Clusters and Competitive Advantage: The Turkish Experience

Clusters and Competitive Advantage The Turkish Experience

Özlem Öz

Clusters and Competitive Advantage

Also by Özlem Öz THE COMPETITIVE ADVANTAGE OF NATIONS: The Case of Turkey

Clusters and Competitive Advantage The Turkish Experience Özlem Öz Department of Business Administration Middle East Technical University (METU) Ankara, Turkey

© Özlem Öz 2004 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted her right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2004 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 1–4039–3613–7 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Öz, Özlem. Clusters and competitive advantage : the Turkish experience / Özlem Öz. p. cm. Includes bibliographical references and index. ISBN 1–4039–3613–7 1. Industrial location—Turkey. 2. Strategic planning—Turkey. 3. Competition—Turkey. 4. Turkey—Economic conditions—1960– I. Title. HC492.O9275 2004 338.6c042c09561—dc22 2004045426 10 13

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne

To Kaya

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Contents List of Tables

ix

List of Figures

x

Preface

xi

Acknowledgements

xv

List of Abbreviations

1

2

3

4

5

xvi

Introduction: A Background to Clusters

1

Origins and milestones Clusters in the world economy Defining clusters: industrial districts, networks and clusters Clusters and competitiveness

1 5 8 11

Clusters in the Management Literature

20

An overview Porter-style geographic clusters

20 25

Industrial Clusters in Turkey

37

The Turkish business environment, past and present Turkey’s position in international competition Geographic concentration of Turkish industries Geographic concentration and competitiveness Finding a suitable methodology for the analysis of clusters Geographic clusters and competitiveness: which cases to study?

37 41 45 52 55

The Furniture Cluster in Ankara

60

Origins and historical developments Sources of international competitive advantage Reasons for geographic concentration Concluding remarks and future prospects

62 67 74 81

The Towel and Bathrobe Cluster in Denizli

84

Origins and historical developments Sources of international competitive advantage Reasons for geographic concentration Concluding remarks and future prospects vii

57

85 88 100 109

viii Contents

6

7

8

The Carpet Cluster in Gaziantep

114

Origins and historical development Sources of international competitive advantage Reasons for geographic concentration Concluding remarks and future prospects

116 119 128 132

The Leather Clothing Cluster in Istanbul

135

Origins and historical development Sources of international competitive advantage Reasons for geographic concentration Future prospects for the leather clothing cluster in Istanbul: stuck in the middle?

136 144 149

Conclusions

158

Theoretical implications Policy implications

158 168

155

Appendix 1 Top Five Industries in Terms of Location Quotient, by Province

172

Appendix 2 A Brief Description of Fuzzy-Set Analysis

183

Notes and References

184

Bibliography

197

Index

215

List of Tables 3.1 Percentage of Turkish exports by cluster and vertical position, 1992–2000 3.2 Top 100 Turkish industries, by C4EMP 3.3 The least concentrated Turkish industries, by C4EMP 3.4 The most populated Turkish provinces 3.5 Cumulative C4EMP totals for the industries examined 3.6 International competitiveness, fuzzy membership categories 3.7 Geographic concentration, fuzzy membership categories 4.1 Market shares of the leading furniture exporting countries 4.2 Provincial shares of employment in the Turkish furniture industry 4.3 Employment in Ankara, by economic activity 4.4 Concentration of furniture firms in Siteler, by street 4.5 Concentration of carpenters in Siteler, by street 4.6 Concentration of upholsterers in Siteler, by street 4.7 Concentration of polishers and varnishers in Siteler, by street 5.1 Employment in Denizli, by economic activity 5.2 Denizli exports of towels, bathrobes and closely-related items, 2002 6.1 Employment in the Turkish carpet industry 6.2 Employment in Gaziantep, by economic activity 7.1 Employment in Istanbul, by economic activity

ix

43 49 51 52 52 54 55 61 62 65 75 75 76 77 89 98 115 120 139

List of Figures 1.1 1.2 1.3 3.1 3.2 3.3 3.4 4.1 4.2 5.1 5.2 6.1 6.2 7.1 7.2 7.3

Examples of highly concentrated industries in the United States Examples of highly concentrated industries in Italy Examples of highly concentrated industries in India Exports and imports, Turkey, 1982–2000 Standard of living, Turkey, 1980–2001 Selected examples of highly concentrated industries in Turkey Methodological process followed in the study Internationally competitive subsectors of the Turkish furniture industry, plus related sectors and institutions Map of the furniture district in Siteler, Ankara Products made in the textile cluster in Denizli, plus related institutions Towns in the province of Denizli Traditional Anatolian carpet-weaving centres Products made in the carpet cluster in Gaziantep, plus related institutions and sectors The Istanbul leather industry, production and sales sites Leading centres of leather production and trade, Turkey, sixteenth and seventeenth centuries Products made in the leather clothing cluster in Istanbul, plus related institutions and sectors

x

6 7 8 39 40 53 56 72 78 97 101 115 126 136 137 146

Preface Economic and business life is conducted in space, and this geographic organization has an impact on how the economy functions, as well as on the process of creating and subsequently upgrading individual firms’ competitive advantages. Not surprisingly, then, the clustering of industrial activities in general and the geographic concentration of specific industries in particular have attracted considerable attention in the academic literature for a long time, the first influential contributions dating back to the nineteenth century. Studies investigating the relationship between location and competitive advantage, for instance, can be traced back to the contributions of Adam Smith, while Alfred Marshall brought the topic of geographic concentration of specific industries in districts to the attention of academics in the 1890s. The subsequent attempts to understand the extent of and underlying reasons for the clustering of economic activity resulted in an extensive body of literature. A wide range of disciplines – including economic geography, location theory, regional development and growth poles, urban economics and social networks – tackled different aspects of the issue and shed light on the phenomenon of clustering. With the ‘mid-century advent of neo-classical economics, however, location moved out of the economics mainstream’ (Porter, 1998, p. 206), and it was only recently that there was a revival of interest in the topic. Scholars of international trade, international business, industrial organization and business strategy have joined geographers and urban economists in investigating geographic concentration (Ellison and Glaeser, 1994). For example Krugman (1991a) contributed substantially to the field by discussing the role of geography in international trade (the role of geography is in fact implicit in any analysis of trade), after realizing that he had spent his ‘whole professional life as an international economist thinking and writing about economic geography, without being aware of it’ (ibid., p. 1). Similarly, growing interest in location-related issues in general and clusters in particular became evident in the management literature, a discipline that had previously shown minimal interest in the subject. The literature posits that very different circumstances, both economic and non-economic, might have an impact on the structure and competitiveness of clusters. Accordingly the foundations of success might be rather different in, say, the clusters in Baden-Württemburg where there is ‘Darwinian competitive pressure’ than in the clusters of ‘Third Italy’, where non-economic factors play a significant role (Staber, 1998). Distinct explanations of why a cluster might become competitive and sustain its competitiveness include those related to the organization of production (for instance in the form of xi

xii Preface

flexibly specialized small and medium-sized enterprises – Piore and Sabel, 1984), the social and political context (the role of tacit knowledge, institutions, the nature of work, trust and social capital – Putnam, 1993; Becattini and Rullani, 1996; Brusco, 1996) and relations within the cluster that pave the way for innovation, learning and untraded interdependencies (Camagni, 1991; Storper, 1999). There is also the possibility that both the initiation and the subsequent development of a cluster might be an accident of history, which is then locked into the region (Krugman, 1991a, 1991b). Although each of these explanations has undoubtedly improved our understanding of the competitiveness of clusters, none of them fully explains why certain clusters manage to become competitive whereas others do not. Contrary to what the flexible specialization perspective posits, for instance, there are competitive clusters that are not flexibly specialized and flexibly specialized clusters that are not competitive (Amin and Robins, 1990). Likewise, although the parts played by historical circumstances, the social and political context and strong collaboration among cluster participants might have contributed substantially to the success achieved by some clusters, such as those in Third Italy, these factors cannot explain the success of prominent clusters such as Silicon Valley (Saxenian, 1994). Similarly, explanations that tie the competitiveness of a cluster to innovation, learning and untraded interdependencies do not sufficiently elaborate why some clusters manage to become innovative and/or develop untraded interdependencies whereas others do not (Porter, 1998, 2000). So despite there being a rich variety of approaches in the literature, each of which has improved our knowledge about the clustering of economic activity, we still lack a comprehensive theory that can fully explain the competitiveness of clusters. One likely contributor for a more complete understanding of the competitiveness of clusters is a latecomer to the area, namely, the management discipline. The unique perspective offered by this discipline involves putting the firm at the centre of the analysis and trying to understand the phenomenon of clustering from that point of view. An interest in clustering has also been observed in the sub-disciplines of strategy and international business. International business scholars (for example Rugman and Verbeke, 2000) have focused on the geographic concentration/dispersion of foreign direct investment, and emphasized the two-way interaction between multinational enterprises and local clusters. Within the strategic management literature the contributions by Porter (1990, 1998, 2000) are noteworthy. Porter asserts that sources of advantage are local, and the impact of local conditions on the international competitiveness of clusters has become more pronounced, despite the increasing trend towards globalization. Understanding the competitiveness of clusters, according to Porter (1998, p. 208), requires embedding clusters in a dynamic theory of competition. Accordingly the basis of competitive advantage has shifted from static efficiencies (such as low input costs) to the ability to innovate and upgrade skills and

Preface xiii

technology. This has in turn brought about a radical change in the importance of location in that the capacity to innovate and upgrade draws heavily on the local business environment. Enduring competitive advantages, in other words, lie in the local environment. This study aims to clarify the link between geographic clustering and international competitiveness by examining Turkish experiences. The perspectives followed to achieve this are those offered by the approach adopted in the strategic management literature in general and by Porter (1990, 1998) in particular, since the purposes of this study are best served by that approach. Apart from the fact that Porter’s framework provides a good basis for highlighting the key sources of advantage in a geographically clustered industry, it also makes an explicit connection between the geographic concentration and international competitiveness of specific industries, which is the focal point of this study. This approach is supplemented by insights from several other perspectives, including those offered by the literature on path dependency, social networks and international business. Thus the implications of the key findings are discussed in respect of not only strategy but also the broader debates on clusters to provide a full account of what the Turkish experience, when looked at from the viewpoint of the strategic management discipline, offers to further thinking on clusters. The link between clustering and competitiveness has been a major area of investigation, but most researchers tend to assume that studying successful clusters is sufficient to understand sustainable competitiveness. Thus fundamental questions such as whether all clusters are competitive and which characteristics of competitive clusters differentiate them from uncompetitive ones have not received the attention they required. It is by no means guaranteed that clustering will automatically bring competitiveness, or that the typical characteristics of success stories (for example the dominance of clusters by flexible small and medium-sized enterprises) are the principal reasons why these clusters are competitive. Contributing to this relatively understudied aspect in the literature is another of the purposes of this study. In addition, by examining the competitiveness of clusters in Turkey, a country that is classified by the World Bank as a middle-income developing country, the study hopes to help overcome another shortcoming in the literature: evidence on the competitiveness of clusters has mainly been derived from analyses of clusters in developed countries, so very little is known about the competitiveness of clusters in the developing world (Nadvi, 1994), including whether the conditions that lead to the emergence and subsequent upgrading/ loss of competitive advantage are any different from those in developed countries. It is equally rare to see detailed discussions of uncompetitive cases, let alone addressing these issues together, especially from the viewpoint of the management literature. The contribution offered by the present study is therefore threefold: it examines the competitiveness of clusters in a developing country setting, it includes a detailed study of an uncompetitive cluster,

xiv Preface

and it conducts these analyses from the viewpoint of the strategic management literature. Although the analysis is restricted to Turkish experiences, a wider audience should find the book appealing given that the theoretical implications of the study are linked to the ongoing debates on competitiveness and geographic clustering in general. The book mainly addresses an academic audience, but as the subject matter is of vital importance to government policy makers and strategic planners in firms, it is likely to be of appeal in these circles as well. In fact the subject has been so important in policy-making circles that the World Bank alone has funded 266 cluster projects in recent years (Lundequist and Power, 2001). Researchers who are interested in the individual industries covered in the book (furniture, textiles and leather products) are also likely to benefit from the study. Needless to say, given that the investigation sheds light on the pattern of international competitiveness and geographic concentration of Turkish industries, as well as providing a comprehensive analysis of several key Turkish clusters, the book will be of interest to researchers and planners working in or writing about Turkey. Finally, the book may also be helpful to graduate and undergraduate students, especially those studying strategy, international business, international trade and economic geography. The structure of the book is as follows. Chapters 1 and 2 set the theoretical foundations for the study and introduce the reader to the main concepts through a review of the growing body of literature on clusters. Chapter 3 provides an overview of the Turkish economy and analyses industry and trade data to identify patterns of international competitive advantage and geographic concentration in Turkey. Chapters 4 to 7 are devoted to four in-depth cluster case studies: a furniture cluster in Ankara, a towel and bathrobe cluster in Denizli, a carpet cluster in Gaziantep and a leather clothing cluster in Istanbul. Chapter 8 discusses the key findings and the policy implications of the study. ÖZLEM ÖZ London and Ankara

Acknowledgements The theoretical part of this study was conducted in London in the summer of 2001 during my time as a research scholar at the London School of Economics (LSE), financial support for which was provided by the Turkish Academy of Sciences (TÜBA). The empirical part was conducted in Turkey (in 2001–4), with funding provided by METU (AFP 2001-04-02-02 and BAP 2003-04-02-01). I am grateful to these three institutions for their support. I thank Professor Michael Porter of the Harvard Business School for being an invaluable source of inspiration and granting permission to use the map presented in Figure 1.1. I also thank Professor Peter Abell (LSE) and Professor Ayda Eraydin (METU) for fruitful discussions on different aspects of the subject. I am indebted to my dear friends Dr Ioannis Konsolas, Dr S. Arzu Wasti and Dr Adil Oran for their help and support during various stages of the project. I also owe much to Funda Cantek, Yasemin Saatçioglu Oran and Özgür Nemutlu for providing me with special access to data and documents, as well as introducing me to the key informants. I am grateful to the numerous managers, state officials, industry representatives and academics who spared their time for interviews. I am particularly indebted to Nusret Özgünaltay (KOSGEB-Siteler), Baris Yeniçeri (IGEME), Dr Nese Kanoglu (SPO), Ismail Sengün (DSO-Ankara), Erhan Sarica (DSO), Abdülgaffar Nemutlu, Kürsat Göncü (GSO), Yusuf Ziya Iymen (GSO), Fahrettin Canpolat (Gaziantep Ihracatçi Birlikleri), Hüsnü Atzel (TDSD), Turgut Kosar (TDSD) and Onur Görgün (TDSD). I also gratefully acknowledge the help provided by a very special individual: Hasan Yelmen. My thanks also go to my research assistants, Yesim Özalp and Gizem Turan, for helping me with the drawings and figures during the preparation of the typescript, and to my students at METU, whose eagerness to discuss various aspects of the subject helped me to refine my ideas. Finally, I would like to thank Kaya Özkaracalar for his unstinting support and encouragement at every stage of the project. This book is dedicated to him. ÖZLEM ÖZ

xv

List of Abbreviations CIS DSO DTO EGS FDI GAP GSO ISIC IGEME ISO ITKIB KOSGEB KÜSGEM LQ METU MPM OAIB R&D SIS (DIE) SITC SPO (DPT) TDSD TSE TÜBITAK TÜSIAD US-AID

Commonwealth of Independent States Denizli Chamber of Industry Denizli Chamber of Commerce Aegean Garment Producers’ Association Foreign Direct Investment South-Eastern Anatolian Project Gaziantep Chamber of Industry International Standard Industrial Classification Export Promotion Centre Istanbul Chamber of Industry Istanbul Textile-Apparel Exporters’ Association Small and Medium-Sized Industry Organization Small Industry Development Centre Location Quotient Middle East Technical University National Productivity Centre Central Anatolian Exporters’ Union Research and Development State Institute of Statistics Standard International Trade Classification State Planning Organization Turkish Leather Industrialists’ Association Turkish Standards Institution The Scientific and Technical Research Council of Turkey Turkish Industrialists’ and Businessmen’s Association United States – Agency for International Development

xvi

1 Introduction: A Background to Clusters

This chapter introduces the concept of geographic clusters by first discussing the origins of cluster thinking and milestone contributions to the field. Selected examples of clusters in developed and developing countries are then provided in the second section. This is followed by a discussion on the definition of clusters, concentrating on their distinguishing characteristics compared with industrial districts and networks. The final section is devoted to the central issue of this study, that is, the link between clustering and competitiveness.

Origins and milestones1 Chapter 10 of Marshall’s 1890 classic, the Principles of Economics, is undoubtedly the most influential work on the geographic clustering of industrial activity. In this short chapter Marshall analysed the geographic concentration of specific industries in particular districts. However, recognition of such concentration went back centuries, and ‘even in [the] early stages of civilization, the production of some light and valuable wares [was] localized’ (Marshall, 1949; p. 222). According to Marshall, amongst the various reasons for the localization of industries, the chief ones were physical conditions such as the nature of the climate and the soil. He saw ‘the patronage of a court’ as another key rationale for localization since ‘the rich [folk] there assembled make a demand for goods of specially high quality, and this attracts skilled workmen from a distance, and educate those on the spot’ (ibid., p. 223). His ideas on the virtues of a local market for special skills are enlightening and inspiring in respect of the process of innovation: ‘good work is rightly appreciated, inventions and improvements in machinery, in processes and the general organization of the business have their merits promptly discussed: if one man starts a new idea, it is taken up by the others and combined with suggestions of their own; and thus it becomes the source of further new ideas’ (ibid., p. 225). He also touches on the likely contribution of industries that supply the core industry with implements and materials, as well as ‘the use of highly 1

2 Clusters and Competitive Advantage

specialized machinery’ and the importance of ‘the convenience of the customer’ (ibid., pp. 225, 227). If we simplify Marshall’s rich observations we can see that hidden in his analysis are some distinct reasons for localization: the availability of specific inputs, labour market pooling, information spillovers, local demand and related industries. Marshall also draws attention to the socioeconomic nature of clustering, which later emerged as one of the most vibrant areas of discussion in the literature. Since nearly all important knowledge has deep roots ‘stretching downwards to distant times’, the growth of a cluster is favoured by ‘the character of the people, and by their social and political institutions’ (ibid., p. 224). Moreover he foresaw that the ‘two opposing tendencies’ we now call globalization and localization can take place simultaneously. In his words, ‘every cheapening of the means of communication, every new facility for the free interchange of ideas between distant places alters the action of the forces which tend to localize industries’ (ibid., p. 227). These could be, for example, a lowering of tariffs or of the cost of transporting goods. As a result people can easily buy from a distance. On the other hand, the same forces that increase people’s tendency to migrate from one place to another bring skilled workers to practice their craft near the consumers. Finally, although it is often disregarded in the literature, Marshall identified some risks associated with clustering: ‘A district which is dependent chiefly on one industry is liable to extreme depression, in case of a falling-off in the demand for its produce, or of a failure in the supply of the raw material which it uses’ (ibid.) Nevertheless the overall benefits of clustering are very clear. For example when an industry is located in a district it is likely to stay there for a long time as the advantages associated with it are so great. As Marshall put it, ‘the mysteries of the trade become no mysteries; but are as it were in the air’ (ibid., p. 225). If the mysteries are in the ‘air’, among other things implying that sources of advantage in a specific locale interact in complex ways to form a system, it follows that it will be almost impossible to replicate it elsewhere, thus increasing the chance that the resulting advantage will be sustainable. Weber (1929) furthered Marshall’s pioneering ideas and concentrated on location theory in a milestone work that stressed the importance of the lower production and transportation costs associated with agglomeration. According to Weber, geographic patterns of production mainly depend on the location of inputs and markets. Weber’s theory triggered considerable debate, especially from the 1950s (Lösch, 1954; Isard, 1956; Smith, 1966). Lösch (1954, pp. 28–9), for instance, criticized Weber’s least-cost emphasis and argued that seeking the place of least cost is as ‘absurd’ as considering ‘the point of largest sales’ as the proper location. According to him, ‘every such one-sided orientation is wrong. Only search for the place of greatest profit is right.’ Lösch also showed that the existence of economies of scale is another viable reason for the geographic concentration of industry. During the 1950s and 1960s Lösch’s classic, The Economics of Location, provided the foundations for two disciplines,

Introduction 3

namely regional science and economic geography, the former subsequently becoming highly mathematical and the latter evolving into a more empirically oriented subject (Martin, 1999). The positivistic approach to economic geography, based on quantitative procedures, was the dominant paradigm until the 1970s (for example Smith, 1971; Amedeo and Golledge, 1975), although several economic geographers (for example Pred, 1967) had already begun to argue that there was a need to attribute a more central role to history and the social relations of production. As a result, economic geography underwent a vigorous expansion, incorporating ideas from French regulation theory, Schumpeterian models of technological evolution and the Marxian notion of uneven accumulation (Martin, 1999). Hence there was a major shift from neoclassical economics to political (especially Marxian) economy.2 As the 1980s progressed, however, Marxist theory came under intense criticism, ‘reinforced both by dramatic new developments in the nature and trajectory of capitalism, and by the emergence of new, post-structuralist and post-modern philosophical and epistemological movements’ (Bryson et al., 1999, pp. 9–10).3 As a result, local agglomeration economics and an emphasis on the relation between culture and economic sociology were reinstated as the focal points of economic geography (Martin, 1999). Meanwhile some studies continued to focus on the demand side, arguing that consumers prefer markets with a large number of sellers (Enright, 1990), since agglomeration minimizes the opportunities for arbitrage, as well as providing customers with greater variety and lower search costs in the case of differentiated goods. The literature on urban economics, regional development and international trade also provides useful insights into the distribution of economic activity within cities and across regions. First, regional theories of concentration and diffusion focus on the spread of regional economic growth, and on the mechanisms and policies that promote growth. Policy implications for backward regions are given special attention in the literature on these theories. Perroux’s (1950) theory of growth poles, Myrdal’s (1957) theory of cumulative causation, Hirshman’s (1958) notion of unbalanced growth and Friedmann’s (1972) core–periphery model are amongst the best known regional theories (Malizia and Feser, 1999, p. 103). Poles of growth contain firms and industries that attract other economic elements, and the theory emphasizes the part played by leading industries in fostering the development of particular regions (Perroux, 1950). Myrdal’s (1957) theory of cumulative causation supports the argument that market forces tend to increase disparities between regions. The origin of concentration, for instance, could be a historical accident and the subsequent growth could be at the expense of other regions because of ever increasing internal and external economies. Although Myrdal’s unit of analysis is the region, similar concepts can be applied to industries. At the industry level, the theory predicts that the advantages of geographic concentration might become so great that a single location might dominate an industry on a national or

4 Clusters and Competitive Advantage

even international scale (Enright, 1990). On the other hand, Hirshman’s (1958) notion of unbalanced growth suggests that some sectors will grow more quickly than others in a given environment, and thus some degree of interregional and international inequality of growth is inevitable. Finally, according to Friedmann’s (1972) core–periphery model, when industrialization begins in a spatial economy, investments tend to be concentrated in particular locations, resulting in an unequal distribution of economic activity between these core areas and those on the periphery. The theory predicts that, in the absence of government intervention, the core will dominate the spatial economy and there will be continued impoverishment of the peripheral areas (Malizia and Feser, 1999, p. 110) Second, the forces identified as responsible for urban concentration can aid our understanding of the geographic concentration of individual industries. The main themes of the literature on this subject are the conditions associated with economies and diseconomies of agglomeration in urban spaces.4 It has long been acknowledged by researchers (for example Hoover, 1937) that a distinction should be made between localization economies and urbanization economies in order to clarify the underlying causes of agglomeration. Accordingly the term localization is used to refer to the agglomeration of firms in closely related industries, and urbanization to refer to the agglomeration of firms in all kinds of industries.5 According to Henderson (1988, 2000), industries with extremely large economies of scale and large labour requirements will operate in large cities in order to utilize the productivity advantage of being located in a centre of activity. More recently Porter (1998) has argued that generalized urban agglomeration economies are diminishing in importance because of trade liberalization, advances in communications and transportation technology, and the availability of comparable infrastructures in more locations and countries. In his view, generalized urban agglomeration economies that are independent of firms and clusters tend to be most important for developing countries. Urban agglomeration diseconomies have also attracted considerable attention, reminding us that there are forces that limit the extent of agglomeration economies. Otherwise in the extreme case, agglomeration economies would extend to the point where all industries and people were concentrated in a single location (Enright, 1990). Finally, the location of industry is a central issue in the study of international trade. In fact the fundamental questions asked about international trade (such as ‘why do countries trade?’ and ‘what determines the international pattern of specialization?’) are directly related to location. In the literature on this subject the unit of analysis is usually the nation, mainly because of data restrictions, but it is possible to extend the same concepts to regions. This is evident even in early works on international trade. In this regard Ohlin’s (1967) seminal book Interregional and International Trade can be viewed as a study of location theory in which the theory of international trade is a special case (Enright, 1990). More recently the so-called ‘new trade theory’

Introduction 5

has paid explicit attention to the role of location in trade. Krugman (1991b), for instance, has developed a monopolistic competition model of international trade that emphasizes increasing returns. The rationale is that if there are economies of scale in specialization, there might be industries for which the world market can only bear a few centres of production. When increasing returns are introduced as a means to understand trade patterns, it becomes necessary to study regional economic concentration and specialization since the presence of increasing returns to scale forces firms to concentrate production in relatively few locations, and they are therefore confronted with the choice of where to operate. As Krugman (1991a) notes, the best evidence for the practical importance of external economies is the strong tendency of economic activity in general and industries and clusters of industries in particular to concentrate in a certain space. A substream of the international economics literature is concerned with the recent increase in ‘created’ location advantages for such activities as R&D (Midelfart-Knarvik et al., 2000). In addition the international economics literature has recently broadened its research area to include the functioning of multinational enterprises (Rugman and Verbeke, 2000). It should be noted that some scholars are sceptical about the revived interest in geography in the international economics literature. According to Martin (1999, p. 66), for instance, ‘although during the post-war period economists occasionally flirted with geography, they never seemed willing to commit themselves to any serious or permanent relationship’. But now, it seems, economists are at last rediscovering geography. In economic geographers’ view, however, the resulting theory – the so-called ‘new economic geography’ – is neither new nor geography but rather a reworking of economic geography proper. Martin also criticizes the preferred methodology and considers that the mathematical models they use – what Krugman (1995) calls ‘Greek letter’ economics – fail to produce novel results. For economic geographers, such models generate ‘a dull sense of déjà vu’ since geographers who analysed location in such terms back in the 1960s and 1970s had long recognized the importance of history in shaping the patterns of regional development. Besides, economic geography is committed to studying real places as well as the role of historical and cultural factors in the development of those places,6 rather than reducing locations to ‘points’ on a surface (Martin, 1999).

Clusters in the world economy Clusters in developed countries7 One of the most comprehensive studies of clusters in developed countries is that by Enright (1990), which presents abstracts of case studies of internationally competitive and geographically concentrated industries in Germany, Italy, Japan, Switzerland, the United Kingdom and the United States.8 Porter

6 Clusters and Competitive Advantage

Seattle-Bellevue-Event Fishing and fishing products Aerospace vehicles and defence Analytical instruments

Denver Oil and gas Power generation Processed foods

Chicago Processed foods Lighting and electrical equipment Plastics

Boston Education and knowledge creation Analytical instruments Footwear

San FranciscoOakland-San José Bay Area Information technology Communications Power generation

Los Angeles Area Aerospace vehicles and defence Entertainment Apparel

New York City Financial services Publishing and printing Jewellery and precious metals

Houston Oil and gas Chemical products Heavy construction services

Atlanta Entertainment Construction materials Transportation and logistics

Figure 1.1 Examples of highly concentrated industries in the United States Source: Reproduced with the permission of M. E. Porter, Cluster Mapping Project, Harvard Business School.

(1998) gives examples of clusters in the United States. As well as those shown in Figure 1.1 these are clusters of boat and ship building (Seattle), clocks (Michigan), automotive equipment and parts (Detroit), biotechnology (Boston), household furniture (North Carolina), carpets (Dalton), optics (Phoenix) and casinos (Las Vegas). The clusters in ‘Third Italy’ (the centre and north-east of the country) have perhaps received the most attention in the literature (Figure 1.2) not only because they are ‘the clearest and strongest’ examples of clustering (Pyke and Spengenberger, 1990) but also because of their dynamism, their ability to remain competitive and the fact that they have been able to maintain a satisfactory wage level (Crestanello, 1996). The remarkable resilience of the Italian clusters has attracted particular attention, given the pressure they have faced since the early 1980s from multinational enterprises and competitors in low-wage countries.9

Clusters in developing countries Clusters in developing countries have been relatively less investigated than those in developed countries (Bell and Albu, 1999). The studies that have been conducted usually focus on whether or not the associated conditions are any different in developing countries, and on policy lessons that can be learned from clusters in the developed world. According to Nadvi (1994) the ‘sparse and patchy’ literature on clusters in developing countries concentrates on the informal sector or small and medium-sized enterprises. Small firm clusters in developing countries usually enjoy ‘a historical tradition in the area with local enterprise in craft or artisanal workings of certain products

Introduction 7

Valpolicella Marble and building stone Piacenza Factory automation equipment Milan Factory automation equipment

Schio-Thiene Machinery manufacture

Bassano Ceramic art

Vicenza Jewellery Belluno Spectacles Montebelluna Sports shoes Ski boots

Brianza Furniture

Riviera del Brenta Footwear Murano Craft glassware Arzignano Leather tanning

Turin Factory automation equipment Sassuolo Ceramic tiles Ceramic art

Carrara Stones and stone work

Prato Textiles

Bologna Packing and filling machinery Monsummano Footwear Santa Croce Leather tanning Empoli Clothing

Arezzo Jewellery Poggibonsi Jewellery

Figure 1.2 Examples of highly concentrated industries in Italy

along side a custom of self-employment and entrepreneurship’ (ibid., p. 201). Meanwhile Schmitz (1999) states that artisanal clusters in developing countries range from those which show little dynamism and seem unable to innovate to those which have been able to improve their competitiveness. The main clusters in India are shown in Figure 1.3; examples in other countries include electrical fans (Gujrat in Pakistan), surgical instruments (Sialkot in Pakistan), farm machinery (Daska in Pakistan), shoes (Leon, Gadalajara and Mexico City in Mexico, Franca and Sinos Valley in Brazil, Trujillo in Peru and Pusan in South Korea), clothing (Lima in Peru), roof tiles (Karanggeneng in Indonesia), textiles (Daegu in South Korea) and cars (Ulsan in South Korea).10

8 Clusters and Competitive Advantage

Ludhiana Light engineering Delhi Cotton hosiery Okhla Garments

Kanpur Leather footwear

Agra Leather footwear Calcutta Cotton hosiery

Morvi Roof tiles

Bangalore IT/software Tiruppur Cotton knitwear

Figure 1.3 Examples of highly concentrated industries in India

One of the main purposes of the present study is to add to knowledge of and the literature on clusters in the developing world by examining the phenomenon of clustering in Turkey, which is classified by the World Bank as a middle-income developing country.

