About the Asian Development Bank Institute

The Asian Development Bank Institute (ADBI), located in Tokyo, is a subsidiary of the
Asian Development Bank (ADB). It was established in December 1997 to respond to two
needs of developing member countries: identification of effective development strategies
and improvement of the capacity for sound development management of agencies and
organizations in developing member countries. As a provider of knowledge for development

Industrial
and a training center, the Institute serves a region stretching from the Central Asian republics
to the Pacific islands.

Industrial Development Planning: Cluster-Based Development Approach Policy Seminar

ADBI carries out research and capacity building and training to help the people and
governments of Asian and Pacific countries. The Institute aims to provide services with
significant relevance to problems of development in these countries. In line with this aim,

Development
the approach is demand-led; ADBI’s Capacity Building and Training (CBT) group seeks to
respond to demand for sustainable, wide-reaching training of government officials in ADB’s
developing member countries.

Planning:
Cluster-Based Development
Approach Policy Seminar
14–19 March 2007
Tokyo, Japan

Asian Development Bank Institute

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo 100-6008, Japan
www.adbi.org
Tel +81 3 3593 5500
Fax +81 3 3593 5571
ISBN XXX-X-XXXXX-XXX-X Printed in the Philippines
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

12
Industrial
Development
Planning:
Cluster-Based Development
Approach Policy Seminar
14-19 March 2007
Tokyo, Japan
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Seminar Design and Coordination

Toru Hashimoto, Senior Capacity Building Specialist, Asian Development Bank Institute,
Tokyo, Japan

Rapporteur

Princess Shimmadar R. Manaois

Published by Asian Development Bank Institute, 2007

ISBN: 978-4-89974-024-7

The Asian Development Bank Institute (ADBI) encourages the use of the material presented
herein, with appropriate credit given to ADBI.

Please address inquires for copies to:

Librarian
Asian Development Bank Institute
Kasumigaseki Building 8F
3-2-5 Kasumigaseki
Chiyoda-ku, Tokyo 100-6008
Japan

This report is available on the ADBI website (www.adbi.org) for free downloading.

The views expressed in this report are the views of the authors and do not necessarily
reflect the views or policies of the Asian Development Bank (ADB), ADBI, or its Board of
Directors, or the governments they represent. ADBI does not guarantee the accuracy of the
data included in this report and accepts no responsibility for any consequences of their
use. Terminology used may not necessarily be consistent with ADB official terms.

ii
 EXECUTIVE SUMMARY

Preface

Recent developments in the global arena have prompted many developing countries to
restructure their economies to deal with the demands of the global economy. Most of these
countries have started crafting their economic policies with the primary aim of fostering
openness and competition with other countries. Most of the economic structural reforms
across countries have focused on industrial development. Increasing urbanization and the
penetration of Global Value Chains and Foreign Direct Investments in many developing
countries for instance, are indicative of the economy’s structural shift to industrialization,
modernization and technological innovation. Transition economies are a good example
of this modern-day industrialization, where most economies have shifted from a centrally
planned economy to a market-oriented one.
Small and Medium Enterprises (SMEs) play a critical role in industrial development. They
are the lifeblood of most developing countries in Asia and some other parts of the world.
In most countries in Asia, they not only constitute a significant share of the economy’s total
output but also generate many employment opportunities, absorbing the majority of the
labor force. These roles, though recognized, are not internalized by many policymakers and
government officials in several countries. Repeated failures with regard to SME development
have been committed over time due to inappropriate or poor policies and strategies. Hence,
there is a need for an approach that is appropriate for and will strategically match the
economic requirements of a country.
The “Industrial Development Planning by Local Governments: Cluster-Based Development
Approach Policy Seminar,” held in Tokyo, Japan from 14 to 19 March, 2006 was spearheaded
by the Asian Development Bank Institute (ADBI) in collaboration with the United Nations
Industrial Development Organization (UNIDO), the Japan International Cooperation
Agency (JICA), the Organization for Economic Cooperation and Development (OECD),
the Foundation for Advanced Studies on International Development (FASID/GRIPS), the
Asian Development Bank (ADB) and other private practitioners in the field of SME/Cluster
Development.
The policy seminar was intended to disseminate successful cluster development cases among
key policymakers and to provide opportunities for discussing possible collaborations among
academics, donors and governments. The seminar served as a follow-up activity to an earlier
workshop held in Hanoi in May 2006, entitled Cluster-Based Industry Development
Workshop. Lectures, presentations and interactive discussions enabled the participants and
seminar members to freely share and exchange country-specific information about industrial
policies and SME-related issues and challenges with each other. The roles of policymakers,
donor institutions, experts, academics and other relevant key players in fostering cluster
development were highlighted during the discussions. The action planning session focused
on the formulation of a national policy framework for cluster development for each country.

iii
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Exposure trips to clusters in the Keihin Industrial Area and Kanagawa Science Park were
organized and made the participants appreciate and learn from the effective strategies
undertaken by successful enterprises in the area.
The five-day policy seminar included lectures, presentations and interactive discussions on
the following topics:
¡ Major challenges in SME Development (Framework of Analysis & Develop-
ment Stage and SME Assistance)
¡ Country-specific SME Analyses
¡ Market Failures and the Role of Government in SME Development
¡ The Advantages of Industrial Clusters for SME Development
¡ The Pattern of Cluster Development
¡ Lessons of the Asian Experiences
¡ UNIDO’s Approaches to Cluster Development
¡ Diagnostic Study and Action Plan for Cluster Development
¡ Japan Center and Business Courses
¡ ADB’s Experience in SME Assistance

The outcomes of the program include:

¡ Well-trained policymakers on the issues of SMEs and the various approaches
for cluster development
¡ Creation of network of government agencies to share information and
knowledge on cluster development
¡ Executive summary of proceedings
¡ CD-ROM of course materials

The policy seminar brought together 19 policymakers from 9 Asian countries who are
involved in Cluster/SME Development, namely: (1) Cambodia; (2) Kazakhstan; (3) Kyrgyz
Republic; (4) Lao PDR; (5) Mongolia; (6) Myanmar (7) Tajikistan; (8) Uzbekistan; and
(9) Viet Nam. The participants were mostly from the trade and industry sector. Resource
Speakers/Persons from Academe, donor institutions, foundations and the private sector
were also invited to discuss specific issues related to the thrusts of the seminar.

iv
 EXECUTIVE SUMMARY

Table of Contents

Preface . .......................................................................................................................iii
Executive Summary...................................................................................................................... 1
Opening Remarks . ...................................................................................................................... 9
Closing Remarks . ..................................................................................................................... 13
Lectures and Discussions............................................................................................................ 15
Lecture 1 : Major Challenges in SME Development: Framework of Analysis.................... 15
Lecture 2 : Major Challenges in SME Development: Development Stage
and SME Assistance..................................................................................... 19
Lecture 3 : Public Policies for SME Development: Market Failures and the Role
of Government ........................................................................................... 28
Lecture 4 : The Advantages of Industrial Clusters for SME Development......................... 32
Lecture 5 : The Pattern of Cluster Development: An Endogenous Model
of Cluster-Based Development...................................................................... 35
Lecture 6 : Lessons Learned from Asian Experiences....................................................... 40
Lecture 7 : The Role of Government in the Cluster-Based SME Development.................. 44
Lecture 8 : UNIDO’s Approaches to Cluster Development.............................................. 48
Lecture 9 : Cluster Development Approach: How Does it Work on the Ground?............. 54
Lecture 10 : What is the Japan Center?........................................................................... 57
Lecture 11 : Japan Center Business Course: Outline of Current Activities,
the Case of Cambodia.................................................................................. 60
Lecture 12 : ADB’s Experience in SME Assistance............................................................. 63
Panel Discussion............................................................................................................... 68
Country Presentations ............................................................................................................... 71
Lao PDR . ..................................................................................................................... 71
Uzbekistan ...................................................................................................................... 74
Viet Nam . ..................................................................................................................... 78
Cambodia . ..................................................................................................................... 83
Mongolia . ..................................................................................................................... 87
Kazakhstan . .................................................................................................................... 90
Kyrgyz Republic . ............................................................................................................. 93
Tajikistan . ..................................................................................................................... 97
Myanmar . ..................................................................................................................... 99


INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Presentation of Country Action Plans........................................................................................ 105

Viet Nam . ................................................................................................................... 105
Lao PDR . ................................................................................................................... 106
Myanmar . ................................................................................................................... 107
Mongolia . ................................................................................................................... 108
Cambodia . ................................................................................................................... 109
Central Asian Countries................................................................................................. 110
Field Trips . ................................................................................................................... 113
Annexes . ................................................................................................................... 115
Agenda . ................................................................................................................... 115
List of Participants......................................................................................................... 119
List of Resource Persons and Organizers....................................................................... 125

vi
 EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

Opening and Closing Sessions

1. Opening Session, Opening Remarks by Masahiro Kawai, Dean, Asian
Development Bank Institute (ADBI), Japan, Toru Hashimoto, Senior
Capacity Building Specialist, ADBI
2. Panel Discussion: Cluster-Based Industrial Development, Toru Hashimoto,
Senior Capacity Building Specialist, ADBI; Hidekazu Tanaka, General
Manager/Principal Consultant, Mitsubishi UFJ Research and Consulting;
João Farinha-Fernandes, Economist, Asian Development Bank; Keijiro
Otsuka, Director, Foundation for Advanced Studies on International
Development (FASID); Michele Clara, Industrial Development Officer,
United Nations Industrial Development Organization (UNIDO); Mukesh
Gulati, Foundation for MSME Clusters; Tetsushi Sonobe, Deputy Director,
Foundation for Advanced Studies on International Development (FASID)
3. Closing, Congratulatory and Closing Remarks by Masahiro Kawai, Dean,
Asian Development Bank Institute (ADBI), Japan; Toru Hashimoto, Senior
Capacity Building Specialist, ADBI

Presentations and Lectures

Lecture 1: Major Challenges in SME Development:
Framework of Analysis

The lecture aimed to provide a historical review of SME policies in Japan and a thorough
appraisal of current undertakings related to SME and market development in three countries,
namely Lao PDR, Viet Nam and Tunisia. A comparative analysis of the major challenges
faced by SMEs between developing and developed countries was made. Recommendations
as to what policies ought to be reviewed and are necessary for SME development were also
provided.

Presenter: Hidekazu Tanaka, General Manager / Principal Consultant, Mitsubishi UFJ

Research and Consulting Co., Ltd. (MURC)
Discussion Moderator: Hidekazu Tanaka, General Manager / Principal Consultant,
Mitsubishi UFJ Research and Consulting Co., Ltd. (MURC)


INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Lecture 2: Major Challenges in SME Development:

Development Stage & SME Assistance

While there are various ways through which the countries of the world can address their
economic development issues, there is no internationally recognized methodology for
the analysis of development. This also applies to the development of small and medium
enterprises (SMEs). Methodologies about SME promotion and development are often
considered not well developed due to the lack of consensus on how to simply understand
its actual state and issues. Thus, there is an increasing need to construct methodologies
that can be easily understood by implementers. This lecture underlined the importance and
applicability of various indicators to monitor SME’s stages of development (i.e., business,
financing, business development services support and technology) in particular countries.
Rather than looking at the indicators exclusively, the interrelatedness of all the policy
parameters and how they reinforce each other should be given importance. The manner
in which the approaches discussed can be applied in crafting or formulating policies and
strategies for SME growth was also discussed.

Presenter: Nori Iai, Consultant, Unico International Cooperation

Discussion Moderator: Hidekazu Tanaka, General Manager / Principal Consultant,
Mitsubishi UFJ Research and Consulting Co., Ltd. (MURC)

Lecture 3: Public Policies for SME Development:

Market Failures and the Role of Government

Governments play a vital role in industrial development. The reasons why government
has to intervene in industrial policies were clearly spelled out in this lecture. Government
intervenes in the market for four major reasons, namely: (i) to correct market failures that
arise from monopolistic distortion, natural monopolies and externalities, both positive and
negative; (ii) to provide for public goods; (iii) to respond to social preferences; and (iv)
to ensure macro economic stability. A conceptual framework for a National Innovation
System was presented highlighting the processes and mechanisms through which key
players interact. The evolution of industrial policies was likewise discussed, with emphasis
on the changing roles of government over time, from merely an originator or creator of
industries to a facilitator of enterprise establishment. Cases of successful industrial districts
were presented, highlighting Italian industries. The difference between tacit and explicit
knowledge was one of the important points tackled in this lecture.

Topics included:
¡ Economic rationale for government intervention
¡ Recent changes in productive structures and international competition
¡ Evolutionary economics
¡ Old and new industrial policies
¡ Innovation systems
¡ The cluster approach
¡ Industrial policy for cluster development
¡ Lessons learned from Italian industries
¡ Successful service centers
¡ Policy implications for government interventions


 EXECUTIVE SUMMARY

Presenter: Andrea Goldstein, Senior Economist, Organisation for Economic Cooperation

and Development
Q&A Session Moderator: Andrea Goldstein, Senior Economist, Organisation for
Economic Cooperation and Development

Lecture 4: The Advantages of Industrial Clusters for SME Development

Proximity is one of the salient features of successful industrial clusters. Enterprises that
are located near each other, producing similar products and parts or components realize
enormous economic gains. A number of industrial clusters exist in both developed and
developing economies. The lecture focused on the types of industrial clusters and the types
of firms in each cluster, the several advantages firms derive from being in a cluster (e.g., flow
of information, absorption of new production ideas and techniques, development of trust
among key players), and the role of innovation in the success of clusters. Results of case
studies about cluster industries in Asia, particularly Wenzhou in People’s Republic of China
and Dhaka in Bangladesh, and the lessons derived from the experience of both countries in
cluster-based industry development were featured. The roles of the government in promoting
SMEs and ensuring their sustainability were likewise given emphasis. Misconceptions and
skepticism about SMEs (e.g., SMEs being a thing of the past, with a vanishing role in an
integrated and globalized economy), the reasons behind such and the ways by which these
misunderstood ideas can be dispelled, were articulated during the discussion.

Presenter: by Tetsushi Sonobe, Deputy Director, Foundation for Advanced Studies on

International Development (FASID)
Commentator: Michele Clara, Industrial Development Officer, United Nations Industrial
Development Organization (UNIDO)

Lecture 5: The Pattern of Cluster Development:

An Endogenous Model of Cluster-Based Development

This Lecture introduced a framework for an Endogenous Process of Cluster-Based Industrial

Development and some details about the importance of multi-faceted innovations for SME
development. It included a summary of findings of case studies of industry clusters in
Japan, People’s Republic of China and Taipei,China (motorcycle and garment clusters in
Japan and People’s Republic of China and machine tool cluster in Taipei,China). It was
noted that the profitability, sustainability and survival of enterprises depend largely on
innovations, particularly in a globalized economy. Education and knowledge transfer from
abroad were cited as important factors behind successful innovations. Well-functioning
markets, appropriate policy instruments, appropriate choice of industry to be developed
(taking into consideration both comparative and competitive advantages) were some of the
requisites mentioned for successful innovations. The importance of global value chains (their
advantages and downsides) in promoting clusters was emphasized. Some country examples
were presented, such as the Philippines, Cambodia, Lao PDR and Viet Nam. FDIs, their
impact on the local industry and the measures that have to be taken in attracting/inviting
them were also incorporated into the discussion of global value chains. The dynamics
between labor-intensive industry and poverty reduction especially in developing economies
was given weight.


INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Presenter: Keijiro Otsuka, Director, Foundation for Advanced Studies on International

Development (FASID)
Commentator: Andrea Goldstein, Senior Economist, Organisation for Economic Coop-
eration and Development

Lecture 6: Lessons Learned from Asian Experiences

The lecture intended to showcase Asian Experiences on cluster development, compare

and contrast the factors that led to the success of each cluster, and draw the lessons that
can be learned from such experiences, particularly in cluster development. The roles of
different institutions (public sector, industry and business associations) at different stages of
industrial development (i.e., initiation, quantity and quality expansion) were underscored.
The highlight of the discussion was on the differences and similarities between Dhaka and
Wenzhou with respect to the strategies taken in each case and their models of industrial
development and the different roles government played.

Presenter: by Tetsushi Sonobe, Deputy Director, Foundation for Advanced Studies on

International Development (FASID)
Moderator: Tetsushi Sonobe, FASID
Commentator: Mukesh Gulati, Project Coordinator, Foundation for MSME Clusters

Lecture 7: The Role of Government in the SME Development

Though the government plays a major role in promoting cluster-based SME development,
various other institutions have roles to play. Non-market institutions such as international
organizations, donor agencies, and non-government organizations are important players
of industrial development. Collaborative actions among these institutions nonetheless are
the key to successful cluster-based SME development. The main objective of the paper was
to highlight the role of government in fostering cluster-based SME development. Lessons
from the successes and failures of other countries in SME development were highlighted
and recommendations were given as to the manners by which the government can assist
in developing SME clusters. The vital role of marketplaces in countries with successful
SME clusters was pointed out. Among the important contributions of marketplaces in the
productivity of SMEs are enhanced interaction among dealers and buyers, stable supplies of
parts and materials, improved information flow, enhanced quality of products in the area,
regular transactions and harnessed relationship among key players. The implications of
macro economic policies (e.g., the appropriate tax policy and trade protection measures) on
cluster development were pointed out. Simple and transparent tax systems and competition
were some of the important policy strategies considered in the discussion. Some proposals
were also given regarding the proper timing for employing and inviting foreign advisers
and consultants. It was explained that enterprises need to know what kind of consultants
to invite and when to invite them (e.g., at the initiation stage, technology experts are
more appropriate; during the production stage, management experts are more suitable).
It was also emphasized that learning should be a continuous process such that even when
enterprises become profitable, advisers or consultants’ guidance and opinions should still
be considered. It was also reiterated that FDI and global value chains are not a panacea for
SMEs or industrial clusters. It was likewise noted that developing countries can benefit
from getting involved in global value chains only when they have the ability to absorb
knowledge, because foreign investors only approach countries that produce products of
exportable quality.


 EXECUTIVE SUMMARY

Presenter: Keijiro Otsuka, Director, Foundation for Advanced Studies on International

Development (FASID)
Moderator: Keijiro Otsuka, Director, Foundation for Advanced Studies on International
Development (FASID)
Commentator: Michele Clara, Industrial Development Officer, United Nations Industrial
Development Organization (UNIDO)

Lecture 8: UNIDO’s Approaches for Cluster Development

The lecture aimed to introduce the cluster-based development approach to industrialization,

the roles the UNIDO plays and the strategies and practices it adopts in promoting industrial
development around the world. The presentation highlighted UNIDO’s programme,
activities and approaches to cluster development. Great emphasis was placed on the discussion
and definition of a cluster, and how it differs from each of the following: (1) industrial
park/export processing zone; (2) industry or subsector; (3) a value chain; (4) a network
and (5) an association/consortium. Key differences involve proximity and concentration of
firms, similarities of production activities, the role of the government in each and linkages
among firms (i.e., backward and forward linkages), among others. Performing from
non-performing clusters were also compared and contrasted, by pointing out their major
differences in terms of costs of production factors (i.e., labor, input, technology), behavior
of firms and people working for these firms, the role of public sector institutions, the
framework in which each operates and the level of innovation. The role of social capital in
cluster development was thoroughly debated, and interesting views and discussions from
the plenary were generated. At the core of the arguments was the distinction between
cooperation and competition. It was argued on the one hand that without cooperation or
social capital, clusters can successfully thrive and on the other hand, it was stated that most
of the successful clusters possess the characteristics of social capital, i.e., mutual trust among
firms and people, cooperation in productive activities, etc. Though the views of participants
and discussants about social capital were somewhat conflicting, there were some mutually
reinforcing insights. The ways by which social capital can help cluster develop and the
situation and conditions under which social capital works well and not so well were likewise
given great emphasis. The role of the government in promoting cluster development was
once again tackled in this session.

Presenter: Michele Clara, Industrial Development Officer, United Nations Industrial

Development Organization (UNIDO)

Lecture 9: Cluster Development Approach: How Does It Work on the Ground?

This lecture provided a venue for the participants to discuss specific problems and difficulties
with regard to SME development, the potential and prospective areas and sectors for
SME growth and the role of public sector institutions and other key players such as donor
institutions and international experts in ensuring the success of clusters. During the session,
the participants were given guidance and consultations in the formulation of their country-
specific action plan for SME development.

The presentation zeroed in on practical examples of SMEs’ experiences, both feats and
problems, using the social capital perspective. Looking at the Indian example of SME
development, problems such as high factor inputs, lack of access to credits, underdeveloped
sector-specific infrastructure and innovation bottlenecks were discussed and thoroughly


INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

analyzed. A glimpse was given into the methodology used to address the problems of
non-performing clusters and other market-related problems. Country-specific market-
related problems (particularly SMEs/cluster industries) were actively discussed and
carefully examined by both the discussants and the participants. Among the problems
that emerged in the interactive discussion include: (1) marketing problems – firms are not
well equipped with appropriate marketing techniques and strategies; (2) small firms have
difficulties in accessing markets or have inadequate access to credit facilities; (3) there is a
lack of information on foreign markets and information asymmetry as regards government
rules and regulations on enterprises and (4) the regulatory environment for business is
unfavorable – cumbersome and costly procedures for small industries, e.g., red tape with
firms having to obtain many signatures in each step of the process (acquiring licenses and
business permits, certifications problems). Among the strategies identified for policy makers
in addressing some of the market-related problems and promoting cluster development
include (1) harnessing private-public sector partnership (through dialogues between the
government and firms, building linkages); (2) prioritization of core issues; (3) finding
the real underlying causes of failures or non-performance of firms; (4) capacity building
for entrepreneurs (training programs for improving their competitiveness); (5) providing
infrastructure and access to credit

Commentator: Mukesh Gulati, Project Coordinator, Foundation for MSME Clusters

Lecture 10: What Is Japan Center & The Japan Center Business Course

At the core of innovation is the quality of human resources. Without the right knowledge,
skills and technical know-how, innovation cannot succeed. Thus, investment in human capital
is the key to achieving sustained innovation and further growth of the industry. On the other
hand, donor agencies play a very important role in the development of an economy. There
are various channels through which donor institutions can contribute to the existing efforts
of nations to develop their economies such as by providing financial and technical assistance
in the area of capacity building. Programs that enhance the technical capacities of people
and communities are a crucial ingredient of industrial development. Knowledge about the
latest technologies and techniques for managing a business, for instance, can be obtained
from various training programs, either local or abroad. Technology and knowledge transfer,
the key factors for successful innovation, are likewise acquired from training programs. The
main objective of the lecture was to promote the Japan Center, the courses it offers and the
importance of this initiative in building the industrial workforce of a country.

Topics included:
¡ The Japan Center, its history, mission, characteristics and main activities
¡ Concept and purpose of the Business and Japanese Language Courses
¡ Concept of Mutual Understanding Activities
¡ Collaboration with other Japanese organizations
¡ Outcomes of Business Courses
¡ Specific details about the Business Courses (lecture courses, etc.)
¡ Sustainability of the courses (localization of lecturers and operation,
employment of local lecturers, action plans, etc.)

Presenters: by Yoshikazu Tachihara, Team Director, Japan International Cooperation

Agency (JICA) / by Yasuyuki Kuroda, Senior Economist, International Development
Center of Japan (IDCJ)


 EXECUTIVE SUMMARY

Lecture 11. ADB’s Experience in SME Assistance

One of the main thrusts of the Asian Development Bank (ADB) in transition economies
at present involves technical assistance and support for policy reform agenda and strategies
that are geared towards accelerating the process of structural change in these countries,
i.e., moving from a centrally-planned economy to a market-oriented one, through sound
economic reform and management with the ultimate goal of reducing poverty. This lecture
aimed at presenting ADB’s experience in SME assistance, with particular emphasis on
the GMS (Greater Mekong Subregion) Countries, namely, Cambodia, Lao PDR, and
Viet Nam.

Topics included:
¡ Basic facts about the economies of Lao PDR, Cambodia and Viet Nam
¡ Poverty reduction: causes, strategies and directions
¡ The role of the government in GMS in supporting the process of structural
change
¡ The role of the government in GMS in supporting SME development and the
process of structural change
¡ Channels and strategies through and by which ADB supports or assists GMS
to support SME development and the process of structural change

Presenter: João Pedro Farinha Fernandes, Economist, Asian Development Bank

Lecture 12: Policy on Industrial Clusters in Republic of Korea

The presentation focused on the role of the government of the Republic of Korea in
promoting industrial clusters. A showcase of successful industry clusters and the specific
roles of public sector institutions (national and local) through some policy agenda items
were the essence of the presentation.

Topics covered:
¡ Rationale for forming industrial clusters
¡ Efforts to boost the rural economy: Benchmarks of best practices
¡ Issues raised as stumbling blocks of national development
¡ Strategies to enhance industrial clusters
¡ Policy agenda for industrial clusters
¡ Situation of industrial clusters in ROK
¡ Blueprint on industrial clusters
¡ Economic situation of Jeollabuk-do
¡ Understanding KSF
¡ Partnering with existing enterprises

Presenter: Bobae Park, Head of Administrative Service, Chonbuk National University,

Republic of Korea


INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Country Presentations
A. Country Presentation: Lao PDR
Presenter: Manohack Rasachack, Deputy Director General, Ministry of Industry and
Commerce

B. Country Presentation: Uzbekistan

Presenter: Aziz Abdukhakimov, Deputy Head, Cabinet of the Ministers

C. Country Presentation: Viet Nam

Presenters: Hoang Kim Huyen, Manager, Industrial Policies and Strategies Institute
(IPSI); Truong Thi Chi Binh, Manager, Industrial Policies and Strategies Institute (IPSI);
Vu Xuan Thuyen, Senior Official and Head of GEL & LP Division, Ministry of Planning
and Investment

D. Country Presentation: Cambodia

Presenter: Tung Ciny, Director, Ministry of Industry, Mines and Energy

E. Country Presentation: Mongolia

Presenters: Bat-Undrakh Nyamsuren, State Secretary, Ministry of Industry and Trade;
Amarkhuu Erdenepurev, Deputy Director, Policy Coordination and Strategic Planning,
MIT; Osorpurev Batsuren, Officer, PCSP, MIT; Bataa Ganbold, Deputy Director, Financing
Department, Ministry of Finance

F. Country Presentation: Kazakhstan

Presenter: Kuat Tumabayev, Head of Budget Investment and Planning Division, Ministry
of Economy and Budget Planning

G. Country Presentation: Kyrgyz Republic

Presenter: Emil A. Abdykaparov, Head of Division, Ministry of Economy and Finance

H. Country Presentation: Tajikistan

Presenter: Nasimjon A. Hakimov, Chief Specialist, President’s Office

I. Country Presentation: Myanmar

Presenters: Khin Maung Than, Deputy Director, Directorate of Industrial Supervision &
Inspection, Ministry of Industry and Htwe Htwe Win, Assistant Director, Directorate of
Industry, Ministry of Industry

Field Trips
Field Visit to Kawasaki City on 16 March 2004
¡ SMEs in Keihin Industrial Area (Kakumaru Kinzoku Co., Ltd. And Hinode
Corporation)
¡ Kanagawa Science Park
¡ Kawasaki Entrepreneur Asian Village (VTECHMATE CO., Ltd.)


 EXECUTIVE SUMMARY

OPENING REMARKS

Opening Remarks
Masahiro Kawai, Dean
Asian Development Bank Institute (ADBI), Japan

Background

The promotion of small and medium-sized enterprises (SMEs) is one of the key elements for
achieving economic growth, employment generation, and poverty reduction in developing
countries in Asia. The Cluster-Based Development Approach Policy Seminar was intended
to showcase the various advantages of a cluster-based approach to industrial development
planning and SME development. Supportive national policy frameworks and enabling local
business conditions are needed for these clusters to flourish. Given the rapid development
of market-based economic activities and the rapid pace of economic globalization,
policymakers and government officials in the former centrally-planned economies, who are
the main target of this endeavor, are facing new challenges with regard to the “role of the
public sector.”

Emerging Issues and Challenges

SMEs constitute an integral part of any economy in Asia. They continue to produce a
significant part of gross domestic product and, more importantly, generate a majority share
of employment. They offer entry points for migrant workers from rural to urban areas,
provide substantial off-farm employment opportunities in rural areas, and have the potential
to harness local capacities and resources. Until recently, it was believed that successful
industrial development often coincided with the emergence of large enterprises with an
intra-firm division of labor that resulted in high productivity and competitiveness. However,
technological and market developments have challenged this industrial perspective. With
the development of new information and communications technologies and the rapid
pace of globalization, the optimal size of industrial firm operations does not have to be
so large. What appears important is the role of networks among firms, large and small,
with specific technologies, know-how, skills, competencies and, above all, entrepreneurship.
Also, consumers put a premium on customized goods rather than standardized, mass-
produced goods. As a result, successful industries are increasingly characterized by flexible
specialization, high-quality networking and close relations among small-scale firms and
supporting institutions. This phenomenon presents new opportunities for SMEs, even
within developing countries, to become main actors of industrial development much more
substantially than previously believed.
Against this background, groups of firms located in close proximity have proved to
be capable of achieving rapid growth of domestic sales, exports, output and employment,


INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

while preserving high-value-added jobs and technological advantages. Evidence from

both developed and developing countries testifies to the unique opportunity that SME
cluster development provides for reconciling the often conflicting objectives of economic
development, environmental sustainability and social equity. In many dynamic clusters
around the world, these features are the outcome of cooperative linkages formed among
local firms, business partners and government officials. Appropriate interventions by public
sector institutions, local governments, and public-private partnerships have proved to be
an essential element in creating mutual trust and collaborative frameworks among various
actors within the clusters, and to harness the endogenous growth potential in the local
areas.
The role of government in promoting economic growth and development has also
shifted as the world has entered the new era of globalization where many countries have
adopted market-oriented economic reforms and policies. As trade barriers and behind-
the-border impediments are lowered, it is no longer sufficient for governments to focus
on growth and development issues in a purely domestic context. Industrial activities of
foreign firms are often an important part of growth equations: they not only bring in
financial resources, advanced production technologies and management know-how, but
they also connect domestic producers, large and small, with foreign markets through their
logistics and distribution systems. At the same time, the public sector needs to withdraw
from industrial activity—directly through state-owned or state-operated enterprises (which
are often inefficient) or indirectly through its guidance of domestic firms to invest here
and there. Essentially, governments must now create a supportive environment to enable
domestic and foreign firms to be active and leave such activities to the private sector,
while setting up appropriate regulatory frameworks so that the market system functions
efficiently. It is likewise recognized that facing a certain degree of market imperfection,
SMEs clearly benefit from some non-distortionary public sector interventions. However,
these new requirements are not yet widely practiced in many developing countries in Asia.
It is essential for policymakers and government officials to have a clear understanding of the
catalytic role of the public sector in the industrial development process.

Expectations for the Policy Seminar on a Cluster-Based Development Approach

The seminar was an attempt to equip key policymakers with sufficient knowledge and
information about industrial development in their respective countries, particularly about
successful SME development experiences, focusing on the cluster-based approach in Asia
and other parts of the world. Policymakers were expected to learn from lectures and
interactive discussions about the common patterns of successful cluster development in
the region. Key catalytic roles of governments were highlighted and the importance of
conducive policy environments was emphasized. One of the vital roles of representatives
from donor institutions is to demonstrate the importance of capacity development activities
that have been applied in Asian countries so as to convey a clear understanding of the
essential elements of successful policy interventions.
The seminar was also a venue for interactive discussions, dialogues and consultations
among academics, donor practitioners and government officials on the necessity of
assistance from donor institutions and the possible modalities of collaboration among the
participating countries. Most importantly, the seminar aimed at generating appropriate and
implementable concrete action plans and policy strategies from country representatives,
in ways geared towards industrial development. As part of the learning process, a field
trip/exposure visit to some industrial areas in Kawasaki City (located next to the Tokyo
Metropolitan area) was scheduled to encourage participants to observe “marketplaces,”

10
 OPENING REMARKS

industrial zones, key infrastructure, and other software support provided by the public
sector in Japan.

