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CLUSTERING AND INTERNATIONAL COMPETITION: A CASE STUDY OF LEATHER FOOTWEAR CLUSTER IN ADDIS ABABA

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CLUSTERING AND INTERNATIONAL COMPETITION: A CASE STUDY OF LEATHER FOOTWEAR CLUSTER IN ADDIS ABABA Dr. Asfaw Wassie 32 ABSTRACT Ethiopia, as many other developing countries in Africa and elsewhere, has
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CLUSTERING AND INTERNATIONAL COMPETITION: A CASE STUDY OF LEATHER FOOTWEAR CLUSTER IN ADDIS ABABA Dr. Asfaw Wassie 32 ABSTRACT Ethiopia, as many other developing countries in Africa and elsewhere, has moved towards a liberalized trade regime since the beginning of 1990 s after a long period of import substitution. This paper analyses the changes in collective efficiency specifically, the cooperative behavior of Micro, Small, and Medium Enterprises (MSMEs) located in the footwear cluster of Merkato, Addis Ababa, because of international competition. It also investigates how firms performance is impacted by the changes in collective efficiency. Hence, the hypothesis explored in this paper is that meeting international competitive pressures require a positive change in collective efficiency specifically, greater local cooperation, both among producers as well as between producers and their suppliers and buyers. The study draws on qualitative data collected through in-depth interviews and quantitative responses came from a questionnaire survey covering a sample of 150-shoe making MSMEs to examine how collective efficiency or more specifically inter-firm ties, both vertical and horizontal, have changed. The empirical evidence shows that although some external events helped the footwear cluster of Merkato, the increase in collective efficiency also played an important role in the recent recovery of the cluster. The result also shows that while majority of firms in the cluster gain from agglomeration economies, the extent of inter-firm co-operation and joint action, and the benefits arising from it, are highly differentiated. It concludes that external economies, while necessary, are not sufficient to bring about growth. For growth, joint action, particularly in strategic vertical ties with local suppliers, subcontractors, and external buyers, is critical. Hence, the positive impact of collective efficiency affects only part of the cluster: those firms, which enter into cooperative actions, and those, which are able to benefit from some externalities, generated by cooperation. The main challenge for the future will be to transform the static part of the cluster. Cluster, Collective Efficiency, Footwear, Merkato etc. INTRODUCTION KEYWORDS Competitiveness is defined as the ability to compete (Ambastha and Momaya, 2004). It is the ability to design, produce and market products superior to others offered by competitors, by considering price and non-price quality. The search to maintain and improve competitiveness in this slippery world has increased in importance and receives much attention from political leaders, business people, and scholars (Markusen, 1996). Many methods to improve competitiveness have been proposed and one that receives particular attention is the concept of a cluster of companies. Clusters are geographic concentrations of interconnected companies, specialized suppliers and service providers, firms in related industries and associated institutions in a particular field where they compete but also cooperate, and enjoy local externalities (Schmitz 1992). A leading business scholar, Michael Porter (1998b), indicates that a key advantage for an individual member of clustering is that they gain as if they were larger companies. The focus of this paper has grown out of the literature in which collective efficiency has been the central concept. It is defined as the competitive advantage derived from local external economies and joint action in a cluster (Schmitz 1995). The former are incidental, while the latter is consciously pursued and the combination of the two varies between clusters and over time. Industrial cluster scholars argue that clustering may help local firms overcome their growth constraints in order to compete in distant markets (Giuliani, Pietrobelli & Rabellotti, 2005). A cluster improves small firms competitive advantages so that they are able to compete with fully integrated firms in the international market. By clustering, firm performance is enhanced, as firms attain benefits from agglomeration economies, including opportunities to utilize innovations in their products and processes (Porter, 1998). In a cluster, firms also have opportunities to cooperate that may compel them to confront the fast pace of market demand (Schmitz, 1999). Clustering may also reduce the production and marketing costs for individual enterprises (Schmitz, 1992; Weijland, 1994) to the extent that they can be able to compete in world markets. In other words, clustering helps small firms improve their competitive advantages, since it helps in overcoming the constraints from diseconomies