Export clusters

(export oriented clusters)

M. Noorizadegan, V. Moosavi
Advisor: Prof.Dr. Farahani
(Amirkabir Univ. of Tech. Industrial engineering department)
Spring 2007
concept

The paradox in global economy (Porter 98)

• What is cluster?
• Clusters are a geographically proximate group of interconnected
companies and associated institutions in a particular field linked by
commonalities and complementarities. Clusters encompass an array
of linked industries and other entities important to competition…
including governmental and other institutions – such as universities,
standard setting agencies, think tanks, vocational training providers
and trade associations (Porter 98)
• Clusters and Competitive advantage of nations
• Cluster VS supply chain
Clusters growing interest

• 719 clusters in over 49 countries, including 23

developing nations. (Harvard Business School, 2002)

• A 2003 Survey of over 200 Cluster initiatives

(The Cluster Initiatives Greenbook, 2003)
• 80% of the respondents believed that the initiative
had improved the cluster competitiveness
• over 60% were confident that the initiative had
improved the cluster international competitiveness
Clusters and specialization
UNIDO cluster development program
(UNIDO 2004)
Advantages

• The effect of clusters on national economy

• Relation between micro and macro economy
• Clusters as engines of regional development
• Employment creation
But: A general review of the many attempts to establish clusters in
Australia as engines of regional development suggests more than half
fail, and as few as 10% are significantly successful. (ACIIC 2004)
• Clusters and SMEs
• Clusters as an export strategy
• 84% of the studied cluster initiatives had a strong component
of export promotion as part of their commercial objectives.
(The Cluster Initiatives Greenbook, 2003)
Export clustering advantages (ITC 2005)

¾ Collective efficiency (creating synergy)

¾ opportunities to access market information more
expeditiously
¾ obtain specialized inputs and technical support more
easily and cost-effectively
¾ participate in ‘consortiums’ to fulfill large orders
¾ leverage market development and promotional expenses
¾ group shipments to minimize transportation costs
¾ share costs for ISO certification
Tripur garment cluster (ITC 2005)

• Before clustering (1985):

™ Low value Production,
™ Low value-addition and low value-retention
™ Limited and mostly informal interaction among firms
™ Weak linkages between suppliers and buyers
Tripur garment cluster (ITC 2005)

• First step (TEA in 1990): reduction of government regulations and export

controls that hampered the export development effort.
• Tirupur cluster (2004):
• The value of exports had risen from the 1990 level of $100 million to
$1.2 billion.
• Investments had not only increased the cluster’s capacity to
produce at high quality standards, but had raised the efficiency of
production, and substantially increased the level of value-retention.
• The number of garment-makers: more than 2,500.
• The number of exporters from around 50 in 1990 to 500 in 2005
• The average size of firm grew from a capacity of 50,000
garments/month and 50 employees, to 200,000 arments/month
and 150 employees.
• Direct export, rather than through agents, became standard
practice.
• Supply and service industries, Local spinning and dyeing
capacity increased by 5 and 20 times respectively.
TEA actions (ITC 2005)

• set up an inland container terminal.

• a fashion design institute
• a trade fair complex to accommodate contact
between cluster members and the increasing
number of international buyers visiting Tirupur
TEA actions (ITC 2005)

After clustering
Further works of TEA (ITC 2005)

• Establishing a physical market presence (a distribution

warehouse) in Europe, a similar facility in the US
• In addition, a strategy is being work out to establish the ‘Tirupur’
brand to reinforce market awareness and penetration and
enhance the overall value of the Tirupur cluster’s product
• TEA’s export target for 2007 is now set at $2.5 billion. (difference
with 2005 indicates exponential growth)
Export oriented clustering (ITC 2005)
Export oriented clusters

• Different types of players including:

ƒ Competing firms
ƒ Suppliers
ƒ Supporting organizations
ƒ Educational institutions
ƒ Governmental institutions
• Type of interactions:
• Vertical: relations with suppliers and costumers
• Horizontal: the paradox of competition and cooperation
awareness of interaction is much important
insights relating to export cluster formation,
development and management
1. The “Four Gears” of a
National Export Strategy.
2. Cluster life cycle.
3. Different structures for
different cluster.
4. Infrastructure development
, financing and public-
private partnership
(government regulations).
5. Cluster success factors
and assessment measures.
The “Four Gears” of
a National Export Strategy. (ITC, Export Strategy Design)
Border-In Issues (ITC, Export Strategy Design)

