CLUSTER SELECTION – AN OVERVIEW Originators: Foundation for MSME Clusters (FMC), UNIDO

Reducing poverty through sustainable industrial growth Why to Select/Prioritize Clusters? Cluster selection.. …the first step of the UNIDO methodology But what for?

Reducing poverty through sustainable industrial growth Why to Select/Prioritize Clusters? Different countries/projects, different answers...  “We cannot select. This is a national programme and we need to cover the whole country!”  “We needed to learn before we could replicate on a bigger scale.”  “It is a good exercise to engage stakeholders and create trust, plus it was good because we had time to better understand project objectives and expectations of counterparts.”  “It was useful since government and donor all of a sudden changed priorities but we could justify why we needed to continue were we started.”

Reducing poverty through sustainable industrial growth Why to Select/Prioritize Clusters?  Selection is a “practical” issue to get started….. but it should not be seen as an objective per se.  Thinking about up-scaling starts at the same time!!!

Reducing poverty through sustainable industrial growth Why to Select/Prioritize Clusters?  To learn about your options – take an informed decision  To generate consensus and build a coalition of supportive stakeholders Legitimate the decision – create ownership Avoid undue external pressures and guarantee the continuity of project activities even in the face of a change of priorities on the part of one or more of the counterparts  To make best use of your resources Focus on the clusters wherein impact can be generated in the lifespan of your initiative given available resources  To set the ground for upscaling

Reducing poverty through sustainable industrial growth The Cluster Selection Process  Step 1: Identification and mapping of existing clusters  Step 2: Shared meaning of the development objective  Step 3: Agreement on prioritization criteria, variables and on their weighting  Step 4: Prioritization of clusters and validation of decision

Reducing poverty through sustainable industrial growth STEP 1: Cluster Mapping  Identification of existing clusters in an area / region / country  Criteria A concentration of firms operating in the same/related sectors Presence of support institutions  Output: List of clusters or cluster map location

Reducing poverty through sustainable industrial growth STEP 1: Cluster Mapping Example: Cluster Map of Italy

Reducing poverty through sustainable industrial growth STEP 1: Cluster Mapping How is information gathered?  Not a unilateral process but a participatory approach  Key informants: Leaders oft the national counterparts Development organizations SME support institutions Industry associations, chambers of commerce Academia

Reducing poverty through sustainable industrial growth STEP 2: Qualifying Dev. Objective Do we all have the same understanding? To be discussed & validated with national counterparts! To promote economic growth through the development of national competitive industries To promote upgrading of local firms along national and international value chains To generate employment (for the poor) To generate business opportunities for (poor) entrepreneurs To increase the availability of goods/services affordable for the poor … …

Reducing poverty through sustainable industrial growth STEP 3: Tuning Selection Criteria UNIDO Selection Criteria 1.Economic outlook of the cluster 2.Expected impact on poverty reduction 3.Intervention feasibility

Reducing poverty through sustainable industrial growth STEP 3: Tuning Selection Criteria 1.Economic outlook of the cluster a)The production system  Location and size of firms  Skills, technology and production processes  Products (quality/price vs. competitors)  Degree of organization of the private sector b)Markets (growing or shrinking? How large?) & value chain integration (existing or potential? How stable? What type of governance and implications for upgrading) c)Strength of the support system – public and private institutions & educational system d)Framework conditions - infrastructure and policy

Reducing poverty through sustainable industrial growth STEP 3: Tuning Selection Criteria 2.Expected impact on poverty reduction a)The poor as a share of the cluster economic actors (entrepreneurs, workers, suppliers, consumers: working with the poor or for the poor?) b)Employment generation opportunities for the poor - prevalence of micro and small firms; labor intensive sectors; low skills requirements, sector employing women, marginalized people… c)Value chain features: potential for upgrading strategies that will generate economic benefits for the poor d)Bottlenecks/discrimination preventing them from participating into the cluster economic activities (access to resources, cultural norms…)