Conclusions

The policy seminar not only allowed fruitful exchange of information and interactive
discussions among participants but also offered a gamut of new and apposite policy
strategies that country representatives can choose from in crafting and formulating their
own industrial development policies. The ADB Institute, as the prime mover on endeavors
such as this, continues to provide support through collaborative actions with its partners
and stakeholders for faster growth and development in the entire region.
The opening remarks session was followed by a brief introduction of the seminar by
Toru Hashimoto, Senior Capacity Building Specialist, ADBI. The introduction addressed
the seminar objectives, schedules, coverage and topics and some procedures for country
and group work preparation and presentations. The objectives of the policy seminar were
as follows:

1. To provide knowledge on possible policy intervention under market economy

for SME development, highlighting the cluster-based approach to industrial
development planning

2. To provide opportunities to discuss possible national policy framework and

action plans among participants, donors and academics.

3. To provide opportunities for future collaborations.

11
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

12
 OPENING REMARKS

CLOSING REMARKS

Closing Remarks
Masahiro Kawai, Dean
Asian Development Bank Institute (ADBI), Japan

Mr. Kawai conveyed his gratitude and compliments to all the participants, guests and
members of the policy seminar, hoping for a very successful endeavor. The interactive
process by which the seminar was conducted would be useful, he stated, for both the ADBI
and the participants as it would not only serve as a training course for participants but
also an intelligent and active communication that allowed for greater exchange of relevant
information and practical knowledge about country experiences on and future prospects for
successful cluster-based SME development. Further understanding of the issues about the
subject matter was expressed in great anticipation.
He said that despite the importance of SMEs in the process of structural change and
economic development, not much attention has been paid to them. The cluster-based
approach to industrial planning and SME development brings about a win-win solution
and situation for all key players involved in the process. Competition is a crucial game to
be participated in by concerned stakeholders and in such a game, some end up in glorious
victory while some are bound to fail. The challenge for policymakers and for the government
as a whole rests on strategic policies and actions plans that will continuously support the
successful clusters and provide assistance to clusters that are falling or way behind the
growth frontier.
Market liberalization and deregulation are a crucial part of the process of economic
development but this does not mean that the government’s roles and functions are to be
taken for granted. In many economies the world over, the government is the most crucial
institution for economic development. A dysfunctional government is not supportive of
market and economic development. Market infrastructure, legal systems, regulatory policies,
conducive environment for business, investment and politics are a necessary mix for well-
functioning markets. This range of government powers over the economy however only
extends when markets fail or when externalities are present.
The market economy works best in conditions where there is a harmonious and
collaborative partnership and relationship between the government and the private sector,
with the former being responsible to the latter and the latter being appreciative of the
functions of the former. Apparently, in some parts of the world insufficient economic
development is often associated with a poor relationship between the public and private
sectors. Fortunately, mutual beneficial interaction is something Asian countries can nurture,
which can then move economies forward.
The greatest challenge for participants is how to come up with sound policy actions
that will move their economies forward and allow them to survive in a globalized
environment.

13
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

14
 EXECUTIVE SUMMARY

LECTURES and DISCUSSIONS

Major Challenges in SME Development: Framework of Analysis

Hidekazu Tanaka, General Manager/Principal Consultant
Mitsubishi UFJ Research and Consulting (MURC)

Introduction

Countries face several issues and challenges regarding SME development that vary across
countries and periods the world over, so the policy applications vary as well. The session was
aimed at providing a historical review of SME policies in Japan and a thorough appraisal of
current undertakings related to SME and market development in three countries, namely
Lao PDR, Viet Nam and Tunisia.

SME Policies in Japan and Economic Development

SME policies in Japan changed with the country’s economic development, dating back to
the reconstruction period after the Second World War to the present-day concept of SME
and its corresponding laws and relevant policy instruments and strategies. At the end of
WWII, Japan’s economy started reconstruction, following the dissolution of the business
conglomerates named the zaibatsu, which were once the controlling and dominating force
in most of the country’s economic activities; as well as fundamental economic reforms such
as privatization and the democratization of the market economy.
During the period 1945-1954, the government encouraged the development of SMEs
through the improvement of basic tools for SME policies based on the establishment of the
Small and Medium Enterprise Agency (an agency under the Ministry of Government Trade
and Industry) in 1948. The period 1955-1962 witnessed Japan’s first stage of high growth.
During that time, gaps between SMEs and large enterprises were reconciled through the
rectification of the Dual Structure with emphases on finance, organizational upgrading,
management diagnosis and guidance. The second stage of high growth occurred during the
period 1963-1972 when SMEs were becoming modernized and the government enacted the
“Small and Medium Enterprise Basic Law” in 1963. Knowledge intensification transpired
during the stable growth period 1973-1984 when intangible managerial resources were
enriched via the Institute for Small Business Management and Technology. After the mid-
80s throughout the first stage of the country’s economic transition period, structural change
and industrial agglomeration took place as part of the government’s efforts to support
start-up and new businesses and to promote SMEs. The most recent policy instrument the
government has initiated was the 1999 amendment of the Small and Medium Enterprise
Basic Law that promotes diverse and vigorous growth and development of independent
SMEs. This law not only strengthens the management base of SMEs but also facilitates
their adaptation to overall economic and social changes.

15
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

SME context in the Japanese Economy

Based on the SME Basic Law, SMEs in Japan are defined as follows:

Definition of SMEs in Japan (SME Basic Law) In terms of the number of enterprises,
SMEs account for 99.7% (4,690 in
Sector Definition absolute figures) of the total enterprises
Manufacturing Capital: < US$3million (¥300mill) in the country, the remaining comprises
Employment: <300
large enterprises. In terms of the
Wholesale Capital: < US$1million (¥100mill) number of employees, 29,960 thousand
Employment: <100
or 70.2% are employed by SMEs and
Retail Capital: < US$0.5million (¥50mill) the remaining 30% work for large
Employment: <50
enterprises. As regards the value of
Service Capital: < US$0.5million (¥50mill) shipment in manufacturing, SMEs and
Employment: <100
large enterprises have an equal share in
the economy, at a ratio of 50-50%.
The graph below shows that there were more cases of business start-ups in the past
than at present, where there are more enterprise closures. Apparently the ideal scenario is to
have higher rates of or more business start-ups than closures. This change happened due to
the country’s economic slowdown.

Change in Start-Up and Closure Rates (enterprise based)

Start-up Rate Closure Rate

7.0%

6.0% 5.9% 5.9%

5.6%
5.0%
4.3% 4.5%
4.0% 4.0%
4.0% 3.6%
3.8% 3.8%
3.2% 3.1%
3.0% 3.5%
2.7%
2.0%

1.0%

0.0%
75-78 78-81 81-86 86-91 91-96 96-99 99-01

Major challenges in Japan

SMEs in Japan are predominantly still in the business of subcontracting. Some of the
automotive and electronic enterprises are moving to foreign countries but most are still
in Japan, so that there are still a considerable number of parts and component suppliers.
This being the characteristics of SMEs, the following are the major characteristics of SME
development in Japan:

16
 LECTURES AND DISCUSSIONS

¡ SMEs are in a disadvantageous position vis-à-vis large enterprises

¡ SMEs need to be protected from unfair trade by large enterprises
¡ Recently, SME have functioned as innovative and venture enterprises.

In general, the major challenges in the transition and developing economies include:

¡ SME as locally capitalized private sector enterprises

¡ SME for utilizing local natural and human resources (employment creation
characteristic of SMEs)
¡ SME to form national industrial structure (some SMEs function as part of
bigger industries)
¡ Challenge on the concept of SMEs, whether size is sufficient to define
SMEs.

Major Challenges in Transition and Developing Economies

The following are the country-specific challenges based on some SME-related development
programs conducted:

Case of SMEs in Lao PDR

SME Decree (No. 42 PM) states that the major tasks are:
¡ Improve the regulatory environment
¡ Enhance the competitiveness of SMEs
¡ Expand the domestic and international market
¡ Improve access to finance
¡ Encourage the development of business organization and accounting
¡ Enhance entrepreneurial attitudes and characteristics within the society

Policies to be reviewed as regards SME development in Lao PDR:

¡ Registration and licensing: simplifying registration and licensing procedures
to make business start-up easier
¡ External trade: simplifying import and export procedures such as the
importation of regulation items, inspection at border to facilitate trade
¡ Investment promotion: simplifying FDI approval procedures using the OSS
technique (one-stop-service)
¡ Access to finance: providing access to finance such as the development of
banking products for SMEs, financial leasing and non-collateral financing
¡ Accounting: simplified accounting for SMEs
¡ Business Development Services (BDS): enhancing function of business
organizations to support SMEs.

Case of Tunisia: Investment Credit for SME

¡ Despite the country’s satisfactory economic performance in 2002-2005, it

still has low investment growth and that growth is very limited in several
export sectors; it is coupled with high unemployment rate
¡ Recognizing the role of SMEs in Tunisian economy, there seems to be a need
to further upgrade SMEs

17
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

¡ Government-created SME Finance Bank

¡ Active commercial banks exist as co-financiers
¡ Government applies non-discriminatory policy for foreign capital
¡ Has requested Japanese government finance though Japan Bank for
International Cooperation (JBIC)

Case of Viet Nam: Competition Law for the Market

¡ Recognizing the need for market rules for a competitive business environment,
the government of Viet Nam enacted the Competition Law in 2005 (the
Anti-monopoly law is the equivalent policy instrument in Japan). Alongside
this effort, technical assistance was received from JICA with assistance from
the Fair Trade Commission of Japan
¡ Issues include the prevailing dominance of State-owned enterprises (SOEs)
in the country’s basic industries (cement, among others)
¡ Foreign invested enterprises already share some major products such as soft
drinks and insurance (Coca-cola and prudential insurance)
¡ Economic growth vs. fair competition
¡ SME promotion under competitive market rules

Among the points considered for further discussion include:

¡ To review the definition of SMEs
¡ Policy applications for the market economy
¡ The government’s role in promoting SMEs

Q&A/Discussions:

Queries about some best practices in the US and the Europe were made, i.e., Affirmative
procurement for SMEs and Small Business Act, respectively as regards government
intervention in promoting SME and developing industrial clusters and whether said
practices or laws and regulations also exist in Japan.
Compared with the US, investment funds in Japan are relatively limited and funding
institutions are less active in providing loans to enterprises. As a result, opportunities for
obtaining funds are very limited especially among businesspersons and investors who want
to start up a new business. Hence, prefectural governments are encouraged to set up their
own investment funds to provide the equity for financing/loans to SMEs. At the national
level, although the government does not provide financial assistance, there are SME agencies
that are responsible for the technical aspects of SME operations. At present, issues about
funding and equity financing have been gaining increased attention, and initiatives from the
prefectural governments are starting to have effects. While the prefectural governments are
responsible for SME development policy, the central government is promoting a scheme for
certain groups of enterprises, such as in infrastructure. State-owned financial institutions also
play a role in SME financing. In Japan, while the government provides the non-collateral
financing, the commercial banks provide the loans.
One of the major characteristics of the Japanese economy is the prevalence of the
subcontracting system. While there are many disadvantages with subcontracting-dominated
businesses, the advantages far outweigh the disadvantages, as the system facilitates technology
assistance (provided by large enterprises to SMEs), managerial assistance and some forms
of financial assistance from large enterprises to SMEs, resulting in reduced market failures
in credit, technology and technical know-how.

18
 LECTURES AND DISCUSSIONS

Major Challenges in SME Development: Development Stage

and SME Assistance
Nori Iai, Consultant, Unico International Cooperation

Background

There are various ways by which the countries and regions of the world can address their
economic development problems. Despite the abundance of economic development
methodologies and theories, it is acknowledged that there is no internationally recognized
methodology for the analysis of development. The same is true for the development of
small and medium enterprises (SMEs). Methodologies for analyzing SME promotion and
development are often not well developed in that there is lack of consensus among players
on how to understand the actual state and issues in a simple way. Thus, there is an increasing
need for methodologies that are easily understood by implementers.
Awareness of the problems regarding SME development through time has grown on
account of the following: (1) the promotion of SMEs has become an essential policy for
sustainable development in developing countries; (2) on top of the diverse nature of SMEs,
the initial conditions in which they operate also vary by country; (3) it is recognized that
the Southeast Asian model of Japanese Economic Cooperation is not always applicable
in other situations; and (4) countries are encouraged to conform to innovation models
that emphasize market mechanism and accountability. The biggest challenge therefore is
how to respond to diversities involving initial conditions, momentums of development and
benchmarks by countries.
As previously mentioned, the initial conditions under which SMEs operate differ by
country or area. Among these conditions are the level of literacy and basic education; the level
of infrastructure development, policy and systems; the incongruous relationship between
the international and domestic social and economic systems; the diversity of development
influences from Japan, Europe, USA and neighboring big economic powers.
Given this, a persuasive and effective methodology for SME promotion must start with
the development of frontline oriented policies by harmonizing global perspectives with the
inherent circumstances of each country. The next step would be to develop or adopt an
innovation model that focuses on market mechanism through: (1) the benchmarking of the
business environment where country-specific investment environment is studied; and (2) a
breakthrough in the MF and BDS approach.

Hypothesis and Framework of the Study

SME promotion policies can be designed in different stages. The first is to define four
themes: (1) Policies/systems/business environment; (2) Business Development Service
(BDS); (3) Finance; and (4) Technology. The second involves designing the development
stage by category. Third is to select indexes for monitoring the stages of development.
The fourth involves preparing support measures by stage of development. The final stage
involves examining the stage of development of sampled countries.
The correlation and interrelationships among the core market, systems and services are
depicted in the figure below, which serves as a framework for evaluating SME development.
Considering this, participating countries can review their existing methodologies for SME
promotion and development.

19
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Correlation among Core Market, System and Service

Finance
Free-based Embedded BDS
services
3
services
Technologies
Services and Infrastructure
Infrastructure Public
services services

Information and communication

Business Environment
Delivery

Producers
1 Consumers
Core Market
Supply Consumption Demand

Setting and enforcing rules

Broadly Sector-specific
relevant laws regulations
2 Business Environment
Non-statutory Institutions Informal
practices
Policies
regulations
System

In each of the four theme categories, the stage or phase in development is determined by
a set of mutually relevant factors. This framework serves as a guide for developing countries
that are interested in evaluating the state of SME development in their countries.
The table below summarizes the conditions or situations under each stage of
development per category of SME development. These conditions also determine the stage
of development of the country in terms of its SME development.

Initial Stage Development Stage

Actual Status of SMEs
¡ Enterprises are mainly micro enterprises and there ¡ There is an abundance of competitive SMEs
are informal sector markets
¡ Level of education and specialized knowledge and ¡ Level of education and specialized knowledge and
technologies is low technologies is high
¡ Low access to finance ¡ High access to finance
¡ Linkages among enterprises are low ¡ Linkages among enterprises are high
Business Environment
¡ Complicated procedures for registering companies ¡ Procedures are simplified
(e.g., whether acquiring licenses to export/import
are constraints)
¡ Complicated tax system and collection system are ¡ Tax systems are in place to enhance competition
elements of constraints
¡ Judicial system does not always protect economic ¡ Decreasing unforeseeable judicial risks as a result of
rights well functioning judicial system
¡ Labor laws constitute impediments ¡ Reforming laws to enhance competition

BDS
¡ Access to basic services is low ¡ Access to basic services is high
¡ There is a market failure in the commercial base ¡ There is free competition among commercially
provision of BDS independent service providers
¡ Direct provision of services and subsidies by the ¡ Government and business associations
government complementarily support markets

SME Finance
¡ People’s confidence in financial markets is low ¡ People’s confidence in financial markets is high
¡ Access by SMEs to financial services is low ¡ Access by SMEs to financial services is high
¡ Ratio of informal finance is high ¡ Ratio of informal finance is low
¡ Development of Credit Insurance System is low ¡ Development of Credit Insurance System is high
¡ Function of financial supervision is low ¡ Function of financial supervision is high

20
 LECTURES AND DISCUSSIONS

For a thorough evaluation of SME development in each country, there are also proposed
indicators by which stages in development can be evaluated or reviewed.

Indicators to Monitor Stages in Development

Actual Status of SMEs

Items Check points Indicators (samples)

Place of SME sector in national economy

Definition of SME, ¡ Who (authorities/institutions or laws) and how Number of business places by
number of SMEs define SMEs? size of company, number of
¡ How many companies are registered and how about companies
proportion of micro-enterprises, small companies,
medium-sized companies and big companies?

Ration of formalized ¡ At what percentage of SMEs do they stay in Informal sector ratio in national
SMEs informal sector? economy

Position of SMEs in ¡ Activities of SMEs, how are they important in the Number of business places by
national production manufacturing sector as a whole? size of manufacturing company,
activities number of companies, sales
volume, added value, amount of
capital investment

Competitiveness of ¡ To what extent are SMEs competitive and productive, Sales volume, added value
SMEs compared with big business? and capital investment per
¡ What is the share of SMEs in domestic market employee, export and import
and that in international markets? data of industrial products

Employment ¡ How do SMEs contribute to labor market Number of employees by size of

absorbability of SMEs (employment numbers)? company

Dynamism of SMEs ¡ How do SMEs contribute to industrial dynamism? Number of start up (start-
¡ (Start-up ratio and closure ratio, are they both up ratio), number of closure
high? ) (closure ratio)

Level of education/training and technology

Level of education/ ¡ At what level of education/training are entrepreneurs Enrollment ratio of primary/
training and and middle management? secondary and higher education,
technology of SMEs ¡ How many entrepreneurs have mastered professional number of graduates of
expertise and management know-how? vocational and business schools

Finance

Access to finance ¡ Financial institutions: do they grant loan facilities Ratio of funding in formal
to micro-enterprises and SMEs? financial sector
¡ What kind of constraints do SMEs face in case
of finance from financial institutions?

Linkage

Linkages among ¡ How strongly do SMEs have vertical or horizontal Ratio of procurement from
enterprises linkages among enterprises and what synergies do SMEs of big companies, number
they appreciate? of subcontracts of SMEs
¡ Are SMEs included in supporting industries of big
business or international network?

21
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Business Environment

Items Checkpoints Indicators (samples)

Procedure of start-up business, acquiring approvals and licenses

Start-up business ¡ How easy is it to register companies in order Number of days, cost and
to pursue official business? minimum capital needed for
registration

Acquiring approvals and licenses ¡ How complicated and how expensive is it to Amount of time and cost needed
acquire approvals/licenses related to for acquiring approvals/licenses
business activities?

¡ How complicated is process of export and Number of documents and

Procedure of international trade import, and how long generally does it take amount of time needed in
to complete the process? process of export and import

Tax system and its collection

Tax system and its collection ¡ Burden of tax and complicated procedure of Type of tax, taxation ratio,
tax payment: how serious are they? amount of time that company
takes for tax payment

Improvement and enforcement of legislation

Protection of business property ¡ Does it happen that central government Lawsuit and percentage of win
and personal assets or local authority unreasonably dispossess
business property or personal assets?

Investor protection ¡ Investors’ rights: how strongly are they Degree of investor protection
protected by means of enforcement of
laws?

Effectiveness of contracts ¡ In case of breach of contracts, how much Amount of time and cost to
time and cost does it take to compensate be spent from initial lawsuit to
damages by means of lawsuit? final compensation

Bankruptcy proceedings ¡ In case of bankruptcy of debtors, how much Amount of time and cost to
time and cost does it take to collect debts by be spent from initial lawsuit to
means of legal proceedings? final collection

Legislation to assure free ¡ Laws to assure competition such as antitrust Lawsuit and percentage of win
competition acts: are they well prepared in order to
assure free competition in markets?

Employment-disemployment

Employment/disemployment of ¡ Laws and rules related to employment and Degree of difficulty and
workers disemployment of workers, how flexible are cost for compliance with
they and how much does it cost to comply law/regulations
with them?

BDS

¡ Are basic services steadily provided at a low cost?

¡ What is the ratio of commercially-based provision of BDS?
¡ How many commercially independent providers are there?
¡ Do independent providers have any fear of crowding-out?
¡ Do business associations and chambers of commerce and industry support
the development of BDS market without competing with private providers?
¡ Does government policy on BDS place a disproportionate emphasis on direct
services and provision of subsidies?

22
 LECTURES AND DISCUSSIONS

¡ Are regulations enforced by government constraints on the promotion of

BDS?
¡ Is there any control of government or self-control of the business
association?
¡ Do business associations and chambers of commerce and industry work for
the interests of the private sector?
¡ Do stakeholders understand the BDS approach?

SME Finance

3 fields to be
Main items Viewpoints Indicators (samples)
checked
Financial institutions Delivery Procedure Days and cost needed to register new
(Financing) company, to take out mortgages

Network Oligopoly ratio of big banks, loan ratio of

rural/urban area

Deposit Interest rate Interest-rate differential between deposits

and loans

Outstanding balance Deposit reserve ratio, ratio of cash outside

banking system

Loan Interest rate Interest-rate differential between deposits

and loans

Outstanding balance L/D ratio, ration of loans to private sector,

NPL ratio

Collateral Function of credit guarantee system, margin

SME Finance

of collateral

SMEs Funding Formal finance Ratio of companies which finance in formal

(Funding) market and ratio of amount financed

Informal finance Ration of informal micro finance

Corporate Financial statement Degree of disclosure of account book and

information financial statement

Business information Appropriateness of business plan

Authorities Supervision Supervision Ration of financial institutions monitored

(Supervising/ by competent authorities, application of
monitoring) Monitoring/report prudential standard
Financial Legislation Enforcement of banking law, days and
infrastructure cost needed to proceed to bankruptcy and
repossession

Accounting system Enforcement of accounting standards,

ability of CPA

Information Trustworthiness of credit bureau

23
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Technologies

Technologies Explanation View Points

Equipment Technological skills to operate What is the level of precision and quality?
technologies and improve introduced/imported Do they source equipment from equipment
equipments manufacturers in the country or within the same
region?
Do they alter and improve equipment they originally
bought?

Proper technologies Technological capability for devel- Do they develop new products by themselves?
opment, design, and production; Do they design in-house?
processing and assembling skills, Do they manufacture machinery tools by themselves?
product inspection technologies

Management To materialize quality improvement, Do they implement management by visualization?

Techniques cost reduction and faster delivery Do they make production plans in-house? At what
frequency?
Do they have a quality inspection unit?

Procurement of How much of parts and materials Are material and parts major factors leading to
parts and materials necessary for production can be defective products?
sourced within the country What is the level of industrial clustering in the region?

Industry Level of organization of industry- Are private sector organizations formed?

associations specific chambers and associations Are there prime contractor firms among local firms?
Are there assembling firms among local firms?

Public institutes Public institutions exist, e.g., testing Is there a technology support center?
and research institutes, sectoral Do they have a technology counseling window?
promotion centers, standard and Is there a vocational training institute?
accreditation institute

Institutions & Existence of organizational unit Is there policymaking unit on technology promotion
promotional in charge of promoting SME for SMEs?
schemes technologies Are there laws for SME promotion and professional
engineer law?
Is there budget provision for SMEs’ technology
development?

In addition to the above-listed indicators and checklists for monitoring and reviewing
the stages of SME development per category and function, more effective approaches for
each function by development stage have been proposed. At each stage of development,
i.e., from initial to developed stages, there are suggested entry points for donor agencies,
involving, for instance, the focus or direction of assistance in each stage of development.
The tables below summarize these approaches.

24
 LECTURES AND DISCUSSIONS

Effective Approaches in Policy, Institution, Business Environment

by Development Stage

Stages Direction of Effective Assistance Approach

1 1. Knowledge Exchange, Transfer and Dissemination (Policy Dialogue) on Advantages of Free and
(Earlier Fair Business Environment and Effective SME Policies and Institutional Framework
stage) 2. Basic Training of Government Officers on Design/Implementation of SME Policies and Institutional
Framework
3. Human Resource Development for Broad Range of People through Development/Strengthening
of Basic Education and Vocational Training
2 1. Development/Improvement of Institutional Framework for Promoting Free and Fair Business
Environment
2. Knowledge Exchange, Transfer and Dissemination (Policy Dialogue), Technology Assistance,
and Human Resources Development for Establishment/Strengthening of SME Promotion
Policies and Institutional Framework
3. Human Resources Development of Public and Private Sectors for SME Promotion at Central/
Local Levels
3 1. Knowledge Exchange, Transfer and Dissemination (Policy Dialogue), Technology Assistance for
Development /Implementation of Concrete SME Promotion Measures Targeted for Specific Policy
Objectives
2. Assistance for Design/Implementation of Concrete Policies Measures for Promotion of Specific
SME Issues (Development of Industrial Sector, Sub-Sector, Region, and Value Chain Activities)
Human Resources Development for Promotion of Specific SME Issues (Development of Industrial
Sector, Sub-Sector, Region, and Value Chain Activities)
4 1. Assistance for Design/Implementation of Institutional Framework for Strengthening Industrial
Linkages with Foreign Companies including Japanese Firms
2. Assistance for Design/Implementation of Institutional Framework for Strengthening Competitive
Advantages of SMEs, which Contribute to Promoting Trade and Investment in Consideration of
WTO and FTA (with Japan and Others)
3. Strengthening of Human Resources Development in relation to 1 and 2
5 No Basic Assistance Needs
(Developed
countries)

25
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Effective Approaches in BDS by Development Stage

Stages Direction of Effective Assistance Approach

1 1. Prioritizing Upgrading and Expansion of Basic Services and Improvement of Business
(Earlier stage) Environment before Promoting BDS, or Considering Measures Combining All
2. BDS Awareness Raising Training for Policymakers in Public and Private Sectors (Existing BDS
training seminars could be made part of such awareness raising training)
3. Development of BDS Roadmap through Market Assessment (Including assessment of other
regulations and public services which might limit development of BDS market)
4. Development of BDS Strategies that also Facilitate Core Market Development
5. Provision of Information on BDS Providers ant Their Service Menus
6. Strengthening Policy Dialogue with Chamber of Commerce and Industry and Business
Associations and Enhancement of their Capacity to Develop BDS Market
7. Introduction of Modern Management Studies into Educational and Training Market,
Entrepreneurship Development

2 1. Expansion and Deepening of the Above

2. Capacity Building of Model Case of Private BDS Providers
3. Introduction of Pilot BDS Presumably Suitable to Particular Clientele

3 1. Expansion and Deepening of the Above with Narrower Targeting

2. Time-bound Use of Market Facilitation Tools such as Matching Grants and Training Vouchers

4 1. Limited Application of the Above, Efforts for Remaining Specific Issues

2. Support for Developing New BDS Products

5 1. BDS Development Focusing on Other Poor and Socially Vulnerable Groups

(Developed countries)

Effective Approaches in Technologies by Development Stage

Stages Category Direction of Effective Assistance Approach

1 Industry level 1. Technical Assistance by Public Institutions on Equipment Operation and
(Earlier stage) Simple Repair Techniques
2. Train Processing Technologies of Simple Manufacturing Industries Using Local
Raw Materials
Public 3. Design Technology Policies by Establishing Organizational Body Responsible
for Technology Policies.
2 Industry level 1. Improve Capacity Utilization Ratio by Planned Technical Assistance on
Preventive Maintenance on Equipments
2. Train Light Industry Technologies and Processing of Related Parts
Public 3. Establish Industry Associations and Build Awareness on Data Collection and
R&D Activities
3 Industry level 1. Train Engineers who can Alter and Improve Equipments, by Promoting
Equipment-related Technologies through Imports of Heavy Chemical Industry
Plants
2. Technical Assistance on Management for Cost Reduction such as Inventory
Management and Subcontract
3. Technical Assistance to Willing SMEs to Improve Local Procurement of Parts
and Materials.
Public 4. Establish High Level Vocational Training Institutes to Increase Skilled Labor.
4 Industry level 1. Develop Human Resources who can Design Complex Integrated Assembly
Products (Development of Management Resources).
2. Promote Supporting Industry by way of Technology Development Strategy
and Facilitating Linkages to Core Manufacturing Firms.
Public 3. Further Development of Information Infrastructure
5 No Basic Assistance Needs
(Developed
countries)

26
 LECTURES AND DISCUSSIONS

The application of these methodologies and approaches and the use of the proposed
indicators to review or monitor the state of SME development in each country and to assess
which development stage of assistance programs are most crucial in SME development
may vary by economy, depending on the prevailing economic circumstances. This kind
of framework could, however, aid policymakers, especially in developing countries in
reconsidering or rethinking which policy parameters and instruments are most suited or
needed for reviewing and improving SME policies or institutions. The framework is not
a standard tool for evaluating SME development but simply provides policymakers with
a checklist or guidelines for assessing the state of SME development in their countries.
Finally, a number of future directions need to be considered in this regard, namely: (1)
Use of check-sheets by the relevant ministry officer in order to recognize the stage of
development by category; (2) Deepening discussion with other ministries or donors,
whenever necessary, about fulfilled check-sheets in order to have a common recognition
and to improve checking methods; (3) Establishing standards free from the personality of
the individual ministry officer and to make an appropriate and transparent Development
Road Map (4) Developing more clear-cut evaluation systems for SME promotion policies
as well as Economic Cooperation.

Q&A/Discussions:

Putting together all the elements of the policy parameters into four categories, namely
business, financing, business development services support and technology is crucial for
monitoring and assessing the level of SME development. Arguments may arise regarding
the appropriateness of the categories developed in the monitoring and assessment tool, but
what is most important in the process is that policymakers are aware of which policies need
to be put in place and which of them require assessment and improvements. It is worth
emphasizing that the importance of the study does not solely rely on how to gauge the stage
of a country using the indicators, but the manner by which all these policy parameters are
drawn together to set up valid guidelines, such as by putting these elements into the next
stage of legislation more rigorously.
A few recommendations were made on how the study could be improved. One
suggestion was to clarify the shift from one stage of development to the next (e.g., does
the country have to move from the first stage to the last to be guaranteed SME growth?).
Another suggestion was to determine the applicability and appropriateness of the study not
only in terms of describing the actual scenario of SME development but also in formulating
policies or strategies for SME development (e.g., if technology and finance are weak but
policy is good, does policy need to be changed?). The interrelatedness of the elements
in each development stage was given emphasis, e.g., indicators that capture the mix of
policies.
It was pointed however that the indicators and stages of development included in
the study are just the minimum standards, and that each country can customize its own
SME monitoring and evaluation tool based on country characteristics, prevailing issues and
pressing needs.

27
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Public Policies for SME Development: Market Failures and the

Role of Government
Andrea Goldstein, Senior Economist, Organisation for Economic Cooperation and Development

Rationale for Government Intervention

There are four major reasons justifying government intervention in industrial policies. One
is to correct market failures that arise due to monopolistic distortion, natural monopolies
and externalities (both negative and positive spillovers) caused by firms or enterprises.
Another reason for government intervention is the provision of public goods. Under
economic theories, the role of government in the provision of public goods is very crucial
given the non-excludability and non-rivalry characteristics of public goods (e.g., non-payers
cannot be excluded from the consumption of a public good, for either technical reasons or
cost inefficiency). Public intervention in this respect is important especially in cases when
there is asymmetric information (e.g., a small firm despite being sound, may not be able
to gain access to credit due to asymmetric information). The third underlying principle for
public intervention pertains to social preferences. In some countries, governments play an
important role in the economy while in others, they do not. Macro economic objectives are
the fourth reason for government intervention in the economy. Ensuring macro economic
stability and promoting growth and competitiveness are the basic principles behind public
intervention in this regard.

