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Geographical agglomeration also throws up possibilities of local joint action, between firms and through local institutions. Finally, well-performing clusters can make an important contribution to poverty reduction, as they promote sustainability in employment and incomes and thus serve to improve the situation for the working poor.

Mere concentration of enterprises operating in the same sector is, however, no guarantee of success. The advantages associated with clustering do not always emerge automatically.

Agglomerations of MSMEs are a widespread phenomenon in many developing countries.

In most cases, however, cooperation among firms is accidental or non-existent. Although © United Nations Industrial Development Organization


entrepreneurs work - and frequently even live - in close proximity, they typically do not share business information, discuss their common problems, or organise themselves to implement self-help actions for fear of revealing business secrets. MSMEs often have only occasional relationships with providers of business development services (BDS) and are not accustomed to presenting articulated calls for action to local policy makers. These underperforming clusters are characterised by low levels of trust, latent conflicts, and cutthroat competition among firms. As an outcome, they are locked in a vicious cycle of stagnation and poverty. In such cases, external technical assistance can be beneficial to help trigger a process in which local actors organise themselves and capture common opportunities.

The UNIDO’s Cluster Development Programme (CDP) assists micro-, small and medium enterprises become more competitive by fostering inter-firm linkages as well as collaborative relations with local support institutions. The Programme aims at helping MSMEs combine their strengths and jointly take advantage of market opportunities or to solve common problems with a combined effort.

Over the last twelve years, UNIDO has worked intensively in the field of MSME cluster and network development in over a dozen countries in Africa, Latin America and Asia (see figure 3.1)22. In all these countries, UNIDO’s key objective has not been to create new clusters but rather to provide effective assistance so that underperforming clusters could not only overcome their problems but also exploit the opportunities provided by the opening of markets and by innovation.

Figure 3.1 UNIDO’s Cluster Development Programme

–  –  –

In Honduras and Jamaica, assistance has been completed. Projects are presently being discussed in Bolivia, Egypt, El Salvador, Indonesia and Iran. In the remaining countries, UNIDO is currently implementing one or more projects.

©United Nations Industrial Development Organization


Box 3.1 UNIDO’s Approach to Cluster Development In terms of implementation strategy, UNIDO’s cluster development approach calls for a multistage

participatory approach entailing the following phases:

• Diagnostic study: Understanding what lies at the core of cluster underperformance is crucial for the success of a cluster development initiative. Information about the cluster is gathered in a participatory manner with a specific emphasis on the constraints faced by the stakeholders, the untapped potential, the features of local as well as global linkages and the viability of support mechanisms.

• Trust building: Establishing an atmosphere of trust within a cluster is an essential prerequisite to obtain support from those involved in the cluster. The cluster development agent must first develop “bilateral” trust with individual stakeholders and then use it to create or enhance trust among them. This starts with informal interactions and later takes the route of trust building through participation in joint activities.

• Identification of an action plan: This list of activities, which is necessarily more than the sum total of demand from the different cluster stakeholders, starts with inputs from the diagnostic study. It is a roadmap that helps foster relationships among the stakeholders while delivering visible results. It is also an attempt to embody a vision for the cluster as a whole in a set of activities that can be implemented through stakeholder collaboration.

• Implementation activities: Turning the action plan into actual activities does not only entail the realisation of the objectives agreed. First and foremost, it involves a radical change in the way the cluster actors interact with each other and conduct activities. The responsibility for implementation lies initially with the cluster development agent but it is progressively shifted to the stakeholders, particularly those in the private sector, with support from local institutions. In the implementation of the action plan the stakeholders discover the advantages of closer cooperation. Joint activities with intermediaries enhance capacity and strengthen governance structure of the cluster.

• Monitoring and evaluation: Monitoring of the quantifiable and qualitative outcomes of implementation helps to disseminate good practices and strengthen trust among stakeholders. It also allows the identification of emerging changes in the relationships among cluster stakeholders and the adaptation of cluster activities and governance structures to these.

B. The CDP’s Experience in India India is a country extremely rich in clusters of small-scale enterprises and one of the earliest cases of a developing country that has embarked upon cluster support as a strategy for SME development. With a contribution of 40% to the country’s industrial output and 35% to direct exports, the small-scale sector has achieved significant milestones for the industrial development of India. Furthermore, small-scale enterprises, provide a viable employment and income opportunity for millions of underprivileged households on the way out of poverty. Within the sector, an important role is played by the numerous clusters that have been in existence for decades and sometimes even for centuries. There are around 400 industrial clusters and approximately 2,000 rural and artisan ones in the country. It is estimated that clusters contribute 60% of Indian manufactured exports.

Despite these achievements, the majority of the Indian clusters share significant constraints © United Nations Industrial Development Organization


such as technological obsolescence, relatively poor product quality, information deficiencies, poor market linkages and inadequate management systems. Moreover, with the Indian economy on the path of liberalisation, all clusters (even the best performing ones) are increasingly feeling competitive pressures from international markets. Under such conditions, achieving greater competitiveness in global markets has become a matter of concern for Indian policy makers.

