Proximity and Knowledge Governance in Localised Production Systems: the Footwear Industry in the North Region of Portugal
Mário Vale* Josué Caldeira
*Correspondence author address: Mário Vale Centro de Estudos Geográficos Universidade de Lisboa Alameda da Universidade 1600-214 Lisboa Portugal
Tel.: +351 217940218
[email protected]
September 2006
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ABSTRACT
Proximity is a key concept in the explanation of traditional and emergent production systems. Recently, the role of geographical proximity has been qualified on the basis of the argument that other types of proximity should also be taken into account in the explanation of innovation and, particularly, knowledge governance in production systems (e.g. sectoral innovation systems, global production networks, etc.). Drawing on in-depth research at the level of the company, this paper discusses to what extent the introduction of new technology, fashion and design, and control of distribution networks is changing the localised footwear production system in the North region of Portugal. The results indicate how leading innovative companies are developing distant spatial relationships in order to gain access to new critical knowledge using different strategies that are modifying the very nature of the spatial agglomeration. As new types of proximity emerge and new governance mechanisms are put in place, we argue that a new industrial and innovation policy is needed to sustain these traditional industrial agglomerations.
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Introduction How do companies combine local and non-local knowledge in a coherent way and what governance structures exist to cope with this challenge? Authors who addressed this question (e.g., Echeverri-Carroll and Brennan, 1999; Vale, 2004; Fontes, 2005) have focused primarily on high-tech sectors rather than traditional industries. On the other hand, more work has been done on the impact of globalisationon traditional industrial clusters (Amin and Thrift, 1992). But also this literature largely fails to shed light on how these spatial agglomerations have been or have not been able to generate more resources and competencies.
In this article, we intend to debate precisely to what extent the introduction of new knowledge (fashion and design) on one hand and consumption preferences on the other are changing the footwear industry in the North region of Portugal. We argue that new knowledge is progressively less produced at the local/regional level, thus putting pressure on local agents (companies, technology centres, training institutions, local authorities) to become engaged in extended spatial networks. Leading innovative companies are developing distant spatial relationships in order to access new critical knowledge using different strategies which are modifying the very nature of the spatial agglomeration. This is a central issue to the future development of traditional industrial agglomerations throughout Europe because new competencies must be generated in order to successfully stand up to fierce competition from companies in Asian countries. Therefore, a new industrial and innovation policy is needed to sustain and develop these particular spatial agglomerations.
In order to discuss the issues raised here, the paper is organised in four sections. The article begins at the theoretical level by examining the role of geographical proximity and the relative importance of other types of proximity in knowledge creation and transmission in localised production systems. The article then addresses the evermore important role of fashion in the footwear industry, consumption preferences and distribution strategies. A question is how knowledge governance structures are changing at the level of the company. The third part of the article is empirical, presenting the main findings of in-depth research on strategies for generating new knowledge among a group of important footwear companies in the North region of Portugal. Both geographical proximity and other types of proximity are analysed and 3
some factors favouring close or distant networking are pointed out. Finally, the paper provides some reflection on policy implications resulting from the growing relevance of distant networking to develop competencies at the localised production system level.
Local and Distant Networking in the Knowledge Creation
Typically, the knowledge base of traditional industries is highly dependent upon local and tacit forms of knowledge, whereas the knowledge base of firms in hightechnology sectors is more codified allowing firms to establish networks to access distant knowledge sources. However, the divide local/tacit knowledge and nonlocal/codified knowledge has been criticised (Gertler, 2003). There are reports of poor transactions at the inter-company level within clusters, as well as examples of companies that do not rely only on local sources to innovate; rather they will often consistently establish distant networks in order to access new knowledge and combine it with local assets. Thus Bathelt et al. (2004) suggest that “…successful clusters are the ones that are able to build and maintain a variety of channels for lowcost exchange of knowledge with relevant hot-spots around the globe” (p. 33).
Recent developments in the organisation of traditional industry production and business strategies point to a more complex form of knowledge production and diffusion and a more “non-local” focus of companies within a cluster. Therefore, this section is devoted to the theoretical underpinning of knowledge creation and diffusion in localised industrial systems discussing the role of spatial proximity in the knowledge production and diffusion process.