Policy Rationale for Government Action

In many developing countries, industrial policies are seen as an ingredient of the

development strategy. Industry has the capacity to organize production, mobilizing both
tangible and intangible assets, in the sense of using existing assets and creating new necessary
assets. Many countries have come to the realization that industrialization is essential for
the transformation of the economy as a whole. Industrial policies are a subset of several
government policies, which likewise encompass different public actions that aim to ensure
the sustainable structural transformation process of an economy. Public actions relating to
industrial polices are also important especially in a rapidly changing environment where
competition and globalization are the name of the game. Industrial policies in this sense
need to be harmonized and consistent with recent developments brought about by global
changes such as the integration of economies. Succinctly, industrial policies concern all
productive activities.
Among recent changes in productive structures and international competition are: the
entry of new competitors, such as Japan in the 1980s and People’s Republic of China
and India more recently; technological changes such as the diffusion of information and
telecommunication technologies (ICTs); scientific breakthroughs such as genetic engineering
and the development of biotechnology; institutional changes such as the deepening of
European integration and enlargement of European Union (EU); social and demographic
changes such as the ageing of the population in developed countries and transformation of
(local) clusters into (global) value chains.
Clusters evolve over time. This kind of transformation depicts the fundamentals
of evolutionary economics characterized by a system that is continuously disrupted by
technological change. This kind of change implies a dynamic process under which mutation
leads to superior responses and outcomes, which are then geared towards innovation. The
factors that facilitate the successful evolution of clusters over time consist of firms that are

28
 LECTURES AND DISCUSSIONS

the key players in the transformation process, with their strategies and intrinsic capabilities;
an institutional framework that is key in any transformation process; tacit knowledge
– a knowledge that is accumulated through experience; and learning by doing, one that
is embodied in individuals, transferred through social interaction, a non-formalized (as
opposed to codified knowledge which can be stored, copied and transmitted easily)
knowledge which large part is needed for innovation.

New Industrial Policy

Industries change, as do industrial policies. There are at least three key differences between
old and new industrial policies, particularly in terms of design. One of the differences is
that there is a growing recognition that growth is led by the private sector. During the 60s
and up to the mid 70s, industrialization was mainly led by the state, but at present, growth
and industrialization focus more on the initiatives of the private sector. Thus policies are
geared towards promoting private entrepreneurship where great emphasis is on high-
powered incentives to trigger private risk taking. Industrial policies are designed in such a
way that incentives are created for firms to form clusters. Another difference involves the
role of public entrepreneurs, i.e., top policymakers engage themselves in organizational
experimentation. Policymakers have become more visionary and are good at steering the
process of structural change. The role of capacity building has gained ground, identifying
and training people who can implement changes in the country. The third difference is that
at present, the focus is on process not outcomes. This entails a private-public process of
discovery to generate new opportunities for private agents. Rather than focusing on the
outcomes of growth in terms of GDP or GNP, emphasis is now on the process of growth
whereby the public-private sector relationship is strengthened, e.g., a dialogue over projects
and programs between private and public enterprises is given importance.

National Innovation System: A Conceptual Framework

Technology Imports:
ã FDI
ã Licensing
ã Capital equipment
S&T Institutions
(in a narrow sense):

ã Quality
FIRMS ã Standards
(targeting learning and ã Metrology
technological efforts to
improve performance) ã Extension services
ã R&D institutions
ã Universities (S&T Dept.s)
ã Technology training
Framework for Technological ã Legal framework for IPR
Efforts and Learning:
ã Human technical skills
ã Technical training
ã Educational system
ã Incentives for local R&D

29
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

The Cluster Approach and Industrial Policies for Cluster Development

Clusters are defined in various ways. Berger and Locke (2001) define them as geographically
concentrated productions systems characterized by a large number of small and medium-
sized firms that are involved in various stages of the production process in a particular
industry. HBS-Porter defines them as geographic concentrations of interconnected
companies, specialized suppliers, service providers and associated institutions in a particular
field. The process by which clusters exist and the means by which they are defined influence
public and industrial policies. Moreover, the so-called associated institutions that define
public policies include educational and training institutions that build the workforce
for an industry; research institutions that generate the scientific knowledge required for
technological change; banking and financial institutions; and government institutions whose
policies and practices have an impact on the providers of infrastructure for the industry.
Central to the understanding of clusters is proximity. Proximity enhances innovation and
facilitates the speedy transfer of tacit knowledge among actors, who then logically and
clearly build clusters.
Cluster theory offers several lessons for the design of industrial policies. One is a shift
from comparative advantages (better access to raw materials, cheap energy sources, natural
harbors, large markets) to competitive advantages (unique, place-specific factors stimulating
learning and innovation activities). Clusters are places that in particular stimulate the
formation of competitive advantages (Porter). Taking account of these attributes of clusters,
government should initiate policies that promote cluster formation and upgrading. This can
be done by ensuring the supply of inputs such as skilled workers and infrastructure and by
stimulating competition and rivalry among key players. The government’s role is to support
all clusters, however, rather than attempting to create entirely new clusters. Government
should focus its efforts on reinforcing and building on existing and emerging ones.

Learning from Italy

The Italian model of industrial districts is a very good source from which lessons about clus-
ter development can be derived. The Italian model of cluster development is mainly char-
acterized by: a high degree of cooperation among competitor firms in order to share risks,
stabilize markets, and share innovations; strong trade associations that provide shared infra-
structure, management
training, marketing, Italian manufacturing industry in 2001:
technical and financial The weight of specialization and districts in employment
support; and a strong
local government role 199 clusters
Total manufacturing
(2.174.000 workforce,
in regulating and pro- 45% of export)
(4.894.796 workforce)

moting core industries.

The figure to the right 100%
illustrates the perfor- 65%
mance of the manu- 44%
18%
facturing industry in “Made in Italy” clusters
(3.167.552 work,
Italy. 57% of italian export,
In Italy in particu- trade balance)=+ €80b)
96 “mono-
lar, real service centers product” clusters
play a vital role in pro- (867.101 work) * Fashion, furniture,
food, mechanics
moting and sustaining
Source: Fondazione Edison and Istat.
clusters. These centers

30
 LECTURES AND DISCUSSIONS

provide business development services that are highly customized to the specific industrial
tradition of each area. The services provided by this kind of center include credit guaran-
tees, export insurance and/or promotion, organization of fairs, access to information on the
evolution of markets and technology, client rating, consultancy, training, waste manage-
ment, pollution control, quality certification and award of trademarks, product promotion,
support for innovation, bulk purchase of inputs, and product testing. Successful service
centers display four features, namely: (1) an effective platform; (2) customer-orientation;
(3) embedded autonomy; and (4) enhancing governance potential.
Industrial clusters have been the lifeblood of Italian industrialization. Although Italy’s
industrial clusters have experienced many challenges, and face tough competition from
Asian clusters, particularly in some traditional sectors such as clothing and footwear,
which are labor-intensive industries, its industrial districts still thrive. In fact, new forms
of coordination are emerging, not only among district firms, but also between SMEs and
“lead firms.” Italy is notable for its pioneering efforts in building industrial districts and
clusters. Towns such as Agordo – where the world’s largest manufacturers of eyeglass frames
operate; Luxottica – a world leader in the design, manufacture and distribution of quality
prescription frames and sunglasses as well as owner of leading chains of optical shops; and
Safilo – also a leading manufacturer and distributor of luxury eyewear, are among the most
successful cluster districts in Italy.

Conclusions and Policy Implications

A useful theory of industrial policy must view policy-making and implementation as an

endogenous process of experimentation and learning that aims to deal with vested interests.
Learning from the experiences of Italy, a number of policy implications have to be taken
into account for successful cluster-based industrial development. Firstly, government
interventions must be systemic in terms of policies relating to enterprise development,
competition, trade, regional development, research and development, public procurement,
health and consumer protection. All of these require improved and functioning markets and
a favorable framework for enterprise development and innovation. Secondly, policies need to
be context-specific, to allow for failures to occur, and to be prepared to address such failures.
Thirdly, linkages between industry and the knowledge infrastructure should be reinforced.
This can be achieved through the stimulation of formal and informal cooperation. Next,
systems and clusters should be compared in a detailed manner through the use of benchmarks
for recognizing systemic problems. Further, rather than direct innovation, efforts should
focus on indirect inducements such as building the right institutions and facilitating linkages
that will allow clusters to flourish naturally. Another important implication is that policy
actions should kick off at the firm level. Finally, improving the capabilities of key actors
is necessary for strategic policy design, and for the formulation and implementation of
cluster-based industrial policies.

Q&A/Discussion:

Clusters are defined as geographical concentrations of enterprises in the same sector and
in the same area, which face similar opportunities and challenges. Clusters with a radius
of about 50-75 kilometers are the most common targets. Depending on the country’s
legislative process, clusters tend to coincide with districts, which are normally the smallest
administrative unit of a country, e.g., a municipality or a small administrative district. It is
worth emphasizing, however, that radius should not be the only consideration for whether
a cluster is effective. Rather, the proximity and the extent to which this gives rise to daily/

31
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

weekly interactions between people should be considered. Apart from the infrastructure
shared by clusters, values such as the trust and bonding that result from physical proximity,
are among the advantages gained by firms in clusters.
Clusters are defined in various ways. Michael Porter’s definition for instance, does not
coincide with UNIDO’s definition. At the core of Porter’s definition and analysis of clusters is
competitiveness analysis. UNIDO’s approach to cluster development is just one of the many
different approaches espoused by different organizations and business experts. Ultimately,
the choice of approach rests on the prevailing needs and conditions of a country.
The key difference between tacit and explicit knowledge hinges on the way one acquires
such knowledge. The former has its roots in individual experience, individual perspectives,
values and relationship with others, while the latter is often referred to as recorded or formal
knowledge. The strategies of firms need not be based on explicit/patentable knowledge to
form clusters or to cluster their industries. A classic example of this would be branded bags
such as Prada in Switzerland where on the one hand, companies have recently clustered
their products that need patenting as soon as they are invented and on the other hand, other
clusters exist.

The Advantages of Industrial Clusters for SME Development

Tetsushi Sonobe, Deputy Director, Foundation for Advanced Studies on International Development
(FASID)

Introduction

The misconceptions and skepticism about SMEs (e.g., SMEs being a thing of the past,
with a vanishing role in an integrated and globalized economy), the reasons behind these
misconceptions, and the ways by which these misunderstood ideas can be dispelled were
articulated. In Japan for instance, Sabae, a city located in Fukui prefecture, is famous for
its clusters of eyeglass frame manufacturers (see figure below). Sabae began its production
of eyeglass frames about a century ago. Accordingly, Fukui prefecture accounts for 90% of
Japan’s market and 20% of the world’s.

Distribution of Eyeglass Frame Makers in Sabae City, Fukui Prefecture

32
 LECTURES AND DISCUSSIONS

Industrial Clusters: Definition and Examples

An industrial cluster refers to a geographical concentration of enterprises producing similar

and closely related products (e.g., assemblers and part-suppliers) in a small area. There
are two types of industrial clusters. Type 1 clusters are those that are characterized by the
dominance of SMEs and Type 2 clusters are pyramidal types in which there is one assembler,
many sub-contractors and an even greater number of sub-sub-contractors (e.g., Toyota).
Traditional handicrafts, furniture, garments (both tailor- and ready-made garment
producers such as those in New York City and Old Delhi in India), footwear (both leather
and synthetic such as those in Agra in India, Wenzhou in People’s Republic of China, Kobe
in Japan, Sinoy Valley in Brazil and Addis Ababa in Ethiopia), metal works (scissors and
tableware such as those in Solingen in Germany and Tsubame in Japan), machinery and IT
(Silicon Valley in California, Bangalore in India and Dalian in People’s Republic of China),
are some examples of successful industrial clusters.

Benefits of Industrial Clusters

As pointed out by Alfred Marshall more than 100 years ago, industrial clusters facilitate the
following:

¡ Information spillovers – enterprises can easily learn from other enterprises

¡ Division of labor – enterprises can easily transact intermediate goods and
services with each other
¡ Formation of market for special skills – enterprises can easily find workers
with desired skills and people can easily find jobs.

In addition, industrial clusters can attract customers and material suppliers.

SMEs benefit more from industrial clusters than do large enterprises. Without industrial
clusters, it is difficult for SMEs to undertake activities such as absorbing new ideas on
production, management and marketing; testing new practices; finding good transaction
partners; monitoring parts suppliers; finding good workers, customers and material
suppliers; and ensuring the collection of money and punishing betrayers or cheaters.

SME-led Development of Labor-Intensive Industry

Type 1 industrial clusters, which are dominated by SMEs, are more common than type 2
clusters. SMEs are prevalent in labor-intensive industries. Hence, the promotion of cluster-
based industrial development is often equated with the promotion of labor-intensive
industries, which in turn is linked to employment generation (particularly for the poor)
and poverty alleviation.
In labor-intensive industries, production cost is largely dependent on wage rates.
Essentially, developing countries have comparative advantages in labor-intensive industries
due to lower wage rates. However, labor-intensive industries are not necessarily growing
in developing countries due to constraints such as: (1) poor infrastructure – expensive
transportation and unstable and limited power supply; (2) poor business environment
– underdeveloped legal system and dominance of SMEs which face various transaction
difficulties; and (3) poor technologies – SMEs face difficulties in absorbing foreign
technologies. Industrial clusters mitigate all of these impediments and as such, SME-led
development of labor-intensive is often cluster-based.

33
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Innovation and cluster

Not all industrial clusters in the world have successfully developed. A number have become
extinct as a result of competition among clusters, both local and overseas. The survival and
success of industrial clusters essentially hinge on innovation. The most important finding
from a series of intensive case studies conducted in East Asia, South Asia and Africa is
that a great similarity is observed in the process of industrial development among different
industries in these countries. Empirical results from these case studies suggest that industrial
clusters break new ground for innovations by attracting various human resources, such as
engineers, merchants, part suppliers, skilled workers and individuals who will contribute
to subsequent innovations. Succinctly, industrial clusters develop market transactions and
enlarge the possibilities for innovation.

Q&A/Discussions:

Firms can gain various advantages from operating in clusters. These advantages depend on
proximity. As a firm moves away, the advantages vanish gradually. Some advantages that
were previously mentioned about mutual trust and flow of information clearly cannot be
stretched indefinitely. The question boils down to what is at the core of the efficiency of the
cluster model and the degree to which the advantages are dependent on proximity. Contrary
to what Michael Porter believes, the drivers for successful clusters depend on the spatial
concentration of firms.
Innovation is not just about big projects by big corporations using large amounts of
capital. Innovations come in various ways such as in marketing, production, management
and technology. The process of accumulating small improvements can also be called
innovation.
Moreover, there is a general misconception regarding innovation, i.e., only large-scale
enterprises can innovate because they can dedicate a great deal of money and resources to
innovative projects. Innovation can also refer, however, to the creative ideas of individuals.
The literature finds that large corporations are very poor at motivating innovation because
they are bureaucratic. Innovation is not suitable to large-scale bureaucratic organizations.
A case at point is Boeing, where the bulk of effective valid innovation of the company was
not done at the R&D department but at the factory level, with small improvements being
made to the engine. Another example is Microsoft, a company with a number of dynamic
engineers and programmers, which conveys that innovation can happen at the individual
level. Often, innovation is with large-scale R&D; while it may be true in some industries
such as pharmaceutical, in the vast majority of sectors, innovation is not amenable to large-
scale corporate enterprises. Innovation is indeed much more feasible at smaller than larger
enterprises.
The major obstacle in the field of cluster development is the skepticism that surrounds
it. Many people believe that SMEs are a thing of the past, that they are bound to disappear
in a globalized economy and that they will disappear into nothing as progress comes.
Contrary to these beliefs, SMEs are very relevant especially in developing economies, where
the majority of firms and enterprises are SMEs. Another obstacle is the lack of awareness of
people about clusters. The challenge therefore is to prove that clusters exist and that they are
still relevant. Empirical studies and the literature find a long list of clusters across the globe,
and show that many of these are in developing countries.

34
 LECTURES AND DISCUSSIONS

The Pattern of Cluster Development: An Endogenous Model of

Cluster-Based Development
Keijiro Otsuka, Director, Foundation for Advanced Studies on International Development (FASID)

Endogenous Process of Cluster-Based Industrial Development

Industrial Development consists of three stages. The first is the Initiation Stage during
which pioneers imitate foreign technology, and then succeed and are followed by emerging
firms that imitate their technology. The second stage is the Quantity Expansion Stage, which
takes place right after the emergence of new firms that imitate the pioneers’ technology
and produce the same products as the originators thus, increasing production. However,
with the expansion of production, supply exceeds demand, causing a decline in the
profitability of firms. It is also at this point that entrepreneurs realize the need for new skills
and knowledge, hence, the accumulation of various human resources. Sluggish growth or
declining profitability induces firms to compete through Quality Improvement, which is the
third stage. Hence, declining profits trigger innovation and as a result, quality competition
is strengthened. The figure below depicts this simple model of industrial development.

Stages of Industrial Development

Stage Typical Process of Development

Initiate 1) Pioneer imitate 2) Pioneer’s success
foreign technology in business
3) Emergence of followers
Quantity (imitation of pioneer)
Expansion 4) Expansion of
5) Decline in profit
production quantity

6) Innovation Model
Quality
Improvement
7) Quality
competition

35
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

The table below briefly summarizes the model depicted above in terms of who the
initiators are at each stage of development, the level of their education, the stage at which
innovation and imitation take place occur and the different institutions and locations where
market transactions transpire at each stage.

Institutions &
Stage Prior experience Education Innovation & imitation
locations
• Traders Low • Imitate foreign technology • Suburbs and villages
Initiation
• Engineers • Urban

• Spin-offs • Imitate imitation • Market transaction

Quantity Entrants with various • Stagnant productivity • Division of labor
Expansion backgrounds Mixed • Profitability
ò • Formation of industrial
cluster

• Second generation of • Multi-faceted innovations • Reputation & brand

founders • Exit names
Quality
• Newcomers with new Very • Emergence of large • Direct sales
Improvement
ideas high enterprises • Sub-contracts or vertical
• Productivity ñ Integration

Innovation has to be multi-faceted for firms to be successful. Multifaceted innovations

require a lot of skills and abilities, and thus necessitate educated or highly and technically-
equipped entrepreneurs. Several points have to be underlined as regards the crucial role of
multi-faceted innovations:

¡ The quality of products must be improved through the work of engineers,

designers, and skilled workers.
¡ Since consumers do not immediately perceive the quality improvement,
innovative enterprises must convey the quality information by establishing
brand names and opening their own retail stores, for example.
¡ Since improved products are differentiated products, innovative enterprises
need special parts, which embody new ideas. To protect new ideas, they must
develop trust and establish long-term sub-contracts with parts-suppliers.
¡ Innovative enterprises should embark on exports, absorb non-innovative
enterprises, and seek economies of scale.

Only educated entrepreneurs can perform the multi-faceted innovations spelled out
above.
Based on case studies on certain cluster industries in selected Asian countries, the
succeeding sections briefly explain the trends and patterns of cluster development.

36
 LECTURES AND DISCUSSIONS

The graphs below illustrate the process and trends of the development of the motorcycle
industry in Japan, particularly in the quantity and quality expansion stages.

The Motorcycle Industry in Japan

SUZUKI’s first motorcycle “Powerfree” (1952). Suzuki used to be a A recent model of HONDA’s Super Cub, the world’s best seller
power-loom maker. It was a late comer to the motorcycle industry

Number of Motorcycle Enterprise in Japan Improvement of Quality of Motorcycle Engines

140 0.45
0.4
120
0.35
100 0.3
Number

80 0.25

60 0.2
0.15
40
0.1
20 0.05
0 0
1945 1950 1955 1960 1965
1945 1950 1955 1960 1965
Year
Year
entry exit incumbent
Exiting Surviving

Garment Clusters in Japan and the People’s Republic of China

Jili and Bingo were the subject cluster districts for a comparative case study on garment
clusters in the People’s Republic of China and Japan. Case studies on these garment cluster
districts reveal various similarities in the characteristics of clusters. One is that garment
clusters in both countries have a strong tradition of commerce. Commonly, it was local
merchants who introduced the idea of producing garment products in rural areas. The
major difference is in the stage of development, i.e., Jili in the People’s Republic of China is
currently in transition from the quantity expansion phase to the quality improvement phase,
whereas Bingo in Japan is in the mature stage, having experienced the quality improvement
phase. Moreover, in both cases, it was found that sales of high quality product seem to
be more effective through direct transactions with outside traders or direct marketing
channels.

37
INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Machine Tool Industry in Taipei,China

Knowledge transfer or learning from abroad played a vital role in the success of machine tool
clusters in Taipei,China. The success of the industry began with Taiwanese entrepreneurs
importing a certain type of machine
from an American company located
in Bridgeport. This phenomenon was Changes in Real Value of Production and NC ratio:
the basis for a quantitative expansion The Case of Machine Tool Industry in Taichung
of the industry in Taipei,China. The 1000 50

cluster produced cheap copies of 45

Bridgeport machines until it became 40

a major producer of (numerically 100

35

Real value
30
controlled) machining centers. The

NC ratio
25
resulting surplus of low quality 20
machines, however, lowered prices of 10
15
machines, triggering innovation and 10
subsequently, a qualitative expansion. 5
The figure to the right summarizes the 1 0

expansion and pattern of growth of 69

71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
the machine tool industry in Taichung, Real value of production index NC ratio (%)

Taipei,China.

The motorcycle industry in the People’s Republic of China

The motorcycle industry in Chongqing, People’s Republic of China, is an embodiment of

knowledge transfer from abroad. State-owned enterprises were allowed to obtain technologies
from Japan, leading to the accumulation of technical and managerial expertise of engineers
and technicians in SOEs. However, these knowledge and skills were not effectively used
in the 1980s. After this period, privatization increased, resulting in the rapid formation of
clusters by former employees of SOEs. These SOE-turned-private experts, after gaining
the knowledge transferred from Japanese companies, began producing motorcycles and
continued until the 1990s, when the prices of motorcycles declined. Again, the decline
in prices prompted firms to further innovate. Innovation in this case resulted from the
growing number of educated entrepreneurs among firms and enterprises in the motorcycle
industry.

Conclusions

Case studies on industrial clusters were carried out in select countries in Asia. The results
of the case studies reveal that among those firms that did were unsuccessful or those that
stagnated over time are the ones that did not innovate or had very few innovations, and that
therefore faced difficulties in terms of competition with firms or enterprises that expanded
sales and production based on quality improvements. Also, anchored in these case studies are
two key factors worthy of note in considering the innovative aspects of firms and enterprises
in clusters, i.e., high education and knowledge transfer from abroad. Without these factors, it
would be difficult to carry out multi-faceted innovations (or simultaneous innovations such
as the introduction of new ideas, quality improvement of products, development of new
marketing channels, development of trust with subcontractors, mergers with unsuccessful
firms and exportable products), which are prerequisites to the survival and success of firms
or enterprises in clusters.

38
 LECTURES AND DISCUSSIONS

Q&A/Discussions:

The success of innovation depends largely on the mix of policies and on the characteristics
of an economy. For innovation to be successful, markets must be functional and policy
instruments should be supportive of cluster development. In deciding which industry or big
sectors to kick off with innovations, a country must consider its competitive/comparative
advantages or competitors, e.g., large-scale production and cheap labor in the People’s
Republic of China. Similarly, in order for clusters to prosper, markets have to be working/
functioning efficiently. Markets facilitate cluster formation and clusters make markets
work.
The roles of business associations largely depend on the international stance of
economies. International trade is a necessary condition for business associations to
work. Business associations play a very important role when the economy is engaged in
international trade.
Global value chains are both advantageous and disadvantageous. In the case of the
Philippines for instance, the arrival of global value chains at first resulted in the production of
high quality goods (garments). However, as wages rose (due to child labor laws and policies
in the country), production flowed out of the Philippines and shifted to Viet Nam. This
phenomenon led to the failure of enterprises in the Philippines due to a lack of marketing
capacity. Firms had difficulties surviving because they only learned how to produce quality
products but did not learn how to sell their products. Thus, marketing is one of the keys
to success. Producers that merely fulfill orders from global merchants do not learn how
to sell, so once the latter goes away, they just collapse. On the one hand, global value
chains help improve the production method but on the other hand, they never consider
the essence of marketing and management. Foreign Direct Investments are also a form of
global value chains where one of the advantages is the transfer of management techniques
from firms (MNCs) to local experts. The People’s Republic of China and Taipei,China
are good examples where production methods from FDIs and foreign companies were
transferred to local industries.
Developing countries have an abundant supply of skilled labor. Although machines are
considered a capital-intensive industry, it is possible and effective to utilize labor to produce
machines. Countries may import cheap machines and use a lot of labor to produce relatively
high quality machine products. Motorcycles, for instance, can be made out of cheap machines
and be produced at a low cost, which in the long run can enhance a country’s international
competitiveness. Finally, the development of labor-intensive industries is necessary for
poverty reduction.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Lessons Learned from Asian Experiences

Tetsushi Sonobe, Deputy Director, Foundation for Advanced Studies on
International Development (FASID)

The Wenzhou Model of Industrial Development

Most successful industrial clusters in Asian economies are characterized by successful

innovations. Two models of industrial development provide useful insights and practical
guidelines regarding the essential elements of successful industrial clusters.
The Low-Voltage Electric Appliance Cluster is one of the industrial clusters thriving
in Wenzhou, People’s Republic of China. Wenzhou was once a poor rural area whose
industrialization began in the earthen floors of poor farmers’ houses. Farming households
survived through shared work between husbands and wives, i.e., the latter producing
low-quality products (e.g., shoes, garment products) and the former selling them illegally
throughout the country. Half of its inhabitants migrated abroad (e.g., to Italy) and a
significant portion of the population migrated illegally within Mainland China. Township
governments could not afford to build township- and village enterprises (TVEs). All
enterprises were “essentially private” and industries were densely clustered. Major industries
were apparels, low-voltage electric appliances, cigar lighters, shoes, and other labor-intensive
types. The rapid economic development was mainly initiated by entrepreneurs who learned
from relatives and friends abroad and from SOEs in Shanghai.
During the early 1980s, Wenzhou was infamous for its “junk” products throughout
the People’s Republic of China. People believed that products from Wenzhou were of low
quality until the late 1980s when one enterprise introduced a testing machine in the electric
appliance industry. Consequently, quality checks on products were conducted and in the
early 1990s, an improvement of quality took place, with multifaceted innovations coming
about. Despite the perceptions of inferior product standards in Wenzhou, enterprises
determinedly resolved these problems through the initiation of marketing strategies such as
full-scale use of sales agencies, use of brand names as well as seeking certification of national
standards for their products. Brand names and the seal of national standards indicated a
superior quality for products, increasing consumers’ confidence and leading to increased
production and profitability for the firms. Traders have also played a very important role
in the development of the clusters as the initiators of small enterprises that have grown
throughout the period. The growth of clusters also involved the proliferation of engineers
and subcontractors among firms, signifying the importance of human capital accumulation
and building trust with key players.

40
 LECTURES AND DISCUSSIONS

HQ building and one of the factories of a low-voltage

electric appliance maker in Wenzhou

Map showing the Low-Voltage Electric Appliance Cluster in Wenzhou, People’s

Republic of China

Specifically, the Wenzhou Model of Industrial Development features the following:

¡ Assistance from local governments in the formation of industrial clusters

through the establishment of “marketplaces,” where an enterprise can
easily procure all the necessary materials and sell its products through local
merchants.
¡ Merchant-led quality improvement and multifaceted innovations led by
highly-educated entrepreneurs.
¡ Multifaceted innovations such as the establishment of brand names, the
formation of independent distribution networks, the use of subcontracting
and the formation of enterprise groups, among others (The essence of these

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

innovations was for the innovators to assure a much greater number of

potential customers that the quality of products was high, without depending
on traders)
¡ Collaborative efforts between innovators and other producers in introducing
advanced knowledge through imitation

The Knitwear Cluster in Bangladesh

The export-oriented garment industry in Bangladesh started in the early 1980s. Workers of a
Korean joint venture in Bangladesh were sent to Korea to receive training and upon completion
of the training, these workers went back home to start their own garment businesses. This
phenomenon jump-started the export-oriented garment industry in Bangladesh. Producers
and purchasing houses (i.e., local traders who served as intermediaries between US or
European buyers and local producers) collaborated to attract orders from buyers in developed
countries. At present, the industry accounts for more than 70% of the country’s exports. The
industry consists of woven garment and knitwear sectors. While the woven garment sector
developed first, the knitwear sector has been growing faster in recent years.
Recent developments in the world economy brought about by globalization resulted
in an increasing number of developing countries entering the world garment market, with
buyers demanding higher quality products at lower prices and shorter lead times. Spinning
and weaving are basically capital-intensive activities and as such, Bangladesh does not have a
comparative advantage. As a result, Bangladesh has come to import woven fabric from India,
Pakistan, People’s Republic of China and other exporting countries. The lack of domestic
supply of woven fabric puts Bangladesh garment producers at a disadvantageous position.
However, in the case of knitwear, the disadvantage is less serious because there is no weaving
process in this sector and yarn is domestically supplied, though self-sufficiency has not been
achieved. This is why knitwear production has been growing faster in the last decade.
Bangladesh is considered a male-dominated society where women have limited roles.
However, the knitwear industry there typifies women’s empowerment (a large number of
women are employed in knitwear factories), as it not only changed the role of women in the
economy and society but also led to the further growth of the economy in general.

Illustration of workers in knitwear factories as well as various machines used in the production of knitwear in Bangladesh

42
 LECTURES AND DISCUSSIONS

Quality Improvement in the Knitwear Industry

As in other cluster industries in different Asian countries, the development of the knitwear
industry in Bangladesh is mainly merchant-led, with purchasing houses playing important
roles in quality improvement. Innovators in this industry also succeeded in assuring the
most profitable market segment that their products are of high standards. In the case of the
garment industry, the most profitable segment is the largest retailers in the world, which are
well known for their high fashion. To assure them of high quality, innovators managed to
deal directly with them without depending on purchasing houses. Multi-faceted innovations
were also made possible by the employment of specialists, compliance with existing laws
and standards of product quality, and vertical integration. Highly educated entrepreneurs
were the main drivers of innovation.
Taking account of the demands of customers is another factor that led to the success
of the knitwear industry in Bangladesh. These demands include: (1) product quality; (2)
lead time; (3) production capacity; and (4) compliance with labor codes in developed
countries.
However, the knitwear industry also faced a number of challenges. One is that local
producers have to deal with some production issues such as compliance with existing
international laws. Labor unions and mass media in the developed countries are very
concerned about the use of child labor, workers’ safety and healthy working environment.
Violation of any of these laws puts the industry in an unfavorable situation since retailers and
manufacturers in developed countries ban the importation of their products. Compliance
with these labor codes therefore enables developing countries, including Bangladesh, to join
global value chains. These challenges have been somewhat resolved by knitwear factories
in Bangladesh, though the establishment of day care centers inside the factories to ensure
that children are taken care of while mothers are working, and avoidance of the use of child
labor in production.

Conclusions

In brief, the success of the rapid development of the knitwear industry in Bangladesh
resulted from:

¡ Specialization in highly labor-intensive industries

¡ The role played by the government, i.e., granting tax exemptions to investments
in equipment garment production
¡ Merchant-led industry development
¡ Multifaceted innovations, led by highly educated entrepreneurs, who had
high ability to learn advanced technologies and management from abroad.
¡ Collaborative efforts between innovators and other producers in introducing
advanced knowledge through imitation.

