Clusters and Competitiveness: Issues in Context of Emerging Industries in India K. Momaya1 and Jyoti S.A. Bhat2 Abstract Clusters are geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries and associated institutions that compete but also cooperate. Quality clusters can play a crucial role in enhancing competitiveness. The importance of clusters in the context of emerging industries is likely to be several orders higher. While the concept of “clusters for competitiveness” is quite well received and experimented in a number of developed regions, in India it is often used in the context of traditional industries. Even business practices of successful Indian exporters have been examined, but the context of emerging knowledgebased industries has not been researched adequately. The paper will discuss findings in an attempt to examine the role of clusters in the context of emerging industries. Efforts will be focused on defining the terms in the relevant context based on secondary data and on evolving and prioritizing key issues. Keywords: competitiveness, emerging industry, clusters, software, nanotech, biotech, innovation, ventures Introduction It has been acknowledged that the convergence of technologies, being introduced and integrated in specific world regions provide opportunities for generating regional wealth. Clusters of emerging industries in locations such as Route 128 in the New England region and in Silicon Valley along the west coast of the USA have been crucial in enhancing the competitive capability of USA. Similar clusters exist in many parts of the world in countries such as Germany and Japan, and even in India. For instance, rapid competitiveness enhancement in some parts of India has been partly attributed to the rapid formation of dynamic clusters in emerging industries such as software. Slow competitiveness journey of firms, industries in India and the country hints at considerable scope for improvement on many fronts including emerging industries. Glimpse of trends in relative country rankings of India and select countries (Table 1) hints at the slow competitiveness improvement at the country level and similar situation 1
Associate Professor of Competitiveness, Department of Management Studies, IIT Delhi, New Delhi110016 Email:
[email protected] Phone: 011-2685 5298 2 Advisor (Scientist-G), Department of Scientific and Industrial Research, Technology Bhavan, New Meharauli Road, New Delhi-110016 Email:
[email protected] Note: The views expressed in the article are those of the authors and not necessarily of the organizations where authors work.
Momaya K. and Bhat J. S. A., 2006, "Clusters and Competitiveness: Issues in Context of Emerging Industries in India", Management and Change, Vol. 10, No. 1, pp. 11-32. 1
at the industry and firm levels. Classical debates on new international economic order and fears of observers in the advanced nations about adverse impact of globalization on their competitiveness as articulated in papers such as “Globalization and the inequality of nations (Krugman and Venables, 1995)” do not appear much true. Even after a decade of globalization, India’s competitiveness ranks have hardly improved. In fact, emerging scenario in domestic ICT industry hints that Indian firms are losing out to global players in software services also; we are not talking about many other important sub-segments such as telecom and IT hardware or information. While primary or secondary industries such as agriculture, manufacturing, wholesale and retail, tourism do and can contribute more to GNP and some still have quite high potential for employment generation, large country such as India also need to nurture emerging industries to become a developed country. Table 1: Country’s Performance Rank on Select Criteria (WCY Ranking) Country 2002 USA Singapore Canada Australia Japan Korea Malaysia China India
Year 2001
1 5 8 14 30 27 26 31 42 (Source: WCY, 2002)
2000 1 2 9 11 26 28 29 33 41
1 2 8 10 24 28 27 30 39
Viewing various factors important for competitiveness: it is seen that competition is becoming more complex, can evolve on multiple fronts and demands competitiveness in a holistic sense if a firm, an organization or an industry has to make a lasting contribution. Competitive firms that qualify for higher stages of competitiveness (Momaya, 2001) such as globally competitive or world-class, last for decades, if not centuries, and make lasting contributions to their various stakeholders, including country and global society. Interesting empirical perspectives on such companies are given by researchers (Jain, 2004; Collins and Porras, 1994; Collins, 2003). The building of such lasting organizations or institutions demands competencies on multiple facets. Many view competition only in terms of the effect on the resulting end products or services, but competition is also necessary for creating a culture of knowledge sharing in respect of talent, core products and capabilities. New thinking such as one articulated by leading management researchers such as Drucker, Porter, Hamel and Prahalad, Nonaka may provide new insights for competitiveness. Prof. Drucker has emphasized the role of knowledge, innovation and entrepreneurship for competitiveness. Prof. Prahalad has emphasized on co-creation and Momaya K. and Bhat J. S. A., 2006, "Clusters and Competitiveness: Issues in Context of Emerging Industries in India", Management and Change, Vol. 10, No. 1, pp. 11-32. 2
