Clusters, Value Chains and Technological Capacities Building

REGIONAL DEVELOPMENT BRIEFING # 2Strengthening the Caribbean Agri-food Private Sector:

Competing in a globalised world to foster rural developmentCaribbean Week of Agriculture

GrenadaOctober 18, 2010

Two major factors have been having significant influence on business sectors worldwide:

1. Globalization and deregulation of markets;

2. Information and Communication Technology (ICT) revolution.

Resulting in increased competition

The Changing Environment

Not just business entities competing

independently, but the system of producers-

packers-exporters of country A competing

against the business system of Country B

(Nitchke and O’Keefe, 1997).

The Changing Environment

As a result of the changing and increasingly competitive business

environment, business philosophy, the specific characteristics of

enterprises, and the nature of interdependencies amongst enterprises

is changing significantly.

But the changing environment is also encouraged new forms of

cooperation and collaboration among small and medium size

enterprises (SME’s)

The Changing Environment

The agricultural sector is one of the sectors affected and rural and remote areas are facing significant problems in adjusting to the demands of the changing environment

In the context of the Caribbean, an important feature of the agricultural sector, is the fact that small and medium size units or enterprises (SME’s) make up the predominant institutional type.

The Changing Environment

These size units have many difficulties in reaching economies of scale, and in managing efficiently all the activities taking place in their supply chain. They are often unable to adapt, and flexible enough to respond to the challenges, and thus gradually lose their competing ability.

The Changing Environment

In Europe, (where CTA has its headquarters) cluster-based policies have been recognized as a very important tool for achieving economic success in local, regional and national level.

Cluster-based policies are now supported by European Union (European Commission, 2002) and have replaced the traditional sector approaches, as being the most appropriate in achieving development and enforce competitiveness (DTI, 2001; OECD, 2001).

The Focus on Clusters

The presence of this concept of CLUSTERING among companies that cooperate and collaborate, with different types of interdependencies, can be traced back in history (Piore and Sabel, 1984)

Porter’s (1990) idea on industrial clusters was introduced in the beginning of nineties.

Clustering for Business Development

However due to multidimensionality and vague character of Clusters, a precise set of principles for delimitation of clusters is or appear to be somehow missing in much of the cluster literature (Maskell, 2001)

This poses problems of theoretical and empirical definition.

Clustering for Business Development

Porter (1998) defines clusters as:

“geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions (for example universities, standards agencies, and trade associations) in a particular field, linked by commonalities and complementarities”.

Clustering for Business Development

The conceptual framework which is built on the theories of economic geography, transaction cost economics and the classical Marshallian externalities (Krugman, 1991; Dalum et al., 2002) focuses on the linkages and interdependencies among value chain actors, going beyond traditional horizontal networks, operating more as cross-sectoral networks consisting of dissimilar and complementary firms, which are specialized around a specific stage in the value chain (Roelandt et al., 2000; Maskell, 2001).

Clustering for Business Development

The critical mass that companies can have, allows for increased options in choosing input suppliers and distributors and moreover, it allows companies to conduct much of the business activities that were previously conducted by firms at the regional/national level.

Clustering for Business Development

This model increases the flexibility and innovation by diffusing organization and technological information and knowledge.

Finally, another important element in the ACM is the establishment of relationships of local agri-business companies with universities, financial institutions and other associations such as research and development institutions, service providers etc

Clustering for Business Development

Basic element in the ACM is the clustering of farmers and of production.

An agri-business cluster may be a local or regional network made up of farmers, input suppliers, co-operatives, pack-houses, manufacturers, transporters etc. with the aim of clustering production, processing, distribution, logistic and many other activities which will reduce the current problem related to the existence of a number of small flows of goods.

The agri-business cluster may also consist of a number of different organizations, such as: local authorities, financial institutions, universities, research and development institutions, and other associations.

Elements /actors in the Cluster

Clusters are:

Based on systemic relationships amongst involved business partners that:-

define their missions, roles and responsibilities, set their priorities and utilize their region’s resources.

These relationships can be built on common or complementary products /services, production and distribution processes, core technologies, resource requirements, logistics, education, training and outsourcing services support.

