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Clusters and Entrepreneurship: Implications for Innovation in a Developing Economy Jamshed H. Khan and Jawaid A. Ghani


• VOL. 9, No. 3 • DECEMBER 2004

Clusters and Entrepreneurship: Implications for Innovation in a Developing Economy Jamshed H. Khan and Jawaid A. Ghani Abstract This article presents a framework for examining technological innovation and entrepreneurship in clusters. Specialized suppliers in the cluster share the risks of failure associated with new technologies. New technologies rapidly diffuse throughout the cluster, encouraged by close proximity, trust, rivalry, and extensive outsourcing arrangements. The framework is illustrated through a case study of the Faisalabad textile cluster, as they upgraded their weaving technology from power looms to shuttle-less looms. Small firms were able to thrive by outsourcing upstream and downstream processes to efficient specialized suppliers. Specialized maintenance contractors helped reduce the risk of adopting the new technology by providing guaranteed 24-hour maintenance support. They also played a key role in diffusing the technology throughout the cluster. Government policy seemed to play a minimal role in this particular technological innovation. Key words: Industrial clusters, innovation, entrepreneurship, industrial policy, weaving

Introduction The basic thesis of this article is that entrepreneurship and technological innovation at the firm level are strongly influenced by the immediate environment in which the firm is embedded. This environment has been the subject of extensive research in the area of industrial clusters. This article presents a review of the literature dealing

Jamshed Hassan Khan is an Associate Professor of Production and Operations at the Lahore University of Management Sciences. His research interests include the application of productivity and quality management techniques, and developing a customer-focused culture in a Pakistani business environment. Jawaid Ghani is a Professor at the Lahore University of Management Sciences, where he teaches in the strategy area. He has published widely in the areas of information technology, psychology, economics, and management. His current research interests lie in the areas of international alliances and the development of competitive export-oriented industrial clusters. The authors wish to thank the editor and three anonymous reviewers for their comments and suggestions on an earlier draft.



with industrial clusters and illustrates the dynamics of technological innovation through a case study of the Faisalabad textile cluster. In studying the relationship between the external environment and innovation, researchers have adopted a dynamic perspective. Wade (1996) for instance, uses data spanning an 18-year period to study the dynamics of technological communities of firms having stakes in different classes of microprocessors. Along a similar vein, Schindehutte and Morris (2001) in their study of the strategic adaptation process of small firms, develop a conceptual model involving multiple levels of analysis from the entrepreneur, to the organizational context, and to the external environment. Baumol (1990) proposes that the nature of entrepreneurial activity is strongly influenced by the reward structure in the economy and at times the rules of the game can result in the entrepreneur leading a parasitical existence that damages the economy. Since government policy plays a dominant role in determining the rules of the game, it is important to design policies encouraging positive rather than negative innovation. Porter (1998) suggests that governments, particularly in developing countries, can play an essential role in the development of well-functioning industrial clusters that encourage positive innovation. At times, government policies unwittingly work against cluster formation such as restrictions on industrial location and subsidies to invest in distressed areas.

Cluster Dynamics Porter (1998) describes clusters as geographic concentrations of interconnected companies and institutions in a particular field, encompassing linked industries and other entities important for competition. Clusters represent a special case of networked firms that are geographically co-located. By enhancing the capacity of specialized firms, clusters result in enhanced regional competitiveness. Furthermore, clusters can play a vital role in the cluster firm's ability to innovate. Clusters are prevalent in both developed and developing economies. Krugman (1991) describes how a narrow belt in the U.S. Northeast and the eastem part of the Midwest dominated U.S. manufacturing up until the mid fifties, with a 64 percent share of manufacturing employment. Schmitz (1995a) describes how the Brazilian shoe cluster, mostly concentrated in the Sinos Valley, was able to raise its share of world leather shoe exports from .5 to 12.3 percent during the period 1970-90. Nadvi and Haider (2002) describe how Sialkot's stainless steel cluster in Pakistan, together with Tuttlingen in Germany, dominate the world surgical instrument market. Other studies describe how clusters dominate such industries as ceramics in Seto, Japan (Izushi, 1997); precision engineering and watch making in Jura Arc, Switzerland (Maillat et. al., 1995); wind musical instruments in Elkhart, Indiana (Krugman, 1991); fashion goods in northeast-central Italy (Storper, 1993). Porter (1998) lists some 30 clusters in the US (e.g., the auto cluster in Detroit, insurance in Hartford, and aircraft equipment and design in Seattle), and another 30 export222