Defining clusters: industrial districts, networks and clusters Although the variety of clusters makes it difficult to define the concept precisely, there is no shortage of definitions in the literature. According to Hill and Brennan (2000, p. 66), for instance, a cluster is ‘a geographic concentration of competitive firms or establishments in the same industry that either have close buy–sell relationships with other industries in the region, use common technologies or share a specialized labor pool’. This is similar to the definition adopted by Rosenfeld (1995, 2000), who sees a cluster as a geographically bounded agglomeration of related firms that together are able to achieve synergy. Redman (1994, p. 37) includes institutions as well and defines clusters as a ‘pronounced geographic concentration of production chains for one product or a range of similar products as well as linked institutions that influence the competitiveness of these concentrations’. For ‘industrial districts’, a term that is sometimes used interchangeably with ‘clusters’ in the literature, Pyke and Spengenberger (1990, p. 2) provide

Introduction 9

the following definition: ‘[Industrial] districts are geographically defined productive systems, characterized by a large number of firms that are involved at various stages, and in various ways, in the production of a homogeneous product’. According to them, small and often family-owned firms, innovativeness and entrepreneurial spirit, interfirm cooperation and flexible productive networks are common features of such districts. Another definition comes from the new industrial districts (NIDs) literature, which focuses on the set of locational characteristics implied by flexible specialization: a district is a spatially concentrated cluster of sectorally specialized firms, with a strong set of forward and backward linkages, a common cultural and social background linking economic agents and creating a behavioural code, sometimes explicit but often implicit, and a network of public and private supporting institutions (Rabelotti, 1995). Biggiero (1999), on the other hand, defines industrial districts as ‘regional hyper-networks’, or ‘networks of firm networks’. Similarly, industrial districts are defined as a network of small and medium-sized enterprises within geographically defined production systems (Asheim, 1994). Meanwhile for Brusco (1990, pp. 14–15), industrial districts comprise ‘a cluster of firms producing something which is homogeneous in one way or another, positioning themselves differently on the market. Thus, the district could be defined as being a cluster, plus a peculiar relationship amongst firms.’ As a final example, Markusen (1996a) sees an industrial district as a spatially delimited area of trade-oriented activity with a distinctive economic specialization. Markusen classifies ‘sticky places’ (districts that demonstrated resilience in the postwar period in advanced industrialized countries) into four broad categories: Marshallian industrial districts (with an Italian variant); hub and spoke districts (such as Boeing in Seattle and Toyota in Toyota City); satellite industrial platforms (such as the US Research Triangle Park); and state-anchored industrial districts (such as a military base or a university influence on the development of some districts). According to Markusen, many localities exhibit elements of all four models. Silicon Valley, for instance, can be considered an industrial district in electronics, but it also has several important hubs (including Hewlett Packard and Stanford University) as well as hosting large branch plants of US, Japanese, South Korean and European companies (including IBM, Hyundai, Samsung and NTK Ceramics). Furthermore it is the fourth largest recipient of military contracts in the country. In Markusen’s view, therefore, it is wrong to concentrate solely on Italian-type, small-firm industrial districts as ‘sticky places’ are the complex product of multiple forces, including corporate strategies, industrial structures, profit cycles, state priorities and local and national politics. From the definitions reviewed above, two broad questions emerge: is it a necessary condition for a cluster to be a small-firm agglomeration, and is it a necessary condition for a cluster to be geographically concentrated? These questions have to be answered in order to differentiate clusters from industrial

10 Clusters and Competitive Advantage

districts and networks. Amin and Thrift’s (1999) analysis of two districts – Santa Croce in Tuscany and the City of London, the former specializing in leather shoes and bags and the latter in financial services – is of special relevance in respect of the first question. Santa Croce is a successful small-firm district that targets the fashion-conscious end of the market. Meanwhile the Marshallian structure of the City of London has undergone considerable changes since the 1960s in that large corporations – including many multinationals – now have offices there. Importantly, however, the concentration of financial services has persisted, which – along with many other examples, such as car production in Detroit – signals that geographic concentration is not peculiar to small and medium-sized enterprises. Another interesting study that reinforces this point is Saxenian’s (1994) work, which compares the high technology cluster on Route 128 near Boston with Silicon Valley in California. The former is dominated by vertically integrated, large companies that prefer to maintain control over their technology and innovations. This is manifest in the fact that companies along Route 128 are located in large, self-contained, campus-like areas. In contrast Silicon Valley has a history of independent, ‘garage-based’ entrepreneurs. It is necessary to remember at this point that the definitions of industrial districts cited above usually emphasize the predominance of small and medium-sized enterprises, although it is not clear in the literature whether this is a necessary condition for industrial districts. With regard to the question of geographic concentration, many researchers, starting with Marshall (1949), have cited geographical proximity as a key characteristic of districts (for example Pyke and Spengenberger, 1990; Asheim, 1994; Van Dijk, 1994). According to Asheim (1994, pp. 93–4), ‘what distinguishes an industrial district from other industrial agglomerations with strong external economies such as the Perrouxian development poles or the Japanese just-in-time production systems is precisely the existence of agglomeration economies’. The latter is therefore a common feature of industrial districts and geographic clusters, but not necessarily of networks. Instead a network is defined in more general terms as a set of high-trust relationships that are usually contractual and explicit. ‘In contrast to clusters, networks are generally based on a group of firms with restricted membership and specific, often contractual, business objectives . . . The members of the network choose each other; they agree explicitly to co-operate in some way’ (Brown and McNaughton, 2002, p. 27). Based on this definition, it can be argued that network relations are usually more cooperative in nature than are relations among cluster participants, for which competitive forces are also emphasized. For example Porter (1998) points to the intense rivalry in clusters. According to him, clusters offer transaction cost advantages without imposing the inflexibilities of vertical integration or the management challenges of creating and maintaining formal linkages such as networks, alliances and partnerships (ibid., p. 214). What can be deduced from the above is that a network usually involves explicit and formal links among firms that are often cooperative in nature. Whether

Introduction 11

or not these are necessary conditions for networks, however, is again not entirely clear. What is clear is that firms in a network are not necessarily tied to the same location, while a cluster is a form of network that is situated in a particular geographic location. Following this rationale, clusters can be seen as ‘localized networks’ (Van den Berg et al., 2001) involving geographically concentrated firms from a particular sector with links that can be both cooperative and competitive in nature. Defined as such, it appears that clusters are a form of network, whereas industrial districts are a form of cluster. Although there are certainly network relations amongst firms that are not geographically restricted, the focus of the present study is on the role of the local environment in shaping competitive advantage in geographically concentrated industries. In this regard Porter’s (1998, 2000) definition exactly matches the purposes of this study, and hence we shall define clusters as geographic concentrations of interconnected companies and institutions in a particular field (Porter, 1998, p. 197).11 They include specialist suppliers, specialized infrastructure, other service providers and associated institutions (including universities, standards agencies and trade organizations), and also extend to customers and firms in related industries.12 As a final note, in many of the definitions provided in the literature, clusters are implicitly seen as dynamic, successful and competitive. This brings us to the focal point of this study: the theorized link between clustering and competitiveness.

Clusters and competitiveness The debate on the competitiveness of locations begins with the fundamental question of whether all clusters are successful. Surprisingly this question has received little attention in the literature. One notable exception is Amin (1994), who investigates the attributes of successful versus unsuccessful clusters based on two Italian case studies: Santa Croce in Tuscany and Stella in Naples. Santa Croce is a competitive cluster where fashionable leather shoes and bags are made, while Stella is a footwear cluster in an area with high unemployment and widespread poverty. Interestingly, Amin argues that many of the characteristics of the Stella firms are similar to those which have made the clusters in Third Italy so successful. For example the firms’ owners are master craftsmen, the production process can respond quickly to changing market signals, the existence of family businesses and community ties permits labour flexibility, the lack of job opportunities mean cash savings, and agglomeration and product specialization attract buyers and sellers of raw materials and machinery. According to Amin, however, the specialist shoe makers in Stella are not competitive since they have not formed themselves into a locally networked economic system (ibid., p. 62). Instead, and despite their agglomeration, they are isolated from each other so there are no exchanges of ideas, spin-offs and economies of scale through specialization. Rather the artisans of Stella carry out ‘the tasks of the whole corporation

12 Clusters and Competitive Advantage

internally, but without any scale advantages or resources’ (ibid., p. 62). In contrast Santa Croce has a typical Marshallian industrial structure, with entrepreneurial, institutional and social interdependencies. According to Amin, firms in successful clusters act like a collective brain, although what contributes to this and why unsuccessful clusters persist are not made clear in his analysis. What is clear is that the same conditions that are associated with internationally competitive clusters are also typical of some rather unsuccessful ones. The main reason why these are not covered in the literature is simply that they have had little publicity. The answer to the question posed at the beginning of this section is therefore ‘no’ – not all clusters are competitive. The following subsections will discuss alternative views on how and why some clusters manage to become competitive while others do not.

Flexible specialization: a sure route to competitiveness? A stream of research called ‘the flexible specialization approach’ focuses on the organizational features of the regional economy and highlights the embeddedness of economic relations in broader social and political contexts. The main argument (Piore and Sabel, 1984) is that there has been a transition from Fordism to post-Fordism over the past two decades and a new post-Fordist landscape has emerged: new industrial spaces containing small firms with specialized, flexible production.13 This perspective has fuelled studies on the adoption of flexible manufacturing techniques and the link between industrial organization and agglomeration. Proponents of flexible specialization argue for vertically disintegrated and locationally fixed production, derived from examples such as Silicon Valley (high-tech), Third Italy (semirural) and Hollywood (inner city) (Amin and Thrift, 1999). In light of his study of industrial districts in Emilia-Romagna, Capecchi (1990) argues that the definition of industrial districts should include flexible specialization as a necessary condition, together with the presence of small and medium-sized enterprises (SMEs). There are, however, strong criticisms of the view that flexible production is a sure route to competitiveness. According to Amin and Robins (1990, p. 199), for instance, this view represents ‘a kind of anti-Fordist utopia’ and ‘an imposing orthodoxy’, since ‘we are being asked to believe that the very laws of capitalist development are becoming, as it were, Marshallian (as opposed to Fordist)’. In their view Fordism has far from disappeared, and the tendency for localized agglomerations is in fact paralleled by a countervailing tendency for transnational networks. It is therefore multinational corporations that are the real shakers and shapers of the world economy. According to this rationale, it is possible that clusters such as ‘Santa Croce will come to perform only specific tasks in an internationally integrated value-added chain, thus risking a shake out of firms dependent upon tasks no longer performed locally’ (Amin, 1994, pp. 59–60). In response to Amin and Robins’ (1990)

Introduction 13

criticisms, Sabel et al. (1990, p. 230) state that proponents of flexible specialization have never claimed that all agglomerations can be viewed as flexible production systems. Sabel et al. cite the Prato cluster as an example: this cluster ‘has survived, even flourished, on the ashes of a number of crises in its history. The current crisis – competition by large firms in some markets served by the district – might simply push the district into doing what it has done several times in the past: move up the price-performance curve by specializing in higher quality items and leave the middle-range products to the large firms’ (ibid., p. 234). Thus the argument that larger corporations and multinationals are of determining importance is regarded as overrated. As suggested by Bellini (1996), the experience of Third Italy seems to offer irrefutable evidence of the possibility of an alternative, socially progressive path of capitalist growth, providing an intellectual base for a number of microinterventions at the territorial level. In the early 1990s, however, there was a shift in the focus of research when some potentially negative effects of flexible production were brought to light. Harrison (1994), for instance, pointed to the adverse effect that corporate flexibility might have on labour practices in light of evidence that the use of child labour and the exploitation of immigrants were becoming more common in some small and medium-sized enterprises in Third Italy as global competition intensified. Malizia and Feser (1999, p. 224), on the other hand, underlined that cooperation between contracting firms did not necessarily imply an even playing field between partners. It is possible to bring the transaction costs approach to bear on the flexible specialization debate. This perspective focuses on the activities of the typical firm and presumes that if transaction costs are high the firm will choose to internalize its operations. Also, in a region that is relatively underdeveloped the firm may have no choice but to handle most of its basic functions in-house since the market may not be large enough for other companies to focus exclusively on producing the intermediate inputs or services needed. The flexible specialization approach, on the other hand, builds on the fact that there are dynamic external economies in districts, and the related benefit is manifested in reduced costs, enhanced productivity and superior innovation. These opposing views are likely to continue to compete in shaping not only the debates in academia but also the organization and location of production. To conclude, the flexible specialization perspective has a normative dimension in that industrial districts have effectively been defined as places where the dominant industries employ flexible production methods and are highly competitive. On the methodological side, what this means is that few researchers have conducted studies on the incidence of flexibly specialized clusters that are struggling in terms of performance. In the absence of such empirical studies, one might gain the impression that the type of industrial structure and organization highlighted in the flexible specialization literature is a guaranteed route to sustained competitiveness. This is of course a rather

14 Clusters and Competitive Advantage

limited picture (Malizia and Feser, 1999, p. 235). In the United States, for instance, there are strong, resilient clusters that are not flexibly specialized (Porter, 1998, 2000). Such clusters have been understudied, as have ones that are flexibly specialized but not competitive. Storper (1999) thinks that although the flexible specialization debate is theoretically powerful, empirical investigation covering a wider sectoral base is needed to determine whether or not the experience is specific to Italy. In Storper’s view there are deep historical roots associated with the Italian districts that are difficult to generalize to other competitive cultures, such as the Anglo-American ones. Overall, although it is by no means certain that localized flexible specialization is a sure route to competitiveness (Malizia and Feser, 1999, pp. 237–8), it is undeniable that the flexible specialization perspective has enabled us to develop a more sophisticated understanding of clusters, where not only markets and industries but also industrial organization, interfirm business relations and the social situation can be instrumental in success (see Chapter 2 for a discussion of this issue from the viewpoint of the management literature). An approach that shares a common thread with the flexible specialization perspective is the socioeconomic approach, which emphasizes the specific roles played by the social situation and politics. We shall consider this in the following subsection.

The parts played by the social situation, trust and politics This perspective is concerned with social, cultural and institutional influences on the competitiveness of clusters. Brusco (1996), for instance, argues that the importance of knowledge accumulation exceeds that of capital accumulation. According to him, two types of knowledge are of particular importance in this respect; namely codified knowledge (scientific and technical knowledge in scientific journals, technical reviews and textbooks, whose conventions and language are universal and known to the scientific community) and local or tacit knowledge (embedded in the minds, imagination and skill of people who live side by side and swap news and experiences when working together). The latter type of knowledge is acquired by seeing how other people do things, a process that is better managed in a local system (ibid.) Becattini and Rullani (1996, p. 167) attribute special importance to a local system’s ability to integrate codified and contextual knowledge, and argue that this makes the cluster concept essentially socioeconomic and thus a ‘disciplinary hybrid’, combining economics, sociology, geography and industrial organization. In a similar vein, and building on the fact that phenomena that persist over time possess some internal logic that cannot yet be explained in full, Becattini (1990) calls for a ‘socioeconomic notion’ that will link neoclassical, Marshallian and Marxian thinking. According to him, ‘better equilibrium in analysis cannot be reached without the direct contribution of the non-economists’ (ibid., p. 38). Only then can we understand what leads to the construction of a strong image that evokes feelings of identification and

Introduction 15

belonging, ‘giving substance to expressions such as “the response of Prato” to the lira devaluation’ (Becattini and Rullani, 1996, p. 172). In contrast to this line of thinking, Lissoni (2001) points to the possibility that even in clusters dominated by small and medium-sized firms, knowledge may be highly codified and firm-specific, rather than flowing freely throughout the cluster. The idea that economic action is embedded in the structures of local social relations paved the way for a related body of work on the role of social capital in reducing transaction costs and facilitating network formation (Granovetter, 1985). According to this literature, close social networks and thus proximity can help social capital to develop (Brown and McNaughton, 2002). A leading scholar in this field, Putnam (1993), argues that areas with low levels of social capital, which in the case of Italy are concentrated in the south, have slower rates of economic development than those with high levels of social capital, which are concentrated in the central and northern parts of the country. According to Putnam, repeated interaction and trust enhance social capital, and it is likely that there will be a high demand for law enforcement in areas with low levels of social capital as a result of heightened distrust. Of course it is possible that other communities will exhibit a different type of social capital (Flora and Sharp, 1997). Cohen and Fields (1999), for example, examined social capital networks in Silicon Valley and found that the understanding of social capital influenced by Putnam’s (1993) ideas (which refer to the complex of local institutions and relationships of trust among economic actors that evolve from unique local cultures) does not fit the situation in Silicon Valley. Specifically, ‘networks of civic engagement’, which Putnam sees as facilitating the activities of politics, production and exchange, have played little role in Silicon Valley. For instance it is not possible to say that business relations in Silicon Valley are embedded in family structures, given that Silicon Valley is a world of strangers and newcomers. Moreover there is no deep history to speak of. For Cohen and Fields, Silicon Valley is an economic space built on a very different kind of social capital, where the pursuit of economic objectives relates specifically to innovation and competitiveness and there is virtually nothing in the history of Silicon Valley to connect these networks of innovation to civil society. The high incidence of lawyers, accountants and auditors is presented as an indicator of the limited degree of informal, familial and communitarian trust in Silicon Valley, while the rapid turnover of employees reveals a commitment to innovation rather than to any particular company. Cohen and Fields conclude that there is trust in Silicon Valley, but it is of a specific kind. This commercially valuable and performance-focused trust is the building block of Silicon Valley’s ‘particular brand of social capital’. Another dimension is the role of work and politics in the competitiveness of clusters. According to Brusco (1996), competitiveness and worker participation are closely linked. He argues (rather dramatically) that the clusters in Emilia-Romagna show that cluster firms have at least solved some of the

16 Clusters and Competitive Advantage

key problems of large companies, that is, ‘How to involve workers and indeed all production people generally in the productive process, how to secure the participation of workers and technicians, how to storm world markets with products that are the creation not only of the hands but also of the heads and hearts of those that have made them’ (ibid., p. 154). Trigilia’s (1990) emphasis is on the related issue of local political subcultures. Following the institutional perspective, he examines two locales with similar socioeconomic but different political structures: the ‘red’ Valdelsa (furniture and glass) and the ‘white’ Bassano (shoemaking). The results of Triglia’s research show that not only social components such as the extended family and the local community, but also specific political components such as industrial relations and the activities of governments in respect of the Catholic and communist subcultures have played a part in the continuing competitive success of the clusters studied. Regardless of its being ‘red’ or ‘white’, a political movement that actively defends the collective interests of the local society seems to matter.

Innovative milieu and untraded interdependencies14 Schumpeter (1934) stressed the importance of the past trajectory of a locale as a sign of its future innovative capacity. Accordingly the likelihood of the next wave of an innovation to take place in its original area of development is quite high. In this regard, Lagendijk and Charles (1999) call for a distinction to be made between scholars who emphasize the role of networking in a particular sociocultural context, as captured in the term ‘innovative milieu’, and those who adopt the more institutional concept of ‘regional innovation systems’. For the former, the growth of a locally embedded innovation system is essential in shaping the social routines and strategies of actors in the regional economy, whereas the latter pay more attention to the development of and interaction between specific technology-oriented organizations such as universities and research centres (ibid., p. 129). Borrowing from Storper (1997, p. 16) however, there are a large number of universities around the world but ‘there is a much smaller number of Silicon Valleys’, which suggests that there must be other necessary conditions for the development of innovative clusters (Brown and McNaughton, 2002). An innovative milieu supports the development of such conditions. Specifically, based on the concept of knowledge spillovers in clusters, the milieu approach focuses on the ways in which a local socioeconomic network creates favourable conditions for innovation and competitive capacity: ‘local factors such as business services, public support, infrastructures, skilled labor and venture capital must be successfully woven together in order to sustain and support innovation’ (McDonald and Vertova, 2002, p. 45). A closely related concept is the ‘learning region’, in which a collective learning process by firms takes place via social and business networks and becomes embedded in the region (Camagni, 1991). This can also be linked to knowledge creation

Introduction 17

and the importance of tacit and codified knowledge in this process, as discussed above. According to this approach, globalization has triggered a shift in the sources of competitive advantage towards innovation and thus knowledge-based economic activity. In turn, knowledge-intensive economic activities have a high propensity to cluster within a geographic region since knowledge is generated and transmitted more efficiently in a local system (Audretsch, 1998). According to Storper (1999), this approach is paralysed by the circularity involved in its analysis: innovation occurs because of a milieu, and a milieu exists in regions where there is innovation. Instead, what really generate region-specific assets and thus govern the sustainability of a cluster’s competitiveness are ‘untraded interdependencies’. Storper argues that a region can be seen as ‘a nexus of untraded interdependencies’ among three systems: the labour market, the input – output system and the knowledge system. A process of becoming specific that is in operation in such regions, imply that ‘there is only one Silicon Valley if one wants to be “in the know” for the most advanced innovations in semiconductor technology’ (ibid., p. 213). The same logic can be extended to explain why some clusters persist and maintain their competitiveness over time. That is, there are webs of user– producer relations and untraded interdependencies, and localization of these is frequent. The region is then key in the supply architecture for learning and innovation (ibid., p. 214). The literature, however, is inconclusive about the conditions that lead to the emergence of an innovative milieu or untraded interdependencies in a locale (see Chapter 2 for the management literature’s view on how clusters foster innovation).

Is it just an accident of history? Path dependency and the lock-in phenomenon This approach investigates how and why a cluster emerges in a given location and looks at the conditions associated with its subsequent development. Understanding how certain standards or technologies persist despite the fact that they might not be optimal has been the special concern of some researchers (David, 1985; Arthur, 1985). Regarding the initiation of a cluster, several authors (Marshall, 1949; Myrdal, 1957; Scott, 1988; Krugman, 1991a) emphasize the role of ‘historical accident’. That is, the initial pattern may simply be an accident of history, and once established a self-reinforcing loop might occur (Martin, 1999). Thus the initial pattern becomes locked into an area for economic and sociocultural reasons.15 Once a locale has become a centre of activity the lock-in effect comes into operation, and even if exogenous circumstances change (perhaps reducing the attractiveness of the site) economic agents may not want to move away and forgo the benefits of agglomeration. History, then, might be a determining factor in the spatial pattern of economic activity. A connected idea is related to sunk costs and how these bear upon

18 Clusters and Competitive Advantage

the spatial configuration of the firm, and thus upon the geography of economic activity (Clark and Wrigley, 1997). Another dimension of the issue is how the location of an agglomeration is determined, given that it is typical for many locations to be candidates for hosting an agglomeration. In this regard the possibilities range from pure accident and the existence of small initial differences (Henderson, 2000), to chance events that are partly shaped by the conditions prevailing in the business environment offered by a location (Porter, 1990). Porter argues that even inventions, which might change the competitive prospects of an industry as well as the location in which it is concentrated, are more likely to occur in places that are conducive to their development, the conditions of which are specified in the diamond framework (see Chapter 2 for a detailed discussion of this). Hill and Brennan (2000), on the other hand, argue that it matters little why an industry locates in a certain place; what is crucial is whether or not the conditions prevailing in the earliest stage of its development begin to generate cluster economies. In short, despite the fact that many studies conclude that ‘history matters’ (Arthur, 1986), it is not clear which industries will become locked in and which will not, and hence whether history does or does not matter (Enright, 1990). Rauch (1993), for instance, asks, whether history matters only when it matters a little.

Negative externalities and the possible dissolution of clusters This final subsection considers a rather overlooked aspect of the competitiveness of clusters: negative externalities. So far we have concentrated on the positive externalities associated with agglomeration. Pulling in the opposite direction, however, are forces of dispersion. The main concern in this respect has traditionally been the impact of congestion on firm costs and performance (Brown and McNaughton, 2002, p. 24). The effects of an increase in the cost and supply of immobile factors (rents and labour costs in particular) might be serious enough to cause firms to relocate. There is also a possibility that a cluster might be locked into the rules and routines of the past, thus missing any new chances of upgrading. What might be even more damaging is that such a situation, which Porter (1998) calls ‘groupthink’, might be exacerbated by a tendency to exclude newcomers or outsiders, as suggested in the social capital literature (Brown and McNaughton, 2002, p. 25). It has been argued that there is a tendency for clusters to disperse as they grow (ibid.) Relatedly, Dei Ottati (1994) emphasizes the destructive aspects of price competition, which are more evident in a cluster environment than elsewhere. She suggests that formal institutions should intervene to prevent competition from degenerating into destructive forms. Otherwise the resulting disequilibrium might produce a chain reaction, and if the destructive forces are sufficiently intense and prolonged a change of organizational model (that is, dissolution of the cluster) might be unavoidable. Yet another force that might contribute to the dissolution of clusters is the globalization of

Introduction 19

economic activities in general and the impact of multinational enterprises in particular (Amin and Robins, 1990). Overall, what the above discussion reveals is that very different circumstances, both economic and non-economic, might have an impact on the structure and competitiveness of clusters. Accordingly the foundations of success are rather different in, say, the clusters of Baden-Württemburg, where there is ‘a Darwinian competitive pressure’, than in the clusters of Third Italy, where there is a significant role for non-economic factors as well (Staber, 1998).16 The various explanations of why a cluster might become competitive and sustain its competitiveness include those related to the organization of production (for example flexibly specialized small and mediumsized enterprises), the social and political context (for example the part played by trust, social capital and institutions) and the existence of relations within the cluster that pave the way for innovation, learning and untraded interdependencies. There is also a possibility that both the initiation and the subsequent development of a cluster might be an accident of history, with the cluster then being locked into the region. Finally, the opposite forces of dispersion should also be taken into account. None of these explanations, however, can explain fully why certain clusters are competitive while others are not. Specifically, contrary to what the flexible specialization approach envisages, there are competitive clusters that are not flexibly specialized and flexibly specialized clusters that are not competitive, as discussed above. On the other hand, although the part played by the social and political situation in general and extensive collaboration among cluster participants in particular might be important to the success of some clusters, such as those in Third Italy, this cannot explain the success of prominent clusters such as Silicon Valley. Similarly, the explanations that tie the competitiveness of a cluster to innovation, learning and untraded interdependencies do not sufficiently clarify why some clusters manage to become innovative and/or develop untraded interdependencies while others do not. Hence despite the fact that the numerous approaches in the literature have improved our knowledge of the clustering of economic activity, we still lack a comprehensive theory that can explain the competitiveness of clusters in full. One likely contributor to a more complete understanding of the competitiveness of clusters is a relative latecomer to the area; namely the unique perspective offered by the management discipline, which is the subject matter of the next chapter.

2 Clusters in the Management Literature

This chapter provides a review and discussion of recent debates on clusters in the management literature in order to complete the background on clusters presented in the previous chapter. An additional purpose of the chapter is to highlight the unique contribution made by the management literature in this regard. As Porter’s (1990, 1998) approach directly parallels the central concern of this study due to its focus on the link between clusters and competitiveness, the discussion will pay special attention to this approach and the literature it has spawned, after considering some recent studies in the general management literature that focus on different aspects of the issue.

