of these
clusters there had been, at the time of the survey, at least a three years gap since the particular
crisis had emerged. In some cases, the surveys collected information of changes in performance
and cooperation over the past five years. In the Mexican study, Rabellotti compared levels of
cooperation and performance in 1996-7 (post onset of new competition) with performance and
cooperation reported in an earlier survey conducted in 1993.
In each of the four clusters, the majority of sampled firms reported that they had experienced
a rise in the level of joint action with their respective trade associations following the onset of the
particular crisis that their cluster faced. In none of these clusters was there a relationship between
firm size and increasing cooperation through the trade bodies. That is to say firms of all sizes were
using local business associations to a greater extent than before. What was also evident from these
findings was that, in each of the clusters, the association had increased its support in the provision
of information and advice to members and through its lobbying activities with government. It was
apparent, however, that in none of these cases was there any significant increase in assistance
provided by the association on issues such as labour training or technical and marketing support.
This suggested continuing and significant gaps in the delivery of real services by local business
associations.
In addition to greater cooperation through the trade association, in a number of these clusters
there appeared to be a relationship between increasing joint action through the business association
and improved firm performance in recent years. While the issue of causality remains, these
findings are particularly notable.
For example, Knorringa (1999 forthcoming) found that 55 per cent of the 58 firms surveyed in
the Agra shoe cluster displayed strong performance (that is reported increasing output, sales,
profits and employment) during the period 1991 and 1996. He observed that although there was
no correlation between bilateral horizontal cooperation and strong performance, there was a clear
and positive association between strong performance and use of the business association. Firms
with strong performance were much more likely to have used the association compared with firms
with average or poor performance. "While 44 per cent of the strong performers make more
frequent use of associations, none of the weak performers do so. Moreover, a statistically
significant correlation was found between firms that have increased their participation in business
associations, strong performers, and larger firms" (Knorringa, 1999 forthcoming, p. 17).
The Mexican shoe cluster of Guadalajara provides further evidence of the presence of a link
between firm performance and association activity. Rabellotti's study, based on a survey of 63
shoe manufacturers in the Guadalajara cluster, provides compelling evidence of a statistically
significant link between the Camera del Calzado, the business association for shoe producers, and
firm performance. Moreover, of all the variables "horizontal cooperation through the
entrepreneurial association is the largest of any regressors" that is statistically significantly related
with performance (Rabellotti, 1999 forthcoming, p. 19). In addition, when disaggregating the
overall performance indicator, Rabellotti found that horizontal cooperation through the association
was positively and significantly associated with improvements in production, sales, profits and
employment. On the basis of this evidence she concludes that "horizontal cooperation with other
local shoe firms and through the entrepreneurial association as well as vertical cooperation with
input suppliers contributes significantly to the sample firm's good performance" (Rabellotti, 1999
forthcoming, p. 19).
Similar results emerge from the Brazilian shoe cluster of the Sinos Valley studied by Schmitz.
On the basis of the data from the sample survey of 65 shoe manufacturing firms, he found that
enterprises displaying a strong overall performance (in terms of annual sales) were more likely to
have increased cooperation through the business association (in particular the industrial chamber
the ACI). He concludes that "multilateral cooperation (participation in the Business Association)
increased only slightly but showed a significant positive relationship with performance" (Schmitz,
1999 forthcoming, p. 21).
Quantitative evidence from the survey of 60 manufacturers in the Pakistani surgical instrument
cluster also indicates that, following the pressures arising from the need to meet international
quality assurance standards, over 70 per cent of the sample had increased their use of the local
trade body, the Surgical Instruments Manufacturers Association (Nadvi, 1999 forthcoming, p. 46).
However, in contrast to the evidence from the three other case studies, there appeared to be no
relationship between overall performance and cooperation through the business association in the
Sialkot cluster. Improvements in performance were closely linked with increases in joint action
in vertical ties with buyers and subcontractors, as well as by firm size, but not with the intervention
and activities of the association.
What is common across the four case studies is that the pressures of the new competition,
including trade liberalization and globalization, have resulted in an increase in cooperation through
the business associations and a greater use of some services provided by the business associations.
With the exception of the data from Pakistan, there is also sufficient evidence from the cluster case
studies to suggest the presence of a relationship between firm performance and ties with business
associations. The Pakistan case is intriguing. As we shall see below the evidence from the
qualitative data collected in Sialkot suggests a somewhat different conclusion than that emerging
from the quantitative analysis. I explain this anomaly as being connected to the issue of timing.
The survey questionnaire, which was applied in 1997, asked local respondents to report if
cooperation with the trade association had increased since the emergence of the quality assurance
crisis in 1994. It did not capture the sequence and timing of such cooperation. However, the local
business association "played a critical role at the time of the crisis through a number of strategic
interventions. Once the required path to address the (international quality assurance) concerns had
been adopted, its influence has diminished" (Nadvi, 1999 forthcoming, p. 29).
