The industrial district narrative

Geographically concentrated clusters of companies in the same, or related, industries have always have existed as long as industry. There has been particular new interest in clusters since the 1980s, however. Giacomo Becattini (1979), studying SME clusters in Italy, saw in them the reXection of English industrial districts described by the Victorian economist Alfred Marshall (1925) almost a hundred years earlier.

Marshall had studied several districts in Britain, including the cutlery and specialty steel district in SheYeld. A century ago, SheYeld was facing stiV competition from abroad, particularly from the US and Germany. The British companies tended to be smaller than their overseas competitors. Marshall argued that the clusters of small companies he observed were able to match big companies with regard both to produc-tion eYciency and to product and process development. Being located in the same city, the companies could draw on the same pool of skilled labor, and use the same specialist suppliers and service companies. In this context, diVerent companies specializing in diVerent stages of production could each achieve scale economies in their own activities and, between them, match the performance of a vertically integrated producer.

But as innovators, how can a bunch of small companies hope to match the perform-ance of a big business with its technical staV and its research and development labora-tories? SheYeld, despite the small size of its companies, remained at the cutting edge of steel technology (and bear in mind that steel was the silicon of the day). Knowledge, Marshall argued, was ‘‘in the air’’ of the steel district: in place of formal research labs were a large number of expert artisans who knew each other, talked, and did business:

178 THE GLOBAL ENVIRONMENT OF BUSINESS

new discoveries and techniques did not stay secret long, were quickly adopted through-out the district.

Mass production industries were in trouble during the 1970s and 1980s, in Italy as anywhere else. What Becattini and numerous others observed was that SME clusters were growing, and were succeeding in competitive international markets. Many of these clusters specialized in high-quality, design-led products in such industries as clothing, textiles, leather goods, ceramics, or furniture; others in applications of mechanical engineering, such as food processing equipment, motor scooters, machine tools, and household appliances; still others in food processing.

A particularly striking feature of these districts is the extreme segmentation of the supply chain. We saw in Chapter 3 how the vertically integrated system of Ford gradually gave way to that of Toyota, outsourcing both production and design of components. To do so required a cooperative working relationship with suppliers along the chain, including the sharing of information which, in the Ford system, had been kept secret within companies.

Now consider the following: in Prato, a town near Florence, there were once vertically integrated mass producers of cloth. In the late 1940s, these companies found themselves in diYculty because their major overseas markets – India, South Africa, and some countries in the Middle East – had at about the same time adopted ISI policies: they had placed high tariVs on textile imports, with the aim of developing their own textile industries. The industry in Prato might simply have collapsed. The big companies did cut back production, lay oV employees, and sell oV much of their equipment. But they oVered the equipment for sale to their employees: individual employees bought indi-vidual pieces of equipment, and set up their own workshops. Within a few years, employment in the district was growing rapidly. In place of cheap, mass-produced cloth for export to the Third World, it came to specialize in high quality wool fabrics, as might go into making a good Italian suit. Production was no longer organized by vertically integrated companies, but by hundreds of independent impannatori.

An impannatore buys raw materials and contracts with a series of workshops to carry out diVerent phases of production. This is sometimes called stage production. This has something in common with the putting-out system, the way textiles were produced in Britain before the existence of factories (Chapter 7). The diVerence is that the workshops to which the putting out is done now are equipped with modern, high-speed equipment, and typically have several employees. Notice, too, that there is a visible hand here – the path from Wbre to Wnished fabric is planned, each operation done not on a speculative basis but with the next stage already scheduled, the aim being a product of a particular design – but rather than the hand of Chandler’s managerial hierarchy, it is that of the impannatore, one person with a desk and a telephone. In the 1980s and 1990s, people were writing about virtual companies, which the word ‘‘virtual’’ might lead us to associate with networked computing: the idea, however, came from cases such as this, circa 1952.

