Developing Industrial Clusters to Integrate Value Chains

Inclusive and Sustainable Industrial Development
Session 3: Perspectives from International Organizations and the Private Sector in Developing and Functioning Industrial Clusters for Supporting Industries
Supporting Industries: UNIDO experience to integrate clusters into value chains
Gerardo Patacconi
Chief, Clusters and Business Linkages Unit
Business, Investment & Technology Services Branch
UNIDO
Workshop on Facilitating Supporting Industries in APEC Region, Phase 2 – Sharing Experiences on Developing and Functioning Industrial Clusters for Supporting Industries. 11-12 September 2014, Hanoi, Viet Nam

•The issues
•UNIDO’s Cluster programme
•Cluster and Value Chains: fostering Supporting Industries
•Conclusions

3
Poverty Reduction
through Productive
Activities
Trade Capacity-
Building Environment and Energy
UNIDO is the specialized agency of the United Nations that promotes industrial development for poverty reduction, inclusive globalization and environmental sustainability
The mandate of the United Nations Industrial Development Organization (UNIDO) is to promote and accelerate inclusive and sustainable industrial development (ISID) in developing countries and economies in transition.
Only UN organization promoting the creation of wealth and tackling poverty alleviation through sustainable industrial development
Focus on three inter-related thematic priorities:
UNIDO

UNIDO Cluster Development and Business Linkages
•Cluster initiatives are considered to be efficient policy instruments as they allow for a concentration of resources and funding in targeted areas with a high growth and development potential that can spread beyond the target locations (spillover and multiplier effects).
•Industrial development also depends on the appearance and performance of clusters that are often integrated into and connected through value chains.
•Most value chains count with the presence of clusters in some of their segments.
• In the UNIDO context, clusters are defined as “geographical concentrations of inter-connected enterprises and associated institutions that face common challenges and opportunities”. This definition highlights two essential features of clusters: (i) they consist of a critical mass of enterprises located in geographical proximity to each other and (ii) enterprises within them share many common features such as shared sourcing of inputs and services, and shared markets and buyers.

•Inclusive
•Sustainable/CSR
•Pro-Poor
•Ethical/Human Rights
•Gender-balanced
•Market-driven
•Cluster development as ISID
–Collective efficiency and Innovation
–Market Access, Profitability, compliance
–Attraction of potential “pioneers” firms and developing vertical/horizontal linkages from such firms including buyers and suppliers integration
–Cluster-to-cluster partnerships
–Export/quality Consortia
•Development objectives
–improving income, jobs and food security
–Diversification
–Value addition and integration (backward and forward linkages
–Consumer protection
–Social, Economic and Environmental Sustainability , Human Rights, anti-corruption
UNIDO Cluster Development
and Business Linkages

•UNIDO’s 20-years industrial cluster and network development approach (Google search UNIDO within the top 5 hits)
•Supported the development of industrial clusters in Asia, Latin America, Africa and Europe (textile, food, wood, construction, automotive,…)
•Fostered Cluster-to-cluster and Suppliers/Buyers (Slovenia/Russia, Italy/India- Vietnam, Mena Region/EU….)
•It focuses on:
–formal industrial sectors (Competitiveness/market access)
–livelihood-driven conglomeration of micro enterprises/farms (pro-poor income generating approach including youth/women empowerment)

•UNIDO is part of the world networks of clusters development institutions, researchers and academia (Cluster excellence, TCI…..)
•Partnerships with leading private companies (Fiat/Renault, METRO AG/Germany, Habitat/France, Illy caffe/Italy, AEON/Japan, H&M- Volvo/Sweden, AGRANA/Austria, Samsung/Korea…..
•Standardized approach supported by tools, network of experts and training packages/e-learning systems, M&E system..

