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Martin Kadzere : Senior Business Reporter

THE development of Small to Medium-sized Enterprise clusters could help enhance their competitiveness by integrating them into the national, regional and global economies. The cluster approach entails the identification and grouping of SMEs in a locality involved in similar business activities such as horticulture or dairy into a single cluster. Capacity building and credit programmes are then tailored to the specific needs of the cluster.Economists say the SMEs cluster approach is one of the key strategies that could be deployed as part of a comprehensive set of policy interventions to drive their competitiveness.

“Concentration of SMEs focused on similar activities will certainly make them more competitive while at the same time help formalise their activities,” economist Dr Gift Mugano said.

Analysts say with the recent structural shift in the economy, which gave rise to a large and expanding SME sector, the cluster model has become a necessity as it helps small to medium enterprises build critical mass needed in production, financing and marketing.

They argued it would be much easier for financial institutions to arrange funding facilities for such business clusters.

“They can also have access to profitable markets, say for example, aggregate their products and sell them to export markets as large parcels,” said one economic analyst with a local financial advisory company.

Dr Mugano said Zimbabwe’s SMEs are estimated at 5,7 million alloperating individually, thereby constraining their potential in terms of expanding. As such, there is need to identify clusters that could be nurtured throughout all the districts of the country.

He noted by operating in “isolation” the SMEs were experiencing difficulties in achieving economies of scale in procurement of equipment, raw materials as well as raising capital.

As such, they are often unable to take advantage of market opportunities that require large production quantities, homogenous standards and regular supply, Dr Mugano added.

“Small size is also a constraint on internalisation of functions such as training, market intelligence, logistics and technology innovation, while preventing the achievement of a specialised and effective internal division of labour,” said Dr Mugano.

“Naturally, because of their narrow profit margins, small-scale entrepreneurs in developing countries are often unable to introduce innovative improvements to products and processes and this limits the scope of firms to take advantage of new market opportunities.

“On a closer observation, however, it is clear that many of these obstacles are the result of SME’s isolation rather than their size.

“Therefore, closer cooperation among SMEs as well as between SMEs and the institutions in their surrounding environment holds the key to overcoming them.”

The majority of small businesses remain excluded from the financial system. As a result they are unable to secure financing for production and adoption of modern technology.

The Ministry of Small and Medium Enterprises and Co-operative Development is working on formalisation of the informal sector and review of cooperative development policy.

Analysts say the two policies were complimentary. The development of a co-operative policy will help in strengthening the case for SMEs cluster so as formalisation strategy particularly in areas of operating space where SMEs can be clustered.

Clusters are very common in Israel and are known as “kibbutz.” Traditionally, they largely focused on agriculture. But farming has been partly supplanted by other economic activities, including industrial plants and high-tech enterprises.

In 2010, there were 270 kibbutz in Israel. Their factories and farms accounted for 9 percent of Israel’s industrial output worth $8 billion and 40 percent of its agricultural output, worth over $1,7 billion. Some Kibbutz had also developed high-tech industries.

Bangladesh has successfully used the cluster model in the development of the SMEs and informal businesses.

Reserve Bank of Zimbabwe governor Dr John Mangudya has called on banks to adopt a cluster-based approach for financing small to medium enterprises. “This is critical in ensuring that the diverse funding needs of the SMEs are attended to in our collective endeavor to reshape the future economy of Zimbabwe in the path towards sustainable growth,” said Dr Mangudya.

“The SMEDCO (the Small to Medium Enterprises Development Corporation) will be required to link the identified clusters with financial institutions for their funding and advisory requirements.”

Dr Mangudya said SMEDCO, banking institutions and microfinance institutions would be required to arrange training on entrepreneurship development where the central bank would play a supporting role. He added the institutions would also be required to incorporate the implementation status of such programs in their annual reports.

Dr Mangudya said the banks and micro-finance institutions should explore the group lending approach particularly in the rural areas where the sense of belonging to the community is an important factor to the performance of a borrowing member in a group.

Such a model has been instrumental in rural development in some developing countries.