The quantitative data provides a powerful indication of the importance that business
associations can potentially have for SME clusters. It is clear that, in the face of new competition
and under pressure for local clustered enterprises to increase local cooperation, collaboration
through the business association improved. Moreover, in three of the four case studies, there is
evidence of a positive and significant association between increasing cooperation through the trade
body and improvements in overall performance. In each of these case studies, however, increasing
cooperation through the association was also linked in with increasing cooperation in other areas
of vertical and horizontal ties. Thus the issue of causality remains. Nevertheless, in one case, that
of the Mexican shoe cluster of Guadalajara, regression analysis clearly indicated that cooperation
through the business association was the most significant factor associated with performance.
To conclude, the quantitative data appears to confirm the proposition put forward in this paper
that cooperation through the business associations is required to face competitive pressures. It
suggests, therefore, that exploring the role of associations in the context of industrial clusters in
a dynamic process of upgrading is worthwhile. It does not, however, provide us with a clear idea
of the process by which local business associations have actually supported local clustered SMEs
to upgrade and face new competitive challenges. To understand that, and to assess how this was
brought about within the associations, we need to turn to an analysis of the qualitative data.
Case study analysis: New competition and the role of business associations in the Sinos Valley and Sialkot clusters
The findings reported above suggest that local business associations have played a role in
assisting SMEs in developing country industrial clusters upgrade in the face of new competition.
Moreover, such support appears to have some relationship with improved firm performance. It
does not, however, provide any insights on how this has been achieved. This requires more in-depth case study analysis.
The qualitative data is by its nature uneven across clusters and the material obtained within
each cluster is not entirely uniform. It does, however, give us a better understanding of the
relationship between business associations, small firm industrial clusters and the new competition.
The bulk of the discussion here centres on two of the four cluster case studies, the Brazilian shoe
cluster and the Pakistani surgical instrument cluster. In part this is because the qualitative
evidence from these two case studies is relatively richer. It is also a reflection of the fact that these
two studies bring out quite sharply differing ways in which support from the associations was
brought about, or failed to emerge.
The discussion is structured in two parts with each part providing a detailed analysis of the role
played by business associations in the two respective case studies. The concluding section draws
together the common threads emerging from the four case studies.
IV.1 Associations and supply chain upgrading in Brazil's Sinos Valley shoe
cluster(Endnote 9)
Schmitz (1995a) describes the Sinos Valley as a "super-cluster". It is remarkable in many ways.
In 1993, Brazil exported close to US$ 2 billion worth of shoes, making it the third largest shoe
exporter in the world (after Italy and South Korea) with over 12 per cent of the world market
(Schmitz, 1995a). The vast bulk of these exports came from the Sinos Valley cluster. In addition
to shoe producers, the cluster is home to numerous firms engaged in manufacturing leather,
producing components, fabricating specialized machinery and providing specialist services for the
shoe industry. The presence of the extensive local vendor and supply network has meant that
specialized inputs are readily available within the cluster, and that subcontracting is extensive,
generating cluster-wide economies of scale and scope. As mentioned earlier, the cluster is unique
among the four case studies for the specialized nature of local business associations. There are six
business associations, each representing the distinct interests of specific segments of the shoe
value chain, two professional associations, four technology and training institutes devoted to the
shoe sector, and a trade fair body (FENAC) geared to the promotion of the cluster's products both
locally and abroad. These features make the Sinos Valley cluster one of the best examples of
industrial clusters in the developing world, and one that comes closest to the idealized model of
industrial districts that has emerged from the "Third Italy".
In recent years, the cluster has been facing pressures from lower-cost shoe manufacturers in
China. As a consequence of Chinese penetration into the US market, with shoe imports into the
United States from China growing seventeen-fold between 1987 and 1997 (Schmitz, 1998, p. 12),
Brazil's export of shoes has declined substantially. In 1997 Brazil's shoe exports were 30 per cent
lower in real terms from their 1993 export levels.
The new competition is forcing Sinos Valley manufacturers to recognize the need to reorganize
production and upgrade in order to remain competitive. Such upgrading requires improvements
in product quality and delivery times as well as seeking out newer, higher value-added markets,
particularly in Europe. One aspect of this process of upgrading calls for greater multilateral joint
action through local associations. The findings reported in the previous section indicate that
cooperation through the associations has increased and that there indications of a statistically
significant relationship between joint action through the business association and improvements
in firm performance in recent years.
A closer and more detailed inspection of the cluster suggests, however, that the quantitative
findings do not capture the full story. The cluster, according to Schmitz (1999 forthcoming),
continues to struggle in the face of the Chinese competition, and while there are signs that certain
aspects of the required upgrading have been incorporated by local producers, such changes are
uneven and highly differentiated. Moreover, the failure of local business associations to bring
about a collective response to the new competition in part explains the uneven spread of the
upgrading process in the cluster. Before turning to a discussion of the recent actions of local
associations in the Sinos Valley in recent years, it is helpful to first chart the role business
associations have historically played in the cluster.
