CLUSTER DEVELOPMENT IN SMALL AND MEDIUM ENTERPRISES:
KEY TO SUCCESS GLOBALLY.
Dr. Ruchi Jain
Sr. Assistant Professor
Dept. of Financial Studies
The IIS University
Ms. Archana Sharma
The IIS University
29-B, Krishna Nagar
Near Mahesh Nagar Railway Crossing
Jaipur – 302015
Res: 0141- 2591421
E- Mail Id : firstname.lastname@example.org
Small and Medium Size Enterprises have played a pivotal role in boosting the Economic
performance of any country. Indian SMEs are serving as backbone for industrial economy.
Despite of high growth rates Indian SMEs lack behind globally due to various challenges
faced such as lack of Financing, Technological Advancements, Skill Development etc.
Cluster Management is one of the strategy which has been world wide accepted in
improving the functional performance of SME sector.
Clustering offers immense benefits to SMEs organizations as it improves and strengthens
the working efficiency by reducing the financial burden at the same time.
The paper aim’s to study the Role of Clustering in SMEs by examining some recent
examples of successful Industries operating globally. The paper also explores different
ways of Clustering in SMEs as well as the competitive advantages provided by clustering
in various sectors to the Indian SMEs so as to improve its performance on global
The results of the study suggest that cluster based approach will not only provide
solutions to various problems faced by SMEs but also increase the contributions
made by SMEs in the overall economic development of the country.
Keywords: SME, Cluster Management, Economic Development, Competitive advantage.
Small and Medium Enterprises plays the most important and crucial role in the development
of economy of any country, this fact has been accepted by developed as well as developing
countries of the world. Yet, in most of the developing countries the challenges
faced by SMEs are very much common in nature due to the fact that these countries
are facing same problems such as uneven income distribution, poverty, less employment
opportunities, lack of proper education and many more. Indian market is growing
rapidly and Indian entrepreneurs are making remarkable progress in local and global
market in various industries like manufacturing, automobiles, precision engineering
design, food processing, pharmaceutical, textile, information technology and agro
based industries etc. In developing countries like India the manufacturing service
and trading functions are largely dominated by SMEs.
SMEs in India
India has the second largest no. of SMEs in the world with an estimated 48 million
firms. SMEs with the staff strength of under 10 (Micro) contributes 94.4% of SME
sector. India’s SME sector has been dominated by manufacturing. There are more SMEs
in Urban areas (55%) as compare to rural area (45%).SMEs are more apparent in Food
products and beverages sector and in Apparel products. 45% of the manufacturing
output comes from SMEs, 40% of country’s export has been contributed by SMEs, 40%
of country’s workforce has been engaged in SMEs, yet despite of all these facts
due to poor productivity SMEs contribution in India’s GDP is just 17%.
For rapid economic growth, Entrepreneurs need to migrate from small to medium and
from medium to large enterprises at a faster rate. The MSME Ministry of Government
of India consistently supports SMEs and due to this, the rate of Industry sickness
has come down rapidly. Cluster based operation is the key factor that contributes
to the growth of SMEs in the country by providing number of advantages to the firms.
MSME suggests that cluster approach should be a key strategy to be adopted by SMEs
in order to become globally competitive.
What are clusters?
According to the United Nations Industrial Development Organization (UNIDO), “Clusters
are the sectorial and geographical concentration of enterprises; in particular Small
and Medium enterprises faced with common opportunities and threat. Clusters can:
1. Give rise to external economies with specialized suppliers of raw materials,
components and machinery, and sector specific skills.
2. Favour the emergence of specialized technical, administrative and financial services.
3. Creates a conducive ground for the development of inter firm cooperation and
specialization as well as of cooperation among public and private local institutions
to promote local production, innovation and collective learning.”
The foundations of this paradigm can be traced back to the work of the economist
Alfred Marshall, who in Principles of Economics in 1890 described the phenomenon
as “the concentration of specialized industries in particular localities” and noted
that these agglomerations of small-scale businesses enjoyed economies of scale comparable
to those of large firms.
In Modern times, the Clustering concept was known to be popularized by Dr. Michael
Porter of Harvard School Business in 1990. According to porter Clusters are “groups of interconnected firms, suppliers, related industries
and specialized institutions in particular fields that are present in particular
Porter also suggests that firms operating in a cluster will
gain competitive advantage over its international rivals by discovering new and
better ways of production and marketing. Competitive
advantage will also be gained by managing the entire network that involves suppliers
of raw materials, intermediate channels and buyers. According to Swann et al Productivity
growth is related to innovativeness in activity and output. Baptista also suggests
that the “exchange of information within a cluster will attract more human capital
to the cluster and technological innovation is the key to cluster growth”. Arthur
in 1990 also suggests that clusters with innovation are more strong and independent.