An overview As with the management literature in general, the literature on organization theory is becoming richer in respect of cluster-related studies. Neoinstitutional theory, for instance, offers a distinctive explanation of why organizations cluster and argues that to be perceived as legitimate, organizations must conform to the rules and requirements in a given institutional environment. According to this rationale the organizations in a common institutional environment converge in response to similar regulatory and normative pressures or as they copy successful organizations (Baum and Haveman, 1997). Meanwhile ecological models predict that the addition of an organization to a population is likely to have stronger competitive effects on neighbouring organizations than on those further away (Hannan et al., 1995). In a related work, Hannan and Freeman (1977) outline a model in which competition among the members of an organizational population is localized with regard to size. They infer that organizations of different sizes use different strategies and structures, and similarly sized organizations compete most intensely. However Baum and Haveman’s (1997) analysis of location decisions by the Manhattan hotel industry provides evidence in support of a combined perspective in which hoteliers locate new hotels sufficiently close to established hotels that are similar in terms of price and therefore benefit 20

Clusters in the Management Literature 21

from agglomeration economies, but differ in terms of size, thus avoiding localized competition and creating complementary differences. In this study, information externalities and the reduction of consumer search costs are seen as the primary reasons for clustering. Ecological models of localized competition have much in common with Hawley’s (1950) model of competitive processes, which asserts that localized competition eventually leads to differentiation since less fit organizations are transformed through functional or territorial differentiation as a result of competitive pressures. Similarly, according to White (1981), entrepreneurs try to avoid invading not only competitors’ product/client niches but also their geographic niches. This approach parallels a line of work from the area of marketing, which particularly focuses on the competitive effects of brand location in product space (Hauser and Simmie, 1981). In fact marketers have developed techniques such as multidimensional scaling to find ‘ideal points’ for new product entries (Baum and Haveman, 1997). Another stream of research is the study of networks and interorganizational relationships. These mostly concentrate on buyer–supplier relationships and pay little attention to location. Studies that compare ‘global Toyotaism’ with ‘global Fordism’ (for example Fujita and Hill, 1999) are a notable exception in this regard. Their main conclusion is that global Toyotaism localizes more of the production process than does global Fordism. The just-in-time (JIT) supply system used by Japanese car makers encourages suppliers to locate nearby to avoid the risk of delivery delays (Van Dijk, 1994). A frequently cited example of this is Toyota City, an immense complex of interlinked suppliers that have grown up around Toyota’s main assembly plants. A similar situation exists in the case of Japanese automotive factories in North America in that component companies tend to be located within a short driving distance of the factories. ‘Just-in-time and in one place’, therefore, is a common phenomenon, but is not necessarily inevitable. Hudson (1992) argues that a historical analysis of the patterns of investment by Japanese automotive companies in North America versus those in Europe provides an illustrative case in this regard. The fact that American car producers have internalized a considerable proportion of component production has left their Japanese counterparts with little choice but to ensure that new component companies are set up to supply them, and it is rational for these companies to be located in close proximity. However a very different pattern is observed in Europe, where the majority of the main European component producers are significant international players and their production is rationalized on a European scale. Therefore it is no surprise that new Japanese assembly plants have plugged into the existing system. The introduction of JIT production organization, therefore, may or may not lead to the spatial concentration of production, depending on the specific historical circumstances and the cost of coordination and transportation, which may be high enough to necessitate close proximity (Malizia and Feser, 1999, p. 233).1

22 Clusters and Competitive Advantage

Paralleling the network literature in general, the study of local networks, which has only recently secured a prominent place in the research agenda (Porter, 1998), focuses on trust and identity. In this literature the functioning of a positive feedback loop in a local network is summarized as follows: the more that people trust one another the more they strengthen their group (network) identity, and the more they perceive themselves as a group (network) the more they trust one another (Biggiero, 1999). Geographic proximity reinforces this process (Porter, 1998). The transaction costs approach has brought additional insights in this regard. According to some researchers (for example Storper, 1999), agglomeration is the result of efforts to minimize transaction costs. Specifically, the assertion that vertical integration has transaction cost advantages over the market form is challenged by the cluster approach since clusters are seen as having an organizational form that lies in between markets and hierarchies, given that some disadvantages of the market form are diminished by geographic proximity. The cluster environment, for instance, is conducive to reputation building since the cluster participants usually live in the same area and are likely to have direct social and economic exchanges over a long period of time, thus making it possible to monitor their behaviour. Visser (1999) argues that spatial clustering promotes the development of networks by lowering transaction costs in at least two ways: the high density of related economic activities facilitates the screening and selection of business partners on the basis of local information and established reputations, and proximity between agents facilitates the monitoring of behaviour and enforcement of contracts. In these circumstances, local business customs are developed to such an extent that violating them may result not only in the withdrawal of cooperation by other parties but also in social sanctions (Dei Ottati, 1994).2 The notion of clusters as an organizational form relates to the connections between location and industrial organization, which are just beginning to be explored (Enright, 1990). In a related work, Steinle and Schiele (2001) argue that clustering is more relevant for industries with a divisible production process and a transportable product. Another interesting piece of research is that by Saxenian (1994), who provides a historical analysis of the development of Silicon Valley and Route 128. This comparison of the two clusters shows that Silicon Valley has exhibited resilience when facing challenges, whereas Route 128 has been rather slow to respond. The main reason for this, according to Saxenian, is related to industrial organization. Specifically, Silicon Valley is a network-based industrial system whereas Route 128 is dominated by a small number of relatively integrated corporations. There is a risk that this conclusion might be misinterpreted as it seems to suggest that we should rethink the large firm as an organizational form. It is therefore necessary to point out that Saxenian’s emphasis is on the importance of local networks rather than the size of firms in a cluster: ‘The contrasting experiences of Silicon Valley and Route 128 suggest that industrial systems built on regional networks

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are more flexible and technologically dynamic than those in which experimentation and learning are confined to individual firms’ (ibid., p. 161). She also acknowledges that there might be large as well as small firm variants of network-based systems, as the Japanese experience suggests. Another noteworthy finding of her study is that although collaborative practices in Silicon Valley are pronounced, the region has long been dominated by individual achievement, pointing to the value of competition as well as collaboration in this cluster. Finally, the idea that ‘industrial organization matters, although the type of organization that is most successful in particular places may vary’ (Malizia and Feser, 1999, p. 236) is perhaps the only point of consensus in this literature, and the organizational aspects of a cluster of independent but informally linked firms and institutions, which constitutes a robust organizational form in the continuum between markets and hierarchies, are still underexplored (Porter, 2000). The main contribution of international business scholars (for example Dunning, 1995, 1998; Rugman and Verbeke, 2000) has been to analyse the geographical concentration/dispersion of FDI conducted by multinational enterprises, which may strengthen the location advantages of the countries in which they operate through spillovers to local networks. A competitive local cluster is in turn beneficial for the multinationals, since it enables them to gain access to leading-edge ideas and specialist talents (Bartlett and Ghoshal, 1991). With regard to new entrants to US industries, for instance, there is evidence that foreign firms locate new plants in states with a high concentration of similar activities (Head et al., 1995). When examining the characteristics of foreign-owned subsidiaries in leading industry clusters, Birkinshaw and Hood (2000) found that these subsidiaries gradually develop the same characteristics as other firms in the clusters, since they have to become insiders in order to reap the associated benefits. According to Rugman and Verbeke (2000, p. 29), it is not only possible that multinationals might alter a cluster’s attractiveness but also that they might act as a conduit for international exchanges and spillovers, and thus contribute to the global diffusion of knowledge. Finally, since the structure and content of the location portfolios of multinationals have recently become more crucial to their global competitive position, more attention needs to be paid to the importance of location per se as a variable that affects the global competitiveness of firms (Dunning, 1998, p. 60). An interesting but overlooked aspect of agglomeration economies has been addressed by Shaver and Flyer (2000): firms contribute to externalities in addition to benefiting from them. This suggests that if firms are heterogeneous they will differ in the net benefits they receive from agglomeration. According to Shaver and Flyer, firms with the best technologies, human capital, training programmes, suppliers and distributors will gain little but suffer much when their technologies, employees and access to supporting industries spill over to competitors. Therefore, unlike firms with weak

24 Clusters and Competitive Advantage

endowments, these firms have little motivation to cluster. Shaver and Flyer found supportive evidence of their arguments by examining the location choice and survival of new foreign investments in US manufacturing industries. Specifically, their results show that large entities are less likely to agglomerate, which in their view explains why some studies have identified the existence of agglomeration mechanisms but many large-sample studies have not found a superior performance among agglomerating firms. One body of research in the strategy literature has investigated how clusters affect innovation (Bergeron et al., 1998). With regard to the localized character of innovation in the UK, for instance, Baptista and Swann (1998) have found that firms in strong clusters are more likely to innovate. Another interesting piece of research is that by Beal and Gimeno (2001), who have found that technological knowledge spillovers matter little for US software firms. What really matters are marketing spillovers in that cluster firms gain an edge in finding markets and customers, as well as tailoring products for them. This finding, which at first seems counterintuitive, highlights two important issues. First, although technological innovations are without doubt very important, sometimes it is possible to gain access to them relatively easily, as in the case of new software technologies. Second, a broader understanding of innovation is necessary, rather than reducing the concept to ‘scientists in laboratories making breakthrough inventions’ (Porter, 1990). As Beal and Gimeno’s (2001) study illustrates, innovation in marketing can be of determining importance as well, and the related information (for example on industry trends, market niches and customers’ needs) might be difficult to codify and is thus easier to acquire in a cluster environment. Following this rationale, it is not unlikely that a non-agglomerated firm will make a breakthrough innovation but mistime its entry into markets (Yu, 2002). As the above discussion has revealed, management scholars have addressed numerous aspects of clustering, including the organization of production, transaction costs, the nature of localized competition, the role of firm strategies and marketing, firm-specific perceptions of the costs and benefits of clustering, the part played by multinationals and the interaction between global and local networks. The unique approach of management scholars involves putting the firm at the centre of the analysis and trying to understand the phenomenon of clustering from that point of view. This micro approach to the issue has without doubt enhanced our understanding of clusters. However, despite the growing interest in location-related issues in management research in recent years, relatively little management thinking is directly connected to location (Porter, 1998). In fact Porter (1994) argues that in the strategy literature, the part played by location has been seriously neglected, particularly in respect of competitive advantage. Meanwhile profound changes have been taking place in the world economy in that globalization and the intensification of knowledge have greatly altered the role of location in competition. Understanding this new role ‘requires embedding

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clusters in a broader and dynamic theory of competition’ (Porter, 1998, p. 208). Porter’s (1990, 1998, 2000) work on this has triggered a revival of interest in the subject and prompted a lively debate in the literature. Apart from furthering our understanding of clusters, Porter’s contributions are of particular relevance to this study since they specifically focus on the relationship between clustering and competitive advantage. The rest of this chapter will therefore be devoted to a discussion of these contributions and the debate they have spawned in the literature.

Porter-style geographic clusters The main focus of Porter’s book The Competitive Advantage of Nations (1990) was on sources of international competitive advantage at the industry level. Based on a study of more than one hundred industries in ten countries, he developed his diamond framework, which rests on the idea that sources of advantage are local. In this framework, four attributes of the local environment – factor conditions, demand conditions, related and supporting industries, and context for firm strategy and rivalry – play a major part in enabling domestic firms to gain and sustain competitive advantage. These factors interact with each other to form a complex, mutually reinforcing system, which makes the resulting advantage very difficult to replicate elsewhere, and hence more sustainable. The dynamic character of the system is magnified by the effects of domestic rivalry and the geographic concentration of industry. Domestic rivalry prompts improvements in all the other determinants, while geographic proximity amplifies the interaction between the sources of competitive advantage. Pressure and challenge are of particular importance in the emergence and sustainability of competitive advantage, and both are driven by intense domestic rivalry and felt more heavily when firms are in close physical proximity. In his subsequent works Porter (1998, 2000) argues that the existence of clusters is a manifestation of diamond theory. In his view the beginnings of a geographic cluster can often be traced to historical circumstances or an unusually sophisticated local demand (Porter, 1998). The prior existence of related industries and/or one or two innovative companies might also provide the seed for a new cluster, the latter echoing the growth pole approach. Alternatively a chance event (such as an invention) may create advantages that foster cluster development. Once a cluster begins to form a self-reinforcing cycle promotes its growth since talented individuals are attracted by success stories, specialist suppliers emerge, information accumulates and local institutions develop specialized training programmes, research facilities and infrastructure. It can take a decade or more to develop a sustainable competitive advantage, but it is also possible that some clusters will lose their competitive edge because external (for example technological discontinuities)3 and internal forces (for example ‘group-think’ among cluster participants, which

26 Clusters and Competitive Advantage

can result in an overly inward-looking cluster) cause shifts in relative competitive positions. In Porter’s (1994) view the basis of competitive advantage has shifted from static efficiencies (such as low input costs) to the ability to innovate and upgrade skills and technology. This has brought about a radical change in the importance of location in that the capacity to innovate and upgrade draws heavily on the local environment, and the related advantages are difficult to tap from a distance. Enduring competitive advantages thus lie in the local environment and distant rivals cannot easily replicate them. In other words the microeconomic quality of the local business environment determines the sophistication with which companies compete. Clusters affect competition in three broad ways: by increasing productivity, by driving the direction and pace of innovation (which means future productivity growth) and by stimulating the formation of new businesses (Porter, 1998). Local rivalry boosts productivity since the presence of successful rivals puts pressure on firms to innovate and break their dependence on less sustainable sources of advantage – say, basic factors – to which their rivals also have access. Close proximity facilitates constant comparison, and rivalry among local firms often transcends the economic to become emotional and personal. In fact the motivation-driving nature of a cluster can be amplified by pride and a desire to look good in the local community. On the other hand, interactions among cluster participants are likely to reflect longer-term interests because the easy spread of information can affect reputation and individuals’ desire for standing in the local community (Porter, 2000). Word soon spreads if one cluster participant takes advantage of another or provides shoddy products or services (Enright, 1990). Moreover, since assets and skills are readily available in the location and would-be entrepreneurs can benefit from established relationships, clusters are conducive to new business formation. These factors, together with the presence of local firms that have achieved success, reduce the perceived risks of entry. Customers’ demands can also be better exploited in a cluster environment since firms can tune into customers’ changing needs with a speed that is difficult to match by companies located elsewhere. Relationships and face-to-face contacts in a cluster enable companies to learn early about evolving technology and marketing concepts. Since the opportunities for innovation are more visible and therefore firms are prompted to act rapidly, clusters can remain centres of innovation for decades (Porter, 2000). This approach to clusters has implications both for economic development (it calls for attention to microeconomic factors in government policy) and for companies (for instance in respect of a location’s chance of attracting FDI). Porter (ibid.) argues that the seeds of most clusters germinate independently of government action and that a market test must be passed before development efforts are justified. What is required of the government changes as a cluster develops. In the early stages the government should focus on improving the

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local infrastructure and eliminating disadvantages. In the later stages, it should concentrate on removing obstacles to innovation. In short, the government’s role is to improve the microeconomic foundations for competition, which will ultimately determine the competitiveness of the cluster. According to Porter, since knowledge and innovation are key factors in cluster development, the incidence of clusters tends to increase with economic development. In developing countries, which usually lack well-developed clusters, diverse economic activities tend to be concentrated in one or two large cities.4 Promoting clusters in such countries, Porter (1998) argues, should start with the basics: improving capital markets, institutions, education and skill levels, and technological capacity. Only then should cluster-specific investments be made. As mentioned earlier, Porter’s ideas on the importance of the local business environment for creating and sustaining competitive advantage became the focus of an intense debate in the academic literature.5 In addition to the ten countries studied in the original work (Porter, 1990), the approach was applied to hundreds of industries in more than 40 countries, and the academic literature on the topic grew to more than 30 book reviews and around 50 published articles (Davies and Ellis, 2000). The following pages will provide examples of the application of Porter’s approach in different contexts, plus a review of the major debates in the literature. Of particular relevance for our purposes are critiques and comments on issues related to geographic clustering.

Applications and empirical tests The many applications of Porter’s approach include ones that replicated his 1990 study in other countries. Some of these replications were conducted by groups headed by Porter himself (for example in Canada, New Zealand and several Latin American and Middle Eastern countries). A commonality among these studies was that they took the value of Porter’s (1990) framework for granted, and thus the primary purpose of the exercises was to identify the sources of advantage/disadvantage in particular industries. The results of the analyses were then used to suggest policy remedies for their weaknesses and strategies to build upon their strengths. Replications conducted by other researchers (such as those in Turkey by Öz, 1999, and Greece by Konsolas, 2002) were aimed at determining whether the diamond concept would work in different contexts. There have also been empirical tests of different aspects of Porter’s model. For example O’Donnellan (1994) has tested, among other things, the geographical concentration hypothesis. The study concludes that in Ireland there is a general preference among industries for large urban areas such as Dublin and Cork, and that there is little association between sectoral clustering and industrial performance. O’Malley and Van Egeraat (2000) have also investigated the link between industrial performance (in this case in terms

28 Clusters and Competitive Advantage

of growth) and clustering, and concluded that there is limited evidence of Porter-type clusters in Irish industry and no clear association between the occurrence of such clusters and the growth of indigenous manufacturing. Yet another study of Ireland is that by Clancy et al. (2001), which integrates the principal findings of three Irish case studies on dairies (O’Connel et al., 1997), popular music (Clancy and Twomey, 1997) and software (O’Gorman et al., 1997). The overall conclusion is that although various elements in Porter’s diamond have contributed to the competitive advantage of the industries studied, there is also support for critics of Porter, especially those who question the importance of a home base in small, open economies such as Ireland, as well as the part played by foreign multinationals in fostering competitiveness. However it should be noted that Clancy et al. (2001) do not focus on industries that are both competitive and indigenous, which they themselves acknowledge is a weakness of their study. This is a reasonable self-critique, and a counterfactual speculation is possible. This does not, however, change the fact that although it lacks clear examples of Porter-style clusters, Ireland has performed well economically in recent years. This leaves two possible explanations. First, critics of Porter may be right that his approach to clusters is not relevant for a small, open economy. Alternatively, it may be that Ireland is an exceptional case, with growth occurring from a low starting point, and it is possible that it will prove difficult to sustain indigenous growth in the long term unless strong clusters emerge. In another empirical test, Yetton et al. (1992) have re-examined the analyses conducted by Porter in Canada and New Zealand and supplemented them with an original analysis in Australia. They conclude that competitive industries usually lack strong diamond elements in their home base in these countries. Similarly, and again focusing on Australia, Ellis and Pecotich (1996) have found evidence to refute the importance of strong home-base diamond elements. The test results obtained by Cartwright (1993) in his attempt to test the whole model in light of the New Zealand finding show that the Porterideal model can be associated with industries that are characterized by moderate competitiveness and static/declining profitability, rather than ones characterized by strong competitiveness and growing profitability. A similar result has been produced from a study on Hong Kong’s competitiveness, in that Hong Kong’s most competitive industries do not have strong demand conditions or favourable factor conditions in their home base. Finally, based on their study in the Netherlands, Jacobs and De Jong (1992) conclude that the importance of the home base varies from sector to sector. Having summarized the country applications and specific tests of the hypotheses put forward by Porter (1990, 1998, 2000), we shall now consider some regional investigations of Porter-style clustering. In their abovementioned study of clusters in Ireland, Clancy et al. (2001) look at the geographical location of dairies, popular music and software. While all three are spatially concentrated, the dairy cluster is the only one that is both indigenous and

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very competitive. The authors argue that proximity has facilitated information flow within this cluster. Interestingly, for the dairy cluster (like many other clusters in Ireland) most of the important downstream and related industries are foreign-owned. This is linked to a much-debated aspect of Porter’s approach that will be discussed in detail in the next subsection. In his application of the diamond framework in London, Hamilton (1991) provides a historical analysis of the capital and argues that during the past 30 years the area known as the City has been transformed from a predominantly materials-based economy to a mainly information- and financial-based one. He then investigates London’s international competitiveness with the help of Porter’s diamond model, which is assumed to be valid and is used as an organizing framework to examine competitiveness. According to Healey and Dunham (1994), who apply Porter’s analysis to another British local economy, Coventry, some changes are required when the diamond is applied to subnational units since a number of the tools available to the national government (such as exchange rate control and interest rates) are not available to regions. Moreover factors of production, especially labour and capital, are more mobile within than between countries. Having discussed such concerns, Healey and Dunham use Porter’s approach to investigate why Coventry’s position changed from relative competitive disadvantage during the 1970s and early 1980s to relative competitive advantage during the remainder of the 1980s. They conclude that Porter’s (1990) analysis provides a useful framework to examine the competitiveness of local economies, since each of Porter’s four determinants has had some bearing on the change in Coventry’s competitive advantage. Kaufman and Gittel (1994) have applied the diamond framework in New Hampshire (United States) to evaluate Porter’s (1990) hypotheses on the effect of geographical concentration on industrial performance. To identify New Hampshire’s competitive industries they used export shares (following Porter’s methodology) plus two additional indicators: productivity and wage levels. A historical analysis of New Hampshire’s four leading industries – fabricated metals, industrial machinery and equipment, electronic and electrical equipment, and instruments – was supplemented by a survey that provided interesting finding. When asked whether proximity promoted rivalry, for example, New Hampshire companies stated that they did not compete with one another, nor did they generally compete with other firms in the region. Kaufman and Gittel’s interpretation of this is that firms in each of the leading industries were operating in different market niches, thus avoiding direct competition. Similarly, with regard to proximity to customers, half of the respondents stated that this was of little importance since the majority of primary products were sold to customers located elsewhere in the country. However there was some evidence of suppliers being geographically concentrated. Thus the survey results indicate that several of Porter’s conclusions do not hold for New Hampshire. Kaufman

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and Gittel’s overall conclusion is that although Porter’s model provides a useful tool for analysing a region’s economic activity, the New Hampshire economy differs in some very important ways from the predictions of the model. As well as the applications and empirical tests summarized above, other studies have taken elements of Porter’s approach. For instance Padmore and Gibson (1998) have designed a model to describe and assess the strengths and weaknesses of regional industrial clusters using some dimensions of Porter’s diamond and applying the model at the regional level in British Columbia (Canada). Dobkins (1996) has modelled locales that produce goods for trade outside their boundaries, assuming monopolistic competition. This model was inspired by Porter’s (1990) story of the Montebelluna (Italy) ski boot industry, in which externalities, economic growth, and historical and spatial considerations were all present. The most significant contribution of these two studies has been to put some of Porter’s key ideas into a mathematical model. In another study, Shilton and Stanley (1999) trace the survival and growth of the headquarters of publicly listed firms in the United States. Their finding supports Porter’s thesis that firms cluster for competitive advantage. Finally, Doeringer and Terkla (1995) explore the economic foundations of business clusters in the United States and their link to development and competitive advantage. Drawing on interview-based field research, they warn that intense local rivalry among firms within production channels can be counterproductive.

The debate on Porter-style clusters There have been various criticisms of Porter’s (1990, 1998) approach. Stopford and Strange (1991) criticize Porter’s lack of formal analytic modelling, while Bellak and Weiss (1993), Dunning (1992) and Grant (1991) question the originality of the framework. Porter has also been criticized for his treatment of macroeconomic policy (Daly, 1993), for his failure to clearly define determinants and several key terms (Grant, 1991) and for paying insufficient attention to modern trade theory (Bellak and Weiss, 1993) and the role of national culture (Van den Bosch and Van Prooijen, 1992). His methodology has also attracted criticism, including his heavy reliance on world export shares as a measure of international competitiveness (Grant, 1991; Cartwright, 1993; Rugman and D’Cruz, 1993), his inadequate treatment of relatively less competitive industries (Yetton et al., 1992) and his treatment of multinationals and foreign direct investment (Rugman, 1991; Bellak and Weiss, 1993; Dunning, 1993; Hodgetts, 1993; Rugman and D’Cruz, 1993; Rugman and Verbeke, 1993). Criticisms of his diamond framework relate to the undue importance attributed to the relationship between domestic rivalry and international competitiveness (Smith, 1993) and the indirect role envisaged for the government (Stopford and Strange, 1991; Van den Bosch and de Man, 1994).

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Several of the contributors to a volume compiled by the OECD (1999) have incorporated Porter’s approach to clustering into their analysis. For example Drejer et al. (1999) assess Porter’s Danish studies, Peneder (1999) focuses on the case of Austria, and Rouvinen and Yla-Anttila (1999) first evaluate Steinbock’s (1998) study of Finland and then apply Porter’s approach to Finland, but with a number of changes.6 While these studies are generally positive about Porter’s approach, Davies and Ellis (2000, p. 1189) offer a rather negative evaluation of Porter’s 1990 book: ‘While it was enormously rich in its range and scope it fell far short of the claims made for it.’ According to them, the assertions at the heart of the study can be refuted because strong diamonds are not in place in the home bases of many internationally successful industries. Amongst the numerous proposals for improvement, Grein and Craig (1996) suggest that the diamond should have three elements instead of four – ‘infrastructure/demand’, ‘competitive investment’ and ‘education’ – and O’Shaughnessy (1997) adds ‘custom’, ‘history’ and ‘politics’. When considering the South Korean case, Cho (1994) suggests that the four-cornered diamond should be replaced by a nine-factor model consisting of four physical factors (endowed resources, business environment, related and supporting industries, domestic demand), four human resources (workers, politicians and bureaucrats, entrepreneurs, professional managers and engineers) and chance. However many scholars have acknowledged the value of Porter’s approach, and ‘even the most hostile [have] praised the richness of Porter’s cases’ (Davies and Ellis, 2000). For instance Greenaway (1993) is of the opinion that Porter’s approach serves as an excellent complement to mathematical analyses of competitive advantage. Similarly Smith (1993, p. 404) believes that Porter’s firm-oriented approach represents an original contribution to development theory: ‘The alternative of simply applying an unalloyed paradigm of neo-classical analysis plus the assumption that government failure is always greater than market failure seems weak by comparison.’ Holt (1998) especially celebrates Porter’s emphasis on local rivalry and considers that his analysis of how competitive pressure in clusters drive innovation and prosperity is ‘one of the glories of his approach’. According to Gray (1991) and Dunning (1992), Porter’s extensive and rich field research has advanced our knowledge of why corporations in some locations have successfully penetrated foreign markets in some product areas but not others, and of why some countries have been able to attract foreign-owned firms to participate in some value-added activities but not others. According to Grant (1991), Porter’s assertion that innovation and upgrading are central to the creation and maintenance of competitive advantage constitutes a step towards the reformulation of the strategy model in a dynamic context. One implication of this is that when determining the sources of competitive advantage and formulating strategy, it should be remembered that the resource base of a firm is determined not only by its own past investments

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but also by the conditions for resource supply and resource creation in its proximate environment (Öz, 1999). We shall now look at the most relevant debates for the purposes of this study.

Geographical unit of analysis and applicability to every context A very interesting debate in the literature is on the most appropriate geographical unit of analysis to apply Porter’s approach. In his 1990 study, Porter argues that many of the determinants of advantage are more similar within a country than across countries. However, because the geographic concentration of competitive industries is so important he questions whether the country is the most appropriate unit of analysis since competitive advantage often seems to be localized in an area within the country. International business scholars, however, tend to take the opposite position. Regarding the EU, for example, Dunning (1993) argues that national diamonds should be replaced by ‘supranational diamonds’ in order to capture the true competitive advantages of the EU. Jacobs and De Jong (1992), on the other hand, argue that there is a dialectic relationship between divergence and convergence, and concur with Porter’s (1990) idea that globalization paradoxically leads to more emphasis on local conditions and creates an opportunity for firms to take advantage of them. Others (for example Rugman, 1991; Hodgetts, 1993; Rugman and D’Cruz, 1993; Rugman and Verbeke, 1993) share the idea that double and/or multiple-linked diamonds would reflect the sources of competitive advantage better than Porter’s (1990) single diamond framework does for smaller countries that are highly dependent on one or more of the major blocs (Europe, North America and Japan). At the micro level the issue is further complicated by the existence of cross-border clusters (Saner and Yiu, 2000). Relatedly, some researchers consider that Porter’s approach cannot be used for all countries. For instance Rugman (1991) believes that while most of Porter’s (1990) analysis would work for managers based in the EU, the United States or Japan, much of it could not be applied in Canada. The main reason for this, according to Rugman, is that Porter’s study does not incorporate the true significance of multinational activities, an issue that will be discussed below. Similarly, in Hodgetts’s (1993, p. 44) view, ‘since most countries of the world do not have the same economic strength or affluence as those studied by Porter, it is highly unlikely that his model can be applied to them without modification’. Porter’s emphasis on home markets and local firms, according to Bellak and Weiss (1993), may be justified in the case of large countries but is of little relevance for small ones. Narula (1993) and Yetton et al. (1992) make a similar point when arguing that since it is based on and applied to them, the diamond is most relevant for mature, manufacturing-based economies and cannot be used to explain the international competitiveness of developing countries. Similarly Davies and Ellis (2000) argue that since Porter generalizes inappropriately from the American

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experience, developing countries are inadvertently encouraged to pursue policies that might be harmful.

Sources of advantage: global versus local Whether sources of advantage are local, as suggested by Porter (1990, 1998), is another issue that has been subject to severe criticism. Porter’s (1990) treatment of multinationals and foreign direct investment in particular has been widely criticized. According to Rugman (1991), the narrow understanding of foreign direct investment is a major conceptual problem with Porter’s model. Relatedly, Davies and Ellis (2000) argue that it is not surprising that Singapore was not included in Porter’s 1990 book, eventhough it had been studied by him: ‘If Singapore’s prosperity were determined by the activities of firms for whom Singapore is a home base its residents would be poor people, but they are not.’ According to Dunning (1993), to suggest that the competitiveness of multinationals rests only on their access to the diamond of competitive advantage in their home countries is ludicrous, regardless of whether or not their initial foray overseas was based on such advantages. The geographical dimension of the criticisms of Porter’s attitude towards FDI is the focus of a work by Lagendijk and Charles (1999), who emphasize the importance of foreign assets in clustering and suggest that at the regional level the issue of multinationality becomes an issue of multiregionality.7 Rugman and Verbeke (1993, p. 72) challenge ‘Porter’s allegation that the core competencies of large MNEs and the innovative processes occurring within these firms necessarily need to depend upon the characteristics of a single home base’. They argue that multinationals from small countries may rely on a host nation to such an extent that it becomes difficult to make a distinction between the home base and the host country or countries.8 According to Rugman and Verbeke (2001), a major problem with Porter’s approach is that he concentrates solely on non-location-bound, firm-specific advantages (FSAs) developed by companies in their home country prior to engaging in FDI, which is only one of many possible combinations that can be observed empirically in respect of the locational determinants of competitive advantage. For example one alternative is for non-location-bound FSAs to be created jointly by subsidiaries located in various countries and exploited throughout the network. Here we have an increasingly complex and blurred picture of the relative contribution of FSAs versus CSAs (countryspecific advantages) and home CSAs versus host CSAs to overall multinational competitiveness. Another point of disagreement concerns the identification of the home base of a multinational. According to Rugman and Verbeke (ibid.), it is necessary to define a threshold percentage of core assets, competencies and strategic decision-making power, below which a firm would be viewed as functioning with several home bases. In addition, if a firm is able to enhance its accumulated competencies through interactions with location advantages

34 Clusters and Competitive Advantage

in host countries, it will again be viewed as functioning with several home bases. This implies that most multinationals will have several home bases, which is in sharp contrast to Porter’s approach. It should be remembered that Porter (1990) uses the world export shares of industries as a proxy to measure international competitiveness at the industry level. An industry is also considered to be competitive when domestic firms in the industry are engaged in substantial outward FDI. With regard to inward FDI, a methodological problem arises when a country has an internationally competitive sector (measured by world export share) that is dominated by foreign companies. What Porter does in such cases is to try to locate the source of advantage through in-country research. This requires determining whether the firms in the industry operate as branches of a multinational company or can be clearly associated with the host country. In the former case the industry is excluded, and in the latter case it remains on the list of competitive industries. This is confusing but logical, and the real challenge is to locate the source of advantage. What is even more confusing is Porter’s (1990) argument that ‘inward FDI is not entirely healthy’, especially when examples of relatively prosperous countries such as Singapore, Canada and Ireland, which host considerable inward FDI, are taken into account. Dunning (1993) argues that Porter’s interpretation of the link between FDI and competitiveness rests on the idea that outward FDI reflects the possession of firm-specific tangible assets that give a competitive edge prior to undertaking the FDI. While this is a valid explanation of why individual firms are able to engage in FDI, it does not follow that inward FDI has a negative effect on the competitiveness of the recipient economies (Davies and Ellis, 2000). Recently Lin and Song (1997) have taken up Dunning’s (1995) extension of the diamond framework, which adds ‘multinational business activity’ as a determinant of competitive advantage. Applying the model to China, Lin and Song conclude that the country’s recent success owes much to inward FDI. Similar findings are available for other countries, including Mexico (Hodgetts, 1993) and Singapore (Chia, 1994). The crucial point here is that foreign investors might and do choose competitive locations because the environment offered by a particular industry cluster acts as a magnet for other firms in the industry, so both national and foreign firms gravitate to favourable cluster locations even if corporate ownership is based elsewhere.9 This being the case, there is no reason why inward FDI should be considered ‘unhealthy’. In summary, many international business scholars (Rugman, 1991, 1992; Rugman and D’Cruz, 1993; Jacobs and De Jong, 1992; Yetton et al., 1992; Bellak and Weiss, 1993; Cartwright, 1993; Dunning, 1993; Hodgetts, 1993; Rugman and Verbeke, 1993; Yla-Anttila, 1994) have found fault with Porter’s (1990) insistence that firms’ ability to compete depends on the strength of the diamond in their home base. As Davies and Ellis (2000) point out, however, this difficulty with the diamond goes deeper than these researchers realize

Clusters in the Management Literature 35

since the argument can be extended to suggest that not only multinational companies but also other companies that are exposed to international influences in one way or other (for instance via exporting) may sharpen their advantages as a result of such interactions. If, however, ‘firms in one country are able to draw upon diamonds in another, the concept of the national diamond is stripped of its content’ (ibid., p. 1204), since the whole concept of the diamond is based on the hypothesis that the sources of competitive advantage are local. Porter thinks that such criticisms mainly stem from an unnecessary confusion: the geographic scope of competition and the geographic locus of competitive advantage are two different things. In his view, competition can be global but the sources of advantage are local (Porter and Amstrong, 1992). It is therefore clear that the two sides of the debate, that is, Porter versus the international business scholars, are arguing for two competing hypotheses: that the sources of advantage are local, or that advantages can be sourced globally. The point made by international business scholars, in other words, is in fact a counter-hypothesis rather than a criticism. Needless to say the burden of proof lies on both sides when there are two competing hypotheses, and this calls for further empirical research. This book hopes to contribute to this by investigating not only the local circumstances of but also the global linkages associated with the Turkish clusters.