Q&A/Discussions:

Merchant-led cluster development focuses on the importance of the roles of local producers
and their commercial activities. Local producers are not passive, but actively attract buyers,
especially global ones. To reach the higher buyers, local producers should carry out strategic
marketing activities and produce high quality products, or products of exportable quality. In
a commercial sense, they are also like traders although they are producers.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

As regards the role of government in Dhaka, Bangladesh, since 70% of economic

activities are from industry, there is a very strong political support. It is impossible to keep
wages low through the force of the government; instead the government can prevent wages
from artificially rising. In other sectors, labor unions put pressure on the government to
implement a minimum wage. Industry uses political power to get exemptions from those
kinds of labor regulations, and as a result, the market wage in the government sector is the
market rate, whereas other sectors have an artificially high rate.
In the case of the People’s Republic of China, the government played an important role
in terms of building market places, and constructing the roofs of market places to attract
material and parts suppliers and buyers of finished products. Local government did not
intervene too much in the operation of the market in People’s Republic of China.

The Role of Government in the Cluster-Based

SME Development
Keijiro Otsuka, Director, Foundation for Advanced Studies on International Development (FASID)

Introduction

Though the government plays a major role in promoting cluster-based SME development,
various other institutions have roles to play. Non-market institutions such as international
organizations, donor agencies, non-government organizations are important players of
industrial development. Collaborative actions among these institutions nonetheless are the
key to successful cluster-based SME development.

Choice of Appropriate Industry

Choosing an appropriate industry is crucial for the economy. Often, driven by political
motives and a desire for “big bang” industrialization, politicians and officials, especially
in developing and poor countries, tend to develop hi-tech and heavy industries such as
automobile and electronics. Theories of industrialization and the experiences of other
countries, however, suggest that low-income countries never succeed when they develop
or start with these types of industries in which they lack comparative advantages. One
reason is that these industries barely survive or do not thrive at all in labor-abundant, low-
wage countries. Simple and light industries are far better industries to begin with in poor
economies. Industries that require labor-intensive activities such as garments, shoe, weaving,
metal work and simple machinery are among those that can certainly survive in developing
economies. Thus, low-income countries aiming to industrialize successfully should focus
their development efforts towards appropriate industries.

FDIs and Global Value Chains

Contrary to some claims, Foreign Direct Investments (FDIs) and Global Value Chains
(GVCs) are not a panacea for economic problems. Such economic strategies can only be of
best use to developing countries when appropriate policies are in place.
To keep FDIs from ending up as “enclave industrialization,” host countries must have
the ability to absorb foreign technologies and management know-how, since FDIs are active
only when supporting industries (e.g., metal processing) have been developed. Similarly,

44
 LECTURES AND DISCUSSIONS

developing countries can benefit from being involved in GVCs only when they have the
ability to absorb knowledge, as GVCs approach an industry in developing countries only
when the industry can produce products with exportable quality. Hence, in order to attract
FDIs and GVCs, industries must be successful in upgrading the quality of their products.

Learning from Abroad

Learning from abroad is the essence of the Asian miracle. It is always the key to successful
industrialization in developing countries. Rather than inviting FDIs to begin domestic
production or export, the aim ought to be to learn from the new technologies and skills they
bring from their participation in the economy. Accordingly, learning from FDIs and GVCs,
visiting advanced countries and employing foreign advisers and consultants are critical.
However, the ability to learn or imitate can only be developed when prior investments in
human capital and technology development are successful.

Recognizing Similarities and Dissimilarities Between Successful and Unsuccessful

Cluster-Based Development

The ways in which industrial clusters are formed are similar in many cases. One of the
dissimilarities between successful and unsuccessful clusters, however, is that multifaceted
innovations take place in the former and not in the latter. Another distinction is that
successful entrepreneurs learn from the experience of Japan and other forerunners in Asia,
whereas unsuccessful entrepreneurs often do not know from where they should learn.

The need to promote industrial clusters

As repeatedly mentioned, the promotion of clusters industries is essential for industrialization.

Clusters promote enterprise-enterprise and enterprise-merchant transactions by reducing
transaction costs (e.g., cheating, stealing, lying, shirking), thus, giving rise to well
functioning markets. They stimulate multifaceted innovations by attracting a variety of
useful human resources, such as engineers, designers, merchants and part-suppliers. The
disadvantage however of clusters is that they discourage investment in innovation as benefits
for innovators are reduced by imitation.
Taking account these advantages and disadvantages of clusters, there are three strategies
by which industrial clusters can be effectively promoted.

1. Initiate new industry – this can be done in different ways such as: (i)
establishing SOEs from which private firms can learn; (ii) attracting FDIs
and learning from the new skills and technologies they bring in; (iii) building
model plants from which people can be trained to initiate new businesses and
to explore and exhibit appropriate systems of technologies and management
2. Support for cluster formation – support may come in the form of: (i)
construction of market-places that will facilitate the transactions of intermediate
inputs between manufacturers and the final goods between manufacturers and
traders; (ii) industrial zones and parks that will attract enterprises producing
similar and related products to enhance agglomeration economies; as well as
roads connecting cluster and markets.
3. Support for multifaceted innovation – once a cluster is formed, appropriate
training programs for entrepreneurs are helpful such as in marketing,

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

management and technology. Providing low-interest loans to successful

enterprises and high-performing entrepreneurs in training programs can also
further innovations.

These strategies are depicted in a simple framework below:

Strategy for Cluster-Based Industrial Development

Support for Cluster Formation

Initiation
Establishment of model plants
Quantity
expansion Construction of marketplaces

Reduction in Construction of industrial

transaction zones/roads
Support for Innovation costs
Technology and management Quality
training improvement

Improved access to finance

Enlargement
of innovation
Technology research possibilities

Recommendations and Conclusions

In order to sustain and promote the efforts of entrepreneurs in various aspects of cluster
development such as innovation, training programs are a requisite. As an institution that is
involved in education, training and research on international development, the Foundation
for Advanced Studies on International Development (FASID) is carrying out intensive
discussions with international and Japanese development organizations to undertake new
initiatives in various locations in the developing world.

Q&A/Discussions:

Choosing the right industry is the starting point for successful cluster development, based
on the country’s comparative advantages. In developing countries, those that start with
heavy industries like automobile, high tech industries at the initiation stage barely survive or
do not survive at all. The development of heavy industries depends mainly on the country’s
income level. People’s Republic of China, for instance, failed to grow until 1978, because
the emphasis was on the development of heavy industries. When reforms were launched,
the industrial infrastructure shifted from heavy to light industries, in which the country
had comparative advantages and they started to grow. Similarly, in 1970, Korea wanted to
catch up with Japan immediately but it completely failed and its economy stagnated for a
certain period. After a series of economic reforms, it returned to its growth path and is now
continuously growing. Hence, for economies in low-income stage of development, it is not
advisable to develop heavy industries, e.g., automobile industry, electronics, etc. Rather,
simple labor-intensive industries are good industries to start with, e.g., shoe, weaving,
simple metal industries.

46
 LECTURES AND DISCUSSIONS

Tax policies are important for cluster development. The formulation and implementation
of a simple and gradual income tax system can speed up cluster development. A tax system
that strategically distinguishes large enterprises from small ones for income tax differentiation
is crucial for avoiding distortions in the economy. Non-discriminatory, clean and transparent
tax systems are thus an important ingredient for successful SME Development.
Other macroeconomic policies such as trade protectionism are also worthy of
consideration. Trade protection policies can be justified for a certain period of time.
Prolonged trade protectionism, however, contributes to lethargic growth or the demise
of protected industries. Japan’s model of industrial development reflects its effective trade
policies, under which the government protected industries for a period of five years and
after that, discontinued trade protection policies.
Especially for landlocked countries (e.g., Central Asian countries like Kazakhstan, the
Kyrgyz Republic and Uzbekistan and Mongolia), trade liberalization is very beneficial since
there are more opportunities at the border due to lower transaction cost as opposed to
island countries like Japan where even within the country itself, transaction costs are high.
On the one hand, tariff liberalization may harm domestic producers and products due to
lower prices of imports. On the other hand, import liberalization can encourage domestic
producers who would like to import inputs like raw materials (e.g., Lao PDR imports raw
chemicals for processing natural materials).
The provision of space for and the physical construction of market places by local
governments is a major initiative that encourages business transactions and market
interactions. The active and aggressive roles of local governments in the People’s Republic
of China, especially in building commune markets, have made the country home to
many successful clusters. This strategy enhances the interaction among parts suppliers
and assemblers, makes business transactions more regular, facilitates the free flow of
information, boosts information credibility and enhances the trust and bond between
market players.
Foreign Direct Investments (FDIs) and Global Value Chains (GVCs) are not a panacea
for industrial development problems. Developing countries can benefit from getting involved
in global value chains only when they have the ability to absorb knowledge, because these
chains only approach countries that produce products of exportable quality. Learning from
abroad is always the key to the success in the development of industries.
Inviting foreign advisers and consultants also helps local firms to innovate and improve
their management skills and technical know-how. The enterprises have to know what kind
of consultants they need and at what stage of the production process the participation of
experts is most desirable (once production is set in motion, managers teach how to manage
the factors of production, hence the need for management experts, account and financial
analyst for viability of enterprises; technology type is more important at the initiation stage
than in the production stage where management experts are most needed).

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

UNIDO’s Approaches to Cluster Development

Michele Clara, Industrial Development Officer
United Nations Industrial Development Organization (UNIDO)

Introduction: The UNIDO Global Programme for Cluster Development

The United Nations Industrial Development Organization is the UN’s specialized

industrial agency mandated to promote industrial development and international industrial
cooperation. The organization was established in 1966 with the primary objective of
improving the life of the world’s poor by helping countries achieve sustainable industrial
development. At present, UNIDO operates in 42 countries (figure below), with an ongoing
portfolio of US$450M. It is based in Vienna, Austria. UNIDO is not a funding agency;
rather, it undertakes development projects in collaboration with participating countries and
donor agencies.
Thus far, UNIDO has implemented technical cooperation projects across the world
based on a Cluster and Network Development since the mid 1990s. The implementation
and monitoring of these projects are based on three core assumptions:

Participating countries ¡ Clustering and networking

among enterprises promotes
enterprise competitiveness
¡ Public policy can facilitate
clustering and networking
¡ Support targeted at
groups of enterprises is
more efficient and effective
than support targeted at
individual enterprises

Definition of a Cluster

A cluster is a sectoral and geographic concentration of Small and Medium Enterprises

(SMEs) with common opportunities and threats.
Despite the general lack of awareness about clusters, they exist in many countries across
the globe. UNIDO has successfully completed some projects in Central America, and has
recently launched some in Africa and in South Asia. Projects have likewise been lined up
and are about to kick off in some socialist countries, such as Viet Nam, that are endeavoring
to shift from a centrally planned economy to a market-oriented economy. While some
countries, such as India, have achieved notable success in cluster development, there is
no single framework, roadmap or strategy that can be mechanically carried out from one
country to another. Cluster development ought to be customized to the characteristics of
an economy.
There are two basic criteria by which UNIDO selects countries to implement cluster
development projects. One is by invitation from a national government that desires to

48
 LECTURES AND DISCUSSIONS

collaborate with UNIDO in developing clusters, and the other is by mobilizing resources
for operations. However, as stated previously, UNIDO is not a funding institution, and
obtaining funds for implementation tends to be the more challenging task. UNIDO assists
the government in terms of clusters mapping, i.e., determining which sites are suitable
based on industrial development standards. However, due to political considerations, the
selection of cluster sites is often decided by the national government with appropriate
technical recommendations from international experts.
A cluster is more than an agglomeration of firms and service providers. The two figures
below present a general idea about clusters.

Concentration as Seen by Firms, Support Firms, Institutions

and Service Provider

Support Firm Firm Firm

Firm Institution Firm

Firm

Support Firm
Service Provider Firm
Firm

Firm Firm Support Firm Firm

Relationships among Key Players in a Cluster

Commercial Service Providers

(Designer, Testing Laboratory, Transporter, Financier, Import Agents etc.)

Backward Production System Forward

linkages linkages
Firm Firm
Raw Selling
Material Agents
Suppliers
Firm Firm

Machinery Direct
Suppliers Firm Firm Firm Consumers

(Public & Private) Support and Service Institution

INTERNATIONAL ENVIRONMENT

The first figure shows a concentration as seen by firms, support firms, institutions and
service provider. While it may represent a cluster, it is not a complete representation of what
clusters really are. The second figure is a more integrated and complete representation of
what clusters are. It shows the relationships between firms inside the production system,
e.g., the backward linkages between raw material suppliers and machinery suppliers; the
forward linkages between selling agents and direct customers; the links between the firms
and commercial service providers such as designers, testing laboratories, transporters, banks
or financiers, and import agents, among others. The relationships and linkages among firms
and between firms and other key players are very crucial as they distinguish successful
clusters from unsuccessful ones.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Terminologies

More clearly stated, a cluster is different from each of the following:

¡ Industrial park/export processing zones – unlike clusters, these are usually

created by government agencies. Most clusters were not created, but are
organic in nature and have existed for 100 years or more. In addition, in export
processing zones, firms are of different types, i.e., garments, IT and service
firms, with no relationship at all. The distinction between industry parks and
EPZ and clusters is important in that the proximity of similar enterprises is
the fuel that starts the exchange of information and the creation of linkages
which are more difficult to create among firms operating in different markets.
As they are similar and face the same problems and opportunities, they have
greater opportunities to face their commonalities and work together compared
to firms that don’t have such commonalities. Moreover, the competitiveness
of firms depends largely on the competitiveness of their part suppliers,
auxiliary industries and their mutual proximity, which make the interaction
and dialogues greater.

¡ Industry/subsectors – Proximity and concentration are what set clusters

apart from industries or subsectors. Unlike a cluster, firms in an industry may
not necessarily be in the same area; some may be located in capital cities and
some may be located in remote areas.

¡ Value chains - The value chain is an attempt to picture the relationships and
the processes in the production and distribution of a product (e.g., paper
product – every step of the production from cutting the trees to producing
a sheet of paper and to the consumption of end users). Who gets what share
of the price in each production process and why are also appreciated in value
chains. Moreover, a value chain is large, often stretching across the world
while a cluster is just a portion of it in a specific location. Finally, clusters are
concentrated geographically whereas value chains are dispersed.

¡ Networks – A key difference between a network and a cluster is membership.

Being in a network is a choice whereas being in a cluster is not. Being in a
cluster, however, facilitates network creation and establishment.

¡ Associations/consortiums – Associations are very diversified and respond

to very different demands, but often fail to have clear strategies. Clusters,
on the other hand, require much more focused strategies than associations.
Chambers of commerce for instance, often represent the whole private sector
in the location and as a result, lack the focus and strategy to support clusters
effectively because they need to address many problems at the same time.

Some observed advantages for SMEs in operating in clusters:

Firms operating in a cluster gain a number of benefits. Firstly, in a cluster, they benefit from
low labor costs thanks to the abundance of specialized labor. Secondly, input costs are lower
because there are competing suppliers of raw materials. Thirdly, technological diffusion
is faster and easily accessible at a low cost due to the presence of dedicated providers of

50
 LECTURES AND DISCUSSIONS

machinery, thus making innovation easier. In addition, firms in a cluster can operate easily
since services are specialized, making possible economies of scale and scope for service
providers. Another advantage is that there is a responsive support framework for firms in
clusters. Since firms in a cluster face the same problems and challenges, addressing their
issues and challenges are simpler than they are for industries where production and economic
activities are very diverse. Finally, firms benefit from infrastructure as they accumulate over
time. All these advantages are mutually reinforcing elements that lead to the success of
clusters.
Unfortunately, not all clusters perform well. Several features are observed in clusters
that do not function satisfactorily. One is the low productivity of firms due to a lack of
skilled local labor. There is no incentive to improve and activities are done the traditional
way. Another is that there is aggressive competition among the firms, driving down
product prices to the advantage of traders. On occasion, products are sold below the cost of
production, making these firms unprofitable. Also, low performing clusters often have low
levels of innovation and great secrecy on technology used. Firms never share information on
production and market techniques with each other. Rather than competing for the benefit
of the entire clusters, firms compete to the detriment of other firms. It is also observed that
in most cases, service providers or banks hardly interact with local firms and policymakers
are uninterested in them. As a result of the lack of support from service providers and
policymakers, infrastructure tends to be underdeveloped, missing or dilapidated. All these
unfavorable circumstances are mutually reinforcing elements that create a vicious cycle
leading to lower dynamism and success of firms.
Behind the dynamism (lethargy) of performing (non-performing) firms are a number
of challenges that ought to be addressed such as the roots of all the mutually enforcing
features of both types of clusters, the results of such phenomena and the different approaches
to cluster development.

The Role of Social Capital

At the core of UNIDO’s approach to cluster development is the idea that the key difference
in the features between performing and non-performing clusters is the nature of social
capital in the cluster. Social capital refers to the strength and quality of inter-relationships
among cluster stakeholders that enables them to work closely together. It is invariably the
least visible of the assets of the cluster, but also the most crucial. The following are the ways
by which social capital can facilitate the development of clusters:

¡ Foster the level of local economic activity by decreasing risks and focusing
expectations
¡ Make joint activities more likely and sustainable
¡ Improve the character of competition and refocus it from cut-throat to
innovation and quality
¡ Facilitate the dissemination of best practices and the absorption of new
techniques
¡ Make it easier for the public and private sector to cooperate in creating and
operating infrastructure
¡ Increase usage of credit/business services

Social capital is not without its downsides. While it is very abundant and self-replicating
in dynamic clusters where success breeds further success and cooperation, it is extremely

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

scarce in non-performing clusters where competition is high, margins are poor and people
do not trust each other. Social capital suggests that interpersonal trust is the key factor that
triggers cluster development. Without it, cluster problems are more difficult to solve easily
and sustainably.
Several factors contribute to the success of clusters. Among them are the environment
in which the clusters operate, the availability of credit, high technology, and adequate
infrastructure. However, there are alternative approaches and other complementary
and mutually reinforcing elements that make clusters thrive. Social capital is one crucial
determinant of the success and failure of clusters. It is one strategy that drives each firm to
work closely with and trust others. Social capital is an approach that can transform non-
performing clusters into performing ones. It helps non-performing clusters revive their
strengths through activities that encourage internal collaboration and governance capacities
as well as collaboration with neutral and external brokers. Highlighting the importance of
social capital, UNIDO offers a few strategies that are aimed at restoring non-performing
clusters and helping emerging clusters succeed.

1. Participatory approach to vision-building

¡ Establishment of dialogue and trust
¡ Diagnostic studies

2. Capacity-building based on shared targets

¡ Identification of a vision for the cluster
¡ Bridging the gap between supply and demand
¡ Building networks

3. Sustainability of the cluster development process

¡ Training programs
¡ Joint learning workshops
¡ Presentation of best practices
¡ Study tours/visits to performing clusters
¡ Ownership by stakeholders

The approaches spelled out in the preceding section are essential in helping low
performing or non-performing clusters to survive and catch up with performing clusters.
Collaborations however are not uniform in all circumstances or conditions. Some
collaborative efforts may help clusters escape from a vicious cycle of low performance and
some may just make clusters remain in such a condition. Thus, the more crucial challenge
of fostering social capital is to devise a strategy that incorporates all or a mix of any of these
elements, depending on the needs and conditions of a particular economy.
The diagram below depicts and summarizes UNIDO’s approach to cluster development,
which places great emphasis on the importance of the linkages between and among key
players, institutions and different networks (as shown by connecting arrows) that operate
at all levels of the economy, i.e., micro, meso and macro levels.

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 LECTURES AND DISCUSSIONS

UNIDO’s Approach to Cluster Development Recommendations: The role

of the government

The role of government

is indispensable in cluster
development. In economies
driven by perfect competition,
government intervention is less
necessary. For clusters that are
already in a trajectory of growth
and success, the government’s
role can be limited to providing
them with what they need
and ask for (e.g., simple and
convenient rules, i.e., less
red tape in their transactions with public sector institutions). Governments should not
engage in cluster creation or formation. In conditions where clusters are under-performing
or non-performing and are about to shut down, the government’s role becoming crucial.
In such a condition, governments can support cluster development in various ways such
as partnerships and collaboration between the private sector and local government (as
facilitator/honest broker) and by inviting international experts with proven experience in
fostering cluster development.

Q&A/Discussions:

Some empirical case studies on cluster development reveal that in many economies where
a cluster is growing, performance seems to differ among enterprises. Some succeed while
others do not grow and some are forced to close down. The initiation of innovation creates
huge gaps among clusters in the level of their performance. At the quantitative expansion
stage, firm size is almost similar across the cluster; but with the advent of newer and higher
levels of technology, qualitative expansion tends to be more evident among firms that
innovate than firms that do not. Social capital was observed to play a less significant role in
clusters that grew successfully.
Cluster policies are not the only solution to the real world problem. Cluster development
is a small subcomponent of an industrial policy. Competition laws, taxation laws, market
economic policies, and exchange rates are what make up an industrial policy. In a perfectly
competitive economy, neither cooperation nor government is required for development.
However, in the real world, economies are not considered perfect in that they operate in
systems and environments that in economic theories can be classified according to any of
the second to fourth best conditions. Hence, the competitive equilibrium is not the most
common one.
The bias between cooperation and competition is something policymakers should
be very aware of. Neither perfect competition nor full cooperation can create the social
optimum. The balance between these two however, can result in more benefits to those who
have already succeeded and are bound to grow in the future. It is in this aspect that the role
of policymakers is important, i.e., creating a balance and sound mix between cooperation
and competition in order to produce the conditions suitable for cluster development.
The most effective way to foster innovation is to focus on the individual enterprises, on
the quality of entrepreneurship and on the linkages outside the clusters.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Cluster Development Approach: How Does it Work

on the Ground?
Mukesh Gulati, Project Coordinator, Foundation for MSME Clusters

Introduction

Social capital is often associated with a number of types of problems, namely: (1) survival
problems; (2) competence building issues; and (3) long-term sustainability aspects. These
common problems among clusters can be addressed by building necessary linkages in the
system. These linkages ought to be built or strengthened among core enterprises, between
core enterprises and other business enterprises, between core enterprises and non-market
based institutions and between non-market-based institutions.
Competition, as argued earlier, does not necessarily solve all the problems of clusters.
In many countries, clusters are normally small; hence, the advantages or disadvantages that
small firms can gain for competing with large enterprises are very uncertain. On the contrary,
interactions among small enterprises certainly bring forth a difference. The possibility of
survival is most likely when small enterprises get together and collaborate with each other.
Even in many developing countries, collaboration among firms breeds successful clusters.

Typology of Problems

Case studies on the common problems faced by SMEs in many economies the world over
reveal the following:

1. High cost of inputs (e.g., raw material and capital equipment)

2. Access to timely and adequate credit without collaterals
3. Linkages with markets
4. Innovation bottlenecks (e.g., Technology and knowledge input)
5. Sector specific infrastructure (e.g., Testing lab, Effluent discharge, Electricity,
Inland container depot, Estate roads)

Social capital plays an important role in addressing each of the problems listed above.
Firms that get together and carry out their activities collectively tend to face fewer risks in
terms of high cost of product inputs. By purchasing raw materials and capital equipment
together, getting bulk discounts from suppliers, small firms can reduce costly outlays on
such production factor inputs. The quality of these inputs is also ensured by the presence of
a common consultant to advise on options regarding the kind of materials and equipment
to purchase and where to purchase them from.
Large firms are not vexed with regard to credit availability and access. Quite the reverse
is true when it comes to small firms that face access problems to credits. Common problems
such as the non-availability of guarantees, low creditworthiness of individual borrowers, the
common practice (historically) of banks that do not or hesitate to lend to small borrowers
and the high cost banks face when lending to small borrowers, are what prevent firms from
having or starting off with sufficient capital to start business. In some countries like India
where many small firms borrow from the informal sector, interest rates range from 5 to
10% a month. Small firms that band together when borrowing money from banks are more
likely to be granted credit. There are banks at present that provide credit through group
guarantees (e.g., Italian MCGFs, Self Help Group, Micro-finance Institutions through JLGs

54
 LECTURES AND DISCUSSIONS

as among artisan groups in Orissa, Ambur cobbler manufacturers). Firms in clusters are
also able to negotiate with banks for cheaper interest rates. However, to ensure that these
conditions work, the following have to be considered: the existence of formal financing
systems; groups that are legally established; prosper contracts, and the existence of a well-
functioning method of legal redress. The risks attached to the implementation of this type
of collective activity should also be considered (medium to high risk). Backstabbing by
firms can result in group failures and the withdrawal of banks, hence, the need for clarity,
trust, legal frameworks and banks.
Linkages with markets are easily built when firms join forces. Small and medium
enterprises (SMEs) can gain access to new markets through bulk tendering (in Rajkot,
engineering, transformers & other equipment for electricity companies in Dhaka); hiring
of common marketing consultant to seek out new buyers among non-competing yet similar
suppliers (Machine tools in Bangalore, drugs & pharmaceuticals in Ahmedabad for sub-
contracting market research for new options); participation in international fairs (COTEX
in Jaipur in Japan & Italy); common marketing outlets in major cities (Ambur shoes at
Coimbatore), and blacklisting of unwanted buyers. The risks attached to this are medium
to high. Just as in the case of financing, group failures result from backstabbing by firms.
Hence, there is a need for clarity on profit/loss sharing and higher trust among firms in the
group.
SMEs can overcome costly and risky innovations by: hiring high-end designers
(COTEX in Jaipur for product diversification, Chanderi by hiring NIFT); setting up quality
systems (ISO certifications in Tiruchirapally engineering & Tirupur RMG, FDA standards
in Pune food processing & Drugs & Pharma in Ahmedabad); Exploring new technologies
(by undertaking joint visit to Bangalore wood fair and Buyer Seller Meets in Jallandhar);
Specialized training courses (40 new courses in 7 clusters by local/national institutions or
consultants on marketing in Jaipur, stitching in Tirupur & Ludhiana, making long-lasting
shoes in Ambur, painting machines in Bangalore); Setting up common facilities for building
skills (in the area of mechanized foot-ball stitching at Jallandhar); and mutual problem
solving and sharing of best practices (CEO club of machine toolmakers at Bangalore, RMG
manufacturers for go-down management at Ludhiana). These strategies are not likely to
work when and where there is history of cheating among potential partners; differences
in innovative capacities among potential enterprises are very wide; and the potential gains
are extremely diverse. The risks involve here are: training (low); hiring expensive designers
(medium); and setting common facilities (high). To avoid such risks, innovations should be
commensurate to the current needs and the needed support should be available.
Infrastructure is notably one of the more difficult problems faced by SMEs. In the
case of India, the infrastructure project interventions were most difficult in the following
areas: Common effluent treatment & disposal (Ambur, Vaniyambadi in Tamilnadu leather
tanneries, Vapi & Ankleshwar chemicals); Common R&D & testing laboratory (Food
processing cluster in Pune by MCCI); Common design facility (Tiruchirapally for design
development and in Bangalore for the machine tool industry); Water supply (to Tirupur
city, Inland container depot at Tirupur, Common exhibition ground at Greater NOIDA by
Handicrafts Export Promotion Council and TEA); maintenance of industrial estate roads
& other infrastructure building of new industrial estates & related infrastructure (more
than 30 such projects on PPP model in progress). This kind of initiative will not work if
there is not a major threat that can only be solved credibly by easing local infrastructure
bottlenecks; there is no previous history of simpler, low-risk common ventures ensuring
SME contribution, however small; there is no public support possible under the given
support framework; and management capacities for building and running infrastructure is
low.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Role of implementing agencies

Collaborative actions and partnership between and among various institutions from the
public (government agencies) and the private (including firms, small and large), donor
institutions, academics, and local and international experts are the key to successful cluster-
based industrial development. The following spell out a number of activities these institutions
ought to carry out to facilitate cluster development:

1. Stimulate trust, create awareness, instill confidence in key players – this can be
done through various meetings, exposure, general seminar/workshop
2. Initiate pilot activities – through testing ideas in the field, demonstration of
new technology, conduct of training programs, seeking pilot contributions
3. Regular (short/medium run) activities – through participation in fairs,
common purchases, quality upgrading, training/ consultancy, skill upgrading
4. Strategic (long run) initiatives – via laboratory creation, information centers,
R&D center, technology modernization, relocation of firms
5. Improvement of linkages – through network formulation, association/
institution building/ restructuring

Q&A/Discussions:

Presentation zeroed in on the practical examples of SMEs’ experiences, both feats and
problems, using the social capital perspective. Looking at the Indian example of SME
development, problems such as high factor inputs, lack of access to credits, underdeveloped
sector-specific infrastructure and innovation bottlenecks were discussed and thoroughly
analyzed.
Among the country-specific market-related problems (particularly of SMEs and cluster
industries) that emerged in the interactive discussion include: (1) marketing problems –
firms are not well equipped with appropriate marketing techniques and strategies; (2) small
firms have difficulties in accessing markets or have inadequate access to credit facilities; (3)
lack of information-standard designs, e.g., intelligence on foreign markets is very difficult
and expensive to get and there is information asymmetry regarding government rules and
regulations on enterprises; and (4) an unfavorable regulatory environment for business
– cumbersome and costly procedures for small industries, e.g., red tape or firms have to
obtain many signatures in each step of the process (acquiring licenses and business permits,
certifications problems).
In terms of policy interventions and strategies, the following were identified by
addressing some of the market-related problems and promoting cluster development: (1)
harnessing private-public sector partnership (through dialogues between the government
and firms and building linkages); (2) prioritization of core issues; (3) uncovering the real
underlying causes of failures or non-performance of firms; (4) capacitating entrepreneurs
(providing them with appropriate training programs to improve their competitiveness);
and (5) providing infrastructure and access to credit.

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 LECTURES AND DISCUSSIONS

What Is the Japan Center?

Yoshikazu Tachihara, Team Director, Japan International Cooperation Agency (JICA)

Introduction

Donor agencies play a key role in the development of an economy. There are various channels
through which donor institutions can contribute to the efforts of nations to develop their
economies, such as by providing financial and technical assistance in the area of capacity
building. Programs that enhance the technical capacities of people and communities are a
crucial ingredient of industrial development. Knowledge about the latest technologies and
techniques for managing a business, for instance, can be obtained from various training
programs, either local or abroad. Technology and knowledge transfer, which are the key
factors for successful innovation, are likewise acquired from training programs.

Mission and Vision

The Japan International Cooperation Agency, as an institution that serves as a bridge

between the people of Japan and developing countries, is aimed at advancing international
cooperation through knowledge sharing for a more peaceful and prosperous world. At
present, JICA is involved in several training programs geared towards promoting the market
economy in transition economies in Asia. The Japan Center is an institution dedicated
to the development of human resources for SME promotion in countries transiting to a
market economy. Consistent with JICA’s mission, the Center endeavors to promote mutual
understanding between the peoples of Japan and those of the respective countries. Accordingly,
the Center’s main goal is to enhance the human, social and economic relationship between
Japan and the recipient countries, an essential condition for the promotion of economic
development in these countries.
Currently, there are ten
Ten Japan Centers in Nine Countries
Japan Centers (image on left)
operating in nine countries in
Asia, namely: Ukraine, Ka-
zakhstan, Mongolia, Kyrgyz
Republic, Uzbekistan, Lao
PDR, Myanmar, Viet Nam
(with two centers) and Cam-
bodia. Japan Centers operate
for a period of five years. The
most recent Center was estab-
lished in Ukraine in May 2006
and the oldest Centers are
found in Viet Nam and Cam-
bodia whose operations start-
ed in late 2000. Of the nine
Centers, five were constructed
by Japanese Grant Aid in Hanoi & Ho Chi Minh cities in Viet Nam, Lao PDR, Cambodia
and Mongolia, while four were established in collaboration with universities (provision of
space) in Kazakhstan, Kyrgyz Republic and Ukraine. The Japan Center in Uzbekistan op-
erates in an International Business Center, which is under the jurisdiction of the country’s
Agency for Foreign Economic Relations.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Features of the Japan Center

Each Japan Center has the following attributes:

1. It is open to the Public and provides a venue for forums.

¡ The Center does not only target business-persons and officials but extends
potential benefits to university professors and students, NGOs as well as
children. It caters to various needs of people (themes include but are not
limited to economy, society, culture and science). It is demand-driven.

