Promoting Co-operation in Clusters

What makes promoting innovation in a cluster different from promoting innovation elsewhere? The answer is straightforward: Apart from all the things one can do everywhere, in a cluster there is the option to activate the potential of innovation based on "collective efficiency", something that is no option in other locations.

I have argued above that promoting innovation in a cluster which does not have a tradition of co-operation, where local actors find the idea of "collective efficiency" implausible, involves two different kinds of innovation: not only technological innovation but also social innovation. The social innovation of transforming a non-cooperative into a cooperation-minded setting is not necessarily a precondition for initiatives to promote technological innovation. But increasing the propensity to co-operate is both in itself an important measure to unleash innovative potential and a precondition to increase the leverage of other measures. How, then, is it possible to increase the propensity to co-operate in the three areas outlined above?

Regarding inter-firm co-operation, I have found that such initiatives are most likely to succeed which meet four criteria:

• they address immediate problems of firms,
• they do not touch what firms perceive as their core activities,
• they open little or no latitude for predatory behavior,
• they offer the potential of savings through economies of scale.

Let me explain these criteria by briefly outlining typical activities which do not meet them and usually fail. First, there is technological co-operation, such as the joint development of a new production process. In such a case, participating firms fear that other firms get to know pieces of information which they perceive as essential to their competitiveness. Accordingly, they put pressure on their technicians not to unveil any possibly critical information, what in effect means that it is unlikely that the co-operation project gets anywhere. Firms may also choose their less competent technicians to take part in the project, something that also does not enhance the probability of success. Second, when one mentions the option of co-operation, businesspeople in a non-cooperative cluster typical come up first of all with ideas which effectively are anti-competitive, such as forming a purchasing co-operative. However, if firms do not trust each other, a supplier who is the target of the co-operative will easily break it by offering preferential purchasing conditions to one or some of the participating firms.

What then are activities which meet the four criteria? Research in clusters in the state of Santa Catarina, Brazil, found three types of activities:

• Training. Even though surprisingly many firms opted for in-house training (even when it came to basic education for semi-literate employees), there were numerous examples of joint training activities. The economies of scale are obvious, the benefits as well, there is little option for predatory behavior, and the training is limited to areas which do not touch upon the core activities.
• Environment-related activities. In this area co-operation between firms involved a level of exchange of information between firms which was unthinkable in areas such as quality management or technological development. Apart from being due to the fact that firms, initially mostly sticking to end-of-pipe-solutions, perceived environmental protection literally as a peripheral activity, the fact that there was the government environmental agency as an external enemy also created an incentive to stick together.
• Basic testing activities. In the textiles industry this refers to testing cotton fibers and chemical inputs, in the ceramic tile industry to testing the clay. In fact, in the ceramic tile cluster around Criciúma, which is the leading cluster in the industry in Latin America, it was after a major crisis in the early 1990s that firms lobbied their business association and state government to create a technology center which had testing as one of its main activities. The crisis forced firms to look out for potentials to save costs. Before that, each firm had its own underutilised laboratory.

Looking at the evolution of the clusters in Santa Catarina, it is possible to perceive that initiatives like those just mentioned may pave the way for more ambitious co-operation activities. As firms see that co-operation creates advantages, they may develop a certain degree of trust which permits other, more ambitious and risky co-operation activities, such as exchange of technological information. However, there is by no means a clear trajectory in this respect. The experience of the tile cluster in Criciúma, Brazil, is somewhat sobering: After a massive joint effort to deal with the crisis achieved most of its declared goals by the mid-1990s, the degree of co-operation has been decreasing again. Whereas four years ago several of the local actors saw their cluster on track to emulate the experience of Italian industrial districts, today one can sense a certain frustration which may be due to the fact that maintaining co-operation is quite an effort.

