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Creating competitive edge through industrial clusters

Industrial clusters are indispensable to rapid economic development; eight steps can improve the competitiveness of clusters in India

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egional economies thrive when they encourage the growth of industrial clusters, which are high concentrations of specific industries and interdependent firms. This conforms to the established theory of comparative advantage that no nation—and certainly no region—can be outstanding at producing everything and, consequently, it is best to attract industries that will gain natural comparative advantages by locating in the region.

India has several strong clusters, which can be made globally competitive

Textiles, gems and jewellery, chemicals, engineering goods, agricultural and leather products account for 83 per cent of the clusters in the country and together constitute 88 per cent of India’s exports

Clusters are self-perpetuating—till a substitute region or product displaces the competitive advantages. They grow through manufacturing competitiveness, which is gained through the shared facilities and common infrastructure such as labour pools, repair shops and waste management plants. The shared facilities decrease overheads and also reduce entry barriers. Clusters also encourage the formation of associations and other forums for knowledge sharing, networking and collective bargaining. The associations fuel entrepreneurs by facilitating technology transfer, capital formation, and business development. The knowledge base in clusters is rarely documented and is not easily accessible outside the cluster, although it is adequately disseminated within it. This results in constructive competition and constant improvement in manufacturing practices. Industries harnessing the region’s competitive advantages and the facilities offered by the clusters, become globally competitive and ultimately the entire economy grows exponentially. The US and Europe have designed programmes to leverage this phenomenon. Focusing on cluster-led development for a comparatively longer period, the US has an edge over European countries (Table 1). Most successful clusters have benefited from interventions such as institutional support, tax breaks and fiscal incentives, stable policy, and infrastructure support from the government. India has several strong clusters, which can be made globally competitive with such support.

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India’s clusters are strong but not globally competitive Industrial clusters are spread across India but predominate in the north and west, with these regions accounting for 67 per cent of total cluster locations and 80 per cent of all clusters in the country (Table 2). Strengths have been established in textiles, gems and jewellery, chemicals, engineering goods, agricultural and leather products, which account for 83 per cent of the clusters in the country and together constitute 88 per cent of India’s exports.

However, though strong, India’s industrial clusters are not globally competitive. This is true even for the more established clusters. A case in point is textiles and clothing, which have been contributing about 27-30 per cent of India’s export trade.

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Despite the existence of clusters in Tirupur, Ludhiana, Jaipur and other centres, India’s share of world garment exports is just about 3 per cent compared to China’s 18.5 per cent and Italy’s 6.7 per cent.

Strengthening industrial clusters in India Combining international precedents with insights gained from studies on cluster competitiveness and representations of industry associations, CRISIL Infrastructure Advisory has identified eight regional and country-level interventions to help strengthen India’s clusters. These correspond to the main inputs needed to ensure cluster competitiveness (see Chart: Creating competitive clusters).

Create centres of excellence to improve clusters’ performance Centres of excellence can focus on developing products, identifying new technologies, providing information support and increasing productivity within the clusters. The National Institutes of Fashion Technology (NIFT), Central Glass and Ceramics Research Institute, Central Leather Research Institute and Footwear Design and Development Centres are good examples. However, these institutions need to be integrated with existing clusters. For instance, a link between clusters in Tirupur and Ludhiana and NIFT is needed to provide manufacturers with innovative designs. Similar institutions for research in jewellery cutting and polishing and advanced engineering goods need to be established, preferably by industry associations.

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Centralise cluster development responsibility in a nodal agency Barring research centres, all organisations and outfits supporting industrial development need to be integrated into a single body. As a case in point, more than five organisations provide assistance for upgrading technology including NSIC, SIDO, SISIs and RTCs,1 apart from the sector-focused institutions. Similarly, over eight organisations provide technical training. Such multiplicity leads to a lack of focus and accountability. All services offered such as training, market information, technology and entrepreneurship, should be concentrated near the cluster. The nodal agencies should also be one-stop service centres that provide information on government resources and support services, and assistance in meeting regulatory requirements.

Strengthen cluster associations Ideally, cluster associations should help deliver government incentives. For this they need to rise above political concerns and prepare a vision to promote cluster development. Currently, a lack of resources prevents cluster associations from taking this larger view. The government can resolve this issue by investing some resources, along with cluster-based companies.

Protect intellectual property rights and ensure a level playing field To encourage innovation in clusters, intellectual property rights should be protected, particularly through stringent penalties for violators. This will ensure that clusters thrive through innovation and competitive factor inputs, rather than unfair trade practices and lop-sided financial subsidies. To create a level playing field, the central government can also stipulate the maximum financial incentives that any state can offer; adherence to these limits should be a precondition for access to the Industrial Cluster Development Scheme and other Government of India programmes.