The debate on policy issues Another noteworthy debate focuses on regional policy issues. According to Markusen (1996b), agglomeration effects are largest for industries that are high-tech, knowledge-intensive, innovative and young. She implies that developing countries need these industries because they support a higher standard of living. Porter (1996), however, believes that this perspective may be misleading, and that the productivity of an industry matters more than its being high-tech. Markusen also challenges Porter’s argument that industrial clusters are the most significant unit of analysis for investigating regional economic advantage. According to her, this is an empirical question and far from self-evident. As an example she cites Seattle, the dynamism of which is explained by the presence of five distinct sectors: shipping, forestryrelated activity, aircraft, software and biotechnology (Markusen, 1996b, p. 91). Porter agrees with Markusen’s view that the significance of generalized versus cluster-specific agglomeration economies is an empirical question. With regard to the Seattle example, Porter underlines that he is not suggesting that all clusters in a regional economy have to be connected. Another major point of divergence for the two researchers is that Markusen supports government targeting of particular industries, which in her view is appropriate and effective, whereas for Porter, the whole premise of targeting is flawed. Porter and Markusen also disagree on the types of regional policy that should be followed. Markusen favours a traditional formulation of regional policy that includes broad incentives for firms to locate in less developed regions,

36 Clusters and Competitive Advantage

whereas Porter thinks that such measures are doomed to failure. According to him, cluster formation can only be encouraged ‘by locating specialized infrastructure and institutions in areas where factor endowments, past industrial activity, or even historical accidents have resulted in concentrations of economic activity’ (ibid., p. 88). Moreover in Porter’s view there are strong arguments for the greater decentralization of economic policy to subnational regions, marking yet another area in which he disagrees with Markusen.10 Another dimension of policy issues that has been subject to debate is the revitalization of inner-city areas.11 Based on his approach to the locational determinants of competitiveness, Porter (1995a) argues that this task can only be done through private initiatives based on economic self-interest and competitive advantage. In the associated debate in the literature, Blakely and Small (1995) state that Porter’s analysis is incomplete, while Johnson et al. (1995) argue that Porter has devoted too little attention to the role of the business community in revitalizing such areas. In their view, Porter’s assertion that the private sector – in exchange for a more business friendly environment – will step in to fill the gap is not convincing given that this has rarely happened in the past. Businesses need steady customers and reliable employees, and people who are ‘ill-housed, ill-fed or just plain ill’ cannot be either (Lowery, 1996, p. 64). Overall the critics agree that Porter’s (1995a) approach can serve to supplement other efforts, but it can never be an all-inone solution or as important as affirmative action. In his reply to his critics, Porter (1995b, p. 304) insists that many of the criticisms indicate a misunderstanding of his arguments. According to him, as a general principle it is necessary to view the disadvantages suffered by inner-city areas as an economic problem and the result of poor strategies and obsolete public policies. It is therefore necessary to develop a new strategy for each area, tailored to its unique characteristics and building on its advantages (ibid., p. 333). With regard to the role of government, Porter (1990) believes that clusters often emerge and grow naturally so there is only an indirect role for the government. This is one of the most criticized aspects of his approach. Several scholars (for example Stopford and Strange, 1991; Van den Bosch and de Man, 1994; Öz, 1999) are of the opinion that in developing countries a more active part should be played by the government as poor countries cannot afford the luxury of letting market forces determine outcomes. In his later work Porter (1998) continues to argue that the essential role of government is to challenge and press industries, and that too much help can undermine the industries’ success. A detailed discussion of the ideal level of government intervention is beyond the scope of this study. However the discussions in this book on the part played by the government in shaping the sources of competitive advantage of the Turkish clusters examined may provide some insights into to the role of government in cluster development.

3 Industrial Clusters in Turkey

The Turkish business environment, past and present During the first ten years of the newly established Republic of Turkey (1923–32), state involvement in economic activities was rather limited. This was mainly because (1) the basic principles adopted in the Izmir Economic Congress (1923) committed the government to the establishment of a private enterprise economy, and (2) some economy-related provisions in the Lausanne Treaty (1924) considerably restricted the area in which the government could operate. For instance the country was bound to apply the Ottoman tariffs for another five years. Over this period little was achieved in terms of industrialization since the private sector lacked the necessary technological competence and capital. These factors, combined with external ones such as the Great Depression, were enough to convince the policy makers that the private sector could not be entrusted with the task of leading the country’s economic development. This marked the beginning of a new period (1933–45) in Turkish economic history called ‘etatism’, during which the government heavily intervened in the production of goods and services. The First Five Year Industrialization Plan (1934–38) placed strong emphasis on the industrialization process, particularly in the case of textiles, iron and steel. As a result of the related policies the pace of industrialization accelerated, with industry’s share of GNP rising from 14 per cent to 18 per cent during the period in question (Kepenek and Yentürk, 1997). Between the end of World War II and 1960, some attempts were made at liberalization, shaped by a new type of etatism in which the government supported the private sector. The transition to a multiparty regime and the provisions of the Marshall Plan are considered to be the major reasons for this policy shift. Significant investment in energy and motorways as well as a boom in the housebuilding sector associated with rapid urbanization created a considerable demand for construction firms, thus promoting the development of the Turkish construction industry. Another feature of the period was that special emphasis was placed on agriculture in accordance with the Marshall 37

38 Clusters and Competitive Advantage

Plan, which brought modern practices to the sector. The government was clearly committed to encouraging the private sector and therefore pursued pro-business policies. However this fostered rent-seeking activities, which subsequently became an increasingly deep-rooted problem. Interestingly, since the pro-business policies did not bring stability, both politicians and business people started to question whether it was possible to achieve stability and liberalization at the same time. In this respect it is worth mentioning that even Prime Minister Menderes, who was very sceptical about planning, had a change of mind and took certain steps to prepare a development plan in his last year in office, prior to the military intervention in 1960. The disappointing results of liberalization, together with the tendency elsewhere in the world for greater government intervention, caused the military government of the early 1960s to introduce a 20-year import-substitution development strategy for a mixed economy, to be implemented via five-year plans. During this period there were improvements in the growth rate of overall output and industrial production. Big businessmen were also in favour of a planned approach and stressed the importance of having a long-term economic strategy to reduce the uncertainty in the economic environment. The need to clarify the boundaries of private sector activity was another factor in this. The sense of responsibility felt by the newly emerging bourgeoisie for the economic development process resulted in the establishment of influential business associations such as TÜSIAD (Bugra, 1994). The period 1960–80 was a time of unusual political turmoil and there were three military interventions (in 1960, 1971 and 1980). After these interventions, concern about the position of the private sector was soon replaced by concern about the instability generated by the regimes’ macroeconomic policies. In the 1970s two additional developments, the oil shock and the Cyprus crisis, exacerbated the already bleak scene. The coincidence of an unfavourable global economic environment with the political instability in Turkey led the country into a major crisis in the late 1970s, resulting in another military takeover in 1980. In that year the ‘January 24 Resolutions’ introduced a comprehensive stabilization programme under the auspices of the IMF and the World Bank. The structural adjustment policies adopted in accordance with the programme were intended to shift the economy from an inward to an outward orientation, with an emphasis on export-led growth. Reforms were conducted in a number of key areas, one of which was trade policy, with the introduction of extensive export promotion measures and the gradual liberalization of imports. The results were impressive in terms of exports in general and manufactured exports in particular, although the increase in exports was matched by a boom in imports (Öz, 1999). In the second half of the 1980s there was a considerable reduction in export subsidies. Tariffs and quotas, and therefore the level of import protection, were also reduced. With the unexpected but comprehensive financial liberalization achieved by making the Turkish lira convertible in 1989,

Industrial Clusters in Turkey 39

the main policies of the liberalization programme were completed. The immediate result was a worsening of the trade deficit, mainly stemming from the increase in imports rather than a decrease in exports, which actually continued to increase gradually (Figure 3.1) and Turkey’s world export share remained fairly stable. It is argued that the frequent and unexpected changes to key policies created a chaotic business environment in Turkey in the 1980s and 1990s (Bugra, 1994). Under the circumstances it was essential for business people to have good state contacts so that they would at least have a vague idea about what was going on. In fact, they often complained not about the changes themselves but about the way they were handled. What was worse, however, was that such an environment offered considerable opportunities for abuse. Allegations about tax rebates for exports, for instance, caused some scholars to question the export success achieved by Turkey in the post-1980 period, and to ask whether the export figures were fictitious (see Arslan and van Wijnbergen, 1990). While the 1980s are associated with major reforms, the 1990s are often considered ‘lost years’ in Turkish economic history (Kumcu and Pamuk, 2001). With regard to the key events that shaped the 1990s, the first was the Gulf crisis in the beginning of the period, which damaged Turkey’s economic relations with Iraq. In 1994 Turkey faced yet another economic crisis, due mainly to mismanagement of a programme to reduce interest rates. The customs union between Turkey and the EU, which had been in effect since January 1996, brought challenges as well as opportunities for Turkish industry. 60 000 50 000 40 000 30 000 20 000 10 000

19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00

0

Exports

Imports

Figure 3.1 Exports and imports, Turkey 1982–2000 (US$ 000s) Sources: SIS (2000); ITC (2002).

40 Clusters and Competitive Advantage

Towards the end of the decade the Asian crisis broke out, affecting many parts of the world. The impact of this on the Turkish economy was indirect and occurred after a one-year lag, but the Russian crisis caused considerable damage to the construction and leather sectors, whose main trading partner was Russia. In 2000 the government introduced a disinflationary programme, but this collapsed in February 2001. Finally, Turkey implemented yet another stabilization programme, under the auspices of the IMF and the World Bank and aimed at ‘empowering the Turkish economy’. Turkey is classified by the World Bank as a middle-income developing country. It has close ties with the EU, including a customs union agreement. It occupies a very advantageous geographical position, constituting a natural link between West and East, and recently it has started to take greater advantage of this, especially in respect of trade and tourism. Turkey’s standard of living, as measured by GDP per capita, has gradually increased (Figure 3.2) but is still rather low at US$ 2200–6080, based on purchasing power parity (PPP) (2001 figures, SPO, 2002). The average annual growth rate of the economy, as measured by the rate of growth of real GDP, on the other hand, averaged about 4 per cent in the post-liberalization period. This rate, though fluctuating widely, was slightly above the average attained by middle-income countries (around 2–3 per cent) during the same period (World Bank, 1999). However, although overall domestic production and per capita income have been increasing at above average rates compared with other middle-income developing countries, inequalities in income distribution remain significant. Persistently high inflation rates and external debts, when taken together with Turkey’s ‘grey’ economy, present a bleak outlook for the country’s macroeconomic future. This is further complicated by the continuing political uncertainty. Such an environment is preventing firms from improving their

7000 6000 5000 4000 3000 2000 1000 01

00

20

99

20

98

19

97

19

96

19

95

19

94

GDP per capita (PPP)

Figure 3.2 Standard of living, Turkey, 1980–2001 (US$) Source: SPO (2002).

19

93

19

92

19

91

19

90

GDP per capita

19

89

19

88

19

87

19

19

85

86

19

84

19

83

19

82

19

81

19

19

19

80

0

Industrial Clusters in Turkey 41

competitive advantages. Given this picture it is not surprising that Turkey has failed to attract much FDI, the annual average being less than US$ 1 billion in recent years, a figure that compares unfavourably with those achieved by other emerging economies (SPO, 2002). An examination of the broad characteristics of the Turkish business environment shows that small and medium-sized enterprises account for more than 90 per cent of Turkish firms, but larger firms’ contribution to value-added and exports are much higher (Taymaz, 1997). Big corporations are a relatively new phenomenon in Turkey: of the 405 TÜSIAD member companies, only 22 were incorporated before 1950 (Bugra, 1994, p. 55). The 1950s were an important decade for many of the largest Turkish companies, reflecting the government’s shift to more liberal policies. Many of today’s leading Turkish construction firms, for example, were either established or made an important turn in their business during that decade (Öz, 1999). Family-dominated management of firms of all sizes is a common phenomenon in Turkey as there is a lack of confidence in salaried managerial personnel. Educating young members of the family in top universities, integrating a professional manager into the family via marriage, and strong relationships established over the years between family members and professional managers, making the latter ‘part of the family’, appear to be common ways of achieving a delicate balance between professionalization and family control (Bugra, 1994). According to Bugra (ibid., pp. 68–9), all Turkish business tycoons have certain characteristics in common, including family support in commercial activities at the start of their career, the arbitrary – and rather opportunistic – choice of their initial area of activity, heavy engagement in unrelated diversification as the business grows, and good connections especially in state circles. Rent-seeking behaviour is common, and real-estate speculation is particularly widespread. The high degree of state involvement in business activity, be it in the form of subsidized credits, input supply or output demand, has been detrimental to the Turkish business environment. Given the key role of government in the economy, good connections in government circles have contributed significantly to business success. The slow bureaucracy and unexpected changes in key policies, on the other hand, have caused problems for Turkish business people.

Turkey’s position in international competition This section provides an overview of the evolution of the competitive structure of Turkish industry. The analysis is conducted with the help of Porter’s (1990) methodology. The basic measure used to determine the international competitiveness of an industry is its share of world exports, which is defined as a country’s exports for an industry divided by total world exports for that industry in a given year. All industries defined in the Standard International

42 Clusters and Competitive Advantage

Trade Classification (SITC) are then sorted by world export share at the lowest possible level of disaggregation (in five-digit detail). Next the cut-off rate is calculated by dividing the total exports of a country by total world exports. Those industries which have world export shares above the cut-off rate constitute the relatively more competitive industries of the country. The list of these industries is then modified according to additional criteria. For example, industries with a world export share that lies between the cut-off rate and twice its value are checked to exclude ones with a negative trade balance. Also, industries that are among the top fifty in terms of their country’s export share (which is defined as the share of an industry in the country’s total exports) but below the cut-off rate in terms of their world export share are included in the list of relatively more competitive industries, provided they have a positive trade balance. If there is considerable outward foreign direct investment in an industry, this industry is also included in the list. Finally, with the addition of the internationally competitive service sectors the list is completed for that particular year and country (Öz, 1999). The list of competitive industries is used to produce cluster charts. These reveal the connections between and interrelationships amongst the country’s competitive industries, and hence the country’s competitive pattern. All competitive industries are classified into three broad groupings, each of which includes different clusters. The first group consists of ‘upstream industries’, whose primary products are inputs to the products of other industries. The clusters included in this category are semiconductors/computers, materials/ metals, petroleum/chemicals and forest products. The second group, ‘industrial and supporting functions’, comprises clusters of multiple businesses, transportation, power generation and distribution, office, telecommunications, and defence. The last group is ‘final consumption goods and services’, which contains the food/beverage, textiles/apparel, housing/household goods, health care, personal, and entertainment/leisure clusters. The industries in each cluster are further classified into four groups, revealing the vertical relationships among industries and the depth of national clusters. These four groups are primary goods, the machinery used to produce these goods, the special inputs required and the related service industries (Öz, 1999). We shall now apply the above methodology to recent data on Turkish industries. Table 3.1 shows the percentage of exports by cluster and vertical position in 1992–2000. Turkey’s share of world exports in 2000 was 0.52 per cent, and six clusters of industries had a share above that figure, namely materials/ metals (from the upstream industries group), food/beverages, textiles/apparel, housing/household, personal and entertainment/leisure (all from the final consumption goods and services group). Of these, textile/apparel had the highest share with an impressive 2.4 per cent. Turkey exports a great variety of items in this category, mainly primary goods and special inputs. The importance of the cluster for the Turkish economy is considerable, given that it accounts for around 37 per cent of the country’s total exports. While it has

Table 3.1

Percentage of Turkish exports by cluster and vertical position, 1992–2000

Materials/Metals

Primary goods Machinery Special inputs Total

Petroleum/Chemicals

Forest products

Upstream industries

Semiconductors/Computers

SC

CSC

SW

CSW

SC

CSC

SW

CSW

SC

CSC

SW

CSW

SC

CSC

SW

CSW

SC

SW

8.3 0.2 0.5 9.0

3.4 0.2 0.5 2.7

0.8 0.1 0.4 0.6

0.1 0.1 0.4 0.1

0.3 0.0 0.0 0.3

0.3 0.0 0.0 0.3

0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0

1.6 0.0 0.0 1.6

0.2 0.0 0.0 0.2

0.1 0.0 0.0 0.1

0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0

10.0 0.2 0.5 10.7

0.2 0.1 0.3 0.2

Multiple businesses

Transportation

Power generation & distribution

Office

Telecommunications

Indus. & support functions

Defence

SC CSC SW CSW SC CSC SW CSW SC CSC SW CSW SC CSC SW CSW SC CSC SW CSW SC CSC SW CSW SC Primary goods Machinery Special inputs Total

0.2 0.2 0.0 0.0 3.7 2.5 0.2 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 1.2 0.3 0.4 0.4 0.0 0.0 4.9 2.8

Food/Beverage SC Primary goods Machinery Special inputs Total

CSC SW CSW

0.2 0.1 2.3 0.7 0.0 0.0 0.0 0.0 0.2 0.1 0.0 0.0 0.2 0.1 2.3 0.7

Textiles/Apparel SC

0.2 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.1 0.0 0.0 0.0

Housing/Household

Health care

0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0

Personal

0.0 0.0 0.0 0.0

0.1 0.1 0.2 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.2 0.2

Entertainment/ Leisure

CSC SW CSW SC CSC SW CSW SC CSC SW CSW SC CSC SW CSW SC CSC SW CSW

9.7 6.9 0.9 0.1 33.1 1.6 2.7 0.7 7.5 2.7 0.9 0.4 0.2 0.2 0.0 0.0 2.0 2.0 0.5 0.5 3.1 1.4 0.6 0.5 0.3 0.3 0.2 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.6 2.5 0.2 0.4 3.4 0.2 1.6 1.0 0.8 0.6 0.3 0.4 0.0 0.0 0.4 0.4 1.3 0.7 1.2 1.8 0.0 0.0 0.0 0.0 10.6 9.1 0.7 0.1 36.5 1.8 2.4 0.9 8.3 2.1 0.8 0.3 0.2 0.2 0.0

0.0 3.3 1.3 0.6 0.3 3.1 1.4 0.6 0.5

6.3 0.2 1.2 7.7

SW 0.1 0.1 0.2 0.1

Final consumption goods & services SC

SW

56.0 0.3 6.1

1.2 0.2 0.7

62.4

1.1

43

Notes: SC share of country’s total exports (2000); CSC change in share of country’s exports (1992–2000); SW share of world cluster exports (2000); CSW change in share of world cluster exports (1992–2000).

44 Clusters and Competitive Advantage

always been important in terms of world market share its performance improved remarkably after liberalization (Öz, 1999). The second most important cluster is housing/household goods, which includes a variety of processed products and some special inputs. Turkey’s strong position in carpets, glass, ceramics and cement products is especially noteworthy. With regard to the food/beverages cluster, Turkey holds significant positions at all vertical stages, including related machinery, although primary goods dominate. Within the primary goods category there has been a move towards processed foods. The materials/metals cluster holds the highest world export share in the primary goods category, together with special inputs and machinery. Competitive industries in the entertainment/leisure cluster, on the other hand, exclusively produce primary goods and have virtually no presence in other vertical categories. Despite the considerable rise in this category’s position in the world market in the 1990s, the range of competitive industries in the cluster is rather limited. The personal cluster has a different structure from the ones outlined above as its strength mainly lies in special inputs. In fact a single item, unprocessed tobacco, is largely responsible for the high export share of the cluster. Thus like the entertainment/leisure industry, the personal industry is hardly a strong contributor to the Turkish economy. In addition to these six leading clusters, some competitive positions are held in the transportation, power generation and distribution, and defence clusters, although their world export shares are rather low at around 0.2 per cent. Turkey’s position is weak in categories such as forestry products, semiconductors/computers, multiple businesses, office, telecommunications and health care. Finally, there have been a few isolated successes, such as that by the construction services sector in the otherwise uncompetitive multiple business cluster.1 The most striking finding of the examination of the competitive structure of Turkish industry over time is that there has been little change in terms of the types of industry in which Turkey is internationally competitive. Although it increased its overall exports after the 1980 liberalization and improved its strength in the existing clusters, it failed to establish itself in other ones. As a result the economy still depends on four major clusters: materials/metals, textiles/apparel, food/beverages and housing/household goods. Turkey also has a strong advantage in primary goods and to as lesser degree in special inputs, but its position in the machinery category is rather weak (Öz, 1999). Although some improvement can be observed in a few additional clusters (Table 3.1) it would be premature to assert that these will join the four major clusters. Three of the four leading clusters (textiles/apparel, food/ beverages and housing/household goods) are in the final consumption goods and services group, where a concentration of competitive industries is considered typical for a developing country.

Industrial Clusters in Turkey 45

Geographic concentration of Turkish industries In the previous section we looked at patterns of export competitiveness in Turkish industry, outlining the changes that have taken place over time. We shall now switch our focus to the location of industries and investigate which are concentrated spatially, and where they are concentrated. First, however, we shall discuss the methodology that will be followed to identify geographic clusters.

Identification of geographic clusters This subsection reviews alternative approaches to identifying clusters. One well-known index is the Gini coefficient, which compares a distribution against a profile. When the profile represents a country the coefficient is called the ‘coefficient of localization’. The ‘location quotient’ is another frequently used measure of spatial concentration. This linear scale transformation is obtained by dividing each occurrence by a constant, enabling the occurrences to be compared against a norm (Üser, 1983). The range of the quotients indicates the relative degree of concentration of a certain activity in a region.2 Enright (1990) has adapted the indices used to measure industrial concentration in the literature on industrial organization. Accordingly, C4EMP and C8EMP are defined as the shares of employment in the leading four and leading eight provinces in a given industry.3 Enright warns that these indices record clusters of firms that are spread across provincial borders as two different clusters, thus understating the extent of geographic concentration. However it would be wrong to merge the provinces in question as this would render the indices non-comparable (ibid., pp. 4–9). Ellison and Glaeser (1994, 1997) propose a ‘dart-board approach’, which is based on a dart-throwing metaphor. The term localized is used to describe industries whose degree of concentration goes beyond that which would have prevailed if firms had chosen the locations of their plants in a completely random manner. Ellison and Glaeser’s main index measures concentration of employment, adjusted for the plant size. The method, however, requires a substantial data filling procedure necessitated by the limitations of census data. Maurel and Sedillot (1999) offer a slightly different index that measures the location decisions of two business units in the same industry.4 Midelfart-Knarvik et al. (2000, p. 2) offer another measure of spatial dispersion that takes into account the relative locations of clusters of industries. In their comprehensive analysis of the location of European industry, they first investigate the degree of specialization in EU countries. For each country they calculate the share of industry k in that country’s total manufacturing output. Next they calculate the share of the same industry in the production of all other countries. It is then possible to measure the difference between

46 Clusters and Competitive Advantage

the industrial structure of a country and all other countries by taking the absolute values of the difference between these shares, summed over all industries. They call this the Krugman specialization index (following Krugman, 1991a). It takes the value of zero if country i has an identical industrial structure to the rest of the EU, and the maximum value two if it has no industries in common with the rest of the EU. They calculate this as a four-year moving average for the period 1970–97 to remove spurious fluctuations due to the differential timing of country and sectoral business cycles. Next they use the Gini coefficient of concentration of the variables for all manufacturing to measure the concentration of manufacturing industries in the EU. Like Enright (1990), Midelfart-Knarvik et al. (2000) discuss the challenges imposed by geographic boundaries when measuring concentration. With their index, two industries may appear to be equally geographically concentrated, when in fact one is predominantly located in two neighbouring countries and the other is split between two geographically separated countries. Since distinguishing such patterns can provide additional insights, they propose ‘an index of spatial separation’, which can be thought of as a supranational index of geographic location, as a complement to the traditional concentration indices (ibid., p. 28). The spatial separation index incorporates a measure of the distance between two locations. It should be noted that Midelfart-Knarvik et al.’s units of analysis are countries (rather than provinces) within a supranational entity – that is, the EU – which works to their advantage in terms of the availability of detailed time-series data. Among the many other ways of measuring geographic concentration are ‘nearest neighbour’ analysis, which takes account of the spatial separation of the observed units; general harmonic mean distance variation, which measures the concentration of each sector in respect of the spatial distribution of employment among provinces, calculated as the average distance between the occurrences; and peak potential, which measures the average distance from the occurrences to their peak potential. Feser and Bergman (2000) have developed a ‘spatial-economic test’, which uses a case control design to test whether certain types of manufacturing firm are more spatially concentrated than might be expected given the general geographic pattern of all firms in the locale. All plants in a given industry are used as a case, and a matched sample of all other manufacturing firms is used as a control. The difference in concentration between the two, measured by means of standard statistical geography techniques, provides evidence of spatial concentration or dispersion at different spatial scales for the firms in the cluster (ibid., pp. 258–9). Finally, Shilton and Stanley (1999) use a modified form of the location quotient, designated as the ‘growth quotient’. It is obvious from the above discussion that there is no consensus in the literature on the best means of measuring geographic concentration. This study will use the concentration indices proposed by Enright (1990), supported by location quotients (LQs). Data-related considerations, comparability

Industrial Clusters in Turkey 47

across industries and ease of interpretation favour the use of these indices. Moreover some of the alternative indices are designed in such a way that an industry is not considered to be localized if employment is concentrated in a small number of plants. This approach underestimates the localization of oligopolistic industries (such as the automotive industry in Detroit), which are as interesting as small firm concentrations for the purposes of the present study.5 It should be noted that problems can emerge if a purely statistical approach is used to identify geographic concentration (Brusco et al., 1996). This is mainly because the definition of clusters itself is not easily quantifiable, given that it involves social relations and value systems as well as production relations. Consequently a purely statistical approach can fail to spot places that are clearly concentrated, the most typical example being Silicon Valley. In fact many of the indices cited above have failed to identify the concentration in Silicon Valley due to the absence of the finely detailed data required to uncover this cluster statistically. Qualitative evaluations should therefore be used to complement the quantitative measures. Identifying the boundaries of a cluster is another crucial issue since industrial clusters do not necessarily conform to political boundaries, as emphasized by Padmore and Gibson (1998, p. 627): ‘A successful cluster may crowd into one corner of a province, span several cities and suburbs, or straddle an international border.’ Saner and Yiu’s (2000) study of a cluster in the Upper Rhine Valley region, which encompasses neighbouring provinces in Switzerland (Basle), France (Alsace) and Germany (Baden), is an illustrative case in this respect. The ceramic goods cluster spanning the border between the provinces of Kütahya and Bilecik in Turkey is another example. It is also possible for a cluster to enlarge over time and spread into neighbouring provinces, as has happened with the textile cluster in Gaziantep, which has extended north-westward to reach Kahramanmaras. The choice of geographic unit of analysis is further complicated by the fact that provinces can differ substantially in size and population. Despite these concerns, the most appropriate geographic unit of analysis for the present study is still the province, since the data are fairly complete at the provincial level for Turkey. Defining the scope of a cluster in terms of the industries it embodies is equally difficult since the distinction between cluster firms on the one hand and related and supporting firms on the other can be fuzzy. In general a narrow definition is preferred since in a broadly defined cluster, linkages are likely to be less strong and less complete. In the end there should indeed be a limit before the cluster is defined as ‘the whole economy’. Otherwise, in the extreme case, it would be possible to define a cluster encompassing the whole economy (Padmore and Gibson, 1998, p. 630). Enright (1990, pp. 4–3) also argues that highly aggregated classifications cannot be used to develop an index of geographic concentration since the true pattern is distorted by aggregation, which tends to ‘average out’ industry location. Such concerns

48 Clusters and Competitive Advantage

clearly favour a disaggregated data set, so this study uses a data set that covers all Turkish industries at the four-digit (ISIC) level. A summary of the results is presented in the next section.6

Spatial patterns in Turkish industry In the present study,7 geographic concentration indices (C4EMP, C8EMP and LQs) are calculated for all Turkish provinces and the 231 sectors for which the necessary data are available at the four-digit level.8 The top 100 Turkish industries, as ranked by the C4EMP indices, are listed in Table 3.2, while Table 3.3 lists the 25 least geographically concentrated Turkish industries.9 Since it is not possible to include the full list of the LQs calculated for all industries and provinces due to space limitations, only the top five industries are reported for each province (see Appendix 1). However the full list of LQs that are greater than 1 will be presented for the provinces and clusters chosen for detailed examination in each of the relevant chapters. Finally, Tables 3.4 and 3.5 show the proportion of the total Turkish population in the four (C4POP) and eight (C8POP) most populated provinces, plus the cumulative totals. The population figures provide a base line to compare the geographic concentration of Turkish industry. Analysis of the information provided in the tables shows that on average Turkish industries are far more geographically concentrated than is the population (with a p value of 0.0191). If the C4EMP and C4POP values are compared, it can be seen that 225 of the 231 industries are more geographically concentrated than is the population. A comparison of Table 3.2 and Table 3.3 provides some rough information on the nature of the most and least geographically concentrated industries. Among the highly concentrated industries are those dominated by a small number of firms, such as the manufacture of tobacco products, which is located in a single province (Izmir). The manufacture of watches and clocks (Eskisehir) and financial intermediation (Istanbul) are highly concentrated despite there being a larger number of firms. Among the least concentrated industries are wholesaling and retailing, plus restaurants, hairdressers, the manufacture of cement and builders’ carpentry. Figure 3.3 shows a selected number of highly concentrated industries. To conclude this section we shall briefly review the evolution of industrial activity in Turkey. In the 1970s the growth rate attained in the less developed regions of eastern Turkey remained below the national average, whereas those achieved in the relatively more developed parts of the country enjoyed a rise. In this decade the Istanbul metropolitan area accounted for almost 45 per cent of national employment, while the relevant figures for the Izmir, Adana and Ankara metropolitan areas were 11 per cent, 5.5 per cent and 5.5 per cent respectively (Eraydin, 2002a).10 In the more liberal environment that prevailed in the 1980s, Istanbul enhanced its position as the top location of choice for Turkish industrial establishments,