the need to focus on the fortune at the bottom of the pyramid (BOP) (Prahalad, 2005). Focusing on what works at grassroots, he concluded that the BOP consumers accept advanced technology readily. Advanced technology solutions must coexist with poor and indifferent electrical and telecom infrastructures. Learning from his bold experiments in attempt to transform the R&D systems in the country, Dr. Mashelkar has challenged many for “Learning to Dare”, promote technological leadership. New Millennium Indian Technology Leadership (NMITL) Initiative launched in the first year of millennium has encouraged breakthrough research in emerging industries such as displays and bioinformatics. Technology-driven emerging industries can play critical role in scale-up of competitiveness for India, if pragmatic strategies are implemented effectively. Competitiveness comes through technology, whether it is quality or costs (Ramamurthy, 2003). Emerging industries are often carefully identified, nurtured and globalized by many developed countries. They are often the drivers or enablers of new economy such as knowledge-based economy. Insightful comparison of differences between new and old economy on important characteristics has been provided by Jain (2004). For instance, Australia has focus on emerging industries and research was undertaken to examine critical issues such as technology, entrepreneurship, distributed expert business services and clusters. While many Indian firms serve companies in the West's knowledge-based industries, such as software, IT services, and pharmaceuticals, they can also contribute to development of emerging industry clusters in home market also. Attempts are made in this paper to evolve the context and key issues for competitiveness of emerging industry. The motivation of this exploratory paper is to provoke thinking by raising questions and issues. The issues are evolved after examining Indian context in light of perspectives from USA and Japan and classified for easy reference. Definitions of key terms are given in Annexure I. Relationship between clusters and competitiveness is discussed below by review of perspectives on subject in context of the USA and Japan Clusters and Competitiveness Clusters are very important for competitiveness and many countries incorporate several measures in their strategy in view of the specific need to nurture identified clusters. The cluster concept represents a new way of thinking about national, state and city economies and points to new roles for companies, governments and institutions striving to enhance competitiveness (Porter, 1998). Knowledge about cluster theory has advanced and a growing number of formal cluster initiatives at regional, country, state or even city level are being implemented in several countries. The USA has some of the most dynamic clusters in emerging industries, and other countries are also catching up. Industrial clusters are considered to be an important tool for strengthening the competitiveness of local industries. Europe has very aggressive plans and continuous benchmarking is done at multiple levels to identify gaps and bridge Momaya K. and Bhat J. S. A., 2006, "Clusters and Competitiveness: Issues in Context of Emerging Industries in India", Management and Change, Vol. 10, No. 1, pp. 11-32. 3
them. Our recent research in Japan indicated that the concept of industrial cluster is quite systematically used to enhance competitiveness of local regions. It has been decided to focus on two major country contexts, Japan and the USA to get a balanced perspective. Never the less, efforts have been made to leverage familiarity of the authors to these two country contexts due to years of research and recent visits. Being a first paper in this complex subject, the scope of the paper is rather limited to review perspectives and evolve important issues. Perspectives from the USA It has time and again been suggested that technological innovation has always been developed in regions that shared similar characteristics. It has been suggested that these regions are characterized not by an abundance of fixed resources but by a set of developed social and cultural structures that are favorable to conceptual advances (Peter Hall, Cities and Civilization, Fromm International, New York, NY, 2001). In the United States, research carried out to understand the forces that contribute to clustering or agglomeration of innovative activity and affect the growth potential of the firms and cities demonstrates the importance of knowledge spill-overs. Technology development efforts have been known to flourish in specific locations and some of the major reasons attributed to such clustering are proximity to research expertise, venture capital financial support and ease of information sourcing (Bhat, 2003a). The importance of industry life-cycles (Duranton and Puga, 2001), composition of activities within a cluster (Glaeser et al. 1992; Hendersen et al. 1995) and the effect of the existing industrial structure (Klepper, 2001) have in addition been identified as other important factors. It has been thought that emerging technology based firms, in their early years invariably grow up around university star scientists who license innovations to companies. Hence, examples of innovative start up ventures in Route 128 and Silicon Valley abound. There has been substantial increase in university patenting, especially since the passage of the Bayh-Dole Act in 1980. This has been well documented and Fig 1 indicates total patents assigned to several research universities from 1983 to 1997. A study of existing literature indicates that at the aggregate level, these numbers are consistent with a substantial increase in patenting as a mechanism of university knowledge transfer. For example, while there were only 26 patents assigned to MIT in 1983, there were 130 in 1997, a 400 percent increase.
