The fact that so many industries are clustered in developing countries, even though the government does not provide any support, and that there are important market failures in industrial clusters warrants the implementation of industrial development policies. The recommended policies basically consist of the following four pillars: (1) a competition-oriented policy, (2) promotion of industrial clusters, (3) investment in managerial human capital, and (4) the construction of industrial zones and the provision of credit possibly through IDBs.
In order to induce the development path consistent with changing comparative advantages, it is essential to build and maintain competitive market environments.
Viewed from this perspective, the structural adjustment policies recommended by the World Bank and IMF can have high pay-offs in the longer run. Also important is investment in social infrastructure, such as roads, electricity, water, and communication
systems, without which no modern industries can develop. Since it is the insightful and competent entrepreneurs who can identify the appropriate industries with comparative advantages, what the government should do is to set the correct market signals for them and to provide general managerial knowledge and basic infrastructures.
The above strategy is termed the “entrepreneur-led and government-assisted” approach.
Our presumption is that there are a number of spontaneously developed industrial clusters consisting of small firms in low-income countries. Since the industrial cluster helps markets function by reducing transaction costs, its promotion can be included as a part of market competition-oriented policy. It is also important to recognize that there are both dynamically growing and stagnant industrial clusters depending on whether multifaceted IPMs take place. In order for such IPMs to take place, innovative entrepreneurs who are competent and adept at learning from abroad are needed.
Without such entrepreneurs, the industrial clusters tend to be stagnant or even shrink due to the competition with imported commodities. In all likelihood, however, stagnant clusters can be activated if the introduction of appropriate management and technological knowledge from abroad is promoted by providing training programs for entrepreneurs and managers. Since IPM will be imitated, the social return to IPM exceeds the private return. This is the basis to provide the support for the industrial cluster by providing relevant new knowledge through training programs. Note that the content of such management training can be general and may be useful for non-clustered industries as well.
Aside from rampant imitation, the major constraints on the further development of industrial clusters are congestion and the lack of credit for sizable investments. Thus, we recommend the construction of industrial zones and the provision of credit. We do
not recommend, however, such policies before the demand for infrastructure services and credit has sufficiently increased due to the IPM introduced by progressive entrepreneurs simply because the rates of return to investments in infrastructure and private capital are bound to be low if there is no prior IPM. Moreover, once IPMs take place, financial institutions, including IDBs, can identify promising firms more easily.
We believe that rather than waiting for industries in low-income countries to develop without any assistance, the time is ripe to implement empirically supported and theoretically sound industrial development policies.
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Table 1. Origin of Development of Selected Industrial Clusters in Asia and Africa
Notes: SMEs stand for small and medium firms. FDIs stand for foreign direct investments. SOEs and TVREs stand for state-owned firms and township-village-run firms, respectively.
Sources: Cases 1, 2, 3, 4, 5, 11, 12, and 13 are from Sonobe and Otsuka (2006); 6, 7, 8, 9, 14, 15, 16, and 17 are from Sonobe and Otsuka (2011); Case 10 is from Iddrisu et al. (2009); Cases 16 and 18 are from Sonobe et al. (2010).
No. Location Main product Origin of cluster development: initial firm type and initial product
1 Bingo, Japan Working clothes Farm households (traditional Japanese working clothes)
2 Hamamatsu, Japan Motorcycles SMEs (woodwork, loom, car repair, musical instruments)
3 Taichung, Taiwan, China
Machine tool SMEs (simple machinery)
4 Zhili, Zhejiang, China Baby clothes Farm households (silk products and hand-made merchandises)
5 Wenzhou, Zhejiang, China
Electrical fittings Farm households (repair parts for electrical fittings in SOE factories)
6 Bac Ninh, Vietnam Rolled steel bars Farm households (agricultural implements ) 7 Sargodha, Pakistan Electric fittings SMEs (electrical fittings)
8 Addis Ababa, Ethiopia
Garment Taylors (tailored suits) 9 Nairobi, Kenya Garment Taylors (tailored dresses) 10 Kumasi, Ghana Metalwork SMEs (car repair) 11 Northern Taiwan,
China
Printed circuit board
FDIs (printed circuit boards)
12 Chongqing, China Motorcycles SOEs and FDIs (motorcycle) 13 Three cities in
Jiangsu, China
Printed circuit board
SOEs and TVREs (printed circuit boards)
14 Hatay, Vietnam Knitwear Cooperative (knitwear for SOEs) 15 Addis Ababa, 17 Nairobi, Kenya Metalwork FDIs and SOEs (metalwork) 18 Dhaka, Bangladesh Garment Training in Korea (garment) 19 Dar Es Salaam,
Tanzania
Garment UNIDO training (garment)
Table 2. Characteristics of the Selected Industrial Clusters in Asia and Africa
Notes:
1. About 30 firms were engaged in the factory production of ready-made garments, and the rest were tailors with own shops at which they directly contacted with consumers.
2. This is a rough estimate of the number of metalwork firms. In the same cluster, there were thousands of garages or car repairers.
3. This number includes self-employed shoe makers who were sometimes employed by other shoemakers.
Figure 1 An illustration of development patterns of industrial clusters in terms of changing profitability and the number of firms
Number of firms
Time Profitability
Profitability
Number of firms
Profitability
Number of firms