Typical obstacles for co-operation

In order to identify typical obstacles to co-operation, it is useful to look at each of the three main areas of potential co-operation. Table 1 summarises the argument.

Table 1: Obstacles to co-operation in clusters

Obstacles to co-operation between firms	Obstacles to co-operation between firms and supporting institutions	Obstacles to co-operation between private and public sector
Prisoner's dilemma in an un-cooperative environment	Difficult relationship between SMEs and associations, in particular chambers	Local governance issues (political rivalry, collective conservatism, role of chambers)
Costs and risks of co-operation	Common problems of co-operation between firms and supporting institutions	Global governance issues (externally owned firms, foreign buyers)

 

Obstacles to co-operation between firms

1. Co-operation and prisoners' dilemma

Co-operation between firms involves a special type of prisoners' dilemma. In the textbook constellation, there are two prisoners who have jointly committed a severe crime without leaving evidence, may be pursued for a small crime where evidence against them is available, are interrogated separately and offered a reduced sentence if they confess (blaming their partner). Both may confess (i.e. behave opportunistically, non-cooperatively), and both will then be condemned to full sentences. If they co-operate, i.e. avoid opportunistic behavior, they will only be sentenced for the small crime.

In a cluster, the a-priori-constellation is quite different from the textbook prisoner's dilemma. Rather than acting jointly, firms are fierce rivals. Unlike the textbook prisoners' dilemma, it is not personal preferences and features or coincidences which will determine the decision for or against opportunistic behavior but a long history of rivalry which will create a strong bias towards non-cooperation. Typical events in the evolution of a given cluster will reinforce this bias, for instance the emergence of spin-off-firms which cater towards the same customers, and whose founders may take trade secrets from their former employer with them.

Another important aspect is the stability which both constellations, co-operation and non-cooperation, tend to display. Moving from one constellation to the other is complicated. This is most obvious if one starts with non-cooperation. Isolated attempts of individual actors to co-operate will evoke opportunistic behavior by other actors, thus disappointing the co-operation pioneers and reinforcing the non-cooperative game. But the co-operative game is quite stable as well, as research has shown that even repeated opportunistic behavior will not necessarily destroy a co-operative game.

Empirical research on prisoners' dilemma has shown that the probability of co-operation is higher than 50 % in repeated games as actors learn that opportunistic behavior is detrimental. The stability of the co-operative game is further enhanced if direct communication is possible and if the game is further stabilised through two mechanisms: rules (and sanctions if rules are broken) and the emergence of trust. In a non-cooperative cluster, the basic constellation is quite different, especially if many firms produce more or less identical products. Everyday business behavior will tend to be opportunistic, as firms are desperate for sales. If firms are competing for the same customers they will tend to underbid each other; it is not by chance that in his early publications Michael Porter emphasised the importance of rivalry for cluster dynamics. Ironically, this disposition may become even stronger in a period of crisis, when co-operation might offer a way out (for instance via a collective effort to upgrade) but when opportunistic behavior is even more likely as firms are scrambling for survival. From both a theoretical and an empirical perspective one thus has to expect the emergence and reinforcement of non-cooperative games in clusters, and any kind of cluster initiative has to be based on the assumption that it will be very difficult to switch to a co-operative game.

2. Costs, benefits and risks of formal co-operation

In the view of the industrial researcher, clusters offer all kinds of opportunities. The perspective of the local businessperson will often be the opposite. He may or may not appreciate the advantages, such as easy availability of inputs and skilled workers, and easy access to customers. He certainly is fully aware of the disadvantages, such as loss of skilled employees and swift diffusion of information about new technologies, customers, or markets. Regarding formal networking and co-operation, be it within an association or some other type of collaborative venture, any decision has to be based on an assessment of benefits on the one hand and costs and risks on the other hand. And quite often, the benefit will be long-term and hypothetical, whereas costs and risks are obvious and immediate. For a firm, the most obvious risk is the loss of trade secrets, such as technology or knowledge regarding markets and customers. Such risks are an important motive for firms not to enter co-operative ventures with direct competitors.

Another relevant risk regards anti-competitive behavior. Many firms basically like the idea of co-operation, in particular if it involves the creation of market-power or the elimination of market processes, such as purchasing or sales co-operatives or even cartels. Such practices are common in many industries, and in countries with an operational anti-trust-policy many firms will have a clear idea of the costs of such co-operation, namely the fines they had to pay. In fact, in this respect firms may find government agencies which promote clustering and co-operation somewhat strange, and may prefer to distance themselves from such initiatives as long as the anti-trust implications are not resolved.

