Economy of Bangladesh

Establishing SME clusters for sustainable development

Establishing SME clusters for sustainable development 

Md. Joynal Abdin

The Financial Express on August 20, 2015

There are about 2.6 million unemployed or under-employed people in Bangladesh. About 1.8 million new workers are coming to the job market in each year. Employing this large number of population is a major challenge for the government. Creating entrepreneurs, skilled labourers, operators, trouble-shooters and professionals through cluster development of small and medium enterprises could be a best option for employment generation as well as poverty alleviation.

There are 177 SME clusters located in 51 districts. All these are naturally-grown clusters. Taking development interventions in these clusters could lead the country to a balanced development of all regions. Minimum resource allocation could offer optimum output because of location of entrepreneurs in these clusters. Development of these clusters could generate new employment, increase GDP (gross domestic product) growth and foster poverty alleviation.

There is no universally accepted definition of a cluster. Experts in different regions of the world, however, have defined cluster as per respective national economies. Porter (2003) defines a cluster as a ‘geographically proximate group of interconnected companies, suppliers, service providers and associated institutions in a particular field, linked by externalities of various types’.  Clusters contain  a mix of industries  related  to by  knowledge,  skills,  inputs,  demand,  and  other  linkages.  The United Nations Industrial Development Organisation (UNIDO) defines industrial cluster as ‘geographic and economic concentration of manufacturing activities which produce and sell a domain of interrelated and complementary products and having common problems and opportunities’. Cluster could be defined on the basis of different parameters like activities, origin, size, technology, linkage, market, state of development and based on entrepreneurship etc. For example, parameters like manufacturing cluster or service-providing cluster, naturally-grown cluster or man-made cluster, growing cluster or declining cluster, export- oriented cluster or domestic market-based cluster etc. could be used to define nature of a cluster.

Cluster development is comparatively a new term in Bangladesh and there was no uniform definition in the country until 2013. The Small and Medium Enterprise Foundation (SME Foundation) has defined SME cluster as ‘a cluster having a concentration of 50 or above enterprises producing similar products or services and is situated within an adjoining geographical location of 3-5 kilometre radius and having a common strengths, weaknesses, opportunities and threats’.  Before that, the Bangladesh Bank published a short list of clusters based on similar activities without any concrete definition of a cluster.

There are 177 SME clusters in Bangladesh. Maximum 48 clusters belong to handicraft, 34 agro-processing/agri-business/plantation, 31 light engineering and metal working, 22 knitwear and readymade garments, 16 fashion-rich wears, personal effects and consumption goods, 13 leather making and leather goods, 10 handloom, 5 healthcare and diagnostic, 3 plastic and other synthetic products, 3 electronics and electrical, and 2 educational service clusters in Bangladesh.

Economic growth increases inflation-adjusted value of goods in a given time without considering decreasing poverty of the poor people of a certain nation. Increasing the size of GDP does not ensure that everyone is benefiting out of it. It increases wealth of a certain community. Inclusive growth means ‘growth that generates decent jobs, gives opportunities for all segments of the society, especially socially excluded groups, and distributes income and non-income gains from prosperity more equally across the society”. Sustained economic growth, in the sense of dynamic, enduring or self-propelling growth, requires structural and especially technological change, that is, the ability of an economy to constantly generate new fast-growing activities characterised by higher value-added and productivity. Inclusive and sustained economic growth can improve the quality of life and avoid reaching physical limits if environment is protected.

For inclusive economic growth, cluster development could be a powerful tool for Bangladesh. The clusters are scattered in 51 districts covering all divisions of the country. These are available at the northwest point like rice mill cluster at Shibganj, Thakurgaon, northeast point like handicraft cluster at Gowainghat, Jaflong, southeast point like marine engine repairing cluster at Cox’s Bazar Sadar, and southwest point like medical bandage cluster at Kaliganj, Satkhira of Bangladesh. There are 23 different SME clusters located at the middle point i.e. Dhaka division.

A cluster does not include entrepreneurs, labourers of that particular sector alone. Stakeholders of a cluster include day-labourers, transportation sector, printing and packaging sector, bankers, wholesalers, retailers, freight forwarders, clearing houses, backward and forward linkages of that sector. Therefore, cluster development could be an option for inclusive growth of the economy.

Most of the SME clusters in Bangladesh are naturally grown. These clusters were initiated their activities by one single or a group of entrepreneurs in early 80s. Skilled workers of the large factories located in Dhaka, or outside the country returned home with technical know-how and started their own enterprises. While they were performing well, others started the same business by replicating their model. Most of the founders of the clusters are aged 70 now. For example, Bhairab shoe cluster at Bhairab, Noyar Hat hosiery cluster at Gobindhagaon, electrical cluster at Shyampur, plastic goods cluster at Lalbagh and Baldia cricket bat cluster at Pirojpur are examples of young clusters initiated in mid- 80s. There are hundred-year old clusters too. For example, sataronji cluster at Nishbetgaon, agor ator cluster at Barolekha, and jewelry cluster at Naogaon Sadar are examples of 100 years or more aged clusters in Bangladesh.