Clustering for Business Development

(Asheim and Ιsaksen, 2000; Competitiveness Group, 2002):

Flexibility and fast change reaction due - to extreme specialization Easy access to specialized suppliers, services and human resources Information spillovers Increase capacity of innovation by diffusing organizational and technological knowledge New business formation, as employees become entrepreneurs in spin–off ventures

Benefits of Clustering

The first and most important barrier that deteriorates the development of agri-business clusters is the lack of the appropriate co-operative business philosophy among entities.

For many years, agri-business entities in rural areas were used to practice their business activity autonomously and independently.

Given the changing nature of competition, most of these entities find themselves unable to trust other entities and, experience difficulties in co-operating with them. They all lack the appropriate co-operative mentality.

Barriers to Agric Cluster Development

Several other factors limit the development of competitive clusters

The Asian Development Bank, (2001) and Rosenfeld, (2002) trace these to physical and technical infrastructure deficits (i.e. roads, telecommunication),

By weak infrastructure it is meant deficits in physical infrastructure which deteriorate potential capital investments in the future The technology infrastructure is the mortar for building cluster-based actions, and its absence is a serious handicap in growing clusters.

Barriers to Agric Cluster Development

The lack of information flow channels limited use of the new technology is one of the most important problems that entities face in rural areas.

In addition, cluster entities may confront the problem of how to strike a balance between internal needs for different organizational and technological systems and external needs for connectivity and share-ability of messages, data, applications and processes (Vlachopoulou and Manthou, 2002).

Barriers to Agric Cluster Development

Lack of access to capital and skilled work force

The limited or total lack of access to capital is also a very important barrier. It influences the adoption and the implementation of new technologies, which are absolutely necessary for building cluster-based economies, and its absence is a serious handicap in growing clusters. Absence of organizational structures,

Barriers to Agric Cluster Development

Rosenfeld (1997), had underlined the need, for the actors forming the cluster, of having active channels for business transactions, dialogue and information exchange.

Technology (ICT ) Applications in the agri-business Cluster model

CADIAC APPROACH

The introduction and the implementation of ICT applications could act as a catalyst in the formation of cluster, since business transactions and information exchanges can be facilitated and improved.

The geographical element of clusters remains important, but not a constrained factor in a number of activities such as information, data and knowledge exchange among cluster members (Gillespie et al., 2001

Technology (ICT ) Applications in the agri-business Cluster model

The use of ICT applications such as e-business and e-commerce can reinforce the organizational structures that already exist but primarily to electronically interface them in order to favour cluster-based actions that are appropriate to these regions transforming them into a related value –added cluster).

ICT applications in the agri-business cluster model

1. Although cluster formation presents a number of opportunities and benefits the development of such a formation is not an easy process.

2. It can be argued, that in the case of the Caribbean, more short-term benefits can be derived and clusters built starting with the value chain approach vs the clustering approach

CONCLUSIONS

BUSINESSFORMATION/FACTOR

VALUE CHAINS CLUSTERS

Membership Closed, mainly stable None required

Relationship Sequential Cooperative and competitive

Basis of Agreement Mutual arrangement, Contractual or not

Social norms and reciprocity

Basis of External economies

Coordinated functions and resources

Location/proximity

Major outcomes Increased sales, profit and cost reduction

Information and Knowledge sharing

Business Activity and Formations

3. Cluster development is in fact a Multidimensional and also Diachronic process.

Multidimensional in the sense that there are a number of reasons energizing the development of a cluster

Diachronic in the sense that the formation of cluster requires a long term approach and under-investments, in a region, may limit future cluster formation.

CONCLUSIONS

4. Rural communities in the Caribbean region are facing significant problems, while trying to adjust under the demands of the new economy. Those problems are complex, but not unexcelled.

5. Even if the advantages of clustering are significantly producers, traders, exporters, processors, service institutions etc often find themselves unable to actively take part in such business formations, either as a result of internal inefficiencies, or as a result of the lack of the appropriate ‘cluster’ business philosophy.

6. In both cases, there is a need for an institutional framework for education, training, technical support, promoted by local, regional or national authorities, under an explicit agri-business development focus.

CONCLUSIONS