Direct costs of co-operation include first and foremost transaction and opportunity costs. Meetings have to be prepared, and there has to be some follow-up, and discussion papers and minutes have to be prepared. All this puts a strain on the scarce time resources of decision-makers in firms. If firms agree on concrete activities, this will generate further costs, e.g. the investment and operational costs of joint development projects. This may lead to the kind of problems which are well-known from R&D and training, i.e. a discrepancy between the individual and the collective benefit which leads to underinvestment. In the field of R&D, governments subsidies firms' activities. Likewise, it may be necessary for government to subsidize co-operative ventures, i.e. cover at least part of the transaction and opportunity costs.

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Problems of co-operation between firms and supporting institutions

There are basically two kinds of problems regarding co-operation between firms and supporting institutions. First, there is often a complicated relationship between firms and business associations, especially between SME and chambers of industry and commerce. SME often perceive, correctly or not, that chambers are dominated by large firms, and they feel that the support they receive from their chamber is inadequate. At the same time, the chambers often have to deal with expectations which they cannot meet, given their limited resources. Other problems include scepticism of firms vis-à-vis business associations which are due to organisational weakness, proliferation of associations, or primarily political motives in founding or maintaining a given association. A further problem is mandatory membership which often minimises the performance pressure on business associations and/or creates the image that a given association is a para-governmental organisation.

Second, there are the usual problems of co-operation between firms and supporting institutions. For many supporting institutions, the satisfaction of local customers from the private sector is not the only, and often not the most important, performance indicator. This problem is particularly pertinent in the case of training and technology institutions; a priori, it is not necessarily likely that they co-operate with firms. In education and training institutions, especially in higher education, academic merits play an important role. But R&D institutions also have a difficult job balancing the demands of private sector customers and academic criteria, something which is further complicated by profoundly different standards – researchers want to publish their results quickly and widely, and they aspire a profound understanding of problems, whereas firms want a quick problem solution, want to keep research results secret, and possibly sell them at a maximum price. Moreover, co-operation is more likely with large firms, which often have elaborate training centers and usually have R&D laboratories and thus an appropriate receptive structure, than with SME.

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Problems of co-operation between public and private sector

Both local and global governance issues establish limits for cluster initiatives. Local governance patterns establish manifold problems:

• It has sometimes been observed that a crisis lead to a dynamisation of cluster potentials. However, it is by no means obvious that this happens. Just as likely the opposite may happen. Local actors may perceive a profound crisis as a structural crisis, they may define the dominating branch in the cluster as a sunset-industry which does not deserve promotion, and they may direct their promotion activities at diversifying the local economic base, preferably achieving broad diversification in order to avoid the vulnerability of depending on just one branch. In other words, local actors may perceive a de-clustering policy as the best option.
• Another constellation has been observed in old clusters, for instance the Ruhr Valley. Communication and co-operation between local actors may become so intense that their ability to perceive changes outside the cluster suffers (collective conservatism). Moreover, they tend to be well organised and politically well connected. Accordingly, they have both the motivation and the means to focus at efforts to keep old industries alive rather than promoting and shaping structural change.
• One important actor will only with great difficulties play a constructive role in cluster initiatives, namely chambers of industry and commerce. Chambers cater to firms from all sorts of sectors and branches. A cluster initiative will involve only a limited set of branches, and those firms not directly linked to the dominating branches in the cluster will feel frustrated if the chamber puts much effort into the cluster initiative. Especially in those locations where one cluster dominates the local economy, the firms from other branches will complain loudly since they tend to perceive that the chamber is dealing too much with the cluster-related branches anyway.
• There is no reason to believe that politically motivated differences can more easily be overcome at the local level than at other levels. It is rather likely that political differences are intertwined with other factors, such as personally motivated aversions, traditional enmity between families or elites, economic rivalries, etc., and that thus a complex set of obstacles emerges which makes organizing a coherent initiative very complicated.

Global governance patterns create two types of problems for local initiatives:

• A crucial element of cluster initiatives is networking between persons rather than organisations. This may face serious obstacles in a cluster where important firms are not locally-owned, and directors are changing frequently. Moreover, in large groups the director of a local branch plant frequently has a limited freedom of decision. In this respect, dramatic changes in framework conditions for clustering initiatives can occur if a local firm is taken over by some external investor.
• External firms can also have a strong impact on cluster initiatives in a different way. Clusters, especially in developing countries, are often part of global value chains which are ruled by some large firm elsewhere, for instance large distribution chains in industrialised countries. Such a large firm may have an interest in the long-term perspective and performance of the cluster, but usually its short-term considerations will prevail. This frequently means that external buyers are playing cluster firms against each other to get the best price, or that they discourage cluster firms to engage in upgrading efforts which might change the power structure in the value chain. This leads us back to the observation that fierce rivalry between local firms is often a major obstacle for local co-operation. Moreover, it means that even well-meaning government initiatives may stay fruitless.

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