forms of industrial organization based on smes in local

Local and Industrial Development

Module A - 4

Marco Bellandi

Forms of industrial organization based on SMEs in

local industrial development

M. Bellandi L. De Propris (2012). Small firms and industrial districts. In: M. Dietrich, J. Krafft (eds.), Handbook on the Economics and

Theory of the Firm, pp. 375-387, Cheltenham: Edward Elgar

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RECALL: Italian experiences of light industrialization after WWII

- In the seventies (last century), in many small firms operating within rapidly developing local areas (outside big urban areas) in north and central Italy: modern and specialised machinery already in use.

- Their final products, at the core of made in Italy, sold in national and progressively in international markets.

- Within the most dynamic areas a persisting dependency upon the demand and economic power of big firms NOT observed.

- Many of such areas characterised by one type of product: the wool textiles in Prato, the ceramic tiles in Sassuolo, the knitwear in Carpi, etc.

SMALL FIRMS?? IS THAT A SOURCE OF WEAKNESS FOR IDs, IS NOT?

TWO PROPOSITIONS

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Small firms thrive in IDs

IDs thrive on small firms

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Well known intrinsic constraints that small firms face: - inability to reach significant scale economies - limited financial resources - lack of managerial and marketing skills - difficulties in exporting or in major risky and costly investments

“Principle of asymmetry” (J. Steindl, 1945): all the economies achieved by a small firm can be internalized by a large firm, however, not all the economies achieved by a large firm are realized on a smaller scale

Small firms in worlds of production dominated by big companies: a) marginal (sunk in insulated and poor markets) b) satellite (inserted within networks controlled by big firms) c) interstitial (suppliers in market niches at the side of mass consumption

dominated by big firms) d) highly innovative, creative to the point of growing in size

a), b): survival of small firms, given empirical constraints to the asym.princ. c), d): exceptions, based on the strength of specialization economies

Small firms thrive in IDs - 1

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A “theoretical”, as well as an empirical, getaway from the trap set by the asymmetry principle (recall the model of external economies in IDs):

“For some products, everything that a large firm can do in terms of

efficiency can be done by a population of small firms specializing in single

phases, provided that they are contiguously located and operate in a

socially, culturally and institutionally congenial environment” Becattini and

Bellandi (2002)

Small firms thrive in IDs - 2

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IDs AS META-NETWORKS HOSTING, WITH THEIR ADAPTED MARKET, QUASI-MARKET (TEAMS OF FIRMS), AND NON-MARKET (PERSONAL KNOWLEDGE, TRUST) ORGANIZATIONAL MECHANISMS, THE WORKING OF POPULATIONS OF SPECIALISED SMALL FIRMS

IN IDs THE DIFFERENT TYPES AND MECHANISMS ARE COMBINED IN VARIOUS AND CHANGING WAYS: BUT TEAMS ARE ALWAYS AT HOME (thanks to the widespread importance of personal knowledge and trust relations)

Types of industrial organization and mechanisms

• Market

• Firm

• Team

The exchange between independent economic agents coordinated by means of prices and the interplay of demands and supplies

The exercise of centralized power (unilateral decisions under constraints) in managing human and technical resources

The exchange between independent economic agents coordinated by means of trust relations and personal knowledge

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Contemporary debate on IDs suggests that IDs require small firms to emerge and develop in ways that help the transformation of the talent and initiative naturally embedded in the local socio-economic fabric into entrepreneurial projects and investment. In particular, three main aspects of such a reinforcing relationship:

entrepreneurship as a life project

artisanship as an expression of talent and skill

formation of teams of complementary producers Example: post- fordism. The range of variations in products has become more and more dense. Increased competitive advantage of “organizations” of production combining: - economies of specialization in activities related to product and knowledge differentiation - economies of scale and stock for those production and service activities reliant on cost savings

IDs thrive on small firms

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1) Projects firms: member of IDs “invest in the firm not only her/his personal savings and those eventually entrusted to her/him by the parental and friendship networks, but also and more her/his reputation in terms of technical and managerial competence, leadership and energy on the job, trade acumen, etc. who s/he has been able to build in the course of time within her/his community of life” (Becattini et al. 2009)

2) Artisanship as expressions of individuals’ talent and skill organizing workshops and laboratories nested in an economically active local society; contribute, with unique and customised services and products, to meeting in flexible and adjustable ways the needs of differentiated markets.

3) Formal or informal teams of producers as collective players able to pursue a joint investment in shared resources; underpinned by quasi-market or hybrid transactions, replace or supplement market or hierarchical transactions.