2. It operates in collaboration with other Japan ODA organizations, universities and

foundations (e.g., AOTS, JF, JASSO, JETRO and JBIC).

3. It is co-managed by a counterpart university that shares costs (e.g., utility costs such
as water and electricity charges).

4. Its services are fee-based. To ensure the sustainability of the Center and keep the
motivation of participants high, participants pay tuition fees.

Activities

Japan Centers focus on three main activities, namely: (1) Business Courses; (2) Japan
Language Courses; and (3) Activities for Mutual Understanding. To achieve the Center’s
purpose, the key challenge is how to interrelate these activities in order to create a synergy
effect.
The Business Course highlights the following:

¡ Promotion of SMEs and entrepreneurial education

¡ Introduction of Japanese styles of management to SMEs in the respective
countries. Part of this is the 5S management technique which basically
stands for: (1) Seiri [Organization]; (2) Seiton [Orderliness]; (3) Seiso
[Cleanliness]; (4) Seikatsu [Standardization] (5) Shitsuke [Discipline]).
Another technique is Kaizen, which is an approach to productivity meaning
continuous or continual improvement. The “just in time” discipline and Total
Quality Management techniques are also taught in this course.
¡ Provision of practical know-how through case studies and on-site
consultation
¡ Course implementation based on the demands of the beneficiaries

All of these contribute to the development of human resources in the private sector,
particularly SMEs. Similarly, these management techniques are helpful in changing the
mind-set of the employer and employees, increasing productivity and encouraging new
business, thus, paving the way for the productivity and development of SMEs and local
industries.
The Japanese Language Course is intended for hotel employees, tour guides
and interpreters. It also includes software program development using the Japanese
Language.
The concept of Activities for Mutual Understanding is to provide information about
Japan and the country and to facilitate exchange of information through various seminars,
conference, study tours and Internet surfing.

58
 LECTURES AND DISCUSSIONS

Sample outcomes of the Business Course: To date, the Business

Course has already achieved
a few favorable outcomes.
One is the establishment of
the Kaizen Association in
Mongolia by graduates (43
members). The association
intends to diffuse the knowl-
edge and skills learned to
other SME employers, espe-
cially those that are located
in remote areas. In Viet Nam
and other countries, the 5S
management technique has
significantly contributed to
the growth and productiv-
ity of goods and services
The Kaizen Association in Mongolia
of SMEs. In Cambodia,
the introduction and adop-
Before 5S After 5S tion of the Quality Control
technique resulted in a 30%
reduction of defective prod-
ucts among enterprises.

Conclusion

The Japan Center has great

potential for building and
developing human resourc-
es. It endeavors to expand its
activities to other regions by
collaborating with local or-
Vietnam and other countries ganizations such as chambers
of commerce and industry
and universities. It enhances
Before Quality Control After Quality Control the quality of learning by
redesigning courses based
on the evaluation and needs
of participants. It empow-
ers countries by entrusting
nationals with the Center’s
operation. Finally, it ensures
project sustainability by
strengthening the Center’s
financial base through diver-
sified revenue streams and
the reexamination of tuition
fees.

Cambodia

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Japan Center Business Course: Outline of Current Activities

The Case of Cambodia
Yasuyuki Kuroda, Senior Economist, International Development Center of Japan (IDCJ)

Introduction

The Cambodia-Japan Cooperation Center (CJCC) is an effort to pursue the objectives of

the Japan Center in Cambodia, i.e., the promotion and development of human resources
among entrepreneurs, with the aim of fostering SME clusters.
Cambodia is one of the many transition countries in Asia that is endeavoring to shift its
economic structure from a centrally-planned economy to a market-oriented one. Economic
transition entails a rigorous process of economic and structural reforms including the training
of future business managers and economic drivers who will lead the country’s economic
development. Hence, human resource development plays a crucial role. However, human
resources development in Cambodia leaves much to be desired. As a result of the purging
of the political system and the bureaucracy, a considerable number of human resources have
not received education. At present, Cambodia’s economy is still considered to lag behind
other economies in the region. The structure of its population is of a pyramidal type, where
the majority of its people are considered young, giving rise to a more serious economic issue
of generating employment for the younger generation. These pressing economic problems
necessitate strategies that will develop human resources in a way that is compatible with a
market economy, in order to generate new businesses or to expand existing ones. This is
where the role of the CJCC comes in.
In response to the challenges mentioned above, Cambodia is now formulating a system
that is aligned with a market economy, with an emphasis on areas such as civil law, collateral
law and accounting standards. Industries and companies in the country are mainly small
businesses such as food processing and beverage firms managed by individuals or families,
and large companies are concentrated mainly in the textile industry. Due to the lack of
practical knowledge and skills in marketing, sales and management, some owners of small
businesses and firms tend to carry out unclear business plans, ambiguous employment
contracts and imprecise accounting work. Hence, there is a need for human resource
development programs.

Courses Offered

In view of the above and consistent with the goals of human resources development,
i.e., to promote the market economy and further strengthen mutual understanding and
cooperation between Cambodia and Japan, the Center formulated the following business
courses:

1. Entrepreneurship Course

This course offers necessary business skills to aid entrepreneurs in preparing a sound
business plan and starting up a company. It provides intensive lectures on business planning,
marketing and sales promotion, basic accounting and finance, and other relevant courses
such as issues on potential target industries. The course lasts about five months, from
October to February of the following year.
The courses are offered on weekdays and last about two hours (6-8 pm). Normally,
around 20 participants/students are enrolled in the courses, and tuition fees amount to

60
 LECTURES AND DISCUSSIONS

US$180 per course. One salient feature of this module is that an English-Khmer interpreter
is employed to facilitate the transfer of ideas and knowledge.

2. Corporate Management Course

This course provides necessary skills for (SME) managers to change their management
styles to more systematic and modern techniques. Managers are allowed to select necessary
lecture subjects based on their needs and weaknesses. Lecture subjects include corporate
management, marketing, bookkeeping and accounting, financial management, production
management, management improvement and human resource management. The recruitment
can be on a per subject basis and course completion is flexible (using a credit system just like
in ordinary universities). The maximum number of participants per lecture subject is 40 and
each lecture subject costs US$30. Interpreters are also employed to facilitate the transfer of
knowledge, skills and ideas. The course runs for five months, from October of one year to
February of the following year.

3. Business Seminars

This course caters to businessmen, government officials and professors and offers
various information about management and the dynamics of the economy and society,
among others. This course provides a link between the entrepreneurship and corporate
management courses. Among the themes discussed in 2006 include: cost and benefit analysis
of investment; small business management – key points for success; major points for business
enterprises analysis evaluation – from viewpoint of creditors; enhancement of financial
management and economic development; accounting standards for SMEs and developing
countries; new wave for food culture in Cambodia–business experience in Cambodia from
the viewpoint of Japanese entrepreneurship, basic production of management in Japanese
factories – 5S & Kaizen.
Briefly, all the above-mentioned courses aim to implement a practical business course
to empower entrepreneurs and SME managers, offer various courses and lectures to meet
diversified needs of local businessmen and provide lectures including business experiences
and know-how by Japanese companies – all of which are intended to equip potential
economic rowers with the right knowledge and technical know-how in terms of sound
business management.

Strategies for Sustainability

The sustainability of the business courses rests on the localization of lecturers and course
operation. The HRD course operation was initiated by Japanese consultants in 2005
and shortly thereafter, the need to proceed with a technical transfer to local lecturers and
counterparts was realized. In response, the Center formulated an action plan to search for,
employ and develop local lecturers. A course operation plan was likewise initiated by the
HRD course manager and staff members with support from the Japanese consultant team.
Local lecturers go through a rigorous recruitment process that includes among other things:
intensive interviews with pre-screened applicants (e.g., good background/reputation)
and job matching (fields of expertise and experience in giving lectures). After successful
placement, local lecturers undergo human resource development training before they are
considered full lecturers at the center, including: attendance in lectures given by Japanese
lecturers, working and acting as assistants to Japanese lecturers and joint lectures/sessions
with Japanese lecturers.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

A number of photos below exhibit some of the recently concluded activities undertaken
by the CJCC:

Lectures

Outside Lecture at a Popular Hamburger Shop

Three-Day On-Site Lecture in the Cambodia

JVC Workshop Institute of Banking

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 LECTURES AND DISCUSSIONS

5S at Kek Seng Company

(Plastic Bottle Maker) Business Seminar

ADB’s Experience in SME Assistance

(Cambodia, Lao PDR, Viet Nam)
João Farinha-Fernandes, Economist, Asian Development Bank

Introduction

One of the main thrusts of the Asian Development Bank (ADB) in most transition
economies at present involves technical assistance and support for a policy reform agenda
and strategies that are geared towards accelerating the process of structural change in these
countries, i.e., moving from a centrally-planned economy to a market-oriented one, through
sound economic reform and management with the ultimate goal of reducing poverty.

The GMS and the structure of their economies

The majority of the people in the GMS (Greater Mekong Subregion) countries still live in
rural areas and are engaged in rural activities like agriculture and fishing. Products are sold
through direct personal exchanges. The creation of impersonal markets, that depend more
on the system of rules, enforcement of contracts, will allow for specialization and increasing
returns to scale in intermediate goods production, providing benefits for the economy and
for what people call export competitiveness. Most ventures (formal or informal, registered
or unregistered, licensed or unlicensed) in these economies are SMEs and more than 75%
of the population is occupied in agriculture.
The three economies have been successful in reducing poverty over the past 13 years.
As can be seen from the graphs below, each country has taken great strides in reducing the
percentage of population living on less than US$1 a day. In Viet Nam, for instance, the
proportion of people living on less than US$1 a day has significantly improved from 50%
of the population in 1990 to less than 10% in 2003. Significant developments were also
clear in Cambodia and Lao PDR, where the proportion of the population living on less
than US$1 a day decreased from nearly 50% to a little more than 30% for Cambodia and
from more 50% to a little less than 30% for Lao PDR. However, most people in these
countries still live on less than US$2 a day and their income-generating activities are largely
based on agriculture, with agriculture having a large share of value added.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Percentage of Population Living on US$1/Day, US$1-2/Day, and US$2+/Day

These countries are at different stages of transforming their economies, from being
essentially rural and agrarian (e.g., Myanmar and Lao PDR) to becoming urban and
industrial (e.g., Cambodia and Viet Nam).

Shares of Agriculture, Industry, and Service Sectors

64
 LECTURES AND DISCUSSIONS

As can be seen from the figures above, in Myanmar and Lao PDR, agriculture still
holds a large share of value added whereas Cambodia and Viet Nam are considered to be
in the modern stage of economic transformation. The shift of population from one sector
to another where there is an improvement in productivity is in itself poverty reducing.
The extent to which inter-sectoral migration has contributed to poverty reduction in the
region is determined by the employment shares of each sector in the total employment
of the economy. In Cambodia for instance, the industry’s share of total employment
doubled (especially in 1998-2001, mainly due to garment manufacturing expansion) and
as a result, people who migrated became 6 to 9 times more productive. Similarly, in Viet
Nam, industry and services have absorbed an increasing share of employment, and in the
process became 5 to 7 times more productive. This means that as people shift from lower
to higher productivity, poverty is reduced. The graphs below illustrate the sectoral shares of
employment for Cambodia and Viet Nam, respectively.

Sectoral Shares as % of Total

Employment: Cambodia Sectoral Labor Productivity: Cambodia

Sectoral Shares as % of Total

Employment: Viet Nam Sectoral Labor Productivity: Viet Nam

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

In these two economies, where agriculture still represents a substantial share of the
economy (both in terms of output and employment), employment expansion in the industry
and services sector has been a major determinant of labor productivity growth and has been
accompanied by poverty reduction.
However, despite the efforts of governments in these economies and considerable
inflows of donor assistance, not much improvement has been witnessed in the rural or
agricultural sector, where most of the labor force is employed. Correspondingly, agricultural
productivity in these economies has been very sluggish over time. Hence, moving out of
the agricultural sector and into the industry sector could lead to a significant rise in people’s
incomes. As previously mentioned, inter-sectoral migration associated with industrialization
and the expansion of urban-based activities seems to have had a significant impact on
poverty reduction in these economies.
Innovation is a crucial element of productivity growth in industrial countries. However,
for some countries that lag far behind the world’s technological frontier, it seems to be much
more effective to create for conditions for copying and importation of technologies rather
than trying to be at the forefront or attempting to innovate. In addition, for countries that
do have sufficient capacity to innovate, a better alternative for increasing labor productivity
is to create the institutional conditions for the transformation of their production and export
structures and enable a shift of resources to activities with higher levels of productivity.

Public policies, SME development and structural change

Public policies in these economies play an important role in supporting the process of
structural change. To speed up the process of structural change, several points have to be
emphasized:

1. Employment expansion and investments in manufacturing and in supportive

financial and business services are a necessary condition. To enable the GMS
economies to benefit from technical and organizational innovations made
elsewhere in the world and to increase their labor productivity, public policies
should focus on encouraging private investments in manufacturing and
financial and business services.
2. To enable these innovations to then spread across the economy, it is necessary
that new firms be able to enter markets for impersonal exchange, that
substandard firms be allowed to fail, and that good firms face less barriers in
increasing their scale of production.
3. Creating the institutions that produce these markets for impersonal exchange,
which is what selects good firms, irrespective of size, and drives the spread of
these innovations across the economy.
4. Ensuring a transparent, consistent and predictable legal and regulatory
framework to support commercial and financial contractual arrangements (at
the heart of which is a fair and effective judicial system) in order to encourage
long-term investment commitments by firms.
5. Openness to trade and FDI are not sufficient for achieving sustained structural
change and poverty reduction. It must be accompanied by the improvement of
a large range of institutional factors and policies to enable small and medium
businesses to expand and grow.

In terms of promoting and supporting SME development, public policies need to draw
attention to the following:

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 LECTURES AND DISCUSSIONS

1. A favorable business environment, characterized by the following:

¡ Transparency and predictability of rules
¡ Competitive markets (easy operation, entry and exit)
¡ Contractual framework (judicial efficiency)
¡ Correction of market imperfections resulting from inefficiencies in
markets for information

2. A sound physical and regulatory infrastructure to promote efficiency in

telecommunications, financial services, power, roads, ports, transport and
water supply, among others.

The ADB, SME development and structural change

The Asian Development Bank plays a major role in supporting SME development in the
GMS. The ADB assists the governments in formulating policies that create institutions that
allow for the structural changes to happen. In addition, the ADB initiated the GMS Regional
Cooperation Strategy Program, which helps strengthen the transport, telecommunications,
energy, environment, tourism and agriculture sectors of the GMS countries, as well as
facilitate trade, promote investments and develop human resources in these economies. The
individual country programs in Viet Nam, Lao PDR and Cambodia are likewise instruments
of the ADB that aim to enhance and speed up the process of structural change in these
transition economies. These programs focus on economic sector work and provide technical
assistance and lending for policy reforms and physical infrastructure development.

Some examples of policy reform assistance programs in each of the GMS countries are
listed below:

In Cambodia:
¡ Financial Sector Program Loans support the development of credit and risk
sharing markets (e.g., regulatory and supervisory structures development).
¡ SME Development Program Loans assist formalization (e.g., business
registration), regulatory (e.g., business licensing), and access to finance
reforms (legal and informational underpinnings of finance).

In Lao PDR:
¡ Banking Sector Program Loans support the development of credit (e.g.,
regulatory and supervisory structures development).
¡ An SME Development Program Loan is under preparation to support
formalization, regulatory, trade and access to finance reforms.

In Viet Nam:
¡ Financial Sector Program Loans support the development of credit (e.g.,
bank and non-bank) and risk sharing markets.
¡ SME Development Program Loans assist formalization, regulatory, access
to resources (e.g., finance and land use rights) and access to international
markets (e.g., industrial/technical standards) reforms.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Panel discussion: Cluster-Based Industrial Development

This session was aimed at stimulating comments and generating feedback from all
participants, discussants and members of the seminar. The session also served as a venue for
opening up and soliciting suggestions for future research and collaborative activities focusing
on the cluster-based approach to SME development. Identifying the key differences between
non-performing and performing clusters was one of the highlights of the discussions in this
session. The panel of discussants included academics, donor representatives and international
experts on cluster development.

The discussion points included:

1. Elements of successful cluster formulation and expansion (what makes some

clusters successful and others unsuccessful?)
2. External support/input in the above process (desirable intervention/critical
support)
3. Role of national government (macro and micro level)
4. Interaction with local government and other concerned parties
5. Interactions with international donors and foreign experts

Elements of successful cluster formulation and expansion and the external support
systems needed for cluster development

Innovation is the key to successful cluster development. While clusters can expand naturally
(quantity expansion phase), it is difficult for them to enter the quality improvement phase
without appropriate innovations.
Training programs that provide knowledge basic management technologies, e.g.,
training programs offered by the Japan Center, are necessary for building and accumulating
human capital, which is also needed for successful cluster development. Training programs
should be expanded to facilitate the formation of new clusters and sustain and further
develop existing ones. Training programs that focus on specific industries where the country/
economy is most competitive at are most likely to yield the best results.
Critical support should be provided for improving the relationship within the clusters.
This is both desirable from a policy perspective and feasible from an implementation
perspective. There are a number of clusters that are not doing well. The key difference between
successful and unsuccessful clusters lies primarily in the quantity and quality of relationships
between and among firms and their relationships with public sector institutions. Clusters
that are locked in a vicious cycle of competition require assistance. Without assistance, these
clusters will very likely disappear. It should be noted however that the government should
not be directly involved in the formation of clusters. Rather, it should provide the necessary
conditions and a conducive policy environment for clusters to thrive.
There seems to be a great deal of overlap between the roles of social capital and innovation.
The two are mutually reinforcing elements that foster successful clusters, which can develop
social capital; social capital sets in motion innovation, but only successful innovation breeds
the ground for further social capital. Similarly, the byproduct of innovation is greater
collaboration and trust, leading to more coordination whereas the necessary byproduct of
social capital is greater innovation.
The following challenge remains with policymakers: which approach or methodology
is most useful and relevant to their economies, subject to constraints and opportunities?

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 LECTURES AND DISCUSSIONS

Succinctly stated, social capital is needed to innovate and innovation is a requirement for
clusters to move from non-performance to performance. Knowledge transfer, innovation
spillover, flow of information and human capital building are the fundamentals for the
development of clusters.
As regards the relationship between innovation and imitation, a few considerations
have to be made. For example, given three enterprises, in order to make progress, at least
must one of them must innovate. In order to increase the level of management, others
must imitate. Imitation is the way by which the level of management efficiency improves
in the industry as a whole. But after innovation, everyone imitates, and to some extent,
imitation makes the other firms innovate less. Imitation reduces the incentives of the
imitators to innovate. Innovation is very important for making progress while imitation is
very important for diffusing new ideas. However to maximize social benefits, innovation
should be stimulated.
The economic rationale for the existence of clusters is also worthy of consideration. The
suitability of location, the benefits of getting together in a common space, the proximity
of the clusters to the market, the availability of resources in the area, the commonalities of
skills and specialization among labor suppliers and other relevant economic characteristics
are crucial for assessing the success of potential clusters.

Institutional arrangements for cluster development: The role of the national

government, interaction between local institutions and interaction with donor
agencies

As an economic principle, the national government should provide the goods and services
where it is best at providing them and where there are no incentives for private enterprises to
provide them. Such areas include national defense, safety and national sovereignty, among
others (natural public goods). In terms of industrial development, relevant public goods
that the national government ought to provide include: better policy systems, judicial and
law systems, banking systems, networks, roads and infrastructure, railroads and bridges
connecting industrial clusters from different regions and parts of the country, and all other
goods and services that extend the confines of local governments and whose externalities
are national in scope.
However, the national government should not set up clusters directly. Existing clusters
that are not performing well are the ones that need help. For potential cluster industries,
decisions to create or initiate clusters should be left to the private sector. The best assistance
the government can provide is to listen to what enterprises ask for. Rather than trying to
impose upon them bureaucratic dos and don’ts, it should facilitate the changes that the
private sector calls for.
Local governments, on the other hand, should provide marketplaces where transactions
can take place. However, to enhance the efficiency of local governments in providing local
goods, they should compete with each other, i.e., yardstick competition. Nurturing and
helping industrial clusters within the boundaries of a local government is key to ensuring
sustainable industrial development. In addition, since local governments are close to the
private sector, they play a more important role than the national government in the success
of the clusters. An alliance between business firms and the local government is enough to
take the cluster development forward.
Simple administrative procedures often hamper industrial development. Hence,
administrative reforms should be executed to eliminate unnecessary burdens on the private
sector such as cumbersome rules and regulations, permits, licensing, etc.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Cluster development, as stated repeatedly in the previous sections, is not the sole strategy
for solving the many problems of industrial development. It is just a subcomponent of a
broader set of industrial policies, and is on par with other equally important policies such
as the rule of law, policies about macro economic stability, business environment, and FDI
policies. None of them should be seen as a replacement for the others.
Industrial donors should be brought in and provide for the needs of the country in
situations when it is no longer capable of providing local needs. In the case of industrial
development, donor agencies should provide experts such as accountants, other human
resources, and working expatriates to implement various programs that capacitate cluster
industries in general, and local entrepreneurs in particular (e.g., JICA Center and other
JICA training programs).

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COUNTRY PRESENTATIONS

The country presentations focused on the following areas:

¡ Country economic overview
¡ Major challenges and issues faced by the economy in general and SMEs in
particular
¡ Policy environment and institutional arrangement with regard to industrial
cluster management/development
¡ Industrial or cluster-based development approach scenario

Country Presentation: Lao PDR

Country Economic Overview

Lao PDR (Laos) is a landlocked and mountainous country in South-East Asia with a land
area of approximately 236,800 square kilometers and shared borders with five countries:
People’s Republic of China in the north, Viet Nam in the east, Cambodia in the south,
Thailand in the west and Burma in the north-west. Lao PDR has a population of about
5.62 million, with an annual population growth rate of 2%.
The Gross Domestic Product in 2005 amounted to US$2.8 billion and GDP capita
was US$490. Among Lao PDR’s sources of economic growth are agriculture, industry, and
the services sectors, each accounting for 45%, 28.2% and 26.4% of the GDP, respectively.
The industry sector of Lao PDR focuses on three major activities, namely manufacturing,
mining and electricity, each having 62.32%, 26.17% and 11.51% share in the total production
of the sector, respectively. The industry sector grows at approximately 11.3 annually.
Industrial policies in Lao PDR focus on the development of key industries, namely: (1)
Electricity; (2) Manufacturing – with particular emphases on wood processing, construction
material, food processing and textile and garment industries; and (3) Agriculture-related
industries such as fertilizer and food processing. In order to promote and develop these
industries, the government recognizes the importance of promoting private sector
participation in the market economy as well as attracting foreign investors. Electricity,
mining (gold, copper, gypsum and coal) and some processing industries (wood processing,
agro-processing industry such as tea, coffee, rubber, vegetable, fruit, oil plant, and fragrant
rice) are among the industries in which Lao PDR is considered to have comparative
advantages.

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Position of SMEs

SMEs in Lao PDR are basically defined according to the number of employees and total
assets, as shown in the table below:

Category Average Annual Total Assets in KIP Annual Turnover in KIP

Number of Employees
Small ≤ 19 ≤ 250 million ≤ 400 million
Medium ≤ 99 ≤ 1.2 billion ≤ 1 billion

Further, SMEs are classified according to sector, namely: manufacturing, trade and
services. The majority of the enterprises in Lao PDR are SMEs, accounting for 95%; the
remaining 5% are large firms.
In terms of employment, large firms absorb about half of the labor supply in the
country, accounting for 50.5% of total employed people, followed by medium firms,
and small and micro firms, each having 28.8%, 19.3% and 1.4% share in the total labor
workforce. In terms of sectoral distribution, most of the SMEs are in the trade sector, which
accounts for 44% of the total number of SMEs, while about 38.5% are in the services
sector and approximately 17.5% in the manufacturing sector. By employment, medium
enterprises grow the fastest with a 23% growth rate, followed by small enterprises and
micro enterprises, each with growth rates of 20% and 6.7%, respectively.
As regards the use of BDS, only 16% or so of the SMEs make use of BDS, this means
that the majority of SMEs (64%) rely on family, relatives, friends and partners. In terms of
access to finance, most SMEs borrow from suppliers (52%), about 30% obtain credit from
relatives and friends, while only 4% have access to banks. The rest obtain credit from other
sources.

Major challenges and issues faced by SMEs

The main constraints faced by SMEs in Lao PDR are as follows:

¡ Limited competitiveness due to
o Low level of technology and small-scale production
o Lack of qualified technical staff and skills
o Inadequate business management skills
o High transaction costs and risks

¡ Lack of awareness of the importance of technical and management

¡ Lack of know-how and skills
¡ Lack of capital and financial resources
¡ Lack of capacity for business development services
¡ Inadequate knowledge of laws and regulations
¡ Underdeveloped inter-business linkages/value-added chains
¡ Unfavorable administrative and regulatory business environment
¡ Unfavorable attitude and limited capacity of public/civil servants

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Policy environment and institutional arrangements

The government of Lao PDR has already initiated some laws and policy strategies
regarding SME promotion and development, i.e., Prime Minister’s Decree No. 42, which
was enacted in April 2004. The decree aims to create, improve and expand SMEs in Lao
PDR and contains six main policies, namely: (1) creating an enabling regulatory and
administrative environment; (2) enhancing the competitiveness of SMEs; (3) expanding
domestic and international markets; (4) improving access to finance; (5) encouraging and
creating favorable conditions for the establishment of organizations; and (6) enhancing
entrepreneurial attitudes and characteristics within the society.

Below is an illustration of the institutions involved in SME development in Lao PDR.

Industrial or cluster-based development approach scenario

MIC SMEPDC

SC

SMEPDO

Admin. Division Plan & Coo. Division Research Division Promo. Division Production Division

“Industrial cluster” is a relatively new term for Lao people. At present, there are
no industrial clusters in the country. However, there are some associations of firms and
enterprises, particularly in the following industries:
¡ Textile and garment
¡ Construction material
¡ Food production
¡ Wood processing
¡ Handicrafts

At present, the government is in the process of developing a legal framework for the
development of industrial areas in the country. The SMEPDO is in charge of exploring and
evaluating potential sites for industrial clusters in selected sectors and provinces.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Country Presentation: Uzbekistan

County Economic Overview

The Republic of Uzbekistan is located in the central part of Central Asia, between the
Amudarya and Syrdarya rivers. The Turan Lowland in the northwest and Tien-Shan and
Pamir-Alay in the southeast are the two mountain ridges that border the territory. The Kyzyl-
Kum Desert is in the North. Uzbekistan borders Turkmenistan, Kazakhstan, Tajikistan, and
Afghanistan.
There are about 26.3 million people in the country, of which 13.1 million are male
and 13.2 million female. Approximately 9.5 million live in urban areas whereas 16.8
million inhabit rural communities. The overall population density is 51.2 people per square
kilometer and the population is growing at an annual rate of 1.1%.
The dynamics of the main macroeconomic indicators for 2000–2006 demonstrate the
positive tendency toward macroeconomic stabilization and acceleration of the country’s
economic growth. In 2006, the GDP growth rate was 7.3%, primarily as a result of
the increase in investment activity, and the growth of internal and external demand for
domestically produced goods and services. With investment and construction growing by
9.0% and 10.7%, respectively, the growth in the economy’s real sector remained strong,
and the expansion of industry made up 8.6% of the sector’s total growth while the share of
agriculture was 7.1%.
Agricultural production, along with the services sector, made the major contribution
to the country’s GDP’s growth. These economic sectors amounted to about 5 percentage
points of the total 7.3% GDP growth. The decrease of the net contribution of indirect taxes
(by 0.8-0.9% points) reflected the current process of tax burden reduction on producers
and participants in foreign trade activities.
The service sector constitutes the bulk of the of the country’s economy, with a 36.7%
share of GDP. The share of the agriculture sector has fallen by 0.5 percentage points,
whereas the share of the industry sector increased has risen to 22.1%. As for expenditures,
the growth of internal demand was led by retail trade and services (12.5% and 15.0%,
respectively).
In general, steady economic growth has been achieved as a result of the improved
balances of government budget and payments, lowered inflation, growth of real incomes,
moderate devaluation of the national currency, strengthening of the banking system, and
improved financial intermediation that helped to increase saving and investment.
In terms of trade, the main export items of Uzbekistan are gold, cotton, zinc, inorganic
chemicals, perfumery and cosmetic products, plastics, grains, vegetables and fruits, and
automobiles. Exports have focused on diversification into new finished products such as
cars, petrochemical production, mineral fertilizers, metal products, textile products, building
materials and others. The country’s main export markets are Russia, the United Kingdom,
United States, Germany, Turkey, Iran, Kazakhstan, Azerbaijan, Afghanistan and Tajikistan.
The share of exports to these countries comprised 80% of total exports in 2006.
In 2006, exports grew by 18% amounting to more than US$6.3 billion. The export
growth rate averaged 10.1% over the past seven years (2000-06). The average value of
exports per capita was US$213.4 in 2006. This growth was supported by an increase in
industrial production that became a basis of qualitative change of the foreign trade structure
and direction. Exports of machinery and equipment have increased by more than 42.7%,
chemical products and plastics 25.2%, foodstuffs by more than 2.5 times, and production
of metallurgy by 1.6 times.

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The expansion and diversification of exports was promoted by the Investment Program
and the Localization Program initiated by the Government of Uzbekistan. The economic
benefits of import substitution amounted to more than US$900 million. Exports of goods
produced in accordance with the Localization Program accounted for 24% of export gains.
Industries in Uzbekistan with a comparative advantage are electricity, mining (gold,
copper, gas) and some processing industries (textile and garment, wood processing, agro-
processing, beverage industries).
Imports, on the other hand, have increased by 7.5%, and amount to US$4.4 billion. The
growth indices of the following three commodities were higher than the average growth of
imports: energy carriers (82.8%), foodstuffs (24.4%) and chemicals (17.8%). Imports of
organic chemical compounds, dyes, paints and varnishes, perfumery-cosmetic and washing
liquids, transport vehicles, and oil and petroleum products have increased significantly.

Position of SMEs

In Uzbekistan there are three types of legal entities, namely: micro, small, and other
enterprises. Each is characterized by the following:

¡ From 30 to 50 employees—in agriculture, the agro-processing sector and

other industrial and manufacturing areas;
¡ From 20 to 25 employees—in science, research services, transportation,
communications, services (with the exception of insurance companies), retail
trade and other industrial and other non- manufacturing areas.
¡ More than 50 employees—in mechanical engineering, metallurgy, fuel, and
energy sector and chemical industry;
¡ More than 25 employees—in wholesale trade and public catering.

