Facing the new competition: Business associations in ... · Facing the new competition: Business...

Discussion papers

DP/103 /1999

Business

and

Soc iet y

Program me

P.O. Box 6CH-121 1 Geneva 2 2Tel.004122/7996128Fax. 004122/7998542E-mail. [email protected]

Facing the new competition:Business associationsin developing countryindustrial clusters

Khalid Nadvi

Institut e of Development St udies, Brighton

Facing the new competition: Business associations

in developing countryindustrial clusters

Khalid Nadvi

Int ernat ional Inst itute for Labour Studies Geneva

Copyright © International Labour Organization (International Institute for Labour Studies)

1999

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ISBN ... . . . .. . . . . . . . . . .

First published 1999

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TABLE OF CONTENTS

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

I. Business associations and collective efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

II. Overview of the cluster case studies and the new competition . . . . . . . . . . . . . . . . . . . . . . . . 7II.1 The clusters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7II.2 The new competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

III. Business associations and firm upgrading: Is there a relationship? . . . . . . . . . . . . . . . . . . . 9

IV . Case study analysis: New competition and the role of business associations in the SinosValley and Sialkot clusters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12IV.1 Associations and supply chain upgr ading in Brazi l’s Sinos Val ley shoe cluster . . . . . . . 12IV.2 Pakistan – Quality assurance pressures and business association init iatives . . . . . . . . . . 17

V. Conclusions and further questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

1 A preliminary version of this paper was presented at the International Workshop on Employers’ Organizations,Development and Jobs, International Institute for Labour Studies, Geneva, 21-22 April 1999.

2 See, for example, Best, 1990; Sengenberger and Pyke, 1991; Schmitz, 1995b; Harrison, 1992; Porter, 1998.3 For example, Humphrey and Schmitz, 1996; UNIDO, 1997; UNCTAD, 1998. The ILO and the International

Institute for Labour Studies have al so been particularly act ive in convening conferences and publishing policy-oriented research on industrial clusters; see, for example, Pyke et. al., 1990, Pyke and Sengenberger, 1992, Nadvi,1992, Cossen tino et. al., 1996.

4 See Brusco, 1982; Piore and Sabel, 1984; Best, 1990; the col lection of papers in Goodman and Bamford (eds.),1989, Pyke et. al., (eds.) 1990, and Pyke and Sengenberger (eds.), 1992; Saxenian, 1994; Scott, 1987, 1996; Porter,1998.

5 See the collection of papers in Rasmussen et. al., 1992, Pedersen et. al., 1994, van Dijk and Rabellotti, 1997,and the review by Nadvi and Schmitz, 1994.

6 See Altenberg and Meyer-Stamer, 1999 (forthcoming) for a useful taxonomy of industrial cluster types.

Introduction1

This paper reviews evidence on the role of local business associations in assisting industrialclusters in the developing world face new competitive pressures. It draws on studies of small andmedium enterprise (SME) dominated industrial clusters in Brazil, India, Mexico and Pakistan. Theproposit ion that the paper explores is that cooperation through the local business associations andsupport extended by such institutions has been central to the ability of such clusters to upgrade andface the new challenges posed by liberalization and globalization in the 1990s.

The argument that spatia l and sectoral clustering can generate potential benefits for localproducers, especially SMEs, is well rehearsed.2 In addition to the obvious advantages that arisefrom the physical agglomeration of a number of firms engaged in a similar activity, advantages thatinclude external economies and knowledge spillovers (Stewart and Ghani, 1991; Krugman, 1995;Audretsch and Feldman, 1996), clustering enhances possibilities for local joint action. It is thisprospect that has particular ly excited researchers and policy makers concerned with promotingprivate entrepreneurship and SME development.3

The initial interest in industrial clusters arose from the empirical experience of sector specificindustrial agglomerations in parts of Western Europe and the United States.4 These findingsmotivated a range of studies that sought evidence of industrial clusters in the developing world.5 Theexperience from the developing world has proven to be extremely heterogeneous.6 There aresurvivalist clusters, such as those observed in parts of sub-Saharan Africa (see Pedersen et. al.,1994; McCormick, 1998), and relatively mature clusters that have managed to enter and competein international, quality-conscious, fashion-driven and price-sensitive markets (Schmitz, 1995a;Nadvi, 1999a). What is particularly exciting in this line of research is the suggestion that (despitethe unevenness) developing country small firms need not necessarily be relegated to the informalsector, but can grow and compete in world markets alongside larger firms.

The proposit ion has been that the success of developing country industrial clusters lies in theconcept of collective efficiency, namely the external economy and joint action benefits generated byclustering (Schmitz, 1995b). The focus of much of the recent study of SME clusters in thedeveloping world has been on the role of local joint action – cooperation both bilaterally and for thecluster as a whole – in explaining and enhancing competitiveness (Schmitz, 1995a; Rabellotti, 1997;

2 Discussion Papers Ser ies No. 103

7 See, for example, Best, 1990, Brusco, 1992, Schmitz and Musyck, 1993, Rabellotti, 1997, Pyke andSengenberger, 1992, and Pyke, 1994.

Nadvi, 1999b). In this regard, the European evidence has highlighted the importance of localcollective institutions such as business associations and producer, or “real”, services institutes.7

Local business associations can represent the collective interests of the cluster. They can alsoprovide a range of key services to local firms and undertake the function of regulating localcompetition and mobilizing cooperation. Brusco (1992) emphasized the importance of collectiveservices provided by local business associations in the development of SME-dominated Italianindustrial districts. Best (1990) also drew from the Italian experience to highlight the influence ofassociations such as the national confederation of artisans (CNA) in providing local producers witha wide range of managerial, financial, business and technical services. Such examples are notrestricted to Italy. For instance, Schmitz (1992) cites evidence of sectoral associations in the BadenWürttemberg industrial district of Germany in delivering technical and legal advice as well as marketintelligence to local SMEs. More recently, Albaladejo (1998) has outlined the positive role playedby sector specific business and technical associations in the development of industrial clusters in theSpanish region of Valencia. In many of these cases support services developed by local businessassociations were developed in conjunction with local or regional government (Best, 1992; Schmitzand Musyck, 1993).

As these studies have shown, business associations can have a positive impact on the developmentof industrial clusters. Doner and Schneider (1998) detail the various ways by which businessassociations can potentially contribute to economic performance, supporting members with a rangeof “market-complementing” and “market-enhancing” functions. These include: horizontalcoordination amongst producers; vertical coordination of upstream and downstream linkages; thesetting and enforcement of product standards; and the provision of information and technical training(Doner and Schneider, 1998, p. 11). They also underline the need to explore further the nature oforganization within business associations. In this regard, Moore and Hamalai (1993) call for caution.They claim that business associations, especially at the national level, can in fact generate politicalconflict and lead to a waste of resources as associations compete with each other, rather thanstimulate private enterprise and firm cooperation.

Despite the prudence advocated by Moore and Hamalai, interest in business associations, and intheir potential role in accelerating economic development, continues to grow. This is especially soin the cluster context. According to Porter business associations can “enhance clustercompetitiveness…(and)… institutionalize collective linkages. In addition to providing a neutralforum for identifying common needs, constraints and opportunities, associations can serve as focalpoints for efforts to address them” (Porter, 1998, p. 258). However, while Doner and Schneider(1998) provide an exhaustive review of business associations in developing countries, evidence ofbusiness associations from developing country industrial clusters is at best sketchy. We know thatbusiness associations exist and matter in this context. In our earlier review of industrial clusters indeveloping countries (Nadvi and Schmitz, 1994) we cite examples of business associations thatundertake significant tasks, both in lobbying government in the inter ests of their members and inproviding a range of producer, technical and advisory services to clustered firms.

Nevertheless, our understanding of how business associations function in developing countryindustrial clusters remains relatively weak. Moreover, what we do know is largely of a static nature.Dynamic concerns remain. For example, how do associations help clusters develop? Can localassociations promote cluster growth? What roles can associations have in assisting clusteredproducers face new competitive challenges? What kinds of associations are best suited to assist thedevelopment of such clusters? How do associations that represent the interests of industrial clusters

Facing the new compet it ion: Business associations in developing country indust rial clusters 3

change as the cluster itself develops? These are some of the questions that this paper seeks toaddress, or at least highlight. As the research focus on industrial clusters moves away from staticdescriptions of clusters and their attributes to an understanding of how clustered producers upgradeand grow, the critical concern is to understand the role business associat ions play in a dynamiccontext in developing country industrial clusters.