The shoe economy of Sinos Valley has traditionally been well represented by a range of trade
bodies. Reflecting the specialized supplier networks locally, the cluster has a number of business
associations, each representing the specific interests of shoe producers as well as various types of
suppliers within the local shoe product chain. Historically, as Schmitz notes, business associations
played a key part in the cluster's development, facilitating the building of trading links between
local producers and global and local shoe traders. Entry into international markets by Sinos Valley
producers began in earnest during the mid-1960s. This process was initiated by the intervention
of the cluster's "umbrella" association, the Business Association of Novo Hamburgo (ACI-NH),
and its collaboration with the local trade fair organization FENAC. With ACI, "FENAC played
a major role in the late 1960s/early 1970s in bringing foreign buyers to the Sinos Valley and taking
local manufacturers to fairs abroad" (Schmitz, 1995a, p. 19). This exchange helped the
development of export networks that linked local producers to global markets. ACI and FENAC
also assisted local producers in attracting public sector support, including export incentives, and
cemented closer ties between the cluster and the federal and regional levels of government. At this
stage of the cluster's development, the ACI continued to represent the legitimate overarching trade
body for the Sinos Valley. According to Schmitz, it collected and compiled census data on the
cluster for the use of local firms, as well as on local and export markets. Such information,
alongside the ACI's involvement in trade fairs, provided local producers with key points of
information on markets as well as of local production and helped the formation of trade ties that
allowed Sinos Valley's shoe industry to produce for distant markets.
As the cluster grew, with rapidly expanding levels of exports, the specific and often conflicting
interests of various components of the local shoe economy became more apparent. A number of
new associations emerged representing the specific interests of local tanners, component
producers, machinery suppliers, export agents and large shoe producers. While cluster-wide
concerns were being replaced by sub-sector interests the pressures of the new competition
intensified. The growing fragmentation within the cluster prompted a process of "collective
failure" in the face of the new demands. Institutional joint action has taken place, particularly in
some of the sub-sectors, however conflicts between specific sub-sector associations have
effectively weakened cluster-wide upgrading.
The search for a collective response to the new competitive pressures posed by the Chinese
manufacturers, and the need to upgrade, has been a core aspect of the Sinos Valley cluster's
development during the 1990s. Attempts to bring together the various sub-sector associations
under an umbrella organization, the Industrial Chamber, was attempted in 1991 and failed
(Schmitz, 1998). The Federal government initiated an upgrading programme (the Quality and
Productivity Programme) in 1992, calling for the active collaboration of all the various sectoral
bodies within the Valley. This initiative also failed to take off.
A more ambitious initiative, coming from the Association of Shoe Producers
(ABICALÇADOS) itself, appeared to mobilize the collective will required to bring about cluster
wide upgrading. ABICALÇADOS organized a seminar on "Partnership in the Footwear Supply
Chain" with other leading sub-sector associations in the cluster. This seminar, reports Schmitz,
was well attended and brought together most of the leading industrialists within the cluster. It led
to the formulation of a "Shoes for Brazil Programme" in 1994.
This initiative aimed to strengthen links within the footwear supply chain in the Sinos Valley
through greater vertical cooperation, was "formally endorsed and actively supported by all the
relevant associations. It proceeded by setting up six working groups each with a brief to diagnose,
make proposals for action in specific areas such as marketing abroad, marketing in Brazil,
reorganization within the firm level, relationships within the supply chain" (Schmitz, 1998, p. 34).
As Schmitz observes, the key development here was that the search for a response was a collective
one. The reports that emanated from the various working groups "were the joint product of groups
which consisted of shoe manufacturers, suppliers, association officials and consultants from the
university. Precisely because the main stakeholders participated in the diagnosis and prescription
there was a good basis for proceeding to the next stage of implementing some of the ideas put
forward" (Schmitz, 1998, p. 35).
Despite the initial momentum and enthusiasm generated to seek a collective response that built
on collaboration between the various elements of the cluster's supply chain, the programme
faltered. It was later revived in 1996 on the impetus of the component manufacturers association
(ASSINTECAL) but once again failed to take off. What factor, or set of factors, explain the
failure of this joint action initiative, mobilized by an association and articulated through
collaboration between the sector's various associations, and aimed at cluster-wide supply chain
upgrading?
Schmitz (1998) argues that one key element in the decline of the supply chain upgrading
initiative was the inability of the State to intervene and mediate between the conflicting interests
of specific elements of the shoe sector supply chain. Had this been done, the prospects for
upgrading for the sector, and the cluster as a whole, would have been enhanced. Underlying the
need for external mediation, however, is the fact that the conflict between the cluster's various
sub-sector trade bodies reflected the cluster's increasing internal differentiation. Connected to
this, the distinct objectives followed by distinct types of associations were highlighted. Schmitz
suggests that the two key associations engaged in the supply chain upgrading programme,
ASSINTECAL and ABICALÇADOS, operate with different "mental models" that govern their
behaviour. Both organizations seek to further the benefits of their members. However, while
ASSINTECAL views its members', namely suppliers and component producers, interests as being
intrinsically tied to the collective development of the cluster as a whole; ABICALÇADOS, in
contrast, no longer considers its members welfare as being wholly associated with the development
of the cluster.