• Development of export capacity and

competence.
• Cluster leaders must seek to
maximize:
1. Inter-firm collaboration and networking
2. Promote capacity development (e.g.
Tirupur’s new industrial park),
3. Collaborative production arrangements
4. Technology transfer and information •Capacity development
exchange. •Capacity diversification
•Human capital development
5. Upgrade competency among firms and
business service providers (the Tirupur
and Ludhiana examples).
Border Issues (ITC, Export Strategy Design)

• cost of doing business and of

getting goods to market
• Issues of:
• Transportation
• Trade facilitation
• Company registration
• Transaction costs •Infrastructure Issues
•Trade Facilitation Issues
•Cost of Doing Business
Development Issues (ITC, Export Strategy Design)

• Employment generation
• Poverty reduction
• Environmental protection
• Women in the workforce
• Environmental protection
Border- Out Issues (ITC, Export Strategy Design)

• Dissemination of information and the

organization of collaborative market
development and market promotion
activities.
• TEA’s pioneering efforts.
• Should buyers involve in clusters?
(ITC executive forum’s question)
Another approach for export clusters
(Caldas, Colombia, Nespresso)
• Clusters can effectively overcome
obstacles to export promotion
facing SMEs (Border-out issues)
Export consortium (UNIDO 2003)

• Low volume producers’ obstacles to export:

1. Severely limited marketing resources
2. Product promotion problems
3. They cannot meet the minimum volume requirements of
the foreign buyer
• Our country (IRAN) condition:
• 98.4%, 1-9 workers (micro-enterprises)
• 1.4%, 10-49 workers
• 0.2% large enterprises
• An effective tool for overcoming constraints:
Consortium approach
 Export consortium (UNIDO 2003)

• Bangalore Machine tool cluster: (success story) 56 SMEs were organized into
9 marketing consortiums.
• Definition: An export consortium is a voluntary alliance of firms with the
objective of promoting the goods and services of its members abroad and
facilitating the export of these products through joint actions (UNIDO Guide 2003).
• The consortiums’ achievements:
1. The alignment of effort among firms and between firms and providers
of business development services;
2. The elaboration of common brochures;
3. The establishment of joint marketing offices across the country;
4. The appointment of common sales agents;
5. The creation of common websites;
6. Joint advertising campaigns;
7. A common warehouse; and
8. Collective participation in several international exhibitions
Cluster life cycle (ITC, Export Strategy Design)

• Clusters can be enhanced, and even induced, but they cannot be

created ‘from scratch’
• A number of local conditions must be in place, including:
1. Confirmed production capacity within the target geographic area based
on SMEs (and possibly one or more larger, prospective lead producers);
2. Some form of actual or potential competitive advantage (defined in
terms of process, product, location or cost);
3. A latent readiness among producers to cooperate
4. International demand for the product.
 Different public sector interventions
in different stages (DTI)

• In ‘embryonic’ clusters: cluster

requires a catalyst. For example:
o the opening of an industrial
park, or the building of
specific needed infrastructure.
o a combination of catalytic
inputs (including, for example,
the emergence of source:
entrepreneurial leadership DTI ?

such as TEA).
Different public sector interventions
in different stages (cont’d) (ITC, Export Strategy Design)

• in the maturity stage: the clusters are in the risk of stagnating and
loosing competitiveness entering then into a decline phase.
• Action for prevention:
Strategy makers should transform the clusters two earlier
phases such as embryonic or established stages.
Solutions:
¾ Product diversification
¾ Market repositioning
¾ Encouraging openness and innovation of regional lock-in.
¾ And/or technology acquisition
• Special cases: micro-producers (e.g. agricultural and artisanal
sectors )
Different structures
for different cluster
what is the right organization mechanism to
support cluster development?