The search for what Sengenberger and Pyke (1991) refer to as a “high road” growth trajectory,generating sustainable jobs and incomes as well as moving local producers further up the productvalue chain, has become more central to both the policy and academic community. In addition, tothis concern for understanding how sustainable growth trajectories can be achieved, it is alsoapparent that clusters are not isolated productive spaces. The recent work on value chains (Gereffi,1995) has underlined the importance of exploring relationships that clustered enterprises have notonly with local agents but also with external bodies up and down the product value chain. Thisimplies that the process of upgrading required for sustainable growth trajector ies for the cluster, asone form of industr ial organization, requires upgrading at various points within the value chain. Rawmaterials need to be linked to production, production to design, and design to marketing. Achievingsustainable growth using the value chain framework is, as Kaplinsky (1998) has pointed out, anissue of raising value-added, or rents, at each point of the chain. This calls for greater awareness ofthe links within the chain in order to encourage joint action within and between the various elementsof a value chain.

Understanding how joint action can be brought about within clusters, and exploring the role ofexternal and local institutions in facilitating joint action, has been a core thread in our own on-goingresearch at the IDS (see Schmitz and Nadvi, 1999 forthcoming). In addition, one part of this agendais making sense of those cases where joint action does not occur, and answering why there iscollective failure within clusters. In as much as business associations can have a function inpromoting local cooperation and with it industria l upgrading, they can also be a factor behind thelack, or even breakdown, of cooperation. Distinguishing between success and failure, of howbusiness associations can become enablers of industrial upgrading in the cluster context and howthey can impede such processes is important both for our broad understanding of businessassociations as well as for policy prescriptive purposes.

In analysing the role that business associations have played in developing country industrialclusters this papers draws directly on new empirical evidence from a number of cluster case studies.These studies use both qualitative and quantitative techniques to analyse the role of localassociations in assisting local clustered enterprises face new competitive challenges. The studies aredynamic in nature and provide some indication of the ways in which clusters and associations havedeveloped. The paper does not, however, deal with all the questions ra ised above. In fact, reflectingthe rather under-researched nature of this subject, it throws up new questions that call for further,more focused, study.

The paper is structured as follows. The following section discusses the joint action that businessassociations can br ing about in industria l clusters. This is framed within the concept of collectiveefficiency, a model that has now been widely accepted as capturing the potential gains of clustering.Section 3 briefly describes the four clusters studied, the types of business associations present withinthem, and the nature of new competition that they have faced during the 1990s. Section 4 usesquantita tive data to evaluate the proposition put forward that increasing joint action through thebusiness associations has been a core aspect of the response of these clusters to the new competition.The findings indicate that in each of these clusters there has been an increase in cooperation throughlocal business associations. Moreover, there is a posit ive and statistically significant associationbetween improvements in firm performance and increases in joint action through businessassociations in a number of these case studies. Section 5 turns to qualitative case study data fromtwo of the clusters to help throw further light on this. This provides a more nuanced perspective of


the ways in which joint action through associations has led to evidence of both collective efficiencyand collective failure. The concluding section identifies the gaps that remain in our understandingof how associations can motivate a sustainable growth trajectory for developing country industrialclusters, and raises questions for further research.

I. Business associations and collective efficiency

As numerous observers have pointed out, business associations are abundant, extremely variedin terms of their composition, scale and organization, and undertake a wide range of tasks (Mooreand Hamalai, 1993; Doner and Schneider, 1998). There are “peak” associations, that bring togetherall business bodies, sector-specific and sub-sectoral associations, regional associations as well aslocal chambers of commerce. Many of these bodies are well-staffed and undertake a range ofactivities. Many others are small in scale and scope, and quite a few exist on paper only. In additionto providing potential benefits to their members, associations can, as Moore and Hamalai (1993)observe, act as political platforms for their organizers and office bearers.

Given this wide spectrum it is useful to specify the associations that constitute the focus of thisstudy. Industrial clusters are defined as being sector specialized and geographically concentrated.Business associations, as understood in this context, are thus also either local or sector specific.Usually they are understood as being both. That is to say they have a significant local presence andthey represent the concerns of the specific industria l sector in which the cluster is engaged. Theemphasis on the local is especially important in that the association is considered as the localcollective body articulating local collective interests.

Within this framework, however, local business associations can be both large and small. Theymay according to Moore and Hamalai (1993, p. 1897) “perform a wide range of functions including:political voice; provision of concrete business services such as seminars, information and libraryservices, exhibitions and trade fairs, foreign contacts, contract adjudication, specialized legal adviceand assistance, and certification of documentation and of product quality; an arena for social contactbetween members; an arena and “cover” for cartel arrangements; …and participation in the framingand/or implementation of public policy, including the performance of regulatory duties”.

In addition to the delivery of such services, what makes local business associations of particularinterest for the industrial cluster is that they represent a key forum for local joint action. We haveargued that collective efficiency provides the basis for cluster competitiveness, and that collectiveefficiency gains are likely to be raised where local firms enter into joint action (Schmitz, 1995b;Nadvi, 1999b; Schmitz and Nadvi, 1999). This raises questions about what kinds of joint actionbusiness associations can engender, the benefits of such collaboration and how such collaborationcan be brought about.

Moreover, such joint action needs to be assessed in a dynamic context to understand howassociations can assist clusters face new competitive challenges. New competition, including thepressures that have arisen for local producers from the connected processes of liberaliza tion andglobalizat ion, require a “switch in gear” in terms of the ways producers are organized. This, it isargued, calls for greater local cooperation. The proposition examined in this paper is that increasedjoint action through business associations is required for by SME-dominated developing countryindustrial clusters to face the challenges of the new competition.

Joint action through the business association is one aspect of the potential for local cooperationthat clustering provides. This calls for deliberate and active cooperation at a multilateral levelbetween local agents engaged in similar activities. Elsewhere I have defined this as one element ofthe “active” dimension of collective efficiency in contrast to the passive gains associated withexternal economies that accrue to local agents purely by virtue of their location within the cluster


8 See for example, Becattini, 1990; Trigilia, 1990; Grabher, 1993; Nadvi, 1999a.

(Nadvi, 1999b). Joint action through the association, such as the formulation of local standards thatresult in a reputation for quality for the locale, can also lead to externality gains for other agentswithin the cluster. These “externalities of joint action” can often be a core benefit for the cluster asa whole.

Promoting joint action through the associa tion, however, may be difficult given that in manyclusters local producers are often also local rivals. While local competition can, it is argued,promote local development (Porter, 1990), the possibilities of external economies and free rider gainscan also discourage cooperation between local agents. A key conceptual issue for understanding thedynamics of clusters has been explaining how the potentially conflicting pulls of local competitionand cooperation are mediated. Some studies have suggested that social ties can be a critical elementin ensuring effective coordination and reducing the transaction costs associated with inter-firm tiesin clusters.8

Analysing the specifics of social influences on economic coordination in clusters lies outside thescope of this paper. Nevertheless, it needs to be noted that local associations within the context ofindustrial clusters not only provide a potential arena for collective coordination and localcooperation, but also have a social dimension. At the very least associations can provide a socialforum, allowing local producers to meet and collectively discuss their problems. Moreover, thelegitimacy and effectiveness of local associations in providing real services to their members andsuccessfully undertaking regulatory functions can be influenced by the dynamics of local social tiesand affective relationships. Thus, the business association, insofar as it represents an element of thelandscape of an industrial cluster, is both an aspect of local “institutional thickness” and, inGranovetter’s sense, a socially embedded institution.

The functions undertaken by local business associations within the cluster context can be broadlycategorized under the following types of activities:

• coordination and regulation;• representa tion of the cluster’s interests to var ious levels of government; and• provision of “real” services.

These are in large part interconnected. The effective delivery of services to local members andthe representation of the cluster’s interests to the state all call for coordination within the cluster andthrough the association. Coordination by the association can be both at the horizontal level, betweenlocal producers, and at the vertical level in terms of backward and forward links that local producershave within their supply chains. Through horizontal coordination producers can, for example,regulate capacity, ensuring that prices for their products are not allowed to decline due to cluster-wide overproduction. They can also regulate local business practices, determining the boundariesof what may be considered as acceptable local competition. This, however, demands a high level oflocal collaboration. As mentioned earlier, mediating local competition and cooperation can be adifficult task within the cluster. This demands authority and legitimacy for the association withinthe cluster. Such authority can arise from the influence of local social and affective ties. It can alsoemerge through on-going business relations.