Momaya K. and Bhat J. S. A., 2006, "Clusters and Competitiveness: Issues in Context of Emerging Industries in India", Management and Change, Vol. 10, No. 1, pp. 11-32. 4
Source: Cockburn, I. and R. Henderson (1998)
Many interesting observations have been indicated in a recent study (Feldman, 2002) of the US biotech industry that suggests how regional specialization is determined and how it affects firm survival in emerging industry sectors. It emerges that existing firms may serve as anchors that establish skilled labour pools, specialized intermediate industries and provide knowledge inputs for new technology intensive firms in a region. The established firm may provide expertise and knowledge about specific applications, product markets, and technical development trajectories that move generic scientific innovations in a particular direction, which over time may distinguish the specialization of the industrial cluster. Silicon Valley: Specific Lessons A region that has captured the imagination of the world in respect of successful clusters is Silicon Valley in California, USA. The region has weathered several economic meltdowns and has proved to be highly resilient and continuously capable of technological innovation. The region combines all the elements representative of emerging regional networks. It has a world class institution, a high concentration of venture capital and risk management, an entrepreneurial spirit, highly skilled immigrants, and companies and linking associations that support each other in a regional network. Important perspectives can be gained from a study of this region that are unique and very note worthy. The region also has industry clusters of inter dependent firms that can cross pollinate projects, people and ideas. This enables people to move from project to project, company to company or venture to venture with ease and continue to have gainful employment. Another important indicator for regional wealth creation is its value added Momaya K. and Bhat J. S. A., 2006, "Clusters and Competitiveness: Issues in Context of Emerging Industries in India", Management and Change, Vol. 10, No. 1, pp. 11-32. 5
or productivity per employee. In the year 2000, individual productivity increased by 7 % to $127,100 average per employee compared with the US average of $60,800. The extraordinary productivity is attributable to the integration of technology in the work place as well as to the long hours of work put in by the employees. Fig 1 illustrates the extraordinary premium paid to knowledge workers in the Valley as compared to salaries in the rest of the US. It can be seen the Valley’s average wage is 84 percent above the national average.
Figure 2: Average Wage per Employee in the US 1992-2000 70 60 50
Amount in ‘000 US $ 40
30 20 10 0 1992
1994 Silicon Valley
1996
1998
2000
Rest of US
The major industry clusters in the Valley are: Computers/communications; semiconductors/semiconductor equipment; software; bioscience; defense/space; innovation services and professional services. The region evolved with a focus on defense in the 1950s to integrated circuits in the 1960s and 1970s, to personal computers in the 1980s to internet in the 1990s. The influx of highly skilled technology workers is said to be responsible for the heightened entrepreneurial activity in the region. The region’s capability to easily absorb and integrate talent from all societies, cultures and ethnic groups is an important attribute reflecting that not merely high wages but attitude has had a major role to play in enhancing the innovative capability in the Valley.
