Economy of Bangladesh

Cluster approach for efficient industrialization

Cluster approach for efficient industrialization

Md. Joynal Abdin

The Independent on September 13, 2019

Agriculture, Industry and Service are the major pillars of an economy. Among the above mentioned pillars, agriculture has a maximum level of outputs and it becomes stagnated after that saturation point. Industry is out of that limitation. As a result governments are promoting industrialization to continue economic growth with a vision of employment generation and poverty alleviation especially in the LDC countries. Bangladesh government provides priorities to industrialization since 1980s. Private sector investment along with foreign direct investment has been encouraged by enacting different acts. At the same time government established different investment promotion agencies to promote private sector investment and facilitate industrialization.

Bangladesh Small and Cottage Industries Corporation (BSCIC) was established in 1957 with a vision of accelerating the industrial growth through promotion and extension of Medium, small and cottage industries. Its development activities are motioned, catalyzed and supported by promotion and extension services to the Medium, small and cottage industries. Later on government spearheaded another organization namely SME Foundation in 2007 with the same objectives.

Along with their series of services BSCIC establishes industrial estate and SME Foundation identified SME Clusters in different districts to facilitate a collocation of industries for supplying better utility services to the industries and rehabilitate industries of that region under a single boundary.

BSCIC has successfully established 74 industrial estates and SME Foundation mapped 177 SME Clusters throughout the country. Heterogeneous types of industries are located in a single estate as a result no particular value chain (local or foreign) has been developed in the BSCIC industrial estates.

On the other hand modern world got industrial cluster concept in late 90s from Professor Michel Porter. Beside this several other concepts like Japanese ‘One Village One Product’ and Chinese ‘One Region One Industry’ etc. concept are available for replication.

Among the available concept of industrialization cluster concept is the most matured and effective one. Conceptually, a cluster is a group of firms from similar industries that are located in close proximity connected to each other to produce goods or services.

Experts in many countries and development agencies have defined cluster-based on respective reality of economy and industrialization. In Bangladesh, the SME Foundation has for the first time defined cluster in Bangladesh as a geographical location (five square km) having 50 or more manufacturing or service-providing units producing similar goods or services along with its backward and forward linkage industries. All the units share common strengths, weaknesses, opportunities and threats.

Internationally, Professor Michael E Porter of Harvard Business School has defined 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’. The United Nations Industrial Development Organization (UNIDO) has defined industrial cluster as ‘geographic and economic concentration of manufacturing activities which produce and sell a domain of interrelated and complementary products and have common problems and opportunities’. Currently, a few experts consider that a cluster shall be a concentration of similar manufacturing units located at a particular place at the same time. They shall be horizontally or vertically linked to each other. Networking, agglomeration, and geographic proximity are considered to define a cluster.

The geographic spread of a cluster can vary. As a part of its natural growth, a cluster generally covers at least that big an area that enables its firms to interact. However, since cluster is not a legal entity, its geographic boundary is scholastically determined. Ideally, the geographic limit of a cluster should not cover too large area such that it deters interaction and the very spirit of cluster development may lack in such situations. Thus a cluster should cover a few villages or a city and its surrounding areas or at best a few blocks of a district. Providing network members with training, operational support, incentives and motivation as well as encouraging knowledge diffusion and providing exposure to best practices are major determinants of the success of a cluster initiative.

Generally speaking, thriving clusters can generate employment, income and opportunities for the local community and become drivers of broad-based local economic development. Three main arguments can be advanced to explain benefits of clustering as collective efficiency gains, special proximity effects, finally pro-poor growth potential.

To start with, clustered enterprises can achieve levels of competitiveness that reach beyond the potential of individual enterprises. While the growth of individual small-scale firms is constrained by limited access to resources and inability to achieve scale and scope economies, firms within clusters benefit from collective efficiency gains, i.e. “the competitive advantage derived from local external economies and joint action”. External economies include the availability of a specialized labor force, machinery and input suppliers, the attraction of traders and buyers as well as an industrial atmosphere where information and knowledge are easily shared. Joint actions range from collaborative relations between individual firms to the establishment of multilateral institutions such as associations, cooperatives or political lobbies. Therefore, cluster enterprises are able to achieve higher and sustained growth rates, for synergies and collaborative linkages allow them to pool resources and efforts together for the achievement of shared economic goals. Collective efficiency gains can be further enhanced when the institutional and policy frameworks are responsive to the firms’ needs and supportive of their efforts.

