Annual Forum Papers

Impact of clustering on innovation, entrepreneurship and organisation of SMEs in transition economies

  • Year: 2008
  • Organisation: Lahore University of Management Sciences
  • Publication Author(s): Faheem ul Islam
  • Countries and Regions: South Africa

The paper presents significant new insights for Policy Makers, Practitioners, Educators, and Researchers into the socio-economy of agglomerated SMEs in developing country context. Using mixed methods of inquiry and concurrent triangulation approach this paper profiles the socio-economy of the internationally competitive textile industry cluster of Faisalabad in Pakistan to establish the validity of the concept of clusters in the context of developing economies and seeks new insights into the phenomenon. The paper also investigates the impact of clustering on the performance, governance, organization and entrepreneurial management practices of the constituent SMEs. The methods employed for research include analysis of secondary data, survey of the textile firms and in-depth semi-structured interviews.

Key learning points of the research are:

1. Cost reductions and information spillovers facilitated by the community ties and the shared local identities were the dominant type of advantages for the agglomerated firms. They largely arose at the level of transactions in goods and services, and to a lesser extent in the transformation of inputs into output. Vertical cooperation, rather than horizontal, was mostly prevalent in the cluster.

2. In the emergence phase of the cluster factor (input) conditions were more dominant. After three decades of growth, however, extensive co-location of related and supporting industries became, and remains, the dominant factor in the success of the industry in the region.

3. The developing economy cluster lacked strong institutions and infrastructure. Selfreliance of the entrepreneurs and the collective action, however, mitigated the aspects of the lack of cluster specific public goods. The Government's initiative and development efforts were mostly passive but still the national industrial policies were instrumental in spurring explosive growth of the small weavers in the region.

4. The paper also provides new insights on the role of the traders in the functioning of the cluster. They helped the small enterprises to overcome the growth constraints and had supported them to compete in distant markets, nationally and abroad. The clustered SMEs are also different from non-clustered firms in terms of average size, governance, human resource practices, marketing efforts, financing, and operations management.