This document discusses how clusters and value chains can help small and medium enterprises (SMEs) in Abu Dhabi upgrade and remain competitive. It covers: 1) How SMEs can upgrade through innovation to compete internationally. 2) How participation in clusters and collective efficiency can benefit SMEs through local linkages and knowledge spillovers. 3) How engagement in value chains through linkages with large buyers and suppliers provides opportunities for SME upgrading. 4) The policy implications of supporting SMEs in clusters and value chains, such as developing skills, innovation, and networks.

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Clusters and Value Chains:
How they can help in the development of
SMEs in Abu Dhabi
Prof. Roberta Rabellotti
roberta.rabellotti@eco.unipmn.it
http://sites.google.com/site/robertarabellotti/home
Università del Piemonte Orientale
Italy
Abu Dhabi – 28 September 2010

2. 2
A 4 Points Agenda
① SMEs upgrading to compete in the
changing international productive
context;
② SMEs in clusters and collective
efficiency;
③ SMEs in value chains;
④ Policy implications.

3. How is the international productive context
changing?
• Increasing geographically fragmentation (across many
countries) & functionally integration (with large global
players having a leading role within Global Value Chains
- GVC);
• At the same time, forms of local productive
agglomeration of SMEs also persist (cluster);
• Enterprise competitiveness both in GVC and in clusters is
increasingly depending on the relationships/linkages
among economic actors:
- the concept of “governance” (coordination), at global,
national and local level, is central;
- the impact of governance on the opportunities of
upgrading for firms is also key.

4. ① Upgrading
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5. UPGRADING = Innovation to increase
value added
Innovation is not necessarily a breakthrough
into a product or a process that is new to
the world.
In most cases, it is rather a story of marginal,
evolutionary improvements of products and
processes, that are
new to the firm, and that allow it to keep up with
an international (moving) technological frontier.
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6. 6
4 types of UPGRADING
Ø 1. Process
Ø 2. Product
Ø 3. Functional
Ø 4. Intersectoral/inter-chain
Upgrading

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1. Process Upgrading
• Achieving a more efficient transformation of
inputs into outputs by reorganizing the
production system and introducing superior
technology;
• Matching standards that are set by buyers (e.g.
in the food processing to enter in hotel market);
• Doing things more competently (matching strict
logistics and lead times and delivering supplies
reliably and homogeneously time after time).

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2. Product Upgrading
• Moving into more sophisticated products with
increased unit value;
• Producing a large range of products with different
specifications that cover the whole range of quality;
• It is sometimes difficult to distinguish product and
process upgrading (e.g. in agro-food products, the
introduction of new processes generates new
categories of products: organics, ‘‘sustainable”
products).

9. 3. Functional Upgrading
• Changing the mix of activities within
the firm and acquiring new, functions
that increase the skill content of
activities (for example from
manufacturing to design).
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10. 4. Intersectoral/Inter-chain
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Upgrading
• Applying competences acquired in one
function of a chain and using them in a
different sector/chain (eg. from TV set to
PC screen);
• Learning what is taking place in one strand
of a value chain (domestic market)
applying to another (export market).

11. How can small & medium enterprises
face the challenge of upgrading?
Exploiting the opportunities offered by two different
and complementary forms of industrial organization:
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1. Clusters
2. Global Value Chains

12. Clusters and Global Value Chains
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Clusters: the focus is on local linkages generating
competitive advantages and sustaining the
upgrading of SMEs
Global Value Chains: the focus is on the linkages
with external actors.
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13. ② Clusters
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14. The 5 pillars of clusters
1 Clusters are geographically bounded;
2 There is a critical mass of actors;
3 Clusters are specialized in one core activity;
4 There are intensive vertical (with suppliers and
buyers) and horizontal linkages;
5 There is a strong and relatively homogeneous
cultural and social background facilitating
interactions.
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15. The 4 main categories of
cluster actors
1 Large and small
firms;
2 Governments;
3 Universities and
PROs;
4 Financial and
other supporting
institutions
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16. Specialisation
• The specialisation may
span numerous sectors,
branches and industries
(manufacturing and
services);
• Effective clustering is
likely to entail a strong
element of
complementarities
between actors.
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There are many different types of clusters
suppliers customers
Marshallian ID Hub-and-spoke Satellite Platform
Local SME
Headquarters of large parent company
Local branch or division of a large corporation

