Possible areas of co-operation in clusters

Based on the case-studies of successful clusters we can identify three main areas of co-operation:

• bilaterally and multilaterally between firms
• between firms and supporting institutions
• between the private sector and the public sector

Co-operation between and among firms

Co-operation between firms typically involves three features which can be analytically distinguished, namely relational contracting, information exchange / joint learning, and collective action.

Relational contracting is the opposite of arms-length relationships. Whereas the latter typically involve spot transactions, often based on auctions or auction-like arrangements, relational contracting involves a long-term business relationship. Arms-length relationships require extensive legal dealings, whereas relational contracting is often based on trust. Relational contracting occurs both within hierarchical settings (for instance in supplier relationships in Japanese industry) and in heterarchical environments (e.g. industrial districts).

Typical kinds of information exchange between firms include the following:

• Informal information exchange between firms in supplier/subcontracting arrangements, going beyond what is necessary for arms-length transactions. The customer may give assistance to his suppliers, e.g. how to work with certain new materials or how to deal with quality problems. This may happen both among neighbouring firms and within global supplier networks.
• Formal and informal information exchange between firms in strategic alliances. There has been a strong increase in the number of national and international strategic alliances between firms, i.e. co-operation ventures aiming at the development of a given technology on the basis of a contract. Behind this is the necessity to pool R&D resources to reduce development lead-times and to realise synergies.
• Formal and informal information exchange between firms in business associations. They often are a forum for technical discussions.
• Information exchange between firms' employees in professional associations, which may be formal (e.g. presentations in conferences) or informal (e.g. discussions during meetings and conferences).

Frequent types of collective action include the following:

• the provision of real services by business associations.
• jointly maintained, organisationally separate mesoinstitutions in fields like training, technology information, or export information.
• political lobbying and active participation in forums which work on shaping locational advantages.

In the real world, relational contracting, information exchange, and collective action will often go hand-in-hand; in fact, all three types of activities will reinforce each other, i.e. meetings in well-functioning business associations open opportunities to informal information exchange, and information exchange may reach barriers that can only be overcome through collective action. Taken together, this leads to the emergence of inter-firm networks.

In the view of institutional economics there are two major reasons why firms co-operate, namely transaction costs and principal-agent problems in arms-length relationships. Arms-length relationships require an elaborate contract which is costly to set up, negotiate, and enforce, thus causing high transaction costs. Principal-agent problems emerge to the extent that, for instance, a subcontractor or supplier is contractually obliged to employ certain process technologies but chooses a cheaper alternative, and the principal contractor is not easily able to tell the difference (for instance in surface treatment or chemical treatment of textiles). Some co-operation arrangements (e.g. strategic alliances) may also involve principal-agent-problems. Relational contracting and dense, long-term networks may offer substantial benefits in terms of minimising transaction costs and reducing principal-agent problems. Such arrangements are based on mutual trust. Agreements are self-enforcing to the extent that firms run the risk of eroding trust, and thus possibly drop out of the network, if they behave opportunistically.

In the perspective of innovation economics, co-operation between firms is a crucial feature since innovation is a cumulative process, involves learning-by-doing, -using, and -interacting, and often yields increasing returns. Particularly important is learning-by-interacting. There is both an empirical and a theoretical argument behind the emphasis innovation economics puts on learning-by-interacting. Behind the empirical argument is the notion that the most frequent type of innovation, namely incremental innovation, is not an event but a process of continuous improvements. The process of incremental innovation takes up speed as a development trajectory of a given technology becomes established, that is as an increasing number of researchers and firms agree that a given technology is preferable compared to other technologies. After this (often implicit) agreement, two things happen. First, there is less uncertainty, i.e. the risk that investment in R&D will have to be completely written off because a given technology has to be dropped is minimised. Second, an increasing number of researchers concentrate on improving a given technology, and a meso-level structure of research groups or institutes, training courses and textbooks, norms and standards, etc. is being created.

The theoretical argument addresses the issues of opportunity costs and increasing returns. The alternative to inter-firm co-operation in innovation would be an autarchy approach, i.e. each firm tries to go through its own research effort and learning processes. In a certain way, this occurs in the real world; it is usually referred to as the not-invented-here-syndrome. This approach involves high opportunity costs as firms could have avoided replication and repeating dead-end tracks by learning from the experience of other firms.