Official data from the State Statistics Committee of Uzbekistan reveal that the share
of small enterprises in the country’s GDP have risen, accounting for about 38% in 2005.
Similarly, SMEs provided 66% of the country’s total employment in the same year. In 2005,
there were ten operational small enterprises per 1,000 residents. As of 2006, the share of
small business in the GDP amounted to 42.1%, resulting in an increase in the number of
operating enterprises in small and private business, accounting for 346 thousand units, 1.5
times more than in 2004. At the same time their share in the total number of registered
enterprises reached almost 90%.
The fastest development of small businesses was observed in the wood and timber
industries, where over 67.5% of total output is derived from SME production. Increased
production of consumer goods by small businesses has continued as a positive trend. Small
businesses produced 40% of consumer goods and 10.6% of light-industry products.
In the machinery building industry, small business are concentrated in areas such as
the production of a variety of spare parts for large industrial enterprises, thus allowing
them save on import expenditures, resulting in a reduction of total production costs. Small
businesses accounted for 9.8% of industrial output in the machinery building industry.
Another significant factor in the development of small businesses is their share in total
exports, which reached 10.7% in 2006 (7.3% in 2004).

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Major challenges and issues faced by SMEs

In Uzbekistan, taxation has traditionally been one of the most problematic issues for
SMEs. High tax burdens, low compliance as a result of the complex taxation system and an
unwieldy tax administrative system are among the factors that hamper further development
of SMEs.
Cumbersome business procedures for obtaining permits and businesses licenses also
impede SME expansion in the country. Some unneeded interventions by public authorities
on business transactions and on the market as a whole have been reported by businesspersons
and entrepreneurs. The voluminous paper requirements for starting up a business and
the delays in the processing of papers characterizing the business regulatory system are
constraints on start-ups or investments by enterprises.
Providing SMEs with greater access to credits and loans is also necessary to foster
cluster development. Though the government has already taken great strides in this respect,
wide and more universal access of SMEs to financing, credits and loans has not yet been
achieved.

Policy Environment and Institutional Arrangements

While the business environment has been beset by some challenges, as previously mentioned,
the government of Uzbekistan is working hard to improve the business environment to
develop the SME sector. A number of improvements, in the form of legislative acts, have
already been introduced by the government. In 2005, laws were enacted to:

¡ Improve legal protection for businesses

¡ Improve the system of submitting reports and calculations
¡ Introduction of single tax payment
¡ Ensuring uninterrupted access to cash
¡ Optimizing license and permit procedures
¡ Reducing and streamlining inspections
¡ Simplification of registration procedures

Providing SMEs with greater access to credits and loans is also necessary for fostering
cluster development. In 2005, the government established a specialized “Mikrokreditbank”
to satisfy the needs for financing. At present, there, there are 37 credit unions operating
countrywide and offering financial services for the SME sector. Though the government has
already taken great strides in this respect, wider and universal access of SMEs to financing,
credits and loans leave much to be desired.
In Uzbekistan, there are a number of laws prescribing basic policies for SMEs,
including:

¡ Law of the Republic of Uzbekistan “On Guarantees of Free Entrepreneurial

Activity,” 25 May 2000
¡ Law of the Republic of Uzbekistan “On Business Partnerships,” 6 December
2001
¡ Law of the Republic of Uzbekistan “On Companies with Limited Liabilities
and Additional Liabilities,” 6 December 2001
¡ Law of the Republic of Uzbekistan “On Private Business Entities,” 11
December 2003

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Furthermore, in order to develop SMEs in Uzbekistan, the President created the State
Committee on Demonopolization, Competition and Entrepreneurship Development in
2004. Later, this became the state body responsible for ensuring favorable conditions and
capacity building of SMEs. This committee is also a working body of the Small Business and
Private Entrepreneurship Development Coordinating Council under the Prime Minister of
the Republic of Uzbekistan. The council was created to provide integrated decision-making
among related ministries and departments, especially the Ministry of Economy, Ministry of
Finance and Chamber of Commerce and Industry.
In addition, the President of Uzbekistan established a fund for small and private
business support funded by means of financial allocations coming from the privatization and
management of state property (2% of total amount). In 2006, SUM350 million were spent
on SMEs support programs. Additionally, SUM35 billion in the form of favorable credits
were directed to creating jobs in small business entities from the Population Employment
Fund under the Ministry of Labor and Social Security.
Laws on micro financing and micro-credit have promoted the activation of the micro
financing process in Uzbekistan. These measures resulted in an increase of the scale of micro
crediting of business entities considerably. The number of micro-credits provided by banks
increased by 44.4 % and amounts to about SUM65 billion.

Industrial or cluster-based development approach scenario

Thus far, there are no industrial clusters in Uzbekistan. The government, however, is in the
process of encouraging and attracting industrial enterprises operating in the same industrial
sector to form associations or groups.
Under the supervision of the Uzbekistan Chamber of Commerce and Industry, industrial
associations have been established in the following areas: textile and garment, construction
material, food production, handicraft and so on.
Realizing that clusters of industrial enterprises are an effective form of industrial
organization for meeting the challenges arising from the operation of free market forces,
the Department of Industry, Ministry of Economy, has been taking the initiative to develop
a legal framework for the development and operation of industrial clusters. In addition,
the Ministry of Foreign Economic Relations, Investment and Trade has already started
promoting a so-called “Localization Program,” in areas such as the Fergana valley and
Tashkent region. The value of goods produced in accordance with the Localization Program
equals US$1.3 billion. The contribution of the Localization Program accounts for 11.3%
of industrial production.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Country Presentation: Viet Nam

Country economic overview

Over the past years, Viet Nam has made significant socio-economic achievements. The
average annual economic growth rate of 7.5% has helped double GDP over the ten-year
period from 1991–2000 and has led to remarkable changes in the socio-economic panorama
of the country. Since 2001, Viet Nam has succeeded in maintaining an annual growth rate
of about 8%. The country’s average GDP per capita 2001–2005 was US$620 and the
population as of 2005 was about 83 million.
The country’s GDP consists of shares from different sectors—industry, services, and
agriculture—each making up approximately 41%, 38%, and 21% of the country’s total
economic output in 2005. As a result of industrial reform policies, the shares in the value
added of each sector have changed dramatically: while in 1991 agriculture was the leading
sector at nearly 38% of GDP and the industry sector only had a 23% share, these industries
had swapped positions by 2005.
At present, the industrial sector not only accounts for the bulk of total production in
the economy but also accounts for the lion’s share of the country’s exports, at 70%. The
value of industrial output in 2005 consisted of 10%, 82%, and 8%, for the mining industry,
the processing industry, and the electricity, gas and water industry, respectively. In the same
year, the number of industrial enterprises in the country was estimated at 20,000, nearly
twice the number five years earlier. Industries were concentrated into agriculture, forest,
aquatic product processing (39%), and textile and footwear (13%). For the main industries,
mechanical enterprises consistently accounted for approximately 58-59% while the chemical
industry made up 33%. The processing industry (consisting of food and beverages, tobacco,
textiles, garments, leather, wood and bamboo, paper, coke coal and refined petroleum
products, chemicals, rubber, building materials, metal and other machinery and equipment,
electronic products, health equipment, motor vehicles, transport equipment, furniture,
recycling, etc.) made up 89.4% of total industrial enterprises, in which most enterprises
had 10 to 200 workers. The electricity, gas and water supply industry only made up 1.34%
of total industrial enterprises.
In Viet Nam, SMEs are defined as “those independent business and production
establishments that have registered under the current legislation and have registered capital
of less than VND10 billion and/or have an annual average number of permanent employees
of less than 300.” The type of and details for each enterprise are summarized below:

Enterprise Types in Viet Nam

Type of enterprise Definition by employment

Micro enterprise 1 to 10 persons
Small enterprise 10 to 49 persons
Medium-sized enterprise 50 to 299 persons
Large enterprise 300 persons or more

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The contribution of SMEs to the national budget has increased in recent years, from
about 6.4% in 2001 to over 7.4% in 2002 (those of FDI enterprises and SOEs were 5.2%
and 21.6% in 2001 and 6% and 23.4% in 2002, respectively). SMEs have been active
and dynamic in almost all sectors. However, most SMEs were active in distributing goods
to consumers through the wholesale and retail trade. SMES involved in manufacturing,
hotels and restaurants and transport, storage and communications are also among those
that have performed satisfactorily during the same period. Towards the end of the last
quarter of 2001, of the total number of SMEs participating in trade, 80.6% were involved
in exporting, and 84.2% in importing.

Major challenges and issues faced by the economy in general and SMEs
in particular

Despite the considerable progress made in the SME sector, there is still much to be done.
The following are some of the major problems and challenges that SMEs and relevant key
players face at present:

¡ Most SMEs do not realize the great impact of globalization and the process
of international and regional integration on the domestic economy, on the
commercial and manufacturing activities of enterprises, including those
producing goods for exports and domestic consumers (Kokko, et al. 2004)
¡ Most SMEs are small in scale, have limited capital and a small number of
employees, operate dispersedly, and do not have sufficient skills to compete
effectively in increasingly liberal markets because of the lack information on
input markets, limitations in market access, and weaknesses in equipment
and science and technology capacity. As a result, the goods and services they
provide are often of poor quality and of low competitiveness, and they face
difficulties in the domestic and export markets. At the same time, they cause
damage to the environment and the eco-system. Investment in technological
innovation by SMEs is at a low level compared with the demand for
development. While there is a lack of concrete evidence of this, it appears
that there is hardly any ongoing research and development activities (R&D)
in the SME sector.
¡ The prevailing protective policies, lack of a level business environment
between economic sectors, the mechanisms that provide subsidies and
privileges to some enterprises, and the instability in legal regulations, lead
many Vietnamese enterprises to try to obtain privileges from policies to gain
short-term benefits rather than to build long-term business strategies.
¡ The lack of adequate cooperation between large-scale enterprises and SMEs
leads to limitations in business quality and efficiency and competitiveness
of both SMEs and large-scale enterprises, and in an inability to make use of
economies of scale for both of these sectors.
¡ The internal management of SMEs is often underdeveloped, unprofessional
and weak, and mainly based on the limited, personal experiences of the
owners. There are usually no clear distinctions between the possessions of
the enterprises and those of the owners of the enterprises. The owners are
also the managers of enterprises. There is usually no clear legal distinction
between the rights and duties of owners, employers and employees. Most
enterprises lack strategies and long-term business plans, and try to operate
with untrained professional staff.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

¡ Financial management in SMEs usually lacks of transparency. The reported

data do not reflect the real financial conditions of enterprises and is not reliable.
Some enterprises are confused regarded tax registration, tax enumeration,
tax paying and other financial duties. Some financial representations are
dishonest or late. Underreporting of financial results and perceptions of non-
transparency prevent a large number of SMEs from getting loans from banks,
especially unsecured loans available through policy lending instruments.

Policy environment and institutional arrangement with regard to industrial cluster

management/development

The diagram below depicts the institutional arrangement for the SME infrastructure.

Structure of the Institutional SME Support Infrastructure

SME Promotion Council

Relevant MPI Provincial

Ministries agencies ASMED Authorities

3 technical National Business

Support agencies assistance centers in Functional
Information Center
Hanoi, Danang Divisions
under ASMED
and HCMC

Other support International

Organizations (VCCI, Donors
Associations, NGOs)

SME

The responsibilities of each of the key institutions involved in the promotion and
development of SMEs are detailed below:
SME Promotion Council, by virtue of Decision No. 12/2003/DQ-TT dated March 2003,
the council is tasked to carry our the following:

¡ To serve as a consulting body to the Prime Minister in the formulation of SME

development mechanisms and policies through out the country, specifically
the strategy orientation and the SME Development Plan that shall be in line
with the national orientation and socio-economic development plan;
¡ To propose amendments, supplementation to current SME development
mechanisms and policies; to propose solutions, measures and SME support
programs to improve and enhance the competitiveness for SMEs; other SME-
related issues assigned by the Prime Minister.

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Ministry of Planning and Investment

¡ To perform the state management function on enterprise development;
¡ To be the host agency and/or coordinate with relevant Ministries and agencies
to submit development policies and management mechanism for SMEs in
different economic sectors to the Prime Minister;
¡ To be permanent body under the SME Promotion Council;
¡ To draft and submit to the Prime Minister the Comprehensive Export
Promotion Support Program for SMEs;
¡ To draft the SME Development Plan 2006-2010 and to prepare for the
expansion plan of NBIN;
¡ To coordinate and collaborate activities that involve among other things,
the issuance of legal documents relating to improving the investment
environment.

Agency for SME development

¡ To draft the Comprehensive Export Promotion Support Program for SMEs,
the Comprehensive Human Resource Support Program for SMEs and the
guidelines for the implementation of this program (activities are ongoing);
¡ To draft the SME Development Plan 2006-2010 under the instruction of the
SME Promotion Council;
¡ To coordinate with Ministries, agencies and localities to develop and to finalize
the business information system including information provision to SMEs, a
critical feature;
¡ To set up relationships with domestic and international organizations and
business associations;
¡ To serve as the host agency in negotiating with international donors on SME
development ODA programs/projects;
¡ To serve as the secretariat for SME Promotion Council meetings.

Ministry of Finance
¡ To amend and supplement tax and fee laws to ensure equality on tax liability
among different business lines, different products, different social strata and
different types of enterprises and to perform other tax-related activities such
as tax monitoring and compliance;
¡ To ensure that accounting and auditing regimes for enterprises are carried out
in line with the existing laws and international standards;
¡ To ensure non-discriminatory financial support measures including tax and
fee incentives; wipe out of tax debt and other payables to budget, settle
outstanding debt and export bonus, etc. and some SME-specific support
measures such as establishment and operational guidelines of Credit Guarantee
Fund, financial management mechanism for the Comprehensive Support
Program on Human Resource Training for SMEs, etc.

Viet Nam State Bank

¡ To boost capital mobilization to meet the credit financing demand of
enterprises and other economic sectors by diversifying channels of capital
mobilization, particularly medium- and long-term capital to expand lending
in response to mounting demand of capital in the national economy;
¡ To renew credit policies so as to allow credit institutions to exercise self-
control and accountability;

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¡ To reform the secured lending mechanism to expand non –security lending

and lending with collateral as future acquired assets.

Provincial Peoples Committee

¡ To provide an orientation for SME promotion;
¡ To draft or participate in the drafting of the implementing guidelines for
government, Prime Minister and MPI regulations on local SME promotion;
¡ To consolidate/develop SME support programs;
¡ To coordinate, guide and supervise the implementation of support programs
after they are approved;
¡ To facilitate SME activities in terms of production premises, land fund and
incentives policy for developing industrial zones and sub-zones for SMEs;
¡ To facilitate access by SMEs to market information and prices of goods, help
SMEs in market expansion, products consumption, and marketing potential
products for SMsE; provision of essential information through conventional
papers and the Internet.

Industrial or cluster-based development approach scenario

At present, there are 112 industrial parks and export-import processing zones in Viet Nam,
of which 68 are IPs & IEPZs. Together, these have attracted FDI projects with over US$11
billion invested capital and domestic investment projects with nearly VND73 trillion
invested capital.

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Country Presentation: Cambodia

Country economic overview

Cambodia has a population of approximately 13.5 million people. Over 80% of the
population lives in rural areas and the agriculture sector accounts for over 70% of total
employment in the country. Poverty is concentrated in rural areas: the majority of the
poorest people are located in rural communities and engaged in agricultural activities. Over
five million people or 36% of the population live below the poverty line, and 90% of them
inhabit rural areas. Economic activities are dominated by small-scale medium enterprises in
all sectors. Despite rapid economic growth over the last decade, GDP per capita remains low
at US$308. On the United Nations Development Program (UNDP) Human Development
Index, Cambodia ranked 130 out of 173 countries. By most measures, Cambodia remains
a poor rural-based economy.
In terms of the three major sectors—agriculture, industry, and services—the industrial
sector has been the most dynamic. By 2003, it had grown significantly, accounting for
27.7% of GDP. This was largely due to the growth of the garment industry. The textiles,
footwear and garment industry accounts for 12.5% of GDP, and from 1994 to 2002 created
over US$579 million investment in fixed assets. The agriculture and services sectors have
the largest share in the country’s GDP and employment. In 2003, agriculture accounted for
36% of GDP while the services sector share was over 36.2%.
The SME Development Framework defines SMEs as follows (based on equivalent full-
time employees):

¡ Micro: less than 10 employees

¡ Small: 11-50 employees
¡ Medium: 51-100 employees
¡ Large: over 100 employees

Small-scale enterprises dominated economic activities and account for a substantial part
of employment. In 2005 the Ministry of Industry, Mines and Energy (MIME) determined
that there were 29,297 small industrial establishments with fewer than 50 employees.
This represents an approximate 21% growth in the number of establishments since 1999.
Food, beverage and tobacco manufacturers represent the largest number of small industrial
establishments. Of these, approximately 90% are rice-milling enterprises. Below is a table
summarizing the employment distribution per SME sector.

Small Industrial Establishments by ISIC, 2005

ISIC Number Total Labor
Food, beverage and tobacco 23,727 57,557
Textile and wearing apparel and leather 1,665 7,073
industry

Rice milling 21,516 47,531

Spinning, weaving and finishing textiles 345 461

Apparel except footwear, others 215 5,059

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Major challenges and issues faced by the policy environment and institutional
arrangements

The government of Cambodia has been implementing policies and programs for SME
development. At present, the government is improving its policy and business environment
to attract more enterprises. Among these efforts are the following:

Capacity Building

The SME Development Framework (SMEDF) is the overall guideline for the
promotion, development and monitoring of small and medium enterprises in Cambodia.
The SMEDF was approved in July 2005 and lunched in February of the following year. It is
basically aimed at providing a roadmap (2005-2010) for creating a more conducive business
environment for SMEs. It comprises two phases and four main components, namely: policy
framework and implementation; regulatory framework; access to finance; and SME support
activities. The SME Sub-Committee seeks to update the framework taking into account the
progress of SME reforms since July 2005 and changes in the economic environment.
In fulfilling the above objectives, the first SME annual report has been issued, providing
a snapshot of the sector’s progress. The SME Secretariat has likewise lined up some activities
to attain the above-mentioned targets, such as hosting a donor coordination meeting to
identify and discuss issues for revision in the new SMEDF document, conducting a survey
to assess the impact of SMEDF, and revising the SMEDF to be submitted and approved by
the SME Sub-Committee.

Supporting the SME Sub-Committee and Secretariat to undertake donor

coordination

Avoiding overlaps, highlighting the needs and stressing the opportunities for operational
coordination of donor support is very important in order to successfully implement the
SMEDF. This activity is intended at increasing the efficiency and effectiveness of donor
support and to catalyze more donor assistance for the Government’s implementation of
the SMEDF; conducting regular meetings and workshops to exchange information and
progress on overall implementation of the SMEDF; regularly updating the Development
Partner Coordination Matrix of the SMEDF; and producing short assessments. The use
of web-based tools is also encouraged to facilitate easy exchange of information between
donors.

Collecting information on the SME sector

To enhance policymaking, implementation, and the monitoring of impacts, there

needs to be a fairly comprehensive, accurate (and regularly updated) profile of the SME
sector. At present however, Cambodia’s SME data tends to be dispersed across ministries
and agencies, largely as a result of the licensing process. Hence, this activity focuses on the
collection of information about SMEs, a task given to the National Institute of Statistic and
SME Sub-Committee. Establishing a technical working group from relevant agencies is
needed to facilitate the collection of information.
Crucial to the growth and development of SMEs is the availability and accessibility of
information related to their activities, such as laws and regulations and other SME-related
activities. In so doing, the MIME and SME Sub-Committee are responsible for issuing a

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plan that provides for the wide dissemination of SME-relevant information. This entails
the development of a plan for greater dissemination of information relevant to SMEs,
through the SME Sub-Committee website portal, and other channels as well as technical
training programs for SME Secretariat officers about improving webmaster skills in order
to maintain the portal.

Licensing, Review and Recourse

Attending to the needs of SMEs contributes to their development. Businesses and

enterprises should be able to able to submit grievances regarding administrative decisions
that they believe are unfair.
There is a pilot hotline in the country, but with few activities, largely due to the lack
of publicity, and some hesitation from SMEs about maximizing it use. In this regard,
workshops with the private sector on utilizing the resources mechanism ought to be planned
and carried out.
SMEs need to know what business licenses and inspections are required, how and from
where or whom they are obtained in order for them to properly comply with regulatory
laws and policies. Hence, there is a need for a one-stop information window on licensing
and inspection. The intent of this kind of strategy is to gather data on business licenses
and upload information on licenses and inspections. Activities to realize these goals are
already underway, such as supporting the draft information window design in the SME
Sub-Committee for approval and consulting on design and operational plans for the one-
stop window. Similarly, the handbook on the law of commercial enterprises is under review
and will be printed and disseminated after the Framework is finalized.

Computerized company registry

This activity or project will be completed through a complete review of the existing
systems of registry, followed by recommendations for enhancement. The activity covers
the following: (1) Scope/procure IT equipment/ Software required; (2) Program upgrades
(ISIC, Declaration, others); (3) Install updated database, test and update data; (4)Develop
database maintenance plan; and (5) Dissemination activities.
Below is the organizational chart of The Ministry of Industry, Mines and Energy’s
Department of Industrial Technique (DIT), the institution that is mainly responsible for
the operation, monitoring, promotion and development of SMEs.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

The Ministry of Industry, Mines and Energy Organization Chart

(Department of Industrial Technique (DIT)

Minister

Secretary of State

Under Secretary of State

Cabinet

General Inspection G. D. of Industry General Department General Department

of of Energy
Department of Mineral Resources
Administration
Department of
Industrial Affairs
Department of Department of Department of
Personnel Mineral Resources Technical Energy
Department of Small
Ind. & Handicrafts
Department of Department of Department of
Finance Geology Energy Development
& Association Department of
In Techniques
Department of Department of Department of
Legislation Mineral Development Hydro Electricity
Department of
Metrology
Provincial Department of
industry, Mines & Energy Department of
(4 Cities & 20 Provinces) Portable Water Supply

Department of Ind.
Standard of
Cambodia

D. of Cooperation &
ASEAN Affairs

Department of
Industrial Property

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Country Presentation: Mongolia

Country Economic Overview

Mongolia is a landlocked country, bordered by Russia and the People’s Republic of China.
The country has a land area of 1,567 square kilometers and is endowed with rich natural
resources. Its population is about 2.56 million, and livelihood activities are derived from
nomadic animal husbandry and agriculture.
Currently, the country’s GDP is growing at an annual rate of 7.5% (2006) and the per
capita GDP is US$950. Mongolia ranked 116 in the latest Human Development Report.
Its unemployment rate is not terrible, at 3.3%. Compared to other Asian countries, the
country’s national poverty level is low at 36%. Trade turnover is US$34.2 million and
exports and imports are US$1.47 billion and US$1.43 billion, respectively. The country has
92 trading partners, and 36% of trade is accounted for by People’s Republic of China; 20%
by Russia; 16% by the European Union; 8% by the United States; and 6% by Canada, with
others including Japan and Korea accounting for 14% of total trades.

Position of SMEs

In Mongolia, SMEs are defined as legally registered business entities engaged in the
production, processing or manufacturing of products or commodities, including agro-
processing, trading and services, and mining entity, that fall into one of the following
categories:

Number of Annual revenue

Category Sector
employees in MNT*
Small

Retail/wholesale ≥9 ≥150 million

Service ≥9 ≥70 million

Agriculture (husbandry) ≥5 ≥50 million

Agriculture (crops) ≥10 ≥70 million

Manufacturing/processing ≥20 ≥150 million

Mining ≥5 ≥100 million

Medium

Retail/wholesale ≥30 ≥300 million

Service ≥25 ≥150 million

Agriculture (husbandry) ≥25 ≥150 million

Agriculture (crops) ≥25 ≥175 million

Manufacturing/processing ≥50 ≥500 million

Mining ≥20 ≥200 million

*US$1 = MNT1165 (official Mongol Bank rate effective 27 February 2007)

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At present, there are about 26,000 active SMEs, of these, 81.7% are enterprises with
less than 10 employees, 7.6% enterprises with 10 to 19 employees, 6.8% enterprises
with 20 to 49 employees and 3.9% enterprises with over 50 employees. SMEs contribute
significantly to the high labor productivity in the country, employing over 300,000 people,
and accounting for approximately 60% of the GDP. The sector distribution pattern is
stable with slight fluctuations, with most SMEs being in trade (41%), service (28%) and
manufacturing (26%).

Major challenges and issues faced by the economy in general and by SMEs
in particular

Just like other countries, SMEs in Mongolia are beset with problems involving:

¡ Access of credit/finance/capital
¡ Access to technology
¡ Training/human resource development
¡ Funding for research and development
¡ Extent of government regulation/compliance costs
¡ WTO commitments
¡ Weaknesses in transportation and infrastructure
¡ Limited information on possible markets and clients
¡ Broader economic situation

Policy environment and institutional arrangement with regard to industrial cluster

management/development

Recognizing the above problems, the government has initiated a number of policy and
institutional reforms geared towards promoting and strengthening SMEs. Below are the
institutions responsible for the development of SMEs in the country and their respective
functions:

The Ministry of Industry and Trade (MIT), Mongolia

To promote SMEs and continuously strengthen them, the following functions are
being undertaken by the MIT:

¡ Providing credits for private sector initiatives

¡ Improving the legal environment
¡ Supporting micro-finance schemes, and promoting foreign investment
¡ Promoting foreign investment

To ensure that the above functions are carried out, the following measures are
implemented:

¡ Support for the development of national industry and the private sector
¡ Increasing employment generation through development of small and
medium enterprises
¡ Increasing exports by improving the competitiveness of products and services
on the world market and establishment of a wholesale network within the

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regional development trend, particularly in outlying rural territories to link

up consumers in those territories
¡ Development of foreign trade and promotion of foreign investment
¡ Introduction of modern advanced administration management, development
of national technologies

Legal and Regulatory System

The key to the business or investment environment lies in the integrity and transparency
of the legal and regulatory system. In this area, the following measures have been taken:

¡ Strengthening the National Council for the Promotion of SMEs and a Small
and Medium Enterprise and Technology Development Division in the
Ministry of Industry and Trade.
¡ Support for the establishment of a Professional Business Associations’ Council,
which will serve as a partner for consultations in policymaking.
¡ In 2002 the Government passed pioneering resolutions directing the
establishment of business incubators in each region. The first business
incubation centre was established in 2003
¡ In 2005, the Program for the Support of Small and Medium Enterprises
(“National Programme”) was launched. It aims to promote the robust growth
of SMEs, improve SMEs’ competitiveness, and create favorable conditions to
encourage the formalization of the informal sector to foster the creation of
new employment opportunities.

Financial sector and micro finance for SMEs

Despite the decline in commercial interest rates since 1990s, they are still considered
high. High interest rates, continued distrust in the financial sector, and a lack of collateral
requirements, have resulted in a serious lack of access to financial services by large groups of
vulnerable people, especially the poor, small herders, and urban and rural micro entrepreneurs.
Realizing that SME financing greatly affects SME development, the government has made
significant progress in mobilizing resources for and ensuring that funds are accessible to
SMEs. These measures are as follows:

Government-sponsored Scheme
¡ The Ministry of Industry and Trade is the underwriter of the Governments
Special fund for SME support. The fund, totaling MNT2 billion, is channeled
through intermediaries, major commercial banks, and offers soft/discounted
loans to qualifying SMEs.

Donor-assisted SME financing schemes

¡ There are over 20 activities/interventions designed around SME development
and promotion, and the majority of them are in the financial and micro-
financial sector, with World Bank being the main source of funding.

Industrial or cluster-based development approach scenario

The clustering process is small in scale and scope. Although some progress has taken place in
the service and trade sectors, especially in urban areas, the major impediments to industrial

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and geographic clustering are the socio-historic requisites of the nomadic culture, sparse
population and mobility of the communities in the regions.

To counter these challenges, the government has adopted the following policies:

¡ Approval of the Industrial Park Bill in early 2007

¡ Identification of potential main regions for the establishment of Industrial
Parks (Ulanbaatar, Darkhan, Erdenet and Nalaikh). Two of the many
considerations include relatively developed infrastructure and rich endowment
of natural resources in the area.
¡ Revision of the Technology Transfer law

Although it is hoped that the establishment of technological parks in major cities will
intensify the process of SME development, potential problems in terms of deteriorating
quality of education and vocational training, the lack of skilled workers are foreseen.

Country Presentation: Kazakhstan

Country Economic Overview

Kazakhstan is situated in Central Asia, deep in the interior of the Eurasian continent. Its
territory is 2,724,900 square kilometers, making it the second largest country among the
CIS states in terms of area. Kazakhstan shares borders with the People’s Republic of China,
Kyrgyz Republic, Turkmenistan, Uzbekistan, and Russia. The total length of its borders is
12.187 km. The country’s population is 15.21 million as of 2007 and its population density
is 5.5 people per square km.
Kazakhstan has made commendable progress in a short period of time during its
economic transition. As a result of successful internal policies and favorable external factors
(global economic recovery and high commodity prices), the country has become one of
the world leaders in economic growth with an annual growth rate of about 9% over the
past five years. The main challenge faced by the country is the strategic use of growing oil
revenues and accumulated savings (primarily pension system contributions) for ensuring
the sustainable growth of a more diversified economy.

Macroeconomic Indicators for Kazakhstan

2001 2002 2003 2004 2005 2006
GDP (US$ bn.) 22.1 24.6 30.9 43.2 57.1
Current Account (% GDP) -5.3 -4.1 -0.9 1.3 3.3
Gross International Reserves ($ bn.) 2.5 3.1 5.0 9.3 7.1
National Oil Fund ($ bn.) 1.3 1.9 3.7 5.1 8.0
External Public Debt (% GDP) 17.2 14.2 11.8 8.3 5.9
Inflation 8.4 5.9 6.4 6.9 7.6 8.6
Exchange rate (KZT per US$) 146.9 153.5 149.5 136 133 127
State budget revenues ($ bn.) 5.08 5.35 6.84 9.60 15.78
State budget expenditures ($ bn.) 5.17 5.43 7.15 9.73 14.63
Deficit ($ bn.) -0.09 -0.08 -0.31 -0.14 1.15

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The structure of GDP is as follows: goods 44%, service 52%, taxes 6%. Industry
has the highest share in GDP, accounting for almost 30%, followed by construction and
agriculture with 7.8% and 6.4%, respectively. The number of industrial enterprises and
factories is estimated at 13,322. The main industries are oil and gas mining. Combined
revenues derived from both sources account for almost 40% of the total budget.
According to the laws of the country, SMEs are defined and classified according to the
number of employees, as follows.

¡ Small: 1 to 50
¡ Medium: 51 to 250
¡ Large: more than 250

At the beginning of 2006, there were an estimated 226,908 SMEs, including state-
owned enterprises (27,471), private firms (188,642) and foreign-owned enterprises
(10,792). Despite this considerable progress, however, the share of SMEs in the total
output of the country is only 20.2%.
The following accounts for the sectors where most of the SMEs operate, and shows
their distribution across sectors/industries.