18. The Hub-and-Spoke Cluster
• A single large firm or several large firms may act as
hubs, surrounded by smaller suppliers and related
activities, spreading around it like spokes of a wheel;
• The large hub-firms often also have substantial links to
suppliers, competitors and customers outside the
district;
• These ‘long arms’ enable the transfer of new ideas
and technology to the home region;
• Inter-firm relationships occur between the hub firm and
their (often long-term) suppliers, but always on the terms
set by the former.

19. The state-anchored cluster
• When industrial activities are ‘anchored’ to a region by
a public entity, such as a state-owned enterprise, a
defence plant, a university or a concentration of
government offices;
• Industrial policy play a central role in the development of
such a form of clusters;
• Many examples of ‘business parks’, ‘science parks’ or
the like, being set up through a government initiative fall
within this category.
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20. The role of anchor firms in clusters
• They facilitate the emergence of new SME: supplying
incubation space to employees, financing their own start
ups, providing technical expertise and initial markets;
• They provide a critical mass of trained people and
experienced managers which small innovating firms
can hire;
• They provide a customer and supplier base;
• They have multiplier effects and they can generate
cost savings in terms of the local economy for
materials and services (these can range from university
graduates to business supply services to raw materials’
production).
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21. The benefits of clustering for small
firms
Spontaneous
Advantages/
Spillovers
(External
economies)
Collective
(Joint) Actions
Collective
Efficiency
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External economies: spontaneously
developing in clusters
• Availability of a pool of specialized labour
force;
• Cheap and ready available supply of
specialized inputs;
• Easy access to specialized technical
knowledge and rapid dissemination of
information;
• Improved market access: the concentration
attracts customers.

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Joint actions deliberately taking place
among cluster actors
• Joint action within vertical linkages: backward
with suppliers and forward with traders and
buyers;
• Joint action within horizontal linkages:
purchasing of inputs, appointment of trade
agents in foreign markets, negotiation of
shipping or air cargo rates;
• Joint action within horizontal multilateral
linkages (business associations): trade fairs,
export consortia, collective provision of business
services, political lobbying.

24. Clusters are increasingly involved in
Global Value Chains
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25. ③ Global Value Chains
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A simple value chain
• The value chain
describes the full
range of activities
which are required to
bring a product or
service, thorugh the
different phases of
production, delivery to
final consumers and
final disposal after
use;

27. Why the concept of GVC is useful?
• Emphasis on non-production activities (e.g.
marketing; design, product development) in the
creation of value added: some activities are more
lucrative than others;
• Emphasis on global buyers (e.g. IKEA) and global
producers (e.g. Toyota) as key drivers in the
formation of globally dispersed production and
distribution networks;
• Emphasis on external linkages as key channels of
knowledge for SMEs;
• Emphasis on the nature of the relationships
(governance and power asymmetries ) within the
chains.
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28. Barriers to entry and rents
• Some activities add more
value than others and
therefore it becomes
crucial to identify which
activities are providing
higher rents along the
value chain;
• These differences among
activities are relevant in
order to understand
opportunities open to
firms’ competitiveness
and upgrading.
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Who captures value in Made in China
Apple’s iPod?

30. • Apple captures most of the value (224 $ over
299$);
• Suppliers of key inputs also gain a good
share of value:
• 7 key inputs: 83 $;
• 444 remaining inputs: 28$;
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Some calculations about the disaggregation of
the value added in the IPod chain

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Who is governing the chain?
• At any point in the chain governance and
coordination is required about:
– What is to be produced (design of products);
– How is to be produced (definition of the
production process: technology, quality
standards);
– How much has to be produced;
• The type of interactions (arms length,
cooperative, hierarchical) and the distribution of
decision power within the chain are key issues in
determining the upgrading of opportunities for
the SMEs involved in the GVC.