Localised Knowledge Creation in Industrial Agglomerations The advantages of spatial proximity in local economic development are epitomised by notions of industrial agglomerations (e.g. industrial districts, clusters, etc.) or technological intensity (traditional vs. high-tech). Recently, spatial clustering of innovative economic activity has been discussed in light of knowledge-based theory (Antonelli, 1999), where innovation, knowledge creation and learning result from interactive processes in which it is suggested that “the more codified the knowledge 4
involved, the less space-sensitive should these processes tend to be” (Bathelt et al., 2004, p. 32). In other words, the sharing of tacit knowledge has been associated with the need for spatial proximity of the actors involved.
According to Amin and Cohendet (2004), two types of spatial proximity have been considered essential to understanding the innovative territories that the authors refer to as “islands of innovation”. The first is supported by the work done within the disciplines of industrial organisation and economic geography on the local production systems. This work stresses the role of spatial proximity and the agglomeration of companies to generate innovation. The second draws from the work of Schumpeterian, evolutionary and institutional economics and stresses the relevance of companies’ embeddedness in national (and regional) innovation systems.
The theoretical contributions from industrial districts (Bagnasco, 1977; Becattini, 1987), new industrial spaces (Scott, 1988; Storper and Scott, 1988), milieux innovateurs (Aydalot, 1986; Camagni, 1991) and clusters (Porter, 1998) are affiliated to studies on industrial agglomeration and spatial proximity between companies. These four perspectives address in different ways the importance of spatial proximity in generating innovation. However, all of them stress the role of the local context – more precisely of the social, cultural and institutional local specificities. These particular territorial conditions promote the creation of tacit knowledge and enable networks of localised companies (Cooke, 1996; Peck, 2003; Amin and Cohendet, 2004; Moulaert and Nussbaumer, 2005).
Recent perspectives on regional innovation systems (Cooke, 1992; Cooke and Morgan, 1998) and learning regions (Florida, 1995; Morgan, 1997) are based on the tradition of innovation systems. In these perspectives, the embeddedness of companies in sectoral and national innovation systems (NIS) is transposed to the regional level, according to Lundvall’s (1988) seminal work on the NIS. Furthermore, authors argue that the quality of local and regional institutions acts “…as a collective resource for both technological and non-technological innovation and learning” (Amin and Cohendet, 2004, p. 87), such as universities, laboratories, technological-transfer institutions, entrepreneurial associations, educational and 5
vocational training institutions, financial institutions (e.g. capital-risk and business angels). The regional innovation system (RIS) perspective has been very influential in the policy design of important organisations such as the OECD and the Commission of the European Communities. The work of Braczyk et al. (1998) provides a good account of RIS at the European scale.
The economic advantages of clustering result from economies of scale and reduced transport and transaction costs. Nevertheless, the role of untraded interdependencies cannot be underestimated in explaining the clustering process (Storper, 1995). The socio-institutional context, the communication between companies and the learning processes at the local level serve as a point of departure for cluster growth and innovation dynamics (Maskell and Malmberg, 1999). The buzz of localised production systems – i.e., the continuous circulation of ideas and information diffusion through face-to-face contact and the co-location of companies and people – is suggested to be very useful for local economic stakeholders, as they may access critical information on technology, products and markets by “just being there” (Gertler, 1995; Bathelt et al., 2004).
Distant Knowledge Creation and the Industrial Agglomeration More recently, the suggested importance of spatial proximity in the knowledge creation and diffusion process has been challenged by ideas of other forms of proximity, e.g. “organisational proximity” (Torre and Gilly, 2000; Amin and Cohendet, 2004; Boschma, 2005; Torre and Rallet, 2005). According to these authors, distant networks can be very effective in the creation and diffusion of knowledge. Moreover, the increasing use of ICT and lower transport costs enable the effective operation of powerful communities of practice (e.g. engineers, entrepreneurs, computer experts, etc.) across space. This is very well illustrated by interconnections between Taiwan and Silicon Valley (Saxenian and Hsu, 2001).
Oinas (1999) finds it more reasonable to see the knowledge creation process as a result of both close and distant interactions. In science-oriented sectors, like biotechnology, there is evidence of the role of non-local knowledge acquired via strategic partnerships at interregional and international scales (Owen-Smith and Powell, 2002; Fontes, 2005). In relation to sectors based on creativity there is 6
evidence of non-local linkages in the creation and diffusion of knowledge in geographical agglomerations (Scott, 2002; Grabher, 2002). Even in the case of less technologically intensive industries such as the New York garment industry, distant networking has been crucial for producing new knowledge and innovation (Uzzi, 1996; Rantisi, 2002).