“shallow” and “Deep” and

embryonic established
clusters clusters
regulations
Informal formal
structure structure
(social capital) trust
•Large firms
•Small firms
•High technical know-how
•low technology
•Rapidly changing
technology
Northern Italy
Ludhiana Triupur
ICT cluster in
Bangalore
Infrastructure development , financing and
public-private partnership (ITC, Export Strategy Design)
• Infrastructure improvement, cluster expansion and
technical training require significant funding.
• The two main sources of funding for clusters:
1. Governments (national and regional)
2. Local industry
• In developed countries :
• venture capital
• Banks
• Insurance companies
• Public pension funds
• Business angels
• Foreign direct investment
Infrastructure development , financing and
public-private partnership (ITC, Export Strategy Design)
• Conditions In developing countries
Weak Financial institutions and high risk,
deficient physical infrastructure,
rigid labor laws,
weaker justice systems generally.
• Financial support: usually government either
solely or with support from a development
finance institution, such as the World Bank
• Further reading: (Didar Singh, FINANCING EXPORT CLUSTERS
OPTIONS AND IMPLICATIONS FOR STRATEGY MAKERS, 2006, ITC)
LEVERAGING CLUSTER
FRAMEWORKS:(TIRUPUR) [Harry]
• Infrastructure Leasing & Financial Services Limited (IL&FS): an
investment banking Institution established by Government of India
agencies in 1987 to develop and implement infrastructure projects
on a commercial basis and provide a wide array of value added
financial services.
• The Tirupur Area Development Program (TADP) contributors:
¾ TEA, Government of Tamil Nadu and IL&FS.
• Phase I of the TADP:
– Implementation of water supply, effluent treatment, sanitation
and sewerage system and low cost sanitation
• Phase II:
– Roads
– Telecom
– Power
– R&D centers
– Logistic management systems
• The project was estimated to cost approximately USD 250 M
Cluster success factors and assessment
measures.
• Three common factors that have an impact on attracting new firms to the cluster
and/or increasing the cluster’s international competitiveness: (Cluster Initiatives
Greenbook 2003)
1. Having the right resources
2. Having a strong and respected facilitator
3. Building a common framework
• Other factors:
1. Infrastructure
2. Availability of venture capital
3. Entrepreneurial spirit
4. Broad potential for the formation of backward and forward linkages
5. Presence of educational or professional institutions (e.g. ICT cluster)
6. stable business environment
7. suitable policy intervention
8. large firms acting as catalysts
Cluster success factors (UNIDO, 1995)

• UNIDO study on five successful clusters in the world(1995):

Cluster assessment

• there is little evidence of the use of consistent

indicators by which to measure the development
of clusters. (DTI guide for cluster development ?)
• quantitative :such as employment or output
• qualitative analysis: softer aspect of clusters
Measuring the success of interventions
[DTI ]
• The appropriateness of • The efficiency of
interventions: interventions:
™ assessing whether the policy • the fact that the effects were
or intervention is relevant obtained at reasonable cost.
with regard to the technical, An efficiency indicator is
social or economic problems usually obtained by dividing
it is meant to solve. the budgetary inputs by the
• The effectiveness of quantity of effects obtained.
interventions:
™ The fact that expected effects
have been obtained and that
objectives have been
achieved. Calculated by
relating an output, result or
impact indicator to a
quantified objective.
What should be measured?
(DTI cluster assessment model)
The present consultation on
“Competitiveness through Export
Clustering”

• ITC (International Trade Centre)

• UNIDO (United Nations Industrial Development Organization)
• TEA (Tirupur Export Association)
Cluster-based export strategies –
where to start?
1. Why clusters?
2. Can clusters boost the quality and quantity of exports?
3. Why do clusters succeed? When do clusters fail?
4. Do clusters just happen or can they be made?
5. Does the Public Sector have a role in creating/building clusters?
Or is this mainly a Private Sector initiative? Who else should be
included?
6. Does a developing country cluster differ from a developed
country cluster?
7. Do clusters require a formal structure? Or is an informal network
enough? What is the role of trust?
8. Should buyers be included in an “Export oriented Cluster”?
9. What is the role of financing? Who pays for what?
10. Are benefits measurable? Are the theoretical benefits borne out
in reality? Are the benefits equally distributed?
 Cluster Policy versus Industrial Policy
Industrial
Policy Industrial Policy
• Target desirable industries /
sectors
• Focus on domestic companies
• Intervene in competition (e.g.,
protection, industry promotion,
subsidies)
• Centralizes decisions at the
national level
Distort competition
Cluster-based Policy
• All clusters can contribute to
prosperity
• Domestic and foreign
companies both enhance
productivity
• Relax impediments and
constraints to productivity
• Emphasize cross-industry
linkages / complementarities
• Encourage initiative at the
state and local level
Enhance competition
Company Attitudes Towards Clusters

• Create more competition • Increase efficiency

• Lose employees to spin offs
• Bid up costs
• Increase flexibility
• Increase information
• Foster innovation
• Most cluster participants are not
direct competitors
Case study:

• Brazil approach
• Turkey approach
• Pakistan approach
 TURKEY

• They are the clusters developed themselves without any

initiative from the government.
Major clusters in TURKEY

1) Textile yarns and carpets : Gaziantep

2) Ceramics: Kütahya, Bilecik and Eskisehir (They are in the same
geographical Region)
3) Automotive: Bursa, Kocaeli (They are at the same geographical Region)
4) Machinery: Konya, Ankara (They are at the same geographical Region)
5) Furniture: Kayseri, Inegöl( a town of Bursa), Ankara (Ankara and Kayseri
are in the same geographical Region)
6) Leather and leather products: Istanbul, Izmir and Çorlu (Çorlu (a town of
Tekirdag) and Istanbul are close to each other geographically)
7) Towels and bath robes: Denizli
8) Clothing: Istanbul
9) Gold jewellery: Istanbul
10) Truck dressing: Beypazari (a town of Ankara)
11) Rose oil: Isparta, Burdur, Denizli, Afyon
 SME Study Group

