Instruments and practices for enterprise development
4. Infrastructure improvement and cluster strategies
Dr Manfred Poppe - 10 May 2005
To assess the impact of provision of basic infrastructure on business performance and its contribution to the mobilization of regional resources To understand basic principles and challenges of cluster strategies to promote local economic development
«providing infrastructure services to meet the demands of businesses, households and other users is one of the major challenges of economic development» «good infrastructure raises productivity and lowers production costs» «the precise linkages between infrastructure and development are still open to debate» (Source: 1994
World Development Report)
Kinds of infrastructure
Economic infrastructure comprises public utilities (power, telecommunications, water supply, sanitation and sewerage, solid waste collection), public works (roads, dam and canal works for irrigation) and other transport sectors (railways, urban transport, ports, ... ). Social infrastructure comprises education and the provision of health care. For any kind of infrastructure, quality and durability are key issues, drawing attention to cost recovery measures and maintenance. Different types of infrastructure have a different impact on the productivity of the enterprises, their profitability, their market access and the working conditions at the business premises.
the importance of infrastructure on the decision of where to locate an enterprise, the impact of a lack of infrastructure on the growth possibilities of firms, the coping strategies of firms to deal with infrastructure deficiencies
Satisfy the short-term needs of infrastructure supply by deciding where to locate. Any additional need for infrastructure has to be satisfied through own resources or becomes a constraint for the firms' activities. Firms with an infrastructure intensive production technology will, therefore, locate in well provided regions. Strategic considerations are also a determinant for the locational decision of a firm. Such considerations are proximity to clients, suppliers and competitors and the availability of a labour force with skills adapted to the enterprise's needs. The importance of infrastructure and other considerations varies according to the size of the firm, the technology used, the type of activities, etc.
Impacts due to lack of infrastructure
Infrastructure problems particularly affect medium-sized firms because of their dependence on advanced production technologies and market access. Micro-enterprises are using production methods that rely less on economic infrastructure. The technology of micro-enterprises, for example, often does not require electricity. Also problems with roads have a lesser effect on their production costs since raw materials are often brought and the final product collected by the customers themselves. In addition, small firms tend to be located near to their customers and they do not rely on telecommunication infrastructure for their relations with clients and suppliers. The RPED surveys in Kenya, Burundi, Cote d'Ivoire en Zimbabwe concluded that, in order of importance, infrastructure as a constraint for growth is preceded by lack of credit, low demand, lack of services and taxes. Especially for small enterprises, the surveys showed the importance of lack of credit and low demand as constraints for growth. Infrastructure becomes a very determining factor in the evolution of a business, i.e. when a micro-enterprise grows. When "evolving" informal sector enterprises lack adequate economic infrastructure (electricity, water, roads, telephone, waste disposal, etc.), they can hardly grow into formal enterprises.
Firms can adopt four different coping strategies to tackle deficiencies in infrastructure: Relocation is a first strategy. Because of high costs this option is not obvious. Moreover, there is a considerable risk of trading one set of lacking infrastructure for another. A second option is factor substitution to make production less infrastructure intensive and reduce dependence on infrastructure services. Self-provision is a third solution. Full self-sufficiency is rare. Selfprovision is related to the size of the enterprise. Microenterprises rely less on self-provision because they often lack means for it but also because their production methods depend less on infrastructure services. A last and very common option is reduction of output. This solution is especially forced on small enterprises which do not have the means for self-provision.
Major Findings from an ILO Study (Dar es Salaam, Tanzania)
Provision of storm water drainage channels removes direct exposure to diseases as much of the land area becomes dry even during the rainy season. Risks of getting malaria and other diseases for people living and/or working in the upgraded area are drastically reduced. This has an obvious direct impact on productivity, especially given the high labour-intensity of the investigated economic activities. Considering the vulnerable situation of a large proportion of informal entrepreneurs, this impact is also important in terms of poverty reduction. The place of residence, the lack of availability of business premises and family reasons are the most important factors influencing the decision on the location of the business. The study confirms that home is often a workplace. However, this does not only depend on family reasons, but rather, is related to the lack of means to rent or build separate premises for their business. As the business expands, the investment in more appropriate premises becomes a priority. Infrastructure upgrading contributes directly to the improvement of the living and working environment of people through a better physical environment (movements in, out and within the area become easier, safer and more comfortable), improved business environment (accessibility, visibility and attractiveness for clients) and better welfare, self-esteem and pride.
cont. Major Findings from an ILO Study (Dar es Salaam, Tanzania)
Infrastructure development also has an impact on those enterprises in the vicinity of the upgraded settlement. Indeed, the impact of the works is not only noticeable in the upgraded settlement since there are spill-over effects on directly neighbouring settlements. Enterprises in the vicinity of the upgrading works become more visible and accessible and thus benefit from the inward movements of clients who were previously limited to the main roads. The potential positive impact of infrastructure upgrading on sales through improved accessibility and visibility is, however, impeded by other, more predominant, constraints faced by informal entrepreneurs such as lack of working capital, limited demand, etc. For the smallest enterprises at the subsistence level, road upgrading has a reduced impact on their businesses given their methods of production and organisation. However, while the enterprises are growing and becoming more structured, the impact is expected to be more important. This is demonstrated by the issue of transport as the study shows that infrastructure upgrading reduces transport costs only for those evolving informal operators who use private transport. Forward linkages have been identified among those persons who participated in the upgrading infrastructure works as, with the income earned during the works, some participants were able to invest and re-invest in small businesses or in farming, to make some home improvements, inducing a multiplier effect for the entrepreneurs in the area through increased demand for renovation works, and through permanent jobs or selfemployment in the construction sector for some persons consecutive to training received during the works. However, no backward linkages have been found from the interviews with the participants in the infrastructure works.
