Due to their reduced size and frequent isolation, small and medium enterprises have inherent limitations regarding economies of scale and scope. In addition, SMEs usually lack the resources to develop their own innovation strategies, rapidly falling behind large enterprises with strong tools to remain competitive at global level. That is why clustering and networking have become fundamental actions to boost SMEs’ competitiveness.

Scarcity of resources has always been a remarkable handicap for SMEs. They are often unable to capture market opportunities that require large productions and regular supplies and have difficulties in achieving economies of scale in the purchase of inputs such as equipment, raw materials or finance. Moreover, small size also constitutes a significant barrier to relevant corporate functions such as training of the workforce, market intelligence and innovation. It can also prevent the achievement of specialised and effective internal division of labour, which is a source of cumulative improvements in productivity and innovation. Finally, because of their low profit margins, SMEs are often stuck in their routine, unable to introduce innovative improvements or to look beyond the own boundaries.

This is not to say that the contribution of SMEs to innovation should be underestimated. Indeed, SMEs have their own comparative advantages over large enterprises, for instance, their ability to respond quickly and effectively to changing environments. Most SMEs have simple systems and procedures, which allows flexibility, immediate feedback, short decision-making chains, better understanding and quicker response to customer needs than larger organizations[1].

In fact, SMEs are regarded as one of the main driving forces of economic development. They are crucial for sustained, long-term growth, dynamism and employment in their local regions. They generally employ the largest percentage of the workforce and are responsible for income generation opportunities. In many EU regions, the SME sector can be a strong pillar of support for regional and economic development since it provides a means for the mobilization of the region’s resources. For instance, in the EU raw materials and mining sector, 18.952 out of 19.237 (98,5%) enterprises are SMEs accounting for 35,5% of the people employed in the sector[2].

In this context, how SMEs can exploit their strengths while minimising their weaknesses?  Well, experts emphasise the value of clustering as a key strategy for SMEs to take advantage of synergy effects. Clustering allow them to enter into cooperative relations with other SMEs, large companies and related partner institutions. In this blog, we have summarised what we think are the main benefits of clustering for SMEs.

CREATE STRATEGIC PARTNERSHIPS

Apart from partnerships among companies across the value chain, clusters usually create strong linkages with local governments, policymakers, civil society and other relevant stakeholders. This gives SMEs the opportunity, otherwise uncommon, to have a voice at the institutional level in defence of their own specifics needs, or to get closer to main social demands, as it is the case in the mining sector and the social license to operate (SLO).

REACH HIGH LEVELS OF SPECIALISATION

Industrial clusters have the effect of enhancing organisational performance at value chain level, achieving a high degree of differentiation within firms. As a result, SMEs are likely to increase variety and diversify their products or services, enhancing profitability, learning and innovation. Clusters are responsible for channelling customised support services to specific groups of SMEs, promoting specialisation patterns that are more likely to boost economic prosperity[3].

OFFER A FAVOURABLE ECOSYSTEM FOR INNOVATION

It has been largely demonstrated that innovation is most likely to happen at the frontier between industries and disciplines. Innovation ecosystems grow in symbiosis, not in isolation. That is why partnering is an essential action to look beyond the own sector and seek inspiration from others. Through their collective actions, clusters offer plenty of opportunities for multidisciplinary discoveries and innovation. They usually host innovative companies that allow access to new knowledge and share of information. Due to the geographical proximity, communication between cluster members is strengthened and exchange and dissemination of new knowledge is intensified. In the last few years, industrial clusters have become privileged innovation systems due to their potential for collective learning at local level.

LOWER PRODUCTION AND TRANSACTION COSTS

Because members are able to reduce costs while improving the level of service to their customers, clusters facilitate lower production and transactional costs. Moreover, internal trust is likely to reduce fees among members, creating an atmosphere of cooperation and confidence.

ENHANCE COMPETENCES AND GENERATION OF COMPETITIVE ADVANTAGES

Encouraging learning and innovation leads to the development of sustainable competitive advantages. That is why many EU countries and regions have promoted the development of industrial clusters where SMEs can develop their competences and competitive advantages against global competitors by sharing resources, innovative capabilities and knowledge. In this context, the role of clusters lies in removing obstacles, lowering constraints and finding partnering and financing opportunities (both public and private) to develop new innovative projects among its members.

PROVIDE A POOL OF SUPPLIERS AND SPECIALISED LABOUR

Belonging to an industrial cluster means being in contact with a pool of suppliers of raw materials, equipment, finance, consulting and other specialised services. By doing so, companies are able to achieve economies of scale, for instance, in the purchase of inputs. In addition, clusters promote the geographical concentration of plenty of resources, including a pool of specialised labour. Indeed, clustering of enterprises engaged in a similar or related activity brings together easy access to a skilled workforce and cooperation with local universities or technical schools that can provide the professionals of the future.

ESTABLISH COOPERATIVE LINKAGES BETWEEN COMPANIES

Being the most obvious, the cooperative linkages established between companies is the one benefit SMEs should consider when thinking about joining a cluster. Proximity helps companies to enhance mutual learning and create innovative knowledge and profitable synergies. Here, the rule works that the sum of the components is of greater value than each individual company or institution. Clusters play a key role in creating both the informal exchanges and the organised interactions needed across value chains and industries to guarantee sustainable economic growth and prosperity. Through joint actions, clusters can definitely drive innovation and contribute to stimulate regional economic development.

All in all, most of the benefits of clustering for SMEs derives from clusters’ ability to concentrate economic activity in a particular location[4]. At the end of the day, geographical concentration of certain economic activities and resources is key, as it allows to gather suppliers, buyers and exporters, government institutions, business associations and providers of business services and agencies that support clustered enterprises in fields such as product development, technology, marketing information and production process improvement.  

Clusters are instrumental not only to promote competition and cooperation, but also to help small companies overcome the main challenges they face in an increasingly complex, globalised world. This is why we encourage clustering as an essential tool for SMEs to greatly benefit from being linked into national, regional and global networks of companies and value chains.  

[1] Strategy development by SMEs for competitiveness: A review. August 2008. Benchmarking An International Journal 15(5):525-547 DOI: 10.1108/14635770810903132.

[2] Eurostat, key size class indicators, mining and quarrying (NACE Section B), EU-28, 2016.

[3] European Cluster Policy –using clusters to support innovation in SMEs across European Macro-Regions. Dr Anna Sobczak, Policy Officer for clusters & emerging industries. Internal Market, Industry, Entrepreneurship and SMEs, European Commission.

[4] C. Mason, T. Castleman and C. Parker, Communities of enterprise: developing regional SMEs in the knowledge economy, Journal of Enterprise Information Management, vol. 21(6), pp. 571-584, 2008.

Note: The header image is a map showing the amazingly large number of EU clusters from different sectors and regions. Source: European Cluster Collaboration Platform.