In the view of innovation economics, the issue of transaction costs involves the different forms learning-by-interacting can take. Formal technology transfer, e.g. by licensing, is one of them. However, as the use of technology implies a lot of tacit knowledge, no technology transfer contract can define all the details that are involved; it can try to define as many as possible, something that would be extremely costly in terms of drafting, supervising and enforcing the contract. The alternative is a combination of formal agreements and informal communication; in particular the latter has often been observed inside clusters. Moreover, there are other forms of technological learning based on communication between firms, e.g. discussions in standardisation bodies or at congresses. These mechanisms have low transaction costs.

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Co-operation between firms and supporting institutions

Co-operation between firms and supporting institutions involves individual firms, or groups of firms, on the one side and business associations or governmental, private, or PPP institutions on the other side.

A well-developed business association ought to display a number of features:

• It articulates the interests of the private sector vis-à-vis government. It has well-functioning communication channels with its member firms to know about things it has to articulate.
• It offers services to its member firms. The two basic services of Chambers are the emission of certificates of origin and legal advice. Beyond this, both Chambers and sectoral associations may offer information services (overall economic climate, economic trends in the sector, changes in government regulations, statistical data, etc.), seminars on specific issues (e.g. new management techniques or technologies), training courses, and fora for information exchange between member firms.
• It has a number of qualified professionals in order to offer services in a competent manner. The relationship between professionals and elected directors is balanced. There is a degree of internal transparency and democracy which makes sure that different types and sizes of firms are represented in the association.

Business support institutions, be they governmental, private, or public-private partnerships (PPP), operate in fields like training, technological support, financing, and export promotion. They ought to display the following features:

• They have a clear customer focus and well-established communication channels with the customers.
• Frequent feedback leads to constant evolution and development of the services offered.
• They are organised in a business-like way, both to make their mindset compatible with that of their customers and to improve efficiency.
• They have systems for quality management and knowledge management in place.

A firm's decision whether or not to co-operate with associations and business support institutions involves a decision-making process which is similar to the make-or-buy decision. Membership in an association has a cost, both in terms of membership fees and possibly opportunity cost due to time spent as an elected officer. A firm will weigh this cost against the benefit, and it will opt against membership if it feels that there are more efficient alternatives, such as direct lobbying with political decision-makers or acquisition of business services from commercial providers. Regarding support services, there is always the option of living without them, or finding other sources (e.g. suppliers or technology consultants in the case of technological services, or commercial providers in the case of business information), or generate these services in-house.

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Co-operation between the private and the public sector

Successful, dynamic clusters display a close, constructive relationship between the private and the public sector. This may be the result of a development-oriented public sector, but more often it reflects effective collective action and lobbying by the private sector. The public sector supports the competitiveness of firms. It streamlines its operations, reduces red tape, and sets up one-stop- or first-stop-agencies. It extends and maintains the infrastructure. It offers real services to firms, especially in fields which are rarely profitable and where collective action may fail due to free-riding behavior, such as training.

Moreover, the public sector may play a strategic role. It may take a leadership role in moving from "passive" to "active" cluster advantages. "Collective efficiency is defined as having two aspects to it: external economies that clustered agents accrue by virtue of their location, and joint action benefits that arise from deliberate cooperation between local agents. I view external economies as the 'passive' dimension of collective efficiency. The term passive describes the nature of ties required between local agents in order to obtain externality gains. In contrast, joint action is the 'active' dimension of collective efficiency requiring deliberate and active cooperation. These two aspects can also be clearly linked; joint action by some agents can generate cluster-specific externality gains for others. This process of upgrading by facilitating the flow of technical information on standards and by assisting in managerial training. Local institutions can also play a potentially key function in defining and regulating local product standards, and thus in creating a reputational basis for the cluster's products. This provides a powerful example of what I refer to as 'externalities of joint action'" (Khalid Nadvi, in World Development, September 1999, p. 1608). The public sector may also pursue a deliberate strategy to strengthen the cluster, for instance by attracting complementary firms. In other places, where clustering is not yet expressive, public actors may pursue a cluster-oriented economic promotion strategy, for instance by stimulating the emergence of technology poles.

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