Cluster Development as a Viable Model for MSMEs

Cluster Development as a Viable Model for MSMEs

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By NELSON OKWONNA* —

The leather and apparel cluster in Aba, Abia State, easily comes to mind when the subject of industry cluster is discussed in Nigeria. Nigeria has a lot of medium, small and micro enterprise (MSME) clusters; in fact, MSMEs in Nigeria survive best and are most competitive when they exist within a cluster. The Nollywood phenomenon is sustained by a cluster of producers and marketers operating mainly from Lagos and Onitsha; ditto for the Kannywood cluster in Kano. The Adire tie and dye cluster in Abeokuta, and the currently challenged tie and dye cluster in Kano are also examples.

The cluster phenomenon

An Industry cluster is a group of similar and related firms in a defined geographic area that share common markets, technologies, worker skill needs, and which are often linked by buyer-seller relationships. It could be difficult to delineate the boundaries of a cluster; hence, providing examples of them, perhaps, is the best way to conceptualise the phenomenon. Hollywood and Silicon Valley are key examples of what a cluster looks like; these are physical locations characterised by intense business activities of a certain sort: with very high level of competition, yet, despite the competition, the location nurtures the capacity of the firms within it to be the most competitive.

Over time, economic and business researchers have noticed that firms tend to benefit from positive externalities when they co-locate. The proximity of firms involved in similar nature of business presents the advantages of better access to market and suppliers and thus turns into economic advantage to present firms and an inducement for potential investors to join the group. A common location also offers firms better access to information about different actors, including suppliers, customers, competitors and state authorities, and thus augments the likeliness of valuable economic exchange between them. Also, when firms are clustered, they are in a better position to actively lobby and advocate for safeguarding their common interests. Another key feature of clusters is the creation of combined knowledge through economic interactions which lead to innovation.

Clusters and knowledge creation

It should be noted, for example, that Stanford University’s approach to university-industry partnership in California is a major contributor to the Silicon Valley phenomenon. The university had as far back as the cold war era launched an industrial park where businesses that benefitted from the research activities in the university could be located; it offered a very synergistic relationship. The leadership of the school believed in research commercialisation and pushed its faculty to commercialise their findings. The research park was the first of its kind, and famously housed early tech pioneers like Lockheed, Fairchild, Xerox and General Electric. The founding of HP (one of the pioneers of Silicon Valley) is another remarkable story of science-industry relations birthed at Stanford. The founders were Stanford research students encouraged to commercialise their findings. Of recent, the university was the first university to receive $1billion endowment in just one year; the firms were simply thankful.

Today, nearly all the firms in the tech community – Google, Facebook, HP etc. – have offices in the park; and more than 40,000 sprouted from Stanford, e.g. HP, Sun Microsystems, Yahoo!, Cisco, Intuit.

In fact, it is claimed that the first 100 Googlers were Stanford graduates.

Nigerian universities must be compelled to realise their role in economic development. Regardless of the different perspectives on the role of universities, the general expectation is that the investment of time and resources should translate to work for the graduates; hence, an industry-focused perspective is a necessity to retain relevance.

So, clusters do not just happen; they are products of something.

How clusters emerge

Generally, clusters are formed from various competitive assets like natural endowment (Niger Delta oil and gas cluster), gradual agglomeration of technological know-how (Silicon Valley and Hollywood) or by the retained advantage of traditional know-how gathered over several years (Aba leather and textile cluster, the Kano tie and dye cluster, and the Italian leather and garment cluster).

Knowing this, governments all over the world have figured out that it makes much better sense to identify and support clusters than to just scatter the efforts of supporting businesses.

The Porter’s Diamond revolution

A breakthrough in cluster research was made by Michael Porter’s book – Competitive Advantage of Nations – which provoked the idea of pursuing a cluster development policy for gaining competitive advantage in the global context. Porter, in his book, maintained that in accelerating international trade, those countries that would remain competitive are those which would exploit strengths of their industrial clusters effectively.

Accordingly, Porter presented a framework, called Diamond model, which rests on the proposition that the performance of individual firms depends upon favourable combination of external conditions including demand, factor conditions, related and supporting industries, and context of firm strategy and structure of rivalry between companies in one location (Porter, 1990).

Moreover, since these favourable conditions are best met in industrial clusters, industrial policy of the government should focus on strengthening existing clusters and the formation of new ones.

He also suggested that government and private sector should dovetail their activities to set up public-private partnerships for undertaking collaborative initiatives for development of the clusters (Porter, 1998a). In summary, Michael Porter gave us a tool for understanding cluster competitiveness, which can also be used for developing effective interventions.

Nigeria’s relative competitiveness and MSMEs

Every year, the World Economic Forum publishes its World Competitiveness Report, part of which is the Competitiveness Rankings; the index for this analysis has, as one of its building blocks, the Michael Porters Diamond. In these rankings, Nigeria has done quite badly when compared to its neighbours like Malaysia, South Africa, India and China.

