Innovation and economic activity: an institutional analysis of the role of clusters in industrializing economies.

AuthorParto, Saeed

The current use of "cluster" is often closely associated with Michael Porter's (1990; 1994; 1997; 1998; 2000a; 2000b; 2003a; 2003b) reconceptualization of the foundations of modern capitalist economies as varying and dynamic mixtures of cooperative arrangements and competitive relationships. Porter's use of "clusters" owes significant intellectual debt to Alfred Marshall's notions of "industrial districts" and "industrial atmospheres" and Piore and Sabel's (1984) "flexible specialization." In contrast to the Fordist mode of (mass) production, agglomerations of firms based on flexible specialization are said to be better prepared to deal with supply related shocks and changes in consumer preferences. The emphasis is on product quality, market segmentation, and economies of scope through the use of adaptive machinery and higher skilled workers or craftspersons.

Hundreds of articles have been written on clusters over the last few years. The increasing interest in clusters is a reflection of the broader change of approach in economic policymaking toward the microeconomic foundations of prosperity and growth (Ketel 2003, 2), a change whose legitimacy has been questioned by the more critical scholars such as Harrison (1992), Harrison, Kelly and Grant (1996), and Martin and Sunley (2003). Also, according to the latter, the notion of "cluster" has been applied largely arbitrarily and continues to remain fuzzy as a concept. The key premise in this paper is that a significant part of this fuzziness is attributable to insufficient attention to "the institutional arrangements" that are said to structure cluster dynamics.

To advance work on cluster studies, and in efforts to contribute "the institutional turn" in Economic Geography (Amin 2001), and Regional Studies (Hayter 2004), we need a fuller understanding of the elusive "institutional arrangements" that structure cluster dynamics and define a given cluster's mode of governance. To this end, the paper outlines a frame of analysis to capture the full range of formal and informal institutions, account for evolutionary change in cluster characteristics, and serve as a first step toward developing a generic institutional approach to cluster studies capable of generating policy-relevant insights for industrializing economies.

This paper is structured as follows. The next section provides a synthesis of some of the literature on clusters to highlight the key determinants (section three) of cluster formation and sustenance. The fourth and fifth sections describe the framework used in the analysis of data on two clusters in Egypt and South Africa (sections six and seven). (1) The eighth section highlights the main findings from this study and concludes with recommendations for policy and future research on economic clusters.

What are Clusters?

Clusters have been studied in sociology, economics, political science, economic geography, and regional studies as groupings of interrelated firms that innovate and generate economic growth. In these studies attention is paid to alternative models of industrial organization and the development of new concepts such as "collective efficiency" (Schmitz and Nadvi 1999). These studies have further spawned the debate on knowledge externalities and spillovers (Audretsch and Feldman 1999; Burt 1992; Coleman 1990; Jaffe, Trajtenberg and Henderson 1993), and the dynamic nature of interactive learning necessary for innovation (Asheim 1999; Becattini 1990; Kline and Rosenberg 1986; Maskell 1999; and Maskell and Malmberge 1999). Many commentators view clusters as a main breeding ground for innovation and therefore economic growth. This view has not gone unchallenged, however.

For example, Chandler (1990) argues that historically, economies of scale and scope have been achieved mainly by large private and public enterprises including large public corporations charged with infrastructure building. Chandler (1990) argues against one of the main orthodoxies in economics that large hierarchies and oligopolistic market structures are inherently undesirable and potentially impede competition and optimal growth by stifling innovation at the firm level. He identifies three forms of capitalism as competitive (the United States), personal (Britain), and cooperative (Germany) and argues that a firm's response to changes in the market is shaped by the dominant form of capitalism in that market. Each form has its own peculiarities and specific governance structure, managerial systems and culture, and legal and regulatory regime. In other words, the actions and responses of firms and other enterprises are shaped--that is, simultaneously constrained and enabled--by the institutional arrangements in each specific context. Based on his in-depth historical studies of the American, British, and German economies, Chandler (1990) concludes that in each case entrepreneurial success or failure was a direct outcome of the three pronged strategy of investing in manufacturing, distribution, and management system structures and personnel.