From a global perspective, the global commodity chain (Gereffi and Korzeniewicz, 1994) and global production networks (Henderson et al., 2002) views the role of geographical proximity in innovation can be problematized. In fact, “Production networks […] have become both organisationally more complex and also increasingly global in their geographic extent” (Henderson et al., 2002, p. 445). Moreover, the authors suggest that even if business networks are geographically embedded, they are not necessarily territorially bound. Production networks are often multi-scalar, ranging from local to global and the other way around (Dicken and Malmberg, 2001). A myriad of stakeholders with varied powers is continuously transforming the production network, which has various implications on economic development, “especially in terms of the distribution of power and value creation and capture” (Henderson et al., 2002, p. 448).
The globalisation of production networks implies a different view on proximity. Indeed, it is most interesting to find out how companies access distant knowledge and how it is subsequently combined with local knowledge in order to produce new knowledge in the industrial agglomeration. There are different ways to pump information in the localised production systems, however. The construction of interregional pipelines to access distant information and knowledge sources is one form suggested by the literature. This may take the form of strategic partnerships (Owen-Smith and Powell, 2002). Nevertheless, other forms of information and knowledge acquisition are possible, such as branch or firm acquisition Also temporary clusters such as international trade fairs, conventions and other professional meetings have been identified as ways to access non-local information and knowledge (Maskell et al., 2004).
The economic cost to access distant sources of knowledge implies that firms often prefer to develop distant linkages with specific goals rather than general ones. Apart 7
from cost another barrier to distant networking is the different institutional contexts and cognitive distances (Bathelt et al., 2004). Both cost, institutional and cognitive differences affect the distant knowledge creation processes and especially the number and quality of interregional and global pipelines that can be developed by each firm.
In sum, the theoretical debate about the role of space in knowledge creation has moved from the ‘local vs. non-local’ and ‘tacit vs. codified knowledge’ dichotomy to a more promising perspective that provides insights into (i) what explains that some firms network internationally and others do not, (ii) how firms may combine local and distant knowledge sources and (iii) what are the repercussions of globalising knowledge creation processes to localised industrial systems. In the next section, we intend to contribute to this discussion, by an analysis of the footwear cluster in Portugal.
Localised Production and Distant Networking in the Footwear Industry
In this section, we intend to analyse the main forces leading to change in the traditional footwear industry. In the footwear industry, innovation dynamics respond to the increasing competition from producers in low-wage countries (Vale and Caldeira, 2004). The development of external trade policies at the European level has had significant impact on the spatial organisational reconfiguration of the footwear sector world wide. As the European Commission observes in a recent report, the footwear sector has adjusted its production capacities and logistics in the context of the agreement with Asian, Central and Eastern European and North African countries. For example, European firms have delocalised certain parts of the footwear (such as ‘uppers’) production to low-wage countries, namely in North Africa (Commission of the European Communities, 2001). In doing so, outsourcing has been combined with technological innovation of the production and design processes. Footwear productioni has undergone several technological innovations, namely computer-assisted conception and design (CAD), the adoption of laser cutting equipment and the robotisation of both the plastics injection and the assembly processes (Fonseca et al., 2001). The adoption of for example water jet or laser cutting technologies enhances productivity and quality, compared to traditional 8
cutting equipment. Robotisation in sole injection lines and shoe assembly, which implies great increases in productivity, requires large-scale production.
In addition to low cost competition, consumption preferences significantly drive change in the sectoral governance structure. Product innovation in the footwear industry is the result of a combination of utilitarian (comfort, durability, practicality) and aesthetic (style) concerns. The growing importance that consumers in more developed markets give to comfort is reflected in greater concern with the technical attributes and the physical quality of the material used. In this case, material flexibility, the way it handles perspiration, impermeableness and ergonomics are crucial characteristics for certain market segments (Fonseca et al., 2001). Aesthetic concerns stem from a need to accommodate the demand for certain market niches with preferences associated to the fashion world. According to Ragazzi (1992), footwear serves utilitarian needs but also presents similar characteristics to other objects of consumption: to satisfy the demands of elegance, the need to affirm social status or distinction (or belonging to a particular social group or lifestyle).
As a result the international spatial division of labour of the footwear industry is changing. Functions change location and actors at different spatial scales and locations become involved. The shoe production is moving away from European regions to Asian countries. However, footwear firms in Europe respond to the increasing competition by the integration of new functions (besides new technologies such as those described above) that are essential to upgrade in the value chain, explicitly fashion and distribution functions. Accordingly new actors have come to play important roles in the value chain, and a new territorial organisation of the industry is emerging. Successful Italian and also Spanish traditional footwear centres are increasingly devoted to high-luxury leather goods production and serve as important fashion centres to the industry, defining fashion trends and generating new concepts and product innovations in the shoe industry. Other traditional footwear production sites across Europe are less able to emulate the successful Italian footwear district and struggle to compete with Asian producers.