Clusters and Entrepreneurship oriented clusters in Portugal (ranging from ornamental stones in Evora to horticulture in Faro). Emergence of Clusters A variety of factors have been identified which trigger the^ emergence of clusters (Krugman, 1991; Porter, 1998). These include local demand, prior existence of supplier industries including natural resources, innovative firms, and chance events. Once a cluster is formed a self-reinforcing cycle promotes its growth, especially with the support of local public and private institutions. Often as a result, initial transitory advantages get "locked in" within the cluster. This "lock-in" effect is due to a variety of agglomeration economies attracting new specialized firms to locate within the cluster and gain from increasing retums to scale. Krugman (1991) describes how in the second half of the nineteenth century, increasing economies of scale in manufacturing together with a dense railroad network, led to the emergence ofthe manufacturing belt in the Northeast U.S. More interestingly, these initial advantages persisted for over a century, as the existence of specialized supplier firms, skilled labor pool, and market access attracted an ever-increasing number of firms to locate within this region. Nadvi and Haider (2002) trace the historic roots of Sialkot's surgical instruments cluster to sword and dagger manufacturing in the seventeenth century and the Tuttlingen cluster to knife forging industry in the late nineteenth century. Saxenian (1994) traces the origins of the high-tech clusters in Silicon Valley and Boston's Route 128 to Stanford University and MIT respectively. A review of the cluster literature indicates that government policy can play an important role in the development of clusters, and can also play a role in transfer of technology among clusters. Institutional supports for training, financing, and maintenance of new technologies can help reduce the risk of adopting new technologies (Schmitz, 1995a; b). Krugman (1991) suggests that local chambers of commerce and city councils can attract foot-loose firms to become self-sustaining once a critical mass has been attracted. On the other hand, incorrect regional policies, often designed to help distressed areas, often end up fragmenting scarce human and capital resources, thereby damaging cluster development (Pouder & St. John, 1996). Cluster Characteristics Agglomeration economies, also referred to as increasing retums to scale, are fundamental to the emergence and existence of clusters. Marshall (1920) describes agglomeration economies in terms of advantages arising from the concentration of many small businesses of similar character in particular localities. Schmitz (1995b) differentiates between economies arising from unplanned activities due to simply being located in the cluster, versus planned activities such as joint actions by cluster firms through industry associations. 223


The notion of agglomeration economies can be illustrated using the example of Sialkot surgical instruments (Nadvi & Haider, 2002). The Sialkot cluster includes some 300 final manufacturers who extensively utilize the services of another 1500 specialized subcontractors. The vast majority (98 percent) of these subcontractors are small, having less than 20 employees, and specialize in processes such as forging and die-making (200 firms), polishing (350 firms), and electroplating (70 firms). As an example of unplanned agglomeration economy, a new entrant specializing in electroplating would immediately increase the options available to all firms needing this process for their final product, and at the same time the cluster provides a ready-made customer base to the new entrant. Furthermore this firm also has ready-access to other specialized inputs available in the cluster such as trained manpower and raw material suppliers (210 firms). Final manufacturers also benefit from access to other support services such as cargo handling agents (100 firms), insurance and legal services (230 firms) and equipment repair support (300 firms). Firms in the Sialkot cluster also benefit from planned agglomeration economies such as the dry port, set up and are operated jointly by multiple industry associations. Krugman (1991) refers to three key characteristics of clusters: a specialized labor pool, specialized input suppliers, and technological spillovers. Developing countries lack the institutional arrangements for contract enforcement, which is necessary for subcontracting. In such situations trust, as a substitute for contract enforcement, becomes a fourth key characteristic of clusters. In the Sialkot cluster for instance, where legal enforcement mechanisms are weak, trust based primarily on kinships and long-term linkages (on average 12 years), is necessary to sustain the high level of interdependence and collaboration between firms. As noted, the existence of a large pool of individuals with specialized skills is a core aspect of clusters. Not only do cluster firms benefit from reduced search and hiring costs, but also the requisite quality skill set is easily available. Individuals with the necessary skills are attracted to the cluster in order to benefit from the abundance of employment opportunities and the reduced risk of re-location in the event of a job change. It is thus no surprise that both IT professionals and IT firms prefer to locate in Silicon Valley, while finance professionals and financial firms locate in London and New York. Another characteristic of clusters is the existence of firms providing specialized inputs. Cluster firms tend to be specialized, thereby gaining from scale economies and yet remaining small enough so as not to be burdened by the excessive overheads usually associated with large vertically integrated firms. Cluster firms thus benefit from their access to the high levels of productivity and responsiveness of other specialized firms, and also from reduced inventory levels, and transportation costs. The Italian leather fashion cluster for instance includes specialized suppliers of footwear components, machinery, molds, design services, and tanned leather (Porter, 1998). The cluster also benefits from chains of other related 224