Focus on building national human & institutional capacity through cluster training, development and upgrading and policy advise
Cluster mapping and VC analysis
Direct Intervention at the cluster level and value chain
Skill upgrading & development for local associations, institutions, consultancies & policy makers
CI of methodology
Linking buyers and suppliers- sustainable sourcing

UNIDO Approach developed and applied since mid-1990s in both emerging markets and LDCs
Adaptation to local contexts (country, sector, size of enterprise etc.)
Continuous Learning process (KM, M&E, integration with other knowledge centres)
Knowledge Sharing of innovative cluster policy solutions (North- South and South-South)

Distinctive features of UNIDO CBL approach:
Creates and improves “ Social Capital” at the local level
Establishes a “sustainable governance framework” within the assisted Clusters and Networks
Adopts a principle of “ not-substitution” to PP sectors functions and roles
Favours a “ catalytic approach” i.e the capacity to leverage local funds and resources
Can be applies to different “ groups of MSMEs” (size, development/ business objective, VC/sectors, countries, regions…)
Integrates tools, methodologies & skills

Pro-poor
Competitiveness
Development Approach
Micro
Medium
Enterprise size
LDCs Less developed regions
Emerging countries/ regions
Country/Region
Automotive
Agribusiness
Handicraft Cultural…
Conceptual model

The Development Dimension
 PSD/Cluster for pro-poor growth/MDGs
 Inclusive growth through better collective business performance
Pull-effect on the local economic system (LED)
Fostering SMEs’ access to local & international markets
Conducive business environment & spill-over effects on local business communities…..
 Cost efficiency
 Economies of scale
 Replication benefits
 Leveraging local resources, skills & assets
 Reduction of transaction costs….

Joint Actions
(B2B, multi- stakeholders)
Development impact
Cluster Initiative
Cluster Performance
Causal chain
Causality
Collective efficiency
Reduced coordination/ transaction costs Reduced information asymmetries
Demand for Labour Profit / Wage raise
UNIDO builds local institutions’ capacity to operate as impartial agents who promote joint actions!
The causal chain

Cluster friendly
policy environment
Definition and endorsement of a cluster policy (also to remedy market failures)
Generation of institutional capacities to design and implement development initiatives within clusters (to remedy to coordination failures)
Establishment of a cluster-friendly policy environment
Foster forward and backward linkages
Cluster Policy
Institutional Capacities
Sustainability through cluster policy

Sustainability through CB
Technical guidance and advice on project design, implementation and M&E
Capacity Building and training activities (ToT, training for final beneficiaries: entrepreneurs, BDS, policy makers, academia)
Pilot and roll-out
Operational tools (analysis, diagnostic, management, audit, evaluation, KPIs..)
Building strategic business linkages for market access
Methodologies, manuals, training kits
Joint learning programmes (class-room/distant learning/on-the-job)
 Action-oriented research
 Business Linkages & match-making (B2B, C2C, VC)
…….

www.clustersfordevelopment.org
UNIDO Knowledge hub and self-learning tool

value chain and cluster development: The Issues

Value Chains in Development
•Business Objectives
–Attract investment and increase value addition and local content
–Market Access and Profitability
–Linking to Buyers (manufacturers or retailers)
–Attraction of potential “pioneers” firms and developing vertical/horizontal linkages from such firms including buyers and suppliers integration
–Increase tax revenues…
•Development objective
–improving income, jobs and food security
–Diversification
–Consumer protection
–Climate Change…
•Inclusive
•Sustainable/CSR
•Pro-Poor
•Ethical/Human Rights
•Gender-balanced
•Market-driven

Holistic value chain & Cluster mapping

Generic examples of clustering across segments in the value chain
20
Source: The authors

Global value chain dynamics and and the role of clusters
21

Approach
–Work with existing clusters and foster new aggregations of suppliers
–Private-sector-oriented
–Inclusive, Sustainable and pro-poor growth,
–Collective efficiency through joint actions
Measures
1) Foster linkages between cluster stakeholders,
2) facilitate consensus building,
3) build relationships,
4) encourage trust building,
5) strengthen governance mechanism
6) support the cluster’s institutional network and
7) strengthen cluster governance mechanisms
Quantity matters: Focus on cluster development