of scale. Micro, Small and Medium enterprises (MSMEs) in Sub Saharan Africa in general and in Ethiopia in particular face a number of constraints, among others, lack of access to markets, finance, business information; lack of business premises; low ability to acquire skills and managerial expertise; low access to appropriate technology and poor access to quality business infrastructure (Stevenson & Annette, 2006). Moreover, their potential contribution to economic growth and poverty reduction often remains unfulfilled because of constrains associated with isolation and informality. Many of these obstacles can be overcome when smallscale firms are able to share resources, access external economies that lower their operating costs, and undertake joint actions that 32 Assistant Professor, College of Business and Economics, Hawassa University, Ethiopia, 1675 P a g e improve their competitiveness. Spatial proximity facilitates the achievement of such gains, as it is the case for firms operating within industrial clusters (UNIDO, 2009). For small enterprises in Sub-Saharan Africa, clusters or agglomerations may offer one means for overcoming some of these challenges and for creating more innovative and globally integrated industrial sectors (Giuliani et al., 2005; Humphrey & Schmitz, 2000, 2002; McCormick, 1999). Ideally, clustering creates external economies and collective efficiencies that increase the competitiveness, flexibility, and responsiveness of an industrial sector while providing opportunities for small firms to increase their production and technological capabilities (Schmitz & Nadvi, 1999). This observation appears to have great relevance to Ethiopia. While much evidence still needs to be gathered, it is now clear that industrial clusters are becoming common in Ethiopia, found in a range of sectors and regions. Moreover, some case material suggests that a few of these clusters have already turned themselves into dynamic clusters by meeting the challenge of intense competition in the local market. This has excited scholars and the aid and industrial policy community. Despite the growing interest, detailed information on SME clusters in Africa in general and in Ethiopia in particular remains limited. Attempts at explicitly studying such forms of industrial organization, as opposed to drawing inferences from studies carried out for other purposes, are rare, the main exceptions being researches undertaken on selected case studies in Sub-Saharan Africa by Oyelaran-Oyeyinka and McCormick (2007) and World Bank (2011). In Ethiopia, few studies related to this one have been conducted on the value of cluster membership by Abdella and Peerlings (2006), on competitiveness and viability by Abdella M. (2008), on the handloom sub-sector infrastructure by Ayele, G., Moorman, L., Wamisho, K., & Zhang, X. (2009), on cluster success factors by Ketselamariam H. (2010), and on the government s role in cluster development by Ali M. (2012). These studies provide important insights into the structure of industrial clusters and how these clusters could help small and medium domestic enterprises to overcome their size constraints and improve both their sales performance and their access to new markets. This paper falls within this emerging literature. It also seeks to understand how clustering facilitates responses to international competitiveness, turning local producers into global competitors. However, the paper pushes the discussion further by analyzing the nature of inter-firm ties and by presenting a more differentiated understanding of the gains that clustering offers. Ethiopia, as many other developing countries in Africa and elsewhere, has been moving towards a liberalized trade regime since the beginning of 1990 s after a long period of import substitution. This reform had a significant impact on Addis Ababa s footwear sector. Imports grew from 0.2 million pairs in 1997 to 0.90 million pairs in 2001 (LIDI, 2014). Since it is known that most, if not all, imported leather shoes came from China, it is clear that the China shock took place primarily in The imports, however, sharply declined thereafter. The decline in shoe imports is accompanied by the significant increase of the number of MSMEs in the shoe making industry in Addis Ababa. The number of firms jumped from 500 prior to 2000s to the current estimation of more than According to interviews, this can be explained by the fact that although Chinese shoes that came to Ethiopia had better finishing and were consumers that are more fashionable, quickly learned that they were much less durable and, hence, began to prefer locally produced shoes. Moreover, the quality of domestically produced shoes was improved, which would have culminated in the recent surge of exports of the Ethiopian shoes. The paper focuses on the case study from Merkato Leather Footwear Cluster where, with little exogenous support, local MSMEs have acquired back a significant share of the local market. This cluster has been identified as an exceptionally successful case in Africa because of such remarkable recovery from