Reasons for processing businesses locating in the cluster

This section examines the reasons why processing businesses located themselves in the two clusters. This is against the backdrop found in the literature on the emergence of clustering activities that appears to suggest that clusters exist due to the natural resources and government support provided to agriculture in the areas. In capturing the reasons for the location of businesses in the clusters, the following variables were put to processors to determine the most influential factors: (1) access to market or buyers, (2) labour, (3) raw materials, (4) machinery, (5) technical advice and (6) credit. The choice of answers was based on a Likert scale of 1 -5, where 1 is not important and 5 is very important.

Access to markets/buyers

Responses relating to the relevance of access to markets in the establishment of the processing businesses in the two clusters varied. In the case of the palm cluster, all of the 82 processing businesses said that access to market was ‘Very important’ (60%) and ‘Important’ (40%) to their location in the cluster. In contrast, only 18% of the 17 processing businesses surveyed in the pineapple cluster concurred that access to market was ‘Very Important’ and 58% said it was ‘Important’ to the location of their business in the cluster.

This finding reflects the geographical situation of the two fruit processing clusters, which are strategically located relatively close to the nation’s capital, Accra, and are linked with accessible road networks. This means that the processing businesses are able to take advantage of the air and sea ports in Accra, especially the processing pineapple businesses, whose products are more perishable. And yet only 18% of the pineapple businesses agreed that access to market was Very Important. The results are not surprising because, compared

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to the pineapple processing businesses, the palm processing businesses see access to market as more crucial in their decision to locate in the cluster since their processing is normally carried out in rural communities with limited accessibility.

The findings mean that the relevance of accesses to buyers/market could be a pull factor to attract processing businesses to locate in a cluster (Porter, 1998). Despite the differences in the responses regarding accesses to buyers/market, most fruit processing businesses perceive it as relevant compared to the other factors. The issue of markets and buyers is examined later in Chapter seven.

Access to labour

The survey revealed that labour is equally essential to the operation of businesses in the two clusters. All the palm entrepreneurs agreed that access to labour was ‘Very Important’ (71%) or ‘Important’ (29%) to the establishment of their businesses in the cluster. In the case of the pineapple cluster, relatively lower values of 35% (‘Very Important’) and 47% (‘Important’) were obtained from entrepreneurs in relation to access to labour in establishing businesses in the cluster. The differences in value accorded to the importance of labour in the establishment of businesses in the pineapple cluster may be as a result of urbanisation and the merger of the municipality with Accra, the nation’s capital. As noted in section 1.9, the Nsawam municipality is 30 minutes from Accra and has a more urbanised environment, which makes labour abundant but relatively expensive. The expansion of Ghana’s city capital has been explained as influencing the supply of cheap labour by an entrepreneur interviewed in the study:

Labour... is becoming a problem now. You know Accra is catching up fast and people around here want to do something else so it’s becoming difficult and expensive now to get the people to work but we are trying (Pineapple case 3; Nsawam, 2014).

In comparison, the palm cluster is more linked to rural communities, whose main form of economic activity is agriculture, producing the raw material needs of these processing businesses. The presence of farming, processing and distributional activities has led to the pooling of labour (Krugman, 1991) from neighbouring communities to the various palm

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processing centres. As a result, labour is relatively cheaper in the palm cluster than in the pineapple equivalent because, in some cases, palm processing businesses are able to take advantage, for example, of students needing part-time employment during school holidays. The relatively inexpensive labour force in the palm cluster is explained by a business entrepreneur below:

When it comes to labour there is a lot available for firms. Even during holidays we are able to access these students on a part-time basis to help these firms (Palm case 5; Kwaebibirem, 2014).

These local conditions account for the relative variation in the level of importance the two clusters place on access to labour. The findings show that the presence of accessible labour had an influence on the businesses’ decision to locate in the cluster. There are variations in relevance of labour, based on the presence of different specific local factors.

Access to raw material

The raw materials needed to run the plants or machines in the various businesses have been argued as influencing the location of businesses in developing economies’ clusters (Weijland 1999; Galvez-Nogales, 2010; Rasiah and Vinanchiarachi, 2013). Findings from the survey seem to support these assertions. The study shows that the majority (94%) of palm processing entrepreneurs see access to raw materials as ‘Very Important’ for their location in the cluster. The situation is different in the pineapple cluster, where relatively fewer, 59% and 29%, respondents agree that availability of raw materials is ‘Very Important’ or ‘Important’ to their operations, respectively.

