Introduction
In the past two decades, small and medium enterprises (SMEs) have become one of the main targets of policies aimed at creating growth and employment in developing countries. Helping small firms develop is not an easy task, given the constraints that SMEs face. Many of these are due to lack of access to:
- Raw materials and components – owing to the absence of local suppliers, or an inability to obtain inputs from abroad;
- Finance – due to discrimination by banks or the high costs of dealing with a large number of small firms;
- Technology – if it has to be imported, or because the initial investment costs are too high;
- Product markets – either due to a lack of contact with market traders, or an inability to effectively market and advertise their products;
- Government – because of their limited political weight and bargaining power.
Problem faced by small firms:
On their own, small firms find it hard to overcome these barriers. There is increasing evidence, however, that it is not the size of firms that is the major problem. Rather, it is their isolation – the fact that they are operating alone in a competitive environment. This is where networking and clustering can help.
Solutions to small and medium firm problems:
There is mounting evidence that clustering and networking help small firms to compete and grow. By working together, firms can gain the benefits of collective efficiency, enabling them to challenge larger competitors and break into national and global markets. Many of the most impressive examples – in Italy, Brazil, Pakistan, and elsewhere – have emerged largely spontaneously. But research suggests that governments can assist the process. The keys to success seem to be a customer-oriented focus, a collective approach, and a cumulative effort to ensure continuous, rather than one-off, improvements.
Clusters and Networks
A cluster is a group of firms concentrated in one geographic location and working in the same sector. Firms may or may not be actively collaborating. A network is a collection of firms working in cooperation, though not necessarily in the same place. Both types of grouping can give firms competitive advantages.
There are two aspects to the ‘collective efficiency’ gains that can achieve:
- Local external economies – these are benefits, which occur purely from the concentration of firms in the same town or region. Such groupings attract local suppliers, giving all firms better access to inputs and raw materials, and helping create a pool of skilled workers.
- Joint action – through firms consciously cooperating, or joining forces in business associations and other groupings. Joint action can bring a number of benefits. For instance, producer associations can help to open up new overseas product markets and increase small firms’ access to government support services.
Some of the best known examples of industrial clustering come from Italy where, in the 1960s and 1970s, there was a surge of growth in the Northeast and Central regions of the country, areas not previously associated with strong industrial capacity. In a number of sectors, groups of firms clustering together managed to break into very competitive export markets, establishing a strong position in world markets for shoes, leather handbags, knitwear, tiles, musical instruments, and food processing – and in the industries which supplied machinery to these sectors. They expanded production and exports at a time when large enterprises elsewhere in Europe were in decline. Perhaps most importantly, they had the capacity to upgrade their production. The close proximity of suppliers, component producers, and subcontractors, and the combination of intense rivalry between firms and cooperation in producer’s associations, seemed to drive whole clusters forward.
Successful examples of clustering are not limited to Europe. Numerous cases also exist in Asia and Latin America, although they have only recently come under the research spotlight. Several are in India – for instance, the metalworking and textile industries concentrated in Ludhiana, the diamond industry in Surat, and the engineering and electrical industry around Bangalore. Mexico, Peru, Indonesia and Taiwan provide other examples. Two of the best-documented developing country cases are in Brazil and Pakistan.
Governments Helps
Most of these success stories came about without outside intervention, largely as a result of the efforts of individual groups of firms. For policy makers wishing to promote small and medium industry, they provide a tantalizing demonstration of what can be achieved when the energy and initiative of small firms is harnessed. The question is, to what extent can governments assist this process – either by fostering the growth of new, embryonic clusters, or by stimulating other forms of networking and inter-firm collaboration?
It is too soon to provide a categorical answer to this question. Evidence from a number of countries, however, suggests that governments can indeed play a valuable supporting role.
In Northeast Brazil, a public procurement scheme was used to stimulate the development of a new cluster, in this case a group of firms producing school furniture (see box). Starting from quite modest beginnings, the impact over five years was substantial.
A contrasting example is the Danish Network Program, a government-subsidized initiative that ran from 1988-93. The idea was to promote networking between firms to help them face increasing international competition. A series of “network brokers” were appointed with responsibility for particular sectors. Their job was to help identify market opportunities, bring participants together, and assist in implementing new ideas. The main challenge was to overcome firms’ resistance to cooperation, and convincing groups to take ownership of their network.
The program was successful on several counts. It achieved a high uptake among SMEs (over five years, more than 5,000 enterprises became involved in forming networks), and it has helped many of them to compete more effectively. Although aspects of the program have been criticized, the approach used has sparked interest in other countries. Variations on it are being tested in the UK, Spain, Norway, Canada and New Zealand.
A similar approach has been tried in Chile, where in 1990 the government agency, SERCOTEC, introduced an initiative designed to encourage networking between groups of firms, and provide a focus for channeling support to small firms. A series of sub-projects were established, each involving three stages:
- Preparation – in which officials work to identify firms in a particular locality, diagnose their problems, and establish the credibility of SERCOTEC;
- Consolidation – in which a manager is appointed to coordinate the network, act as an interface with various government and marketing agencies, facilitate the take-up of training and other support services, and develop better inter-firm relations;
- Independence – after three years, participating firms are expected to take on responsibility for the manager’s salary. The idea is that the benefits to the participants are great enough for private initiative alone to sustain it.
Although the program is still small, early results have been encouraging. Most participating firms succeeded in gaining access to new domestic or international markets. The majority of networks also showed the capacity to be self-sustaining. Government officials have been sufficiently encouraged to develop a new initiative designed specifically for exporting firms.
These examples show that a collective approach to SME support can work, even in situations where previous linkages are limited. By working together, firms were able to improve their collective efficiency, increase their competitiveness, and enter new markets.
In all three cases, the programs were able to overcome initial skepticism about the benefits of cooperation. For individually minded entrepreneurs, with an instinctive mistrust both of competitors and government agencies, this can be a significant hurdle.
The Triple C Approach
Comparing experience in different countries, there are three factors, which seem critical to the success of schemes aimed at encouraging the growth of small firms. To be effective, interventions need to be:
- Customer-oriented – efforts must be driven by the needs and demands of the customer. This forces firms to face up to underlying problems of competitiveness. The most successful interventions are those, which have helped firms to learn about their customers, and then introduce the changes and innovations needed to meet market demands.
- Collective – outside assistance is most effective when it is directed at groups of enterprises, rather than individual firms. This means working with business associations, producer groups, and other industry alliances. Where they do not exist, support can be linked to the formation of such groups. This has two advantages – it is more cost-effective than assisting enterprises individually, and it helps to develop constructive relationships between firms, which can improve their efficiency and increase the potential for learning from each other.
- Cumulative – one-off improvements are not enough; if firms are to remain competitive they need to be able to change and develop in response to new market conditions and new opportunities. The objective should be to help generate this capacity within groups of firms so that in the longer term public support is no longer needed.
Added together, these elements represent a fresh approach to SME promotion, which has been dubbed the ‘Triple C Approach’.
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