•Networks are alliances of firms that work together towards an economic goal
•Can exist outside clusters
•Horizontal and vertical networks
•Approach:
–Building institutional capacities to foster network development
–Trust building
–Engaging knowledge network brokers.
–Fostering learning through collaboration
–Stimulation of ideas, skills and competencies development
Focus on firm networking for local capacity development

•Need to develop systems to comply with the new management standards,
•Countries are required to operate laboratories, which are able to test products and samples for compliance to international standards.
•UNIDO’s assistance consists particularly in:
–Enabling national standards bodies to offer services for industrial compliance with WTO agreements, while taking into account private sector, exporter and consumer needs;
–Developing local capacities in metrology, calibration and product testing, in order to provide services to local testers, producers and exporters according to international best practices, and also to enhance consumer protection;
–Enabling national and regional accreditation schemes to assess the performance of local and regional laboratories, inspection units and certification bodies; and
–Building the capacities of consumer associations to promote consumer rights based on national policies and in line with international best practices.
Focus on standards compliance infrastructure development

•Insufficient infrastructure and services in developing countries
•Industrial parks/SEZ provide business-enabling conditions and infrastructure
•Concentration of industries and support services attracts investors
•Industrial parks/SEZ can become growth and innovation hubs
•UNIDO supports the development of industrial parks:
–identifying appropriate locations,
–planning of scope and scale of park operations,
–marketing and promotion of the park concept, promotion of investments,
–setting up service providers that are able to provide infrastructure,
–setting up capacity to manage park development and park operation,
–linking up firms in the park via cluster and networking approaches,
–provision of manufacturing and agro-processing knowledge and technology and support to marketing efforts of firms
Focus on business agglomeration within industrial parks/SEZ

•Work with farms and firms in developing countries –organized in clusters - that face difficulties complying with market requirements and lack technical and financial means to produce sustainably goods with appropriate quality at required quantity
–Gradual capacity building among suppliers in developing countries with a continuous improvement focus at heart:
–Develop partnerships for responsible supply chain development and promote appropriate and feasible cost sharing among different partners:
–Adapt to country or region:
–Engage in harmonization of standards
–Promote networking among firms
–Stronger bargaining power
Focus on sustainable supplier development

How is a cluster different from a…
network = an alliance between a limited number of firms that share joint business objectives.
•Can be horizontal or vertical;
•Cooperation produces little externalities - benefits are fully appropriable;
•Can be part of a cluster. However firms are nor necessarily located in spatial proximity.

How is a cluster different from a…
Industrial park = refers to the delineation of districts and the definition of regulations and special incentives to attract investments (national and foreign) and nurture the development of new industries.
•Induced not spontaneous concentration of industries – an explicit, time- bound policy
Business incubators – are support programs that provide affordable work space, shared facilities, counseling, training, information and access to external networks for entrepreneurial groups, thereby helping promote venture creation and economic development.

Footwear cluster
Shoe factories
Affiliated leather
goods producers
Marketing
Transport
Retail
Consumer
Disposal
Livestock breeding
Slaughterhouses
Veterinary services
Agricultural research centers
Forage
Land farming
Support institutions:
•Leather technology center
•Vocational schools
Tanneries
When the economic actors pertaining to one or more linkages of a VC are located in the same territory  we speak of a cluster
Clusters can be part of a VC but do not (always) exhaust all functions of the chain
Value chain or cluster?

