Increasing MSME competitiveness through cluster development

The United Nations Industrial Development Organization (UNIDO) defines clusters as sectoral and geographical concentrations of enterprises that produce and sell a range of related or complementary products and, thus, face common challenges and opportunities.188 UNIDO notes that clusters can promote the development of specialized suppliers of raw materials and components or the growth of a pool of sector-specific skills and foster the development of specialized services in technical, managerial and financial matters. Strong evidence suggests that a cluster policy brings an additional positive effect to existing MSME policy in industrialized economies.189 Thus, adopting a cluster approach is essential for policymakers to expand MSME competitiveness in Asia-Pacific countries.

Through cluster development, MSMEs can intensify cooperation to improve the collective MSME competitive position in a particular sector. By coordinating their activities, MSMEs can collectively achieve economies of scale beyond the reach of individual small-scale firms, obtain bulk-purchase inputs, and achieve optimal ranking using machinery and pool production capacities to meet large-scale orders.190 The competitive advantage of clustered business derives from two primary sources: the extent to which the knowledge base of these businesses deepens and broadens to include design, quality control and information related to markets and marketing; and the establishment of linkages to a broader set of technology inputs and actors.191 Cooperation among MSMEs enables them to focus on their core businesses, allowing for an external division of labour, thus improving their collective efficiency in production. Partnership via proximity can also encourage MSMEs to share good practices on enhancing product quality and move toward more profitable market segments. The success of the cluster model is based on consolidated systems of specialized small firms that can generate the settings that amplify efficiency and productivity on a long-term basis and, therefore, become attractive to FDI.192 Box 1 showcases the clusters development initiatives driven by the Thai government.

Box 17. Translating policy into implementation: Thailand’s superclusters

In the context of the economic model known as Thailand 4.0, the government selected a set of priority sectors in November 2015 comprising “First S-Curve” and “New S-Curve” industries. The “S-Curve” concept posits that an industry’s growth is relatively slow during the infancy stage due to limited market size, but  output rises rapidly once economies of scale take hold and the market expands, and that growth eventually levels off due to demand saturation. “First S-Curve” industries include five sectors that can be upgraded in the short or medium term by adding value through advanced technologies: next-generation automotive (e.g. electronic vehicles), smart electronics (e.g. high value-added ICT products), high-income tourism and medical tourism, efficient agriculture and biotechnology, and food innovation. “New S-Curve” industries include five sectors identified as promising drivers of growth in the long term: robotics, aerospace, biofuels and biochemicals, digital industry and medical hub.

To support the development of these priority sectors, the government launched investment promotion measures in designated Special Economic Zones (SEZ) in different locations and with specific purposes. SEZs are based on the concept of clusters to improve industrial value chains by strengthening linkages among firms, research and academic institutions, and public organisations, within a geographical area. The government provides both financial incentives (e.g. tax reduction and subsidies for innovation and human resource development) and non-financial incentives (e.g. simplifying visa procedures for skilled foreign labour and easing regulation of foreign equity and land ownership). In July 2016, three provinces in the east coast area were designated as the Eastern Economic Corridor, which is to be the flagship SEZ and leverages off the existing manufacturing and energy industrial base there. The government has set an ambitious target of THB 1.5 trillion (Thai baht), or some 10% of 2016 nominal GDP, for public and private investments in the corridor from 2017-21. This initiative is a good example of how government can translate a policy into an implementation model.

Source: BOI (2017), OECD (2018)

Resources

188UNIDO 2001, Development of Clusters and Networks of SMEs,

189 Karaev, Aleksandar & Koh, S.C. & Szamosi, Leslie. (2007). The Cluster Approach and SME Competitiveness: A Review. Journal of Manufacturing Technology Management.

190 Ibid.

191UNCTAD (2005), Improving the Competitiveness of SMEs Through Enhancing Productive Capacity - Proceedings of Four Expert Meetings,

192 Ibid.