Lobbying government has tended to be the most common activity undertaken by associationswithin developing country industrial clusters (Nadvi and Schmitz, 1994). Through lobbyingactivities, associations seek to defend the interests of their members, to influence the policy makingprocess to the benefit of their cluster by providing informed intervention at various levels ofgovernment. This function also provides an intermediary between the state and local producers.


Thus, at a more mundane level, local associations can be institutions for local producers to negotiateon their behalf with local government agencies on individual problems.

Lobbying has often been viewed as a rent-seeking objective wherein business associationsprimarily seek fiscal and trade benefits from the state for their members. In an era of tradeprotection, lobbying functions possibly helped strengthen the consensus for protectionist measuresfor local producers. Such measures also privileged particular associations, and their office bearers,as trade bodies became conduits for lucrative trade licenses and managers of restrictive quotas(Moore and Hamalai, 1993).

Trade liberalization and the new competitive pressures exhibited in the global economy have,however, raised new pressures on business associations. These pressures require associations toextend their activity beyond lobbying, as well as focus more strategically within their lobbyingfunction. Business associations are thus no longer simply rent seeking institutions, but potentiallyalso rent-generating institutions for their members. That is not to suggest that lobbying functions areno longer important. On the contrary, they may continue to be significant. Nevertheless, a largerrange of service provisions, information sourcing, and strategic networking by associations thatallows local firms to develop capabilities as well as link themselves to key external agents thatprovide access to higher value markets may become increasingly more critical.

Associations can play a more significant function in assisting local clustered producers to easetheir internal constraints. In addition, this more interventionist and supportive role is also likely toinvolve a greater understanding of market drivers that the cluster faces and developing responses thathelp the cluster as a whole to compete. In this context, there is a range of enabling activities thatassociations can deliver. These include the provision of:

• “real” services such as technical and managerial advice, information services that help linklocal producers with distant markets, including data on markets, prices, competitors, tradepolicies and as well as general trade information;

• technology support that help local producers upgrade, both in process and producttechnologies as well as moving up the value chain into areas such as design and research anddevelopment;

• the linking of local producers to local and global trade fairs that provide exposure to localfirms and brings external buyers to the cluster;

• benchmarking services that help local producers compare their performance with global bestpractice;

• technical assistance to meet new global standards and the development of local qualitylabeling.

Not all business associations are positioned to provide such services. In addition, exploring thepossibilities of associations to enter into such activities requires fur ther understanding of howassociations are organized within the cluster. This raises questions on how the associations function,the nature of their leadership, how representative are they, who elects the leadership, what is thebasis of their financing arrangements etc? It also raises questions of their capacity to provide suchservices. Do they have a secretariat with skilled, experienced and professional expertise? Is thesecretariat sufficiently empowered? Can it effectively regulate the cluster and dissuade destructivelocal competition?

Business associations are, by their very nature, not autonomous from the membership that theyrepresent. Inasmuch as they are embedded in the local milieu of their members, their effectivenessas a body is a reflection of the broader capabilities of the cluster. That is to say, in an environmentwhere local competition is intense, where the structure of the industry is highly skewed, and wherepractices are such that the cluster as a whole is geared to moving towards a “low road” trajectory,


an association is unlikely to function effectively in promoting joint action and cluster-wideupgrading. Nevertheless, dynamic competitive pressures also imply that associations are dynamicinstitutions. The pressures of the new competition are forcing local clustered producers to upgrade.Under such conditions, associations can change and can potentially play a catalytic role in enablingthe process of industrial upgrading.

In some cases such competitive pressures are directly linked to the process of trade liberalization,opening up formerly protected markets to lower priced imports. In other cases, the competition hasbeen marked by the entry of new and more competitive producers. In still others, the competition hasbeen sparked off by the closure or the loss of former markets. And in some cases this has beendirectly linked to the need to upgrade, to meet global quality standards, new designs or more efficientproduction organization.

Clustered firms need to upgrade in order to compete. The hypothesis in exploring the responseof developing country industrial clusters to new competition has been that greater joint action, bothbi- and multi-lateral, is required. A key aspect of this is the role of local business associations inproviding a collective, cluster-wide, basis for greater local cooperation, and thereby generatingcluster-wide advantages. The association can be a critical instrument in initia ting and fostering thecooperation and upgrading required by clustered firms to continue to compete in a sustainablefashion. However, such forms of cooperation are far from guaranteed, and the joint action they callfor not uncontested.

II. Overview of the cluster case studies and the new compet ition

This paper focuses on evidence from four cluster case studies, each of which has faced aqualitatively more competitive environment during the 1990s. This has raised doubts on their abilityto grow. A key aspect in analysing how the clusters have responded to the new competition has beenan examination of the role of local trade associations and other local self-help and supportinstitutions in the response to the new competition. The case studies are of the shoe manufacturingclusters of Brazil’s Sinos Valley, Guadalajara in Mexico and Agra in India, and the surgicalinstrument cluster of Sialkot in Pakistan.

II.1 The clusters

Small and medium-sized firms dominate these clusters, although there is an increasinglysignificant presence of large firms in each. The Pakistani and Brazilian clusters, in particular, arehighly export-oriented while the Indian and Mexican clusters have begun to make inroads into exportmarkets. In many respects these case studies are considered some of the more remarkable anddynamic examples of industrial clusters in the developing world. They display features observed inthe classic industrial districts of the Third Italy. In addition, each of these clusters has found globalcompetition in the 1990s to be qualitatively more challenging than before, demanding substantialrestructuring and reorganization of production. While the challenges posed are specific to each case,the critical need for collective joint action is common to all. Business associations have been acentral element in accounting for the collective collaboration, or the lack of it.

The clusters do differ in scale. For example, the Brazilian cluster, the largest of the four in termsof sales volume, has exports of over US$ 1 billion annually. In contrast the wholly export-orientedsurgical instrument cluster of Sialkot recorded annual export volumes of over US$ 100 millionduring the mid-1990s.

Nevertheless, each has a critical mass of specialized producers, suppliers and other ancillaryagents. For example, the Sinos Valley cluster in Brazil has over 400 shoe producers and some 1,300


other enterprises which provide raw materials, manufacture components, undertake process-specifictasks, or deliver a varied range of manageria l and export-related services to the local shoe industry(Schmitz, 1995a). Similarly, the shoe cluster of Guadalajara in Mexico has 1,200 enterprises,accounting for 26 per cent of all shoe producers in the country (Rabellotti, 1995). A critical massis also found in the Agra cluster, with “around 5,000 mostly informal small-scale manufacturingunits” employing approximately 60,000 production workers (Knorringa, 1995, p. 49). The Sialkotcluster, for its part, has 300 manufacturers and exporters of surgical instruments, over 1,500 processspecialized sub-contracting workshops, some 200 suppliers of inputs and raw materials and over 500service providers (Nadvi, 1999a).

Most of the clusters have at least one key local trade body. The Surgical InstrumentManufacturers Association (SIMA) represents a ll manufacturers and exporters within the Sialkotcluster, although not the ancillary units or the process subcontractors. In addition, there is the SialkotChamber of Commerce and Industry (the SCCI) which includes all manufacturers and traders withinSialkot. The Guadalajara shoe cluster has two local sector-specific trade bodies. The Camera delCalzado represents some 500 local shoe producers, while APICEJ serves the interests of the shoecomponents sector (Rabellotti, 1995, pp. 156-157). In the Brazilian cluster, business associationsare more specialized, with a wider range of sub-sector specific trade bodies. Thus, in addition to thelocal chamber of industry (ACI) and the shoe manufacturers association (ABICALÇADOS), thereare independent associations for component suppliers (ASSINTECAL), tanners (ABICOURO),leather and shoe machinery manufacturers (ABRAMEQ), and export agents (ABAEX).

The range of services provided by each association differs in each of the case studies, and theirlevel of activity varies. While the functions of each of these associations are broadly similar, and afocus on lobbying of government agencies a common feature, the effectiveness of the associationsare far from uniform. For example, Rabellotti’s 1993 survey of 30 shoe manufacturing firms found“a rather positive evaluation of the activities of the Camera in Guadalajara: 83 per cent of the firmsinterviewed judged the organization of trade fairs, 63 per cent of the lobbying activity, 56 per centthe diffusion of information and 34 per cent the training activity as very good” (Rabellotti, 1995, p.155). However, I observed that the Sialkot cluster’s surgical instrument manufacturers associationwas, according to local producers in 1994, “not felt to be sufficiently proactive in representing thecluster’s collective interests” (Nadvi, 1999b, p. 97).

