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Dr Gift Mugano
Small and medium scale enterprises (SMEs) worldwide play a key role in economic growth and equitable development. The contribution of SMEs to employment generation, poverty reduction and wider distribution of wealth and opportunities represents a major window of opportunity for most developing countries.

However, the potential role of SMEs is often not realised because of a set of problems commonly related to size.

Individual SMEs experience difficulties in achieving economies of scale in the purchase of such inputs as equipment, raw materials, finance and consulting services and are often unable to take advantage of market opportunities that require large production quantities, homogeneous standards and regular supply.

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.

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

Therefore, closer co-operation among SMEs as well as between SMEs and the institutions in their surrounding environment holds the key to overcoming them.

Evidence from developing and developed countries shows that cooperative relations and joint action are more likely when enterprises operate in proximity and share business interests such as markets for products, infrastructure needs or challenging external competition.

Within such groups, or clusters, enterprises’ joint initiatives are stronger, because of the critical mass of interested parties, more cost-effective due to shared fixed costs and easier to coordinate, with proximity fostering mutual knowledge and trust.

Clusters are defined as sectoral and geographical concentrations of enterprises that produce and sell a range of related or complementary products and, thus, face common challenges and opportunities.

These concentrations can give rise to external economies such as emergence of specialised suppliers of raw materials and components or growth of a pool of sector-specific skills and foster development of specialised services in technical, managerial and financial matters.

The establishment of SME clusters is a global phenomenon. Vibrant industrial clusters are well defined in the United States of America, Italy, Spain, United Kingdom, Denmark, Norway, New Zealand, Pakistan, India, etc.

In the United States, in particular, the State and local governments had prominent roles in the establishment of clusters. In several instances, State or local governments created a process that has been taken up by the private sector.

In Arizona, for example, a commission set up by the local Governor initiated a process of identifying clusters in the state at local universities and bringing together relevant actors from the private sector.

Cluster organisations were then formed to assess and address the constraints and opportunities facing individual clusters.

These organisations encompassed members from a specific set of industries, suppliers, customers, consultants, and universities.

Although seed funding came from the Government, the subsequent growth and development of the cluster organisations has largely been led and funded by the private sector.

Still in the USA, California, New York, Minnesota, Oklahoma, Oregon and several other places had similar initiatives have been taken up by local governments and industry groups.

In Italy, the typical practice has been for regional or local governments to work with industry associations and local organisations such as financial institutions, research centres, and universities.

Several regional governments, such as those in Emilia-Romagna, Lombardy, Tuscany, and others created departments or key individuals who are devoted to cluster development. Like in the USA, Local universities, research institutes, service centres, and financial bodies contribute to the process.

These actors have also been instrumental in the founding and development of specific organisations that work to identify and overcome the problems and constraints the clusters face.

Lumetel, a cluster organisation for metalworking in Lumezzane, for example, was started by a local government in conjunction with a regional bank.

As a result of these efforts, Italy established cluster sectors which are diverse such as textiles, leather, jewellery, optical frames and others which are very instrumental in driving exports.

In Spain, cluster initiatives have tended to start at the regional level. In the most prominent example, Catalonia, the regional government has worked with a local consulting company to assess the opportunities and threats faced by local clusters and to develop strategies to improve the clusters’ competitive positions.

Extensive research process was used to assess the competitive position of the Catalonian cluster.

This was followed by study trips which were organised to introduce mangers from the cluster to best practice elsewhere, and efforts are made to bring the participants together into a cluster-based organisation capable of collective action.

Supporting services and institutions, such as research institutes, universities, and regional financial bodies are brought in when necessary.

The United Kingdom, New Zealand, India, Denmark and Norway used the same strategies used by USA, Italy and Spain in developing their respective clusters. Zimbabwe in 2011 in its industrial policy mooted the establishment of industrial clusters aimed at strengthening the SMEs in order to raise competitiveness. Sadly, this has remained a pipeline dream.

At this juncture, taking into account the fact that our economic has redefined itself into an SME and informal sector economy, it is therefore imperative to revisit the need for development of SMEs clusters and unpack policy measures required for their successful establishment taking notes from international experience.

From this end, basing on global experiences, the establishment of the SMEs cluster requires a multi stakeholder approach.

Hence, Government should facilitate local partnerships involving private actors, developmental partners, non-governmental organisations (NGOs) and different levels and sectors of government so as to arrive at agreements on individual responsibilities (for example in co-locating complementary public investments with related concentrations of private investment).

The private sector must lead in cluster-development initiatives, with the public sector playing a catalytic role.

The process of development of SMEs clusters requires a gradual approach with different or diversified portfolios of clusters in order to minimise risk.

Normally, it is prudent to start with low risk and early return clusters. It is important to generate small but evident gains through collaborative effort at the outset. As success develops, higher risk/longer term activities can be introduced.

In the same vein, it is important to target real market failures. In this case, Government should identify and comprehend how, for example, under provision of public goods such as critical non rivalry and non excludable infrastructure and co-ordination failure constrain a particular cluster can point toward fruitful areas of public private or private-private co-operation.

Participating stakeholders must seek to lock in benefits of existing or embryonic clusters by:

Facilitating access to accommodation for SMEs. Naturally, like in Zimbabwe case, this is most difficulties small firms face, and particularly start-ups, in gaining access to industrial real estate). This facilitation can take different forms, but the public role should essentially seek to leverage and reduce risk for corporate property investments in industrial real estate;

Promoting the establishment of suppliers associations and learning circles, and other forms of collaborative undertaking that are made possible by virtue of physical proximity among firms (such as mutual credit guarantee associations);

Allowing specialisation and local adaptation in university-industry linkages including experimentation in incentive structures that can encourage local linkages to industry; this critical element for Zimbabwe as universities are revamping their curriculums;

Ensuring effective technical support and information services. Markets may under-supply some business services and certain types of information, especially to small firms. Policy should address market failures where these are significant and aim to induce private provision as early as possible;

Ensuring access to specialised infrastructure, communications and transport;

Focusing on investment promotion efforts on linkages within a cluster considered weakest (such as gaps in the chain of local suppliers);

Supporting initiatives at sub-national and international levels to promote co-operation between SMEs within transnational innovative clusters;

Evaluating the initiative throughout, not just at the end of the process. In this way, evaluation can help measure progress, identify midcourse corrections if necessary, and focus efforts on overcoming problems;

Creating a mechanism for terminating an initiative if it fails to produce results, as not all programmes can be successful.

The establishment of SMEs clusters is a necessary evil which requires extensive commitment and collaboration with various stakeholders like civil society, developmental partners, private sector, research institutions, think tanks, universities and various arms of Government. The process must be supported by strong institutions, extensive research, consultation and dialogue.

Dr Mugano is an Economic Advisor, Author and Expert in Trade and Competitiveness. He is a Research Associate at Nelson Mandela Metropolitan University (SA). Feedback: Email: [email protected], Cell: +263 772 541 209.