Although enterprise networking, especially in a globalized environment, has no territorial boundaries, it has been observed that the achievement of collective efficiency gains is facilitated by special proximity such as among firms within clusters. By means of reputation effects as well as a shared work ethos and attitudes, proximity moderates the moral hazard associated with the performance of economic transactions.  On the one hand, risk is decreased when firms know their partners and can easily gather information on their reliability. On the other hand, firms have fewer incentives to engage in opportunistic behavior since this will affect their future ability to acquire economic partners as well as attract social stigma. More generally, proximity may facilitate the development of trust-based relations that lower transaction costs and support collaborative interactions.

In the experience of UNIDO, spatial proximity also enhances the effect of technical cooperation, as it stimulates “crowding in” or “spontaneous replication” effects among a number of stakeholders higher than the recipients of direct assistance. Indeed, the extensive web of relationships shared by cluster stakeholders facilitates the dissemination of information, knowledge or commercial gains from directly assisted enterprises and institutions to the cluster at large.

With respect to pro-poor growth, UNIDO has learned that a cluster approach can be a valuable tool to tackle poverty and lay the ground for a process of broad-based growth. This is partly due to the fact that clusters are also socio-economic systems where the population of firms overlaps with the community of people and their families, living and working in a delimited territory.  Not only do entrepreneurs and workers share a similar social, cultural and political background, but also norms of reciprocity and collective practices of self-help are common among employers and employees. Overall, this accounts for a distribution of the benefits of growth that is likely to be more inclusive than in other economic systems.

The biggest advantage of the cluster approach is that the group of people is having common prospect or problem; hence they can unanimously decide and come to a solution. The unanimity makes it easier to handle a common obstacle for the artisans. From raw materials to energy and from production to marketing similar opportunity and threat is observed by the cluster-members. Also from government’s point of view it becomes easier to extend support to maximum beneficiaries who are already under a single umbrella. To create Common Facility Centre (CFC) or to facilitate marketing support becomes much more pragmatic just because the total number of beneficiaries remains under constant observation under MSME scheme. Providing not only technological support, but also making them psychologically equipped for further struggle to conquer success becomes equally important for the trainers.

Benefits of Adopting Cluster Approach:

  1. Collective efficiency: Clustering approach could offer various collective efficiencies like manufacturing capacity of a certain product, offering of large variety of a product line, collective force to peruse a certain challenge, increase power to negotiate with government or other external forces to bring a positive change for the cluster or sector.

  1. Special proximity effects: Geographical proximity could offer facility of developing value chain, availability of backward or forward linkage services, and sharing certain expensive technical facility etc.

  1. Pro-poor or inclusive economic growth: Clustering approach enables use of local manpower in mass scale by the estates; use of local manpower could be termed as inclusive employment opportunity and leads into inclusive economic growth of that society.

  1. Strengths of unity: Same types of enterprises of a cluster feel necessity of similar facilities. Thus they can be united and negotiate with concerned authority unitedly. This strength of unity could help them out to achieve their objective easily.

  1. Research and development: Proximity effect in clustering approach can increase the opportunity of research and development new products in a cluster.

  1. Easy access to government policy support: Homogeneous enterprises of a cluster could easily get access to different government policy support as well as to the industrial utilities.

  1. Easy access to buyers and suppliers: A large number of homogeneous enterprises can easily attract attention of the buyers and suppliers into a particular location.

  1. Easy access to business intermediary services: A large number of similar enterprises in a particular location could easily attract attention of business intermediary service providers like management consultant firms, training centers, testing laboratories etc.

  1. Scope for specialization: A large number of people’s practice on a particular industry could bring good manufacturing practice and facilitate scope for specialization on a particular task. It is another very important factor to increase productivity of a firm.

  1. Sharing of technical and managerial know-how: Similar enterprises in a particular location could facilitate technology transfer through labor migration. In long run it brings positive result for the entire community.

Finally we can state that, the Cluster Approach have become a popular economic development approach among policymakers and economic development practitioners. Cluster analysis can help to diagnose a region’s economic strengths and challenges and identify realistic ways to shape the region’s economic future.

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