Clusters and Entrepreneurship industries such as the extensive textile fashion cluster and specialized equipment suppliers (tanning equipment, footwear CAD systems, and machine tools). A further characteristic of clusters is the existence of trust and the related concept of social capital (Bazan & Schmitz 1997). Granovetter (1985) suggests that economic activity must be considered in terms of the social structure in which such activity is embedded. He describes how deals in valuable diamonds are sealed by a handshake on the diamond exchange. This is possible because the transaction is embedded in a close-knit community of diamond merchants who have developed high levels of trust over time. Nahapiet and Ghoshal (1998:243) define social capital as the "sum of the actual and potential resources embedded within, and available through, and derived from the network of relationships possessed by an individual or social unit." Rousseau et. al. (1998) identify consequences of trust to include reduction of harmful confiict, decrease in transaction costs, and promotion of effective responses to crises. Adler and Kwon (2002) summarize a series of studies indicating how social capital facilitates resource exchange between firms, product innovation, entrepreneurship, creation of intellectual capital, supplier relationships, and regional production networks (clusters). Fukuyama (1995) suggests that tmst can play an important role in reducing transaction costs and thus supplementing property rights, contracts, and commercial law which are all indispensable for establishing modem market-oriented systems. He further points out that networks of firms can save on transaction costs substantially if their members follow an informal set of mles that require little or no overhead to negotiate and enforce. When tmst breaks down, unwritten rules must be codified and third parties brought in to resolve differences. Developing countries lack formal institutions for contract enforcement, thereby increasing the risks of doing business and limiting market opportunities (World Development Report, 2002). Tmst among closely-knit networked firms, substitutes to a certain extent, for this deficiency. The Maghrebi traders of eleventh century North Africa set up major trading centers across several continents despite the lack of formal regulations, in part due to the high level of tmst within the network (Grief, 1993). Schmitz (1995a) attributes much ofthe early collective actions and success of the shoe cluster in the Sinos Valley in Brazil to the shared socio-cultural identity (mostly of German origin) and the resulting high levels of tmst.

Innovation and Technological Spillovers Clusters can produce high levels of technological spillovers and innovation (Kmgman, 1991). This is primarily due to proximity since information flows are easier locally than over distances. Cluster characteristics described above all play a role in encouraging technological innovation within clusters. The high tmst environment and easy access to specialized suppliers increases the number of transactions, which results in increased exchange of technical know-how between cluster firms. Porter (1998) identifies factors that lead to innovation in clusters. These include the 225


existence of sophisticated buyers in the cluster who become a source of valuable information on emerging technologies and markets. Cluster firms through their access to the wide range of specialized suppliers have high levels of fiexibility and are able to implement innovations more rapidly. Firms can experiment at lower costs and can delay investments until the market potential of the innovation is proven. Finally, high levels of competition and peer pressure within the cluster act as an important stimulus for innovation. Nahapiet and Ghoshal (1998) discuss how networks with high levels of social capital encourage firms to combine and exchange knowledge. This reduces the amount of time and investment required to gather information. Kmgman (1991:12) describes how in clusters "the mysteries of the trade become no mystery; but are as it were in the air . . . Inventions and improvement in machinery, in processes and the general organization of businesses have their merits promptly discussed: if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas". Saxenian (1994) describes how the high tmst environment in Silicon Valley resulted in the development of a technical community, which accelerated the diffusion of technological capabilities and know-how within the region. Kmgman (1991) notes that while much of the evidence for technological spillovers are reported for high-tech clusters, such spillovers occur equally in low tech clusters such as the carpet cluster in Dalton, Georgia. Pouder and St. John (1996) suggest that while clusters play an increasingly important role in technological innovation, under certain conditions the opposite may be tme. They develop a framework linking resource conditions, institutional processes and management's mental models to enhanced competitive behavior and innovation. They conclude that while initially clusters encourage innovative behavior, over time cluster firms might actually start experiencing resource diseconomies and insular competitive practices, which eventually may discourage innovation. Based on this literature foundation, a framework for examining technological innovation in clusters is presented in Figure 1. The basic elements and key propositions are as follows: 1. The key dependent variable is technological innovation, which is a central aspect of entrepreneurial activity. 2. Clusters facilitate innovation by: a. Reducing the risk of failure of the entrepreneur (small firm), since other specialized suppliers in the cluster assume part of the risk of innovations. b. Rapid exchange of technological information through proximity, tmst together with rivalry, and extensive outsourcing arrangements. 3. The rapid exchange of technological information ensures that innovations in individual firms upgrade the overall cluster. 226