Larger firms with relevant competences in manufacturing, marketing, distribution, and fashion creation have more possibilities to control the overall production 9
network, locally and globally, and as such they have more resources to devote to distant cooperation agreements that may provide specific knowledge necessary for process and product innovation. Small firms, on the other hand, are expected to be more oriented to local networking simply because distant networking may absorb an enormous amount of financial and human resources that are not available at firm level. As a result distant networking strategies of small firms are expected to be reduced in scope and comprise very specific aspects.
The rising significance of fashion in the value creation in shoe production bears upon the knowledge governance of the localised production system. New functions and actors, often located outside the region, are becoming more relevant in the value chain. Moreover, conception, manufacturing, distribution, marketing and sales are increasingly integrated in the footwear value chain. Business strategies embrace not only fashion and design but also distribution and retail strategies that prove instrumental in retaining an important part of added production value. The degree of complexity has considerably increased compared to previous footwear production organisation models.
Also the internal organisation of footwear firms is undergoing changes due to the incorporation of new functions and new kinds of knowledge in the production. First of all, firms have to identify general fashion trends and consider them in the product design. It is a very complex process because it is necessary to integrate into production immaterial signs that reflect collective preferences. A growing number of actors performing diverse functions that are not strictly in the production itself (fashion trends, consumers preferences, colours, new materials, leather types, shoe components, etc) have to be addressed. Eventually, the shoe goes into production and again more attention has to be paid to branding, distribution, retailing and marketing strategies.
All of these changes make a strong impact on the footwear industry. Good interconnections between new and more agents from different technological backgrounds become critical to the success of footwear companies. We address the issue in the next section of the article based on in-depth research on footwear companies in the North region of Portugal 10
Local and Distant Networking of Portuguese Footwear Companies
The footwear industry in the North region of Portugal Regarding the spatial organisation of footwear production in Europe, the sector flourishes in terms of production and employment mainly in Southern European countries. Italy has a predominant position as the greatest producer and sector leader in Europe. Spain, Portugal and France also belong to the group of main European footwear producers. This set of four countries was responsible for approximately 83% of the production volume in the EU at the end of 1990. Footwear production represents 4% of Portugal’s manufacturing production. Italy also registers a high industrial specialisation rate, with the sector representing a share of 2% of in the country’s total manufacturing industry. Footwear production holds a very limited share of France and Germany’s total manufacturing production, however.
Since the mid-1970s, the footwear industry has contributed considerably to overall manufacturing employment and production in Portugal (accounting for around 7% and 4%, respectively in 2000). The footwear sector plays a major role in the Portuguese economy, considering that the sectorals exports comprised around 8% of the country’s total manufactured exports at the end of the 1990. The footwear industry has an atomised entrepreneurial structure with a large proportion of micro and small companies (defined as firms with less than 100 employees) representing approximately 86% of all footwear companies and 50% of total employment in 2000. This is a typical feature of the industry in Southern European countries (Calafati, 2006). Large companies are only few (1.8%), though they account for around 28% of total employment in the sector. Most of them are foreign owned. The decline in employment between 1995 and 2000 was mainly due to the closures of large foreignowned factories as production was relocated to Eastern Europe and East Asian countries to save labour costs.
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The entire industry is concentrated in only three NUTS III-level regions (Fig. 1). In fact, the Ave, Tâmega and Entre Douro e Vouga NUTS III level regions are the leading production centres of footwear in Portugal with more than 40,000 employees and about 1,300 companies. At the same time, the footwear industry in Tâmega and Entre Douro e Vouga has a large share of sub-regional manufacturing employment (27.4% and 36.1%, respectively), whereas in the Ave sub-region the footwear sector makes only a modest contribution to local manufacturing employment (less than 6%) as a result of its strong textile and clothing specialisation. In these sub-regions the footwear industry is localised in only a few agglomerations, explicitly São João de Madeira (Entre Douro e Vouga), Felgueiras (Tâmega) and Guimarães (Ave). This means that footwear production in Portugal is very spatially concentrated.