As Schmitz's study points out, the Sinos Valley cluster is highly differentiated, both by the
extensive range of shoe-related activities undertaken locally and by firm size. Amongst shoe
manufacturers, differentiation by firm size is particularly acute. Over half the total number of shoe
producers (55 per cent) are small units employing less than 50 persons. Large firms, with a labour
force of 200 persons or more, account for 23 per cent of the total number of firms (Schmitz, 1998,
p. 16). More importantly, however, the five largest shoe producers in the cluster had a 25 per cent
share of total Brazilian shoe exports in 1996 (Schmitz, 1998, p. 36). In addition, they exported
almost wholly through one US buyer, a company that absorbed 40 per cent of shoe exports from
the Sinos Valley. With such volumes and levels of concentration, the US buyer and the five
largest firms had a disproportionately large sway within the cluster. As Schmitz notes (1998, p.
36), these firms were "both admired and feared" locally. They were also able to exercise a great
deal of power and influence in the shoe manufacturer's association.
The five large firms have traditionally dominated the ABICALÇADOS and, according to
Schmitz have "used their influence more to control the sector than to promote it". Elections for
the presidency of the shoe manufacturers association have been dominated and effectively
controlled by these large firms. The association's President has enormous influence over the
association's activities at any given time, and the ability of these five firms to choose candidates
of their choice, or veto others, has meant that the ABICALÇADOS' policies reflect the objectives
of the large firms.
What then are the objectives of these large firms? They themselves were originally small
enterprises as early as the 1970s. Their rapid growth, however, has changed the nature of their ties
with the cluster. As these firms expanded they began to increasingly integrate activities and to rely
less on local suppliers. Backward integration led to most of these firms acquiring their own
dedicated tanneries, and in some cases even cattle ranches. Their almost complete reliance on the
leading US buyer, providing guaranteed markets for their products, limited incentives to promote
new marketing initiatives and develop their own design capabilities. The declining concern with
the Sinos Valley cluster and the locational advantages that it offers has led to some of these large
firms setting up new manufacturing facilities in northern Brazil, an area with no shoe
manufacturing capabilities or shoe-related locational advantage but offering regional fiscal
benefits.
In contrast, the component producers' association, ASSINTECAL, appears to be concerned far
more with promoting the Sinos Valley cluster. This is clearly in the interests of their members
whose welfare depends on the further development of the cluster. Thus, as Schmitz (1998) shows,
using table 1, ASSINTECAL differs in many ways from ABICALÇADOS.
ASSINTECAL is a more active body. It provides marketing support to members, particularly
through the promotion of trade fairs, and services including technology support. Members are
assisted in exhibiting at trade fairs, both nationally and abroad, with ASSINTECAL negotiating
with fair organizations on behalf of members and with SEBRAE (the Brazilian Small Enterprise
Service) to obtain financial support for members to participate in trade fairs. In contrast,
ABICALÇADOS has taken no active role in promoting its members participation in trade fairs,
resulting as Schmitz observes in the almost complete absence of Brazilian shoe producers in the
leading international shoe fairs (Schmitz, 1998, p. 39).
Table 1. Profiles of two Sinos Valley associations, 1997
| |
Association of Shoe Producers
(ABICALÇADOS) |
Association of Component Manufacturers
(ASSINTECAL)
|
|
Ambition of leaders |
Control cluster |
Promote cluster |
|
Membership |
Exclusive |
Inclusive |
|
Main purpose of association |
Defend |
Provide services |
|
Marketing support |
Passive |
Active |
|
Technology support |
Ignores technology institutes |
Partnership with technology institutes |
|
Source: Schmitz, 1998, p. 38. |
Thus ASSINTECAL, working with the objective of helping members to innovate and break into
new markets, saw membership increase from 40 firms in 1993-94 to 80 component manufacturers
in 1997-98. The relatively lethargic ABICALÇADOS, however, has experienced a decline in
membership, to under 100 of the total of over 400 shoe manufacturers in the cluster. In large part,
this failure on the part of the shoe producing association lay with the dominance of a few large
firms, whose dependence on the cluster as a whole has declined, and who see little benefit in
promoting a programme of joint action within the cluster supply chain.
