Definition and Importance of Cluster Development
Md. Joynal Abdin*Thank you for reading this post, don't forget to subscribe!
Co-Founder & CEO of Bangladesh Trade Center
Professor Michael Eugene Porter is the founder of modern industrial cluster concept through his book ‘the Competitive Advantage of Nations’. Similar but not the same concept one village one product, one city one product concept was originated in Far East in early 80s. But industrial cluster concept has basic differences than that of the said concepts. The term cluster is commonly known as industrial cluster, competitive cluster, Porterian cluster. Michael Porter claims that clusters have the potential to affect competition in following three ways:
- By increasing the productivity of the companies in the cluster,
- By driving innovation in the field,
- By stimulating new businesses in the field.
A long list of economists, researchers, professors, practitioners have contributed to popularize the concept throughout the world. They have defined clusters from multiple aspects. A good number of models were developed for cluster development. A long list of organizations including the United Nations Industrial Development Organization (UNIDO), the World Bank, Government of Several Countries and Think tanks came forward and popularized the concept.
Clustering can contribute to knowledge dissemination, increase of competitiveness; improve products quality, capacity building of employees, facilitating innovation in the society. All of the above-mentioned factor’s resultants into a positive change and fostering industrialization of the country. Thus, cluster contributes to increasing GDP growth, generating employment, increasing export earnings, and finally poverty alleviation of a country.
Cluster based entrepreneurship development could ensure optimum use of lands, industrial logistics, and other factors of production. Ensuring compliance and environmental safety in a cluster is much easier for the state / entrepreneurs. Revenue collection and providing incentives in a cluster is much easy than that of the scattered enterprises of a country.
What and why is Clustering?
Definition of cluster:
Different economists, researchers, practitioners and organization have defined industrial clusters in different ways. Followings are the notable definitions of industrial cluster:
- Michael E. Porter, who is recognized as the founder of industrial cluster concept, defined the cluster as “geographic concentration of interconnected businesses and associated institutions in a particular field” .
- United Nations Industrial Development Organization (UNIDO) defines industrial cluster as: “Cluster can be defined as concentration of micro, small and medium enterprises in a given geographical location producing same or a similar type of products or services and these enterprises face similar type of opportunities and threats. The cluster is known by the name of the product being produced by principal firms and the place they are located in”.
- SME Foundation (Bangladesh) has defined cluster as “A Cluster is a concentration of enterprises producing similar products or services and is situated within an adjoining geographical location around 5 km radius and having a common strengths, weaknesses, opportunities and threats”.
- Rosenfeld (1997) defined cluster as “Geographically bounded concentration of similar, related or complementary businesses, with active channels for business transactions, communications and dialogue, that share specialized infrastructure, labor markets and services, and that are faced with common opportunities and threats.”
- Enright (1998) defined cluster as “Regional clustering has been used to describe industrial districts of small crafts firms, high technology centers, agglomerations of financial and business service firms in cities, company towns, and large branch plants and their supply chains.” “…clusters at least must be characterized along relevant dimensions if appropriate policies are to be devised … (these include) …density. Breadth depth…activity base…growth potential…innovative capacity”.
- Cluster Development Program of the Ministry of MSME (Government of India) defined it as “A cluster is a group of enterprises located within an identifiable and as far as practicable, contiguous area and producing same/similar products/services”.
- Government of Gujarat (India) defined cluster as “A minimum of 50 industrial units, indulging in the manufacture of the same or related products and located within a radius of 10 km in a particular location, is referred to as a cluster”.
Almost all of the above definition considered the following factors to define a cluster:
- A cluster displays a shared identity and future vision.
- A cluster is an arena of dense and changing vertical input-output linkages, supply chains and horizontal inter-firm networks.
- Products or services should be similar or homogenous along with related products.
- Enterprises must be production or service units with colocation, interlinked, and interdependent.
- Adjoining geographical location: several villages, wards, unions and industrial estates
- Over time, clusters can reveal features of emergence, dominance and decline.
Clusters can be categorized in different perspective, feature, origin, function, stage of development, market orientation, as follows:
- Classification based on origin: Clusters are classified into two major categories based on their origin. These are naturally grown clusters and man-made clusters.
- Classification based on stage of development: Clusters are classified into three major categories based on the stage of development. These are growing cluster, matured cluster, declining cluster.
- Classification based on activity performs: If the enterprises of a cluster manufacturing oriented is known as Manufacturing Cluster. While enterprises of a cluster provide service the cluster is termed as Service Cluster.
- Classification based on size of cluster enterprises: Clusters could be termed as SME cluster if the enterprises of that cluster represent small and medium segment of the industry. Export oriented cluster dominated by exporters.