49 Table 3.2

Top 100 Turkish industries, by C4EMP

Rank

ISIC

Industry

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

1010 1030 1542 1600 2213 2421 2430 3710 4020 4550 5251 6210 6591 7122 7413 7495 8022 6412 7492 7230 3330 7320

23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47

6599 7422 3150 7111 5190 7220 6712 6110 6220 2310 9211 3220 3000 2412 5150 6420 3694 7290 9213 3320 1110 7210 2927 1712 1730

Mining and agglomeration of coal Extraction and agglomeration of peat Manufacture of sugar Manufacture of tobacco products Publishing of recorded media Manufacture of pesticides and other agrochemical products Manufacture of man-made fibres Recycling of metal waste and scrap Manufacture of gas; distribution of gaseous fuels Hiring out of construction or demolition equipment Retail sale via mail order houses Scheduled air transport Financial leasing Hiring out of construction and civil engineering machinery Market research and public opinion polling Packaging activities Technical and vocational secondary education Courier activities other than the national postal service Investigation and security activities Data processing Manufacture of watches and clocks Research on and experimental development of SSH (Social Sciences and Humanities) Other financial intermediation n.e.c. (not elsewhere classified) Technical testing and analysis Manufacture of electric lamps and lighting equipment Hiring out of land transport equipment Other wholesale Software consultancy and supply Security dealing activities Sea and coastal water transport Non-scheduled air transport Manufacture of coke oven products Motion picture and video production and distribution Manufacture of television and radio transmitters, etc. Manufacture of office and computing machinery Manufacture of fertilizers and nitrogen compounds Wholesale of machinery, equipment and supplies Telecommunications Manufacture of games and toys Other computer-related activities Radio and television activities Manufacture of optical and photographic equipment Extraction of crude petroleum and natural gas Hardware consultancy Manufacture of weapons and ammunition Finishing of textiles Manufacture of knitted and crocheted fabrics and articles

CR4EMP 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 0.9935 0.9921 0.9906 0.9880 0.9744 0.9715 0.9712 0.9677 0.9630 0.9613 0.9570 0.9569 0.9565 0.9535 0.9500 0.9447 0.9356 0.9353 0.9333 0.9321 0.9265 0.9264 0.9264 0.9262 0.9225 0.9156 0.9146 0.9099 0.9092 0.9086

50 Table 3.2 (Continued) Rank

ISIC

Industry

48

6719 Activities auxiliary to financial intermediation n.e.c.

0.9065

49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94

9303 8021 1723 5131 2423 1912 2892 8010 3693 3130 3512 6601 2919 3691 7414 3210 1711 9220 1820 3230 7010 2413 2101 3699 7493 2912 2109 5142 2102 3110 6120 6304 1310 5149 3592 7430 3312 2610 2926 1532 3190 3591 2422 5139 2929 2923

0.9032 0.8900 0.8851 0.8796 0.8780 0.8775 0.8710 0.8701 0.8675 0.8657 0.8642 0.8618 0.8602 0.8506 0.8503 0.8500 0.8463 0.8401 0.8396 0.8383 0.8381 0.8342 0.8338 0.8330 0.8323 0.8288 0.8275 0.8232 0.8225 0.8183 0.8165 0.8163 0.8094 0.8094 0.8066 0.8059 0.8056 0.7964 0.7883 0.7879 0.7859 0.7851 0.7829 0.7786 0.7782 0.7769

95

2922 Manufacture of machine tools

Funeral and related activities General secondary education Manufacture of cordage, rope, twine and netting Wholesale of textiles, clothing and footwear Manufacture of pharmaceuticals, medicinal chemicals etc. Manufacture of luggage, handbags etc. Treatment and coating of metals; mechanical engineering Primary education Manufacture of sports goods Manufacture of insulated wire and cable Construction and repair of pleasure and sporting boats Life insurance Manufacture of general purpose machinery Manufacture of jewellery and related articles Business and management consultancy activities Manufacture of electronic valves, tubes etc. Preparation and spinning of textile fibres News agency activities Dressing and dyeing of fur; manufacture of fur articles Manufacture of television and radio receivers, etc. Real estate activities with own or leased property Manufacture of plastics in primary form Manufacture of pulp, paper and paperboard Other manufacturing n.e.c. Building cleaning activities Manufacture of pumps, compressors, taps and valves Manufacture of articles of paper and paperboard Wholesale of metals and metal ores Manufacture of corrugated paper, paperboard etc. Manufacture of electric motors, generators and transformers Inland water transport Travel agencies, tour operators etc. Mining of iron ore Wholesale of intermediate products, waste and scrap Manufacture of bicycles and invalid carriages Advertising Manufacture of instruments for measuring etc. Manufacture of glass and glass products Manufacture of machinery for textile and leather production Manufacture of starches and starch products Manufacture of other electrical equipment n.e.c. Manufacture of motorcycles Manufacture of paints, varnishes etc. Wholesale of other household goods Manufacture of other special purpose machinery Manufacture of machinery for metallurgy

CR4EMP

0.7759

Industrial Clusters in Turkey 51 96 97 98 99 100

2511 2913 2732 4520 6309

Table 3.3

Manufacture of rubber tyres and tubes Manufacture of bearings, gears, gearing and driving elements Casting of non-ferrous metals Building of complete constructions or parts; civil engineering Activities of other transport agencies

0.7704 0.7703 0.7688 0.7661 0.7641

The least concentrated Turkish industries, by C4EMP

Rank

ISIC

Industry

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

5520 5232 5220 5233 9302 2811 5234 7494 2930 1533 5260 2695 2921 5211 8520 2010 1541 5020 5050 5040 6022 1410 1531 4010 2022

Restaurants, bars and canteens Retail of textiles, clothing, footwear and leather goods Retail of food, beverages and tobacco in specialist shops Retail of household appliances, articles and equipment Hairdressing and other beauty treatments Manufacture of structural metal products Retail of hardware, paint and glass Photographic activities Manufacture of domestic appliances n.e.c. Manufacture of prepared animal feeds Repair of personal and household goods Manufacture of concrete, cement and plaster articles Manufacture of agricultural and forestry machinery Non-specialized retail shops Veterinary activities Sawmilling and planing of wood Manufacture of bakery products Maintenance and repair of motor vehicles Retail of automotive fuel Sale, maintenance and repair of motorcycles and parts Non-scheduled passenger land transport Quarrying of stone, sand and clay Manufacture of grain mill products Production, collection and distribution of electricity Manufacture of builders’ carpentry and joinery

CR4EMP 0.3959 0.3892 0.3851 0.3830 0.3745 0.3743 0.3657 0.3615 0.3580 0.3545 0.3459 0.3397 0.3278 0.3270 0.3168 0.3122 0.3095 0.3093 0.3018 0.2967 0.2780 0.2589 0.2547 0.2542 0.2026

whose export orientation increased enormously. In general, regions that could survive the test of international competition prospered, while the less developed areas became even less attractive. In the 1990s the share of the Istanbul metropolitan area in national employment rose to almost 50 per cent and, as could be expected, diseconomies of urbanization began to emerge. As a result, export-oriented industries chose to move to nearby areas – Tekirdag in particular. In the last two decades, several new locations, including Denizli, Gaziantep, Kayseri, Konya and Çorum, have attained impressively high growth rates. Overall, however, Istanbul and its

52 Clusters and Competitive Advantage Table 3.4

The most populated Turkish provinces

Province

Population

Istanbul Ankara Izmir Konya Adana Bursa Içel Samsun Manisa Antalya Hatay Diyarbakir Gaziantep Sanliurfa C4POP C8POP

7195773 3236378 2694770 1752658 1549233 1546327 1267253 1161207 1154418 1132211 1109754 1096447 1010396 1001455

Table 3.5

0.127420 0.057308 0.047718 0.031035 0.027433 0.027382 0.022440 0.020562 0.020442 0.020049 0.019651 0.019415 0.017892 0.017733 0.263481 0.361298

Cumulative C4EMP totals for the industries examined

C4EMP range 1.000 0.9–0.999 0.8–0.899 0.7–0.799 0.6–0.699 0.5–0.599 0.4–0.499 0.3–0.399 0.2–0.299

Share of total

Number of industries

Cumulative total

17 32 36 40 30 30 20 20 6

17 49 85 125 155 185 205 225 231

environs have historically been the leading location for industrial activity in Turkey, followed by Izmir, Ankara, Bursa and Adana. In fact the geographical concentration of economic activity in major metropolitan areas and regional centres has become more pronounced in recent years (ibid.).

Geographic concentration and competitiveness Although the information provided in Tables 3.1–3.3 is helpful, a more detailed analysis is needed to establish a link between geographic concentration and international competitiveness. Our data set has allowed us to conduct simple statistical tests to investigate whether internationally competitive

Istanbul Textiles/apparel Leather/fur Jewellery Glass Financial services Media and entertainment

Ankara Construction Furniture

Bolu Leather tanning

Bartin Ship building Sinop Fish and fish products

Bursa Textiles Furniture

Tekirdag Wine

Trabzon Fish products Ship building

Çanakkale Fish and fish products Ceramics Kütahya Ceramics Usak Leather tanning Carpets

Adiyaman Carpets

Mugla Construction and repair of boats Tourism Denizli Textiles Antalya Tourism

Gaziantep Carpets

Isparta Carpets Afyon Ceramics

Nevsehir Ceramics Wine

Kayseri Carpets Furniture

Figure 3.3 Selected examples of highly concentrated industries in Turkey

53

54 Clusters and Competitive Advantage Table 3.6

International competitiveness, fuzzy membership categories

Raw score in (%)

Membership position

Fuzzy membership score (F)

>2.08 1.05–2.08 0.53–1.04 0.52 0.26–0.51 0.13–0.25 <0.13

Fully in Mostly in More or less in Neither in nor out More or less out Mostly out Fully out

F 1 0.751 < F < 0.999 0.501 < F < 0.750 F 0.500 0.251 < F < 0.499 0.001 < F < 0.250 F 0

industries are any more concentrated than uncompetitive ones and the constituents of the economy as a whole. These tests have failed to reject (D 0.1) the null hypotheses that the mean of C4EMP is the same for competitive industries and the economic constituents as a whole, and that there is no difference between the mean concentration of competitive versus uncompetitive industries.11 The fact that we cannot find a statistically significant difference between competitive and uncompetitive industries in respect of geographic concentration, however, may be related to data problems. Specifically the data used to measure international competitiveness (SITC-based) and geographic concentration (ISIC-based) are not exactly compatible, making it infeasible to employ conventional statistical methods apart from the simple tests used in this case. A possible solution to this problem would be to employ a less conventional technique using fuzzy logic and fuzzy membership scores (Ragin, 2000).12 This would enable varying degrees of competitiveness and geographic concentration to be taken into account. If industries that are not covered in the SITC system and suspect cases are eliminated,13 80 of the 231 industries remain to be analysed by means of fuzzy-set methods. To estimate the degree of membership of these 80 industries in the set of competitive industries, assessments of competitiveness based on world export share are translated into fuzzy membership scores. This is done by taking the cut-off rate as the cross-over point and arraying the remaining cases according to their world export shares, as shown in Table 3.6. Specifically, cases with the highest world export shares (more than double the cut-off rate) are assigned full membership of the set, while competitive cases with world export shares that are higher than the cut-off rate but lower than double that rate are assigned strong but less than full membership of the set. The same rationale is used to assess the fuzzy membership categories of the relatively less competitive cases. In a similar vein, the degree of fuzzy membership of a given industry in the set of geographically concentrated industries is assessed by means of its C4EMP ratio, as shown in Table 3.7.

Industrial Clusters in Turkey 55 Table 3.7

Geographic concentration, fuzzy membership categories

Raw score (%)

Membership position

Fuzzy membership score (F)

>0.8 0.6–0.8 0.6 0.4–0.6 <0.4

Fully in Mostly but not fully in Neither in nor out Mostly but not fully out Fully out

F 1.0 0.5 < F < 1.0 F 0.5 0 < F < 0.5 F 0

Having determined the fuzzy membership scores for both variables, the FS/QCA algorithm (Drass and Ragin, 1999), which was specifically prepared to implement the techniques developed by Ragin (2000), is employed to perform the necessary analyses. The results indicate that geographic concentration is neither a necessary nor a sufficient condition for competitiveness if 0.80 (D 0.05) is taken as the benchmark proportion.14 If, however, the benchmark proportion is reduced to 0.60 (D 0.1), we obtain the interesting finding that geographic concentration is usually necessary for international competitiveness. In other words, making full use of the information at hand and fuzzy-set methods provides some evidence (though not particularly strong) of a positive relationship between geographic concentration and international competitiveness since the former has been found to be usually necessary for the latter.

Finding a suitable methodology for the analysis of clusters Once the relatively more competitive and concentrated industries (as well as the relatively less competitive and concentrated ones) are identified, a method is needed to choose and analyse the clusters in-depth. This section will outline and discuss the method that will be used in the rest of this study. Although there is no clear consensus on methodology used for measuring geographic concentration, a number of standard measures are used widely. When it comes to analyzing how and why a cluster has become or could not become internationally competitive, and also whether a cluster has been able to maintain its competitiveness, the methodological approaches are rather diverse, ranging from mathematical models15 to surveys16 and qualitative case studies17. Using qualitative case studies to analyse clusters is well justified because if a cluster is viewed as a highly complex interaction of several factors it is very difficult to measure the causal relations in a robust manner. In the following chapters, case studies will be used to determine how and why competitive advantage is created in a specific cluster, as well as to identify the processes that are associated with the subsequent upgrading and/or loss of the

56 Clusters and Competitive Advantage

Clarify the link between geographic concentration and competitiveness

Select and conduct cluster case studies

Identify geographically concentrated industries

Seek a statistical link between geographic concentration and competitiveness

Analyse industrial statistics Figure 3.4

Identify internationally competitive industries

Analyse trade statistics

Methodological process followed in the study

advantage created. The main steps in the methodology employed are summarized in Figure 3.4.18 The qualitative analysis of the case studies is based on a review of the literature, secondary data analysis and in-depth interviews with cluster participants. The review of the literature provided information on the clusters’ historical development and their main local players, as well as recent changes and challenges faced by the cluster members. Academic journals, government publications, trade magazines, trade associations and local newspapers were amongst the major sources. Secondary data on given clusters provided such information as a cluster’s size and growth over the years, its employment specialization, the distribution of each firm in the cluster by number of employees, the type and distribution of occupations in the cluster, and the cluster’s export and productivity performance. A total of 72 in-depth interviews and numerous shorter ones were conducted. The interviewees were managers of firms, government officials and other industry experts from organizations linked to the cluster (such as universities, sectoral associations, research centres and institutes). The interviews were semistructured and took 1.5–2 hours, although some took as long as 4–5 hours. The respondents were asked for their overall evaluation of the cluster, the reasons for geographic concentration and the possible

Industrial Clusters in Turkey 57

contribution of attributes of the location to the international competitiveness of the cluster. The interviews were then transcribed and the main themes were identified. This information served as the basis for the reports prepared on each of the cases studied. The information derived from the interviews, the literature review and the secondary data were used to construct a cluster map for each cluster.19

Geographic clusters and competitiveness: which cases to study? To understand the complex role that the attributes of the local environment play in shaping the competitive advantages of firms, a detailed analysis of specific clusters is needed. Only a full analysis of the historical development and current structure of a cluster can reveal the true nature of the relationship between geographic clustering and competitiveness. This challenging task will be the subject of the next four chapters. The clusters chosen were the furniture cluster in Ankara, the towel and bathrobe cluster in Denizli, the machine-made carpet cluster in Gaziantep and the leather clothing cluster in Istanbul. The furniture cluster in Ankara served as a pilot study, since my residential proximity to this cluster made it much easier to go back and forth and reinterview many of the participants, and to revise the method of investigation accordingly. Although the cluster is one of the leading areas of economic activity in Ankara and is highly concentrated geographically, its degree of international competitiveness has remained low. This is interesting in that furniture making is a traditional, labour-intensive industry and in this respect it resembles many of the competitive clusters. Given that there is an overemphasis on competitive clusters in the literature and the relatively less competitive ones are understudied, the furniture industry in Ankara makes an ideal case for detailed study. The second case study was of the towel and bathrobe cluster in the Aegean city of Denizli. This choice was well justified given that this cluster was arguably the one that brought the concept of geographic clusters to the attention of academics and policy makers in Turkey. Its success in the world market has attracted considerable attention. A comprehensive analysis of that success and its resilience in the face of recent challenges at home and abroad can substantially improve our understanding of the relationship between clustering and competitive advantage. The process Denizli has gone through is also different from that in other provinces with significant textile industries, such as Tekirdag which owes most of its development impetus to its geographical proximity to Istanbul and Western Europe. Moreover the public sector does not have much of a presence in Denizli, which has forced it to rely on its own capabilities. Finally, the textile-town of Denizli provides us with a natural and unique laboratory to investige the

58 Clusters and Competitive Advantage

geographic concentration of specific industries given that the impact of localization economies is very clear in this city in the absence of urbanization economies. The south-eastern city of Gaziantep’s success in several areas, including machine tools, carpets, yarn and pasta, has also attracted considerable attention. Of these the carpet cluster, with its high geographic concentration and rapidly improving export performance, deserves detailed analysis for two reasons. First a case study of this cluster will serve to reinforce the findings obtained from the study of the equally successful towel and bathrobe cluster in Denizli. Second, Gaziantep is not among the major historical carpet-weaving centres in Turkey. This adds another dimension to the study in the form of an exploration of why and how the carpet cluster came to develop in this city rather than somewhere else (for instance in one of the traditional carpetweaving centres in Anatolia). An additional reason for studying this cluster is that it is located in south-eastern Turkey, an area otherwise associated with poor economic development. Thus in addition to contributing to our understanding of locational factors in competitiveness, this cluster study is likely to provide valuable insights into regional economic development more generally. Finally, the leather clothing cluster in Istanbul provides an opportunity to investigate a very interesting set of relations. First, the nature of its link to international markets is different from that of many other clusters, given the important role assumed by the so-called ‘luggage trade’ in this cluster. Second, in response to recent changes in the business environment there has been a shift in the strategic orientation of Istanbul’s leather producers, which provides interesting insights into the changing patterns of competitive advantage in clusters. Third, within Istanbul there are two separate concentrations of activity that are related to the cluster: production units and networks are concentrated in Tuzla on the Anatolian shore, and the sales and marketing functions are concentrated in the Laleli/Zeytinburnu districts in the historical, European section of the city. Such an interesting network of relations merits special consideration. The analysis of this cluster in Chapter 7 also contains a discussion of the Istanbul economy in more general terms, providing the reader with knowledge of the range of activities that prevail in the economic capital of Turkey. In addition to the detailed studies outlined above, this book briefly discusses other clusters that exist in the cities examined, including the construction cluster in Ankara, the footwear, cutlery and marble clusters in Denizli, the machinery cluster in Gaziantep, and the footwear, motion picture and jewellery clusters in Istanbul. All the case studies presented in the following chapters have the same structure. Each chapter starts with an overview of the cluster, outlining its general characteristics and importance. Next the origins of the cluster and

Industrial Clusters in Turkey 59

the key events in its history are presented. This is followed by an investigation of the cluster’s sources of competitive advantage/disadvantage, and then the specific reasons for its geographic concentration in the area in question are identified. The concluding section discusses the future prospects of the cluster, given the preceding analysis.

4 The Furniture Cluster in Ankara

In many industrialized countries the furniture sector accounts for about 2–4 per cent of the production value of the manufacturing sector. The EU furniture industry is particularly strong, accounting for about half of the world’s production. Table 4.1 shows the market shares of the top ten exporters of furniture (SITC 821) in 1991–2000. As can be seen, Italy had the highest share with an impressive 17 per cent. Moreover Italy maintained its leading position throughout the period, while the export share of the runner-up, Germany, dropped from 15 per cent to around 9 per cent. The latter figure matched the US share, which remained fairly stable. The share of Canada, on the other hand, increased considerably in the second half of the 1990s and reached a significant 9 per cent. The shares of the two other important furniture producers, France and Denmark, fell slightly, each stabilizing at about 4 per cent. Belgium and Luxemburg also suffered a gradual decline from 4.5 per cent to 3 per cent. A similar market share (3 per cent) was captured by the United Kingdom, whose stake remained relatively stable. Meanwhile China and Poland emerged as new players and gradually increased their shares to 8 per cent and 4 per cent respectively. The export performance of the Turkish furniture industry, on the other hand, has not been particularly impressive. Despite an increasing trend in recent years, exports remain insignificant and the industry is mainly domestically oriented. The value of exports rose from about US$20 million in 1990 to $180 million in 2000. Over the same period imports increased from $25 million to $190 million. Turkey’s share of the world furniture market has remained at 0.2–0.3 per cent in recent years, which is below the calculated cut-off rate of 0.52 per cent for the Turkish manufacturing industry as a whole (Chapter 3), suggesting that the industry is not competitive in respect of SITC 821; that is, the general category ‘furniture’. Turkey does, however, hold competitive positions in some of the subsections of the industry. Of these, the export performance of manufacturers of seats and convertible beds (SITC 82115), motor vehicle seats (SITC 82112) and mattresses of other materials (SITC 82125) was relatively 60

The Furniture Cluster in Ankara 61 Table 4.1 Market shares of the leading furniture exporting countries (per cent) Country

1991

1992

1993

1994

1995

1996 1997

1998

1999

2000

Italy Germany USA Canada France Denmark China Belgium/ Luxemburg United Kingdom Poland

17.7 15.4 7.9 3.7 5.6 4.9 1.5 4.5

17.0 13.9 8.5 4.0 5.5 4.9 2.4 4.5

16.6 11.7 9.5 4.8 4.7 4.6 3.1 4.0

16.7 10.8 9.2 5.4 4.5 4.4 3.7 3.7

17.6 10.5 8.0 5.5 4.4 4.6 3.7 3.6

17.8 9.7 8.0 6.1 4.3 4.0 3.7 3.4

16.7 8.6 9.1 7.0 4.2 3.9 4.7 3.0

18.1 10.0 9.2 8.9 5.0 4.2 5.9 3.4

16.6 10.0 8.5 9.0 4.8 3.8 6.8 3.6

15.3 8.7 8.7 9.5 4.4 3.5 8.4 3.1

3.3

3.3

2.6

2.7

2.8

3.0

3.1

3.3

3.1

2.7

1.1

1.2

1.7

2.2

2.8

3.2

3.3

4.0

3.8

4.0

Sources: ITC (2002); UN (1999).

strong in 2000, with world export shares of 4.2 per cent, 3.8 per cent and 2 per cent respectively (ITC, 2002). The major export destinations are Germany, Israel, the Netherlands, France, Russia and the CIS countries, especially Azerbaijan, Kazakhstan and Turkmenistan. In recent years exports to the Balkans in general and Greece in particular have also increased. Italy, Germany, France, the United States, the United Kingdom and Spain, on the other hand, are the leading exporters of furniture to Turkey. Within Turkey, the export performance of furniture manufacturers in Ankara is particularly weak, especially when compared with those in Istanbul and Bursa-Inegöl.1 The geographic concentration of furniture manufacturers in some EU countries is striking. German enterprises, for example, are concentrated in three regions: North Rhine-Westphalia, Bavaria and Baden-Württemberg. Several districts in northern Italy are home to more than two thirds of the total number of furniture manufacturers and related employment in the country, with about 55 per cent being concentrated in the regions of Lombardy, Veneto and Tuscany. In France the concentrations are in the Ouest/Vendee/Bretagne, Ile-de-France, Rhone-Alpes and Normandy regions. Almost all Belgian furniture manufacturers are located in the western part of the Flemish region (Engels, 1999). Other well-known examples are Jutland in Denmark and Smaland in Sweden, and, outside the EU, Sasaki in Japan (Erzurumluoglu, 1991). As in the countries mentioned above, furniture manufacturing in Turkey is highly localized, with Ankara, Istanbul, Izmir, Bursa and Kayseri being the leading centres (Table 4.2). Although the manufacturers in Istanbul have recently replaced those in Ankara in terms of share of total employment in the industry, the LQ for Ankara is much higher than that for Istanbul

62 Clusters and Competitive Advantage Table 4.2 Provincial shares of employment in the Turkish furniture industry (ISIC 3610)1 Province

Share of national employment in the sector (%)

Location quotient

Ankara Istanbul Izmir Bursa Kayseri Adana Hatay Eskisehir Samsun Içel Sakarya Trabzon Isparta Burdur Van

24.17 20.75 8.57 6.88 3.82 3.06 2.46 2.32 2.27 2.09 1.10 1.03 0.52 0.31 0.10

2.5698 0.8475 1.1798 1.7617 2.8844 0.9712 1.4040 1.8171 1.3281 0.8367 1.0796 1.0026 1.0332 1.0100 1.8051

C4EMP C8EMP

60.362 72.022

Notes: 1. Top ten provinces in terms of share of national employment and LQ greater than one. 2. Concentration ratios for the first four and eight provinces, respectively.

(2.57 and 0.85 respectively), indicating that in relative terms the industry is much more localized in Ankara. Indeed the firms in Ankara are concentrated in one district (Siteler) on the outskirts of the capital.

Origins and historical developments Ankara was once a significant centre of mohair production, and this was the core economic activity in the city until the late nineteenth century and the coming of the railway. This enhanced the strategic location of the city and attracted additional economic activities. The main goods exported from Ankara at the time were grain, mohair, grapes, honey, leather, carpets/rugs and agricultural tools. Interestingly, although there was little in the way of forestry in the environs of Ankara, it appears that wood working was relatively developed in the region (Önsoy, 1994). For example wooden looms for the weaving of mohair were produced locally in the sixteenth and seventeenth centuries, pointing to the existence of wood-related business activities (Tuncer, 2001). In fact the craft of furniture making has been practised in central Anatolia for centuries. Impressive exhibits of eighth century BC royal wooden furniture

The Furniture Cluster in Ankara 63

from Gordion, the ancient Phrygian capital, located near Ankara, are displayed in the Museum of Anatolian Civilizations in Ankara (Simpson et al., 1992). Much of the area’s historical magnificence was, however, lost over time, as evidenced by the way in which Major Robert Imbrie, a special representative of the United States, described the Ankara of the early 1920s: ‘The shops are tiny affairs with the most primitive of stocks. There is no bazaar worthy of the name. It is impossible to buy a chair, a table or a bed, or the simplest household article.’ According to him, it seemed that ‘the swing of the pendulum through the arch of centuries had brought little change to Angora’ (Cross and Leiser, 2000, pp. 143–4). Despite historians’ bleak picture of the general economic situation in Ankara at that time, the city took on strategic importance – both politically and economically – when the newly established Turkish Republic declared Ankara its capital in 1923, a decision that hardly received a warm welcome. Illustrative of this and the underdevelopment of Ankara is the fact that most diplomatic missions were reluctant to move from Istanbul to Ankara. For instance it took the American ambassador more than 10 years to move his residence permanently from Istanbul to Ankara (ibid.) The plan of the new Turkish government was to preserve the heart of old Ankara and build a completely new city round it. The transformation of Ankara from a small, underdeveloped, Oriental town to a large Westernstyled city and the consequent flurry of construction activity inevitably influenced the structure of local industry and marked the emergence of two related sectors: construction and furniture.2 Towards the end of the 1920s, factories and workshops began to spring up around Akköprü, specializing in ceramics, timber and furniture.3 A notable development in the 1950s was the relocation of small producers and tradesmen outside the city centre. This started with the construction of small industrial estates around Ankara, including Yeni Sanayi, Büyük Sanayi, Ata Sanayi, Demir Sanayi and Keresteciler Sitesi. Although a number of industrial zones housed furniture firms and enterprises in related areas, one in particular, Siteler, is important for our purposes due to its currently high concentration of furniture manufacturers.4 Written and oral evidence suggests that Siteler was established in the late 1950s by timber merchants who, after a large fire, were encouraged to move from their central location in Akköprü and Sogukkuyu to a more peripheral one, mainly because of the risk of fire but also due to the noise and pollution associated with their activities. The head of the municipality in Ankara, Atif Benderlioglu, with the support of Prime Minister Menderes, was highly instrumental in organizating this move. About 60 acres of land were allocated to the purpose, and the seeds of the subsequent furniture cluster were sown in Siteler by the arrival of the timber merchants. In the following years more timber merchants set up business in the district, and towards the end of the 1960s furniture makers formed a subdistrict of their own. Later the construction of residential

64 Clusters and Competitive Advantage

buildings began, and production activities gradually diffused into the new residential areas, blurring the boundaries of the district. Finally, the entry of larger firms triggered a transformation in Siteler in that the emphasis on the local market shifted towards regional, national and even international markets, though to a lesser extent (Tekeli, 1994). Very few final customers visited Siteler in the early years of its development. Rather they bought their furniture from retailers in the city centre, where the prices included a considerable mark-up. Seeing the business potential in this, many furniture makers in Siteler set up showrooms often on the ground floor of their premises. Thus Siteler was no longer just a production centre but also a specialized shopping centre. This proved very profitable for the furniture makers, especially given the fact that their rents were much lower than those in the centre. Moreover ‘the former workshop owner now acquired the status of a businessman who had an office in the showroom’ (Hazar, 1983, p. 17). The success achieved by Siteler during these years resulted in nationwide recognition of ‘made in Ankara’ furniture and a cosy life for the furniture makers. However they failed to channel their earnings into investments, and when similiar furniture districts began to emerge in other parts of the country, coupled with the liberalization of imports, they found it difficult to sustain their dominant position since they had little export experience and few contacts in international markets to turn to in order to fight the competition. As a consequence the good reputation Siteler had built up over the years began to erode. A prominent manager interviewed in the course of this study, whose company was amongst the first to move to Siteler, stated that what they dreamt of in the early days could not be realized. They had envisaged that Siteler would come to be endowed with well-functioning institutions, including sector-specific education and research institutions and even a forest of its own. He thought that over time the district’s highly skilled craftsmen had gradually been replaced by people who had the required capital but were not necessarily equipped with sufficient skill. This, in his view, had changed the nature of the district. ‘If it had developed as envisaged, Siteler would have been a leading export centre; but now only 10–15 firms are engaged in exports on a regular basis’, he lamented. Siteler now occupies about 1250 acres of land. According to the Small and Medium-Sized Industry Organization (KOSGEB), approximately 10000 firms are active in furniture making and related businesses in Siteler. The number of workers employed by these enterprises is estimated to be around 100000. Although the cluster has managed to survive the recent challenges, Istanbul has replaced Ankara as the leading location for furniture making and the export performance of the cluster is still rather poor. The following pages examine the reasons for this decline, which will enable us to comment on the competitiveness of clusters more generally. Before proceeding with this