The narrow interests of ABICALÇADOS, and its failure to undertake meaningful joint action
to upgrade the cluster's supply chain is not restricted to its relationship with ASSINTECAL and
the "Shoes for Brazil Programme". As its leading members have become large integrated units
their individual objectives have clashed with those of many of the cluster's raw material and
component suppliers. Thus, as Schmitz (1998) has shown, instead of supporting actions that
improve the quality of the cluster's key raw material, leather, the ABICALÇADOS has effectively
promoted a strategy that lowers value added. ABICALÇADOS defeated a proposal by the tanner's
association for the imposition of an export tax on semi-processed leather. This proposal was aimed
at allowing manufacturers and exporters of finished leather to compete on a level playing field
with exporters of semi-processed leather in the European market (where finished leather faced
import tariffs). However, leading members of ABICALÇADOS were also exporters of semi-processed leather and stood to lose from the proposal (Schmitz, 1998, p. 40). Yet the consequence
of the defeat of the proposal has been that the cluster's tanning industry has suffered, with
incentives to lower value added and produce semi-processed leather.
If we recall the quantitative evidence presented earlier, Schmitz noted that there had been an
increase in joint action through the industrial chamber (the ACI), and that there was an indication
of a positive association between this and overall firm performance. The qualitative material
suggests that this conclusion needs to be treated with some caution. While local shoe producers
surveyed were using the services of the overarching industrial body in the region, the ACI,
membership in the shoe producers association ABICALÇADOS was declining. According to
respondents, the latter was increasingly a "club of the big firms" (Schmitz, 1998, p. 39). Joint
action at the level of vertical ties that individual firms had with their suppliers and subcontractors
appeared to be more strongly associated with performance than cooperation through the
association. In fact, the one collective attempt to upgrade vertical supply chains within the cluster
had been defeated by the failure of joint action between local associations. This case of 'collective
failure' reflected the differentiation within the cluster and the divergent interests that it generated.
To conclude, the evidence from the Brazilian case study highlights the complexities of
understanding the functioning of business associations in a cluster context. At particular points
in time in the cluster's evolution, the association played an important, catalytic function. At other
periods various sub-sector associations within the cluster actively pursued a programme of
upgrading, but were thwarted in their objectives due to the growing sub-sector differentiation
within the cluster, and the power of large players. Let me turn now to the case study from Pakistan.
IV.2 Pakistan - Quality assurance pressures and business association initiatives
The Sialkot surgical instrument cluster is one of Pakistan's rare stories of consistent export
success by small and medium enterprises. The 300 family-run manufacturing enterprises that form
the core of the cluster together exported over US$ 100 million worth of surgical instruments in
1992-93, with over 60 per cent of export going to the United States. In May 1994, however, the
Food and Drug Administration (FDA) of the United States, the key regulatory body in the US
health sector, restricted imports of Pakistani-made surgical instruments on the grounds that they
failed to meet internationally accepted quality control and quality assurance standards. The impact
of this action on the cluster was severe. Local producers exporting to the US saw orders being
cancelled, and consignments already in shipment stranded. With mounting costs and increasing
competition amongst local producers for sales in the European market, a number of firms and
ancillary units were forced to cease operation, in the process laying off workers.
Quality assurance standards move the focus away from product to process quality. As part of
the overall emphasis on total quality management, they provide a system of quality traceability,
involving detailed documentation of quality dependent procedures, quality training of personnel,
quality driven management, constant monitoring of quality performance measures and internal as
well as independent quality auditing. Implementing such standards requires changes in production
organization and manufacturing practices. This necessitates a capacity to learn both at the level
of the individual firm and in the relations between firms in a supply chain. This can be a costly
process. Such changes are increasingly important, however, as meeting international standards,
on quality assurance as well as on environmental, labour and even ethical concerns, are fast
becoming necessary for entry into high quality markets. For Sialkot's surgical instruments sector,
for example, in addition to the quality assurance requirements stipulated for entry to the US
market, access to markets in Western Europe and Japan is increasingly becoming conditional on
compliance with the ISO 9000 quality assurance standards. Similarly, there are growing pressures
on the cluster to meet global concerns on child labour as well as on environmental pollution.
The actions of the US authorities were not aimed at individual firms but to the cluster as a
whole. All producers in Sialkot were deemed to be sub-standard. This, therefore, called for a
collective upgrading on the part of the cluster. To a great extent this has taken place. By late 1997,
some three years after the FDA's action, the cluster's export volumes were 25 per cent above the
1992-93 levels. Overall quality had also improved in as much as 130 of the 300 manufacturers in
the cluster were now certified by the US FDA as conforming to international Good Manufacturing
Practices (GMP) standards, and two firms having obtained the coveted ISO 9002 quality assurance
certificate.
This was a remarkable turnaround, one that reflected a collective achievement. The cluster's
business association, the Surgical Instrument Manufacturer's Association (SIMA), played a key
role in bringing this about. It facilitated the process of upgrading and learning required to comply
with the quality assurance standards. As indicated earlier, the issue of timing of support was
important. The association played an important function soon after the crisis set in. It mobilized
local producers and developed a collective response. Once the required changes were set in
motion, support from the association receded. Hence, as shown above, quantitative data based on
a survey conducted in 1994 indicated no association between increased cooperation through the
association and improved firm performance in the Sialkot cluster.