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Populations of small firms. Differentiated by: - aims of the entrepreneurs (see project firms vs. capitalist firms) - filière and phase of specialization within the same filière - product oriented and market oriented - sub-contractors, organizers of filière - team related, local market related - size - leadership/dependency and innovative capabilities (see last slide) Medium sized local firms with a mixed nature and “anchored” entities of MNEs (see next slide) Heterogeneity in IDs’ business forms related to: extent of the internal system of markets and resources tight interpenetration between businesses and the local society small firms intrinsically reflecting more the individual traits of their founders

Heterogeneous nature of small firms in IDs

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Medium sized local firms with a mixed nature - internal and external (business group) growth of firms which still maintains deep roots in the ID - the geographical extension of production activities of ID firms across localities, i.e. trans-local firms (see lesson on trans-local relations) Drivers: increase the control over strategic complementary production stages; extend the product range; acquire frontier knowledge or complementary knowledge; gain and secure access to product or geographical market; gain access to venture capital and risk finance Anchored (mildly embedded) entities of MNEs IDs may attract such entities – more or less temporarily – seeking technology and knowledge related to the tacit know-how of specific places Larger firms/entities can have a bridging role between the ID and the outside; however, they could also have predatory or domination strategies that damage the ID

Medium sized firms, business groups and trans-local firms in IDs

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In the face of difficult market and social challenges, the survival of IDs often depends on the constant regeneration of its pool of firms, in particular a larger presence of small firms embodying a business culture that enables boundary-spanning activities and the integration of diverse fields of judgment:

“What is common to the entrepreneurial firm … is that it involves self-conscious design… This is so because, rather by definition, they do not draw on existing unselfconscious repositories of knowledge and capability, whether these be existing market patterns or existing systems of rules of conduct within organizations… This is why entrepreneurial firms are sources of systemic novelty… If we mean by an entrepreneurial firm a firm in Coase’s sense not just in Knight’s, then design also involves direction of the effort of others… Knight reminds us, however, that the ‘effort’ the entrepreneur must direct, actually involves the exercise of judgment. This complicates the problem somewhat, since, even in a small entrepreneurial firm, there may be a good deal of delegation of judgment, and that judgment may cover a wide ground.” Langlois (2007, pp. 1120-1121)

Small firms and IDs in a knowledge economy - 1

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The diffusion of such types of firms within IDs is far from granted. In many Italian IDs that emerged in the mid 1960s and that contributed to create the ‘Made in Italy’ brand internationally, the prevailing business culture saw: - business leadership coinciding with small successful entrepreneurs - who were self-made business people and a sort of stand-alone little geniuses - coordinating paternalistically very small ventures and possibly small teams of related producers

So, what are the conditions and policies enabling IDs and district-like systems, based on systems of small to medium sized firms, possibly in interaction with local entities of big firms and public institutions of research, to up-grade their business culture and trigger again virtuous circles of local socio-economic forces ??

Small firms and IDs in a knowledge economy - 2

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The model of the University centric industrial district (UCID - Patton and Kenney 2009): - a city with industrial traditions or an industrial district with urban features has hosted a university (or at least some important campuses of her) for a pretty long period; - networks of entrepreneurs partly but not casually overlap with networks of university scientists thanks to a tradition of joint researches and job placement of graduates, also supported by institutions and strategies both within the university (e.g. Industrial Liaison Offices) and the entrepreneurial community (e.g. Cultural associations promoting industry-university matching); -scouting and entrepreneurial tutoring and mentoring from both university services (e.g. University incubators) and external (private and public) initiatives help a constant flow of companies spinning-off from innovative projects tied to university competencies and related to local specializations;

Small firms and IDs in a knowledge economy – UCID 1


- finding a favorable innovative eco-system, university spin-offs embed at least for a while into the local clusters and fed them with new specialized activities both directly and through further new companies spinning-out from the university spin-offs or from relations with other innovative local firms; -the innovative eco-system, connecting local firms and university spin-offs, is supported both > by specific organizations (e.g. Business angels associations,

Communities of technological practice, Clubs of managers and innovators) which enrich the institutional frame of industry-university relations

> and by the team structures that realize integration/absorption of technology and management/business development within the companies and among them;

Small firms and IDs in a knowledge economy – UNIC 2


- A set of bridging ties: > the network of scientific and didactic relations among

universities; > some spin-offs after the first phase of business acceleration

leaving the UCID but keeping in contact with local networks; > some of the university alumni who leave out but stay well

connected to the local homeland; flows of incoming FDI and skilled migrants;

> a generation of young people (in particular graduates) with skills and attitudes apt to cross-cultural social and business activities either at the local or at the non local and international level

All this may help a systemic overlap of localized and extended networks fuelling local innovative dynamics, and allowing some of local SMEs a not subservient insertion in global value chains.



The UCID cases suggest types of organization combining small firms and IDs with the intrusion of science-based knowledge and globalization. “If” supported by an “up-dated” (against the lock-in risk) structure of specific public goods, even SMEs clusters specialized in traditional products may benefit from UCID-like processes: > a structured combination of artisan expertise and technological

frontiers > within regional “magic circles” of cities and industrial districts

(see lesson on multi-scale external economies) > where university systems find both urban structures and nearby

SMEs clusters--



forms of industrial organization based on smes in local

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