Similarly, Lazonick's (1991) view is that the economies of scale enjoyed by large, vertically integrated, and strategically flexible corporations will remain overwhelmingly important in the innovation process and in generating economic growth. Due to their size, managerial endowment, and access to material resources large corporations are said to be better positioned to control marketing activity and input supply, both of which are key determinants in investment decision making. Following a similar line of argument, Florida and Kenny (1990) emphasize the need for larger enterprises to be strategically oriented toward maintaining long-term research and development efforts and thus the opportunity of following through on innovations. To support their argument, Florida and Kenny point to the role played by large Japanese and Korean conglomerates in appropriating external knowledge as a basis for generating homegrown technological breakthroughs and subsequently building their own dynamic national economies. (2) The views by Chandler (1990), Florida and Kenny (1990), and Lazonick (1991) imply that large corporations are at the heart of the innovation process and growth since they have, unlike small firms, the ability to combine technology, investment, and clearly defined organizational structures.

The arguments for the role of large corporations as the main source of innovative activity notwithstanding, there is broad agreement among the commentators that something has definitely changed in the post-World War, post-Fordist industrial landscape. Post-Fordism is characterized by a decline in the formal role and functions of the nation state with a corresponding decline in social welfare provisions including education and health; disaggregated and fragmented demand with new forms of consumption; adoption by large corporations of labor practices of flexible specialization, "just-in-time" production, and outsourcing; and multi-skilled and multi-tasked employees. Manifestations of post-Fordism include reduction in management and production costs, renewed craft tradition with flexible working arrangements, and the resurgence of regional and local economies based on product specialization.

The emergence of agglomerated small and medium-sized enterprises (SMEs) in "industrial districts" and clusters is arguably directly related to post-Fordism and its ideological reflection in liberalization policies of governments in developed and developing countries. Because of structural flexibility, the agglomerated SMEs are said to be better-suited to cope with, and innovate in response to, disaggregated and changing consumer demand than the vertically integrated large corporations. Flexibility and adaptive behavior are conducive to (at least) incremental innovation. However, whether or not agglomerated SMEs are more innovative than large corporations in terms of scale, scope, and long-term impact across the economy remains an unresolved point of dispute. Without lessening the importance of the arguments by Chandler (1990), Lazonick (1991), and others about the instrumental role of large corporations in the innovation process, the main goal in this paper is to draw attention to the emergence in some African countries of what could be best described as post-Fordist clusters or industrial districts, discuss some of the key characteristics of these clusters, and underline the implications for future research and policy focused on clusters.

An industrial district can be defined as a localized network or geographically identifiable concentration of similar, related, or complementary businesses or producers bound together in a social division of labor. These enterprises conduct business transactions through formal and informal means of communication and dialogue, share specialized infrastructure and labor markets, and are faced with similar threats and opportunities (Scott 1988; Rosenfeld 1997). Such agglomerations bring together complementarities through vertical and horizontal linkages among the co-located firms. Included in Scott's (1992) networks are large firms and branch plants. Emphasizing the firm size, Goodman, Bamford and Saynor (1989) describe industrial districts as being populated by small and medium-sized firms while Pyke, Becattini, and Sengenberger (1990, 16) make reference to "a high number of firms active in different stages and in different modes of the production...." Others have emphasized the innovative characteristics of an industrial district or cluster (Cooke 2002; Cooke and Morgan 1998; Asheim and Gertler 2005). Other features of industrial districts include the economic or strategic importance, the range of products produced or services used, and the use of common inputs (Rosenfeld 1997).

Much earlier, Marshall ([1890] 1959; [1919] 1920) made reference to industrial agglomerations of small and medium-sized enterprises in the...

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