The Furniture Cluster in Ankara 65

analysis, however, we shall summarize the general economic outlook of Ankara in order to put the situation of the furniture cluster into that context. As can be seen in Table 4.3, which shows the structure of Ankara’s economy by economic activity and share of employment, the current structure is quite similar to that observed historically: construction and related activities, Table 4.3

Employment in Ankara, by economic activity1

ISIC

Sector

8022 9220 4020 7210 7493 4520 7010 6591 2694 2924

Technical and vocational secondary education News agency activities Manufacture of gas; distribution of gaseous fuels Hardware consultancy Building cleaning activities Construction of buildings; civil engineering Real estate activities with own or leased property Financial leasing Manufacture of cement, lime and plaster Manufacture of machinery for mining and construction Courier activities other than the national mail service Architectural and engineering activities and consultancy Manufacture of machinery for metallurgy Manufacture of furniture Manufacture of office and computing machinery Other entertainment activities n.e.c. (not elsewhere classified) Maintenance and repair of office machinery Telecommunications Social work Extraction of salt Manufacture of medical and surgical equipment Research on and experimental development of NSE (Natural Sciences and Engineering) Building completion Cargo handling Wholesale of machinery, equipment and supplies Other human health activities Activities auxiliary to financial intermediation n.e.c. Manufacture of machinery for food etc. Manufacture of other non-metallic mineral products Manufacture of lifting and handling equipment Service activities related to printing

6412 7421 2923 3610 3000 9219 7250 6420 8532 1422 3311 7310 4540 6301 5150 8519 6719 2925 2699 2915 2222

Ankara’s share of Location national employment quotient in the sectors (%) 8.2230 7.7405 5.6415 5.0227 4.9979 4.2882 3.5444 3.4805 3.3328 3.1600

77.33 72.80 53.06 47.24 47.00 40.33 33.33 32.73 31.34 29.72

3.1314

29.45

2.9847

28.07

2.6363 2.5698 2.5244 2.4805

24.79 24.17 23.74 23.33

2.4669 2.4608 2.4494 2.3852 2.3068 2.2911

23.20 23.14 23.04 22.43 21.69 21.55

2.2308 2.2249 2.2110 2.1374 2.1184 2.0585 1.9742

20.98 20.92 20.79 20.10 19.92 19.36 18.57

1.8827 1.8692

17.71 17.58

66 Table 4.3

ISIC

(Continued)

Sector

4510 Site preparation 5141 Wholesale of solid, liquid and gaseous fuels, etc. 2212 Publishing of newspapers, journals and periodicals 3312 Manufacture of instruments for measuring etc. 7411 Legal activities 8511 Hospital activities 3110 Manufacture of electric motors, generators etc. 8090 Adult and other education 4530 Building installation 2731 Casting of iron and steel 5143 Wholesale of construction materials, hardware etc. 5139 Wholesale of other household goods 3692 Manufacture of musical instruments 9212 Motion picture projection 7430 Advertising 6021 Other scheduled passenger land transport 5240 Retail sale of second-hand goods in shops 7499 Other business activities n.e.c. 2914 Manufacture of ovens, furnaces and furnace burners 7290 Other computer-related activities 7020 Real estate activities on a fee or contractual basis 3120 Manufacture of electricity distribution apparatus etc. 4100 Collection, purification and distribution of water 1310 Mining of iron ores 2913 Manufacture of bearings, gears and driving elements 2320 Manufacture of refined petroleum products 1544 Manufacture of macaroni, noodles, couscous etc. 2929 Manufacture of other special purpose machinery 2221 Printing 2812 Manufacture of metal tanks, containers etc. 3693 Manufacture of sports goods 2101 Manufacture of pulp, paper and paperboard 6720 Activities auxiliary to insurance and pension funding 5030 Sale of motor vehicle parts and accessories 6023 Freight transport by road

Ankara’s share of Location national employment quotient in the sectors (%) 1.8042 1.8003 1.7767

16.97 16.93 16.71

1.7722 1.7068 1.5911 1.5355 1.5021 1.5005 1.4897 1.4719

16.67 16.05 14.96 14.44 14.13 14.11 14.01 13.84

1.4699 1.4425 1.4228 1.4194 1.3871 1.3704 1.3575 1.3556

13.82 13.57 13.38 13.35 13.05 12.89 12.77 12.75

1.3188 1.3165

12.40 12.38

1.3088

12.31

1.3025

12.25

1.3013 1.2982

12.24 12.21

1.2915 1.2875

12.15 12.11

1.2840 1.2827 1.2811 1.2811 1.2588 1.2473

12.08 12.06 12.05 12.05 11.84 11.73

1.2043 1.2031

11.33 11.31

The Furniture Cluster in Ankara 67

2102 Manufacture of corrugated paper and paperboard 8512 Medical and dental practice activities 7412 Accounting and auditing activities; tax consultancy 5219 Other retail sales in non-specialist stores 2429 Manufacture of other chemical products n.e.c. 3140 Manufacture of accumulators, primary batteries etc. 3230 Manufacture of television and radio receivers etc. 3220 Manufacture of television and radio transmitters etc. 2922 Manufacture of machine tools 5149 Wholesale of other intermediate products, waste 2892 Treatment of metals; mechanical engineering 2021 Manufacture of veneer sheets, plywood etc. 2732 Casting of non-ferrous metals 3190 Manufacture of other electrical equipment n.e.c. 9303 Funeral and related activities 5010 Sale of motor vehicles

1.1941 1.1837 1.1646

11.23 11.13 10.95

1.1380 1.1378 1.1207

10.70 10.70 10.54

1.1034 1.0953

10.38 10.30

1.0945 1.0902

10.29 10.25

1.0865 1.0389 1.0340 1.0305

10.22 9.77 9.72 9.69

1.0290 1.0172

9.68 9.57

Note: 1. Top 50 industries by share of national employment and LQ greater than one.

the furniture industry, metal working and various services still dominate the economic landscape. Although Ankara has experienced rapid growth as a city, it cannot be said that industry has developed at the same pace. On the contrary, it is rather weak relative to the size of Ankara, especially as regards factory production. However the service sector and commercial activities have prospered, reflecting the administrative character of the capital.

Sources of international competitive advantage Factor conditions Although Turkey has an adequate supply of basic materials such as wood, chipboard, veneer, fittings and other inputs, good quality domestic inputs are not available in sufficient quantities and at competitive prices (KOSGEB, 2000; TC Basbakanlik Dis Ticaret Müstesarligi, 1998). In addition to the fact that Turkey does not have an abundance of free species, Turkish wood is of poor quality. Another barrier to the development of the furniture industry is that locally produced intermediate goods such as metal accessories are low-quality copies of European products (Er, 1994, pp. 282–3). Hence firms are left with little choice but to use imported inputs, and it has been estimated that about 75 per cent of inputs are imported (Sakarya, 2001). According to

68 Clusters and Competitive Advantage

one of the managers interviewed for this study, not only did his firm prefer to use imported inputs but also the customers expected it too: ‘You have a better image . . . if you use imported inputs.’ Ankara has many warehouses that carry a variety of domestic and imported inputs. The great majority of these are located on Demirhendek Street in Siteler and attract customers not only from Ankara but also from other provinces of Turkey. The furniture industry is labour-intensive and clustering has clear labour cost advantages. However the industry is associated with substandard working conditions and temporary employment is commonplace (SPO, 1995). Both owners and workers usually lack formal qualifications (Er, 1994). According to a survey by Hacettepe University (1993), a large proportion of the ownermanagers of the establishments in Siteler (70 per cent in small firms and 50 per cent in larger ones) have no secondary education. More than 90 per cent of the respondents in small firms and almost 70 per cent in larger ones stated that they had acquired their skills through many years of working on the job.5 Relatedly, one manager interviewed for this study confided that although Siteler was the leader in the Turkish furniture industry, Istanbul was in a more advantageous situation with regard to workers since ‘the business environment is more vibrant in Istanbul, and thus artisans there better know what to do and how to do it’. Although world-class design and engineering education is available in Ankara,6 interviewees stated that even the most prominent institutions could not fully satisfy the specific staffing needs of many cluster firms, especially when it came to mid-level positions. As one of them put it, ‘In reality, there are no sector-specific education institutions. Apprenticeship is the only way to learn the details of this business. It is just that an educated person can make faster progress in learning the necessary skills.’ Industrial designers working in small and medium-sized furniture firms, on the other hand, expressed their dissatisfaction with the low wages and limited career opportunities. One manager argued that for bright graduates the current state of the cluster was a great disappointment. So although some institutions in Ankara offer specialized education in furniture making and related subjects, the cluster firms continue to suffer a shortage of qualified personnel. The need for qualified designers and marketers in particular was frequently stressed by interviewees. Despite the above, many firms in Siteler prefer to employ workers who have done an apprenticeship and worked in the district for a considerable time: ‘There is a particular atmosphere in Siteler, and we prefer to employ those who know how we do business here.’ The Siteler Occupational High School was established in 1986 to contribute to the better organization of apprenticeships, however the number of registered students has gradually decreased, falling from more than 5000 in the 1980s to around 1000 in 2002. Interestingly the composition of students has also changed in that at first almost all students chose furniture-related subjects, but now there is

The Furniture Cluster in Ankara 69

a growing demand for courses in other trades, such as hairdressing. Another related theme that emerged during the interviews was that parents in Ankara were increasingly encouraging their children to consider apprenticeship positions in other industries, such as metal working. Moreover, ‘Since people see no future in this business, they try to avoid it as an occupation. I know some people from Siteler who liquidated their investments in the sector and became truck drivers,’ said one interviewee. Given the unstable macroeconomic situation in Turkey in general and the high interest rates in particular, it is not surprising that cluster firms are reluctant to use bank credit and prefer to rely on owners’ equity as a source of finance. When asked about their opinions on bank credit, many interviewees spoke extremely unfavourably, as exemplified by the following statements: ‘If you get credit from a bank, it means that you will get burnt sooner or later’, and ‘You take the risk of bankruptcy if you choose bank credit as a means of financing’. This attitude can be explained by the fact that bitter memories of the February 2001 financial crisis are still very fresh in managers’ minds: ‘Although we know that it means slower progress, we have preferred to rely on our own means of financing since February 2001.’ Clearly, then, financing constitutes a major problem in terms of limiting competitive potential and thus the further development of the cluster. Finally, the infrastructure in the Siteler region, which was very poor in the 1970s, has improved over time, supporting the view that improvements in social and physical infrastructure usually happen after rather than prior to cluster formation (Yurteri, 1986). However significant problems remain, including some as basic as the continuous supply of electricity and water. Also, while firms are not subject to the much higher rents they would have to pay in the centre, the district has limited opportunities for expansion. In summary, of the three major operating costs – raw materials, wages and finance – cluster firms have an advantage only in labour cost and suffer severe disadvantages in the others. A comparison of the price of a typical piece of bedroom furniture in Turkey and Germany reveals that low wages are not enough to compensate for the high material, financing and administrative costs in Turkey, which is damaging the price competitiveness of the cluster firms.

Firm strategy and rivalry In the Ankara furniture cluster a small number of larger enterprises coexist with thousands of small and medium-sized ones. The dominance of small firms can be explained by the lack of serious entry barriers to the industry, particularly the small amount of initial capital required. New business formation usually takes place via spin-offs. It is typical for an employee to spot a business opportunity or to leave the firm as a result of a conflict with the owner-manager and then establish his own business. As such people tend to leave before they fully acquire the necessary skills, this practice is

70 Clusters and Competitive Advantage

seen as damaging rather than contributing to the dynamism of the cluster (Porter, 1998). Family firms dominate the cluster. These small firms are typically managed by the owner, who is usually also the founder of the company. Typically, owner-managers do not have any professional training but have learnt the necessary skills as youngsters through informal apprenticeships. More importantly, the dominant part played by the owner-manager persists even if the firm grows into a large one, resulting in the firm being managed as though it were still a small workshop. Kahveci et al. (1999, p. 407) report that although there is a trend towards professionalization, professionals usually adapt to the existing system and put little effort into changing it. Another characteristic of the cluster is the important role assumed by retailers. The bargaining power of retailers is very high, due mainly to the low entry barriers to furniture making as well as to some retailers’ control over a network of small workshops. Also, few of the furniture manufacturers have separate marketing departments or systematically plan their marketing activities. Under these circumstances, retailers and department stores can dictate even the finest details of production (Er, 1994, p. 250). The firms in the cluster are highly committed to the industry, and diversification into another sector is very rare. The reason for this, according to one of our interviewees, is that it takes a great deal of time and energy to design and produce furniture: ‘It is a product that is very difficult to standardize, it takes a lot of your time. It needs much effort and concentration.’ Besides, furniture making is a craft with an artistic aspect and masters of the art are emotionally attached to the industry. One interviewee believed that each product group required an expertise that could only be gained over a long period of time, thus it was better for a firm to specialize in producing say, armchairs only. It is therefore not surprising that there is a high degree of specialization in the cluster in terms of subsectors of the furniture industry and distinct activities in the value chain of a single furniture item. Subcontracting some stages of the production process (such as upholstering, wooden frame production, assembling and finishing) to different workshops is widespread in the cluster.7 This provides flexibility and facilitates a broad range of prices and models. Cooperation amongst the cluster firms is usually in the production phase, and hence vertical. Despite the dense network of vertical relations, however, the formalization of intercompany relations and industry representation is a relatively recent phenomenon. The sectoral organizations are combined under the umbrella of the TAIF, a federation that consists of chambers specializing in different subgroups of members, including carpenters, furniture producers, upholsters and polishers. A number of the managers interviewed thought that the associations were ‘too political’ and did not contribute much to the development of the cluster. The cluster firms are rather sceptical about engaging in cooperative ventures with rival firms, especially if it involves sharing information about markets

The Furniture Cluster in Ankara 71

and/or customers. One interviewee argued that, according to his recollections, there had only been a few examples of rival firms cooperating in Siteler, usually in the form of work-sharing during periods of high demand. In particular the possibility of strategies and products being imitated by competitors made firms nervous about forming cooperative relations with them. The interviewees were of the opinion that personal rivalry and the importance attributed to being one’s own boss were playing a key role in shaping firms’ structures and strategies. They frequently used such terms as ‘aggressive’ ‘insanely intense’ and ‘extreme’ when describing the nature of competition in the cluster. In general they were opposed to this kind of rivalry since it pushed firms into fierce price competition, often resulting in the sacrifice of quality. On one occasion the managers of rival companies did not even want to fly on the same plane as each other on a trip sponsored by KOSGEB to encourage participation in international fairs. Another interesting example in this respect was the outcome of two attempts by cluster firms to form a sectoral foreign trade corporation.8 The product of the first of these attempts, Ankara Mobilya, lasted only a short while, and the second, MOSAS, could hardly be called a success and is currently undergoing a major restructuring. The lack of success is attributed to the fact that the managers and leaders of individual firms were too busy with their own endeavours to spare the time. Another probable reason is that firms were reluctant to share information on customers and foreign contacts with their competitors. The furniture firms in Ankara produce a broad range of articles in traditional and modern styles. However they rarely have in-house design units, and original design is a rare phenomenon. Instead it is common to copy the designs of foreign (usually European) producers. Alternatively they copy each other’s designs, which hitherto has been made possible by the weakness of the regulations on intellectual property rights. As one manager observed: ‘The reason we are lagging in terms of design is because we cannot protect original designs properly. It has only very recently come to the agenda. We still lack experts in this area. But it is developing. We have managed to get results relatively quickly in a few court cases, for instance.’ Also, in small, family-run firms original designs are only accorded importance if the owner-manager is convinced of their necessity. If that person happens to be a designer (as in the case of Koleksiyon, for example), than greater importance is likely to be given to design. In many countries considerable use is made of computers in furniture design and manufacturing, but in Ankara this is only in the very early stage. Moreover workshops are usually equipped with rather basic machinery, and Erzurumluoglu (1991) has found that some companies prefer to remain semimechanized in order to exploit their labour cost advantage. There are also segments that can be no other than labour-intensive, such as the production of traditional furniture with carvings, which requires the expertise of master craftsmen.

72 Clusters and Competitive Advantage

Institutions that provide technical and marketing information and arrange seminars and trade fairs (the latter can have a strong influence on furniture design and public taste, as do the Triennale exhibitions in Milan) either do not exist or are weak in Ankara. Thus information on foreign markets is limited, and acquiring such information depends on individual initiatives. Although participation in trade fairs is increasing, the attendance rate is still low. This can be explained by the furniture makers’ limited interest in exporting, the difficulties associated with transportation and the high cost of floor space at fairs (OAIB and KOSGEB, 1996). To summarize, the furniture cluster in Ankara is dominated by small family firms that largely focus on the domestic market. There is an extensive network of subcontracting relations and thus vertical cooperation. However rival firms compete fiercely, resulting in damaging price competition. Original designs are rare, and firms instead adopt a copy-cat strategy.

Related and supporting industries An examination of trade data reveals that of the 22 (SITC five-digit) subsectors of the Turkish furniture industry, only six are competitive in international markets. These, plus, related sectors and institutions that exert an influence on the industry, are shown in Figure 4.1.

Education and research institutions

Construction services

Housing and household goods

Motor vehicles

Motor vehicle seats

Governmental institutions

Adjustable swivel seats

Seats, convertible beds

Mattresses

Metal office furniture

Wooden office furniture

Metallic decorative items

Textiles and apparel

Wood: rough, painted and preserved

Materials and metals

Figure 4.1 Internationally competitive subsectors of the Turkish furniture industry, plus related sectors and institutions Note: Industries/institutions with a presence in Ankara are shaded.

The Furniture Cluster in Ankara 73

The furniture industry is linked to three of the strongest sectors of the Turkish economy: housing and household goods, textiles and apparel, and materials and metals. The industry is also associated with the construction industry, which is internationally competitive, and with motor vehicles, whose export performance has improved in recent years. On the other hand Turkey is not competitive in many subsectors of the timber industry in terms of both price and quality (SPO, 1995). For example the export performance of the fibreboard and particleboard subsectors is rather poor. The local machinery sector is weak as well, and state-of-the-art, sector-specific machinery is imported from Europe, especially from Germany and Italy, which together hold more than half of the world market in this product category (OAIB and KOSGEB, 1996). As mentioned above, the Turkish construction industry has become internationally competitive and many of the major construction companies have chosen to locate their headquarters in Ankara, bringing considerable benefits to the Ankara furniture cluster. The important contribution that Turkish contractors’ activities abroad have made to furniture exports is frequently mentioned in the literature (for example Erzurumluoglu, 1991; SPO, 1995). In the 1980s and early 1990s, Middle Eastern and African countries, especially Libya, were the leading markets for Turkish furniture exports, but towards the end of the 1990s Germany and former republics of the Soviet Union, especially the Russian Federation, became the most important foreign customers (Koç et al., 1999). This shift from the Middle Eastern and North African markets to Russia and former Soviet republics closely matches the path taken by Turkish construction firms in their international operations (Öz, 2001). The development of the contract furniture subsector has played an important part in strengthening the links between the two industries. Also, when the construction industry is booming, this has a positive impact on the Ankara cluster, especially with respect to kitchen and bathroom furniture and interior decoration. In summary, of the competitive industries with links to the furniture industry, only construction and metal-working are located in Ankara. It therefore cannot be said that the furniture cluster in Ankara is surrounded by a group of competitive related industries, although the presence of the construction and metal-working industries as well as some supporting institutions (such as KOSGEB-Siteler) signals that a potential does exist.

The role of the government As discussed at the beginning of this chapter, the decision to make Ankara the capital of the newly established Republic of Turkey was instrumental in the early development of the furniture cluster. More recently, in the 1980s, the liberalization of imports served to educate both producers and consumers, and prompted some furniture firms to look for export markets. KOSGEB-Siteler is the main local governmental institution to support the development of the furniture cluster.9 Another governmental institution,

74 Clusters and Competitive Advantage

IGEME, concentrates on export promotion.10 However, larger enterprises usually have their own export departments, while very small firms and workshops are either unaware of the services provided or have little interest in them as they do not intend to export. The high levels of bureaucracy and red tape constitute major drawbacks for firms in this regard. Another government-related problem is the absence of stringent quality and service standards. The managers interviewed for this study thought that the industry was ahead of the governmental institutions in this respect: ‘Many years ago, I contacted some governmental institutions and several universities to solve a technical matter. None of them could help me. After that experience, I did not look for any other contacts with them since they are lagging behind. In fact, some governmental institutions do admit that we are ahead of them.’ Some of the smaller workshops are able to create unfair price competition by operating in the so-called ‘grey economy’, in which workers are not insured and taxes are not paid in full. An indication of this is that some of the managers interviewed were reluctant to disclose the size of their workforce. In general the interviewees repeatedly stressed the negative impact of the macroeconomic conditions in Turkey and the difficulty of doing business in such an environment, in which ‘it would be more profitable to liquidate your assets and make use of the persistent high interest rates’. The opportunity cost of conducting industrial activities is, in other words, high in the prevailing circumstances. Overall, government-induced problems are considered to be the greatest barriers to the further development of the cluster.

Reasons for geographic concentration This section addresses the question of why furniture firms concentrate geographically and investigates why they have concentrated in Ankara. The section also considers the changing image of the furniture cluster in Ankara. Before we proceed with this analysis, however, it is necessary to highlight the phenomenon discussed earlier in this chapter: the further concentration of furniture and related businesses in the district of Siteler. Tables 4.4–4.7 provide details of this concentration by street. A map of Siteler is presented in Figure 4.2. One major reason why furniture firms tend to be geographically concentrated is related to demand. Furniture firms are usually located in populated urban areas where the potential demand is high and distribution and marketing facilities exist. It is also more convenient for customers. As one interviewee explained: ‘If sellers are concentrated, shopping takes place faster. Customers also feel that they are better informed when they have an opportunity to see many alternatives.’ Another reason is the local availability of specialist inputs, particularly human resources, plus related and supporting industries. With regard to the latter, each item requires specialist expertise, and the

75 Table 4.4

Concentration of furniture firms in Siteler, by street

Street

Percentage share of the local sector

Location quotient

1.12 0.54 0.74 0.77 9.39 2.18 4.32 1.12 0.17 0.57 0.57 1.86 1.89 2.18 2.26 1.17 2.52 2.23 10.82 3.72 0.74 0.37 1.00

1.5130 1.4422 1.3755 1.3468 1.3255 1.3137 1.3115 1.3094 1.3094 1.2470 1.2470 1.2335 1.2002 1.1847 1.1493 1.1184 1.0819 1.0639 1.0559 1.0556 1.0556 1.0316 1.0017

Atilgan Street Kalim Street Akbal Street Özdes Street Eregli Street Yalinç Street Akçakale Street Bilgin Street Onay Street Altinözü Street Senyüz Street Dizboyu Street Sirma Street Fatih Street Açiktan Street Yanki Street Özgü Street Dolanti Street Çamlitepe Street Kartalcik Street Muradiye Street Bilecik Street Yapit Street

Note: Only streets with an LQ of more than one are included.

Table 4.5

Concentration of carpenters in Siteler, by street

Samsun Highway Ulubat Street Dikmeli Street Yapici Street Senkal Street Karacakaya Avenue Karpuzlu Street Toptas Street Yapit Street Köycegiz Street

Percentage share of the local sector

Location quotient

0.30 5.49 2.52 3.41 4.30 9.27 7.27 2.67 1.11 2.52

2.2626 1.9357 1.8995 1.6137 1.4829 1.3696 1.1921 1.1891 1.1128 1.0990

76 Table 4.5

(Continued) Percentage share of the local sector

Location quotient

2.52 8.38 2.60 10.68 2.15 0.59 0.37 2.00 1.85 3.34

1.0835 1.0743 1.0489 1.0426 1.0415 1.0344 1.0285 1.0182 1.0101 1.0031

Özgü Street Demirhendek Avenue Serince Street Çamlitepe Street Altinay Avenue Yagiz Street Bilecik Street Açiktan Street Fatih Street Kopça Street

Note: Only streets with an LQ of more than one are included.

Table 4.6

Concentration of upholsterers in Siteler, by street Percentage share of the local sector

Toptas Street Safir Street Koçak Street Köycegiz Street Çalim Street Altinay Avenue Kopça Street Bilecik Street Yagiz Street Kartalcik Street Senkal Street Sarigül Street Dolanti Street Muradiye Street Demirhendek Avenue Karacakaya Avenue Karpuzlu Street Serince Street Dalboyu Street Tasdelen Avenue Yanki Street Tezcan Street

7.01 1.98 4.73 4.88 1.98 3.96 5.64 0.61 0.91 5.49 4.42 3.20 3.05 0.91 9.76 7.77 6.86 2.74 1.83 1.83 1.07 3.35

Note: Only streets with an LQ of more than one are included.

Location quotient 3.1222 2.8782 2.4850 2.1254 2.0489 1.9188 1.6949 1.6907 1.5941 1.5570 1.5235 1.4906 1.4529 1.2975 1.2503 1.1483 1.1249 1.1085 1.0237 1.0237 1.0171 1.0077

The Furniture Cluster in Ankara 77 Table 4.7

Concentration of polishers and varnishers in Siteler, by street

Sariçam Street Onay Street Senyüz Street Dalboyu Street Bilgin Street Sarigül Street Sirma Street Köycegiz Street Yagiz Street Demirhendek Avenue Toptas Street Serince Street Yapit Street Çamlitepe Street Karacakaya Avenue Tasdelen Avenue Yanki Street Yapici Street Tezcan Street Altinözü Street Kartalcik Street Dolanti Street

Percentage share of the local sector

Location quotient

0.33 0.33 0.83 3.16 1.33 3.32 2.33 3.32 0.83 10.96 2.99 3.16 1.16 11.63 7.64 1.99 1.16 2.33 3.65 0.50 3.82 2.16

5.0664 2.5332 1.8094 1.7663 1.5589 1.5470 1.4777 1.4475 1.4475 1.4050 1.3313 1.2750 1.1628 1.1349 1.1286 1.1155 1.1083 1.0997 1.0981 1.0857 1.0840 1.0291

Note: Only streets with an LQ of more than one are included.

ready availability of, say, polishers, is essential for firms that rely heavily on subcontracting. Moreover, according to the managers interviewed, firms can gain a better understanding of rival firms as well as the nature of competition when there is geographic concentration: ‘You can always see what the neighbouring company is doing and can decide how to respond.’ In this environment, firms find it easier to keep up with the latest developments. One interviewee mentioned that friends from small towns in Anatolia had to visit him frequently just to see what was going on. While the above factors generally explain why furniture firms tend to concentrate and confirm the theoritical reasons for geographic concentration (see Chapters 1 and 2), they do not fully explain why firms have concentrated in Ankara. As the capital of Turkey, Ankara hosts many governmental institutions, which adds to the attractiveness of the city as a location for furniture producers. ‘Since many construction firms, public institutions, the defence industry and several big universities are located in Ankara,’ said one interviewee, ‘Ankara has many advantages, especially regarding office furniture.’

St

St

(Y ild iz Yo lu)

78

i nk Ya

St

es zd

Õ

in lg Bi

Yalinç St

Kalim St

Köycegiz St

Atilgan St

Tezcan St

Karacakaya Ave

Sarigül St Muradiye St

Kopça St Demirhendek Ave

Samsun Highway

Map of the furniture district in Siteler, Ankara

Source: KOSGEB.