Regarding co-operation between firms and institutions, it is useful to distinguish two issues. First, there are business associations. In Brazil, like elsewhere in Latin America, business associations tend to be relative weak, with few employees and a low level of competence, especially when it comes to providing member firms with real services. Organisational development in such associations is a lengthy but unavoidable activity. Regarding the case of Santa Catarina, there was a German technical assistance project which after five years of hard work was quite successful. The methodology it had developed was first extended to other parts of the state and recently to other parts of the country, with financial and organisational support of the parastatal SME support organisation SEBRAE.

Second, there are institutions such as training and technology institutes. In the past, such institutions in Brazil tended to operate in a kind of vacuum and were highly auto-referential. In the import substitution era, i.e. until 1990, technology institutes found little demand from the private sector which was under little pressure to innovate in a not very competitive market. Training institutes encountered an environment which was marked by massive skills shortages so that whatever training they provided was gladly accepted by the private sector. Even though a large part of the vocational training system was administrated by the private sector itself the possibilities of firms articulating their specific demands vis-à-vis the training institutes were often very limited. With a new, more competitive environment, institutions have to face tough challenges.

In order to get a better understanding regarding how to make supporting institutions more responsive to private sector demand, it is useful to use a concept that has been implicit in much of the restructuring which took place in firms in the 1990s. Figure 1 summarises four key goals of organisational development: efficiency, quality (in the sense of minimizing the cost of quality management), flexibility (i.e. the ability to satisfy a wide scope of differentiated demand), and responsiveness (i.e. the ability to respond quickly to demand).

In the old days, optimizing the factors mentioned in Figure 1 involved trade-offs. Increasing flexibility often went to the detriment of efficiency, responsiveness went to the detriment of quality, and so forth. In the management field, the analysis of Japanese organisational methods provided crucial insights in terms of overcoming these trade-offs. It was the main contribution of the Toyota production system to show industrial managers how to optimize all four factors at the same time. An analysis of the world car industry provided both managers and researchers with the relevant benchmarks.

Four dimensions of organisational development

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There is no reason why this idea should not be applicable to supporting institutions in fields such as education, training, and technology. Sure, it will often involve major upheaval in organisations which so far had a single-minded rationale, e.g. academic excellence. But getting to a balance between different rationales is exactly the point of organisational development.

Co-operation between the private and the public sector puts high demands on both sides. On the side of the private sector, it is, first and foremost, essential to have effective organisations. Large firms can interact with government, especially local government, on an individual basis. Small and medium-sised firms will find this difficult. They will have to unite their voices to be heard; this leads us back to the issues mentioned before in terms of creating effective business associations.

On the side of the public sector, the first issue is that it has to take an active interest in the fate of the private sector. This is much less obvious than might be expected. In Brazil, I have found that local government often did not care about private business, except as a source of revenue. First, private businesses had been growing for decades without support from local government, and second, there had been all sorts of policies from central and state government so that local government developed a disposition to wait for their action rather than acting on its own.

The second issue is that government, before starting cluster initiatives, ought to get its own house in order. Government at all levels tends to erect all sorts of obstacles for private business – some of them essential and in fact important to stimulate competitiveness, such as environmental regulation and consumer protection, but many of them either inefficient or altogether not very sensible. Reviewing regulation, removing those obstacles which are not essential, and reorganizing what remains is the most important task for government. In practical terms this means different things at different levels, such as moving from command & control to economic instruments for environmental policy at the national level, streamlining regulations at all levels, or creating one-stop or first-stop-agencies at the local level.

Only after addressing the obstacles it has created for the private sector does government have the credibility to get involved in meaningful private sector promotion activities, such as a cluster initiative. Government agencies at the local or regional level can play two important roles in this respect. First, they can act as moderators, mediators, and facilitators, i.e. provided they have competence and credibility they may play a crucial role in overcoming mistrust among firms. Second, they may cover part of the transaction costs any co-operative venture incurs. In this respect, the justification is pretty much the same as in terms of government support for R&D. In a microeconomic perspective the costs of co-operation will often be substantial whereas the benefits are hypothetical, and the appropriability may appear dubious. Therefore, firms will tend to underinvest in co-operation.

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