Reducing poverty through sustainable industrial growth STEP 3: Tuning Selection Criteria 3.Intervention feasibility a)Given time and resources constraints, where is the initiative likely to succeed?  Local leaderships and commitment  Cost of the initiative  Value added of the initiative b)Diffusion potential  Spillover effects  Extra-regional effects  Replicability

Reducing poverty through sustainable industrial growth Case Study 1 Selection of the Clusters for the Consolidated Project for SME Development in India  Development Objective: Enhancing the competitiveness of the selected industries in the cluster locations by upgrading their capacities and through cluster twinning with Italian counterparts  Setting the development objective the project, already introduced a filter for selection: How did we get to this filter?  Cluster twinning with Italian Clusters  Strong commitment from the political side  Presence of Support institutions  High export and subcontracting potential

Reducing poverty through sustainable industrial growth Case Study 1 Process:  First, according to the Project Document, a Chief Technical Advisor (CTA) was recruited  CTA was in charge of undertaking a cluster mapping and a rapid assessment (3 months)  CTA working on the basis of a series of criteria as established in the Terms of Reference (ToRs)

Reducing poverty through sustainable industrial growth Case Study 1 TOR Criteria:  Cluster framework: institutions / associations in the cluster that enjoyed the trust of the entrepreneurs, capable leadership, adequate business infrastructure, a conducive policy framework, lead technical institutions  Cluster critical mass: number, type and size of the firms, their distribution in the cluster, estimated turnover of broad groups, contribution to employment, contribution to income, types of products  Cluster location: within a city/village/linkage with nearby cities/villages (if executing agency has a specific rural/urban mandate)

Reducing poverty through sustainable industrial growth Case Study 1 TOR Criteria:  Viability: whether the products have a future in current national/global settings, what are the main markets (geographical, consumer segments) and main national & international competitors, major threats & opportunities, the stage of product in the product life cycle. value chain position.  Social and environmental conditions: sketchy profile of typical owners/managers and workers and of their economic status, average yearly earnings (man/woman) of workers/unit owners, drudgery in activity, if any, pollution related issues, legal issues related to quality.

Reducing poverty through sustainable industrial growth Case Study 1 Selection Process:  A list of 9 clusters was prepared after 3 months from kick off and submitted to the Project Steering Committee (SC), which finally selected the clusters to be assisted.  After a tedious negotiation process, the SC selected 3 sectors (Automotive, Leather and Footwear) and 3 locations (Delhi, Chennai and Pune).  Selection rationale for Pune (example): The production system: a big cluster, diversified product lines, auto hub for major car manufacturers (VW, BMW, FIAT-TATA), market demand strong and growing, growing export demand Support system: MCCIA and Auto-Cluster Diffusion potential: auto hub, tremendous export potential and subcontracting

Reducing poverty through sustainable industrial growth Case Study 2 Selection of the Handicraft cluster of Bhubaneswar in India  Why handicraft? – expected impact on poverty Major non-farm employer 60% of handicraft workers live below the poverty line Large segment of workers belong to scheduled castes or are women Highly labour intensive Craft workers using simple manual tools – allows for integration of the poor into production activities  Cluster Mapping 145 clusters with 100 or more artisans spread across 30 districts of the Orissa state

Reducing poverty through sustainable industrial growth Case Study 2 Selection of Bhubaneswar  Production system Relatively small cluster but: Diversified product lines Close proximity to Orissa's well known tourist ‘golden triangle’ Market demand for these items appears to be strong and growing Small but growing export demand Rich heritage of skills  Support system Directorate of Handicrafts and Cottage Industry (DCHI) in Bhubaneswar NGOs working in artisanal clusters are active on the ground  Diffusion potential Proximity to the Directorate – facilitate exposure of policy makers Leading cluster in stone carving – a pilot that facilitates the showcasing of benefits

Reducing poverty through sustainable industrial growth Case Study 2 How to apply the criteria?  Not “yes” or “no” questions but key issues to take an informed decision  Not “either” … “or” but a blending of (1) and (2) according to development priorities  A basic set, but you may add… e.g. sectoral focus / regional focus / community development / environmental /cultural preservation…