Public Disclosure Authorized DIRECTIONS IN DEVELOPMENT Public Disclosure Authorized Private Sector Development Industrial Clusters and Micro and Small Enterprises in Africa From Survival to Growth Public Disclosure Authorized Public Disclosure Authorized Industrial Clusters and Micro and Small Enterprises in Africa Industrial Clusters and Micro and Small Enterprises in Africa From Survival to Growth Yutaka Yoshino, Editor A report based on joint research by the World Bank, the Japan International Cooperation Agency, the Foundation for Advanced Studies on International Development, and economists affiliated with the African Economic Research Consortium. © 2011 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved 1 2 3 4 13 12 11 10 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. 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HC800.Z9D555 2010 338.8'7—dc22 2010047884 Cover photo by Yutaka Yoshino. Cover design by Quantum Think. Contents Foreword xiii Acknowledgments xv Abbreviations xix Overview1 Performance Gaps between Domestically Owned and Foreign-Owned Firms in Africa 2 Industrial Clusters in Africa5 Growth Constraints for Survival Clusters6 Building Managerial Human Capital 8 Implications for Policies9 Chapter 1 Introduction 11 Dualistic Structure of the Private Sector in Africa 13 Performance Gap between Domestically Owned and Foreign-Owned Enterprises in Africa 16 Notes 23 References 24 v vi Contents Chapter 2 Unbundling Foreign-Domestic Performance Gaps in Africa’s Private Sector 25 Productivity Gap 26 Market Access: Participation in Nonlocal Markets 34 Notes 38 References 39 Chapter 3 Industrial Clusters as Natural Agglomerations of Micro and Small Enterprises: A Conceptual Framework 41 Concept of Clusters 44 Economic Geography of Industrial Clusters 47 Beyond Transportation Costs: Market and Government Failures, Transaction Costs, and Industrial Clusters 49 External Linkages and Cluster Competitiveness 51 Internal Dynamics and External Linkages in Industrial Clusters around the World 52 Role of Clusters in Micro and Small Enterprise Development 59 Notes 61 References 62 Chapter 4 Industrial Clusters and Business Performance of Micro and Small Enterprises in Africa 65 Clustering and Business Performance: Natural Industrial Clusters in Light Manufacturing Industries 68 Nontraditional, Nonmanufacturing Clusters in Africa 82 Notes 88 References 89 Chapter 5 Location, Market Access, and Business Performance of Cluster-Based Enterprises 91 Location Choice of Micro and Small Light Manufacturers 92 Micro-Level Choice of Location and Business Performance: Findings from the Arusha Furniture Cluster Case Study 94 Contents vii Notes 100 References 100 Chapter 6 Agglomeration and Growth Challenges for Enterprises in Survival Clusters in Africa 101 Growth Bottlenecks in Survival Clusters 103 Successful Transformation from Informal Survival-Cluster Enterprises to Formal Enterprises 108 Implications of Cluster Growth for Employment 109 Note 110 References 110 Chapter 7 Building Managerial Human Capital in Africa’s Survival Industrial Clusters 113 Cluster-Based Pilot Managerial Skill Training Programs in Kumasi and Nairobi 114 Assessing the Impacts of Training Programs 124 Implications of the Results 132 Notes 135 References 136 Chapter 8 Policy Implications: Turning Survival into Growth 139 Building Managerial Skills 140 Sound Spatial and Urbanization Policy 141 Supporting Market Expansion through Regional Integration 143 Government Cluster Development Policies 145 Note 155 References 156 Appendix 1 Instrumental Variable Model Estimation on Domestic Ownership Effect on Productivity 157 Reference 158 Appendix 2 Basic Characteristics of Sampled Micro and Small Light Manufacturing Enterprises Inside and Outside