What is common is that at various points in the evolution of the respective clusters, tradeassociations have played important functions. I explore this, and the distinctions between the varioustrade bodies, further below. The point to note here is that each cluster has within it sector specific,and in some cases sub-sector specific, trade bodies as well as local chambers of industry. In a fewof these clusters these trade bodies are also ostensibly national associations, but they retain thenature of a local institution given the concentration of that sector within the cluster. Some of theseassociations are themselves component members of national apex bodies. However, it is their roleand function as sector and cluster bodies that is of concern.

II.2 The new competition

Before analysing the specific roles of these business associations consider first the challenges thateach of these cluster has faced in recent years. This raises the issue of the specific types of responsescalled for from local producers, and from the cluster as a whole. In the three shoe clusters, variousaspects of trade liberalization have made competition more intense. For the Brazilian cluster,aggressive penetration by lower waged shoe producers from China in their main export market, theUnited States, has resulted in a significant decline in sales. Competing with the Chinese has led toa need for improvements in production organization, with faster delivery schedules and lower stockcosts through just-in-time production. It has also required upgrading, particularly in developing


design capabilities, improving quality and accessing new, higher value added markets that have yetto be targeted by low waged producers. A similar experience is observed in the Mexican shoe clusterwhere the lifting of trade barriers has opened their traditional domestic market to cheap East Asianimports. This has again required both an improvement in product quality and a lowering ofmanufacturing costs. It has also provided an impetus for local producers to consider upgrading andexports.

For the Agra shoe cluster, the 1990s have been marked by the loss of their main and quiteundemanding export market in the former Soviet Union, alongside a rapid rise in consumerexpectations and demand for higher quality and design in the domestic market. Again, these changeshave led to the need for local producers to consider more carefully design and quality concerns andto improve production capabilities. For some elements of the cluster , these changes have spelt doom.For others, particularly those who draw on a capability built on competing in the ever moredemanding local market, opportunities are arising for exports through major European and NorthAmerican retail chains.

The nature of the new competition faced by the Pakistani surgical instrument cluster is somewhatdifferent to the liberalization pressures observed in the Brazilian, Mexican and Indian shoe producingclusters. Since the mid-1990s, the cluster has been confronting pressures to conform tointernationally accepted quality assurance standards in its leading markets in the United States andWestern Europe. Global standards are increasingly gaining importance in international trade(Stephenson, 1997; Maskus, 1997). These are in many ways the new non-tariff barriers. Certainlyfor the Sialkot cluster, failure to conform to such standards has meant that access to key markets isrestricted. Compliance with international quality assurance standards requires greater monitoringof process activities and calls for upgrading of inter-firm linkages in vertical ties. New forms ofmanagerial knowledge and organizational practices are required to successfully meet such standards.The costs to individual SMEs of acquiring such know-how and soft technology can be prohibitive.

The nature of the new competition, while distinct across the four case studies, place similar setsof demand of upgrading in intra-firm organization and in inter-firm relations. They call for greaterjoint action and increased coordination in both horizontal and vertical relations of production. Thenext two sections explore specifically whether such joint action has occurred through the cluster’sbusiness association. They examine the relationship between improved cooperation at the level ofthe associations and overall performance, and in more detail, the actual process of upgrading broughtabout through the intervention of the business association.

III. Business associations and firm upgrading: Is there a relationship?

This section reviews the quantitative evidence from the four cluster studies. It explores the linksbetween cooperation through the business association, firm performance and the ability of the clusterto face new challenges. The findings clearly suggest a relationship between support through theassociation and a cluster’s overall competitiveness. However, the evidence is far from uniform.Moreover, it only provides part of the story. To get a sense of the dynamic processes associated withbusiness associations and the new competition, the next section turns to qualitative evidence fromtwo of the case studies, the Brazilian shoe cluster and the Pakistani surgical instrument cluster.

The research carried out on the four case studies used similar methodologies to explore thehypothesis that greater joint action is necessary to meet the challenges posed by the new competition.For each cluster, the primary researcher had undertaken earlier survey-based investigations atvarious points during the early to mid 1990s (see Rabellotti, 1997; Schmitz, 1995a; Knorringa,1995; Nadvi, 1996). This helped to provide a baseline for the current research. Sample surveysof approximately 60 manufactur ing enterprises, coupled with in-depth interviews with local key

1 0 Discussion Papers Ser ies No. 103

informants, were conducted in each cluster during 1996 and 1997. In each survey, firms weredifferentiated by firm size and a similar set of questions posed. These included, inter alia, questionson whether respondents had increased their use of services provided by the business associationfollowing the onset of new competition pressures, and if so what particular types of services werecalled upon. Alongside questions on changes in inter-firm cooperation in backward and forwardlinkages and in ties with other producers, information was also gathered on changes in firmperformance following the new pressures. For each of these clusters there had been, at the time ofthe survey, at least a three years gap since the particular crisis had emerged. In some cases, thesurveys collected information of changes in performance and cooperation over the past five years.In the Mexican study, Rabellotti compared levels of cooperation and performance in 1996-7 (postonset of new competition) with performance and cooperation reported in an earlier survey conductedin 1993.

In each of the four clusters, the major ity of sampled firms reported that they had experienced arise in the level of joint action with their respective trade associations following the onset of theparticular crisis that their cluster faced. In none of these clusters was there a rela tionship betweenfirm size and increasing cooperation through the trade bodies. That is to say firms of all sizes wereusing local business associations to a greater extent than before. What was also evident from thesefindings was that , in each of the clusters, the association had increased its support in the provisionof information and advice to members and through its lobbying activities with government. It wasapparent, however, that in none of these cases was there any significant increase in assistanceprovided by the association on issues such as labour training or technical and marketing support.This suggested continuing and significant gaps in the delivery of real services by local businessassociations.

In addition to greater cooperation through the trade association, in a number of these clustersthere appeared to be a relationship between increasing joint action through the business associationand improved firm performance in recent years. While the issue of causality remains, these findingsare part icularly notable.

For example, Knorr inga (1999 forthcoming) found that 55 per cent of the 58 firms surveyed inthe Agra shoe cluster displayed strong performance (that is reported increasing output, sales, profitsand employment) during the period 1991 and 1996. He observed that although there was nocorrelation between bilateral horizontal cooperation and strong performance, there was a clear andpositive association between strong performance and use of the business associat ion. Firms withstrong performance were much more likely to have used the association compared with firms withaverage or poor performance. “While 44 per cent of the strong performers make more frequent useof associations, none of the weak performers do so. Moreover, a statistically significant correlationwas found between firms that have increased their participation in business associations, strongperformers, and larger firms” (Knorringa, 1999 forthcoming, p. 17).

The Mexican shoe cluster of Guadalajara provides further evidence of the presence of a linkbetween firm performance and association activity. Rabellotti’s study, based on a survey of 63 shoemanufacturers in the Guadalajara cluster, provides compelling evidence of a statistically significantlink between the Camera del Calzado, the business association for shoe producers, and firmperformance. Moreover, of all the variables “horizontal cooperation through the entrepreneurialassociation is the largest of any regressors” that is statistically significantly related with performance(Rabellotti, 1999 forthcoming, p. 19). In addition, when disaggregating the overall performanceindicator, Rabellott i found that horizontal cooperation through the association was positively andsignificantly associated with improvements in production, sales, profits and employment. On thebasis of this evidence she concludes that “horizontal cooperation with other local shoe firms andthrough the entrepreneurial associat ion as well as vertical cooperation with input suppliers

Facing the new compet it ion: Business associations in developing country indust rial clusters 1 1

contributes significantly to the sample firm’s good performance” (Rabellotti, 1999 forthcoming, p.19).

Similar results emerge from the Brazilian shoe cluster of the Sinos Valley studied by Schmitz.On the basis of the data from the sample survey of 65 shoe manufacturing firms, he found thatenterprises displaying a strong overall performance (in terms of annual sales) were more likely tohave increased cooperation through the business association (in particular the industria l chamber theACI). He concludes that “multilateral cooperation (participation in the Business Association)increased only slightly but showed a significant positive relationship with performance” (Schmitz,1999 forthcoming, p. 21).

