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UNIDO Cluster Development Programme

SMEs within clusters face barriers to growth due to their small size and isolation. UNIDO's cluster development approach focuses on promoting collective efficiency and joint actions between cluster stakeholders to overcome these barriers. The approach strengthens cluster governance mechanisms and provides targeted support to the institutional network to encourage cooperation and collective gains.

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Adib Ahmed
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54 views

UNIDO Cluster Development Programme

SMEs within clusters face barriers to growth due to their small size and isolation. UNIDO's cluster development approach focuses on promoting collective efficiency and joint actions between cluster stakeholders to overcome these barriers. The approach strengthens cluster governance mechanisms and provides targeted support to the institutional network to encourage cooperation and collective gains.

Uploaded by

Adib Ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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UNIDO Cluster Development Programme

Clusters are particularly promising environments for SME development. Due to their small size, SMEs
individually are often unable to realize economies of scale and thus find it difficult to take advantage
of market opportunities that require the delivery of large stocks of standardized products or
compliance with international standards.

They also tend to have limited bargaining power in inputs purchase, do not command the resources
required to buy specialized support services, and have little influence in the definition of support
policies and services.

The existence of a cluster per se does not automatically ensure that entrepreneurship will flourish or
that enterprises will generate sustained returns. Even when located within a cluster, small and
medium-sized enterprises (SMEs) face barriers to growth. Although these barriers are often
considered to relate to the size of the enterprises, on closer examination they are frequently revealed
as having more to do with isolation.

In non-performing clusters, these constraints often manifest in unhealthy competition based on


lowering wages, disregarding the welfare of workers, minimizing investment in technology and
depleting natural resources. This form of competition results in stagnant clusters, with local
stakeholders reaping few benefits.

Evidence from strongly performing clusters, by contrast, demonstrates that it is possible for SMEs to
achieve high levels of growth by achieving steady quality improvements and adding value, while at the
same time respecting environmental, social and labour standards.

Spatial proximity and shared strategic interests allow enterprises and their support institutions to
realize shared gains through the organization of joint actions between cluster enterprises (e.g. joint
bulk inputs purchase or joint advertising, collaborative R&D or innovation projects, or shared use of
equipment), and between enterprises and their support institutions (e.g. provision of technical
assistance by business associations or investments in infrastructure by the public sector). The
advantage accruing to the cluster from such collective efforts is referred to as collective efficiency.

Evidence suggests that the willingness of entrepreneurs to engage in joint actions is a critical success
factor to unleash their growth potential. However, despite the potential benefits deriving from joint
actions, entrepreneurs often choose a go-it alone strategy. Several factors can hinder cooperation
between enterprises including:
▪ transaction costs,
▪ coordination costs, and
▪ adverse business culture.
Obstacles to cooperation can also arise between enterprises and support institutions. While spatial
proximity on its own can reduce some of the costs associated with cooperative activities between
enterprises and institutions, other obstacles need to be consciously addressed for a cluster to become
dynamic and growth-oriented.

The UNIDO approach to cluster development thus focuses on removing obstacles to joint actions with
the objective of encouraging collective action. The intervention logic underlying the approach is
depicted to the below.
To promote private sector based inclusive growth, UNIDO has developed an approach to cluster
development based on the following principles:

1. Focus on existing clusters


An essential feature of the UNIDO approach is its focus on working with existing clusters,
rather than creating new ones. While existing clusters often demonstrate significant
unrealised potential, the creation of clusters from scratch is likely to lead to a topdown
process, with private sector having limited incentives to assume a leading role.

2. Promote private sector based inclusive growth


The private sector plays a central role in promoting growth in general, as well as pro-poor
growth in particular. Growth per se does not necessarily lead to a reduction in poverty. To
be pro-poor, economic growth must be broad-based, inclusive of all categories of
stakeholders, sustainable and gender balanced. Cluster initiatives with a pro-poor focus
need to focus not only at enhancing (labour force) productivity, innovation and participation
in economic life, but also address non-economic issues such as limited human and social
capital by empowering marginalized groups, promoting improved access to employment
opportunities and improving the health and education of the labour force.
3. Encourage collective efficiency through joint actions
The UNIDO Approach to cluster development focuses on initiatives that encourage
enterprises and institutions to undertake joint actions that could ultimately yield benefits to
the cluster as a whole and the communities in which they are embedded. Measures to help
cluster stakeholders reduce barriers to cooperation and help them overcome their isolation
include: ▪ Foster linkages between cluster stakeholders ▪ Facilitate consensus building ▪ Build
relationships ▪ Encourage trust building ▪ Strengthen governance mechanism ▪ Support the
cluster’s institutional network.

4. Strengthen cluster governance mechanisms


As has been noted before, cooperation can be strengthened by investing in trust-building
activities. In the context of cluster development, not only the propensity of individual cluster
stakeholders to engage in joint actions is important, but also how these interactions are
organized and embedded into the local economic system. Any formal or informal
organization or arrangement that plays a leadership role in initiating and managing joint
actions for the improvement of cluster competitiveness can be identified a governance
mechanism. UNIDO’s approach to cluster development places great importance on
strengthening the cluster’s governance mechanisms by changing patterns of interactions
among cluster stakeholders and establishing or reinforcing institutions that can lead and
coordinate joint action. Good governance in a cluster allows for coordinated and effective
planning. Through coordinated joint actions the cluster can reach a higher level of
performance. Good performance in turn increases the cluster’s “social capital stock”
(embodied e.g. in the trust, shared values). This raising “social capital stock” tends to
reinforce the good governance in the cluster. UNIDO approach to cluster development
attempts to set this virtuous cycle in motion.

5. Provide targeted support to the cluster’s institutional network


The UNIDO approach focuses on providing incentives for public and private sector bodies to
more effectively promote cluster development and to build their capacity to do so. Relevant
local, regional and national institutions, including chambers of commerce, local
governments, NGOs, producer associations, universities, training institutions and regional as
well as local economic development agencies are assisted to gradually assume a strong
supporting role in the development of the cluster. Activities include establishing and/or
providing support to business networks, building public-private partnerships and promoting
dialogue among service provides and/or policy makers. UNIDO also technically assists
financial and non-financial service providers (e.g., business development service (BDS)
providers, vocational schools etc.) to make their services more responsive to the demands
from within the cluster.

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