What is the purpose, and what are the eVects, of carrying supply chain segmentation so far? Less extreme forms of stage production have often been used as a way to cut wages. Along the US–Mexican border, for instance, it has been common for the higher skill (and better paid) stages in clothing production to be carried out on the US side, the lower paid stages in Maquiladora plants on the Mexican side: for instance, cutting fabric in the US, sewing in Mexico; on the same border, a similar cross-border division of labor is found in the electronics industry (Kenney and Florida 1994). The Italian industrial districts are not located on a border; wages for many jobs are negotiated nationally in Italy, and the industrial districts are located in areas which, at the time of their development, had not only strong unions but in many cases Communist-led municipal and regional governments (it once seemed a great irony that Communist governments had fostered such entrepreneurial cultures, but China and Vietnam have since left Italy’s little local ironies in the dust). Although the variance of wages was higher in the industrial districts than in Italian mass production companies, and that the average wage was slightly lower, the jobs were generally regarded as good (Brusco 1990).

Moreover, the big role for very small, specialized companies meant that ambitious skilled workers had a good chance of setting up their own businesses. The improbable mix of working class organization and entrepreneurship, of good wages, high quality and high export growth, was appealing to many.

How did the Italian industrial districts produce these results? The explanation devel-oped by Becattini (1979), Brusco (1982), Piore and Sabel (1984), among others, is what Piore and Sabel calledXexible specialization. As we saw in Chapter 10, that term has been applied to situations other than SME clusters; moreover, similar analyses of the Italian industrial districts have used diVerent terms. Here’s how Piore and Sabel described Xexible specialization in this context:

It is seen in the networks of technologically sophisticated, highly Xexible manufacturing Wrms in central and north-western Italy. Flexible specialization is a strategy of permanent innovation:

accommodation to ceaseless change, rather than an eVort to control it. This strategy is based on Xexible – multiuse – equipment; skilled workers; and the creation, through politics, of an industrial community that restricts the forms of competition to those favoring innovation.

(1984, p. 17)

So we have a system of production which is also a strategy of innovation. The production process stands Chandler’s theory on its head, so that the economies of speed lie with small Wrms rather than large ones. Chandler wrote of a world in which companies with special purpose equipment produced uniform products. In that world, economies of speed, or Xow, were about moving the materials and the product through the production chain, minimizing costs and inventories, eliminating bottlenecks. Not only were the products uniform within a given production run, but they did not change much from month to month, or even year to year.

180 THE GLOBAL ENVIRONMENT OF BUSINESS

In a world of Xexible machines, Chandler’s imperative for vertical integration disap-pears. The story here is much the same as with the progression from mass to lean production in automobile manufacturing, discussed in Chapter 10. In the classic industrial district, however, the extent of vertical disintegration is much greater than in Toyota’s Xexible mass production.

What do Piore and Sabel mean by ‘‘the creation, through politics, of an industrial community that restricts the forms of competition to those favoring innovation’’?

Essentially, that price and wage competition are curtailed within a district, so that competition is in the form of oVering improved products, improved processes, and new designs. How are price and wage competition curtailed? Standard measures in districts of the Third Italy aren’t so diVerent from those between Wrms, or between Wrms and unions, in an oligopolistic mass production economy, albeit on the scale of a small city rather than a national market: published price lists for particular or manufacturing services; a wage Xoor provided by national union agreements; a wage ceiling provided by anti-poaching agreements among employers in the district.

Gabi Dei Ottati (2003) tells how such agreements came into force in the Prato textile district. When the big companies Wrst started selling equipment to individual artisans in 1948, savage price-cutting ensued: the big companies were cutting back, after all, because they had excess capacity. So, on a very small scale, they re-created the problem that had faced early big business in the 1880s and 1890s: with lots of producers with high Wxed costs, a fall in demand led to a situation in which no producers made a proWt. It took a few years to sort out the institutions of cooperation – or, if you will, price Wxing – but by 1952 that was accomplished and the district was set on its course of Xexible, design-oriented, high quality manufacture. Competition is thus channeled into what Michael Porter (1990) calls rivalry, an ongoing contest to create the better new design or improved product, a competition which raises the game of the whole district and maintains its competitive position in wider markets.

Cooperation Wgures in the classic industrial district model in many ways beyond the price-and-wage Wxing noted above. These include cooperation between pairs of buyers and sellers along the supply chain (vertical cooperation); horizontal cooperation be-tween pairs of competitors; and collective action by groups of Wrms, particularly horizontal, to secure common services or favorable actions by the state. We might also list (though it is not clear whether to call it cooperation) what Marshall called an

‘‘industrial atmosphere,’’ in which the secrets of the trade were not very secret at all.