Traditionally, UNIDO’s cluster development methodology has focused on assisting firms in underperforming clusters to exploit the opportunities provided by the opening of markets and by rapid technological change. The CDP attempts to enhance the competitiveness of a cluster by fostering export promotion, introducing technological innovations within the cluster, stimulating human resource development, improving marketing techniques and facilitating access to information. The majority of clusters supported so far have been industrial clusters and the CDP has mainly worked with wellestablished cluster actors, in particular exporters and vibrant small-scale units. Past interventions have, however, shown that whereas strengthening a cluster’s competitiveness is a necessary condition for poverty reduction, it is by no means a sufficient condition.

To develop a deeper understanding of the impact of cluster development on poverty reduction, UNIDO, with funding from the Swiss Development Cooperation (SDC), launched an action research project in 2002. A central component of the project are pilot activities in India aimed at developing methodologies, tools and best practices to maximise the contribution of cluster development to the fight against poverty. The two pilot projects in India - Chanderi and Sindhudurg - have been chosen taking into consideration that the bulk of the deprived and marginalised population in India is concentrated outside the major metropolitan areas and that the livelihoods of most poor people in developing countries continue to depend on the growth of the agro-related industry.

The handloom cluster of Chanderi, Madhya Pradesh, is a small rural town of about 30,000 inhabitants. Weaving and related industries, such as dyeing and trading, are the main source of income for more than half of Chanderi’s population. The relevance of caste and religious communities continues to be very strong in Chanderi. Whereas the affluent traders are mostly Jains, weavers mainly belong to the Muslim (70%) and Hindu (30%) communities and largely live at subsistence level. A participatory poverty assessment found that almost 90% of weaver households live in poverty and most suffer from bad health, poor working conditions and dependency on middlemen. Although women perform a considerable part of the weaving, they are typically unpaid and not recognised as weavers.

To address the problems faced by weavers in Chanderi, UNIDO assists them in forming self-help groups and to engage in collective production and marketing. UNIDO has also encouraged the establishment of a federation of SHGs, registered as an NGO, to ensure sustainable backward and forward linkages for the groups. Moreover, weavers receive training in areas such as dyeing, product costing, pricing, accounting, marketing and product diversification. UNIDO attempts to improve women’s social and economic status through the creation of women-only networks, exposure and sales visits, literacy classes ©United Nations Industrial Development Organization


and health camps. In order to mitigate the resistance of traders and master weavers to propoor activities, UNIDO assists them in targeting new niche and export markets. Finally, awareness creation activities about the need to improve physical infrastructure and public services are organized for local and district authorities.

The district of Sindhudurg in Southern Maharashtra is, on the other hand, an agroprocessing cluster for cashews, mangoes, kokum and jackfruits. It covers an area of 1,200 km2. Food processing activities are spread all over the district and are carried out by about 3,000 workers in more than 70 self-help groups and approximately 100 micro- and small enterprises. The participatory poverty assessment in Sindhudurg determined that poverty was particularly severe among small and marginal farmers, microentrepreneurs and workers of small-scale industry. These groups have difficulties in sustaining their livelihoods and, in most cases, suffer from poor health.

In Sindhudurg, UNIDO has promoted networks of microenterprises and works with NGOs to improve the services provided to self-help groups. It organises exposure visits for SHGs and microenterprises on new technologies and the production of value-added goods.

Business development services providers are introduced to assist in upgrading production technology and marketing as well as to promote improvements in product quality, packaging and hygiene. Sensitisation activities on gender issues and health of workers take place. Lastly, capacity building activities in the field of cluster development are organised for local government officials.

In the pilot activities carried out in India, lack of access to formal financial services has repeatedly been identified as a major constraint to cluster development and as a factor perpetuating poverty. In Chanderi, limited access to formal credit and the resulting recourse to advances from middlemen has strengthened weavers’ dependency on traders and master weavers. In Sindhudurg, scarcity of working capital is one of the greatest constraints to the expansion of local processing capacities. In light of what has emerged in the previous section, it seems that microfinance can make an important contribution towards cluster development. Moreover, by benefiting particularly the poorer strata of the cluster, microfinance can enhance the pro-poor effects of cluster development.

C. Areas of Synergy between UNIDO and Microfinance Providers UNIDO’s cluster development methodology focuses on strengthening inter-firm networks as a key component to enhancing the performance of micro-, small and medium enterprises. In the pilot activities in India aimed at determining the impact of cluster development on poverty reduction, UNIDO has promoted cooperation between poor weavers (in Chanderi) and small agro-processing units (in Sindhudurg). One of the main mechanisms to improve such cooperation has been the creation of SHGs and the strengthening of existing, but non-operational, groups. SHGs have proved to be an important tool to reach the poorer sections of both clusters and to promote economic and human development within them. By working together in SHGs, poor cluster actors in both Chanderi and Sindhudurg have been able to decrease input costs through bulk purchases, increase quantity and quality of output, develop new markets and obtain higher wages. After participation in UNIDO-organised exposure visits, skills training and health camps, group representatives disseminated the knowledge gained during group meetings.

© United Nations Industrial Development Organization


The fact that UNIDO’s activities involve working with SHGs, whose performance is often constrained by lack of credit, suggests the existence of synergies between UNIDO’s Cluster Development Programme and financial institutions willing to provide microfinance to SHG members.

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