- Classification based on technology used: Categorization can also be made based on the technology they use. There could be family-based Artisan clusters if they are using indigenous technology, whereas the enterprises in a cluster using modern technology and labor force outside the family members can be termed as. Industrial cluster.
Importance of Cluster:
Enterprises of a cluster are collocated, interdependent, interlinked, and shares common strengths, weaknesses, opportunity and threats. As a result, an invisible competition is there among the enterprises to produce qualitative products in competitive price. Firms are always in thinking of additional feature of a common product to get comparative advantage in the market. New innovation and higher productivity provide economies of scale where large numbers of buyers are available at a cluster. Enterprises located at a cluster enjoys following positive impacts:
- Higher productivity
- Better quality
- Economies of scale
- Availability of buyers
- Availability of high standard raw materials
- Availability of skilled labors
- Knowledge about newer technology
- Shared vision
- Competitive tendency
- New product development
- New features in existing product line
- Collective negotiation (with government and policy makers) power
- Collective action / joint effort etc.
Role of Government and Development Partners
It is the government who is responsible for creating and maintaining a pro-growth entrepreneurial environment through policy, fiscal, capacity, technology, market access etc. supports. An entrepreneur is a self-employed person generates employment opportunity for several unemployed population and perform value addition every day. Cluster is that entrepreneurial garden where he / she could enjoy every business logistics easy at his / her doorstep. Richer cluster could promote increasing trend of GDP growth and finally contribute to strengthening economic condition of the country.
Increased production means increased revenue; increased revenue could enrich government treasury. So, government has a very vital role to foster cluster development movement in a country. It is the government who could establish dedicated cluster development agency in the country. It is government who could direct development partners towards cluster development even in absence of cluster entrepreneurs or stakeholder.
Government could facilitate regional development program, fight regional unemployment, and promote traditional products of that region through cluster development activities. There are long lists of stakeholders for developing a cluster and government could effectively coordinate among them. Stakeholders of a cluster could be enlisted as follows:
- Local government institution (union / upzila / municipal administration)
- Raw material suppliers
- Income tax, VAT and Customs authority
- Department of environment
- Road construction authority
- Electricity, gas, water and other utility supplying authority
- Controller of import export authority
- Law enforcement agencies
- Wastages management authority
- Printing and packaging businesses
- Transport companies
- Intermediary raw materials suppliers
- Repairing workshops
- Standard authority
- Training centers, technology suppliers
- Common facility centers
- Banks and non-bank financial institutes
- Insurance companies
- Technical and other facility providing government agencies.
- Large national / international companies of the same product manufacturing
- Support service providers
- Government and development partners etc.
From the above list of clusters stakeholders, it is clear that multi-dimensional stakeholders are involved with a cluster development process. Some of them are government agencies, some of them are forward or backward linkage business entity, few local, national and even few international organizations are involved with the process. Therefore, it is necessary to play the role of coordinator here in this process. Able and effective coordinator could be a powerful government agency or the government itself.
Among other roles government has to adopt a policy stand, prepare cluster development action plan, and mobilize resources, building capacity of entrepreneurs, workers, professionals, suppliers, and other key stakeholders. Government has to encourage development partners to finance, technology, and other required know how for fostering development of the cluster. Finally, it is the government who has to educate the stakeholders and inspire to play respective role for long term sustainability of the cluster against mutual benefits. Government (cluster development agency) could play following roles in cluster development:
- Strengthen relationship among the public sector agencies, donors, cluster stakeholders etc.
- Organize dialogues between cluster people, donors and academia for establishing academia – industry – donor linkage.
- Aliening government support in line with the cluster / sectoral needs.
- Identify regulatory barriers / burdens and resolve these.
- Engaging development partners
- Designing and implementing development interventions
- Ensuring smooth supply of resources to continue and sustain the development.
Development partners especially the multinational development partners have diverse experience of working with the same issue in other countries earlier. Therefore, development partners could suggest, guide and direct the government for taking cluster development initiative to ensure sustainable development of the country in long run. Experience sharing of the development partners could educate the local government, cluster people and other stakeholders to think with the issues and replicate.
Cluster Identification and Initial Preparations
Some clusters are automatically grown due to market mechanism of few locations. Influential factors of a naturally grown cluster could be availability of raw materials, availability of skilled labor, market demand, good communication facility, traditionally manufacturing products, lifestyle of the local people etc. A naturally grown cluster is a place where a large number (50 and above) of homogeneous manufacturing entities are collocated at an adjoining area and produce same or similar products over a long period of time without any preplanned government mechanism. In Bangladesh, SME Foundation has identified 177 naturally grown SME clusters located at 51 districts of the country.