the intense competition from imported Chinese shoes in the late 1990s (Sonobe et al., 2006). Can this recovery be entirely explained as a windfall gain from changes in the consumer attitude towards Chinese shoes? Alternatively, are there structural changes occurred in the footwear cluster which have enhanced the ability of domestic producers to compete? Alternatively, how does a cluster responds to opportunities and crisis of international competition? This study addresses these questions focusing on changes in external economies and structural changes in vertical and horizontal relationships between Merkato shoe firms and their suppliers, subcontractors, and buyers. The objective is to assess if international competition induces greater changes in external economies and cooperation in vertical and horizontal linkages. It also analyzes if these changes in collective efficiency positively influence firms' performance and together with a favorable market environment contributes to the cluster's recovery. Furthermore, the paper investigates the heterogeneous behaviour of firms in the cluster and assesses whether external economies alone are sufficient to ride out major changes in product or factor markets. BACKGROUND INFORMATION Like other countries in the world, there are industrial clusters of micro- and small-scale enterprises in Ethiopia. The most common types of clusters in Ethiopia are natural clusters. Although the exact number of clusters in Ethiopia is not known, they are commonly found among labor intensive manufacturing sectors and are mostly located in urban centers, rural towns and tourist areas. One example of such clusters is the footwear cluster in Merkato, Addis Ababa. The Merkato footwear cluster is a spontaneously grown agglomeration of MSMEs (natural cluster). Its name reflects its location. Merkato is the largest open-air market in East Africa located in the city centre of Addis Ababa. The cluster is believed to comprise 1676 P a g e above 1500 shoemakers. This cluster is also home of many other related businesses and complementary activities that include buyers, suppliers of various inputs (soles, leather, shoe accessories), and service providers (repair, machinery rent etc.). The producers obtain nearly all raw materials needed for the shoe making and services such as machinery and equipment maintenance, design, and labor supply from the cluster. The majority of firms also sell their products through wholesalers that are mainly located in the cluster and the vicinity (Sonobe et al., 2006). This cluster has been functioning for decades and went through difficult times. The socialist ideology and associated command economy that persisted for about two decades ( ) in the country was hostile for private investment and entrepreneurship. The cluster and the sector at large were stifled as a result. With the change of government in 1991, the country undertook trade liberalization and extensive policy reforms to transfer the economy into a market oriented one. It also adopted a structural adjustment program that includes domestic market deregulation and trade opening. Some of these reforms might be helpful for the revival of the cluster and the private sector at large. However, the domestic market was flooded with imports particularly Chinesemade shoes following the trade opening. The imported Chinese shoes were less durable but had better finishing, more fashionable and cheaper than the products produced in the cluster and elsewhere in the country. Throughout the 1990s, the domestic footwear industry was hit hard. As a result, many firms could not compete and they were forced to close/change or downsize their business (Sonobe et al., 2006). The government export promotion strategy that was adopted at the end of the 1990s, consequent industrial, Micro, and Small Enterprises (MSEs) development strategies consider the leather industry as a priority sector. This is partly justified because Ethiopia has the largest livestock production in Africa and the 10th largest in the world, which gives the country a comparative advantage in the raw materials needed for the leather sector. The strategy emphasizes the need to upgrade exports from unprocessed toward fully processed leather and final products such as footwear, bags, jackets etc. The focus of the support, however, has been the large footwear firms. The small firms in clusters did not benefit from the government MSE promotion initiatives mainly because they operate out of the radar of officials. Despite the absence of support from the government, the Merkato small shoe cluster has made a remarkable recovery in the early 2000s at a time when the large firms continue to struggle for survival and lobby for government support. Although there is no official record on the number of firms in the cluster, recent studies have shown the increasing expansion of this cluster. Prior to 2000 the number of firms in the cluster was estimated to be around 500. This number increased substantially following the recovery from the severe import competition and reached about 1000 by 2005 (Sonobe