Quantitative evidence from the survey of 60 manufacturers in the Pakistani surgical instrumentcluster also indicates that, following the pressures arising from the need to meet international qualityassurance standards, over 70 per cent of the sample had increased their use of the local trade body,the Surgical Instruments Manufacturers Association (Nadvi, 1999 forthcoming, p. 46). However,in contrast to the evidence from the three other case studies, there appeared to be no relationshipbetween overall performance and cooperation through the business association in the Sialkot cluster.Improvements in performance were closely linked with increases in joint action in vertical ties withbuyers and subcontractors, as well as by firm size, but not with the intervention and activities of theassociation.

What is common across the four case studies is that the pressures of the new competition,including trade liberalization and globalization, have resulted in an increase in cooperation throughthe business associations and a greater use of some services provided by the business associations.With the exception of the data from Pakistan, there is also sufficient evidence from the cluster casestudies to suggest the presence of a relationship between firm performance and ties with businessassociations. The Pakistan case is intriguing. As we shall see below the evidence from thequalitative data collected in Sialkot suggests a somewhat different conclusion than that emergingfrom the quantitative analysis. I explain this anomaly as being connected to the issue of timing. Thesurvey questionnaire, which was applied in 1997, asked local respondents to report if cooperationwith the trade association had increased since the emergence of the quality assurance crisis in 1994.It did not capture the sequence and timing of such cooperation. However, the local businessassociation “played a critical role at the time of the crisis through a number of strategicinterventions. Once the required path to address the (international quality assurance) concerns hadbeen adopted, its influence has diminished” (Nadvi, 1999 forthcoming, p. 29).

The quantitative data provides a powerful indication of the importance that business associationscan potentially have for SME clusters. It is clear that, in the face of new competition and underpressure for local clustered enterprises to increase local cooperation, collaboration through thebusiness association improved. Moreover, in three of the four case studies, there is evidence of apositive and significant association between increasing cooperation through the trade body andimprovements in overall performance. In each of these case studies, however, increasing cooperationthrough the association was also linked in with increasing cooperation in other areas of vertical andhorizontal ties. Thus the issue of causality remains. Nevertheless, in one case, that of the Mexicanshoe cluster of Guadalajara, regression analysis clearly indicated that cooperation through thebusiness association was the most significant factor associated with performance.

To conclude, the quantitative data appears to confirm the proposition put forward in this paperthat cooperation through the business associations is required to face competitive pressures. Itsuggests, therefore, that exploring the role of associations in the context of industrial clusters in adynamic process of upgrading is worthwhile. It does not, however, provide us with a clear idea ofthe process by which local business associations have actually supported local clustered SMEs toupgrade and face new competitive challenges. To understand that, and to assess how this wasbrought about within the associations, we need to turn to an analysis of the qualitative data.


9

This section draws extensively on Schmitz, 1998.

IV. Case study analysis: New compet ition and the role of business

associat ions in the Sinos V alley and Sialkot clusters

The findings reported above suggest that local business associations have played a role inassisting SMEs in developing country industrial clusters upgrade in the face of new competition.Moreover, such support appears to have some relationship with improved firm performance. It doesnot, however, provide any insights on how this has been achieved. This requires more in-depth casestudy analysis.

The qualitative data is by its nature uneven across clusters and the material obtained within eachcluster is not entirely uniform. It does, however, give us a better understanding of the relationshipbetween business associations, small firm industrial clusters and the new competition. The bulk ofthe discussion here centres on two of the four cluster case studies, the Brazilian shoe cluster and thePakistani surgical instrument cluster. In part this is because the qualitative evidence from these twocase studies is relatively richer. It is also a reflection of the fact that these two studies bring out quitesharply differing ways in which support from the associations was brought about, or failed toemerge.

The discussion is structured in two parts with each part providing a detailed analysis of the roleplayed by business associations in the two respective case studies. The concluding section drawstogether the common threads emerging from the four case studies.

IV.1 Associat ions and supply chain upgrading in Brazil’s Sinos Valley shoe cluster9

Schmitz (1995a) describes the Sinos Valley as a “super-cluster”. It is remarkable in many ways.In 1993, Brazil exported close to US$ 2 billion worth of shoes, making it the third largest shoeexpor ter in the world (after Italy and South Korea) with over 12 per cent of the world market(Schmitz, 1995a). The vast bulk of these exports came from the Sinos Valley cluster. In addition toshoe producers, the cluster is home to numerous firms engaged in manufacturing leather, producingcomponents, fabricating specialized machinery and providing specialist services for the shoeindustry. The presence of the extensive local vendor and supply network has meant that specia lizedinputs are readily available within the cluster, and that subcontracting is extensive, generatingcluster-wide economies of scale and scope. As mentioned earlier, the cluster is unique among thefour case studies for the specialized nature of local business associations. There are six businessassociations, each representing the distinct interests of specific segments of the shoe value chain, twoprofessional associations, four technology and training institutes devoted to the shoe sector, and atrade fair body (FENAC) geared to the promotion of the cluster’s products both locally and abroad.These features make the Sinos Valley cluster one of the best examples of industrial clusters in thedeveloping world, and one that comes closest to the idealized model of industrial districts that hasemerged from the “Third Italy”.

In recent years, the cluster has been facing pressures from lower-cost shoe manufacturers inChina. As a consequence of Chinese penetration into the US market, with shoe imports into theUnited States from China growing seventeen-fold between 1987 and 1997 (Schmitz, 1998, p. 12),Brazil’s export of shoes has declined substantially. In 1997 Brazil’s shoe exports were 30 per centlower in real terms from their 1993 export levels.


The new competition is forcing Sinos Valley manufacturers to recognize the need to reorganizeproduction and upgrade in order to remain competitive. Such upgrading requires improvements inproduct quality and delivery times as well as seeking out newer, higher value-added markets,particularly in Europe. One aspect of this process of upgrading calls for greater multilateral jointaction through local associations. The findings reported in the previous section indicate thatcooperation through the associations has increased and that there indications of a statisticallysignificant relationship between joint action through the business association and improvements infirm performance in recent years.

A closer and more detailed inspection of the cluster suggests, however, tha t the quantitativefindings do not capture the full story. The cluster, according to Schmitz (1999 forthcoming),continues to struggle in the face of the Chinese competition, and while there are signs that certainaspects of the required upgrading have been incorpora ted by local producers, such changes areuneven and highly differentiated. Moreover, the failure of local business associations to bring abouta collective response to the new competition in part explains the uneven spread of the upgradingprocess in the cluster. Before turning to a discussion of the recent actions of local associations inthe Sinos Valley in recent years, it is helpful to first chart the role business associations havehistorically played in the cluster.

The shoe economy of Sinos Valley has traditionally been well represented by a range of tradebodies. Reflecting the specialized supplier networks locally, the cluster has a number of businessassociations, each representing the specific interests of shoe producers as well as various types ofsuppliers within the local shoe product chain. Historically, as Schmitz notes, business associationsplayed a key part in the cluster’s development, facilitating the building of trading links between localproducers and global and local shoe traders. Entry into international markets by Sinos Valleyproducers began in earnest during the mid-1960s. This process was initiated by the intervention ofthe cluster’s “umbrella” association, the Business Association of Novo Hamburgo (ACI-NH), andits collaboration with the local trade fair organization FENAC. With ACI, “FENAC played a majorrole in the late 1960s/early 1970s in bringing foreign buyers to the Sinos Valley and taking localmanufacturers to fairs abroad” (Schmitz, 1995a, p. 19). This exchange helped the development ofexport networks that linked local producers to global markets. ACI and FENAC also assisted localproducers in attracting public sector support, including export incentives, and cemented closer tiesbetween the cluster and the federal and regional levels of government. At this stage of the cluster’sdevelopment, the ACI continued to represent the legitimate overarching trade body for the SinosValley. According to Schmitz, it collected and compiled census data on the cluster for the use oflocal firms, as well as on local and export markets. Such information, alongside the ACI’sinvolvement in trade fairs, provided local producers with key points of information on markets aswell as of local production and helped the formation of trade ties that allowed Sinos Valley’s shoeindustry to produce for distant markets.

As the cluster grew, with rapidly expanding levels of exports, the specific and often conflictinginterests of various components of the local shoe economy became more apparent. A number of newassociations emerged representing the specific interests of local tanners, component producers,machinery suppliers, export agents and large shoe producers. While cluster-wide concerns werebeing replaced by sub-sector interests the pressures of the new competition intensified. The growingfragmentation within the cluster prompted a process of “collective failure” in the face of the newdemands. Institutional joint action has taken place, particular ly in some of the sub-sectors, howeverconflicts between specific sub-sector associations have effectively weakened cluster-wide upgrading.