Cluster
Networks
Value chain

SUPPORTING INDUSTRY: CAR COMPONENTS CLUSTERS
FORESIGHT, RESEARCH & POLICY ADVICE
Supplier Development
-Training of experts on Lean Manufacturing, strategic planning, monitoring with KPIs
-Productivity & quality upgrading of suppliers
-Development of supplier case studies to illustrate best practices & impact
-Data collection of suppliers through surveys & profiling
-Benchmarking of suppliers against performance nationally and internationally
Clusters, Business & Investment Linkages
-Training experts on developing and facilitating linkages and joint activities amongst suppliers
-Developing and strengthening automotive cluster bodies
-Establishing dialogue platforms for stakeholders
-Training / application of Technology Foresight Methodology
-Investment Promotion
-Establishing SPX Centres
Low Carbon
-Establishing R&D centers for Hydrogen Energy Technologies
-Hydrogen pilot activities for creation hybrid vehicles
-Training of experts & suppliers on Cleaner Production (CP)
-Support to suppliers for CP implementation (incl. ISO 14001, carbon footprint, greenhouse gas accounting)
-Chemical leasing
-Elaborating national energy conservation plans
-CFC-11 elimination in suppliers

AUTOMOTIVE INDUSTRY

•Upgrading of clusters of automotive suppliers in India (in partnership ACMA)
•Duration: 1999 – 2010
•Goal: Assist suppliers to overcome challenges related to low productivity, insufficient and inconsistent quality, and scalability, so that they can become more efficient, reliable and cost-effective suppliers
•Approach:
–Formation of supplier groups (based on location)
and assignment to a trained counselor
–Counselors visit companies in their group by rotation
(45 visits during a 30-months programme)
–Counseling and training based on “upgrading road map”
–Monthly Review Meetings (MRMs) with all firms of one group (peer review, invitation of guest presenters – associations, OEMs, etc.)
–Firm competitions on TQM subjects to boost motivation
–Case study development for dissemination and learning
SUPPORTING INDUSTRY: CAR COMPONENTS CLUSTERS IN INDIA

Results:
–more than 50 national counselors, company experts and quality staff trained, with their capacity to provide support services on productivity upgrading
–133 companies upgraded
•100% of have shown increased sales, on average of 33%
•82% have added new customers – on average 6 new clients per firm
•90% have added new products – on average 30 new products per firm
•100% have shown tangible benefits/cost savings – on average USD 73,000 per firm
•33% achieved a delivery schedule adherence of between 96% and 100%; 44% achieved 95%; and 16% achieved between 80% and 95%
•41% achieved zero PPM (parts per million) in terms of customer rejection and another 40% reduced customer rejection rates by more than 50%
•86% reduced in-process rejection by more than 50%
•84% improved ITR to reduce working capital requirement
•90% improved OEE from 56.4 to 76.9 (+36.4%) to reduce machine break down time
•86% improved productivity from 93.45 to 162.65. (+74%) to reduce production cost

Video (4.50 min)
http://www.youtube.com/watch?v=nJqwdRDx1hg

Case Study – Samara/Russia
Objective: Enhance the competitiveness of clusters of automotive component manufacturers and their integration into global supply chains Duration 2008-2012 (phase I); new phase 2014-2016 Achievements:
Establishment of Association of Automotive Suppliers of Samara
Increased productivity of 33 component manufacturers through training 600 CEOs, experts, managers and employees in lean techniques, TQM, and SMED, which resulted in:
a 20-45% reduction in changeover time
a 10% reduction in the lead time
a 15% reduction in downtime
Launch of joint projects between industry and public/private institutions: e.g. Measuring Laboratory for Collective Use, Center of Lean Manufacturing and Quality
Internship scheme launched to offer hands-on experience
SUPPORTING INDUSTRY: CAR COMPONENTS CLUSTERS IN RUSSIA

Case Study – Samara/Russia
Success Elements:
Cluster-to-cluster: Twinning of a developed cluster (Slovenia) with an emerging cluster (Samara Russia):
Clear business interest of Slovenian cluster members to explore business opportunities in Samara
A need for training and upgrading of companies and support institutions in Samara
Slovenian automotive cluster was capable and ready to transfer best practices on automotive supplier and cluster development to Samara
Study tours/exchange visits (both countries) and trainings undertaken with the UNIDO as neutral broker, also bringing in other international best practices
Establishment of the Russian-Slovenian Business Club (with now 43 members) based on Slovenian Consulate in Samara
3 joint ventures (Russia-Slovenia) realized as a result of this project
Win-win-situation for recipient and donor country companies
Request for project continuation – phase II started Q3, 2013
SUPPORTING INDUSTRY: CAR COMPONENTS CLUSTERS IN RUSSIA