Agriculture, hunting and forestry: 12,006 (5.3%)

Fishing and fish breeding: 379 (0.2%)
Mining: 1,383 (0.6%)
Manufacturing: 17,405 (7.7%)
Production and distribution of electricity, gas and water: 1,527 (0.7%)
Construction: 23,682 (10.5%)
Trade, repair of motor vehicles, personal and household goods: 76,659 (34.1%)
Hotels and restaurants: 2,707 (1.2%)
Transport and communications: 9,698 (4.3%)
Others: 79,413 (35.3)

Major challenges and issues faced by the economy in general and the SMEs
in particular

SMEs in the country are also beset with the following problems:
¡ Complicated business registration and license regulations
¡ Delay in the issuance of business permits and licenses
¡ Lack of sources for financing, expensive funds, lack of qualified personnel who
are familiar with micro finance systems, entrepreneurs and business owners
who are not familiar with financial and accounting standards
¡ Too many and overlapping laws and degrees regulating the SMEs (216
legislative acts about SME regulation, and upon registry, SMEs need to go
through different authorities to obtain license and permits)

Policy environment and institutional arrangement with regard to industrial clusters

To address the above problems, the government, through the Committee for SME
development under the Ministry of Industry and Trade and its attached institutions, has
taken the following measures:

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¡ Enactment of law on private businesses;

¡ Enact of law on joint stock companies;
¡ Since 2004 the government has been actively allocating a considerable budget
for SME development (US$22 million in 2004, US$99 million in 2005,
US$95 million in 2006 and US$91 million in 2007);
¡ Establishment of the special funds for SME development (e.g., Special Fund
for SME Development in the agriculture sector) in order to provide affordable
and accessible credit to SMEs;
¡ Ongoing discussions about the Labor Code, particularly about setting up a
minimum wage rate and allowing contract arrangements between employees
and employers;
¡ Streamlining of administrative regulations for SMEs, potential tax exemptions
on certain investments;
¡ Regular dialogues are conducted between the president and business owners,
investors, entrepreneurs and business associations regarding problems about
business and possible solutions;
¡ Construction of key infrastructure;
¡ Strengthening public sector institutions (especially those newly established,
i.e., 5-year old institutions);
¡ Establishment of business incubators and innovation centers by local
governments to provide the necessary infrastructure for small enterprises.
Activities and services of the centers include consultancy, education,
accounting, etc.). At present there are 44 business incubators and innovation
centers in Kazakhstan.
¡ Construction of Information and Marketing centers to help SMEs through
the following services: (1) Legal advice; (2) Audit and accounting; (3)
Marketing; (4) Business planning; (5) Tax administration; and (6) Custom
administration, etc.;
¡ Collaboration with International Finance Institutions that support SMEs.
At present, there are 150 foreign and international organizations in
Kazakhstan that support SMEs. International Financial Organizations such
as IBRD, EBRD, ADB, JICA and others also play an active role in SME
development.

Industrial or cluster-based development approach scenario

Kazakhstan started experimentation with cluster based-development in July 2004. The

government invited international experts (American consulting company J.E. Austin
Associates Inc and the renowned Professor Michael Porter, the Director of the Strategy and
Competitiveness Institute of Harvard University) to discuss and share their experiences and
strategies about the cluster-based approach to SME/industrial development.
The consultancy firm has visited and assessed 150 sectors in the country to find out
and develop which clusters can give economic competitive advantages to the country. Of all
the recommended industries, the government chose seven: metallurgy, transport logistic,
textile, construction materials, food, tourism, and oil and gas machinery. Accordingly, the
government has developed strategic plans to develop these clusters.

The chosen clusters are as follows:

¡ Metallurgy – Karaganda oblast (industrial zone)

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¡ Transport logistics – Green transport way “People’s Republic of China-

Kazakhstan-Europe” and new transport logistic center in Almaty
¡ Textile – South-Kazakhstan oblast (cotton sector)
¡ Construction materials – Astana city (industrial zone), Kyzylorda oblast (glass
production), Almaty oblast
¡ Food– vegetables producing cluster (South-Kazakhstan oblast), milk
production (Kostanai oblast), and grain cluster (North and center of
Kazakhstan)
¡ Tourism – Almaty and Almaty oblast
¡ Oil and gas machinery – West-Kazakhstan

Country Presentation: Kyrgyz Republic

Country economic overview

The Kyrgyz Republic is located in the northeastern part of Central Asia, in the “heart”
of the Eurasian continent. The country’s land area is 1,985 thousand square kilometers
and borders the People’s Republic of China, Kazakhstan, Uzbekistan, and Tajikistan. Its
population is 5.16 million.
For the years 2000–2005 the economy grew at an annual average rate of 4% (real
GDP) with the highest growth rates in 2003 and 2004 but negative growth during 2005.
Inflation significantly declined from 18.7% in 2000 to just 4.3% in 2005. Unemployment
however, has been on the rise since 2000 and reached 8.7% in 2005. The budget deficit has
been improving and in 2004 was just 3.4% of the GDP. Similarly foreign debt, though at a
very lethargic rate, has been improving over the years from more than a 100% of GDP in
2000 to 82% in 2005. The table below shows the trend in the key economic indicators of
the country for the period 2000-2005.

Key Economic Indicators of the Kyrgyz Republic, 2000-2005

Indicators 2000 2001 2002 2003 2004 2005
GDP, real growth (%) 5.4 5.3 0.0 7.0 7.0 -0.6
Inflation (%) 18.7 6.9 2.0 3.1 4.1 4.3
Unemployment (%) 7.8 8.6 8.9 9.0 8.7
Current transitions account (% to GDP) 5.7 -1.6 -3.1 -4.2 -3.4
Wide money growth (%) 12.1 12.2 35.1 34.5 33.6
Primary budget deficit (% to GDP) -6.9 -4.4 -5.1 -4.3 -3.4
Foreign debt (%) 102 94.15 114.5 104.2 95.5 82.4
Source: NSC, NBKR

The major factors that affected economic growth during the past years are as
follows: (i) sustainable growth of economy in the major trading partners at the level of
7-12% (People’s Republic of China, Kazakhstan, Russia); (ii) annual growth of personal
consumption amounting to 11%; (iii) sustainability of investment, which on average
amounted to 20% per annum; and (iv) better budget sustainability and level of fiscal
mobilization.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

The structure of GDP production went through notable changes, with the share of
industrial production dropping from 17.3% in 2003 to 16.1% in 2005, and the share of
agriculture—from 33.6% in 2003 to 30.5% in 2005, due to the growth of the service sector
which, starting in 2002 has exceeded the share of agriculture and amounted to 40.2% in
2005. Industrial growth in 2003-2005 on average amounted to 2.5%, and derived mainly
from gold mining and power industry enterprises which on average accounted for 57.2%
of industrial produce. Without gold and energy, the average annual growth of industry
amounted to almost 3%.
Unfavorable climatic conditions in 2005, growing oil prices, and reduced livestock
production caused a fall of agricultural production volumes to 4.2%, leading to a situation
when the average growth rate in 2003-2005 amounted to slightly over 1% per year, thus
reducing agriculture’s share.
The average annual growth rate of gross production in construction amounted to
1.8%, mainly on account of growing domestic private investments. Foreign investments
decreased, e.g. the PIP portfolio dropped from 3.6% of GDP (minus grants) in 2003 to
3.2% in 2005. On the whole, the use of capital investments grew from 9 billion in 2003 to
Som10.6 billion in 2005.

Position of SMEs

Small and medium-sized enterprises (SMEs) in the Kyrgyz Republic have existed for more
than ten years, and are one of the most influential factors in the country’s recent satisfactory
economic development performance. Efforts to promote and develop the SME sector in the
country in earnest began in 1998 when the government expressed its support for the sector
via its Program of Actions.
As of January 2006, the share of SMEs in the country’s GNP was satisfactory at 43.6%.
On the facing page is a table summarizing the key indicators for SMEs for the period.

Major challenges and issues faced by the economy in general and by SMEs
in particular

Despite the considerable progress made by the country in promoting SMEs, the following
problems continue to hamper SME growth:
¡ Over 30% of the small and medium enterprises are unprofitable
¡ The existing budgetary and tax systems hamper investment prospects and do
not stimulate export. The high level of tax payments considerably increases
the cost of work, raises the cost of production and the general rate of inflation,
and also limits the competitiveness of enterprises.
¡ The low level of transparency of the legal and regulatory framework
¡ The complexity of administrative procedures regarding business transactions
and registration and the resulting high transaction costs discourage potential
investments
¡ Difficulties of businesses in starting up businesses due to the cumbersome
rules of the government

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 COUNTRY PRESENTATIONS

Key SME Indicators for Kyrgyz Republic

Jan. Jan. Jan. Jan. Jan. Jan. Sept. Sept.

2002 2003 2004 2005 2006 2007 2005 2006 +
Indicator
ACT ACT ACT ACT ACT FCST ACT FCST -
Quantity of 8,579 7,759 8,089 8,485 8,557 8,780 7,792 8,288 +496
subjects

Number of 7,555 6,893

SMEs
Small 1,024 866 7,298 7,729 7,784 7,930 7,125 7,620 +495

Medium 791 756 773 850 667 668 +1

Individual 111,295 122,525 134,386 149,280 163,119 175,700 159,033 176,006 +16,973
businessmen

Share of 42.9 44.8 43.4 43.3 43.6 44.5 45.7 46.0 +0.3
the total
added cost
of subjects in
gross national
product of
the republic in
million soms in
percentage

Small 8.1 5.6 5.0 6.7 7.4 7.6 8.8 8.1 -0.7

Medium 6.2 4.4 3.4 4.3 4.1 4.3 2.7 3.7 +1

Individual 13.4 15.1 15.5 14.6 15.0 15.3 19.9 19.0 -0.9
businessmen

Farms 15.2 19.7 19.5 17.7 17.1 17.3 14.3 15.1 +0.8

Volume of 11,520.5 11,539.8 10,130.5 11,078.9 10,405.4 10,950.1 6,942.5 8,069.7 +1,127.2
industrial
output of
SMEs (million
soms)

Small 2,060.0 2,015.3 2,640.6 3,033.2 2,600.3 3,350.5 2,371.5 2,904.4 +532.9

Medium 4,817.2 4,858.9 5,077.7 4,783.0 5,937.6 4,799.3 3,569.1 3,283.7 -285.4

Individual 4,643.3 4,665.6 2,504.6 3,262.7 1,867.5 2,800.3 1,380.9 1,881.6 +500.7
businessmen

Volume of 23.6 24.7 18.5 20.1 21.4 22.1 19.0 21.4 +2.4
industrial
output of SME
(percentage)

Small 4.2 4.3 4.8 5.5 6.9 6.7 6.7 7.7 +1

Medium 9.9 10.4 9.2 8.7 9.9 9.6 8.5 8.7 +0.2

Individual 9.5 10.0 4.5 5.9 5.9 5.8 3.8 5.0 +1.2
businessmen

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Policy environment and institutional arrangement with regard to industrial cluster

management/development

In line with the economic development thrusts of the government are policy strategies for
SME development. Hence, a number of laws in this regard have been enacted and some are
currently being implemented in the country. These are:

¡ Laws pertaining to the protection of the rights of businessmen

¡ Creation of associations of employers in the country
¡ Simplification of the tax system for small businesses
¡ Providing clear basis for the technical regulation of SMEs
¡ Simplification of administrative rules on business registration and transactions,
resulting in lower transaction costs
¡ Amendment to the Tax Code. e.g., a 10% reduction in the tax on gross sales
or profits of firms and simplification and transparency of the tax system
¡ Establishment of business incubators that are involved in services such as
consultancy, education, accounting, all facilitating a conducive environment
for all businesses and investors
¡ Establishment of economic zones
¡ Provision of SME financing from the government

Industrial or cluster-based development approach scenario

In the Kyrgyz Republic, little attention has been given to cluster development. In the formal
sense, clusters seem to be inexistent in the country. There are however potential clusters,
such as the clothing industry in Bishkek. Many may have existed already naturally but
they have not been formally classified as cluster industries. Thus, the big challenge for the
government is to facilitate SME promotion through a better policy environment and more
financing schemes and human resource development, among other things. Partnership with
the private sector in activities that will foster the growth of SMEs such as identification of
industrial districts will help speed up the process.

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Country Presentation: Tajikistan

Country economic overview

Tajikistan is a land-locked, mountainous country in Central Asia with a territory of 143.100

km². In the West, Northwest and Northeast, the country is bordered by Uzbekistan and
the Kyrgyz Republic, in the East by the People’s Republic of China, and in the south by
Afghanistan. The distance from the west to the east is 700 km, and from the north to the
south is 350 km. Mountains and plateaus, which belong to the mountain systems of Pamir
and Tien Shan, occupy 93% of the total territory.
According to the State Statistics Committee, the population of Tajikistan for 2006
exceeded 7 million. Tajikistan is a multinational country. The majority of the population
(80%) are Tajiks. There are also Uzbeks (15.3%), Russians (1.1%), and Kyrgyzs, Tatars,
Kazakhs, etc. Only 27% of the population lives in urban areas. The average density of the
population is 37 persons per square km. However, 80% of people live in warm valleys—
Vakhsh, Hissar, and Ferghana. The mountainous regions of Pamirs (Gorno-Badakhshan
autonomous oblast) are sparsely populated.
Since 1997 stable production growth has been observed in the country. In 1997, the
GDP growth rate was 1.7%, and in 2001 the growth rate soared to 10.2%. In 2006,
GDP amounted to US$2.7 billion while the growth rate was stable at 7.0% and GDP per
capita amounted to US$388.6. The output of industrial products increased by 4.9% in
2006 compared with 2005, whereas agricultural production increased by 5.4% in the same
period. Details of the structure of GDP are shown below (in percent):

1. Production of goods: 45.3

Components:
Industry 18.4
Agriculture 21.5
Construction 5.2
Other activities for goods production 0.2
2. Services: 43.6
3. Taxes: 11.1

Tajikistan is an agrarian-industrial country. It is considered to have a comparative advantage

in terms of agriculture, with significant water resources, favorable climatic conditions for
growing grains and animal husbandry, and an abundance of cheap labor. The share of the
agriculture in GDP is significant. Seventy three per cent of the country’s total population
lives in the countryside. Plant growing dominates agricultural produce. Its principal branches
are cotton growing, viticulture and horticulture, and aromatic plants growing. Plant growing
produce composes approximately two thirds of the gross volume of agricultural produce,
with more than 50% being cotton. In terms of cotton production, Tajikistan is the third in
the CIS after Uzbekistan and Turkmenistan. A significant land area is used for grains. Wheat,
barley, corn and rice are cultivated. In the area of animal husbandry, cattle breeding and sheep
breeding (coarse-haired. caraculs. meat) play the most important roles.
The main industrial branches in the Republic of Tajikistan are the following: metallurgy,
mechanical engineering, and the production of durable consumer goods, light industry, and
food industry.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

The growth rates of indicators reflect the positive impact of reforms initiated by the
government. However, much remains to be done, especially in terms of developing the
industrial sector, which at present accounts for less than a quarter of the country’s total
production.

Policy environment and institutional arrangements with regard to industrial cluster

management/development

Monetary and fiscal policies

In general, the initiation of reforms and the efficiency of the economic system were
made possible by the stability and reliability of the credit-monetary system regulated by
the country’s National Bank. The circulation of money in the economy is controlled by
the National bank in three ways: (1) granting credit to credit institutions; (2) crediting the
treasury; and (3) sterilization of the issue of bank notes through their exchange to foreign
currency. As a result of various economic and monetary reforms in the country, a number
of credit institutions came into existence for the benefits of SMEs. There are at present five
micro credit deposit organizations, 20 micro lending funds, and 30 micro lending funds
in the country. Altogether, there are about 143 branches and 69 sub-branches of these
institutions nationwide.
With the adoption of the Law of the Republic of Tajikistan “On the fundamentals of
budgetary structure and budgetary process” in 1997 and corresponding laws on the state
budget adopted for each year, the appropriate legislative basis in the area of the budgetary
relations of the state was created. This basis facilitated the stabilization of the economy,
finance and budget of the country.
The country’s Taxation Code was enacted on 1 January 2005. It is expected to facilitate
and speed up the implementation of financial reforms. The Code contains five main types
of taxes: value-added tax, sales tax, profits tax, income tax, and excise tax on certain types of
goods. Moreover, in order to strengthen the state budget and to increase its revenue, sales
taxes on cotton and aluminum were authorized and introduced. Revenues of the state budget
for 2006 as a percentage of GDP were 17.9%. The state budget on revenues and grants for
2006 reached 106.5% of the adjusted plan for this period and amounted to TJS1,657.6
million. Expenditures of the state budget for 2001 amounted to TJS1,619.5 million or
101.0% of the adjusted plan for 2001. The ratio of expenditures to GDP was 17.4%.

Foreign and domestic investment policies

Investment is necessary for economic growth, as it is the main driving force and
catalyst of reforms. There is a need for the country to attract more investments to further
and sustain its economic growth. In this regard, the government has carried out an active
investment policy aimed at creating a favorable investment climate, granting equal rights
and guarantees to both foreign and domestic investors, and protecting their interests and
property on the territory of the country.
A legislative framework that focuses on attracting and encouraging foreign investment
has been developed by the government. The law of the Republic of Tajikistan “On foreign
investments in the Republic of Tajikistan” of 10 March 1992 defines the legal framework
for the participation of foreign capital in the economy, and contains a number of benefits for
foreign investors. For foreign investment in priority branches of economy and in separate
territories, additional tax relief and other benefits can be determined in the legislation of the

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 COUNTRY PRESENTATIONS

Republic of Tajikistan. Other initiatives with regard to attracting investments are the “Law
on Investments,” the law on “Privatization of state property.” The government is also in the
process of privatizing some sectors.

Foreign trade

By 2006, the country had already established trade-economic relations with 88

countries. The structure of foreign trade has not been favorable for the economy in past
years. In the area of exports, there is prevalence of undesirable exports of raw materials
and non-ferrous metals, and in imports, or power resources and foodstuff. The one-sided
structure of export intensifies the dependence of foreign trade and the state of the national
economy in general on the fluctuation of prices on the world market, particularly on the
aluminum and cotton markets, where prices have fallen over the course of several years.
Hence, a review of trade and industrial policies must focus on the types of reforms that are

Country Presentation: Myanmar

Country Economic Overview

Myanmar is located in the southeastern part of Asia, and borders the Andaman Sea and
the Bay of Bengal, between India, Bangladesh, the People’s Republic of China, Lao PDR,
and Thailand. The economic system has changed from a centrally-planned economy into
a market-oriented system since 1988. The economic structure is mainly dependent on
agricultural crops, especially rice, cereals crops and beans, with supplements of natural
resources such as petroleum, natural gas, and forest products. Education in Myanmar is
well developed. About 83.1% (in 1995) of the population are educated.
The country’s total area is 676,577 km2 with an estimated population of 52.17 million
in 2003. Approximately 60% of the total population is in the labor force. In 2006, the
country’s GDP was MK12,254.6 billion and the growth rate was around 13.2%. GDP in
the same year consisted of:

¡ Agriculture: 50.1%
¡ Industry: 15.2%
¡ Services: 34.7%
¡ Export: US$3.56 billion
¡ Import: US$1.98 billion

The Government has formulated and implemented national development plans to

attain the all-round development of the national economy in accordance with four economic
objectives:

1. Development of agricultural as the base and all-round development of other

sectors of the economy;
2. Proper evolution of a market-oriented economic system;
3. Development of an economy inviting participation in terms of technical know-
how and investments from sources inside the country and abroad; and
4. The initiative for shaping the national economy must be kept in the hands of
the state and the people.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Manufacturing accounts for the largest share of products in both the industrial sector
and the country’s GDP, at 74.9% and 11.4%, respectively. With the exception of “other
industries,” which account for 20% of the sector’s production, the mineral and mining,
energy, and electricity industries each accounts for less than 1% of total GDP (meaning that
they make nearly no contribution to the country’s total output), and a 2.9%, 1.3%, and
0.8% share in the industrial sector respectively. In total, the country’s industrial sector as of
2006 is still low at only 15.2 of the country’s GDP.
The country’s industrial policy is mainly geared towards industrialization and economic
development. The MIDC, which was established in 1995, laid down the following objectives
for industrial development:

1. To develop the industrial sector based on agriculture;

2. To enhance the quantity and quality of industrial products;
3. To increase the production of new types of machinery and equipment;
4. To produce industrial machines and equipment; and
5. To create suitable conditions for changing over to an industrialized state.

The country has found its comparative advantage in such industries as agro-based
Industries; labor-intensive Industries; oil & gas and hydro-power industries. The major
export goods include natural gas, garments, timber, jade, hardwood, beans, minerals &
mining, prawn, fish and green peas. Its major import goods are petroleum products,
machinery products, steel and construction materials, plastic raw materials, edible oil,
ship and accessories, pharmaceuticals, vehicles and accessories, steel and accessories and
telecommunication equipment.

Position of SMEs

SMEs in Myanmar are defined according to the size of firm, the number of employees
and the firms’ capital investment. Below is a table summarizing the details of SMEs in the
country.

Enterprise Types in Myanmar

Size No. of Workers Capital Invested Power Usage
(kyats) (HP)
Cottage < 10 - <3
Small 10-50 1 million 3-25
Medium 51-100 1-5 million 26-50
Large > 100 >5 million > 50

In terms of number of employees, the following table provides some basic facts.

Current Status of SMEs in Myanmar

Size No. of Industries No. of Workers Annual Production
Employed (million kyats)
Small 31,724 (82%) 125,988 6,736
Medium 4,725 (12%) 39,093 5,290
Large 2,442 (6%) 112,976 5,698
Total 38,891 (100%) 278,057 17,724

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 COUNTRY PRESENTATIONS

SMEs in the country can be found in the following industries:

Number of Enterprises in Myanmar by Type and Size

Business Type Small Medium Large Total %

Food & beverages 22,003 3,659 1,765 27,427 63.3
Clothing & apparel 1,354 360 276 1,990 4.6
Construction materials 2,413 536 449 3,448 8.0
Personal goods 479 280 249 1,008 2.3
Household goods 122 90 104 346 0.8
Printing & publishing 243 98 20 361 0.8
Industrial raw materials 650 278 97 1,025 2.4
Minerals & Mining 1,201 429 188 1,818 4.2
Agricultural equipments 36 20 8 64 0.1
Transport vehicles 65 18 56 139 0.3
Electrical goods 12 12 34 58 0.1
Miscellaneous 4,674 615 145 5,434 12.5
Total 33,456 6,443 3,452 43,351 100%
(77%) (15%) (8%) (100%)

In general, the growth rate of SMEs has been very sluggish over the years. In 2006,
all except for small industries, which remained stagnant during 2005, grew at less than 1%
compared to the previous year, with growth rates of 0.8% and 0.7% for medium and large
enterprises respectively. This is an alarming trend considering the efforts of the government
to improve Myanmar’s business climate.

Policy environment and institutional arrangement with regard to industrial cluster

management/development

SME development policies are geared towards the following:

¡ Assisting the development of the economy with a more suitable income
distribution;
¡ Complementing and supporting large-scale industries through a network of
industrial linkages;
¡ Producing high quality and value-added products; and
¡ Increasing productivity through the use of modern technology and
management system.

The government also undertakes activities that promote private industrial development
in general and SMEs in particular. Namely, it supports the establishment of industrial
zones; holding of industrial exhibitions, seminars and workshops; and establishment of the
Myanmar Industrial Development Bank for granting industrial loans to private enterprises.
In addition, there are laws that encourage, promote and foster the establishment of private
SMEs, such as: Private Industrial Enterprise Law (1990); Promotion of Cottage Industries
Law (1991); and Myanmar Citizen Investment Law (1994). The institutions involved in
the conduct of these activities are shown in the organizational/functional chart below.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Institutions for SME Development

Committee for Industrial Development

(CID)
headed by Prime Minister

Myanma Industrial Development

Committee (MIDC)
headed by Minister for Ministry of
Industry (1)

Myanma Industrial Development

Working Committee (MIDWC)
headed by Minister for Ministry of
Industry (2)

(10) Sub-Committees
headed by Deputy Ministers of Related
Ministries

Industrial Zone Supervisory and

Management Committees
headed by regional district authorities

Furthermore, business-specific measures are being undertaken to encourage more

investments, and thus facilitate SME growth in the country. These are:

¡ Myanmar Citizen Investment Law. MCIL (1994)

¡ Partnership Act (1932). Myanmar Company Act (1914)
¡ Promotion of Cottage Industries Law (1991)
¡ Labor Act and Social Security Act (1954)

In addition, the government has business development services (performed by sub-

committees) to assist the SMEs in their respective industries:
¡ Farm Machinery & Equipment Production Sub-committee
¡ Standardization Sub-committee
¡ Industrial Law Drafting Sub-committee
¡ Small & Medium Industry Development Sub-committee
¡ Industrial Information & Publication Sub-committee
¡ Human Resource Development Sub-committee
¡ Motor Vehicle Production Development Sub-committee
¡ Iron & Steel Production Development Sub-committee
¡ Research & Development Sub-committee
¡ Rubber Product Development Sub-committee

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 COUNTRY PRESENTATIONS

Industrial Associations are formed and affiliated with the Union of Myanmar Federation
of Chambers of Commerce and Industry (UMFCCI), such as:

¡ Myanmar Rice Millers Association (MRMA)

¡ Myanmar Industries Association (MIA)
¡ Myanmar Computer Industry Association (MCIA)
¡ Myanmar Garment Manufacturers Association (MGMA)
¡ Myanmar Plastic Industries Association (MPIA)

Among the services and activities provided and undertaken by NGOs in terms of
business development services are the following:

¡ Consultancy services in project formulation and implementation;

¡ Conducting seminars, workshops and trainings on topics of commercial,
industrial and managerial interest;
¡ Publication and distribution of industrial information bulletins and
newsletters;
¡ Organizing member companies to participate in local and overseas trade fairs
and exhibitions;
¡ Organizing and making arrangement for the exchange of information and
views among local and foreign industrialists;
¡ Organizing and arranging business opportunities networking between local
and foreign enterprises;
¡ Organizing and making arrangements for factory visits, study tours and
sending business mission overseas;
¡ Acting as representative of the member companies in advising government in
matters affecting businesses and the economy;
¡ Facilitating networking through a variety of Chambers/Associations
activities.

In terms of SME financing, credits and loans to SMEs are provided by both private
and government banks.

Industrial or cluster-based development approach scenario

Myanmar has already initiated some cluster-based industrial zones in a few areas and
sectors such as the: (1) Myaungtagar Steed-based Industrial Zone and (2) Watayar Wood-
based Industrial Zone. The first is located in Hmawbi Township, Yangon Division near
Myaungtadar Steel Factory. The steel-based industrial zone mainly caters to the domestic
market and produces and manufactures steel-based construction material products, such as:
steel round-bars; steel flat-bar; steel angle-bars; steel sheets; and steel roofing sheets.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

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 PRESENTATION OF COUNTRY ACTION PLANS

PRESENTATION OF COUNTRY ACTION PLANS

Country Presentations on Action Plan for Cluster Development

This session aimed at evaluating the participants’ general understanding of cluster-based
SME development, the relevance of this strategy towards industrial development, especially
in transition economies, and the role of policymakers in fostering cluster-based SME
development.
Below are the guide questions provided to the participants that served as their pointers
for discussions/presentation:

1. Do you understand the advantage of cluster-based SME development? Did

you find the concrete cases presented in the seminar useful?
2. If so, can you find any cases/areas (towns or districts), and examples in your
country which you would like to promote or are worth promoting through
cluster-based approaches?
3. What policy interventions you feel are appropriate for promoting cluster-
based industry development? Please consider macro-level interventions, such
as legislative and fiscal actions as well as micro-level interventions that are
appropriate at the local level.
4. What specific actions you propose to undertake once you return to your home
country and to the agency you belong to?
5. What supports do you need at this time upon the completion of the seminar
from international agencies such as ADBI, UNIDO, JICA and from foreign
experts like FASID?

Country Presentation: Action Plan for Viet Nam

The representatives from Viet Nam asserted that the cluster-based approach to SME
development is very advantageous. They expressed a clear understanding of the potential
benefits of this approach, which are as follows:

¡ Collective benefits that firms in clusters receive: sharing of raw materials,

components and machinery, and highly specialized skills of workers;
¡ Co-operation between public and private institutions can be facilitated by
clusters;
¡ The environment in which firms in clusters operate has a support system to
make coordination of activities simpler.

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

Among the cases considered useful by this group of participants were: (1) the low-
voltage electric appliance cluster in Wenzhou, People’s Republic of China; (2) the Chandlery
loom cluster in India; (3) the machine tool cluster in Taipei,China; (4) the motorcycle
industry in Chongquing, People’s Republic of China; and (4) eyeglass frames in Sabae City,
Japan.
The group identified a specific ceramics industry (Battrang Ceramics Village) in Hanoi
as one industry worth promoting through a cluster-based approach. The industry was
chosen as it is a potential export cluster and it has the ability to form linkages in terms of
raw materials, showrooms and logistics. The challenges to developing this industry however
include poor access to new markets, lack of product development strategies (designs.
products and value added), emerging environmental issues and low economies of scale.
Among the policies identified as crucial to fostering cluster development at the macro
level include: (1) Support for and programs pertaining to SME financing; (2) simple rules
and regulations for business registration and establishment; and (3) availability of credit
guarantee funds. At the micro level, the following policies were identified: (1) increasing
the role of local governments in assisting cluster-based industries, such as promoting
transparency in transactions with SMEs; and (2) encouraging SMEs to join business
associations or to participate in the latter’s business activities.
Knowledge transfers, conduct of seminars about cluster-based industrial development
(intended for local governments, industrial development, local SME agencies and BDS
providers) and undertaking pilot projects are among the specific actions the group planned
to embark on upon return to their home country.
To carry on with the efforts of promoting cluster-based SME development, the group
will require the following: (1) financial and technical assistance from ADBI and JICA to
organize similar seminars in Viet Nam, with a need for international experts to give lectures
on the subject matter such as FASID, ADBI and UNIDO experts and training documents
that illustrate successful case studies of SMEs in clusters; (2) assistance from UNIDO to
conduct a pilot project in Viet Nam, specifically in terms of cluster and area selection,
and training for local counterparts; and (3) financial support in general from ADBI and
donors.

Country Presentation: Action Plan for Lao PDR

The Lao PDR representatives stressed that they gained a great deal of new knowledge,
information and experience from the seminar, specifically from the country presentations
of the participants from other countries, seminar lectures and interactive discussions and
field trips.
The Lao representatives gained insights into the definition of cluster, the difference
between a cluster and an industrial zone, subsector, association, network and value chain, as
well as the benefits and advantages of having clusters of firms.
The group emphasized that in terms of policy interventions, its government has already
initiated some laws and policy strategies regarding SME promotion and development, i.e.
Prime Minister’s Decree No. 42, which was enacted in April 2004. The decree aims to create,
improve and expand SMEs in Lao PDR and contains six main policies: (1) creating an
enabling regulatory and administrative environment; (2) enhancing the competitiveness of
SMEs; (3) expanding domestic and international markets; (4) improving access to finance;
(5) encouraging and creating favorable conditions for the establishment of organizations;
and (6) enhancing entrepreneurial attitudes and characteristics within society.

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 PRESENTATION OF COUNTRY ACTION PLANS

With regard to the specific actions the group intends to propose to its government,
the following were emphasized: (1) knowledge gained form the seminar, especially the
idea of a cluster, its advantages and the role of the government in fostering clusters; (2)
implementation of a survey or study about clusters in the Lao PDR; and (3) formulation of
a national strategic framework for cluster development. In doing so, the group will seek the
assistance (technical and financial) of various experts and donor agencies that are involved
in cluster-based industrial development.

