By Lawrence U. Ekeh#
All over the globe ‘cluster development’ is now seen as the most effective industrial strategy to foster SME growth, regional/state development, and employment creation. Just as states in Nigeria build more schools and universities in their relevant states rectify a deficit in human knowledge and increase opportunities for employment,, they can also make good the job opportunities shortfall, by collaborating with the private sectors to establish industrial clusters.
Harvard University professor, Michael Porter, is known as the father of clusters. In 1985 Professor Porter became President Ronald Reagan’s advisor on industrial competitiveness. That appointment led to his study on national, state, and local competitiveness. In 1990 he published a book entitled: The Competitive Advantage of Nations. Since then, clusters have become widely adopted as industrial strategies, and productivity around the world has been dynamically transformed.
This has happened because he demonstrated that regions that have clusters tend to be more economically successful than regions without. He defines a cluster as a “geographical proximate group of interconnected companies, suppliers, service providers and associated institutions in a particular field, linked by externalities of various types”. From this definition, it is clear that clusters are a state-based phenomenon rather than being driven by federal government.
In other words, cluster development should be one of the top priority issues for state governments in Nigeria to generate employment, create self-employment through entrepreneurship development, increase revenue earnings and reduce poverty. How do clusters achieve this?
A cluster is not only the concentration of output producing enterprises, but also input suppliers, output buyers, various service-providers and in all cases, the government and non-governmental institutions are involved. It provides competitive but mutual benefits to the enterprises. The availability of inputs, specialised labour and various services in a cluster helps reduce costs of doing business within clusters and internal competition leads to innovation and improved quality of products in a cluster.
This modern industrial strategy is being adopted by both developed and developing countries and there is no reason why every state government in Nigeria should not embrace it as a production system to accelerate economic growth and create jobs for its indigenes.
However, it is necessary to know that the nature of clusters and the processes that make them competitive differ. Each cluster is situated in particular local conditions and the relevant policy interventions must be tailored to their distinct needs and particularly be market driven. Also, cluster principles must be understood and applied if appropriate policy responses are to yield dividend.
Fortunately, clusters have recently become very fashionable in some states in Nigeria but the basic concepts and management of it remain poorly understood – hence the term “industrial clusters” in Nigeria remains a misnomer.
Many successful industrial developments are cluster-based throughout the world and for most of them, the cluster concept and its methodology remain a national industrial secret. Silicon Valley in the USA, Modena in Italy, Dhaka, Taiwan, Denmark, Sweden, France, Germany, China, Japan, Vietnam and many developing countries have adopted industrial clusters as a promising driver of both regional and national economic growth. In fact, there is no European and Asian country that does not recognise that a cluster system has great advantages over non-clusters.
Nigeria’s economic prosperity and job creation therefore require resilient industrial structures. Strengthening Nigeria’s industrial base should be a key priority and competitive industrial clusters by every state have a major role to play. It will provide new challenges and opportunities for firms to compete, innovate, create employment opportunities and social capital that are lacking in most of our communities.
The mass production method of manufacturing goods was born in 1913 when the Adam Smith theory of specialization and division of labour was put into practice by Mr Henry Ford. It was the mass production system that used to churn out most of the goods we used. Where mass production is located, goods are manufactured en masse and merely transported to other members of the global village for consumption or as semi-finished goods. But nowadays, partly because of their ability to create job opportunities and pay taxes wherever they locate, mass production technologies have become national treasures and their transfer to other nations has become a hot global political issue.
Secondly, in order to reduce the cost of production further, the technologies have become more automated, robotic and sophisticated – making the cost of technologies too expensive for developing countries. But clusters are merely putting several specialised labour-intensive machines or services together in order to achieve the same advantages, such as reduced cost of production, usually enjoyed by single complicated mass production technology.
However, apart from manufacturing technology transfer restrictions and their astronomical costs, there are other ways countries make their products competitive. For instance, some governments use subsidy incentives to dump goods manufactured in their countries onto other countries. Such incentives and subsidies help their manufacturers to reduce the cost of production and hence reduce the price of their product for a targeted country. What is the consequence? The producers of a similar product in a country where goods are dumped will be unable to continue operation and consequently close their businesses and dismiss their workers.
A recent such international trade war is that between China and Europe. The European Commission discovered that Chinese Hot-rolled flat steel – a semi-product used for the production of steel tubes for construction, shipbuilding, gas containers, cars, pressure vessels, energy pipeline, etc, had been sold in Europe at “heavily dumped prices”. What does the Chinese government want to achieve? Simple – to make European makers of hot-rolled flat steel be domestically uncompetitive so that they will eventually close their businesses. The British steel industry suffered this fate. Of course, business closures of this type lead to an increase in unemployment with social consequences.
You may want to know how the European Commission reacted to this finding. The EU imposed new import duties on hot-rolled flat steel from China from 18.1% to 35.9%. This just scratches the surface of the international trade wars that affect Nigeria, hence the reason why there are no jobs for our youths.
In the absence of mass production technologies, these countries promote clusters in their localities and use it to dominate the world. It is time for Nigeria’s leaders to wake up to this economic strategy, otherwise the future generation will not forgive us for allowing this to happen unabated.