Nigeria’s global competitiveness has been worsening and currently ranks 127th in the 2016 Global Competitive Index, whereas a similar competitor, India, climbed 16 places from the previous year, ranking 39th. These changes are attributable, among other things, to the focus of the Indian Ministry of Micro, Small and Medium Enterprises on developing and supporting its numerous clusters. For example, since the early 1990s, India has strategically supported its more than 2, 000 rural-based and artisan clusters. These clusters contribute 60% of India’s manufactured export and 40% of its industrial output. A dedicated Ministry of Micro, Small and Medium Enterprises exist to support this sector to gain global competitiveness and has cluster development as its key development approach.

India, unlike Nigeria, understood that MSMEs that generate the bulk of the employment are located within clusters and that, to help the MSMEs, it is best to design and implement cluster specific interventions. For example, about 97% of the 1.8million jobs created in Nigeria each year are from MSMEs (NBS, 2015).

No doubt, the MSMEs sector is an important engine of growth, employment and social cohesion in Nigeria. Studies by the International Finance Corporation (IFC) shows that approximately 96% of Nigerian businesses are MSMEs compared to 53% in the US and 65% in Europe.

The Aba case study and why cluster development approaches work

The biggest challenge of MSMEs is isolation. Unlike the relatively bigger firms, the MSME lacks the wherewithal to procure the technology and to improve other factors (the elements of the diamond) that will boost its competitiveness. However, the mere fact that the MSME exists is proof of its ability to survive. Cluster development initiatives, therefore, seek to support that already existing opportunity and not necessarily to create it. The business men and women at Aba are already surviving, but they can do better. The Central Bank of Nigeria’s largely successful intervention in rice production proves that sector-specific interventions, when carefully thought out, can work, despite all the known challenges of Nigeria.

A good cluster development approach does two things: It recognises the importance of PLACE in business development interventions; it also recognises the importance of joint action (cooperation and social capital) between competing firms and between them and the public sector.

A good cluster initiative does not seek to stop the firms from competing with one another but it must help them to cooperate; in all successful clusters like Hollywood and Silicon Valley, there is a great deal of cooperation despite the competition; the internet, for example, is based on a “protocol” agreed on by firms, not governments. A protocol is a set of rules. The game of football gives another insight – a set of competing firms, competing by a common rule (a code of conduct) and sharing common resources. It is the football associations (a cooperative entity) that have shaped the face of modern football.

Therefore, to help a cluster, we start by first understanding areas where they can do better together. A cluster intervention in Aba, for instance, will start with a value-chain diagnostic; we need to know where they can all do better; here, the focus is not on one laggard firm, but on the entire industry.

Generally, governments should not get involved in doing the business itself, but can help the firms organise themselves to benefit from and drive the government-supported interventions. It is generally better to work with business associations, cooperatives and private-led special purpose vehicles that have both public and private sector actors.

Deploying cluster specific interventions

Though clusters are generally not planned, and evolve spontaneously over the years, policymakers can support and expedite the process. Development organisations like UNIDO and the World Bank have emphasized the benefits of such an approach and, for the past 20 years, UNIDO has supported the development of cluster initiatives around the world.

In a recent initiative for the Kano tie and dye sector, at a public-private stakeholders meeting, we employed the tools to evaluate possible areas of intervention. The result was a very optimistic private and public sector that saw how clearly they can jointly make the efforts needed to revive the competitiveness of the industry. I am optimistic that there are so many clusters in Nigeria that will benefit from similar interventions. For example, the automobile technicians in Nigeria represent more than 300, 000 artisans who, when organised in standard mechanic villages (common facility centres) and supported to access standard technical capacity and equipment, can retain competitiveness for a long time to come. Craftsmen of different sorts, agricultural processing clusters, artisanal mining clusters, furniture making clusters, the ICT cluster in Yaba, paper making clusters etc. are a few examples of what is possible.

Often, a cluster exists entirely within one state. It is important to note that though a federal policy will greatly help, it is the states that should lead the charge. The government of Abia State, for example, has a lot of responsibility in deciding the fate of the Aba leather and textile cluster. There is also a sense of urgency to this because, in the new world of globalisation, a cluster can easily lose competitiveness and die. For example, in just a few years, the Kano tie and dye cluster lost 75% of its employment rate as it failed to withstand the Chinese imports.

We cannot rest on our oars. The good news also is that a failing cluster can also gain a new breath of life when we do the right thing.

Conclusion

Governments in developing countries can engage the cluster framework as a critical economic development tool. The approach offers promising results for many industries in Nigeria which are challenged by a myriad of factors. To achieve success, however, robust engagement of the relevant stakeholders is critical for achieving joint action. A prescription approach will not work; the stakeholders must be engaged to develop sustainable private-led interventions that promote cooperation without limiting competition.

*Okwonna, a business strategy adviser and development practitioner, is the CEO of Onel Consults Limited. He can be reached at nelson.okwonna@onelconsults.com .

 

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