About 17 per cent of SME clusters are at declining stage due to fall in demand or emergence of substitute products, 6 per cent of these are in stagnant stage and need policy and other business supports from the government or development partners. Rest of the clusters i.e. 77 per cent clusters are in growing stage having potentials to grow further.

MAJOR BARRIERS OF CLUSTER DEVELOPMENT

  1. Old technology and technique: Absence of modern machinery, operators and trouble-shooters is one of the most important barriers to increase productivity in the SME clusters.
  2. Lack of testing facilities: Absence of testing laboratories, knowledge about testing system and products standardisation is barrier to produce international standard products in the SME clusters.
  3. Scarcity of linkage industries: Most of the enterprises in the SME clusters are producing products in isolated mode. They do not have linkage with backward linkage industry (raw material producers) or forward linkage industry (for further value addition). Mentorship or support organisation is totally absent in the clusters which could show them how to export products or import raw materials.
  4. Market access and linkage: There are a few clusters producing products and selling to middlemen with a margin. They do not know their customers or the end-users. Till now, exporting products is not in their consideration.
  5. Limited access to finance: Entrepreneurs of the SME clusters are doing business with ordinary consumer loans. Most of them do not have access to investment / industrial loan, or having loan as per their requirement in terms of amount or features.
  6. Limited number of products in the product basket: Most of the enterprises in a cluster are producing similar products with same quality. They do not have idea about product designing, diversification or further value addition.
  7. Lack of knowledge international quality certification: Entrepreneurs of SME clusters do not have idea how to get international quality certification of their products to make it more acceptable to the buyers.
  8. Absence of support organisations: No clusters of Bangladesh have product research, design, development centres to diversify product basket. Even they do not have any common facility centres to use for particular process of manufacturing similar products.
  9. Adverse regulatory, customs and tariff regime at home and abroad: In a few cases, SME clusters are facing adverse tariff regime at home (VAT and tax on locally manufactured products and imported products), or import duty charged by the importing countries is extremely higher due to lack of negotiation for enjoying LDC facilities for those products.
  10. Absence of sector-specific practical oriented engineering and technology institutes: There are no institutions in Bangladesh operating based on current demand of local industries. Curriculum of the local institutions has to be massively revised or new institutes need to be established to produce demand-driven skilled manpower as per requirement of the industries. Entrepreneur development institute (EDI) has to be established to produce entrepreneurs instead of managers or jobseekers.

Bangladesh should take short-, mid- and long-term steps for cluster development.

SHORT-TERM (UP TO 3 YEARS) PLAN

  1. Creating skilled manpower: Creating skilled manpower with relevant modern technology in each cluster should be the number one agenda for cluster development.
  2. Creating mentorship / leadership group with modern knowledge about the sector / product development in each cluster.
  3. Providing industrial loan as per local demand of entrepreneurs in each cluster.
  4. Awareness building among entrepreneurs and workers on productivity, quality, standards and other issues.
  5. Introducing entrepreneurs / managers with potential export market of their products.
  6. Creating and maintaining an SME friendly / cluster worthy environment (regulatory, taxation, infrastructure, banking, and other support services).
  7. Organising regional, divisional, national and international SME Fairs with products produced in different SME clusters.

MID-TERM (UP TO 5 YEARS) PLAN

  1. Establishing common facility centre (CFC) in each / suitable location for the SME clusters.
  2. Establishing cluster-specific testing laboratories.
  3. Assisting entrepreneurs to achieve international quality certifications.
  4. Providing assistance to establish backward linkage industries for each cluster product.
  5. Establishing forward linkage industries for all clusters.
  6. Extending support to search / access new export market.
  7. Ensuring adequate industrial infrastructures for every cluster and
  8. Organising SME Fairs abroad with products produced in different SME clusters.

LONG-TERM (UP TO 10 YEARS) PLAN

  1. Establishing Cluster Development Authority. Setting up Entrepreneurship Development Institute (EDI) in each divisional city.
  2. Establishing cluster / sector specific engineering and technology institutes in suitable locations.
  3. Negotiating with potential export market authorities to allow duty and quota-free market access (DFQF) to Bangladeshi SME products in respective countries.
  4. Establishing new product design, development and research centres for most potential SME sectors.
  5. Branding Bangladeshi SME products with international acceptability.
  6. Developing 25 export-oriented SME clusters as role model.

Bangladesh has limitations in terms of investment, capacity building, entrepreneurship development, business support services, human resources development, infrastructure development, electricity generation, gas distribution, water supply, regulatory regime so on and so forth. In such a situation, we need an approach to get optimum output out of limited resource allocation. Therefore, cluster-based SME development could foster entrepreneurship development, industrialisation, employment generation, increasing GDP growth, poverty alleviation and finally sustainable and geographically balanced development of country.

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