ALTINAY Ave

Karacakaya Ave

Onay St

St Akbal

yu St

Eregli St

Senkal St

Kartalerk St

Dizbo

Figure 4.2

Çalim St

Koçak St

Yapici St

Karpuzlu St Karpuzlu St

Akçakale St

Dolanti St

Bilecik St

li St

Açiktan St

Dikmen

St Sirma

m Sariça

St

Karpuzlu St

Yapit St

Yagiz St

Fatih St

TASDELEN Ave

Ulubat St

Senyüz St

ÇAMLITEPE St

St

Dulboyn St

Çamlitepe

Özgü St

Serince St Demirhendek Ave

The Furniture Cluster in Ankara 79

As noted at the start of this chapter, the construction boom that followed the designation of Ankara as the Republic’s new capital triggered the revival of the forgotten tradition of furniture making in Ankara. From a theoretical point of view, this highlights the important part played by the presence of a related industry in the emergence of a cluster (Porter, 1998). The growth of Ankara as the capital of Turkey, on the other hand, can be considered a chance event or a historical accident, as defined in the literature (Krugman, 1991a). Interestingly, historical accidents might play a part at the level of individual firms as well. For instance one interviewee mentioned that his father had gone to Ankara to attend the university (a chance event). Upon graduation he had decided to stay on in the city and establish a furniture firm, ‘since furniture was one of the few industries with a growth potential in Ankara’. This incident underlines the self-reinforcing nature of clustering in that the presence of people who have made a success of a venture invites further investment in the location, which in turn reinforces the growth of the cluster (Porter, 1998). It should be noted that the existence of demand does not of itself explain the emergence of the cluster in Ankara. For example in another highly populated Turkish city, Antalya, there has been an enormous demand for hotel construction during the last two decades but this has not triggered the development of a furniture cluster there. Instead furniture is often imported from Ankara, which is not surprising given that the firms constructing the hotels are based in Ankara.11 In addition to the existence of demand, Ankara’s status as the capital of Turkey and the strong presence of a closely related industry (construction), another benefit Ankara offers the furniture industry is its climate. In particular its low humidity is of crucial importance in furniture making, providing Ankara with an advantage over many other furniture producing regions, such as Istanbul. Its geographically central location is also an advantage since furniture is bulky and its distribution incurs relatively high transportation costs. According to one interviewee, however, the real advantage of Ankara as a location is the accumulated experience and know-how that the city has acquired in furniture production over the years: ‘it is not only my skills and knowledge but the accumulated know-how in the region plus my knowledge’. The following story by one of the managers interviewed, who had moved his firm from a small province in Anatolia to Ankara, is very informative: ‘Many years ago a foreign customer visited our firm and said that although our firm was very good, as there were virtually no related businesses in the place where the firm was located at the time he would not do business with us. He thought it would be very difficult for an isolated firm to manufacture good-quality products on time. We later heard similar statements again and again, so realized that we had to move. This is how we came to Ankara. But now, looking back, I think that it was the wrong decision; we should have moved to Istanbul. I believe Ankara is the wrong place to grow, the wrong

80 Clusters and Competitive Advantage

place to internationalize.’ In a similar vein, another interviewee stated that the real masters of this business were now in Istanbul. Besides, he argued, since Istanbul had a larger number of a relatively well-off people there was a significant demand for high-quality designer furniture there, whereas Ankara was a ‘civil-servant city’ (meaning customers with limited purchasing power): ‘If you are looking for something of really good quality, you should go to Istanbul. Istanbul is also the place if you are planning to buy furniture accessories and imported materials. As a producer, you have more opportunities to prove yourself in Istanbul. Here you are in a way hidden. Istanbul is much better connected to the international markets than is Ankara, in terms of both contacts and infrastructure.’ The decline in the image of the Siteler cluster is also evident in the following remarks by another interviewee: ‘There is a street between my firm and Siteler. When I say that, some potential customers are relieved.’ Despite the relative decline in its image, however, ‘made in Ankara’ furniture continues to have a better reputation than furniture produced in many other clusters in Turkey. Interestingly, one of the firms in Siteler had considered opening a branch in Inegöl in order to make use of the export connections of the cluster there, but had later decided that such a move could damage the image of the firm because Inegöl was associated with cheaper and lower-quality products. Nevertheless the newly emerging clusters are severely affecting the firms in Siteler by imposing a strong downward pressure on prices. A related issue is the limitation imposed by the structure of the buildings in Siteler, which is one of the reasons why several of the larger firms are moving out of the district. Siteler is composed of apartment-style buildings so production has to be spread over several floors, meaning that heavy furniture, materials and machinery have to be moved up and down stairs and through narrow doors.12 It is also difficult to supervise employees in this layout. One interviewee argued that the buildings suited firms employing 10 workers at most, but not the bigger firms. Interestingly, many of the firms that have moved out of Siteler have formed another cluster, this time in Akyurt (near Ankara airport). One manager spoke of how the firm took the decision to move to Akyurt: ‘We were suffering the constraints associated with the buildings in Siteler and were considering moving out. When one of our competitors moved to the area next to the airport, we thought that it might be a good idea to own land there, and later we constructed a factory.’ Then other firms followed suit, and as a result the germ of a new furniture district emerged, this time composed of larger firms. While these firms have maintained a presence in Siteler, this is often only in the form of a showroom. As a final note in this section, the interviewees pointed out some negative aspects of concentration. For example, being close to one’s competitors can be harmful since it facilitates imitation, supporting an assertion in the literature that agglomeration might not be as beneficial for strong and successful

The Furniture Cluster in Ankara 81

firms as it is for the followers (Shaver and Flyer, 2000). In this context, imitation is seen as a negative externality that is magnified in geographic clusters: ‘It is very easy in a district to copy what others do. It is, on the other hand, very difficult to fight against it.’ Thus although, successful firms tend to be secretive about their new products, they are immediately copied by competitors when they are put on the market. Some firms even install a partition between the showroom and the workshop to hide the development of the latest model. Referring to the managers of rival firms, a prominent and successful manager rather dramatically stated that he had no friends in Siteler. When the above is combined with the general lack of original design and the existence of destructive price competition, it is clear that, in the absence of a supportive business environment, the upgrading of a cluster will be difficult. This has important theoretical implications, as do the two other salient features of the Ankara cluster: the dominance of flexibly specialized small and medium-sized enterprises and the difficulty that the cluster firms face in terms of internationalization. A detailed discussion of these observations will be left until Chapter 8, although several related aspects will be touched upon when we analyse other clusters in the following chapters. It suffices here to state that our analysis of the Ankara cluster provides evidence against theories that associate the presence of flexibly specialized enterprises with international competitiveness (see Chapter 1), given that the cluster’s position in international markets is weak. The evidence provided by the analysis of this cluster also invites a discussion as regards the exact role played by competitive forces and accumulated know-how in the development of a cluster. With regard to the former, we need to identify the circumstances that lead to destructive price competition versus those which lead to the improvement of competitive advantage in a cluster environment. Regarding the latter, we need to clarify the conditions for and the process of knowledge accumulation in respect of internationalization. When the analysis of this cluster is combined with those in the following chapters, which will bring new dimensions to the issues raised in this chapter and open up some novel areas of discussion, we shall be better equipped to offer an understanding of the link between clustering and competitive advantage. However one thing is very clear even at this initial stage: some clusters are not internationally competitive, but we do not know about them because they are rarely discussed in the literature, as noted by Amin (1994).

Concluding remarks and future prospects The furniture cluster in Ankara presents a rather bleak picture with regard to international competitiveness. The advantages enjoyed by the cluster – such as low labour costs, its central location and its links with the construction industry, paving the way for direct and indirect furniture exports – do not

82 Clusters and Competitive Advantage

compensate for its drawbacks, which include difficulties with financing and acquisition of the main input (wood), unfair competition stemming from the presence of firms in the ‘grey economy’ and, most importantly, problems with strategy, especially in respect of design and export marketing mechanisms. Recently, however, Turkey’s internationalization measures have facilitated the entry of inputs and consumer products, and this has been instrumental in Turkish manufacturers paying increased attention to quality and adopting a more customer-oriented approach (SPO, 1995). Moreover large Turkish industrial groups have entered the furniture industry,13 a move that is likely to bring about a structural transformation of the industry (Er, 1994). Various forms of partnership with foreign companies have also been established, which might prove helpful in overcoming the weak product development capability of the cluster firms. Such developments will serve not only to bring new capital and technology to the sector, but also to intensify competition, forcing firms to capitalize more on their advantages. Finally, furniture firms have paid more attention to export opportunities since the February 2001 financial crisis, and have extended their connections in international markets beyond those they have via construction projects. In light of the analysis in this chapter, we can conclude that destructive price competition and the dominance of reproduction furniture rather than original design are the major barriers to the further development of the cluster. The countervailing forces include increased competition, both international and domestic, and technology transfer via foreign partnerships. The increase in exports is also noteworthy. Cluster firms are showing an interest in expansion, especially through investment in technology and marketing. There are also some early signs that the industry has started to accumulate the necessary knowledge for new product development (ibid.). In fact some of the managers interviewed were quite optimistic about the future of the sector: ‘There are lots of things to do, and we know that there is a potential. All we need is to professionalize our design, production and marketing.’ Hence there is clearly an awareness of the importance of design, and it has been argued that independent design firms would be beneficial to the industry (Erzurumluoglu, 1991) as they could serve firms that appreciate the importance of design but cannot afford to employ full-time designers.14 As a final point, being a part of a global chain via subcontracting relations has become an increasingly popular way of organizing production in the furniture industry worldwide. It remains to be seen whether Ankara’s furniture producers will become part of this global chain (either as subcontractors or subcontracting firms), and if they do, whether this will enable them to improve their competitive advantages. This chapter has shown that a potential exists but that considerable effort will be needed to mobilize that potential, the outcome of which will determine the future of the cluster and define its position as a local centre of global furniture production. Given that there

The Furniture Cluster in Ankara 83

are successful examples of transformation (see for instance Parkin, 1999), the challenge is to identify the attributes of the local business environment that will provide the means to realize such a transformation. These are matters that can only be properly addressed after conducting a thorough analysis of the experiences of more successful clusters. The next chapter analyses one of these: the towel and bathrobe cluster in Denizli.

5 The Towel and Bathrobe Cluster in Denizli

‘The secret of success lies in courage’ (a businessman from Babadag) Textile production starts with the main inputs – natural or man-made fibres, dyes and chemicals – and involves two major operations, namely yarn preparation and fabric weaving. Although there are firms of all sizes operating at the various stages of production, larger firms have become increasingly dominant as the industry has become more and more capital-intensive. More than half of the output of the industry is used by clothing manufacturers. The rest goes to the manufacturers of household goods (for example bedclothes) and industrial goods (for example vehicle seat upholstery). Compared with the textile industry, the clothing industry is more labour-intensive and the technology used is less sophisticated. Distributors have become increasingly important in this sector due to the dominance of retail activities by large firms, a phenomenon that has affected the organization and geography of clothing manufacture (Dicken, 1998) since the Industrial Revolution. First Britain and then other developed countries such as Germany and France moved into the mass production of textiles, often in localized clusters. Later on the industry grew rapidly in developing countries and either stagnated or declined in developed ones. Despite this trend, however, several developed countries (including Italy, France, Germany and Britain) continue to be amongst the leading exporters of textiles and clothing. In the case of towels and bathrobes,1 Turkey is amongst the leading exporters in this product group, along with China, Pakistan, Germany, Italy and India. During the period 1996–2000 Turkey was one of the top three exporters, accounting for around 10–20 per cent of total world exports of these products. The main destinations are the United States and the EU countries, especially Germany, Britain, France, the Netherlands, Italy and Belgium. Imports of towels and bathrobes into Turkey, on the other hand, have been negligible (ITC, 2002). The leading ‘textile cities’ in Turkey have traditionally been Istanbul, Adana, Bursa and Izmir, but in the post-liberalization era they have been 84

The Towel and Bathrobe Cluster in Denizli 85

challenged by producers in the provinces of Thrace, Gaziantep and Denizli. The leading centres of towel and bathrobe production are the cities of Denizli and Bursa, with a higher concentration of employment in Denizli2 which accounts for more than 50 per cent of the country’s total production of towels and bathrobes. The Denizli cluster is highly export-oriented, and more than 60 per cent of its products are sold either directly or indirectly to international markets (Temel et al., 2002). The Denizli Chamber of Commerce values the city’s textile/clothing exports at US$1 billion per year, or about 10 per cent of the total value of textile exports from Turkey (TBMM, 2001a). More than 60 per cent of these exports are towels and bathrobes (Akaydin and Ay, 1998). Denizli industrialists are very proud of their towels, which are used at Wimbledon and in five-star hotels throughout the world. Strikingly, over 40 per cent of Germany’s imports of towels and bathrobes come from Turkey (ITC, 2002), most of them from Denizli. Terms such as ‘the shining star of Turkey’, ‘the Anatolian tiger’ and ‘the Denizli miracle’ are frequently used by researchers and policy makers to describe the city’s impressive performance in international markets. While much has been written about Denizli’s success in this product area, the strategic management aspect of this has been largely ignored. This chapter will take a detailed look at the sources of competitive advantage of the Denizli cluster and the resilience it exhibited in the face of recent challenges, including the economic crises of the late 1990s and early 2000s and competition from other locations. The chapter will also discuss the underlying reasons for and the associated costs and benefits of clustering in this particular case. The analysis will enable us to identify key issues in the link between clustering and competitiveness, which will in turn make it possible to consider the competitiveness of clusters more generally.

Origins and historical developments The beginnings of the cluster can be traced back to antiquity. Textiles that are estimated to be 2000 years old have been found in the region, ranking amongst the oldest found anywhere in the world. These early textiles were made of wool, suggesting the practice of animal husbandry. With the development of agricultural activities in general and the cultivation of cotton in particular, there was a shift to cloth made of cotton (Karaalp and Batmaz, 1998). Denizli’s location in the Menderes Valley, the historic gateway between the Aegean Sea and Eastern Anatolia, was very instrumental in the high level of development attained by this region in these early times (TC Denizli Valiligi, 1998). Historians claim that textiles took up the largest space in the historical bazaar of Denizli, and each of the subsectors of the industry (such as fabric, clothing and dyes) concentrated in certain parts of the bazaar (Gökçe, 2000).

86 Clusters and Competitive Advantage

Denizli’s brightest historical period was the Roman era, during which its already strong position in the production of textiles was enhanced. In fact ‘trimita’, a type of fabric produced in the region, was so famous that the city was called ‘Trimita’ by some (TC Denizli Valiligi, 1998). There is also evidence that some of the material used for Caesar’s clothing was imported from Denizli (Sözkesen, 1998). There was a relative decline in the region’s economic position during the Byzantine era, mainly because the centre of commercial activity shifted from the Aegean and Mediterranean to Constantinople (Istanbul) and its environs. Nevertheless textiles continued to be amongst the leading items produced in the region (TC Denizli Valiligi, 1998). It is also known that the existence of various types of plant and water in and around Hierapolis (Mutluer, 1995) laid the foundations for the development of a closely related industry: dye production (Gökçe, 2000). During the early Ottoman period the key location of the city, then known as Ladik, guaranteed a vibrant commercial life. The careful processing of high-quality cotton resulted in textiles of superior quality that were known for their durability as well as their beauty. Ottoman historians report that a certain type of cotton fabric produced in Denizli and decorated with golden yarn was unmatched anywhere in the world in terms of beauty and quality. Cotton fabrics produced in the region were preferred by the Ottoman aristocracy and were popular in Istanbul’s palaces (Mutluer, 1995). In fact Denizli fabrics and clothing were so unique and valuable that they were given as presents to Sultans and other high-ranking people. It is also known that fabrics produced in Denizli were exported to various Mediterranean countries during this period (Gökçe, 2000). In the fifteenth century, when new routes to the East were discovered, the region lost much of its importance. Moreover the capital of the Ottoman Empire shifted from Bursa to Edirne and then to Istanbul, which favoured the development of the regions of Marmara, Thrace and Western Black Sea. In addition the restrictions imposed on foreign merchants damaged international trade and caused a relative loss of position for some key ports in the Aegean, including Izmir, the negative consequences of which were transferred to nearby cities such as Denizli (TC Denizli Valiligi, 1998). Nevertheless, as it was located in a region that produced one of the highest-quality cottons in the world, Denizli continued to be widely known as a leading centre of textile production. Like many other areas of the empire, Denizli underwent an economic downturn in the late Ottoman era (Karaalp and Batmaz, 1998). This is mainly attributed to the Industrial Revolution in the west, which, coupled with the extremely liberal trade policy followed by the empire at the time, seriously damaged the already underdeveloped indigenous industry. One direct effect of this on Denizli was that cotton yarn and fabrics began to be imported, the first large-scale imports of textiles taking place in the 1870s. As a result, the production of inputs such as silk, raw cotton, wool and dyes gained

The Towel and Bathrobe Cluster in Denizli 87

importance in the region’s economy as they were in great demand abroad. Towards the end of the century, another noteworthy event for the Denizli economy was the construction of the the Izmir–Aydin railway, whose arrival in the region triggered a revival of economic and commercial activities. With the outbreak of World War I which was followed by the Turkish War of Independence the few remains of Ottoman industry virtually disappeared. Although there was a slight revival after the wars, following the return of some master craftsmen, the extent of destruction, especially in terms of human life, had such an effect on Denizli that in the early years of the Turkish Republic economic progress was minimal (TC Denizli Valiligi, 1998). In 1927 there were 1581 enterprises in Denizli, 27 per cent of which were textile-related and 98 per cent of which had fewer than 10 workers (Mutluer, 1995). Family members, particularly females, participated in the production process while the male members concentrated on obtaining inputs and marketing the products, mostly via tradesmen (Erendil, 1998). A noteworthy event in the mid 1930s was the emergence of cooperatives in Denizli, which laid the foundation for industrialization by enabling individuals and firms to join forces to acquire cotton yarn at favourable terms, and thus reduce their dependence on yarn merchants (Mutluer, 1995; Karaalp and Batmaz, 1998). There was quite an increase in the number of small textile cooperatives in the 1940s, mainly because a state enterprise, the Sümerbank yarn Factory, was given the task of supplying cotton yarn to manufacturers via the cooperatives (Mutluer, 1995).3 In the 1960s the use of electricity became widespread, triggering the adoption of electrical looms. The modernization impetus was reinforced when Denizli was included amongst the provinces that were given priority status in terms of development in the early 1970s, which meant an increase in public investment.4 The Denizli Dyeing and Printing Factory was founded in 1974 and provided high-quality cotton yarn treatment, dyeing and printing services to producers. Another novel development was that the remittances sent by the Turkish workers in Germany fed the private capital accumulation in Denizli that had been initiated by the cooperatives.5 The 1970s also witnessed a rapid increase in subcontracting relations amongst the cluster firms (Erendil, 1998). An important upturn in the Denizli economy took place in the 1980s, when the textile industry engaged in a significant export drive, making good use of the liberal government policies of the period. Meanwhile importing the required machinery became much easier, further facilitating the transition from home/workshop production to larger, sometimes factory-based production (TC Denizli Valiligi, 1998). Following an initial learning period, a real increase in exports took place in the second half of the 1980s and throughout the 1990s. Bigger firms and sectoral foreign trade corporations were usually the first vehicles by which small and medium-sized enterprises in Denizli began to export.6 Denizli towels and bathrobes were in great demand in

88 Clusters and Competitive Advantage

international markets, which prompted firms to increase their production of these product categories. Other items such as bedclothes and babies’ clothing were also exported, but their share of total exports remained well below that of towels and bathrobes. An examination of the cluster firms’ date of establishment highlights the importance of the post-1980 period in Denizli’s development in that around 80 per cent of the enterprises were established from the mid-1980s onwards, more than half of these after 1990 (Temel et al., 2002). As Sengün (1998) argues, it was this process of internationalization that created the economically vibrant environment that exists in Denizli today. In summary, the revival of the ancient tradition of textile production began in the early 1970s, developed in the 1980s and expanded both nationally and internationally in the 1990s. This section closes with a summary of the current general economic structure of Denizli in order to put the towel and bathrobe cluster into that context. According to a survey by the State Planning Organization, there are around 6500 industrial establishments in Denizli, more than 90 per cent of which are small firms with up to nine workers. The total number of workers is almost 50000, 65 per cent of whom work for the larger firms (ibid.). Table 5.1 provides a breakdown of employment in Denizli by economic activity, in which the dominance of textile, apparel and related businesses is clear. Other sectors with a considerable presence are tourism-related activities, metal-working and machinery production, cutlery, leather footwear, earthenware products, products of marble and glass, food and beverages (especially flour, non-alcoholic beverages, roasted chickpeas, pasta, olives, wine, spices, milk and animal feed) and furniture. It should also be noted that the variety of industrial activities has increased in recent years (Sarica, 1997). In terms of export success, the textile/apparel sector is followed by the metal-working and food and beverage sectors, in that order. The leading item with regard to imports is machinery, followed by a range of textile-related products. Imports are mainly from Germany, Italy, Japan and Switzerland.

Sources of international competitive advantage Basic factors of production The principal items in the total cost of a typical textile product produced by the cluster firms are raw materials (especially cotton), labour and energy. Around 30 per cent of the major inputs are imported from abroad and another 30 per cent from nearby provinces. The remaining 40 per cent, are procured outside the regional economy (Temel et al., 2002).7 Although Turkey is amongst the world’s top ten producers of cotton and the best quality cotton in Turkey is grown in the Aegean region, where Denizli is located, Denizli has to import around 30 per cent of its cotton yarn requirement as cotton production falls short of the domestic demand. However the local availability of high-quality

89 Table 5.1

ISIC

Employment in Denizli, by economic activity1

Sector

1723 Manufacture of cordage, rope, twine and netting 1711 Preparation and spinning of textile fibres; weaving of textiles 1721 Manufacture of textile articles, except apparel 1531 Manufacture of grain mill products 1421 Mining of minerals for chemicals and fertilizers 2923 Manufacture of machinery for metallurgy 1429 Other mining and quarrying n.e.c. 1552 Wine production 1712 Finishing of textiles 1554 Manufacture of soft drinks; production of mineral water 3312 Manufacture of instruments for measuring, testing etc. 1911 Tanning and dressing of leather 3591 Manufacture of motorcycles 2926 Manufacture of machinery for textile and leather production 1729 Manufacture of other textiles n.e.c. 2925 Manufacture of machinery for food, beverages and tobacco 1320 Mining of non-ferrous metal ores 2411 Manufacture of basic chemicals, except fertilizers 2893 Manufacture of cutlery, hand tools and general hardware 3420 Manufacture of bodies for motor vehicles (coachwork) 1410 Quarrying of stone, sand and clay 9214 Dramatic arts, music and other arts activities 1820 Dressing and dyeing of fur; manufacture of fur articles 1920 Manufacture of footwear 7020 Real estate activities on a fee or contractual basis 2429 Manufacture of basic chemicals, except fertilizers etc. 4510 Site preparation 3692 Manufacture of musical instruments 6220 Non-scheduled air transport 2022 Manufacture of builders’ carpentry and joinery 3000 Manufacture of office, accounting and computing machinery 5040 Sale, maintenance and repair of motorcycles and related parts

Location quotient

Denizli’s share of national employment in the sectors (%)

28.3713 12.2743

39.08 16.91

7.6795 5.7509 5.5022 5.3998 4.9386 4.8805 4.8021 4.0696

10.58 7.92 7.58 7.44 6.80 6.72 6.61 5.61

3.4570

4.76

3.2278 2.9999 2.7944

4.45 4.13 3.85

2.5550 2.3785

3.52 3.28

2.2218 2.2044

3.06 3.04

2.1489

2.96

2.1143

2.91

2.1025 2.1006 2.0546

2.90 2.89 2.83

1.8616 1.8562 1.8278

2.56 2.56 2.52

1.7129 1.6883 1.6883 1.6286 1.5668

2.36 2.33 2.33 2.24 2.16

1.5423

2.12

90 Clusters and Competitive Advantage Table 5.1

ISIC

(Continued)

Sector

1543 Manufacture of cocoa, chocolate and sugar confectionery 7414 Business and management consultancy activities 1513 Processing and preserving of fruit and vegetables 6302 Storage and warehousing 2710 Manufacture of basic iron and steel 5020 Maintenance and repair of motor vehicles 2811 Manufacture of structural metal products 2519 Manufacture of other rubber products 5510 Hotels, camping sites etc. 9301 Washing and (dry-) cleaning of textile and fur products 1544 Manufacture of macaroni, noodles, couscous etc. 7412 Accounting, book-keeping, auditing activities etc. 9219 Other entertainment activities n.e.c. 2914 Manufacture of ovens, furnaces and furnace burners 2930 Manufacture of domestic appliances n.e.c. 2212 Publishing of newspapers, journals and periodicals 6021 Other scheduled passenger land transport 5149 Wholesale of other intermediate products, waste and scrap 7421 Architectural and engineering activities and consultancy 2921 Manufacture of agricultural and forestry machinery 4530 Building installation 7494 Photographic activities 2696 Cutting, shaping and finishing of stone 5260 Repair of personal and household goods 5231 Retail sale of pharmaceutical and medical goods etc. 5219 Other retail sale in non-specialist stores 8511 Hospital activities 9302 Hairdressing and other beauty treatments

Denizli’s share of Location national employment quotient in the sectors (%) 1.5257

2.10

1.5067 1.4822 1.4777 1.4416 1.4043 1.3337 1.3170 1.3097 1.3016

2.08 2.04 2.04 1.99 1.93 1.84 1.81 1.80 1.79

1.2440 1.2270 1.1843 1.1569

1.71 1.69 1.63 1.59

1.1388 1.1122 1.1082 1.1053

1.57 1.53 1.53 1.52

1.0906

1.50

1.0795

1.49

1.0750 1.0631 1.0378 1.0294 1.0285

1.48 1.46 1.43 1.42 1.42

1.0144 1.0123 1.0011

1.40 1.39 1.38

Notes: n.e.c. = not elsewhere classified. 1. Top 50 industries by share of national employment and industries with an LQ of more than one.

cotton was of great advantage to the cluster in the early years of its development, and more recently it has enabled the firms to build up a reputation for quality. A comparison of international labour costs in the textile industry reveals that the wage rate in Turkey, at about US$2 per hour, is much lower than in

The Towel and Bathrobe Cluster in Denizli 91

developed countries (for example about $17 in Italy and $22 in Germany) but higher than in some other developing countries. For instance in China, India, Pakistan and Indonesia the rate can be as low as $0.5–0.6 per hour (SPO, 2001). In Denizli it is not uncommon to employ uninsured home workers, who are willing to work long hours and demand relatively low wages, providing cost advantages for the smaller firms (Eraydin, 2002a). However the fact that there is a high demand for workers increases their bargaining power. One of our interviewees, a manager of one of the leading cluster firms, said that his boss had warned him about this issue on his first day in office: ‘ “Treat the workers well”, said my boss, when I first started to work here. The unemployment rate is very low in Denizli; if they quit, it won’t take much time for them to find a new job.’ The shortage of qualified personnel is another problem, specifically managers, engineers, designers and marketing specialists. The recent establishment of apprenticeship centres and an occupational high school in the organized industrial zone are positive developments in this regard. Our interviewees emphasized the importance of improving the quality of life in Denizli and promoting the positive aspects of the city in order to attract suitable personnel.8 ‘If we manage to attract qualified human resources’, one interviewee argued, ‘the life span of the cluster will be longer, which in turn will help to realize our dream: to make Denizli the capital of textiles.’ The use of earnings from previous commercial activities and family assets to finance the founding of an enterprise is very common. In a survey conducted by the State Planning Organization, more than 90 per cent of the enterprises in Denizli reported that the owners’ equity had been used to finance the initial investment, falling to around 80 per cent for subsequent investments (Temel et al., 2002). The main reason for the low utilization of bank credit was its high cost. The fact that the use of shortterm credit created severe problems in subsequent years when the Turkish economy was hit by a series of crises further increased the perceived risk of using bank credit (TBMM, 2001a). Financing is therefore a major problem for the cluster. In general the infrastructure in Denizli is poor with the exception of the industrial zones. In particular, manufacturers complain about the poor quality of the motorways that link Denizli to other provinces, the high cost of energy (the highest among OECD countries) and the severe shortages of energy (ibid.) The airport is far from the city centre and the number of flights is limited. Although there is a railway to the Izmir port, there is no station close to the industrial zone. In short, infrastructure-related problems pose a threat to the long-term development of the cluster. With regard to factors of production, then, Denizli enjoys advantages in terms of raw materials and labour costs vis-à-vis developed countries but not compared with some other developing countries. The principal disadvantages are the lack of qualified human resources, the cost and shortage of energy, the cost of capital and the poor infrastructure.

92 Clusters and Competitive Advantage

Pressures to upgrade: firms’ strategies As noted earlier, more than 90 per cent of the cluster firms are small enterprises with up to nine workers (Temel et al., 2002). These firms usually work as subcontractors for larger firms that are engaged in international trade, and increasingly for multinational enterprises (Akaydin and Ay, 1998). As a result, large firms with 200 or more employees account for more than 60 per cent of Denizli’s total textile exports (Erendil, 1998, pp. 209–10). The firms employing ten or more workers account for more than 90 per cent of value added (Temel et al., 2002). Family firms dominate the cluster. According to the manager of a leading towel firm who was preparing to transfer the management of the firm to the next generation of family members, there are many advantages to being a family firm: ‘There is a clear consensus on what we should focus on: quality and customer satisfaction. It makes us faster and dynamic. I am the ownermanager of the company and have 30 years’ experience in this sector. The firm and I are now ready to deliver the accumulated experience and created values to the second generation, to my sons.’ Another manager pointed out that family members are dedicated and emotionally tied to the business, which increases their motivation and productivity: ‘It is hard for professional managers to keep up with our pace of doing business here. Our tempo is such that we often work until very late, and sometimes for 24 hours.’ In a similar vein, another interviewee underlined the high demands made on professionals: ‘We all run here and expect professionals to run with us too.’ Others, however, were unsure about the advisability of family dominance of the management process. According to one interviewee, for example, family firms are managed rather unprofessionally, and as the firm grows this lack of professionalism creates significant managerial problems. The dominance of the family often means that the management structure is rather hierarchical and necessitates obedience to the older members of the family in general and the boss in particular. For the younger generation and non-family members, it is difficult to challenge the decisions taken by the older generation, who are also reluctant to delegate authority. Under these circumstances, ill-advised policies can easily become the norm. Although some firms have recognized the importance of good management, particularly in respect of marketing and strategy, and have taken steps to ‘professionalize the family’9 by encouraging second-generation members to take university courses in related subjects, this is still an exception. One reason for the slow pace of professionalization in general is simply that it is hard to find qualified professionals. Also, owner-managers might be reluctant to trust the judgement of professionals in respect of key issues that might affect the future of the enterprise, such as new investments. Partnerships are typically formed by members of the extended family, but such partnerships run the risk of breaking down when the members marry

The Towel and Bathrobe Cluster in Denizli 93

and start another family. Also, as family businesses grow in size and income, conflicts can emerge amongst family members, resulting in spin-off firms. Partnerships among friends and fellow townsmen are also common. The general tendency, however, is for such partners to establish their own businesses as soon as they feel financially confident and have built up a network of business contacts (Erendil, 1998). Spin-off firms can be in the same product area as the original firm or in a related area, depending on whether the separation has been friendly or hostile. A similar dynamic may pertain when a professional leaves the firm to establish his or her own business. A final form of new business formation is when a financially successful firm in an unrelated sector decides to expand into the textile business. All spin-off firms and new entrants are perceived as posing a threat to the existing firms in the cluster, since new firms tend to steal both workers and customers. The entrepreneurial abilities of the owner-managers of the family firms are one of the principal distinguishing features of the cluster. Indeed Denizli has a cultural heritage of supporting entrepreneurship, and the entrepreneurs of Denizli are proud that the city’s industrial development has been achieved without notable government support. However it has been argued that envy of the heavy public investment in the nearby provinces of Aydin and Isparta motivated the Denizli firms to develop their business (Eroglu, 1998). In particular the establishment of a textile factory in the nearby town of Nazilli, in line with the etatist policies followed during the 1930s, caused annoyance in Denizli as it was thought that Denizli’s long experience in the industry made it a better candidate for the factory. In retrospect, however, the managers interviewed were of the opinion that it had proved beneficial for Denizli as many of today’s entrepreneurs might have gone to work at the factory and never realized their potential (Sengün, 1998). An illustrative example of the numerous entrepreneurial initiatives taken by Denizli businessmen was the establishment of the city’s second industrial zone. After a proper analysis of the situation, some two hundred entrepreneurs decided that it would take too long to complete the project if they relied solely on the government. In fact the average time taken by the government to finish such projects was nine years. Therefore they decided to use their own means to build the zone, the first private venture of its kind in Turkey. The zone was completed within a year. It is noteworthy that, despite the lack of government involvement, great effort was still required to overcome bureaucratic obstacles. There are many other examples of the culture of self-sufficiency in Denizli. During the War of Independence, for instance, Denizli formed its own army and resisted occupation. Also, the first joint stock corporation in Turkey was established in Denizli. Moreover the people of Denizli built their own hospital, several high schools and even the governor’s residence. Finally, in 2002 the firms in the industrial zone established their own power generation plant to overcome the energy-related problems they faced.