The relatively lower significance accorded to access to raw materials by the processors in the pineapple cluster can be explained by the fact that the fruits in the pineapple cluster are cash crops and produced directly (large-scale plantations) and indirectly (out-growers) by processing businesses in the cluster to meet their market needs. Furthermore, the findings show that three of the large- to medium-scale pineapple plantations were situated near a water body to ensure a regular supply of water. Most of the other plantations were equipped with irrigation mechanisms to facilitate regular supply of fruits. They explained that, due to the nature of their clients and the quality expected in the market for their products, most

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processing businesses prefer producing fruits rather than buying them. As a result, most (five out of seven) of the processing businesses interviewed valued the suitability of the environment to cultivate their fruits themselves rather than rely on farmers for their availability. The situation indicates that raw material as a pulling factor of clusters (FAOSTATS, 2009; Galvez-Nogales, 2010) in developing economies must be reconsidered since the market decision of processing businesses may have less regard for fruit availability. The comment by one of the respondents sums up the view of raw material accessibility:

I think it will be prudent for us to be here in this district; to be closer to the raw materials we produce is best because of the environment... [which] helps us to produce the pineapple to meet what our customers [want] (Pineapple case 6; Nsawam, 2014).

In the case of the palm cluster, most processing businesses buy fresh fruits from the numerous farmers in the district to be able to meet their production needs without any clear requirements apart from the need to process fruit immediately after harvesting. The findings show that there is insatiable demand for palm fruits in the cluster such that even those processors with plantations rely on farmers to keep their plants running. As a result, a higher premium is placed on access to raw material in the cluster. The comments from a medium- sized palm processing business sum up the source and importance of raw materials within the cluster:

With regards to the fruits, yeah, our major input is the fruits, the raw materials, as for that it is all available all around here, and because we have been in the industry for quite some time we have enough data concerning the raw materials ... Particularly this district is a good place for the industry, thus why most of the major industries are here ... Once [the farmers] have an alternative, we cannot dictate to them; they can take their fruits wherever they want (Palm case 2; Kwaebibirem, 2014)

These findings indicate that, for the operation of businesses in the cluster, raw materials are important and have an influence on the entrepreneurs’ decision to establish their business in this cluster. However, excess demand for raw materials may lead to serious competition among palm processors, while the excess supply of raw materials in the case of the pineapple cluster presents a less competitive situation among processors (this is discussed in the next section).

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Access to machinery

According to the survey data, processing businesses’ decisions to locate in the cluster have hardly been influenced by access to machinery. From the palm processing businesses’ surveyed, we can see that 77% find access to machinery to be ‘Slightly Important’ to the location of their businesses. Only 41% of processing businesses in the pineapple cluster said that access to machinery was ‘Slightly Important’ in the location of their businesses in the cluster.

This is explained by the interview data that shows that processing businesses have alternative means through which they acquire machinery needed for their operations in the cluster. Throughout my dealings in the palm and pineapple clusters, the machines needed for all large-scale and some medium-scale producers were observed to have been imported, and it is understandable for the cluster to rely on machinery. The managers of two processing businesses in the cluster explained the source of machinery:

Most of our machines come from food tech, JB food tech – it’s in Italy. But our extractors come from Brazil, Sentinario. These machines are acquired through the efforts from the owner (Pineapple case 6; Nsawam, 2014)

We import them [the machinery] so the importer comes with the machine and we import them from Malaysia and of late too we have imported some machines from Britain. Some by sea some by air, so we get the information (Palm case 2; Kwaebibirem, 2014).

It is worth noting that the so-called ‘artisans’15 have been observed to provide machinery to small-scale and some medium-scale processors in their operation. However, the levels of importance that these businesses place on access to machinery is relatively low. This perhaps could be because it is of inferior quality, as explained by the owner of a medium-scale palm processing business:

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The local machine has not got the capacity to be used at the factory level. Anyone that manufactures local machinery... [if they]... will be sincere, will note that it is mostly businesses that operate Kramer16 machines that need such machines made locally (Palm case 4; Kwaebibirem, 2014).

The observations from the field reveal that artisans are more valuable to the small-scale palm processors. This suggests that small-scale palm processing activities, which are observed to be widespread, should have responded positively to access to machinery but this was not the case from the findings.