Prior to the crisis of 1994, knowledge of international quality assurance requirements was
restricted to the larger firms in the cluster. The association did not disseminate information on
quality assurance nor provide any technical training. More importantly, it was not at the time seen
as key local institution. The association certainly had a long history, having been set up in the
1940s. All manufacturing and exporting firms within the cluster were required to be members, and
the annual election for office bearers hotly contested. Nevertheless, in 1994 it was widely
considered as an inactive and ineffectual body. Amongst its responsibilities SIMA is meant to
provide members with information on new markets and buyers, on trade policy, and on product
and technology development. It is expected to assist members in their dealings with the federal and
regional state authorities and other regulatory bodies. It is also mandated to regulate business
practices within the cluster.
Despite the wide range of functions ascribed to the business association, its most common
activity has been to occasionally lobby government. A survey conducted in 1994 found broad
consensus within the cluster that the association was ill-informed with regards to technical
developments, its marketing information was considered woefully out of date, it was unable to
provide technical guidance to its members, and was an ineffective "voice" of the cluster's
collective interests (Nadvi, 1999b). In part this was a reflection of the fact that the association had
no specialised secretariat staff and few resources to undertake the tasks mandated to it. In addition,
there was a strong perception, especially among SMEs, that the larger firms in the cluster
dominated the association's management and that it was their interests that determined the level
(or even lack) of the association's activities.
Given the prevailing disenchantment with the association it is thus more surprising to observe
how proactive it was soon after the crisis of May 1994. The association provided a physical focus
and arena for discussions among local producers in Sialkot on the challenges posed by the FDA's
action. Through SIMA a collective response was formulated within a month of the import 'ban'
being imposed. A delegation was organised under the auspices of the association to visit the
United States and negotiate directly with the US regulatory authorities. The objective being to
obtain US agreement for a phased programme of quality assurance certification that would also
allow for a resumption in exports. When this failed, the association turned to the Pakistan
government for support to acquire the required know-how necessary to adopt the quality assurance
standards. On the insistence of the association, the government agreed to provide financial support
to hire foreign consultants to assist local producers upgrade quality management practices, and to
finance the development of a new, internationally recognised, metal testing laboratory within the
cluster.
Developing this collective response took time. It was, nevertheless, seen by many local
enterprises as the best way to address the crisis. Moreover, SMEs considered the predominance
of representatives of large enterprises in SIMA's delegation an advantage in the cluster, in that
they could more effectively lobby government officials in both Pakistan and the US. There was
a clear, and statistically significant, (inverse) size distribution amongst firms that felt that the
association's role in lobbying government had increased substantially.
At one level, successful lobbying for government intervention was the association's core
achievement following the crisis. However, closer analysis indicates that of the steps initiated by
the association, the most important was seeking technical knowledge on quality management.
While the government subsidized this, it was the association that recognized that external know-how was required and undertook to coordinate the provisioning of such expertise.
What made the association more active and vocal than before? In part, the explanation lies in
the changes that have taken place within it since 1994. In 1994 there was a widespread view that
large firms dominated the body. At any given time the incumbent Chairman closely influences the
level of activity displayed by the association. Since 1980 nine of the eleven individuals who had
acted as chairmen of the BA were owners of large local firms. While the perceived bias towards
the large firms is difficult to substantiate, the continuing "dominance" of larger producers within
the working of the trade body was brought into question by the FDA action.
Large firms certainly dominated the association's initial reaction. It was in their immediate
interest to negotiate with the FDA and ease the shipment of ongoing consignments. SMEs also
stood to benefit from this initiative; nevertheless it was the large firms that had the most at stake
in terms of proportion of exports. Interestingly, however the association's subsequent effort in
obtaining state support for an external consultant to provide quality assurance training to 200 firms
in the cluster provided an advantage that was particularly critical to SMEs. Large firms had the
resources to obtain such expertise independently, and some had begun to do so. Small and
medium sized enterprises were, however, in a weaker position. They could not acquire the quality
assurance and management training required without a collective initiative.
How did this joint action, providing benefits particularly for SMEs, emerge within the
association? In effect, there appears to have been a discernible shift in power within SIMA since
1994. At the time of the crisis, the association's then chairman was considered to be closely tied
to the interests of some of the larger firms in the cluster. By 1995 only five firms (all large units)
had managed to get through the GMP hurdles set by the FDA. In the annual elections held in 1995,
the frustration felt by the SMEs in the cluster at the slow pace of progress came to a head. A new
panel of office bearers was voted in, representing the interests of some large firms and the more
dynamic SMEs. This panel, which was re-elected in 1996, had as its Chairman an owner of a large
enterprise. He was respected widely in the cluster and his efforts were seen as being important in
making available consultancy services on a cluster-wide basis. Thus, as reported by local
respondents, "SIMA is now more active as a consequence of the GMP and FDA issue. Before the
big firms would hinder the activity of SIMA and of smaller firms. Now, through SIMA, all firms
in the cluster, big and small, can get the help they need to get through this (quality assurance)
problem" (Nadvi, 1999 forthcoming).