Momaya K. and Bhat J. S. A., 2006, "Clusters and Competitiveness: Issues in Context of Emerging Industries in India", Management and Change, Vol. 10, No. 1, pp. 11-32. 6
There are two important characteristics of the Valley that compound its exponential growth: (i) The transnational ethnic groups such as Indians, Chinese, Israelis and others are able to work between their own native countries, the Silicon Valley and other regions around the world in a seamless manner and (ii) Use of job sharing in multi location teams enables companies to work around the clock everyday through technology linkage and to train many more people around the world in the culture and best practices of the US technology firms. Thus the Valley serves as a large research and development laboratory and the original think tank for manufacturing enterprises based around the world. The Valley is well positioned to continue to be a global technology economy leader because of the diversity of its business sectors, its linkage to the high tech world regions and the ability of its economy to be flexible and adapt to ever changing technology trends. The Valley has also led to the growth and development of a new global entrepreneurial class of industry executives. This is exemplified by the large number of successful entrepreneurs from different parts of the world who have all migrated to the region and who operate globally. It emerges that regional wealth creation can also be greatly enhanced through skilled use of marketing which can be adapted for the successful enterprises – companies, regions and organizations. This is epitomized in the Valley with so many companies using innovative positioning styles and successful branding to build upon their consumers’ minds. The key difference between commercial product positioning and technology regional positioning is that the emphasis on branding and positioning in technology must focus on the needs of the market to be fulfilled positioning ahead of actual product availability. Glimpse of Japanese Perspectives Japan has achieved very high competitiveness in number of important industries and the country as a whole. Despite ten years of recession Japan's competitiveness in key industries from automobiles to electronics and telecom (please refer to Exhibit 1) has been sustained. While Japan ranks bit lower in many competitiveness ranking, it was found to be second only to the USA with developed country weightages (NCR, 2004). On number of competitiveness factors of trade, finance and technology, it ranks ahead of the USA. In overall competitiveness also it has improved ranking recently. Here are just few indicators of competitiveness of Japan: •
More than eighty five companies in Fortune Global 500 in as compared to just two for India
•
Japan has commanding positions in a number of key industries such as automobiles including in the country that brought automotive revolution-the USA.
•
Clusters are quite developed in such industries and value-chains are almost fully completed in some regions
Momaya K. and Bhat J. S. A., 2006, "Clusters and Competitiveness: Issues in Context of Emerging Industries in India", Management and Change, Vol. 10, No. 1, pp. 11-32. 7
Japan is working hard to become competitive in emerging industries to meet the challenges of low cost competition and outcomes thereof such as hollowing-out. Japan has taken many steps to become competitive and has been quite successful in select sectors such as 3G, 4G communication. For instance, there are scores of IT hubs with great growth across the country, referred to as a second silicon valley in the making (Jetro, 2003). Digital authorization, Internet Data Centers, Application Services Providers, E-Learning and E-Commerce have been identified as 5 promising e-business areas under government’s e-Japan strategy with massive investments. Consequently eJapan Strategy II was adopted in July 2003. It has signaled shift in focus from development of ICT infrastructure to the promotion of ICT utilization and positioning the ubiquitous network as the goal in developing the next generation of the ICT environments. Similar efforts are underway in biotechnology. There were some 300 startups in the field as of the spring of 2002 and explosion is likely to continue with deregulation such as permitting teachers at national universities to serve as executives for private companies from 2000 (Jetro, 2003). Innovation is given increasing importance for strong Japan post-rebirth and clusters can play an important role. Many interesting dimensions of innovation starting from corporate innovation to product, process and societal innovation have emerged from considerable research (Matsuda, 2003). Conceptual architecture of large-scale knowledge clusters and satellites was conceived. Importance of corporate innovation and practical ideas for implementation were identified by the team lead by Fukushima (2003). Among many important dimensions of innovation, e.g. technological, product, market and customer-focused, identified some can be sources of competitive emerging industries. Japan often creates highly sophisticate domestic market to strengthen the