Research Method The case study was developed in the North region, particularly in the agglomerations mentioned above and it focuses on changes at business level with a particular emphasis on fashion, distribution and retailing functions. Particular attention was given to the role of close and distant networks for different types of firms. Finally the study would highlight the issues arising from the combination of internal and external knowledge at firm and cluster levels. In order to understand the business strategies, an intensive research methodology was adopted based on qualitative data collection and analysis, namely through in-depth interviews with footwear companies and institutions that focused on functions and relationships with new actors across space (local and distant relationships).
In this study, eight footwear producers were selected that were expected to use diverse strategies to deal with the incorporation of fashion in footwear production and to follow different approaches to market and distribution. The producers were chosen based on preliminary interviews with institutions in the footwear sector, such as technological footwear and leather centres, an entrepreneurial footwear association, a footwear training centre, and others involved in fashion activities, including design centres and fashion event organisers. The companies were selected against criteria of industrial organisation, fashion creation and market strategies. Data gathering methods consisted in intensive face-to-face interviews with business representatives (owner or director). 12
General Description of Companies Interviewed for the Case Study Table 1 lists the general characteristics of companies under study. Three different types of companies can be identified as regards the size of companies: only two companies have more than 500 employees, three companies employ less than 100 workers and the remaining three employ from 100-500 employees. As for production volume, figures vary from about 70,000 2,500,000 pairs of shoes per year. Regarding annual turnover, values range from a minimum of EUR 3 million to a maximum of EUR 65 million. Companies in this group were established over three separate periods of time. Two were founded in the mid-1950s. They have, until recently, been the leaders of the Portuguese footwear sector. Their activities include subcontracted production for international companies and own production for the domestic market. Four companies were established in the 1980s. These large companies have multiestablishment structures, which they hoped would enable them to compete on the European market (Portugal became member of the EU in 1986). The last two companies, founded by young entrepreneurs during the 1990s, possess singleestablishment structures and follow niche-market competitive strategies.
Manufacturing, Market and Fashion Strategies Looking through the lens of fashion (creative trends and collective consumer preferences) and its role on product innovation, three different company strategies were identified: ‘imitative and dependent production’, ‘overall control of the value chain’ and ‘production for market niches’ (Vale and Caldeira, 2004). The following paragraphs summarise the most important findings.
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Companies A, B and C exhibit a very simple business organisation model. They perform weakly in terms of innovation. We have dubbed this strategy ‘imitative and dependent production’. Nevertheless, these companies have developed significant control over the production process. Via technological improvement at the production level, these companies were able to increase productivity levels, respond in time to market changes and new demands from large retail chains and guarantee good quality products. They establish strong local production networks with small, 13
labour-intensive, family-owned companies that concentrate on sewing leather parts to be joined with other components later on before undergoing finishing treatment at the subcontractor.
This strongly production-orientated strategy puts more ambitious market, design and creation strategies on the backburner. In effect, there is no control over the retail chain and their own brands are weak on the market, often linked to certain low-end segments of domestic market. These companies intend to produce as much as possible for large clients (e.g. department stores, large clothing or footwear chains and international footwear companies). The basic information source for shoe design is the non-local leading subcontracting companies or, as in the case of their own brand footwear, information about local preferences generated by market experience and information gathered by vendors and customers.
Companies D, E and F are the most complex business organisations among the case studies, characterised by a high level of control over the entire production chain (i.e., conception, marketing, distribution and retail). This strategy is identified as ‘overall control of the value chain’. In these three cases, size matters, as companies maintain high production volumes and employment in addition to controlling large retail chains. Both companies span a range of activities, from conception to distribution, and maintain a very strong emphasis on the production process and product quality. With this vertical integration of production strategy, companies retain a large share of the value generated from the conception, production and distribution of a product.
These companies have been able to create a strong market image through distinctive design and quality, associated with a very successful branding strategy. Clearly, the incorporation of fashion trends in shoe design has been important for business development. In two cases, design centres were established and have become instrumental to business performance, employing skilled staff in functions such as fashion trends monitoring and creation, design, comfort and materials and components research. These functions are situated outside the localised production system, as fashion trends are defined outside of the local production system and in connection with clothing industry designers and fashion agents. The main centres in Europe, such as Milan or Paris, have a tremendous influence on the creation of 14
fashion, forcing companies to establish contacts with agents in these areas. One company has a very small international design office in Florence and also makes use of internationally renowned design expertise. Another company also employs the latter strategy The foreign-owned company in this group has a very large international design centre in Northern Europe, although designers travel around Europe to identify the latest fashion trends and consumer preferences in the different European markets. The ‘production for market niches’ strategy refers to companies G and H, Their distinctive characteristic is a small-market niche orientation with a strong symbolic content. These two young, small companies are owned by designers and clearly make use of new production technologies to achieve high levels of flexibility in the production process. They are able to produce small production series and to respond quickly to consumer preferences. The value of a pair of shoes is well above average, targeting higher market segments. As with the Italian case, entrepreneurial spirit, technology divisibility and social capital factors explain the birth of new small companies (Calafati, 2006).