In summary, the experience from the Pakistan case indicates the importance of strategic
lobbying by the association, providing cluster-wide benefits through the provision of external
know-how. It also gives some sense of the difficulties in bringing this about, particularly given the
size structure of the cluster. Finally, this case highlights the importance of leadership and
individual agency. But, despite the apparent success that the association was instrumental in
achieving, there were a number of shortfalls. The association continued to play a primary function
of a lobbying body. It did not provide real services, nor did it have the secretariat capacities to help
local producers with managerial, technical and information-related needs. This makes it all the
more understandable that cooperation through the association did not appear to have any positive
relationship with improved firm performance in this cluster.
V. Conclusions and further questions
This paper set out to examine the role of local business associations in developing country
industrial clusters. It did so within the context of the challenges that globalization and
liberalization pose to these clusters. Competition in this environment requires a sustained process
of upgrading. This calls for greater local cooperation. One key area for such joint action lies in
the local business associations. The proposition explored here is that clustered firms need to
increase their cooperation through the association in order to face the new challenges. Business
associations offer a range of functions to local firms. These include representing the interests of
their members to government, undertaking coordination and regulatory tasks within the cluster and
providing members with a wide range of producer services.
In the face of the new competition, however, it is important to note that not only firms but also
local business associations need to upgrade. Associations have to increase and refine the delivery
of appropriate producer services that effectively lower costs to local firms. They need to articulate
the concerns of the cluster more effectively to the state, and identify and promote targeted and
focused forms of state intervention that strategically assist the cluster. Finally, the new pressures
can call for a more active role in providing effective coordination, both within the cluster and with
external agents.
The evidence presented indicates that cooperation through local associations has increased
following the onset of new commercial pressures in each of the four cluster cases studied.
Moreover, there are signs that there is a link between increasing cooperation through the
association and improvements in firm performance. However, while the statistical evidence is,
in some of the clusters, impressive, the causality remains unclear. At the same time, the findings
also indicate that there remain numerous areas where cooperation through associations has not
increased. In none of the clusters are there significant signs of improvements in the delivery of
producer services associated with raising skills, labour training or technical upgrading. In the
Sialkot cluster, as the more detailed case study material outlines, the local association was
instrumental in obtaining the required technical know-how for local producers. However, it did
not achieve this by raising its own technical capabilities but by identifying external consultants
to provide the requisite training.
Despite the sense of collective efficiency being promoted through local associations, as some
of the findings suggest, there remains strong evidence of collective failure on the part of local
associations. The Brazilian case study best exemplifies this. A collective attempt to bring about
supply chain upgrading within the cluster, initiated and coordinated by local sub-sector
associations, collapsed due to the diverging interests of each of these sub-sector specific trade
bodies.
The qualitative evidence from the two case studies gives an indication of the function that
business associations can play in providing a catalyst for action, in collectively articulating cluster-wide interests, and in promoting programmes of upgrading. It also shows clearly how collective
goals can be thwarted by the actions and particular interests of key leading actors. In both cases,
the issue of internal differentiation within the cluster is of great importance. In the Sialkot cluster,
the over-riding dominance of large firms in the management of the association was challenged,
resulting in a more proactive stance by the association. This also resulted in benefits accruing to
a larger pool of local producers, and in particular to SMEs who were, and still are, especially
threatened by the demands posed by the new quality assurance standards. More recent evidence
indicates that the association is now engaged in the promotion of a wider range of standards raising
activities, raising awareness within the cluster of the need to conform to international labour
standards and to upgrade to meet ISO quality assurance and environmental standards.
Differentiation within the Brazilian cluster has increased at two levels. Between large and small
shoe producers, and between the shoe sector and the ancillary industry. Increasingly, it appears
that with the cluster's largest firms being less concerned with the overall development of the
cluster as a whole, the ability of the large firm dominated shoe producers' association to provide
a local forum for joint action is diminishing. Small and medium sized shoe producers are likely
to feel that their particular interests are neglected, possibly leading to calls for a separate
representative trade body for SMEs. The differentiation within the cluster's supply chain, again
largely arising from the internalization process of the cluster's largest firms, has meant that
improved coordination and collective action within the chain, between suppliers and producers,
is less feasible.
The process of differentiation in both clusters has consequences for the organization,
management and effectiveness of the local association. Doner and Schneider (1998) have argued
of the need for associations to keep large, and influential, firms on board in order to remain
effective bodies. The logic in this argument is that obvious. If key agents in the form of large
firms exit from the association, the association loses its relevance and ability to influence local
behaviour. Yet, the findings presented here suggest that the tension between the interests of large
firms and SMEs, and between producers and suppliers, within the cluster are not unproblematic.