The problem of vertical cooperation I will leave to the next section, where I deal with the problem of interWrm trust in some detail. Explicit horizontal cooperation between pairs of competitors is found in most studies to be of marginal importance.

Small diVerences in the sharing of information, however, may make big diVerences in the industrial atmosphere – the quality of information in the air. Michael Best (1990) compares the conduct of the owners of small furniture factories in a district in Emilia-Romagna, and in the (now largely defunct) furniture manufacturing district of north

London. The factory owners in Emila-Romagna were, according to Best, in and out of each others establishments on a casual basis; those in London were loath to have competitors visit, for fear that their designs would be stolen. Ironically, the London manufacturers produced mostly reproduction Edwardian furniture, while their Italian counterparts produced new designs. Best did his study in the early 1980s, when Xat-packing of furniture together with the reduction of trade barriers within Europe had made the European furniture market Wercely competitive. The Italians thrived, the secretive Londoners closed their doors – Wrst to each other, then to business altogether.

I should note that evidence from other studies suggests that producers in design-led districts in Italy do, in fact, try to keep their new designs secret; apparently, that doesn’t always mean keeping their factories oV limits. Why would it matter if competitors saw one another’s factories? For a start, factory visits can be a simple method of dissemin-ating new techniques. The Wrms in the district are competing not only with one another, but also with manufacturers elsewhere. For each, then, there is some small cost to letting local rivals see how they’ve gone about solving production problems, but for the district as a whole such sharing is beneWcial. This presents a simple collective action problem. In Best’s account, the district in Emilia-Romagna appears to have solved this problem informally. He also relates a diVerent furniture manufacturing district in which the same problem was solved formally. The oYce furniture manufacturers of Grand Rapids, Michigan tour one member’s factory every time their trade association meets. The proud owner shows oV the latest equipment and at least some of its uses.

Khalid Nadvi (1999) oVers an example of collective action among manufacturers of surgical instruments in Sialkot, Pakistan. The Sialkot cluster makes Pakistan the world’s second largest producer of surgical instruments, after Germany. Stainless steel, produced by recyclers in a nearby town, is transformed into scalpels and other instruments by about 300 SMEs in Sialakot. Each Wrm engages in one or more stages of instrument production:

forging, milling and grinding, Wling, polishing, and heat treatment. In 1994, the cluster faced a crisis, when the US Food and Drug Administration (FDA) banned Sialkot instruments on the grounds of inadequate quality assurance procedures. Getting back into its largest market required training in, and implementation of, procedures which require tests and written records at each stage of production. This was a particular problem for the smaller companies, which tended to operate in a paperless world and many of whose owners were illiterate. The larger producers were better equipped to make the changes; they also had better contacts with foreign customers, who could help with training. In the absence of collective action by the smaller companies, it is likely that only the larger companies would have succeeded in implementing the required quality assurance procedures; that could have led to a major shakeout of smaller producers, transforming the district from an SME cluster into the home of a handful of large companies. The smaller companies, in alliance with some of the larger ones, worked through the local manufacturers association to put a training program in place.

182 THE GLOBAL ENVIRONMENT OF BUSINESS

There we have the picture of a cluster of networked SMEs replacing large companies with something more Xexible; more innovative; providing good jobs generally, and opportunity for the creative and the ambitious; a place where cooperation and com-munity replace the nastier aspects of competition. Utopian though this may sound, it has been a powerful and persuasive narrative. It has shaped UNIDO’s program for industrial development in poor countries. At the other end of the scale, in terms of both technology and wealth, it gives us Annalee Saxenian’s (1990, 1994) inXuential inter-pretation of the success of California’s Silicon Valley. It is worth our while, then, to ask two questions. First, do these districts really work as advertised? Second, in whatever way they do work, why do we see them in some places and not in others?

I will unpack those questions in the following way. In the next section I will consider the basis for cooperation and trust between companies in clusters. In the following, and last, section of this chapter, I will examine the idea that SME networks replace large Wrms, that they are a great source of innovation, and that they create good jobs.