Blue Ballet, by South African artist Glen Josselsohn, 2011 (Source: Wikimedia Commons)
Ideas for Leaders #263

Innovation and External ‘Clusters’ in Emerging Markets

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Key Concept

Regional clusters, combining companies and research institutes and government agencies, have long been considered important for the development of new businesses and new ideas, particularly in highly competitive and turbulent environments such as emerging economies. But they need to be complemented by external networks. A recent study underlines the link between successful innovation and partnerships outside ‘home territories’.

Idea Summary

A growing body of literature demonstrates the positive impact of regional clusters and networks on innovation. Including links to government agencies and research institutes as well as to similar companies and their distributors and suppliers, intra-cluster ties (ICTs) are seen as a gateway to technical know-how, trade contacts and capital for small businesses. They encourage co-operation, trust, collective learning and smooth exchange of knowledge — and they compensate for resource constraints as joint action and agglomeration lead to economies of scale.

They are not, however, sufficient for successful small-business innovation. Research has also shown that extra-cluster ties (ECTs) make invaluable contributions, complementing ICTs and providing new and more diverse ‘inputs’ of information and opportunities for non-local partnerships.

Meanwhile, ‘entrepreneurial orientation’ (EO), usually defined as pro-activeness and risk-taking, is seen as another significant resource for achieving competitive advantage in general — and for innovation in particular.

This combination of a broad network and EO is considered ‘optimal’ for success in highly competitive and turbulent environments in emerging economies. Few studies, however, have looked at the interplay and relationship between its separate elements. How do the EO traits of pro-activity and risk-taking interact with a firm’s ICTs and ECTs to affect ‘innovative performance’ in emerging economies? Recent research sets out to answer that question.

Based on an analysis of primary data on 120 small- and medium-sized enterprises (SMEs) in the Cibaduyut footwear-manufacturing cluster in Indonesia, it hypothesises that pro-activity allows a firm to develop the ties necessary for innovation and that risk-taking reinforces the positive impact of those ties, ensuring a firm makes the necessary commitments (in terms of resources, etc) to maximise their value.

Further, it suggests that risk-taking is more essential for ECTs than ICTs — and, therefore, for the positive impact of ECTs on innovative performance.

The results show mixed support for the hypotheses — but confirm the key role of external networks in small-business innovation.

The researchers found that the link between pro-activity and innovation was mediated by ECTs but not by ICTs. They also found that risk-taking strengthens the relationship between ECTs and innovative performance — but that it negatively moderates the effect of ICTs on innovative performance.

What explains the results? The researchers suggest that being embedded in a cluster may dissuade firms from actively searching out new knowledge and that those that commit resources to within-cluster knowledge sharing may become over-reliant on the diffusion of redundant or cluster-specific knowledge.

Put very simply, entrepreneurs who don’t look beyond their own regional clusters can limit their chances of competitive advantage by being too insular.

Business Application

The research suggests that SMEs in emerging economies should actively develop inter-organizational networks that go beyond their local regions. Committing resources to nurture these networks and increasing the diversity of a firm’s knowledge intake can be vital for successful innovations.

It also, it can be argued, has implications for bigger and more established companies. Multinationals and businesses that want to mitigate the risks of expanding into emerging markets by forming partnerships could profit from links to local entrepreneurs and regional clusters.

Importantly, ‘out-reach’ to small businesses and clusters could help the sustainable development of communities, leading to the innovations that fuel economic growth and create wealth and jobs — and, ultimately, benefit shareholders and other stakeholders.

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