On the other hand, man-made clusters are the collocated group of enterprises established under a preplanned mechanism of the government or development partners or private initiative.
First initiative of cluster development process of a country is identifying existing naturally grown clusters of that country / province / locality. It is census types of activity just to identify and locate collocated industrial places under a certain definition and spot mark in the national geographic map along with some basic information.
Steps to identify naturally grown clusters of a country:
- Defining cluster as per socioeconomic condition of the country or selecting an existing definition as standard.
- Forming a governing team along with representatives of relevant government agencies, trade bodies, civil society, cluster experts, journalists and public representatives.
- Forming study team with relevant expertise like economist, statisticians, GPRS expert, GIS experts, and data enumerators etc.
- Sending the enumerators to an administrative area it could be a district wise, upzila or municipal area for collecting information.
- Communicating with probable data sources like trade license issuing authority, Tax office, Upazila Administration / District Administration, Local Chamber of Commerce, Press Club etc.
- Physical visit to the probable area.
- Recording primary information about a potential cluster area.
- Marking that area in geographic map of the country.
- Recording GPS data
- Preparing database through data entry
- Data cleaning and data preparation
- Data analysis and finalizing the cluster map of the country.
- Report writing with basic information about each of the identified clusters
- Cross-checking through validation meeting with stakeholders of the identified area for authentication of cluster data.
- Finalizing the report and map.
Tools could be used in cluster identification step:
- A concept notes cum census guideline.
- Questionnaire for cluster information collection
- Questionnaire for enterprise survey
- Guideline for Key Informant Interview
- Training for enumerators.
- M&E System.
It is a written document includes definition of a cluster, what is not a cluster, what are the prospective sources of information, list of stakeholders, duties and responsibilities of the involved officials, reporting obligation of each of the parties, time bound action plan of the whole identification tasks along with geographical details, deadline for closing the major tasks, monitoring and evaluation system to monitor the overall activities.
Questionnaire for cluster information collection:
It is a set of question for recording basic information and geographical location of cluster. It is necessary to fill up 5-7 questionnaires from the stakeholders of a single cluster to facilitate cross checking of information and get an overall idea of the cluster.
Questionnaire for enterprise survey:
An enterprise survey should be conducted during the identification visit of the cluster to know basic features of the cluster enterprise. It will facilitate to know business environment of the cluster in brief.
Key Informant Interview:
About 10 – 15 Key Informant Interviews could be conducted to validate and cross check the information gathered from cluster questionnaire and enterprise survey. Entrepreneurs, Policy Makers, Local Administration, Peoples Representative, Journalist, Teachers of that particular location could be selected as key informant.
Training up the enumerators:
Skilled enumerators could collect concrete data. Therefore, it is necessary to conduct a training session for enumerators of duration of three – five days to orient them about the objective, scope, process, timeframe of cluster identification. Does and don’ts of enumerators, data collection techniques, data checking / testing techniques, data validation techniques etc. could be included in the course curriculum of the training.
Close monitoring and evaluation are essential to ensure quality of the task. Monitoring during field work is essential weather the enumerators are going to every potential data source or not. Weather they are visiting all potential places or not. Weather they are including a non-qualified location as cluster or excluding a qualified place from the cluster list etc. could be monitored to ensure quality of the output. A dedicated team has to be involved for Monitoring field work of each of the location during the cluster identification field work.
Definition and Importance of Cluster Development, this is the summary of two chapters of the book “Cluster Development Handbook” of the Author. To purchase the book click here.
*Author’s Short Profile:
Mr. Md. Joynal Abdin is a Business Consultant & Digital Marketer based in Dhaka, Bangladesh. He is also Co-Founder & CEO of Bangladesh Trade Center. Previously he served at Dhaka Chamber of Commerce & Industry (DCCI) as Executive Secretary; DCCI Business Institute (DBI) as Executive Director; SME Foundation as Deputy Manager; and the Federation of Bangladesh Chambers of Commerce & Industry (FBCCI) as Assistant Secretary.
The list of services Mr. Abdin is offering includes but not limited to Business Research and Documentations like Feasibility Study, Project Proposal Preparation, Writing Business Manual, Standard Operating Procedures etc.; Export Market Selection and Product Positioning at Home and Abroad; Buyers-Sellers Matchmaking; Website Development; Search Engine Optimization (SEO); and Social Media Marketing etc.
Definition and Importance of Cluster Development, this is the summary of two chapters of the book “Cluster Development Handbook” of the Author. To purchase the book click here.