Industrial cluster initiatives will overcome all these problems. It is now the modern engine of growth and development for many countries. As for the breakdown of its benefits, the picture is usually clearest when the lens is placed on those places that host clusters. In this write up It is not possible for me to list all regions or states that are currently benefiting from clusters globally, but what is certain is that within these states or regions, cluster developments are associated with productivity increases. Productivity increases lead to localised external economic benefits. Productivity increases lead to reduced cost of production per unit and price competitiveness of local enterprises. Productivity increase arises due to productivity interrelationship. Examples are some savings in clusters due to;
– Market interrelationship
– Procurement interrelationship
– Technological interrelationship
– Infrastructure interrelationship
– Large-scale networking
– Finance interrelationship,
– Innovation and R & D interrelationship,
– Joint lobbying and political power, etc.
Let us look at ‘Infrastructure interrelationship’ for example. Apart from savings to be made by individual firms in the cluster, it is very easy for a state government to provide industrial infrastructure – such as constant power supply – in a particular cluster with say 200 SMEs, than the same number of enterprises that are scattered in many locations. With all these savings, costs of products are reduced in the cluster, enabling products from clusters to compete both in price and quality.
As soon as productivity increase is achieved, the next stage is to get clusters’ products into the global network which will subsequently take the cluster into the global production system – occupying market share and making profits. How do we do it? It is not impossible for states in Nigeria to replicate what the Chinese national and local governments did in 2001. The so-called ‘China Shift’ was as a result of the low cost of production which led manufacturing companies in Japan to relocate to China. How did China do it?
The Industrial Cluster Plan announced in 2001 was used by both national and local governments in China to set up industrial clusters. Note here that the cluster plan was used by both national and local governments. In other words, it must not be an industrial strategy for federal government alone.
Also, it is the low cost of production that can lead to state and national economic development, not necessarily the bi-lateral trade agreements with other countries or continents. A typical example of such agreement is the Economic Partnership Agreement signed on June 23, 2000, between West Africa and the European Union. This agreement was based on preferential reciprocal liberalisation. As far as I am concerned that trade agreement means, unlike the US, we do not receive preferential trade treatment from Europe – in other words, we must open our borders for EU products before we are able to sell our goods to the EU..
On the other hand, the World Bank is currently on Nigeria soil promoting clusters in some states in the name of the Growth and Employment Project (GEM). By-the-way I is your state benefiting from it? GEM is an employment project supported by Nigeria’s Federal Ministry of Trade and Investment (FMTI) and funded by the World Bank and the United Kingdom’s Department for International Development (DFID). The World Bank is providing a concessionary loan of $160 million, while DFID is providing a grant of £90 million. The programme targets six sectors for intervention to support SMEs. These sectors are information and communications technology (ICT), entertainment, wholesale and retail, construction and real estate, hospitality and tourism, and meat and leather.
Apart from meat and leather, these sectors will not help us to integrate Nigeria products into the global production system. For instance today, the big shops in UK such as Marks and Spencer, Peacocks, Next and Primark, pay millions of pounds daily for their goods being manufactured in Asian countries. In other words, the clusters we want should be world-leading sector driven. Such sectors will meet our priorities which are productivity increase, import substitution, export driven and innovation upgrading.
The World Bank and DFID should help us integrate any such sector into the global market while the sector association should also make “sector deals” with their state government. Also, many countries in Africa have now opened up their economies to external competition through trade. These countries (including ECOWAS members) are the free market for goods made in Nigeria. Even ECOWAS, which is promoting economic integration in all fields of activities among constituting countries, should also be making regional trade arrangements with other parts of the globe and our clusters will be the beneficiaries.
Clusters also provide more than trading opportunities; they are the modern means of attracting soft loans and foreign investments. For example, two months ago, Abia State Government brokered a $1.5 billion project for the establishment of a shoe industry in Aba by Chinese Huajian Shoe Industry. The Abia-Huajian shoe industry will have the capacity to produce 5,000 shoes per day and employ about 10,000 people directly and indirectly. But what attracted the Chinese company to come to Abia State? Their attraction is the Aba leather cluster which has also benefited from the UK DFID, Bank of Industry funding and now attracting foreign investment. From this scenario, one can see how transnational corporations come to states to build industrial clusters which depend on each other. It is also necessary to note that states should avoid forming clusters which may carry on vicious competition among local clusters.
Launching the biggest tax cut in US history, the chief economic adviser of President Trump said: “Our objective is to make US businesses the most competitive in the world”. It would be encouraging to see Nigerian leaders thinking the same way. A cluster is a strategy to build a stronger and fairer Nigerian economy that could create jobs for everyone, not just the privileged few in government and politics. All hands must be on deck. The world is a marketplace and state governments in Nigeria should see it that way and map out clusters that can help us compete at both national and international levels.
The starting point for achieving this should be the establishment of a dedicated specialised body or at least a strong team to actively look after SME cluster development in the state. This body would work to promote the cluster concept among all states’ stakeholders, policy-makers, local businesses and communities – designing and cultivating social capital and management of clusters.
In conclusion, accepting the “selfish gene” thesis that we exist as vehicles seeking to ensure the immortality of our genes, state governments in Nigeria must compete against each other in job creation and use the selfish gene ideology to promote positive economic and social transformation as a means towards immortalising their states.
Lawrence U. Ekeh is a UK based Industrial Cluster Consultant. He is the Author of Industrialization and National Prosperity and Technical Director of Luzek Industrial Strategies, Abuja Nigeria. For a one week IN-HOUSE cluster training, we can be contacted via our email: staff.luzek@yahoo.com or LUZEK INDUSTRIAL STRATEGIES