the Clusters 159 Appendix 3 Data Envelopment Analysis 163 Reference 164 viii Contents Appendix 4 Format of Managerial Skills Training Programs 165 Notes 168 References 168 Appendix 5 Average Treatment of Treated and DID Matching Estimator 169 References 171 Appendix 6 List of Background Papers and Boxes Contributed for the Study 173 Index 175 Boxes 2.1 World Bank Enterprise Surveys 26 2.2 Blinder-Oaxaca Decomposition 32 3.1 Typology of Industrial Clusters 45 3.2 Clusters and the Environment 57 4.1 Labor Productivity of Cluster-Based Enterprises and National Averages 69 4.2 Clusters and Gender 80 4.3 IT and IT-Enabled Services Clusters in Africa and around the World 86 4.4 Tourism Cluster in Rwanda 87 5.1 Subclusters within the Arusha Furniture Cluster in Tanzania 96 6.1 The Olezoa Furniture Cluster in Yaoundé 104 7.1 History of Suame Magazine 115 7.2 History of Kariobangi Light Industries 116 7.3 Challenges among Micro and Small Enterprises in Suame Magazine 122 8.1 Interface between Government Policies to Support Micro, Small, and Medium Enterprises and Strategies to Develop Clusters in Cameroon 145 8.2 Interface between Government Policies to Support Micro, Small, and Medium Enterprises and Strategies to Develop Clusters in Kenya 146 8.3 Interface between Government Policies to Support Micro, Small, and Medium Enterprises and Strategies to Develop Clusters in Ghana 148 Contents ix 8.4 Interface between Government Policies to Support Micro, Small, and Medium Enterprises and Strategies to Develop Clusters in Rwanda 149 8.5 Role of Public Policies in Industrial Clusters in South and East Asia 151 8.6 Role of Public Policies in Industrial Clusters in Latin America 153 A4.1 Outline of the Managerial Training Programs 166 Figures 1 Aggregate Sales and Number of Enterprises in Sub-Saharan Africa, by Size of Firm 2 2 Size and Productivity of Domestically Owned and Foreign-Owned Enterprises in Africa 3 3 Rate of Participation in Local, National, and International Sales Markets in Africa, by Nationality and Size3 4 Factors Contributing to the Foreign-Domestic Performance Gap in Africa 4 5 Sales Performance in Light Manufacturing Clusters in Africa 6 6 Market Access Performance in Light Manufacturing Clusters in Africa 7 1.1 Doing Business Indicators of Sub-Saharan Africa 15 1.2 Aggregate Sales and Number of Enterprises in Sub-Saharan Africa, by Size 16 1.3 Size Distribution of Enterprises in Africa, by Nationality and Ethnicity of Owner 17 1.4 Foreign-Domestic Differences in Productivity and Growth in Africa 18 1.5 Foreign-Domestic Productivity Differential in Africa, by Country 18 1.6 Foreign-Domestic Productivity Differential in Africa, by Sector 19 1.7 Capital-Labor Ratio in Africa, by Nationality, Size, and Sector 20 1.8 Rate of Participation in Local, National, and International Sales Markets in Africa, by Nationality and Size 21 1.9 Rate of Participation in Export Markets among Domestically Owned Enterprises and Micro and Small Enterprises, by Country 22 xContents 1.10 Size and Productivity of Domestic and Foreign Enterprises in Africa 23 2.1 Number of Competitors, by Size of Enterprise and Type of Principal Sales Market 29 2.2 Size of Domestic Ownership Effect on Business Performance: Percent Marginal Effect from Instrumental Variables Estimation 30 2.3 Decomposition of Domestic Ownership Effect on Value Added per Worker 33 2.4 Decomposition of Domestic Ownership Effect on Sales per Worker 34 3.1 Backward and Forward Linkages and Agglomeration 49 3.2 Porter’s Diamond Model 52 4.1 Differential of Sales per Worker and Capital per Worker Inside and Outside of Spontaneous Light Manufacturing Clusters 69 4.2 Differential of Market Participation Inside and Outside of Spontaneous Light Manufacturing Clusters 74 4.3 Distribution