The search for a collective response to the new competitive pressures posed by the Chinesemanufacturers, and the need to upgrade, has been a core aspect of the Sinos Valley cluster’sdevelopment during the 1990s. Attempts to bring together the var ious sub-sector associations underan umbrella organization, the Industrial Chamber, was attempted in 1991 and failed (Schmitz,


1998). The Federal government initiated an upgrading programme (the Quality and ProductivityProgramme) in 1992, calling for the active collaboration of all the various sectoral bodies within theValley. This initiative also failed to take off.

A more ambitious initiative, coming from the Association of Shoe Producers (ABICALÇADOS)itself, appeared to mobilize the collective will required to br ing about cluster wide upgrading.ABICALÇADOS organized a seminar on “Partnership in the Footwear Supply Chain” with otherleading sub-sector associations in the cluster. This seminar, reports Schmitz, was well attended andbrought together most of the leading industrialists within the cluster. It led to the formulation of a“Shoes for Brazil Programme” in 1994.

This initiative aimed to strengthen links within the footwear supply chain in the Sinos Valleythrough greater vert ical cooperation, was “formally endorsed and actively supported by all therelevant associations. It proceeded by setting up six working groups each with a brief to diagnose,make proposals for action in specific areas such as marketing abroad, marketing in Brazil,reorganization within the firm level, relationships within the supply chain” (Schmitz, 1998, p. 34).As Schmitz observes, the key development here was that the search for a response was a collectiveone. The reports that emanated from the various working groups “were the joint product of groupswhich consisted of shoe manufacturers, suppliers, association officials and consultants from theuniversity. Precisely because the main stakeholders participated in the diagnosis and prescriptionthere was a good basis for proceeding to the next stage of implementing some of the ideas putforward” (Schmitz, 1998, p. 35).

Despite the initial momentum and enthusiasm generated to seek a collective response that builton collaboration between the various elements of the cluster’s supply chain, the programme faltered.It was later revived in 1996 on the impetus of the component manufacturers association(ASSINTECAL) but once again failed to take off. What factor, or set of factors, explain the failureof this joint action initiative, mobilized by an association and articulated through collaborationbetween the sector’s various associations, and aimed at cluster-wide supply chain upgrading?

Schmitz (1998) argues that one key element in the decline of the supply chain upgrading initiativewas the inability of the State to intervene and mediate between the conflicting interests of specificelements of the shoe sector supply chain. Had this been done, the prospects for upgrading for thesector, and the cluster as a whole, would have been enhanced. Underlying the need for externalmediation, however, is the fact that the conflict between the cluster’s various sub-sector trade bodiesreflected the cluster’s increasing internal differentiation. Connected to this, the distinct objectivesfollowed by distinct types of associations were highlighted. Schmitz suggests that the two keyassociations engaged in the supply chain upgrading programme, ASSINTECAL andABICALÇADOS, operate with different “mental models” that govern their behaviour. Bothorganizations seek to fur ther the benefits of their members. However, while ASSINTECAL viewsits members’, namely suppliers and component producers, interests as being intrinsically tied to thecollective development of the cluster as a whole; ABICALÇADOS, in contrast, no longer considersits members welfare as being wholly associated with the development of the cluster.

As Schmitz’s study points out, the Sinos Valley cluster is highly differentiated, both by theextensive range of shoe-related activities undertaken locally and by firm size. Amongst shoemanufacturers, differentiation by firm size is part icularly acute. Over half the total number of shoeproducers (55 per cent) are small units employing less than 50 persons. Large firms, with a labourforce of 200 persons or more, account for 23 per cent of the total number of firms (Schmitz, 1998,p. 16). More importantly, however, the five largest shoe producers in the cluster had a 25 per centshare of total Brazilian shoe exports in 1996 (Schmitz, 1998, p. 36). In addit ion, they exportedalmost wholly through one US buyer, a company that absorbed 40 per cent of shoe exports from theSinos Valley. With such volumes and levels of concentration, the US buyer and the five largestfirms had a disproportionately large sway within the cluster. As Schmitz notes (1998, p. 36), these


firms were “both admired and feared” locally. They were also able to exercise a great deal of powerand influence in the shoe manufacturer’s association.

The five large firms have traditionally dominated the ABICALÇADOS and, according to Schmitzhave “used their influence more to control the sector than to promote it”. Elections for thepresidency of the shoe manufacturers association have been dominated and effectively controlled bythese large firms. The association’s President has enormous influence over the association’sactivities at any given time, and the ability of these five firms to choose candidates of their choice,or veto others, has meant that the ABICALÇADOS’ policies reflect the objectives of the large firms.

What then are the objectives of these large firms? They themselves were originally smallenterprises as early as the 1970s. Their rapid growth, however, has changed the nature of their tieswith the cluster. As these firms expanded they began to increasingly integrate activities and to relyless on local suppliers. Backward integration led to most of these firms acquiring their owndedicated tanneries, and in some cases even catt le ranches. Their almost complete reliance on theleading US buyer, providing guaranteed markets for their products, limited incentives to promotenew marketing initiat ives and develop their own design capabilities. The declining concern with theSinos Valley cluster and the locational advantages that it offers has led to some of these large firmssetting up new manufactur ing facilities in northern Brazil, an area with no shoe manufacturingcapabilities or shoe-related locational advantage but offering regional fiscal benefits.

In contrast, the component producers’ association, ASSINTECAL, appears to be concerned farmore with promoting the Sinos Valley cluster. This is clear ly in the interests of their members whosewelfare depends on the further development of the cluster. Thus, as Schmitz (1998) shows, usingtable 1, ASSINTECAL differs in many ways from ABICALÇADOS.

ASSINTECAL is a more active body. It provides marketing support to members, particularlythrough the promotion of trade fairs, and services including technology support. Members areassisted in exhibiting at trade fairs, both nationally and abroad, with ASSINTECAL negotiating withfair organizations on behalf of members and with SEBRAE (the Brazilian Small Enterprise Service)to obtain financial support for members to participate in trade fairs. In contrast, ABICALÇADOShas taken no active role in promoting its members participation in trade fairs, resulting as Schmitzobserves in the almost complete absence of Brazilian shoe producers in the leading international shoefairs (Schmitz, 1998, p. 39).

Table 1. Profiles of two Sinos Valley associations, 1997

As sociat ion of Shoe Prod ucers

(ABICALÇADOS)

As sociat ion of Comp onen t M anuf act urers

(ASSINTECAL)

Ambition of leaders Control cluster Promote cluster

Membership Exclusive Inclusive

Main purpose of association Defend Provide services


Marketing support Passive Active

Technology support Ignores technology institutes Partnership with technology institutes

Source: Schmitz, 1998, p. 38.

Thus ASSINTECAL, working with the objective of helping members to innovate and break intonew markets, saw membership increase from 40 firms in 1993-94 to 80 component manufacturersin 1997-98. The relatively lethargic ABICALÇADOS, however, has experienced a decline inmembership, to under 100 of the total of over 400 shoe manufacturers in the cluster. In large part,this failure on the part of the shoe producing association lay with the dominance of a few large firms,whose dependence on the cluster as a whole has declined, and who see little benefit in promoting aprogramme of joint action within the cluster supply chain.

The narrow interests of ABICALÇADOS, and its failure to undertake meaningful joint action toupgrade the cluster’s supply chain is not restr icted to its relationship with ASSINTECAL and the“Shoes for Brazil Programme”. As its leading members have become large integrated units theirindividual objectives have clashed with those of many of the cluster’s raw material and componentsuppliers. Thus, as Schmitz (1998) has shown, instead of supporting actions that improve the qualityof the cluster’s key raw material, leather, the ABICALÇADOS has effectively promoted a strategythat lowers value added. ABICALÇADOS defeated a proposal by the tanner’s association for theimposition of an export tax on semi-processed leather. This proposal was aimed at allowingmanufacturers and exporters of finished leather to compete on a level playing field with exportersof semi-processed leather in the European market (where finished leather faced import tariffs).However, leading members of ABICALÇADOS were also exporters of semi-processed leather andstood to lose from the proposal (Schmitz, 1998, p. 40). Yet the consequence of the defeat of theproposal has been that the cluster’s tanning industry has suffered, with incentives to lower valueadded and produce semi-processed leather.