Clusters and Entrepreneurship Figure 1 Determinants of Technological Innovation in Clusters

Cluster is upgraded through imitation by other firms

Entrepreneur's Initiatives — ^


Technoiogical Innovation


1 Cluster facilitates innovation



1 Government facilitates ciuster development


4. Govemment policies can facilitate, and at times hinder, the development of well-functioning clusters.

Case Study of the Faisalabad Textile Cluster This section describes the evolution of the textile cluster in Faisalabad, and its characteristics in terms of specialized labor, suppliers, and trust. It includes a case study of technological innovation. Table 1 provides a summary profile of the Faisalabad Textile Cluster. The Textile Industry About 10 percent of the world cotton crop is produced in Pakistan, making it the fourth largest producer in the world. The textile industry currently accounts for "almost 65% of Pakistan's exports, 20% of value-added production and employs 40% of manufacturing labor. The textile industry is concentrated in the provinces of Sindh and Punjab, with Karachi and Faisalabad being the hubs of textile activity in these provinces respectively. In the past ten years, growth in the number of small firms entering the Faisalabad textile industry has been dramatic, particularly in weaving. In this sector, small firms typically own I to 20 shuttle-less looms, medium firms up to 50, and large firms over 50. 227


Table 1: Summary Profile ofthe Faisalabad Textile Cluster

Textile Sub-Categories

Number of Firms

1. Cotton ginning and pressing


2. Cotton waste processing


3. Doubling of yam


4. Embroidery


5. Hosiery products


6. Ready-made garments


7. Sizing of yam


8. Textile machinery parts and service 9. Textile processing (printing, dyeing & finishing) 10. Textile spinning

79 212 106

11. Textile weaving (large scale sector)


12. Textile weaving (small scale sector)


Source: Directory of Industrial Establishments Punjab 2002, published by Directorate of Industries Govemment of Punjab, Lahore. ' Note: As this directory is published by the Government of Punjab, these figures subsequently under report small-scale entrepreneurs who prefer not to be recognized by government departments for tax purposes.

The textile industry consists of a chain of vertically linked sub-industries oi* production processes: ginning, spinning, sizing, weaving (or knitting), finishing (including dyeing, and printing), embroidery, cutting, and stitching. The finished product of each process can be exported or consumed as an input to the next process. Raw cotton has to be ginned to clean and prepare it for the production of yam. This yam may be knitted to make knit-fabric or starched to enhance its strength and then be woven, to make cloth, known as greige fabric, which is the 228