These companies have been able to develop distribution agreements in large Portuguese cities as well as abroad, namely in London and Japan. One of the companies owns a few retail shops. Nevertheless, distribution and retail agreements are preferred strategies, as these companies are very small and are not well established financially. Branding is an important company strategy and it requires a good deal of the attention of the entrepreneurs, building up a fashion image, quality and a very exclusive retail strategy (only certain shops in certain places). This successful combination of fashion with a market niche orientation is another possible strategy for local companies to upgrade their position in the value chain.
The analysis of the cases show that the most important knowledge sources for companies seeking to rise in the value chain are accessed via non-local relationships. These knowledge sources are fashion agents, such as colour and design committees, fashion and trends offices, designers and stylists’ organisations, fashion media agents and fashion events promoters. The local atmosphere cannot reveal future fashion
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trends. Therefore, to capture the trends in time to produce a new collection, it is necessary to build ‘pipelines’ to international fashion centres.
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Table 2 summarises the distinctive functions and actors involved in localised and distant networking models for the footwear industry. Note that the typical localised production model performs many functions related to the manufacturing process itself, whereas the distant networking of the new agents has been increasingly used in order to gain access to sources of fashion trends and to incorporate them in the production process at the level of the company.
Manufacturing functions have been quite central to achieving high productivity levels through the modernisation of equipment and the introduction of information technologies in the manufacturing phase but also in the product conception phase. Furthermore, components industry companies have also played a part in the overall competitive upgrading of Portuguese footwear, as many product innovations stem from footwear component innovations. The local labour market is fundamental to the local production system, furnishing necessary skills at low to medium cost and enabling companies to adopt flexible production strategies. Often bigger companies organise large subcontracting networks at the local level in order to reduce production costs and to handle cyclical market changes. Traditional companies still follow this productive strategy. Therefore, they do not have significant activities or relations with actors from outside of the manufacturing system, whether local, national or international.
As for market and distribution functions, distant networking is absolutely crucial in order to establish a successful international strategy based on international brand creation and the control of distribution and retail chains. Local networks are more important in labelling and (less frequent) the creation of brands for the national market. In the localised networking model, fashion functions and agents are not tremendously important, except in the case of footwear and fashion fairs (temporary clusters) that are crucial for business contacts with the large clients. Fashion activities are, in contrast, quite central in the distant networking model, including connections 16
with different agents such as designers and stylists, colour and design committees, fashion and trend offices, media agents and fashion promoters.
The critical dimensions of knowledge and its relationship with geographic and relational proximity are described in Fig. 2. Throughout the entire footwear chain, from conception to consumption and monitoring, companies in the production system establish two types of networking: low-order (low value added activities) and highorder (high value added activities) networks. The former is typical within close distance and is very much a result of a strategy to reduce production costs by using local labour and subcontracting linkages. In high-order networks, it is most common to establish partnerships among different agents beyond the manufacturing activity in an extended spatial network often at the international level. Companies frequently collaborate in strategic and value-added activities with better-balanced intercompany power relations.
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Why do some firms network internationally and others not? What would enable (or not) more locally oriented firms to embark on an international networking strategy? These questions are important for the development of local policy. The obvious reason for distant networking of some firms is the non-existence or the lack of quality of certain critical services or functions in the local clusters. The competitive pressure have been the trigger element for distant networking. Firms have tried to move their position in the value chain and therefore have felt a need to pay more attention to other functions that are not available on the local clusters (fashion activities).
Firms poorly (or not at all) involved in international networks are those following traditional competitive strategies with a passive approach to product innovation and that have been found wanting notably in terms of marketing. Hence, the local cluster can provide the services and functions these firms need to remain in business. In the long run the cost focus is a dangerous strategy because it is almost impossible for a European producer to compete in ‘cheap’ markets. The alternative, to embark on a more decisive internationally networking strategy, is not very easy among traditional 17
long established family-based SMEs. Moreover, SMEs lack the information and the human and financial resources to target potential international collaborators, and it seems that, as yet, the “business as usual” strategy allows businesses to survive.