cluster for global competitiveness. For instance, the development of a ubiquitous network society driven by the Fourth Wave of ICT innovation will create huge demand for new products and services (Jetro, 2003). The market will be worth 30 trillion yen in 2005 and 84 trillion yen in 2010. Japan had the second largest wired population with rapidly expanding broadband capabilities. In fact, in percentage terms it surged far ahead of the USA in many segments and contributed to as high as 50 percent of global mobile commerce. Intelligent highway vehicle systems and service innovation from products such as shared cars by Toyota are just other examples from many such that can be found in Japan. Government’s e-Japan program based on e-Japan strategy of 2001 is likely to create many such sophisticated markets in Japan for emerging industries. Glimpse of Indian scenario The Government policies in India have been continually primed to nurture science and technology related capabilities in various core areas in tune with changing needs. Even after more than a decade of liberalization, government remains the dominant investor in R&D. Share of the private sector in R&D investments in India remains quite low as compared to developed countries or even newly industrialized economies such as Korea and China. Despite having to cope with very diverse requirements, efforts have been Momaya K. and Bhat J. S. A., 2006, "Clusters and Competitiveness: Issues in Context of Emerging Industries in India", Management and Change, Vol. 10, No. 1, pp. 11-32. 8
made by the governments to develop and retain core strengths in several areas of industrial activity. Multiple facets of economy, governance and human resources need to be explored to fathom the depths of competitiveness. Situation has been improving, but at too slow a pace on important fronts such as literacy, governance, employment, trade and competitiveness to meet accelerated aspirations and wants of masses. There is a view point that without rapid and quality improving on the above fronts, the vision of India (Kalam and Rajan, 2002; Mashelkar, 2003; Khanna, 2004) can not be realized. While there will be clusters of excellence and prosperity in pockets, the overall competitiveness of India will improve very slowly. Considering that the goals of economic equity are very difficult to achieve in even the most competitive economy such as the USA, India should not wait to nurture emerging industries till equity is achieved. The Government has been the driver of investment in creation of a base for emerging industries and there are limits to sustainable scale-up of the existing model if the commercialization dimension is not improved. The bases of scientific and technical human resources and infrastructure for R&D were built largely by the Government during the 1950s through the 1980s with some need based strategic interventions now and then and these have resulted in significant achievements in strategic sectors such as atomic energy, defense and space. However, these bases did not, barring few exceptions, translate into significant industrial innovation. Currently, however, there is cause for some concern and need to take corrective measures. The in built ‘indigenous’ technological innovation capabilities developed over years has been losing its sheen in the market place in India in the face of global competition, and even manufacturing in traditional sectors is increasingly being taken over by global players. Taking the lead in emerging industries in global markets is very challenging but a goal worth pursuing, even if only few can succeed. Our research about the orient hints that when even small countries such as Taiwan and Korea (countries such as China and Japan are far ahead of India on key parameters) can win commanding market share of the global market, India can and must act to win at least in niches of emerging industries, if not a full market segment. Emerging clusters around metro cities such as Bangalore, Chennai, Delhi, Hyderabad, Kolkata and Mumbai can become anchors for emerging industries. Quick comparison of two clusters in IT industry provides some insights. One cluster was taken from the USA and other from India. Competitiveness journey of the two clusters is given in Appendix II. Select comparative factors, including performance factors, of the two are given in Table 2. Despite many achievements, early origin, the performance of the Bangalore cluster may not be considered far superior than the Texas cluster. In fact, the Texas cluster has better production and export performance. More involvement of local or indigenous firms may be a reason for differences in the performance.
Momaya K. and Bhat J. S. A., 2006, "Clusters and Competitiveness: Issues in Context of Emerging Industries in India", Management and Change, Vol. 10, No. 1, pp. 11-32. 9
Table 2: Quick Comparison of Two Clusters in IT Industry Factor Cluster’s National share of production & exports (compared to competitive clusters) Annual Cluster Growth Annual Export Growth World Export share Local firms have own foreign marketing firms Presence of foreign companies
Texas Austin IT Cluster Major (