Clusters and Entrepreneurship simplest unprocessed form of any fabric. This greige fabric can then be dyed, printed or even embroidered. Processed fabric can then be cut and stitched into garments, linen, and made-ups and packaged for selling in local or export markets. AU of these inter-linked firms, together with a number of support institutions, are located in Faisalabad, and hence qualify as a textile cluster. The cluster consists of a vertically integrated chain of textile activities. At the core of this cluster is the weaving industry. Weaving produces the first meaningful value addition to the cotton based production, by transforming yam into woven fabric. Upstream firms produce fabric and downstream firms finish and process this fabric. Hence, the sizable concentration of fabric producing weaving units justifies the growth of both upstream and downstream business activities. Ail members of this cluster surrounding the weaving industry are competitive in their own fields and may even be small clusters within themselves. These clusters consist of the sizing cluster, the yam cluster, the exporter cluster, the finishing (dyeing and printing) cluster, the embroidery cluster, and the cutting and stitching cluster. Weaving is a manufacturing process, the quality of which is largely dependent on the technology of the loom. Three main technologies exist in the weaving sector of Faisalabad; power looms, automatic looms and shuttle-less looms. Automatic looms, which were an improved version of power looms, became obsolete with the entry of the shuttle-less looms. Productivity of shuttle-less looms is about six times that of power looms. Within the shuttle-less looms there are many varieties, the most used being those produced by Sulzer Ruti, of the projectile technology. Initially this technology was adopted by textile units in developed countries, and gradually is being replaced by the newer air-jet looms which represent the latest shuttle-less technology. In Pakistan, several large textile units have been early adopters of air-jet looms. (Qureshi & Diwan, 1989) Over the past three decades the weaving capacity of large textile units has decreased while the number of looms in the small sector has increased. The small-scale producers were encouraged by the regulatory laws of Pakistan, as there was no excise tax on units with less than four looms. Having no labor unions they managed to avoid the stringent labor laws and consequently had access to cheaper manpower. Lower fixed costs also contributed to their profitability. Due to their small size they were more flexible in operations and adaptable to changing trends. The overhead costs of operating a smaller unit, with fewer administrative, security and maintenance staff, were much lower. Hence, it made more financial sense to operate shuttle-less looms in a small set-up, rather than huge textile units that required a larger workforce for peripheral jobs. To control cost and quality, some large weavers changed their production plant organization by separating 40 looms in five sheds instead of all 200 looms under a single roof. The small-scale sector was mainly using inexpensive locally manufactured power looms and producing inferior and inconsistent quality fabric. At the beginning, the large textile units also used the power looms, but they later shifted to the automatic looms that had higher productivity and were approximately twice as 229


expensive. However, these looms became obsolete very quickly as their production quality was not significantly better than the power looms. The larger weaving units catering to the export and upper end of the domestic market could not afford to have low quality production. Thus, they were the first to install the imported shuttle-less looms. They also had the financial capacity to bear the cost of foreign technical support staff and technical plant managers. Characteristies of the Textile Cluster The weaving sector of the Faisalabad textile industry is surrounded by a number of supplier industries, upstream and downstream industries and related businesses. Major suppliers to a weaving unit are sizing units, machinery suppliers and the spinning mills or yam market. Supporting businesses include spare parts and maintenance service providers. Similar to weaving is the business of knitwear units, which produces knitted fabric that is thicker and has a different constmction than woven fabric. Downstream activities include dyeing, printing and stitching units. A very important and related activity is the commercial export business. Govemment support in terms of a dry port, technical training and educational institutions are also present. In the early part of the twentieth century, Faisalabad emerged as an intensive cotton growing area due to the then recently built canal network. Over time, as the surrounding farm areas of Faisalabad became saline, cotton-growing areas moved further south. However the size of the yam market in Faisalabad attracted yam producers and sellers from all over Pakistan, thus providing buyers with a wide variety of yam. The fact that a natural resource was no longer abundantly available was countered by the creation of the strongest and most competitive yam market in the country. The large number and variety of spinning mills producing yam lowered costs for both large and small weavers. Of the approximately 500 spinning mills in Pakistan, more than 100 are located in and around Faisalabad. The yam market in Faisalabad consists of more than 400 shops, all located on a single street. Yam from all over Pakistan is available in this market. The yam market also provides credit facilities based on tmst and credibility. This makes it easier for small weavers to delay large payments. Sixty percent of the buyers in the yam market are predominantly exporters, while the rest are local weavers producing fabric mostly for the local market. Almost all kinds of yam can be used on any kind of loom. Prices of similar yam varieties vary depending on cotton quality, spinning technology, percentage polyester mix and yam quality. Weaving requires yam to be sized before the process can begin. Sizing consists of two processes. First, warping: shifting yam from small cones to a large cylindrical beam. Second, sizing: taking all threads wound on the beams and stretching them, passing them through hot starch; drying them with steamers and hot air blowers; and finally winding them again onto a larger beam which could be inserted in a loom for weaving. There are many sizing units in Faisalabad; some are 230