The spatial implications of the processes analysed above are in the short term very clear, that is companies and employment in the localised production system are expected to experience decline due to delocalisation trends and as a result of the increasing role of distant networks. The productive system is undergoing a re-sizing process not very different from that experienced by the Marche region in Italy (Calafati, 2006). While a successful strategy of knowledge acquisition via distant networking may well guarantee high revenue for highly competitive companies (second and third groups of companies in our study), small traditional companies will possibly face severe consequences with substantial social costs to the localised production system.
Conclusion and Policy Implications
Footwear companies increasingly have been forced to consider design and fashion in production. Distribution and retail in the industry has become important for retaining part of the value. These changes render traditional local knowledge (especially at the manufacturing level) relatively less important. In other words, the role of geographical proximity in the creation and diffusion of new knowledge is less relevant in relation to the new functions of the footwear industry.
The three strategies identified in the case study have evolved throughout the recent period of economic globalisation and they correspond to different approaches to market and production organisation changes.
The first group of companies follows a passive strategy in relation to the erosion of competitive factors in the localised production system. The companies still rely on local capabilities. Expansion of production is primarily based on traditional know-how in the labour market and the
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introduction of new technologies that serve to increase productivity. They do not deal much with the non production functions.
The large producers of the second group are developing international strategies in every critical domain of their activity, from conception to production and distribution. The strategy is essentially based on the design, function and quality of the product, avoiding competition from Asian producers in lower market segments. Branding and distribution strategies are key to this competitive strategy.
The third group of companies is developing a rather interesting strategy via investment in non-production functions and new technologies at the production level in order to achieve flexibility rather than productivity. It is not by chance that these companies are small, owned by designers and were created only in the 1990s, precisely when the limitations to the low-cost production model started to become apparent in an increasingly global market. In particular, the fashion knowledge of company owners represents a vital factor of competitiveness.
These findings suggests that the dichotomies of traditional vs. hi-tech, local vs. distant, tacit vs. codified knowledge dichotomy divisions are not useful to the theoretical debate about the role of geographical proximity in the knowledge creation and diffusion. The case study shows that both close and distant networking are present in a traditional industry. Local networks in the footwear industry are more oriented to a production costs reduction, whereas distant networks seek to establish partnerships in strategic and value-added activities with better balanced intercompany power relations. It can be suggested that tacit knowledge is contained in both local (production knowledge) and distant networks (fashion knowledge).
The case study discloses a strong divide between firms that network internationally and others that do not. We also explored the factors that enable (or not) more locally oriented firms to embark on an international networking strategy. In particular, competitive strategies regarding market positioning , combined with human and financial resources help to explain networking patterns in terms of composition and geographical scope). The quality of the local environment is another factor. Distant
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networking is mainly a result of the lack (or poor quality) of services in certain domains in the localised production system, forcing firms to establish distant networks to access critical functions.
As a result, the leading firms in the Portuguese footwear cluster manage to develop distant networking forms especially for high value functions. These companies improve their competitive advantages, while an important number of SME is hardly benefiting from the new knowledge obtained through ‘pipelines’. The main reason for this is that local inter-firm cooperation, with a few exceptions, is oriented towards labour cost cutting, which limits new knowledge dissemination. Moreover, traditional firms tend to consider fashion as something rather fluid and difficult to incorporate in the production system. At present a group of small companies is collaborating with training centres and fashion agents (events organisers, media and stylists) and the components industry, which may help them to take a more outward looking direction. Yet, the critical question is whether these companies are able to develop more international market strategies and become larger producers while at the same time preserving their local networks.
There are different ways to improve the knowledge dissemination in the existing cluster. Besides the traditional development of transport and communication infrastructures that enable interaction between agents in the cluster, there are other policy domains that may help to develop the localised industrial system. This includes the financial support to innovative firms, the development of knowledge intensive business services, like fashion trends monitoring and fashion creation services, and the human capital development. Cowan and Wintjes (2001) suggest that whatever the development stage of a cluster, the external networking of a cluster is a major policy concern. The authors suggest attracting external professionals to stay in the region for long periods. These will enhance trust and informal knowledge dissemination in the cluster. The local and regional authorities can act through the formation of local institutions to support SME internationalisation, by for instance organising international business attendants, business platforms or specific training programmes on international markets and consumer preferences.
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It can thus be argued that policy response needs to address both distant networking and knowledge dissemination at local level. Recently, the first has received more attention in Portugal trough the Dinamo Programme, a national policy initiative new on the scene that is aimed at upgrading Portuguese clothing and footwear, by helping companies gain more control over distribution and retail chains at the international level and to expand companies’ networks beyond the localised production system in fashion and design capabilities.