Objective of the study
1. To find out the need of clustering among SMEs.
2. To find out the advantages or benefits avail by SMEs clusters.
3. To study the cases of successful clusters of India and
their impact on economy.
The data has been obtained through Secondary sources by researching in house Journals,
previous researches relevant to the topic, reports, Books, Newsletters & Case
Studies. Data collected was crosschecked through the official website of the Organizations.
Why Clusters are needed?
One of the Millenniums development goals includes reducing the poverty to half by
2015. Development of Private sector has been identified as an effective strategy
to reduce poverty in the nation. A growing private sector “can alleviate poverty
by contributing to economic growth, job creation and poor people’s incomes. It can
also empower poor people by providing a broad range of products and services at
lower prices.” With respect to pro-poor growth, UNIDO suggest that a cluster approach
can be a valuable tool to tackle poverty and lay the ground for a process of broad-based
growth because clusters are also socio-economic systems.
SME’s no doubt contributes in employment generation, reducing the poverty and in
wider distribution of wealth in any country still the SMEs potential is often underutilized
because of the common problems associated with them.
Problems related to individual unit of SMEs include:
1. SMEs are not able to achieve economies of scale in the purchase of raw materials
and other necessary equipment and machines.
2. Due to lack of Innovation, most of the SMEs operation are more time consuming
and requires more human efforts.
3. Workers in SMEs are underperforming due to lack of training and guidance by experts.
4. Scope of SME is limited thus SMEs are unable to take the advantages associated
with new opportunities.
Most of the SMEs are operating in isolation and thus they are facing the above mentioned
problems in their day to day functioning. The SMEs which are operating with closer
association among them are able to find the solution for most of their problems.
The closer link between the SMEs and the associated institutions (both Government
as well as private) also solve most of the common problems.
Advantages offered by Clustering
1. Cluster develops competitive advantage for the firms.
SMEs in a cluster are able to achieve the higher
level of competitiveness that are beyond the potential reach of individual firms.
Porter (1998) suggests that clusters can create competitive
advantages for them:
a. By increasing the productivity of firms involved in clusters.
b. By introducing innovative ways of production as well as
c. By expanding the cluster with new firm’s involvement.
As per Swann’s (1998) positive feedback model:
a. Firms within clusters grow faster as compare to firms operating outside the cluster.
b. Clusters attract new firms thus tend to expand faster.
c. Firms within cluster are more innovative than individual firms outside the cluster.
2. Clusters are better than networks
Clusters are most often confused with Networks but both of them are different in
terms of their characteristics.
According to Rosenfeld (2001) these are some common difference between clusters
1. Networks allow firms access to specialized services at lower costs whereas Clusters
attract needed specialized services to a region.
2. Networks have restricted membership whereas Clusters have open membership
3. Networks are based on contractual agreement whereas Clusters are based on social
values that foster trust and encourage reciprocity.
4. Networks make it easier for firms to make complex products whereas Clusters generate
demand for other firms with a variety of similar and related capacities
5. Networks are based on cooperation while Clusters take both cooperation as well
6. Networks have common business goals whereas Clusters have collective visions
7. Networks can be developed within or independently of clusters, whereas cluster
3. Cluster makes the firms achieve economies of scale
SMEs are able to achieve economies of scale by purchasing inputs such as raw materials,
financing, consulting services etc. beyond their reach thus able to achieve large
4. Clustering offers high growth rates.
Due to the collaborative efforts of clustered firms and shared economic goals, firms
are able to achieve high and sustained growth.
5. Limitations of SMEs can be overcome by clustering.
SMEs are normally small in size; employing limited number of employees, normally
a one man show / family business / women handling business, where owners operate
the business with fixed mind-set and need of professional approach is missing. These
are some of the common SMEs limitations:
a. Lack of availability of credit.
b. Low capital base.
c. Availability of raw material at competitive cost.
d. Inadequate infrastructure, technology and storage.
e. Lack of skilled manpower, training.
f. Less or no exposure to international environment.
g. Lack of interest in R&D.
6. Cluster promotes self-employment
Due to less complicated procedures of functioning and aid available by Government
and other International institutions like UNIDO, Entrepreneurs are more willing
to work in a cluster.
7. Cluster overcomes financial constraints
In the initial stage Entrepreneurs finance the cluster but once the cluster starts
developing, banks promote their financing and thus help in expanding the cluster.
8 Cluster deepens the division of labour
Clustering decompose the process of production by dividing it into small steps among
several firms which require low level of investment.
9 clusters lowers the production cost and improves the services to customers
SMEs can form a cluster on the basis of:
1. Common area of business.
When entrepreneurs have a common interest in a particular business but due to lack
of resources they are not able to run their business profitably.