•RECENT PARTNESHIP WITH VOLVO AND SCANIA
–Post-sales and maintenance services for job-creation
–Feeding the supply chain
–Creating/strengthening public-private dialogue and partnerships
–Partnering for employment and economic revival of Iraq’s industrial manufacturing sector

Cluster & enterprise twinning (C2C)
Viet Nam

•Cluster Development and Upgrading for enhancing competitiveness of Vietnamese SME clusters/enterprise networks in local, regional, and global markets;
•Twinning and Business Partnerships with Italian SME clusters/districts/enterprises, networks and industry associations;
•Cluster Development Policy upgrading and streamlining
Promotion of business partnerships
(B2B C2C)
Cluster Development and Upgrading
Technical assistance and training
Govt. of Italy DGCS
Govt. of Viet Nam ASMED/MPI
UNIDO
Cooperation agreement to support SME development in Viet Nam
Viet Nam: Cluster & enterprise twinning (C2C)

Viet Nam: Cluster & enterprise twinning (C2C)
Cooperation agreement Textile/garments cluster Leather/Footwear cluster Wood/furniture cluster
Italian Clusters:
•DESIGN
•QUALITY
•MARKETING
•KNOW HOW
•PROJECT FUNDS
Viet Nam Clusters:
•LOWER PRODUCTION COSTS
•FREE TRADE ACCESS TO REGIONAL MARKETS
•LOCAL CONTENT/DESIGN
Dissemination of the Industrial District Model in Viet Nam
Transfer of Italian manufacturing Know-how
Promotion and support to business agreements

42 training events in Vietnam
Over 4000 trainees
10 Study visit abroad
3 clusters and over 90 firms assisted
3 Sector associations
strengthened
Textile Lab modernized Technology & marketing
A Master Degree tailor-made
A new policy on cluster development
Vietnam promoted in Italy as best platform
Italian firms coming to Vietnam
Confindustria
ICE, Federlegno
Chambers, regions
New products developed and promoted…
Over 30 top international experts involved
More than 30 national experts involved and trained
13 local services contracted and trained
1.2.3……100 new joint activities, ventures…

HOW TO MAKE COLLABORATION WORK
•GOVERNMENTS: To contribute and be part of it; no conflict between regulations and marker requirements and foster integration/linkages
•BUYERS: To integrate functions (QA, Purchasing, CSR, and to work as a buying cluster)
•SUPPLIERS (commit to continuous improvement, collective actions..)
•DONORS and DEVELOPMENT PARTNERS (no duplication and joint funding)
•Global Initiatives: foster integration of tools and competency/capacity building, KPIs. Monitoring and Evaluation…
•SERVICE PROVIDERS: take part of the scaling up/expansion

•Negotiate with investor and buyers local content and development of intermediary and end-producers and services;
•Foster cluster development and networking within and outside SEZ to increase competitiveness;
•Developing innovate capacities to venture into new activities downstream in the value chain and in other sectors;
•Drawing from in-depth value chain analysis and cluster mapping and corresponding industry strategy development based on holistic understanding of the value chain/cluster;
•Strengthening managerial, technical and vocational skills and technology to improve competitiveness and efficiencies;
•Promote policy and financial instruments to support development in line with WTO and other global and regional practices
•Ensure a strong development impact
•Achieve Economic, Social and Environmental Sustainability
Conclusions

ACHIEVE INCLUSIVE AND SUSTAINABLE INDUSTRIAL DEVELOPMENT (ISID)

XINH CAM ON!
THANK YOU!
Contact details:
G. Patacconi: g.patacconi@unido.org

Developing Industrial Clusters to Integrate Value Chains

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