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owned by large weavers and others are stand-alone units of different sizes, catering to large and small weaving units. The most important machinery in a weaving unit is the loom. Apart from power and automatic looms, which are also manufactured locally, though of mediocre quality, all other kinds of shuttle-less and air jet looms are imported. The only kind of collaboration that the weaving units had with these foreign equipment manufacturers was for .purposes of machinery installation, training, and maintenance, which were all very costly services. A very important supporting business is that of the spare parts and maintenance contractors. The large textile units were very stringent about quality so they imported all the parts and paid the maintenance team of the foreign manufacturer to provide adequate service. As shuttle-less looms entered the small sector of the weaving industry, cost became a major concem. The small weavers were forced to rely on local rather than expensive foreign parts and expertise. Local technicians, some of whom had been trained by the foreign training teams at large textile units, had now started the maintenance contracting business. With the encouragement of the small sector, they also started producing the parts locally. This collaboration has been very important in the process of technological progress, as the weavers were moving from simple technology acquisition to technology adaptation and absorption, and almost emulation. Since these contractors are located very close to the weaving units, service is timely and cost efficient. The weaving units function 24 hours a day with three 8-hour shifts, and may require technical assistance at all times, hence the maintenance and spare parts shops are also accessible 24 hours a day. Maintenance contractors in Faisalabad compete fiercely with each other, but have yet to develop intemational competitiveness. There is a concentration of dyeing and printing units of all sizes on the outskirts of Faisalabad. They use both local and imported chemicals and dyes, depending on the demand set by the exporter or the stitching units. They are fairly competitive and provide high quality finishing. However to cut costs for local demand, they do not maintain strict quality standards. Basically they can cater to a multitude of quality standards. Recently some of these companies have also gone through major machinery upgrade to be more competitive intemationally. There are many cutting and stitching units in Faisalabad, which have installed a variety of the latest sewing machines. They cater both to the local and export markets but mainly the latter therefore their quality of work is internationally competitive. A related business that holds key significance to the weaving industry is that of the exporters. Almost 90% of the work done by the weavers is 'conversion'. Conversion refers to weaving fabric out of yam provided by an exporter to certain specifications, provided by the foreign buyer. There are approximately 700 fabric exporters in Faisalabad of which one-half are purely commercial exporters and one-half are composite exporters (which also have some in-house manufacturing). Currently most exporters have given conversion work to weavers of whom 70% 231


have shuttle-less looms and 30% have power and auto-looms. Exporters buy yarn from the yam market, transfer it to their warehouse, and then send it out for weaving. The weavers are responsible for getting the yam, having it sized, and then delivering the fabric back to the exporter warehouse for quality checks. The exporter may send this fabric for dyeing and printing and then cutting and stitching or may export it as greige fabric. The exporters prefer the small weavers to larger firms, since this provides greater flexibility and bargaining power to ensure delivery schedules and product quality. The exporter breaks the order into small portions, which are then outsourced to various weavers. Exporters work closely with the weavers to minimize variations in the production of greige fabric from one weaver to another. These export houses have flat management stmctures with family members heading the various departments of purchase, general management, marketing and finance. Transportation of yam to the sizing units is done mostly on donkey carts. The sizing units produce starched yam that is loaded onto a beam for installation onto a loom for weaving. Donkey carts also transport sized yam to the weavers and finished fabric from weavers to finishing processors. It is the most suited form of transport as most inter-linked units are situated very close together and are linked with narrow brick-and-mud streets where other modes of transport do not function. The greatest benefit of donkey carts is their low transportation cost for small weavers, which helps make them cost competitive. For bulk intercity transport, the national highway links Faisalabad to the country. Another investment in the textile industry infrastmcture was the establishment of a dry port in Faisalabad, which makes transportation and export convenient. Earlier, freight had to be packed in Faisalabad, taken to Karachi port, opened and rechecked, and then forwarded to the country of export. This extra process was eliminated with the establishment of the local dry port. Public sector investment was made in training workers through foreign technical support staff. A textile engineering college was set up in Faisalabad to provide trained personnel for the textile industry. The presence of the University of Agriculture, with many departments focusing on cotton crop and fiber varieties, also provided valuable know-how and trained manpower. These factors complemented the abundant supply of unskilled labor at lower salaries available in Faisalabad, the third most populous city in the country. Almost all firms in the weaving industry are family-owned businesses. While a majority of them are small, a significant number are large. The management stmcture in the small sector is simple with very little hierarchy. The owners are the key personnel in their firms and keep a vigilant eye on their business. Delegation of work and autonomy is practiced only with family members. All this contributes to the family atmosphere in the organization, close ties with workers, better control of costs, and better monitoring of quality. In the large weaving units there is a certain level of hierarchy with specialized functional departments and a large number of workers and peripheral crew consisting of janitors, gardeners, helpers, 232