The type of infrastructure to be put in place should be in line with the type of enterprises present in the settlement and the constraints faced by them. Infrastructure upgrading is necessary but not sufficient to solve the problems faced by informal sector enterprises. In order to increase the ability of entrepreneurs to take advantage of the opportunities, additional support is needed for informal sector entrepreneurs: training, appropriate saving and credit schemes, etc. Ensure the presence of backward linkages in infrastructure programmes: identification of potential suppliers of materials and tools in the settlement, assessment of their capacity to meet the demand.
The Cluster Development Strategy
Conducive national environment
Regulatory review R&D / Education Interregional Infrastructure
Best Practice Documentation
Sectoral focal point
Domestic & International Market Intelligence
Access to resources
Feasibility Studies & Specific Projects
Facilitation & Capacity building
Market Study & Marketing strategy
Local leadership group
Local private stakeholders
Effective local self-organization
How to promote clusters at different stages of development
Need for policy recommendations for creating dynamic clusters. Internationally there is no agreement on what constitutes a dynamic cluster. The cluster approach concentrates on local linkages. Its central proposition is that the ability to compete in national or global markets depends on the quality of the local linkages, both between enterprises in the cluster, and between enterprises and institutions.
Strengthening the organisational capability of the cluster
One of the features which has been discussed particularly in the policy debate is the ‘organisational capability of the cluster’. Strengthening this organisational capability is a particular concern through strengthening local cooperatives or business associations. Recognising that these collective organisations are often weak, potential cluster co-ordinators would ensure the provision of ‘cluster development services’
Selective co-operation or comprehensive co-operation?
Taking advantage of major opportunities and coping with crisis often requires organisational and financial resources which go beyond the means of the individual enterprise. Selective co-operation is stronger than comprehensive cooperation. Negative experiences with cluster-wide co-operation. One of the reasons was that co-operatives were set up which sought to include all enterprises and conduct all operations together. The all-inclusive cooperative does not seem to be a good role model. ‘Competition & selective co-operation’ seems to be a better role model. Firms can be fierce competitors in the product market, but benefit from co-operation in areas such as training or the joint acquisition of expensive machinery.
Who should take the lead in cluster co-ordination and conflict management?
In principle, this role can be carried out by one of three actors:
the local co-operative/association, a local government agency, or a private consultant.
Requires good knowledge of the sector in question as well as the political skills and legitimacy in bringing local enterprises and institutions together and mediating between them. Even if the skills are present, there is the question of whether there will be effective demand for such a ‘cluster development service’. In other words, who would pay the consultant for carrying out this service?
Individual enterprise support remains important
While the cluster approach emphasises the quality of relationships between local enterprises, the internal improvement of enterprises continues to be important and support for intra-firm upgrading is not redundant. Traditional instruments of providing advice to individual enterprises continues to be relevant.
Strengthen the knowledge flow from outside
For a cluster to become dynamic it needs to be able to tap outside knowledge. Learning by visiting is very effective – provided the study tours are well organised. Participating in national or international trade fairs is another way of tapping outside knowledge. Encouraging group-learning about the requirements for competing in new markets.
Combine the cluster approach with the value chain approach: the supply of raw material
More attention needs to be given to linkages external to the cluster. Both backward linkages to the suppliers of inputs and forward linkages to the customers need to be considered explicitly. Hence, the cluster needs to be analysed in the context of the value chain(s) in which it is inserted. Some recent research suggests that the extent and mode of insertion in these value chains have a decisive influence on the dynamics of the cluster and provide new insights on whether and how clusters can be upgraded. Without regulating the raw material supply and certification, cluster promotion is unlikely to succeed.
Combine the cluster approach with the value chain approach: the relationship with customers
Buyers have a major influence on the acquisition of capabilities by SMEs. The type and quality of the feedback of the customer matters. Dissatisfied customers, who simply move on to other producers, leave the producers without idea as to why they lost the business. The best customers are those who provide indications as to how problems can be avoided in future. In many cases, substantial improvements in product quality and timely delivery require action on both, the producer and customer side. Where such a commitment to ‘learning-by-interaction’ exists, the conditions for improving processes and products are ideal. Involving buyers in the upgrading of producers does not work if the competence gap is too large (i.e. distance in capabilities and equipment between what these customers require and what the enterprises can offer).