Encourage mentoring through non-financial incentives Mentoring through non-financial incentives can rapidly upgrade capabilities and manufacturing practices. To stimulate mentoring, the central government could credit the exports of a local firm under a mentoring programme to the export obligation of the mentor. This will particularly benefit clusters that cater to large companies such as those of auto ancillary makers supplying auto manufacturers.

Encourage collaboration between academics and the industry To help build the capabilities needed in the marketplace, industries should support technical and vocational institutes in such areas as curriculum development. School-to-work apprenticeship programmes that offer students the chance to gain job skills should also be developed, and these apprenticeship programmes should be extended to displaced workers from declining industries. This would help migrate the workforce from one industry to another within the cluster.

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NSIC: National Small Industries Corporation; SIDO: Small Industries Development Organisation; SISI: Small Industries Service Institutes; RTC: Regional Testing Centres.

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Remove infrastructure bottlenecks Constraints to development in the form of a lack of or poorly functioning infrastructure can be removed by increasing transport capacity connecting principal trading nations, and by according special status to export cargo. The infrastructure supporting manufacturing in clusters also needs to be upgraded. For this, the mandate of state industrial development corporations can be extended from just creating the infrastructure to operating and maintaining it to the desired standards.

Catalyse investment by targeting specific investor communities European markets have recognised the competitiveness of Indian textile clusters and are keen to invest in the country. Concerted efforts can result in substantial investments in textile clusters in Gujarat, Tamil Nadu and Rajasthan

Investment promotion strategies that target specific investor communities will be effective in bringing in the resources needed. For instance, the European markets have recognised the competitiveness of Indian textile clusters and are keen to invest in the country. Concerted efforts by the Government of India can result in substantial investments in textile clusters in Gujarat, Tamil Nadu and Rajasthan.

Performance measures will maximise impact The interventions described above should reverse India’s dropping share in exports. Monitoring export trends would be an effective measure of how well interventions are succeeding. Those found to be less effective can be customised to ensure maximum impact on the target clusters.

INTERNATIONAL BEST PRACTICE Most of the world’s successful clusters owe their beginnings to chance. Nevertheless, it has always been favourable policymaking and government support that have propelled rapid growth and consolidation. For instance, Malaysia’s wood-based cluster accounts for 4.3 per cent of Malaysia’s exports in value terms, and employs 3.6 per cent of the national workforce. It supports an industry accounting for 3.4 per cent (in 2001) of the nation’s GDP—an increase from 0.6 per cent in 1987, which means a CAGR of 13 per cent. The chemicals cluster in the Netherlands provides direct employment to 80,000 workers and has attracted 25 per cent of the total investments in the country. In Singapore, the life sciences industry—which is active in manufacturing and developing research-based products for the global market—contributed S$ 6.3 billion (in 1999) to manufacturing output, a value addition nine times that of the country’s average manufacturing value-added output. Some targeted interventions used internationally are as follows:

Creating institutions for cluster development Malaysia established a National Timber Certification Council to certify wood products as eco-sensitive and ensure that appropriate forest management guidelines are followed in the cluster. National forest and land councils were established to judiciously allocate land among the competing requirements of

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agriculture, mining and forestry. A forest research institute was also created to focus on product development and undertake research for improving raw material quality. In Singapore, the government promoted over 14 research institutions in life sciences, to ensure a development edge for the country. A drug discovery system based on American and European standards was also set up to certify that products developed in Singapore were fit for human consumption.

Catalysing human resource development In Malaysia, industries receive incentives for manpower training; in the Netherlands counselling on career options in the chemical sector starts at the school level. Besides, industry associations in the Netherlands develop specific courses to build necessary skills and provide scholarships to encourage students to undertake these courses. Labour policy, coupled with tax-breaks, is widely used by governments. A permanent work force is not compulsory in the Netherlands—in the country’s chemicals cluster, almost 42 per cent of the work force at individual companies is in either temporary or part-time positions. It is the cluster on the whole that provides continuous employment. Singapore even attracts foreign talent for its clusters through income-tax breaks.

Encouraging entrepreneurship through financial incentives Financial incentives in the form of tax breaks and duty exemption on specific imports have been successfully employed by Malaysia. These financial incentives, coupled with a ban on the export of timber logs, ensured rapid growth in value; downstream industries were added to its wood products cluster. Singapore has set up incubation centres, and venture capital and angel funds to encourage entrepreneurship in its clusters.

Promoting a favourable environment through policy To signal stability in policy, the Government of Netherlands has frozen environmental rules for a 20-year period, ensuring that investments in chemical industries are not subject to environment policy risks.

Enabling rapid growth through proactive infrastructure development Proactive infrastructure development has ensured rapid growth in the number of units within clusters. Netherlands has the most comprehensive infrastructure within its sea limits for supporting chemical industries, and the petroleum havens it has created are a global benchmark in infrastructure service provision.

Ramnath N. Iyer Head, CRISIL Infrastructure Advisory

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