If we recall the quantitative evidence presented earlier, Schmitz noted that there had been anincrease in joint action through the industrial chamber (the ACI), and that there was an indicationof a posit ive association between this and overall firm performance. The qualitative materialsuggests that this conclusion needs to be treated with some caution. While local shoe producerssurveyed were using the services of the overarching industrial body in the region, the ACI,membership in the shoe producers association ABICALÇADOS was declining. According torespondents, the latter was increasingly a “club of the big firms” (Schmitz, 1998, p. 39). Joint actionat the level of vertical ties that individual firms had with their suppliers and subcontractors appearedto be more strongly associated with performance than cooperation through the association. In fact,the one collective attempt to upgrade vertical supply chains within the cluster had been defeated bythe failure of joint action between local associations. This case of ‘collective failure’ reflected thedifferentiation within the cluster and the divergent interests that it generated. To conclude, the evidence from the Brazilian case study highlights the complexities ofunderstanding the functioning of business associations in a cluster context. At particular points intime in the cluster’s evolution, the association played an important, catalytic function. At otherperiods various sub-sector associations within the cluster actively pursued a programme ofupgrading, but were thwarted in their objectives due to the growing sub-sector differentiation withinthe cluster, and the power of large players. Let me turn now to the case study from Pakistan.

IV.2 Pakistan – Quality assurance pressures and business association initiatives


The Sialkot surgical instrument cluster is one of Pakistan's rare stories of consistent exportsuccess by small and medium enterprises. The 300 family-run manufacturing enterprises that formthe core of the cluster together exported over US$ 100 million worth of surgical instruments in 1992-93, with over 60 per cent of export going to the United States. In May 1994, however, the Food andDrug Administrat ion (FDA) of the United States, the key regulatory body in the US health sector,restricted imports of Pakistani-made surgical instruments on the grounds that they failed to meetinternationally accepted quality control and quality assurance standards. The impact of this actionon the cluster was severe. Local producers exporting to the US saw orders being cancelled, andconsignments already in shipment stranded. With mounting costs and increasing competitionamongst local producers for sales in the European market, a number of firms and ancillary unitswere forced to cease operation, in the process laying off workers.

Quality assurance standards move the focus away from product to process quality. As part of theoverall emphasis on total quality management, they provide a system of quality traceability,involving detailed documentation of quality dependent procedures, quality training of personnel,quality driven management, constant monitoring of quality performance measures and internal aswell as independent quality auditing. Implementing such standards requires changes in productionorganization and manufacturing practices. This necessitates a capacity to learn both at the level ofthe individual firm and in the relations between firms in a supply chain. This can be a costly process.Such changes are increasingly important, however, as meeting international standards, on qualityassurance as well as on environmental, labour and even ethical concerns, are fast becomingnecessary for entry into high quality markets. For Sialkot's surgical instruments sector , for example,in addition to the quality assurance requirements stipulated for entry to the US market, access tomarkets in Western Europe and Japan is increasingly becoming conditional on compliance with theISO 9000 quality assurance standards. Similarly, there are growing pressures on the cluster to meetglobal concerns on child labour as well as on environmental pollution.

The actions of the US authorities were not aimed at individual firms but to the cluster as a whole.All producers in Sialkot were deemed to be sub-standard. This, therefore, called for a collectiveupgrading on the part of the cluster. To a great extent this has taken place. By late 1997, some threeyears after the FDA’s act ion, the cluster’s export volumes were 25 per cent above the 1992-93levels. Overall quality had also improved in as much as 130 of the 300 manufacturers in the clusterwere now certified by the US FDA as conforming to international Good Manufacturing Practices(GMP) standards, and two firms having obtained the coveted ISO 9002 quality assurance cer tificate.

This was a remarkable turnaround, one that reflected a collective achievement. The cluster’sbusiness association, the Surgical Instrument Manufacturer’s Association (SIMA), played a key rolein bringing this about. It facilita ted the process of upgrading and learning required to comply withthe quality assurance standards. As indicated earlier, the issue of timing of support was important.The association played an important function soon after the crisis set in. It mobilized local producersand developed a collective response. Once the required changes were set in motion, support from theassociation receded. Hence, as shown above, quantitative data based on a survey conducted in 1994indicated no association between increased cooperation through the association and improved firmperformance in the Sialkot cluster.

Prior to the crisis of 1994, knowledge of international quality assurance requirements wasrestricted to the larger firms in the cluster. The association did not disseminate information onquality assurance nor provide any technical training. More importantly, it was not at the time seenas key local institution. The association certainly had a long history, having been set up in the 1940s.All manufacturing and exporting firms within the cluster were required to be members, and theannual election for office bearers hotly contested. Nevertheless, in 1994 it was widely considered asan inactive and ineffectual body. Amongst its responsibilities SIMA is meant to provide memberswith information on new markets and buyers, on trade policy, and on product and technology


development. It is expected to assist members in their dealings with the federal and regional stateauthorities and other regulatory bodies. It is also mandated to regulate business pract ices within thecluster.

Despite the wide range of functions ascribed to the business association, its most common activityhas been to occasionally lobby government. A survey conducted in 1994 found broad consensuswithin the cluster that the association was ill-informed with regards to technical developments, itsmarketing information was considered woefully out of date, it was unable to provide technicalguidance to its members, and was an ineffective “voice” of the cluster’s collective interests (Nadvi,1999b). In part this was a reflection of the fact that the association had no specialised secretariatstaff and few resources to undertake the tasks mandated to it. In addition, there was a strongperception, especially among SMEs, that the larger firms in the cluster dominated the association’smanagement and that it was their interests that determined the level (or even lack) of the association'sactivities.

Given the prevailing disenchantment with the association it is thus more surprising to observe howproact ive it was soon after the crisis of May 1994. The association provided a physical focus andarena for discussions among local producers in Sialkot on the challenges posed by the FDA’s action.Through SIMA a collective response was formulated within a month of the import ‘ban’ beingimposed. A delegation was organised under the auspices of the association to visit the United Statesand negotiate directly with the US regulatory authorities. The objective being to obtain USagreement for a phased programme of quality assurance certification that would also allow for aresumption in exports. When this failed, the association turned to the Pakistan government forsupport to acquire the required know-how necessary to adopt the quality assurance standards. Onthe insistence of the association, the government agreed to provide financial support to hire foreignconsultants to assist local producers upgrade quality management practices, and to finance thedevelopment of a new, internationally recognised, metal testing laboratory within the cluster.

Developing this collective response took time. It was, nevertheless, seen by many local enterprisesas the best way to address the crisis. Moreover, SMEs considered the predominance ofrepresentatives of large enterprises in SIMA’s delegation an advantage in the cluster, in that theycould more effectively lobby government officials in both Pakistan and the US. There was a clear,and statistically significant, (inverse) size distribution amongst firms that felt that the association’srole in lobbying government had increased substantially.

At one level, successful lobbying for government intervention was the association’s coreachievement following the crisis. However, closer analysis indicates that of the steps initia ted by theassociation, the most important was seeking technical knowledge on quality management. While thegovernment subsidized this, it was the association that recognized that external know-how wasrequired and undertook to coordinate the provisioning of such expertise.

What made the association more active and vocal than before? In part, the explanation lies in thechanges that have taken place within it since 1994. In 1994 there was a widespread view that largefirms dominated the body. At any given time the incumbent Chairman closely influences the levelof activity displayed by the association. Since 1980 nine of the eleven individuals who had acted aschairmen of the BA were owners of large local firms. While the perceived bias towards the largefirms is difficult to substantiate, the continuing “dominance” of larger producers within the workingof the trade body was brought into question by the FDA action.

Large firms certainly dominated the association’s initial reaction. It was in their immediateinterest to negotiate with the FDA and ease the shipment of ongoing consignments. SMEs also stoodto benefit from this initiative; nevertheless it was the large firms that had the most at stake in termsof proportion of exports. Interestingly, however the association’s subsequent effort in obtaining statesupport for an external consultant to provide quality assurance training to 200 firms in the clusterprovided an advantage that was particularly critical to SMEs. Large firms had the resources to


obtain such expertise independently, and some had begun to do so. Small and medium sizedenterprises were, however, in a weaker position. They could not acquire the quality assurance andmanagement training required without a collective initiative.