Country Presentation: Action Plan for Myanmar

A potential area for cluster development in Myanmar is located about 30 kilometers from
Yangon, on the banks of the Hlaing River. The industrial land area is about 800 acre, with
400 acres still available and 35 factories in operation. Operations in this area began in
2003. Of the 35 factories, 10 enterprises belong to the government while 25 are owned
by private firms. However, at present there are a number of under-performing clusters as
a result the following: basic infrastructure problems; insufficient power supply; difficulties
with raw wood supply; decreasing market share; insufficient cooperation among factories
and weak support by local governments. Overall, though, cluster industries in Myanmar
have the following features: strong central government support; high labor supply; suitable
infrastructure and easy creation of markets.
Clusters in Myanmar have several opportunities but some threats as well. Among the
opportunities are a high demand for natural wood products, presence of foreign customer
support and high support from lending institutions. The threats, on the other hand, include
strong competition in foreign markets, difficulties in making transactions overseas or
internationally, and high customization requirements.
In view of the above, the group realized that the cluster-based development approach
to industrialization would aid Myanmar in its efforts to generate more jobs and create
employment in the region. It also aims to promote and further strengthen the wood-based
cluster industry and in so doing, crafting or formulating a realistic industrial cluster model
is crucial.
The proposed action plan for Myanmar will be implemented over four years. During
the first year, the aim will be to carry out preparatory activities to enable SMEs to start
up their businesses, such as providing an adequate supply of power and raw wood. This
objective can be realized through public-private partnerships (central and local government
support and cluster stakeholders) in activities such as negotiations with suppliers of power
and raw wood materials and in lectures involving international experts, which will enhance
the understanding of concerned stakeholders about the advantages of cluster-based approach
to SME development. During the second year of implementation, the aim will be to explore
foreign markets and develop cooperation among factories. This will involve activities such
as hiring marketing consultants, participation in trade fairs, both local and international,
dialogues with cluster factory members, and holding of seminars and workshops related to
cluster-based SME development. The third year of implementation will involve endeavors
to further economic growth by ensuring the profitability of markets and creating channels
and providing conditions to attract more entrants to the cluster. Activities during this
implementation year will focus on activities involving the customized production of target
markets, innovation, setting up quality systems and diagnostic evaluation of prospective or
potential market players or new firm entrants. During the last year of implementation, the
aim will be to foster human resources development, further development of markets and

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establishment of an association of wood-based furniture makers. These objectives will be

carried out through activities involving basic and specialized training courses for business
managers and owners, participation in trade fairs, marketing strategies that will expand
the markets of clusters and seeking the approval and participation of government in the
establishment of business associations and networks.

Country Presentation: Action Plan for Mongolia

The group from Mongolia felt that cluster-based industrial development is essential for
economic development. The advantages of locating firms in clusters, according to the
group, are: absorption of new production ideas and techniques; sharing of experiences;
faster and easier flow of information; trust among key stakeholders/players; cost reductions,
profit increase; and more effect monitoring and control.
A number of industries and areas have been identified by the group as potential
opportunities for cluster development: ICT parts; manufacturing area in UB (agro-raw
material processing firms and leather goods, shoe manufacturing); textile industrial areas
(Gobi, Eermel, Buyan, Goyo, etc.) camel wool, cashmere products, manufacturing metal
fibers, copper cathodes in Erdenet, free economic zones and industrial and technological
parks.
In promoting cluster-based industrial development, the Mongolian representatives
identified the following as appropriate policy interventions:

At the macro level:

¡ Formulation of a “cluster map” reflecting the comparative advantages and

unique conditions of localities
¡ Pursuit of sound fiscal and monetary policies (ensuring law inflation, reducing
the cost of financing. stable exchange rate etc.)
¡ Creation of a suitable legal environment for SMEs (SME law, company law,
leasing law)
¡ Provision of basic public goods (infrastructure, roads, electricity, water supply,
and others)
¡ Development of “One stop services”

At the micro level:

¡ Conduct/implementation of regular training programs (management,

marketing. accounting, technology, etc.)
¡ Establishment of industrial parks, business incubators (like Kawasaki city
incubator, ICT incubator in Mongolia)
¡ Taking actions to bolster cooperation and collectivism among firms in cluster
area as implementing suggested policies and measures, enhancing social
capital
¡ Implementing two-step-loans (JBIC example)
¡ Ensuring incentives for firms, reducing asymmetric information in cluster
area and ensuring the availability and accessibility of guarantee funds

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In terms of the needed support from ADBI, UNIDO, JICA, FASID and other relevant
institutions, the group will solicit the following: continuation of training programs;
information updates about international best practices (knowledge sharing as well) and
partnership in conducting field studies/research with UNIDO (practical actions/support).

Country Presentation: Action Plan for Cambodia

Among the industries identified as potential industries for cluster development in Cambodia
are garments, footwear and textile, traditional handicrafts and furniture, and metal working
and machinery. Potential areas where these industries can thrive in clusters are Phnom Penh
and its surrounding provinces.
In terms of policy interventions, the group emphasized that the government’s industrial
policy is focused on diversifying production away from reliance on a few key sectors,
increasing its range of exports and improving productivity. The Cambodian government
intends to carry out these objectives by concentrating on: (1) the development of labor
industries such as garment, toys and footwear; (2) the promotion and development of
agribusiness by strengthening the legal framework for long-term land management and
by providing tax incentives for establishing factories to process agricultural products, such
as cotton, jute, sugar, palm oil, and cashew nuts; and (3) the development of industries
based on processing existing natural resources such as fish, meat, cement production, bricks
and tiles. Also, as part of the industrial development strategy, the Cambodian government
is endeavoring to promote SMEs, micro-enterprises, and handicrafts; (4) the creation of
Knowledge Management Centers; and (5) Crafting industrial development plans (for
industrial zones).
The group proposes to undertake activities related to knowledge transfer upon its
return home. The key players in cluster development need to be equipped with the proper
knowledge, both tacit and explicit, to enable them to pursue activities that can foster cluster
development. Knowledge transfer may come in training programs on problem solving,
discussion and preparation of manuals, and creation of proper databases for SMEs/clusters
and their activities.
To group also seeks the assistance of ADBI, UNIDO, JICA and FASID for the conduct
of training courses related to cluster development in Cambodia, with a focus on industrial
security and safety (e.g. technology on food processing. which is under the science and
technology division of the trade department).

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Country Presentation: Action Plan for Central Asia

To encourage further growth, the Central Asian participants believe that cluster-based SME
development will be very helpful. The cluster-based approach to SME development generates
employment, induces innovation, increases the country’s economic competitiveness and
improves product quality and the expansion of exports.
The potential cluster industries in Central Asia are pyramid cluster types. Examples are
detailed below:

1. JC “Uzavtoprom”
The company has a manufacturing plant in Asaka city, Andijan region in
Uzbekistan (the sector has a production capacity of over 200 thousand units
a year and its exports account for over 60% of the region’s GDP). The region
has more than 40 independent SMEs manufacturing spare and component
parts for cars that are mostly located in the Andijan region.

2. Shurtan gas and chemicals complex

This cluster has a plant that manufactures different types of polyethylene
in Shurtan city, Kashkadarya region (the largest gas condensate field in
Uzbekistan). There are over 100 SMEs in the region manufacturing goods
with the application of polyethylene (greenhouse film, bags and netting, a
wide assortment of packaging materials, and construction materials, among
others. Overall, the cluster produces up to 100 types of goods and the SMEs
are mostly located in neighboring regions and Tashkent city.

3. JV “Nestle”
The company has a manufacturing plant that produces dairy products (milk
for long-term storage, yoghurt, different types of milk blends) and is located
in the Namangan region in Uzbekistan. The cluster has more than 200 farmers
who supply the plant with raw materials (milk) on a contract basis. The cluster
maintains veterinary services, livestock breeding, and quality control service
enterprises.

4. Shirin factory
The company produces candies (chocolate, cake, zefir, etc.) and is located in
Dushanbe city in the central part of Tajikistan. More than 100 workers supply
the plant with raw material on a contract basis.

There are also potential horizontal cluster types including:

5. Tourist centers
Samarkand City in Uzbekistan has more than 50 hotels (only 5 large hotels
with up to 300 rooms, with the rest having about 30-40 rooms); in Bukhara
city, there are over 40 hotels in operation (only 3 large hotels with up to 200
rooms, with the rest having about 30-40 rooms). In Khiva city, there are
over 20 hotels (only 2 large hotels, with the rest having about 30-40 rooms).
In tourist destinations such as the mountains of Uzbek i.e. Mountain resort
Chimgan-Beldersay, there are over 40 hotels (only 4 large hotels, with the rest
having about 5-20 rooms).

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6. Traditional crafts
In the Pamir region, juraby (a kind of sock made of wool) production is
dominant. This product is produced by 40 small enterprises; in Margilan
city, there are several dyeing and weaving enterprises manufacturing silk by
traditional technology (without artificial dyes and mechanical lathes); in
Bukhara city, there are hand-manufacturers of silk carpets; in Tashkent city,
there is an old town that manufacture tin-ware products with around 70-80
small enterprises, each having at least five employees.

There are many more potential or prospective clusters in Central Asia such as finished
textile goods producing clusters; agro industrial clusters (processing, storage and packaging
of agricultural products) and construction materials manufacturing clusters (processing of
marble and granite, ceramic covering materials).
The above-listed prospects for cluster development can only be realized and made
possible if the following problems are resolved:

¡ A VAT exemption on every stage of processing (the VAT is charged every

time a semi finished product is transferred from one legal entity to another)
by introducing a conception of “cooperative supply” and a VAT exemption
into the legislation
¡ Exclusion of R&D expenses from the taxable base
¡ Passing a law on clusters (SME) and financial-industrial groups (big
companies)

Practical implementation of the target strategies will involve the following steps:

¡ Establishment of special group consisting of a number of experts from

ministries, state departments and research centers
¡ Conduct of analytical research to define cluster development strategies and
the most attractive fields of their foundation (growth points)
¡ Selection of prospective production areas via competition among local
governments
¡ Signing of investment contracts with investors and allocation of the mentioned
production areas and land plots to them

The Central Asian group consists of participants from Kazakhstan, Kyrgyz Republic,
Tajikistan, and Uzbekistan. The group is seeking the assistance of ADBI, UNIDO, JICA
and FASID in terms of partnerships in the conduct of training programs and knowledge
transfer.

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FIELD TRIPS

On the third day of the seminar, all the participants and some of the speakers visited two
SMEs in the Keihin Industrial Area, which is located in Kawasaki city, Kanagawa Prefecture.
One group visited Kakumaru Kinzoku Co., Ltd. The company’s profile is as follows:

Founded: 1960
Type of business: Mold component supplier
Description of business: Manufacturing of tools for vehicle parts
Precision components for electronic parts
Clients: Major telecommunication manufacturers
Major car equipment manufacturers
100 small and medium-sized electronic
component manufacturers

The other group visited Hinode Cooperation. The company profile is as follows:

Description of business: Manufacturing of vehicle parts, processing and

assembling of machine components
Clients: THK Corporation, Fuji OOZX Inc.,
Toshiba Corporation, etc.
History: 1960 Founded in Kawasaki City
1989 Moved to Kawasaki industrial zone
2005 ISO 9001: 2000 Certified
2006 Started sale of in-house products

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The whole group then visited Kanagawa Science Park, KSP Inc., which is a semi-public
corporation established as the central entity of the Kanagawa Science Park. KSP actively
promotes the growth of new industries by systematically developing R&D corporations as
well as through the overall operation of the Science Park. Its business incubation service is
exemplified in the following categories: Business Start-up Support Services, Development
Support Service, and Entrepreneur Nurturing Service.

As the final visit, the whole group took a tour to VTECHMATE in Asian Venture
Business Town(*1). VTECHMATE is a Japanese corporation founded in 2004 by former
Vietnamese, government-financed students. It is the first company to join the Asian Venture
Business Town with active support from the City of Kawasaki. VTECHMATE is expected
to be a breakthrough for activating economic exchanges between Viet Nam and Japan,
and has been widely supported by the City of Kawasaki in terms of administration and
legislation matters. Their company profile is as follows:

Description of business: Development of:

• Web systems;
• Applications for mobile phone;
• Contents for mobile GPS;
• Image processing technology.

(*1) about Asian Venture Business Town

Kawasaki City is currently engaged in the revitalization of the Keihin Industrial Area. By
utilizing the power of the rapidly expanding industries and markets of Asia, the Asian
Venture Business Town aims to nurture venture businesses and establish globally active
companies primarily through the efforts of Asian entrepreneurs. The final product of this
process will be the establishment of a core community of industries and joint research
projects located in Kawasaki, promoting the creation of new industries that can be active
global contributors.

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ANNEX 1: AGENDA

Industrial Development Planning:

Cluster-Based Development Approach Policy Seminar

Wednesday 14 March 2007 (Day 1)

8:30-9:00 Registration

9:00-9:15 Opening Remarks & Photo Session

by Masahiro Kawai, Dean, Asian Development Bank Institute (ADBI)

9:15-9:30 Introduction to the Seminar

by Toru Hashimoto, Senior Capacity Building Specialist, ADBI

9:30-10:20 Major Challenges in SME Development: Framework of Analysis

by Hidekazu Tanaka, General Manager / Principal Consultant,
Mitsubishi UFJ Research and Consulting Co,, Ltd, (MURC)

10:20-10:40 Discussion/Q&A Session

Moderator: Hidekazu Tanaka, MURC

10:40-10:50 Coffee Break

10:50-11:40 Major Challenges in SME Development: Development Stage &

SME Assistance
By Nori Iai, Consultant, Unico International Corporation

11:40-12:00 Discussion/Q&A Session

Moderator: Hidekazu Tanaka, MURC

12:00-13:00 Lunch Break

13:00-16:25 Group Presentation: The Analysis of SME in Country

1. Cambodia 6. Kazakhstan
2. Uzbekistan 7. Kyrgyz Republic
3. Viet Nam 8. Tajikistan
4. Cambodia 9. Myanmar
5. Mongolia
• Coffee Break

15~20 minutes presentation followed by short Q&A

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16:25-17:15 Public Policies for SME Development: Market Failures and

the Role of Government
by Andrea Goldstein, Senior Economist, Organisation for Economic
Co-operation and Development

17:15-17:30 Discussion/Q&A Session

Moderator: Andrea Goldstein, OECD

17:45- Dinner Reception at Tokai Club

Wednesday 14 March 2007 (Day 1)

9:00-9:50 The Advantage of Industrial Cluster for the SME Development

by Tetsushi Sonobe, Deputy Director, Foundation for Advanced
Studies on International Development (FASID)

9:50-10:20 Discussion/Q&A Session

Moderator: Tetsushi Sonobe, FASID
Commentator: Michele Clara, UNIDO

10:20-10:35 Coffee Break

10:35-11:25 The Pattern of Cluster Development: An Endogenous Model of

Cluster-Based Development
by Keijiro Otsuka, Director, FASID

11:25-12:00 Discussion/Q&A Session

Moderator: Keijiro Otsuka, FASID
Commentator: Andrea Goldstein, OECD

12:00-13:30 Lunch Break

13:30-14:20 Lessons Learned from Asian Experiences

by Tetsushi Sonobe, Deputy Director, FASID

14:20-14:50 Discussion/Q&A Session

Moderator: Tetsushi Sonobe, FASID
Commentator: Mukesh Gulati, Foundation for MSME

14:50-15:05 Coffee Break

15:05-15:55 The Role of Government in the Cluster-Based SME Development

by Keijiro Otsuka, Director, FASID

15:55-16:30 Discussion/Q&A Session

Moderator: Keijiro Otsuka, FASID
Commentator: Michele Clara, UNIDO

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16:30-17:00 Summary of Day 2

by Toru Hashimoto, Senior Capacity Building Specialist, ADBI

Thursday 15 March 2007 (Day 2)

7:50 Departure from ANA Hotel

9:00-10:00 SMEs in Keihin Industrial Area

Kakumaru Kinzoku Co., Ltd.
Hinode Corporation

11:00-12:00 Lunch

13:00-15:00 Kanagawa Science Park

16:00-17:00 Kawasaki Entrepreneur Asian Village

VTECHMATE Co., Ltd.

18:00 Arrive at ANA Hotel

Friday 16 March 2007 (day 3)

9:00-10:20 UNIDO’s Approaches for Cluster Development

by Michele Clara, Industrial Development Officer, United Nations
Industrial Development Organization (UNIDO)

10:20-10:35 Coffee Break

10:35-12:00 UNIDO’s Approaches for Cluster Development (Continue)

12:00-13:30 Lunch Break

13:30-14:45 UNIDO’s Approaches for Cluster Development:

Diagnostic Study & Action Plan
by Mukesh Gulati, Programme Coordinator, Foundation for Micro,
Small & Medium Enterprise Clusters

14:45-15:00 Coffee Break

15:00-16:30 UNIDO’s Approaches for Cluster Development:

Diagnostic Study & Action Plan (Continue)

16:30-16:45 Policy on Industrial Clusters in Republic of Korea

by Bobae Park, Head of Administrative Service,
Chonbuk National University

16:45-17:00 Summary of Day 4

by Toru Hashimoto, Senior Capacity Building Specialist, ADBI

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17:00- Group Work: Cluster Development Action Statement

Saturday 17 March 2007 (Day 4)

9:00-9:45 What is the Japan Center?

by Yoshikazu Tachihara, Team Director, Japan International
Cooperation Agency

Japan Center, Business Course

by Yasuyuki Kuroda, Senior Economist, International Development
Center of Japan

9:45-10:00 Discussion/Q&A Session

Moderator: Toru Hashimoto, ADBI

10:00-10:30 ADB’s Experience in SME Assistance

(Cambodia, Lao PDR, Viet Nam)
by João Pedro Farinha Fernandes, Economist, Asian Development Bank

10:30-10:45 Discussion/Q&A Session

Moderator: João Pedro Farinha Fernandes, ADB

10:45-11:00 Coffee Break

11:00-12:30 Panel Discussion: Cluster Based Industrial Development

Moderator: Toru Hashimoto, ADBI

Panelist: Hidekazu Tanaka, MURC
Panelist: Keijiro Otsuka, FASID
Panelist: Michele Clara, UNIDO
Panelist: Mukesh Gulati, Foundation for MSME
Panelist: Tetushi Sonobe, FASID
Panelist: João Pedro Farinha Fernandes, ADB

12:30-13:30 Lunch Break

13:30-17:00 Group Presentation: Cluster Development Action Statement

1. Viet Nam 5. Cambodia
2. Lao PDR 6. Central Asian Countries
3. Myanmar (Kazakhstan, Kyrgyz Republic,
4. Mongolia Tajikistan and Uzbekistan)
• Coffee Break

10~15 minutes presentation followed by 5 minutes Q&A

17:00-17:30 Closing
by Jeoung-Keun Lee, Director of Capacity Building and Training
Dept., ADBI, and Toru Hashimoto, Senior Capacity Building
Specialist, ADBI

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ANNEX 2: LIST OF PARTICIPANTS

Country Delegates
Cambodia
Mr. Seung Kimyonn
Exective Director
Cambodian Craft Cooperation
No. 1, Norodom Blvd, Wat Phnom, Daun Penh
Phnom Penh
Cambodia

TEL : +855-23-982-154
FAX : +855-23-982-154
E-mail : ccc_kimyonn@online.com.kh
info@cambodian-craft.com

Mr. Tung Ciny

Director
Department of Industrial Techniques
Ministry of Industry, Mines and Energy
#45, Preah Norodom Blvd, Khan Daun Penh
Phnom Penh
Cambodia

TEL : +855-23-427-840
FAX : +855-23-427-840
E-mail : tungciny1@yahoo.com

Kazakhstan

Mr. Kuat Tumabayev

Head of Budget Investment Planning Division
Investment Policy and Planning Department
Ministry of Economy and Budget Planning
Pobeda ave 11
Astana 010000
Kazakhstan

TEL : +7-3172-717-999
FAX : +7-3172-717-816
E-mail : tumabayev_km@minplan.kz
keresagebab@mail.ru

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Kyrgyz Republic

Mr. Emil A. Abdykaparov

Head of Division
Structural Reforms and Regulatory Policy
Ministry of Economy and Finance
Erkindik Avenue 58
Bishkek
Kyrgyz Republic

TEL : +996-312-663-635
FAX : +996-312-661-645
E-mail : e,abdykaparov@mf.gov.kg
a_emil80@mail.ru

Lao PDR

Mr. Somchay Inthapatha

Technical Officer, Research and Planning Division
Lao Trade Promotion Center
Ministry of Commerce
104/4-5 Khounboulom Road, Chanthaboury District
PO Box 4107
Vientiane
Lao PDR

TEL : +856-21-216-293 /-216-207

FAX : +856-21-213-623 /-241-913
E-mail : Laotpc@yahoo.com

Mr. Manohack Rasachack

Deputy Director General
SME Promotion and Development Office (SMEPDO)
Ministry of Industry and Commerce
Nong Bone Road, Ban Phay, Saysetha
Vientiane
Lao PDR

TEL : +856-21-414-064
FAX : +856-21-263-590
E-mail : manohackr@yahoo.com

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Mongolia

Mr. Osorpurev Batsuren

Officer
Policy Coordination and Strategic Planning
Ministry of Industry and Trade
Government Building 2, United Nations Street 5/1
Ulaanbaatar 210646
Mongolia

TEL : +976-51-260701
FAX : +976-51-260701
E-mail : batsuren@go.com
supersuren@hotmail.com

Mr. Bat-Undrakh Nyamsuren

State Secretary
Ministry of Industry and Trade
Government Building 2, United Nations Street 5/1
Ulaanbaatar 210646
Mongolia

TEL : +976-51-261096
FAX :
E-mail : bnyamsuren@mit.pmis.gov.mn

Mr. Amarkhuu Erdenepurev

Deputy Director
Policy Coordination and Strategic Planning
Ministry of Industry and Trade
Government Building 2, United Nations Street 5/1
Ulaanbaatar 210646
Mongolia

TEL : +976-99116882
FAX : +976-51-260701
E-mail : aerdenepurev2006@yahoo.com

Mr. Bataa Ganbold

Deputy Director
Financial Policy and Coordination Department
Ministy of Finance
Government Building 2, United Nation’s Street 5/1
Ulaanbaatar 210646
Mongolia

TEL : +976-51-267273
FAX : +976-51-267273
E-mail : ganbold_b@mof.pmis.gov.mn

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Myanmar

Ms. Htwe Htwe Win

Assistant Director
Directorate of Industry
Ministry of Industry
Building No. 37, Ministry of Industry No. 1
Nay Pyi Taw
Myanmar

TEL : +95-67-408-337
FAX : +95-67-408-127
E-mail : moi1@myanmar.com.mm

Mr. Khin Maung Than

Deputy Director
Directorate of Industrial Supervision & Inspection
Ministry of Industry
Building No. 37, Ministry of Industry No. 1
Nay Pyi Taw
Myanmar

TEL : +95-67-408-334
FAX : +95-67-408-134
E-mail : moi1@myanmar.com.mm

Tajikistan

Mr. Nasimjon A. Hakimov

Chief Specialist
Economic Reform and Investment Division
President’s Office
80 Rudaki Avenue
Dushanbe 734004
Tajikistan

TEL : +992-372-224-61-53
FAX : +992-372-221-57-41
E-mail : hnasimjon@mail.ru

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 ANNEX 2: LIST OF PARTICIPANTS

Uzbekistan

Mr. Aziz Abdukhakimov

Deputy Head
Main Information-analytical
Department of Economic Relations
Cabinet of the Ministers
Government House
Tashkent
Uzbekistan

TEL : +99871-1398-276
FAX : +99871-1398-652
E-mail : aziz.abdukhakimov@gov.uz

Viet Nam

Ms. Truong Thi Chi Binh

Manager
International Cooperation Policy Department
Industrial Policies and Strategies Institute (IPSI)
30C Ba Trieu Str, Hoan Kiem Dist
Hanoi
Viet Nam

TEL : +84-4-913-007-435
FAX : +84-4-825-3417
E-mail : binhtc,ipsi@moi.gov.vn
truongchibinh@yahoo.com

Ms. Hoang Kim Huyen

Manager
Training Department
Industrial Policies and Strategies Institute (IPSI)
30C Ba Trieu Str, Hoan Kiem Dist
Hanoi
Viet Nam

TEL : +844-934-8252
FAX : +844-825-2653
E-mail : hoangkimhuyen@yahoo.com

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Mr. Vu Xuan Thuyen

Senior Official and Head of GEL & LP, Division
Agency of SME Development
Ministry of Planning and Investment
No. 2 Hoang Van Thu St, Badinh
Hanoi
Viet Nam

TEL : +84-80-44948 /+84-914-368-199

FAX : +84-4-734-2189 /+84-4-823-4453
E-mail : thuyenvx@mpi.gov.vn
vuthuyenmpi@yahoo.com.vn

Ms. Nguyen Thi Thanh Hang

Officer
Banks and Non-bank Credit Institutions Department
State Bank of Vietnam
47-49 Ly Thai To Str, Hoan Kiem District
Hanoi
Viet Nam

TEL : +844-936-0907
FAX : +844-825-3640
E-mail : hangsbv5@yahoo.com

Self-financed Participants
Ms. Bobae Park
Head of Administrative Service
Chonbuk National University
664-14, Deokjin-dong
Deokjin-gu Jeonju 561-756
Republic of Korea

TEL : +82-63-270-3154
FAX : +82-63-270-3162
E-mail : bobpark@chonbuk.ac.kr
bobaepark@yahoo.com

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ANNEX 3: LIST OF RESOURCE PERSONS

and ORGANIZERS

Resource Persons
Mr. Michele Clara
Industrial Development Officer
Private Sector Development Branch
United Nations Industrial Development Organization
(UNIDO)
PO Box 300
Vienna 1400
Austria

TEL : +43-1-26026-3376
FAX : +43-1-21346-3376
E-mail : M.Clara@unido.org

Mr. João Pedro Farinha Fernandes

Economist, Governance, Finance and Trade Division
Southeast Asia Department
Asian Development Bank
6 ADB Avenue, Mandaluyong City
Manila 0401
Philippines

TEL : +63-2-6326346
FAX : +63-2-6362331
E-mail : jfarinha@adb.org

Mr. Andrea E. Goldstein

Senior Economist
OECD Development Centre, Paris
49 Avenue des Ternes
Paris 75017
France

TEL : +33-1-4524-2558
FAX : +33-1-4524-7943
E-mail : Andrea.Goldstein@oecd.org

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Mr. Mukesh Gulati

Project Coordinator
Foundation for MSME Clusters
USO House, 6 Special Institutional Area
New Delhi 110067
India

TEL : +91-11-2660-2885 (ext, 27)

FAX : +91-11-4168-8589
E-mail : mukeshgul@gmail.com
mukesh@msmefoundation.org

Mr. Nori Iai

Consultant
Unico International Corporation
5F Nakagawa Tsukiji Bldg, Tsukiji 3-5-4, Chuo-ku
Tokyo 104-0045
Japan

TEL : +81-3-5148-0600
FAX : +81-3-5148-0377
E-mail : n,iai@unico-intl.co.jp

Mr. Yasuyuki Kuroda

Senior Economist
International Development Center of Japan (IDCJ)
4-12-6 Higashi-shinagawa, Shinagawa-ku
Tokyo 140-0002
Japan

TEL : +81-3-6718-5931
FAX : +81-3-6718-1651
E-mail : kuroda.y@idcj.or.jp

Mr. Keijiro Otsuka

Director
FASID Graduate Program
GRIPS/FASID Joint Graduate Program
7-22-1, Roppongi, Minato-ku
Tokyo 106-8677
Japan

TEL : +81-3-5413-6035
FAX : +81-3-5413-0016
E-mail : otsuka@grips.ac.jp

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 ANNEX 3: LIST OF RESOURCE PERSONS AND ORGANIZERS

Mr. Tetsushi Sonobe

Deputy Director
FASID Graduate Program
GRIPS/FASID Joint Graduate Program
7-22-1, Roppongi, Minato-ku
Tokyo 106-8677
Japan

TEL : +81-3-5413-6035
FAX : +81-3-5413-0016
E-mail : sonobete@grips.ac.jp

Mr. Yoshikazu Tachihara

Team Director
Japan Center Program Team, Group I (Governance),
Social Development Department
Japan International Cooperation Agency
Shinjuku Maynds Tower Building 7F, 2-1-1 Yoyogi,
Shibuya-ku, Tokyo 151-8558
Japan

TEL : +81-3-5352-5600
FAX : +81-3-5352-5079
E-mail : Tachihara.Yoshikazu@jica.go.jp

Mr. Hidekazu Tanaka

General Manager/ Principal Consultant
Department of International Studies,
International Business Division
Mitsubishi UFJ Research and Consulting Co, Ltd
1-11-7, Shimbashi, Minato-ku
Tokyo 105-8631
Japan

TEL : +81-3-3572-9689
FAX : +81-3-3572-9025
E-mail : h-tanaka@murc.jp

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INDUSTRIAL DEVELOPMENT PLANNING: CLUSTER BASED DEVELOPMENT APPROACH

ADBI Secretariat
Mr. Toru Hashimoto
Senior Capacity Building Specialist
Capacity Building & Training
Asian Development Bank Institute
Kasumigaseki Bldg, 8F
3-2-5 Kasumigaseki, Chiyoda-ku
Tokyo 100-6008
Japan

TEL : +81-3-3593-5509
FAX : +81-3-3593-5587
E-mail : thashimoto@adbi.org

Mr. Akira Fukasawa

Capacity Building Associate
Capacity Building & Training
Asian Development Bank Institute
Kasumigaseki Bldg, 8F
3-2-5 Kasumigaseki, Chiyoda-ku
Tokyo 100-6008
Japan

TEL : +81-3-3593-5552
FAX : +81-3-3593-5587
E-mail : afukasawa@adbi.org

Ms. Tomoko Doi

Program Assistant
Capacity Building & Training
Asian Development Bank Institute
Kasumigaseki Bldg, 8F
3-2-5 Kasumigaseki, Chiyoda-ku
Tokyo 100-6008
Japan

TEL : +81-3-3593-5544
FAX : +81-3-3593-5587
E-mail : tdoi@adbi.org

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 ANNEX 3: LIST OF RESOURCE PERSONS AND ORGANIZERS

Ms. Mariko Sekiya

Administrative Assistant
Capacity Building & Training
Asian Development Bank Institute
Kasumigaseki Bldg, 8F
3-2-5 Kasumigaseki, Chiyoda-ku
Tokyo 100-6008
Japan

TEL : +81-3-3593-5549
FAX : +81-3-3593-5587
E-mail : msekiya@adbi.org

Ms. Akiko Kuno

General Coordination Assistant
Administration, Management & Coordination
Asian Development Bank Institute
Kasumigaseki Bldg, 8F
3-2-5 Kasumigaseki, Chiyoda-ku
Tokyo 100-6008
Japan

TEL : +81-3-3593-5500
FAX : +81-3-3593-5571
E-mail : akuno@adbi.org

Ms. Princess Shimmadar R. Manaois

Rapporteur
Tokyo
Japan

TEL : 080-3429-9150
E-mail : shimz.manaois@gmail.com

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12
About the Asian Development Bank Institute
The Asian Development Bank Institute (ADBI), located in Tokyo, is a subsidiary of the
Asian Development Bank (ADB). It was established in December 1997 to respond to two
needs of developing member countries: identification of effective development strategies
and improvement of the capacity for sound development management of agencies and
organizations in developing member countries. As a provider of knowledge for development

Industrial
and a training center, the Institute serves a region stretching from the Central Asian republics
to the Pacific islands.

Industrial Development Planning: Cluster-Based Development Approach Policy Seminar

ADBI carries out research and capacity building and training to help the people and
governments of Asian and Pacific countries. The Institute aims to provide services with
significant relevance to problems of development in these countries. In line with this aim,

Development
the approach is demand-led; ADBI’s Capacity Building and Training (CBT) group seeks to
respond to demand for sustainable, wide-reaching training of government officials in ADB’s
developing member countries.

Planning:
Cluster-Based Development
Approach Policy Seminar
14–19 March 2007
Tokyo, Japan

Asian Development Bank Institute

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo 100-6008, Japan
www.adbi.org
Tel +81 3 3593 5500
Fax +81 3 3593 5571
ISBN XXX-X-XXXXX-XXX-X Printed in the Philippines