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security guards, administrative and accounting staff. This increases their costs of operating, thereby making the small firm model more profitable. This organizational structure is suited to Pakistan's culture where family ties are considered important. Rivalry among weaving firms in the cluster is intense. Price competition and employee poaching is rampant. A few family groups, particularly the 'Chinioti Sheikhs', dominate the textile industry of Faisalabad. Most of them are related to each other and take competition very seriously, both at the firm and at the personal level. Owners exhibit great pride at social gatherings in boasting about their success stories. While creating jealousy, this also creates a will to improve, and encourages entrepreneurial and innovative activity. Technologieal Innovation in the Textile Cluster The success of the Faisalabad weaving cluster is dependent on the multitude of small-scale players and all the strong linkages they have with their specialized suppliers, upstream and downstream industries. The collaboration between these industries, the tmst in financial transactions, the flexibility to experiment together, the local competition driven by strong rivalry, the cost-effective business and infrastructure environment, all make the cluster a center for innovative activity. Most of the supporting and related businesses have fairly high standards and competitive intemationally. They work closely with weavers to deliver quality at a reasonable cost and end up exchanging new technology information and knowledge, which is beneficial to all members of the textile industry. If one of these related industries improves or innovates, they demand the same from their upstream businesses, thus making the whole Faisalabad textile cluster a dynamic place for innovation and growth. Demand from foreign markets and consumers led the pace of progress and competitiveness in the Faisalabad weaving sector. As it became more costly for foreign producers from advanced economies to produce textiles economically, the fashion and apparel industry tumed to Asian producers. Foreign buyers even provided guidance on technology and production methods. Hence entrepreneurial, export-oriented firms in the weaving sector started making investments to upgrade weaving technology to shuttle-less looms and initiated the process of innovation. Since this was a capital-intensive process, the larger weaving units were the first to undergo this change. The apparent success of larger units with shuttle-less looms encouraged a moderate trend of acquiring similar looms, by the small sector. Another effect of export orientation was the emergence of commercial exporters. They would make contact with foreign buyers, get product specifications from them, and have the required fabric produced locally. As the large weaving units were composite manufacturers and exporters of their own production, the commercial exporters had to approach small weaving units to fill their orders. Since quality was important, exporters worked closely with small weavers to meet the required intemational standards. This partnership of small weavers and export233


ers was mutually beneficial and encouraged investment by weavers in better technology. Demand in the domestic market was initially not sophisticated and the majority of consumers were price rather than quality conscious. However over time, consumers became aware of styles, brands and quality of fabric, creating a significant segment of sophisticated and demanding local buyers. Some weaving-exporters opened discount shops to sell their excess or slightly damaged production in the local market. Faisalabad has a market of over a hundred such shops concentrated in the "Factory Area." Usually the fabric sold there is better than the expensive imported and smuggled fabrics available at the retail outlets, and definitely better than the inferior production for the local market. All these factors led to the creation of a profitable local niche market for good quality fabric, made on modem looms. Large weaving units concentrating on large orders from foreign buyers had to innovate to be competitive intemationally. However, it was through the sophisticated local buyers and commercial exporters served by small sized units that this innovation spread across the whole Faisalabad weaving industry. Once the potential for exports and local sales became apparent, investment in the textile industry, especially in the weaving sector increased. A slow and steady shift from labor intensive to capital-intensive methods of weaving was made. Entrepreneurs made a habit of regularly visiting textile machinery and product trade shows in Europe to improve their knowledge of modem products and production methods. The local Chamber of Commerce and Industry and other textile-related associations, encouraged this activity by inviting delegations of foreign entrepreneurs and by making visa processing easier by issuing support letters. This constant information flow and link with advanced countries benefited not only the large firms, but also indirectly helped the small weavers. It was in the early 1980s that a few large weaving units in Karachi imported shuttle-less looms from abroad. With this switch to shuttle-less looms, the quality of the fabric improved tremendously. These looms had pick finders (to stop the process in case even one single pick was missed), left no oil stains, and produced tuck-in selvage. Tuck-in selvage refers to the close-ended edges of the roll of fabric. Power and auto looms usually had an open selvage. Shuttle-less looms could also produce a larger variety of fabric constmctions of variable widths. The major problem faced by these firms was the shortage of technical personnel to operate and maintain these looms and the availability of spare parts. This shortage was overcome by hiring technical personnel from Faisalabad with expertise in the powerloom technology. Note that Faisalabad had always been a significant source of labor and technical personnel for the large textile units in Karachi. Foreign trainers hired by the large textile units at considerable expense trained these personnel. Firms also had to maintain a large stock of imported spare parts. While expensive, this effort was necessary for the introduction of the new technology. During the past decade more large firms in Faisalabad acquired shuttle-less looms to stay competitive with their Karachi counterparts. The demand for trained 234