How did this joint action, providing benefits particularly for SMEs, emerge within theassociation? In effect, there appears to have been a discernible shift in power within SIMA since1994. At the time of the crisis, the association’s then chairman was considered to be closely tied tothe interests of some of the larger firms in the cluster. By 1995 only five firms (all large units) hadmanaged to get through the GMP hurdles set by the FDA. In the annual elections held in 1995, thefrustration felt by the SMEs in the cluster at the slow pace of progress came to a head. A new panelof office bearers was voted in, representing the interests of some large firms and the more dynamicSMEs. This panel, which was re-elected in 1996, had as its Chairman an owner of a large enterprise.He was respected widely in the cluster and his efforts were seen as being important in makingavailable consultancy services on a cluster-wide basis. Thus, as reported by local respondents,“SIMA is now more active as a consequence of the GMP and FDA issue. Before the big firms wouldhinder the activity of SIMA and of smaller firms. Now, through SIMA, all firms in the cluster, bigand small, can get the help they need to get through this (quality assurance) problem” (Nadvi, 1999forthcoming).

In summary, the experience from the Pakistan case indicates the importance of strategic lobbyingby the association, providing cluster-wide benefits through the provision of external know-how. Italso gives some sense of the difficulties in br inging this about, particularly given the size structureof the cluster. Finally, this case highlights the importance of leadership and individual agency. But,despite the apparent success that the association was instrumental in achieving, there were a numberof shortfalls. The association continued to play a primary function of a lobbying body. It did notprovide real services, nor did it have the secretariat capacities to help local producers withmanagerial, technical and information-related needs. This makes it all the more understandable thatcooperation through the association did not appear to have any positive relationship with improvedfirm performance in this cluster.

V. Conclusions and f urther quest ions

This paper set out to examine the role of local business associations in developing countryindustrial clusters. It did so within the context of the challenges that globalization and liberalizationpose to these clusters. Competition in this environment requires a sustained process of upgrading.This calls for greater local cooperation. One key area for such joint action lies in the local businessassociations. The proposition explored here is that clustered firms need to increase their cooperationthrough the association in order to face the new challenges. Business associations offer a range offunctions to local firms. These include representing the interests of their members to government,undertaking coordination and regulatory tasks within the cluster and providing members with a widerange of producer services.

In the face of the new competition, however, it is important to note that not only firms but alsolocal business associations need to upgrade. Associations have to increase and refine the deliveryof appropriate producer services that effectively lower costs to local firms. They need to articulatethe concerns of the cluster more effectively to the s tate, and identify and promote targeted andfocused forms of state intervention that strategically assist the cluster. Finally, the new pressurescan call for a more active role in providing effective coordination, both within the cluster and withexternal agents.

The evidence presented indicates that cooperation through local associations has increasedfollowing the onset of new commercial pressures in each of the four cluster cases studied. Moreover,


there are signs that there is a link between increasing cooperation through the association andimprovements in firm performance. However, while the statistical evidence is, in some of theclusters, impressive, the causality remains unclear . At the same time, the findings also indicate thatthere remain numerous areas where cooperation through associations has not increased. In none ofthe clusters are there significant signs of improvements in the delivery of producer servicesassociated with raising skills, labour training or technical upgrading. In the Sialkot cluster, as themore detailed case study material outlines, the local association was instrumental in obtaining therequired technical know-how for local producers. However, it did not achieve this by raising its owntechnical capabilities but by identifying external consultants to provide the requisite training.

Despite the sense of collective efficiency being promoted through local associations, as some ofthe findings suggest, there remains strong evidence of collective failure on the part of localassociations. The Brazilian case study best exemplifies this. A collective attempt to bring aboutsupply chain upgrading within the cluster, initiated and coordinated by local sub-sector associations,collapsed due to the diverging interests of each of these sub-sector specific trade bodies.

The qualitative evidence from the two case studies gives an indication of the function thatbusiness associations can play in providing a catalyst for action, in collectively art iculating cluster-wide interests, and in promoting programmes of upgrading. It also shows clearly how collectivegoals can be thwarted by the actions and particular interests of key leading actors. In both cases, theissue of internal differentiation within the cluster is of great importance. In the Sialkot cluster, theover-riding dominance of large firms in the management of the association was challenged, result ingin a more proactive stance by the association. This also resulted in benefits accruing to a larger poolof local producers, and in particular to SMEs who were, and still are, especially threatened by thedemands posed by the new quality assurance standards. More recent evidence indicates that theassociation is now engaged in the promotion of a wider range of standards raising activities, raisingawareness within the cluster of the need to conform to international labour standards and to upgradeto meet ISO quality assurance and environmental standards.

Differentiation within the Brazilian cluster has increased at two levels. Between large and smallshoe producers, and between the shoe sector and the ancillary industry. Increasingly, it appears thatwith the cluster’s largest firms being less concerned with the overall development of the cluster asa whole, the ability of the large firm dominated shoe producers’ association to provide a local forumfor joint action is diminishing. Small and medium sized shoe producers are likely to feel that theirparticular interests are neglected, possibly leading to calls for a separate representative trade bodyfor SMEs. The differentiation within the cluster’s supply chain, again largely arising from theinternalization process of the cluster’s largest firms, has meant that improved coordination andcollective action within the chain, between suppliers and producers, is less feasible.

The process of differentiation in both clusters has consequences for the organization, managementand effectiveness of the local association. Doner and Schneider (1998) have argued of the need forassociations to keep large, and influential, firms on board in order to remain effective bodies. Thelogic in this argument is that obvious. If key agents in the form of large firms exit from theassociation, the association loses its relevance and ability to influence local behaviour. Yet, thefindings presented here suggest that the tension between the interests of large firms and SMEs, andbetween producers and suppliers, within the cluster are not unproblematic. If large firms no longerview the cluster as generating key advantages for them and thus do not see their interests as beingtied with the development of the cluster as a whole, they are unlikely to promote a proactive localassociation.

This suggests, as Moore and Hamalai (1993) did earlier but for somewhat different reasons, aneed for caution regarding the ability of local business associations to actively support localindustrial clusters in the developing world. Associat ions continue to matter . The evidence from someof the clusters is especially strong. The Mexican and Pakistani cases are possibly the best examples.


In the former, as Rabellott i (1999 forthcoming) has noted, coordination between associationsrepresenting shoe producers and component manufacturers led to a process of standardization incomponent and shoe production, thereby easing one of the cluster’s key constraints. In the latter,the association was able to mobilize the state and was the catalyst in br inging about a process ofupgrading by the cluster. Yet, the sense of collective failure and of missed potential for local jointaction through the associations remains strong.

Clearly local and national governments as well as international donor institutions should play arole in ensuring that the potential for local associations for promoting joint action is not missed. Asa first step this calls for a policy environment that facilitates the development and activit ies of localassociations. This also calls for improved coordination between associations and the state. Inaddition, support needs to be geared towards assisting local associations in the delivery of theirvarious functions, from producer services to regulatory tasks. In order to do this, however, policyagents need to develop both an in-depth understanding of the nature of specific business associationsand the particular challenges faced by individual sectors.

There are, in my view, two main areas for further empirical research that would be integral to thedevelopment of such a policy programme. First, a greater understanding of the internal workings ofassociations and of the links between the association and its members. Second, in the context ofglobalizat ion, wherein local clusters are now more closely integrated into global markets, the focuson local institutions needs to be widened, both to observe how local associations can facilitate tieswith external agents, and to see how external institutions can influence local practices. Both linesof enquiry seek a better understanding of the factors that help bring about an enabling association.

The first agenda calls for a better understanding of the functioning and organizational structureof business associations. A number of questions arise regarding the relationship between theassociation and its members, and the relationship between the association and the state. Howrepresenta tive are associations? How are they elected? How are they managed? How do localproducers, large and small, get heard within these bodies? Who decides what tasks the associationtakes on? Is there a specialized secretariat and if so do local producers manage it? These broad setsof questions need to be posed in cases where a priori evidence indicates that associations may havefacilitated commercial success by local producers, and in cases of commercial failure. Suchcomparative analysis, based on primary case study evidence, is likely to result in a better grasp ofhow associations can promote local competitiveness.

The second agenda recognizes that, in the process of upgrading, ties with external agents(particularly traders and foreign producers) are often of greater importance in export-orientedindustrial clusters. This has significant consequences for local business associations. Where doesnew information come from? How do local associations access new know-how from outside theconfines of the cluster? How do associations representing local clustered firms link into internationalvalue chains? What ties do local associations have with external traders and multinationals who exertpower and influence on the functioning of such chains? This raises questions about governance ofvalue chains itself, and of the ways in which business associations can influence them, as well as ofthe importance of the regional and local space within the context of globalization.


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