So far the policy initiatives targeting new capabilities on fashion creation and design at firm level proved to be incomplete, since they benefit mostly large firms. Therefore, future policy response should promote local knowledge dissemination through the existing social networks. We argue that it is important to support more locally oriented firms to embark on an international network strategy. We suggest to create ‘searching clubs’ for new knowledge, involving the cooperation among private (different local entrepreneurs) and public (technological centre, entrepreneurs association, training centre, etc) actors. Such cooperation has the potential of ensuring the dissemination of new knowledge in the localized production system. Since private firms do not disclose easily what they perceive as own strategic knowledge, the involvement of public institutions is fundamental to integrate a large number of firms in the internationalisation process and to guarantee knowledge dissemination. Universities and other R&D institutions are less market-oriented and can circulate knowledge in the university-firm interactions. Co-operation agreements with international fashion training centres also may prove to be a means to ensure local skills and knowledge needed for product innovation.
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Acknowledgments – The authors are grateful to all the members of the research projects TELL - Technological Knowledge and Localised Learning: What Perspectives for a European Policy? (HPSE-CT2001-00051) and EURODITE Regional Trajectories to the Knowledge Economy: A Dynamic Model (CIT3006187). We would like to thank the very helpful comments of the two editors of this special issue.
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Table 1. Production, distribution and fashion creation networks Firms Year created No. employees Turnover (1000 Euro) Production subcontracting to other firms Production subcontratced by other firms Retail chain
Branding and labelling
Design and fashion creation
A 1942 70 3000
B 1955 400 9340
C 1980 100 5650
D 1984 1300 64000
E 1984 300 37000
F 1987 700 65000
G 1990 50 3000
H 1994 85 10000
Local
Local
Local
No
Local and abroad
Local and abroad
Local
Local
Local and abroad
Local and abroad
Local and abroad
No
Local and abroad
No
No
No
No
No
No
Own brand and retailers label
Own brand and retailers label
Distribution agreements Local and abroad Own brand and other producers brand
Own retail chain Local and abroad Own brand
Distribution agreements Local and abroad Own brand
Own retail chain Local and abroad Own brand
Internal, Modellers
Internal, Modellers
Own brand, retailers label and other producers brand Internal, Modellers
Own retail chain Local and abroad Own brand
International Design office
Internal Designer (firm owner)
Internal Designer (firm owner)
Own Internal and International external Design designers Centre
Source: own fieldwork
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Table 2. Functions and actors of localized and distant networking models in the footwear industry Subsystems
Manufacturing
Localized Production Model Actor Type Functions
Distant Networking Model Actor Type Functions
Public-private partnerships & entrepreneurial association Private firms
Technological transfer
Private firms
New materials
Equipments and tools Footwear components Job training
Private firms
Software development
Distribution control
Private firms & inter-firm cooperation Private firms
International distribution control International brands Independent designers and stylists Colours and design
Private firms Public-private partnerships & entrepreneurial association Private firms
Market and Distribution
Private firms Private and public-private partnerships Private firms & entrepreneurial association
Labelling and branding Fashion and design Footwear and fashion fairs
Professionals and private firms International committees Private firms
Fashion
Agents & private firms International promoters & private associations
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Fashion and trends Fashion media Fashion events
Figure 1. Regional concentration of footwear production in Portugal
Vale do Ave
North
#
#
Tâmega #
Entre Douro e Vouga
Lisbon #
0
50
100 km
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Figure 2. Geographical proximity and distant networking in the footwear industry Capacity of innovate and development assistance Innovation and development capacity Non-local (inter-regional and international) Strategic phases/processes of production More balanced power relations among firms
Distant Networking Partnerships (High order networks)
Trends monitoring
Design and conception
Manufacturing
Marketing
Geographical Proximity Cost reduction linkages (low order networks) Price, capacity to answer orders timely and according to technological requirements Low cost labour Unskilled/ordinary tasks Asymmetric power relations (manufacturing, knowledge, technology)
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Retailing
Consumption monitoring
NOTES i
The production process is basically divided into five phases (Fonseca et al., 2001): cutting the leather by means of laser, vibrating knife or high pressure water jet (cut); preparing cuts through gluing and sewing procedures (pre-stitching); using diverse stitching techniques to join the cuts or uppers (sewing and pre-joining); joining the shoe's components by means of automated equipment (assembling); and final treatment to improve the appearance of the shoes (finishing).
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