If large firms no longer view the cluster as generating key advantages for them and thus do not see
their interests as being tied with the development of the cluster as a whole, they are unlikely to
promote a proactive local association.
This suggests, as Moore and Hamalai (1993) did earlier but for somewhat different reasons, a
need for caution regarding the ability of local business associations to actively support local
industrial clusters in the developing world. Associations continue to matter. The evidence from
some of the clusters is especially strong. The Mexican and Pakistani cases are possibly the best
examples. In the former, as Rabellotti (1999 forthcoming) has noted, coordination between
associations representing shoe producers and component manufacturers led to a process of
standardization in component and shoe production, thereby easing one of the cluster's key
constraints. In the latter, the association was able to mobilize the state and was the catalyst in
bringing about a process of upgrading by the cluster. Yet, the sense of collective failure and of
missed potential for local joint action through the associations remains strong.
Clearly local and national governments as well as international donor institutions should play
a role in ensuring that the potential for local associations for promoting joint action is not missed.
As a first step this calls for a policy environment that facilitates the development and activities of
local associations. This also calls for improved coordination between associations and the state.
In addition, support needs to be geared towards assisting local associations in the delivery of their
various functions, from producer services to regulatory tasks. In order to do this, however, policy
agents need to develop both an in-depth understanding of the nature of specific business
associations and the particular challenges faced by individual sectors.
There are, in my view, two main areas for further empirical research that would be integral to
the development of such a policy programme. First, a greater understanding of the internal
workings of associations and of the links between the association and its members. Second, in the
context of globalization, wherein local clusters are now more closely integrated into global
markets, the focus on local institutions needs to be widened, both to observe how local
associations can facilitate ties with external agents, and to see how external institutions can
influence local practices. Both lines of enquiry seek a better understanding of the factors that help
bring about an enabling association.
The first agenda calls for a better understanding of the functioning and organizational structure
of business associations. A number of questions arise regarding the relationship between the
association and its members, and the relationship between the association and the state. How
representative are associations? How are they elected? How are they managed? How do local
producers, large and small, get heard within these bodies? Who decides what tasks the association
takes on? Is there a specialized secretariat and if so do local producers manage it? These broad
sets of questions need to be posed in cases where a priori evidence indicates that associations may
have facilitated commercial success by local producers, and in cases of commercial failure. Such
comparative analysis, based on primary case study evidence, is likely to result in a better grasp of
how associations can promote local competitiveness.
The second agenda recognizes that, in the process of upgrading, ties with external agents
(particularly traders and foreign producers) are often of greater importance in export-oriented
industrial clusters. This has significant consequences for local business associations. Where does
new information come from? How do local associations access new know-how from outside the
confines of the cluster? How do associations representing local clustered firms link into
international value chains? What ties do local associations have with external traders and
multinationals who exert power and influence on the functioning of such chains? This raises
questions about governance of value chains itself, and of the ways in which business associations
can influence them, as well as of the importance of the regional and local space within the context
of globalization.
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Endnote 1:
A preliminary version of this paper was presented at the International Workshop on Employers' Organizations,
Development and Jobs, International Institute for Labour Studies, Geneva, 21-22 April 1999.
Endnote 2:
See, for example, Best, 1990; Sengenberger and Pyke, 1991; Schmitz, 1995b; Harrison, 1992; Porter, 1998.
Endnote 3:
For example, Humphrey and Schmitz, 1996; UNIDO, 1997; UNCTAD, 1998. The ILO and the International
Institute for Labour Studies have also been particularly active in convening conferences and publishing policy-oriented
research on industrial clusters; see, for example, Pyke et. al., 1990, Pyke and Sengenberger, 1992, Nadvi, 1992,
Cossentino et. al., 1996.
Endnote 4:
See Brusco, 1982; Piore and Sabel, 1984; Best, 1990; the collection of papers in Goodman and Bamford (eds.),
1989, Pyke et. al., (eds.) 1990, and Pyke and Sengenberger (eds.), 1992; Saxenian, 1994; Scott, 1987, 1996; Porter,
1998.
Endnote 5:
See the collection of papers in Rasmussen et. al., 1992, Pedersen et. al., 1994, van Dijk and Rabellotti, 1997,
and the review by Nadvi and Schmitz, 1994.
Endnote 6:
See Altenberg and Meyer-Stamer, 1999 (forthcoming) for a useful taxonomy of industrial cluster types.
Endnote 7:
See, for example, Best, 1990, Brusco, 1992, Schmitz and Musyck, 1993, Rabellotti, 1997, Pyke and
Sengenberger, 1992, and Pyke, 1994.
Endnote 8:
See for example, Becattini, 1990; Trigilia, 1990; Grabher, 1993; Nadvi, 1999a.
Endnote 9:
This section draws extensively on Schmitz, 1998.
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