2. Infrastructure needs.
When firms shares the same need for infrastructure like machinery, equipment, transportation
etc. they come together to form a cluster.
When firms share the same kind of competition both domestic as well as international
they come together to form a cluster and work in synergy.
Successful cases of SMEs cluster in India
Area of operation
Tirpur Cluster, Tamil Nadu
Cotton Hosiery products.
Agglomeration of more than 7,000 SMEs. Exported US$650 Million worth to EU, Japan
Represents over 80% of all Indian exports of such goods.
Panipat Cluster, Punjab
Produces 75% of the country’s blankets
Agra Footwear Cluster
Agglomeration of 800 registered and 6,000 unregistered enterprises with cumulative
capacity of approximately 150,000 pairs of shoes per day. Contributes US $ 60 million
Multiple products like woolen knitwear, bicycle and bicycle parts, sewing machines.
Produces 95% of the country’s woolen knitwear, 69% of the total bicycle and its
parts and 85% of the country’s sewing machines.
Ahmedabad Pharmaceutical Cluster
Pharmaceutical drugs – tablet, capsule, liquids, ointments, lotions etc.
Commands share of over 40% of Indian drug production and over 17% of total drug
exports. Agglomeration of 400 to 500 SMEs, estimated turnover is around Rs. 8000
Chennai Leather cluster, Tamil Nadu
Leather items – finished leather and Footwear.
Agglomeration of over 1000 SMEs. Contributes to 42% of India’s leather exports which
is estimated to be around Rs. 13000 crores. 100% export oriented units.
Many other core industry sectors present numerous opportunities for MSMEs. To help
the MSMEs tap these opportunities, the government is looking at ways to facilitate,
incentivize and support the technology transfer and provide other supportive measures
at individual as well as collective levels. Linkages with Research & Development
Institutes, rewarding innovation and new technology, creation of Technology Development
Fund, etc. are some of the suggestions being considered at present. Few of the opportunities
presented by some of these sectors are discussed below:
Role of Government and UNIDO in Cluster development
1. United Nations Industrial Development Organization (UNIDO) has taken several
initiatives to strengthen the clusters by promoting linkages between SMEs, firms
and institutional environment. The projects of UNIDO’s on clusters are customized
to the requirement of individual countries. Due to aid and guidance provided by
UNIDO’s broker many Clusters of India are running successfully now. Some of them
are Pune Food Processing Cluster, Bagru Cluster near Jaipur, Ludhiana cluster and
2. The National Manufacturing Competitiveness Council (NMCC) has announced 10 schemes
for developing global competitiveness of the Indian MSMEs in the manufacturing sector.
3. The Ministry of MSMEs announced the Cluster Development Program for enhancing
productivity in MSMEs. This Program also provides financial assistance, and helps
in identifying the infrastructure development needs for the Common Facility Centre.
This program has strengthened many clusters in India.
Limitations of clusters:
Enterprises with common business initiatives will come together and form a cluster.
Although clusters offer several benefits in terms of reducing the cost per unit,
financial aid, specialized skills etc. still most of the clusters lack proper networking
due to which they face several problems. “When clusters are unable to shift from
stagnation to growth their potential to contribute to the local communities remains
Most of the common problems associated with in clusters are:
1. Low level of trust among the firms.
2. Conflicts and cut throat competition among firms: Clustered firm’s sometimes
starts competing within the cluster due to which they limit their scope of growth
as well as innovation.
3. Exchange of information: Most of the firms within cluster share only basic information
about their business due to which they restrict their synergy and collective behavior.
4. Clash in Business Objectives: Most of the conflicts occur when firms with in
the cluster operate with different vision and different business objectives thus
there lay lack of commitment towards common goals.
5. Clustered firm’s limited collective behavior reduces their ability to react to
policy changes. Individual firms outside any cluster are more adaptable towards
sudden changes in Industry or Government policy, as they face fewer constraints
in their business.
The results suggest that SMEs in India plays a pivotal role in the growth of Industrial
economy of India. Along with high growth, MSMEs are also facing a number of problems
like increased domestic and international competition, lack of training, lack of
advance technology and infrastructure etc. In the era of globalization there lies
an urgent need for cluster based approach in the operation of SMEs. Cluster approach
will work as a key strategy to make SMEs competitive in the market. Due to several
advantages associated with clustering, small entrepreneurs gets an opportunity to
operate their business profitably yet within their own boundaries. The government’s
and UNIDO’s facilitator role will make the operation of firms within the cluster
smooth and transparent. Further Government can strengthen SMEs by providing improved
infrastructural facilities such as roads, electricity and water supply in the coming