Access to technical advice

The survey data on access to technical advice seems to be less significant to the location of processing businesses. From the survey data, 50% of respondents in the palm cluster said access to technical advice was ‘Slightly Important’, and 22% said access to technical advice was ‘Not Very Important’ to the location of their businesses in the cluster. The case of the pineapple cluster was not different: 41% of the processing businesses in the pineapple cluster said availability of technical advice was ‘Slightly Important’ and 24% said access to technical advice was ‘Not Very Important’ to their location in the cluster.

Observation in the cluster shows that there were research and export institutions that were able to offer relevant technical advice to businesses. It is an important finding that the fruit processing businesses did not value access to technical advice as very important to their decision to establish businesses in the cluster. The situation could be because most of the large- and medium-scale businesses had their own research and technical support units. In addition to this, these businesses depend on online sources and research from their mother company. Therefore, public research institutions and technical advice service units within the clusters are perceived as nonessential for the establishment of businesses. The situation is explained by Pineapple case 1, who suggested that public research institutions sometimes depend on their laboratory to run their tests. This means that the call for government to

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strengthen the link between research institutions and processing businesses cannot be over- emphasised (Budget Statement, 2014).

Prior to us acquiring the FFA [Free Fatty Acids] testing machine, we had to take a sample to GOPDC after producing the palm oil. They have a laboratory where I go to test the various samples to obtain the various FFA levels ... The FDA [Food and Drugs Authority] even prefer using their facility to for testing for the FFA levels and they sometimes depend on their laboratory (Palm case 4, Kwaebibirem, 2014)

The fact that these processing businesses may seek external research information and technical advice supports Porter’s (2000) argument that intangible resources such as technical advice can be effectively sourced in the global market. The external sourcing of technical advice is discussed in detail in Chapter six.

Access to Credit

The findings show that 48% of the processing businesses in the palm cluster said access to credit was ‘Not Very Important’ to the location of their businesses in the cluster, whilst 15% of them felt that it was ‘Not Important’ at all in their decision to locate in the cluster. In the same way, the findings from the pineapple cluster show that 76% of the processing businesses in the pineapple cluster said credit availability was ‘Slightly Important’ in deciding to locate in the cluster, while 18% said credit availability was ‘Not Very Important’. The findings show that access to credit holds little value to the fruit processing businesses in their decision to locate in the cluster.

The interview data from the two clusters points to the presence of external support to processing businesses in the cluster to explain why access to credit within the cluster is seen as less significant to the location of businesses. For instance, the majority of the businesses in the pineapple cluster (five out of seven) and half of the businesses in the palm cluster (three out of six) relied on international funds. This means that the processing businesses may have been supported by external financiers whose capital was externally sourced and not by financiers within the cluster. The external sources of funding were explained by two managers, one from each of the two clusters:

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Owners are Dutch and British, we have only one Ghanaian... the shareholders are oil tycoons so they have the money... they are the people who finance us (Pineapple case 6; Nsawam, 2014)

The business is a free zone company established with the help of some Italians. The mother company is in Italy so they came and established the business (Palm case 3; Kwaebibirem, 2014)

Those that did not have external start-up credit began as small-scale farmers or processors who depended on their personal finances to begin their operation and therefore did not consider credit as important in locating their businesses in the clusters. Below are explanations from two fruit processing businesses:

... the business didn’t actually start as a palm oil-producing factory. It was basically farm products. With time, the family started the small-scale palm oil production like the ones you saw along the road, and then little by little we started acquiring equipment and machinery (Palm case 2; Kwaebibirem, 2014). Initially run by me and my family. I started initially with pineapple. I used my

money to buy it from farmers all over the place and processed it in the house for some customers in town (Pineapple case 7; Nsawam, 2014)

The findings suggest that locating businesses in a cluster may not always depend on credit availability from financial institutions in the location as some assume (Naude et al, 2008). In particular from the findings, the palm cluster has flexible credit relationships among processors, farmers and distributors that encourage the establishment of business (see section 5.3). External funding from multinationals and entrepreneurs’ personal income and credit from businesses may form the basis for the location of a business, rather than access to credit. In effect, start-up finance may not be location bound but may emanate from several sources including global markets.

5.2.2 View of key government informant on emergence of clusters