• Ministry of Industry and Trade

• the State Planning Organisation
• Undersecretariats of Treasury and Foreign Trade
• State Institute of Statistics
• Small and Medium Industry Development Organisation
• Union of Chambers of Commerce
• Maritime Trade and Commodity Exchanges (TOBB)
• Commodity Exchanges (TOBB)

The execution of the Plan has been coordinated by State

Planning Organization.
Major Drivers for the Development of Clusters

• Private Sector Organizations

• Public Sector Organizations
• Sectoral Foreign Trade Companies and Foreign Trade
Capital Companies
• NGOs initiatives (Non-Governmental Organizations)
Pakistan approach

Five pilot clusters:

• Leather and leather products in Korangi,
Karachi;
• Gems and jewellery in Saddar, Karachi;
• Ready-made garments in Lahore;
• Electric fans in Gujrat; and
• Cutlery in Wazirabad.
• In 2003 the Government of Pakistan announced its decision
to adopt SME cluster development as a principal element of
its trade policy.
• Ministry of Commerce (MOC) and Export Promotion Bureau
(EPB) has the mandate to enhancement of exports.
• EPB is the primary agency working under MOC.
Ministry of Industries and Production (MOI&P),
Small and Medium Enterprise Development Authority
(SMEDA)
PSIC (Punjab Small Industries Corporation).
EPB’s support to the UNIDO cluster development
programme in Pakistan:

• The EPB will contribute US$ 211,000 in cash towards the

implementation of the follow-up sub-projects in the five pilot clusters…
.
• The EPB will make a further contribution, in cash or in kind… .
• Subject to the satisfactory implementation of this project, the EPB will
consider a further contribution towards the expansion of the
programme to several new clusters.
Mission statement of MOC,
objectives to be achieved:

• To develop, strengthen and modernize Pakistan’s

trading regime.
• To liberalize flow of trade, remove bottle –necks.
• To create opportunities for entrepreneurs to profit
from their innovations.
Major Departments working under MOC

• Export Promotion Bureau (EPB)

• National Tariff Commission (NTC)
• Foreign Trade Institute of Pakistan (FTIP)
• Trade Marks Registry (TMR)
• Trading Corporation of Pakistan (TCP)
Export Promotion Bureau (EPB)

”Marketing
”Communication
”Human Resource Development
”Service to exporters
”Regulatory
”Special incentives
 Ministry of Industries & Production (MOI&P)

• Mission of MOI&P is to facilitate economic development by propagating

information and analytical insight to create enabling environment that will
promote industrial development, enhance value addition and
exportability of products at competitive prices in a globalized economy.
Departments working under MOI&P

• Export Processing Zones Authority (EPZA)

• Small & Medium Enterprises Development Authority
(SMEDA)
• Engineering Development Board (EDB)
• The Patent Department & Design
• National Productivity Organization (NPO)
• Pakistan Industrial Development Corporation (PIDC)
• Technology Up-Gradation & Skill Development Company
(TUSDC)
References

• Michael Porter 1998, On Competition, Harvard Business School Press, Boston,.

• Cluster Meta-Study, Institute fro Strategy and Competitiveness, Harvard Business School, 2002
• The Cluster Initiatives Greenbook”, Örjan Sölvell, Göran Lindqvist, Christian Ketels,
2003
• Australian Centre for Innovation & International Competitiveness Ltd. (ACIIC)
University of Sydney NSW, Australia, 2004
• DTI
• ITC 2005, International Trade Centre, Innovations in Export Strategy
Competitiveness through export clustering, Geneva.
• Export Strategy Design Sector-Level Strategy – Product Sectors Guidelines for
Strategy-Makers,
• UNIDO 2003, Development of clusters and networks of SMEs: The UNIDO programme a guide to
export consortia, 2003
• ITC, Export Strategy Design Sector-Level Strategy – Product Sectors Guidelines for Strategy-
Makers
• UNIDO, 1995, Industrial Clusters and Networks: Case Studies of SME Growth and Innovation,
written by K. Nadvi.
• UNIDO 2004, SUPPORTING UNDERPERFORMING SME CLUSTERS IN DEVELOPING
COUNTRIES