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staff to repair and manage these shuttle-less looms led to higher salaries for skilled workers. This resulted in the movement of trained personnel and weaving masters from Karachi to Faisalabad. When the Faisalabad industry developed, these workers had a strong incentive to retum and live close to their relatives. The crime situation in Karachi was also a factor in this movement of skilled labor to Faisalabad. Unlike these large firms, small firms in Faisalabad could not afford to simply acquire and install new technology and also finance its foreign maintenance. They had to develop local collaborations with upstream and downstream industries as well as various supporting businesses and institutions, to decrease the cost of operating new technology. Some of these workers had been repairing machine parts for the shuttle-less looms of large weavers in Karachi. After retuming to Faisalabad they started their own shuttle-less loom contract repair workshops. This resulted in about sixty such workshops on a single road in Faisalabad, next to the highest concentration of small weaving units using shuttle-less looms in the area. There is a high level of collaboration between the small weaving units and contractors who provide comprehensive 24-hour maintenance support including parts and repair work. Usually after a used shuttle-less loom has been bought, it is opened and refurbished at the weaving unit site. Defective parts are either replaced or repaired. Encouraged by cost-conscious small weaving units these workshops also started molding simple replacement parts, which were previously being imported. These locally manufactured spare parts were inferior in quality and would last only a year, while foreign ones would last for five years, but the cost differential was high enough to make local parts economically feasible. While this decreased the cost of spare parts for these units, it also spurred a new activity in the Faisalabad region. These cheap local replacement parts did not affect the quality of fabric produced on the shuttle-less looms, which was of key importance to export-oriented weavers. Adoption of more productive air-jet looms by large textile units in Karachi and Faisalabad, resulted in used shuttle-less looms being sold at rates much cheaper than the new looms. In addition the complete technological shift to the new air-jet technology in developed countries resulted in a large pool of inexpensive used shuttle-less looms. This made shuttle-less technology affordable for the small weavers in Faisalabad. The barriers to entry for the small weavers were also lowered as trained weaving masters and loom operators were abundantly available locally. Since their skill was of diminished value in the Karachi market due to the technological shift there, they were ready to work for lower salaries in Faisalabad. Table 2 shows number of shuttle-less looms installed in the small-scale weaving sector in Faisalabad.

Conclusions The basic assertion of this article is that clusters play a key role in facilitating entrepreneurship and technological innovation by reducing the risks of failure and 235


Table 2: Shuttle-Less Looms Installed in the Small-Seale Weaving Seetor in Faisalabad


Number of Shuttle-Less Looms





Source: Small and Medium Enterprise Development Authority, Pakistan.

encouraging the diffusion of new technologies. Specialized suppliers in the cluster assume part of the risk of innovation. New technologies are diffused throughout the cluster, encouraged by close proximity, trust together with rivalry, and extensive outsourcing arrangements. An area for future research is to examine entrepreneurship and the process of technological innovation in other clusters and in different contexts. The findings of the case study support the framework presented in Figure 1. The Faisalabad textile cluster did facilitate the up grading of weaving technology as follows: 1. During the early nineties, small firms in the Faisalabad textile cluster replaced the older power loom technology with shuttle-less looms. 2. The existence of specialized firms in the cluster made it feasible for entrepreneurs to establish small firms. For instance the typical weaving firm, with only 3-4 looms, was able to thrive by outsourcing upstream and downstream processes to efficient specialized suppliers. 3. Specialized maintenance contractors played a key role in facilitating the introduction of the new weaving technology. These contractors helped reduce the risk of failure by the weaving entrepreneur. For instance, they assumed a part of the technological risk by providing guaranteed 24-hour maintenance support. 4. These maintenance contractors also played a key role in diffusing the technology throughout the cluster, by encouraging entrepreneurs to adopt the new technology and by sharing best practices. 5. Govemment policy seemed to play a minimal role in the diffusion of this particular technological innovation. However, govemmental policy assisted the cluster by establishing the Faisalabad dry port, supporting educational institutions, and encouraging private initiatives for setting up training and educational institutions. 236

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2004_cluster, innovation and entrepreneurship  

Clusters and Entrepreneurship: Implications for Innovation in a Developing Economy Jamshed H. Khan and Jawaid A. Ghani

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