32. ④ Policy actions to support
SMEs in clusters and value
chains:
‘what works’
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33. 3 key areas at the heart of an industrial
strategy based on clusters and value chains
1 Supporting networks and
linkages;
2 Developing a strong skill base;
3 Supporting innovation and R&D
capacity.
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34. 1.Supporting networks and linkages
• Networks can vary in size from a handful of companies
working together to associations with a hundred or more
members;
• Fostering linkages is key: this may consist in bringing
firms together or developing new institutional formats (i.e.
business associations);
• All members should gain something from their
participation in networks: ‘networking with a
purpose’ (i.e. joint marketing, training, learning)
• SMEs may receive (temporary) compensation for some
of the costs of their network participation;
• Network can be accelerated by brokers, facilitating
netwoking eventss;
• Anchor firms can be key leaders in networks;
• Networks should also be international for accessing new
knowledge and ideas.

35. 2. Developing a strong skill base
• Emphasis on cluster s pecific training and
knowledge needs;
• Creating Skills Centres for training new entrants
and re-entrants and for broadening and
deepening the skill base;
• Creating strong links between Higher Education
Institutions and businesses for developing
specific curricula, skill standards and
certifications.
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36. 3. Supporting innovation and R&D capacity
• Public and private universities and PROs are
catalysts for research and innovation and they
are key for attracting research-oriented
businesses in innovative clusters;
• Promote strong linkages between researchers
and local firms and facilitate technology transfer
from scientific research to commercial ideas;
• Attract researchers from abroad, facilitate
international research collaborations and
promote excellence in domestic universities.
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37. 4 contributory factors for successful
cluster development
1 The presence of large firms: actively involve lead firms
in the design and implementation of policies;
2 Adequate infrastructure: in clusters there are economies
of scale in the provision of infrastructures;
3 Access to financial and non-financial services;
4 A supportive policy environment:
– improving contract enforcement and property rights;
– simplifying bureaucratic rules;
– setting up efficient standards, testing and quality
assurance systems.
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38. Strengthen the local supply of financial and
non-financial services
• In clusters, the common specialization and the
geographical concentration of firms generate
economies of scale in the provision of services;
• Creation of local Business Development Service
(BDS) Center which also have a role in stimulating
firms’ demand of new services;
• SMEs’ access to capital: commercial banks need to
develop specific skills for lending to SMEs;
• Financing policies can be used to encourage
particular types of activities (e.g. tax incentives for
R&D projects; access to venture capital).
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39. To conclude 4 rules for effective strategies
1 Long term perspective;
2 Policies need to adopt a dynamic approach
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and evolve over time;
3 Mobilisation: building interest and
participation, involving the main stakeholders
in the identification of the actions to
implement;
4 Assessment: Evaluation and monitoring are
areas where little has been done so far.
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40. The life cycle of
clusters
Clusters are
dynamic and the
intervention that are
appropriate at an
early stage (e.g.
network brokers) are
likely to differ from
those appropriate at
later stages (e.g.
encouraging
innovation and
openess).
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41. Assessment
• Establish a set of metrics capable of tracking the
performance of a cluster over time and the success of the
different interventions;
• Clusters are multi-faceted and measurement should
recognise this;
• Indicators are needed for measuring: networks, innovation,
skills, economic performance at firm and cluster level;
• Multi-source information: official statistics, commissioned
survey work, qualitative understanding based on
discussion with cluster members;
• Measure additionality: what would have been observed
in the absence of the intervention?
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42. Thank you!
roberta.rabellotti@eco.unipmn.it
For related works visit:
http://sites.google.com/site/robertarabellotti/home
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