et al., 2006) and is currently estimated to be above This paper analyses whether the recovery is related to the increase in collective efficiency in the cluster. More specifically, it analyzes the changes in collective efficiency, particularly the cooperative behavior located in the footwear cluster of Merkato, Addis Ababa, due to the international competition. In other words, it investigates how the cluster has been responding to the international competition. Hence, the hypothesis explored in this paper is that meeting such international competitive pressure requires a positive change in collective efficiency and specifically greater local cooperation that ultimately results in improved performance. OBJECTIVES OF STUDY The general objective of the study is to analyze the changes in the collective efficiency, specifically on the cooperative behavior of MSMEs in a cluster due to international competition. The specific objectives of the study are to: Examine cluster s responses to the opportunities and challenges of international competition (specifically related to Chinese competition). Examine the relationship between collective efficiency and the performance of MSMEs in a cluster. SCOPE AND LIMITATION OF STUDY The study is limited to the footwear cluster found in Merkato, Addis Ababa. From the methodological point of view, the sample and context are always issues of concern. Using leather footwear SMEs in Addis Ababa as a target population contributed to the research s generalizability but it was also a weakness. Further expansion of this research to large organizations and other clusters would significantly contribute to understanding of the competitiveness of the Footwear Industry in Addis Ababa, Ethiopia. MATERIALS AND METHODS This study adopted mixed methods design in which quantitative and qualitative approaches were simultaneously used, but quantitative approach was the dominant one (QUAN+qual). More specifically a mixed method design is a type of design in which different, but complementary data were collected on the same topic. In this study, the quantitative, numeric, data were collected 1677 P a g e using a questionnaire survey for hypothesis testing. Concurrent with these data, a qualitative (network case study) approach employing semi structured interviews, informal discussions, and literature surveys was conducted. The purpose of this qualitative phase was to understand the characteristics of clusters and explore their linkages. The reason for collecting both quantitative and qualitative data was to bring together the strengths of both forms of research to compare, validate, and corroborate results. To test the hypothesized model, quantitative data were collected through a semi-structured questionnaire. A total of 175 were dispatched to a randomly selected sample. Table one show the size distribution in the population and the sample. The questionnaire was designed by modifying the instrument developed by Nadvi and Schmitz (1994). The survey was conducted to ascertain whether collective efficiency in terms of external economies and cooperation had increased or decreased over the previous five years. The major element of the questionnaire deals with the changes in the five constructs namely Access to Market information (AcMktInfo), Access to Inputs and Services (AcInpSer), cooperation with other local producers (PC), cooperation with suppliers (SC), and cooperation with local buyers in the domestic market (BC) and the six dependent variables (output, sales, number of workers, speed of delivery, average price, and net profit). All are measured on a five-point scale ranging from Increased a lot to decreased a lot. Items in the questionnaire were checked for the reliability using Cronbach s alpha. Cronbach s alpha values for all items under each constructs were checked, minimum of 0.7 were obtained, and thus the literature considers this value acceptable. The survey instrument was pre-tested on some entrepreneurs for clarity, and questions were matched with the appropriate factors. Modifications were made on the pre- test results. The instrument was also checked for its validity. The researcher checked the content validity of the research instrument. Based on expert judgment, the degree to which a measurement scale contains items which experts consider to be representative of that which is to be measured. The key informants for the study were the owners or managers of the enterprises. For the analysis, collective efficiency and performance index was constructed. (They are composite indices of the external economies and cooperation variables used for the figures and tables in this paper). Both indices were generated by attaching equal weights to each external economy and cooperation variable. The five possible values from big increase to big decrease were coded on a range of +2 to -2 respectively, with no change coded as 0. The index for each firm was then constructed by adding up the actual values and dividing them by the number of variables. Ordinary least squares (OL
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