94 Clusters and Competitive Advantage

Denizli businessmen are reputed to have a strong work ethic, are highly committed to their work, associate hard work with success and enjoy working hard (Uslu, 2000). A common joke in Denizli is that when three people from Denizli get together they talk about establishing a new business, whereas people from the neighbouring province of Aydin talk only about what to drink.10 Especially for the first generation of Denizli entrepreneurs, saving and not wasting a penny are important principles (Eroglu, 1998).11 According to one interviewee this had a negative impact on product quality for a while as owner-managers tended to postpone new investments. The following adjectives were repeatedly used by our interviewees to describe Denizli’s entrepreneurs: dedicated, hard-working, motivated, confident, practical, sharp, ambitious, honest, patient, bold and determined, but also envious and merciless. Accordingly they have an optimistic outlook, are willing to take risks, can ‘smell’ opportunities and are quick to find solutions to problems. One can also argue that personal envy, as defined by Schoeck (1966) and Klein (1975), might have a triggering effect on motivation and innovation in this cluster. More than 80 per cent of the cluster firms now use state-of-the-art technology (Temel et al., 2002). A recent sign of the importance attributed to technology was the setting up of a technopark project (Tekmer) in the Pamukkale University campus. Another initiative, the first of its kind in Turkey, is the on-line exchange of second-hand textile machinery, set up by the Denizli Chamber of Industry. These machines are usually sold to other Turkish regions with some presence in textile-related businesses. Although the machines are still in good working order, Denizli industrialists target the upper end of the market, which requires the best and latest technology, making the frequent replacement of machinery inevitable. Although the current level of R&D activities is rather low – less than 5 per cent of Denizli firms conduct R&D on a regular basis (ibid.) – there is growing interest in it,12 usually in relation to product quality and control, product variety, new production technologies from other firms (domestic and foreign) and new product design. An interesting example was provided by one of the interviewees, who stated that cluster firms had worked hard to develop a towel that was both soft and absorbent, and had invented a machine that fulfilled this need. Relevant publications and catalogues, domestic and international fairs, and trade and governmental institutions are the main means of keeping up with developments and innovations in the sector.13 The final and most striking innovation-related observation for the purposes of this study is that around 60 per cent of the cluster firms closely follow other firms in the cluster when trying to learn about and keep up with innovations in the sector (ibid.). (We shall return to this subject when discussing the reasons for geographic concentration.) The cluster firms keep a constant eye on quality standards (ibid.), and managers confidently claim that they are able to ‘produce high-quality

The Towel and Bathrobe Cluster in Denizli 95

products at competitive prices and sell them to difficult customers all around the world’ (TBMM, 2001a). The importance placed on quality means that firms prefer to maintain long-term relations with trusted subcontractors. The share of subcontracting firms in the cluster is about 70 per cent (Eraydin, 2002a, p. 146). Subcontracting provides flexibility and enables firms to accept orders beyond their capacity. It is mostly the later stages of the production process (such as clothing production, ironing and packaging) that are subcontracted. For small firms, almost 50 per cent of production is associated with subcontracting; the corresponding figure for large firms is about one fifth (Temel et al., 2002). There are also less formal arrangements among cluster firms; for instance it is not rare for accessories to be bought or borrowed from competitors if a firm should urgently need them. One of the firms in our study once lent workers for a couple of days to another firm with which it had close relations. On a later occasion it obtained the help of that firm in having its products ironed when its own ironing facilities broke down. Such informal, ad hoc cooperation is common among relatives, friends and fellow townsmen. Organized institutions for cooperation include the Aegean Garment Producers’ Association (EGS), which was established in 1993 by 464 businessmen, 60 per cent of whom were from Denizli (Eraydin, 2002a). The EGS developed rapidly and helped its member firms in the areas of procuring inputs, exporting the final products, training, financing, insurance and organizing fairs (Uysal, 1998). It has been especially successful at promoting members’ exports; in fact the EGS Foreign Trade Company became the leading export firm in Turkey in the late 1990s (ibid.). The previously mentioned examples of the construction of the second industrial zone and the establishment of Birlik Enerji should be repeated here to underline the extent of cluster firms’ cooperation if they are convinced that a project will benefit them all. Business associations are another example of organized mechanisms for cooperation, including sectoral organizations, the Denizli Chambers of Commerce and Industry, and industrialists’ and businessmen’s associations. The presence of so many informal and organized mechanisms for cooperation does not mean that competition amongst the cluster firms is not intense. In fact it is the rule for firms operating in the same area of business (Eroglu, 1998; Ilgeri, 1998). Our study found that cluster firms tend to conceal information on their products, markets and the companies with which they have relations. This applies even to close friends and family members who have separate establishments, and in fact is not surprising given that imitation is rapid in clusters. Nevertheless it is difficult to keep secrets, given the high rate of circulation of workers and other personnel, the use of common suppliers and the sharing of customers (Erendil, 1998). Another aspect of the issue is that if information on products, technologies and markets is a crucial asset for the cluster firms, it follows that employees and/or managers who are

96 Clusters and Competitive Advantage

equipped with such information are indispensable and indeed firms compete fiercely for them. The local environment is therefore characterized by competition that is balanced by cooperation and relationships based on mutual trust, the latter being especially important among firms operating in complementary areas (Eraydin, 2002a). Adopting a copycat strategy to try to match the success achieved by similar firms in the cluster is very common and reflects the general attitude in the Turkish business environment. As Eraydin (2002b) notes: ‘Turkish businessmen believe what they see.’ Nevertheless there is some recognition in the cluster of the difficulty of sustaining such a strategy, since successful imitation could push firms into price competition (TBMM, 2001a). Relatedly, it has been argued by Sözkesen (1998) that Denizli may soon lose its competitive advantage in towel and bathrobe production since costs are likely to increase. What is implicit in this view is, of course, an evaluation of the cluster firms’ competitive advantages which is argued to rely largely on cost advantages such as cheap labour. However, the cluster firms have perceived product quality (77 per cent) and labour cost advantages (56 per cent) as their key strengths, followed by production capacity (50 per cent). Their main disadvantages are government-related issues such as energy prices and regulations, plus financing and transportation costs (Temel et al., 2002, p. 101). In summary, with regard to firm strategy the conditions are largely favourable in Denizli, but in order to maximize their potential and competitive advantages the cluster firms need a better resource base, especially in respect of human resources.

Related and supporting industries Sectors related to the towel and bathrobe industry in Denizli are shown in Figure 5.1, together with associated institutions. Table 5.2 provides data on exports of towels, bathrobes and other textile products that are competitive in international markets. Paralleling the development of the towel and bathrobe sector, a demand for high-quality inputs, dyes, machinery, packaging and other services emerged in Denizli. Between 1965 and the late 1990s the number of factories producing dyes for the industry, for example, rose from zero to 20 (TC Denizli Valiligi, 1998). Local producers of textile machinery have achieved some successes (Eraydin, 2002a), a good example of which is a towel-making machine invented by one of the leading firms in the cluster. However these two sectors are at the development stage and are not competitive in international markets. Their full development will probably take some time – as one interviewee nicely put it: ‘It is not that easy to be the master of a business; there must be a history of it.’ Another interviewee argued that the best way for Turkey to develop its presence in these sectors would be via multinational enterprises since it was too late to start from the beginning. Currently, 80 per cent of the machinery used by the cluster firms

Services∗ (e.g. banks, transportation services)

Outerwear (men’s and women’s)

Nightshirts and pyjamas

Underwear (men’s and women’s)

Towels

Denizli tourism cluster

Bathrobes

Governmental institutions (e.g. KOSGEB, DETKIB)

Bedclothes

Woven and knitted cotton fabrics

Accessories∗

Textile machinery∗

Figure 5.1

Education, research and trade organizations (e.g. DSO, DTO, DTB, EGS, Pamukkale University)

Cotton yarn

Other textile products (e.g. babies’ clothes, socks)

Accessories∗

Dyes∗

Products made in the textile cluster in Denizli, plus related institutions

Source: Author’s estimations based on the cluster case study. Notes: * denote sectors/institutions that are currently developing in Denizli. The competitive ones are shaded.

97

98 Clusters and Competitive Advantage Table 5.2

Denizli exports of towels, bathrobes and closely-related items, 2002

Towels Bathrobes Bedclothes Women’s outerwear Cotton woven fabric Men’s outerwear Nightshirts and pyjamas Men’s underwear Cotton yarn Women’s underwear Cotton knitted fabrics Other

Export value (thousands of US $)

%

219009 190658 87958 41070 30989 20670 19544 9548 6601 2322 1383 61726

31.7 27.6 12.7 5.9 4.5 3.0 2.8 1.4 1.0 0.3 0.2 8.9

Source: Detkib (2003).

is imported (Temel et al., 2002). Some improvement is also needed in logistics, transportation and banking services. The latter will be discussed in the following section as it is directly related to the macroeconomic conditions prevailing in the country, and thus to the role of government. Amongst the non-textile industries that have a presence in Denizli, the tourism sector has played a key role in the success of the towel and bathrobe cluster. Pamukkale, which has been designated by UNESCO as a world heritage site, is a major attraction for the more than 1.5 million tourists who visit Denizli every year. The tourism sector has a multiplier effect on many other sectors, and it was argued by the interviewees that the large rise in tourism in the 1980s contributed positively to the development of the towel and bathrobe cluster in general and the process of internationalization in particular. Overall, it can be argued that most of the industries that are related to and support the towel and bathrobe industry are internationally competitive in the textile city of Denizli. The exceptions are the dye and machinery sectors, which are still developing. Support from institutions such as industryspecific research and education establishments is available although there is room for improvement, especially in respect of the quality of the services they provide. Finally, the contribution of the tourism sector is noteworthy in that it has facilitated the internationalization of demand.

The role of government As mentioned earlier, given the macroeconomic situation in Turkey, firms prefer – or rather are forced – to use their own resources for financing, which is limiting their growth prospects. Therefore one of the most pressing problems experienced by the cluster, financing, is in many ways related to

The Towel and Bathrobe Cluster in Denizli 99

the part played by the government. The only positive role assumed by the government in this regard is the provision of Eximbank credits. Although they are limited in amount and there are some concerns about the allocation procedure, Eximbank credits have benefited the cluster.14 However it is difficult to identify any other way in which the government has helped to ease the financial problems of the cluster firms, although there is no shortage of examples in the opposite direction. In February 2001, businessmen felt that the government had deceived and misguided them since the fixed exchange rate policy, which was supposed to continue for some time, was abolished that month, causing the worst financial turmoil in the history of the Turkish Republic. Many businesses paid a heavy price, and some had to close down their operations (TBMM, 2001a). Even worse, in the aftermath of the crisis there was a loss of mutual trust amongst the government, banks and industrialists, and this is proving difficult to rebuild. Moreover the fact that the actions of the government have been rather unpredictable has made it a real challenge for firms to conduct any serious strategic planning. It was frequently stressed by the interviewees that it is essential to achieve political and economic stability, which is perceived as one of the necessary conditions for sustained growth. There have, however, been a few positive government measures. Incentives provided during the 1970s, for example, triggered the development of the cluster, and in later years the establishment of the first industrial zone in Denizli contributed to the cluster’s growth. More importantly, the export-oriented development strategy followed by the government since the 1980s has been especially beneficial for the cluster (Küçüker, 1998) as firms have been able to make good use of the financial incentives and tax rebates provided in accordance with the related policies. The interviewees agreed that the incentive system introduced in the 1980s had worked perfectly in the case of Denizli.15 Finally, the establishment of the Denser free trade zone in 2000 served to boost exports. All this, however, does not change the fact that in the absence of a strategic master plan, the help provided by the government is sporadic and policies are rather arbitrary. Moreover bureaucratic obstacles cause setbacks. Of particular concern is the time taken by Ankara to respond to requests. As one interviewee put it, ‘the bureaucracy continues to crawl, while the industrialists are running’. Managers also complain about the improper implementation of regulations, corruption in the customs department and the unfair competition that results from the existence of the grey economy. The factor-related problems mentioned earlier, such as the high cost of financing and energy, are other problems that are largely seen as government-induced. Denizli businessmen are rather proud of their heritage of independence and expect little more from the government than the removal of obstacles: ‘All we need are inputs and energy at competitive prices and proper financing mechanisms. This will enable us to compete on the same terms

100 Clusters and Competitive Advantage

as our international rivals.’ ‘What we ask from the government is proper governance and economic stability. The rest we can handle ourselves.’ Indeed Denizli entrepreneurs typically establish their own businesses, generate employment, engage heavily in exports and pay their taxes (Göksu, 1998). As mentioned above, for example, they organized and completed the second industrial zone (known as the Özdemir Sabanci Organized Industrial Zone) within a year, whereas it had taken the government 13 years (from 1976 to 1989) to finish the first one (ibid.; Sarica, 1997). In fact the phrases, ‘growing without government help’ and ‘doing what the government would not do’ are frequently heard in Denizli.16 However this does not mean that government cooperation is unimportant. As one manager warned, ‘If the government continues to disregard our problems, it might be unrealistic to expect Denizli to raise new generations of entrepreneurs’ (TBMM, 2001a). Having recognized this, the Denizli Chamber of Industry set up an office in Ankara to hasten bureaucratic procedures, engage in lobbying activities and foster better communication with members of government circles.

Reasons for geographic concentration The landscape of the textile/apparel industry in Denizli The towns of Babadag, Buldan and Tavas have played a key role in the development of the Denizli cluster (Figure 5.2; see also Figure 3.3 for the location of the province). Babadag in particular is a historically important textile production centre. In the 1940s, textile producers started to migrate to Denizli from these towns to seek better lives, bringing their skills and crafts with them (Sengün, 1998). The first comers were from Babadag and were known for their industriousness and dedication to business. Located on the slopes of a mountain, Babadag had no arable land so the people of the town had to engage in non-agricultural activities. Given the age-old history of textile production in the region, the people focused on this sector and became either merchants or producers. During the early years of the republic, when there were no large textile factories in Turkey, Babadag assumed the important task of satisfying the domestic demand for a variety of textile items. A noteworthy event in Babadag during this period was the very first attempt in Turkey at quality assurance and standardization. Long before the national standards institution (TSE) was established, the Babadag Chamber of Commerce made it compulsory for its members to have the quality of their products approved by the chamber before they were sent to market. There was also a custom of master craftsmen signing their names on their products, which can be seen as an early version of branding. The items produced and traded were domestic products such as bedclothes and tablecloths.

The Towel and Bathrobe Cluster in Denizli 101

Çivril Bekilli

Güney Çal Baklan

Buldan Akköy DENIZLI Sarayköy

Bozkurt Çardak

Babadag Honaz Tavas Serinhisar Kale

Acipayam Beyagaç

Çameli

Figure 5.2

Towns in the province of Denizli

Electricity was brought to Babadag in 1932 by an entrepreneur, Mehmet Islak, who installed a small power generation plant that was later enlarged by another individual, Necip Mutcali. This private initiative provided electricity to the populace only at night; during the daytime the limited supply was used to power the new electrical looms. Despite this extraordinary effort

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there was too little electricity to meet the needs of the textile producers, and in the 1940s this, together with the fact that the mountain terrain allowed little space for those who wanted to expand their business, resulted in the leading textile producers and merchants of Babadag migrating to the central town of Denizli in search of better opportunities. Küçüker, the founder of one of the leading firms in the Denizli cluster, recounted that in 1948 his family was one of the very first families to emigrate from Babadag to Denizli, and that the main reason for this was the need for a continual supply of electricity. Although Babadag eventually secured a proper supply in 1964, this time provided by the government, Babadagians continued to migrate to Denizli to expand their operations.17 In the 1970s the first attempts to internationalize were again driven by entrepreneurs. One interviewee, an entrepreneur from Babadag, reported that in the 1970s he and a few friends went to Paris by car to seek business contacts there. When the government introduced liberal policies and export incentives in the 1980s the entrepreneurs were, as one interviewee put it, ‘well prepared’ and ‘full of can-do spirit’, so they made very good use of the incentives offered. The extent of their success and the contribution they have made to the development of the Denizli cluster is such that the label ‘born in Babadag’ guarantees a very good reputation in the cluster.18 One Denizli-born interviewee underlined the importance of this by stating that those managers who had not been born in Babadag (including himself) joked about applying to change their birth certificates so that they could reap the associated benefits. As in the case of Babadag, textile production has deep historical roots in Buldan. Historians report that textile items produced in Buldan during the Ottoman era were of high quality and demanded by the aristocracy. The cooperatives established in the 1940s played a key role in the development of the textile sector in Buldan by facilitating input supply and product marketing. Production increased further when second-hand electrical looms were purchased from Bursa and Sümerbank factories in the subsequent years. Currently there are 1112 electrical and 135 manual looms in the town, and the sound of weaving emanates from almost every house, just as in Babadag. Buldanians continue to produce hand-made textiles of unique quality, and use natural dyes prepared in accordance with secret recipes passed down the generations. Another textile town in Denizli province is Tavas, which is home to numerous tailors specializing in clothing for men and children. Although textile production has well established roots in Tavas, the presence of a disproportionally high number of tailors is associated with what can best be described as a historical accident (Krugman, 1991a). The origins of this phenomenon can be traced to a Greek tailor who moved to Tavas during World War II and taught the details of the craft to Tavasians, who were already skilled at textile-related activities. Nowadays the tailors mostly target

The Towel and Bathrobe Cluster in Denizli 103

the price-sensitive segment of the Turkish market. Textile workers in the Kizilcabölük district of Tavas specialize in the production of various items for the home, plus handkerchiefs and hand-made garments. The master craftsmen of Kizilcabölük excel in arty designs and work as subcontractors for larger Turkish firms that target the upper end of the clothing market (such as Beymen and Vakko).19 The towel and bathrobe cluster is predominantly concentrated in and around the provincial capital of Denizli. The city hosts merchants and numerous small clothing firms operating in workshops, business centres and even apartment buildings. Some of the larger enterprises are located in the Sümer district in the north of the city, others are situated next to the motorways connecting Denizli to Izmir and Ankara (Mutluer, 1995). In the late 1980s some of the larger firms moved to the industrial zone on the outskirts of the city. Now, 90 out of the 134 firms operating in the zone are in textile-related businesses (DTO, 2003). A final note on economic activity in Denizli concerns the main suppliers and customers of the cluster firms. Cotton processing factories mostly use cotton produced in the Denizli region. Yarn factories, on the other hand, use processed cotton not only from Denizli and its environs but also from Isparta, Adana, Antalya, Gaziantep, Mugla and Aydin. Cotton yarn is also purchased from the provinces of Gaziantep, Adana, Antalya, Urfa, Hatay, Bursa and Kahramanmaras, and from abroad, particularly from Pakistan, Sri Lanka and Sudan. The fabrics used to produce towels and bathrobes come mainly from Denizli but also from Bursa, Istanbul, Izmir and Adana. The principal customers of the cotton processing factories are the yarn factories in Denizli and, to a lesser extent, Izmir. The main customers of the cotton yarn and fabric factories are in Denizli, too, although they also sell their products in Istanbul, Usak, Isparta, Ankara, Bursa and Izmir (Mutluer, 1995). Finally, the towel and bathrobe manufacturers export the great majority of their products to the EU and the United States. In other words, the final products of the cluster are exported and the remaining cluster firms are mostly organized to serve the needs of the producers of the leading product category.

Why Denizli? Why towels and bathrobes? We turn now to the reasons for the concentration of towel and bathrobe production in Denizli. Why did this business concentrate in Denizli rather than anywhere else, and what brought about the specialization in towels and bathrobes rather than some other product category? The related topics of the perceived costs and benefits of clustering, and the self-reinforcing nature of clustering will be discussed separately in the subsequent sections. As discussed earlier in this chapter, historical circumstances played a key part in the eventual emergence of the cluster in Denizli. The roots of the cluster can be traced back to antiquity, when the region was host to major

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civilizations. This guaranteed an environment that was conducive to development and commercial exploitation of the high-quality local cotton. Although the region’s fortunes waxed and waned over the centuries, invaluable experience in the production of textiles was accumulated. In the later decades of the twentieth century, development of the cluster was aided by central government measures (especially public investment in the 1970s and the provision of incentives in the 1980s) and the support provided by local institutions such as the Chambers of Commerce and Industry, the small and Medium-Sized Industry Association (KOSGEB) the Aegean Garment Producers’ Association and Pammukkale University. The availability of capital accumulated through cooperatives and previous commercial activities, as well as remittances from Turkish guest workers in Germany who were keen to invest in their home town, was also beneficial to the growth of the cluster. Yet another factor was Denizli’s favourable sociocultural environment, with strong entrepreneurial skills going hand in hand with financial relationships based on mutual trust and fellow citizenship. One example of this was private borrowing against the so-called ‘Babadag Banknotes’, or promissory notes, which were always paid on the due date. This traditional practice, although not as prevalent as it once was, still takes place in Denizli (Sengün, 1998). Borrowing money from family members and friends (rather than banks), and borrowing and buying machinery from other firms owned by relatives or friends were also common (Erendil, 1998), and of crucial importance during the early years of an enterprise. Other types of support provided by the social network included knowledge and technology transfers (Eraydin, 2002a). The widespread use of subcontracting served to reinforce trust, especially with respect to vertical relations among cluster firms, as evidenced by the fact that firms still prefer to maintain long-term relations with trusted subcontractors. Thus in answer to the question ‘Why Denizli?’, it can be argued that favourable historical circumstances, the availability of high-quality raw materials, the presence of talented craftspeople, a local demand for their products, and experience and know-how accumulated over the centuries led to the burgeoning of commercial activities in textile-related areas, aided by public investment, guest workers’ remittances and state incentives. Without one final factor, however, the cluster might never have realized its potential: the entrepreneurial spirit of the people of Denizli. One of our interviewees pointed out that Denizli was not in fact an ideal location because, among other things, the quality of the water and the transportation services were poor, and therefore Izmir would have been a better location. However, given that the cluster emerged and developed in Denizli despite its locational disadvantages, it can be concluded that the factors identified above far outweighed the disadvantages. Besides, once the process of cluster formation begins, the dynamics of this process can turn the cluster into a self-reinforcing system. This will be discussed in a later section. Here it is sufficient to say

The Towel and Bathrobe Cluster in Denizli 105

that outside individuals, firms and institutions may be drawn into the locale after seeing the success of others and the benefits of concentration, thus feeding the reinforcement of the cluster. Turning now to the second question posed at the beginning of this section – what brought about the specialization in towels and bathrobes? – although textile production in the region (including towels) had deep historical roots, towel production became an important economic activity in Denizli only in the 1970s.20 This was mainly initiated by two events: the large-scale importation of looms used for towel production from Bursa in the 1950s, and the export success achieved by this product from the 1970s. One of the very first exporters of towels and bathrobes was a prominent entrepreneur from Babadag, A. Kadir Uslu, whose father was a merchant of cotton yarn. Uslu’s willingness to take risks was such that when he wanted to import looms to produce towels his father was reluctant to help him financially, saying that he was ‘a bit crazy’. Despite the lack of support from his relatives, he duly imported the looms and later went to Germany with a container load of towels. This venture was very successful, and he returned to Denizli with a significant number of orders, which motivated others to enter this area of activity. The story of this entrepreneur raises the question of whether the emergence of the towel and bathrobe cluster in Denizli was purely a chance event. I would argue against this contention. It was no accident that Denizli came to specialize in towels and bathrobes. Rather Denizli entrepreneurs deliberately concentrated on the manufacture of these products and their export, aided by the economic infrastructure of Denizli, the main dimensions of which were a long history of textile production and the availability of major inputs, semiskilled workers and related/supporting industries. In other words the local business environment was conducive to such a development, and its potential was realized by the entrepreneurs of the region. According to our interviewees, towels and bathrobes are amongst the easiest textile/clothing items to produce, which facilitated the entry of new comers and hence the enlargement of the cluster. Another factor was the international demand for these products. Arguably, local demand was an important factor only in the early stages of the cluster, although local customers are still demanding when it comes to the quality of textiles and clothing, for example people from Babadag can judge the quality of a product at first glance. However it is the cluster firms’ export orientation that is now putting pressure on the firms to upgrade. Research and development are sometimes internationally driven, too: ‘The impetus for new product development comes from international customers. A customer from the USA, for instance, asked whether we could produce towels made of synthetic materials, and this triggered R&D activity as well as new investments in this area. The same is true of quality- and design-related issues.’ Although international customers can be very demanding and ask for improvements in quality and

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service, the Denizli producers have faced the challenge and specifically targeted difficult, demanding customers in stable developed markets.

Perceived costs and benefits of clustering As mentioned previously, there are strong subcontracting relations among the cluster firms, enabling them to excel in their particular areas of specialization and to undertake work beyond the capacity of their firms. This ensures smooth and rapid production. With regard to intermediate tasks such as embroidery in particular, it is important for firms to have easy access to the required services and the degree of control afforded by geographic proximity. It is also important for the subcontractors to be competitive in their special areas of activity. As emphasized by one of our interviewees, ‘if they are good, you do not need to worry about this part of the production process; you instead focus on the critical issues of your business such as quality and the marketing of your products’. In a cluster environment, benefits accrue not only from vertical relations in the value chain but also from relations with related and supporting industries and competing firms. Apart from obvious advantages such as lower transportation costs, the presence of related and supporting industries also enables operations to run smoothly, just as in the case of subcontracting relations. According to one manager, ‘It is reassuring to know that there are firms nearby operating in complementary areas such as dyeing, machinery and packaging. I think this also encourages people to choose Denizli when they think about starting a new venture in this area.’ Hence it is not surprising that suppliers of high-quality inputs, dyes, packaging and so on emerged in Denizli in parallel with the development of the towel and bathrobe industry. With regard to the benefits associated with the presence of competing firms, the cluster firms closely monitor each other in order to keep up with new developments and innovations. An interesting related observation is that there is an unspoken agreement on maintaining price parity on the main products of the cluster, and if one firm substantially reduces the price of, say, its bathrobes, this will immediately be brought to the attention of the other producers in Denizli. In this regard the cluster environment acts as a control mechanism to prevent destructive price competition, since it is clear that all producers will lose if such competition breaks out. One negative aspect of the colocation of rival firms is the immediate copying of ideas. However the managers interviewed seemed to agree that although this can cause some concern in the short term, it does not matter in the long term as it prompts firms to strive to achieve what others cannot do, stimulating a mutually reinforcing process of upgrading and the pursuit of best practice. All this is easier and more rapid in a cluster context, and is facilitated by the existence of social networks and a sense fellow townsmanship that aid the flow of information.

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Thus information spillovers enhance the self-reinforcing process that feeds innovation in the cluster. As mentioned earlier, new information is obtained from various sources, including trade fairs, catalogues, subcontractors, customers and the Denizli Chambers of Commerce and Industry. Moreover members of industry associations meet regularly to discuss their problems and find remedies for them. Information on markets, strategies, customers and products are especially important – even more so than technological information, according to some of the interviewees. One interviewee mentioned that a few cluster firms prefer to register their exports not in Denizli but in Izmir or Antalya to avoid the leakage of information on key customers and products. In summary, the case of the towel and bathrobe cluster in Denizli shows that a number of benefits can be derived from clustering. Apart from being convenient for customers (see the next section), control over subcontractors is much easier in a cluster context, ensuring smooth and rapid production. Social relations and relations of trust among the major actors in the region also contribute in this respect, as well as promoting a better flow of information. Further benefits are obtained from related and supporting industries, and even competitors. The only problems with the proximity of competitors are the rapid imitation of key strategies and the possibility of a price war, although the latter is unlikely as all parties would incur high costs. Similarly the former, although annoying for innovative firms in the short term, can produce fruitful results in the long term if it encourages firms to develop more sustainable sources of competitive advantage.

The self-reinforcing nature of clustering Once a cluster is formed and successfully functioning, a positive feedback mechanism might come into operation, turning the cluster into a magnet that attracts other firms in the same or complementary lines of business. This happened to the Denizli towel and bathrobe cluster in the 1990s, when the city became well known in the world market. As towel production and export only began in earnest in the 1970s, cluster formation in this particular case took about 20 years. To illustrate the benefits of the self-reinforcing system that comes to operate in a well-functioning cluster such as the one in Denizli, consider the example given by one of our interviewees of a hypothetical entrepreneur in Nazilli (an Aegean town about 80 kilometres from Denizli), who wishes to establish a firm specializing in towel and bathrobe production. Nazilli also has a background in textiles and a similar, if not better, infrastructure and workforce than Denizli. Let us assume that this person has already imported the necessary machinery. He is likely to have problems right from the start of his endeavour; that is, setting up the right layout in the factory, for which he will probably need to employ a master craftsman from Denizli. Having sorted this out, the next step will be to buy cotton yarn. In order to do this

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at favourable terms he will have to go to Denizli, where the numerous merchants located in the city control this line of business. These merchants know all their Denizli customers very well, as well as their families. It will take some time for the entrepreneur to establish such a close relationship with the yarn merchants and gain their trust. Interpersonal relations are very important in securing a competitive price, good-quality products and timely delivery.21 Another problem for the entrepreneur is that textile machines break down frequently, again requiring him to go to Denizli to find someone to repair them. He will also have to go to Denizli if he has to subcontract some of his factory’s operations. Moreover he will have to arrange the transportation of all inputs and products to and from Denizli. Assuming that he manages to overcome these obstacles, the next question he will face is how to market his towels and bathrobes in Nazilli. As pointed out by the interviewees, the Denizli industrial zone also functions as a market, and customers visit many firms before finalizing their purchasing decisions. The geographic concentration of the firms makes it convenient for the customers to visit them rather than the other way round. In addition the related services are organized according to the needs of the cluster. For instance the personnel working in the banking sector in Denizli have detailed knowledge of the specific problems of the manufacturers operating there. In short, it will be virtually impossible for the hypothetical entrepreneur in Nazilli to keep up with the pace of business in Denizli and compete with its firms. In light of the above it is not surprising that none of the interviewees intended to leave his home town and change the location of his factory. Frequently heard statements in this regard were ‘We know how to do business here’, ‘We can follow the latest developments in our field here’, and ‘It is good to know that there are other enterprises in Denizli you can turn to if you need help and support’. These statements are in conformity with the finding of a survey by Mutluer (1995) that the locational advantages offered by Denizli were the principal reasons why 65 per cent of entrepreneurs decided to establish their enterprises there. A key factor in the growth of the cluster is new business formation, which usually takes place via spin-offs. The process works as follows. The growth of an enterprise provides its partners (who are usually relatives or fellow townsmen) with the financial means to found a business of their own, and well established contacts give them the confidence they need to engage in business operations by themselves. They are also familiar with the particular way of doing business in the locale, which is by no means guaranteed to be the same in another location. It should be noted that although spin-off firms tend to continue their contact with the original firm in the beginning, a delicate dynamic arises as the former may well become a competitor of the latter (Eraydin, 2002a).22 With regard to the relative importance of the factors that contribute to the self-reinforcing nature of the cluster, external economies appear to be

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the leading ones. Given that many other locales in Anatolia have a long history of textile production, as well as similar infrastructural and factor conditions, why did external economies in towel and bathrobe production emerge and turn into a self-reinforcing system in Denizli rather than somewhere else? There are a number of possible answers to this, some of which were outlined above when discussing the reasons for geographic concentration. If we consider one possible reason, entrepreneurship, the question then is, why are Denizli entrepreneurs better than entrepreneurs elsewhere? This, it can be argued, is due to the characteristics of the local business environment, competitive pressure in particular, which force people to sharpen their entrepreneurial skills, so the challenge now is to identify these characteristics. This can only be done by combining the analyses of all the case studies in this book, so the task will be left until Chapter 8. Before closing this section, it should be emphasized that a combination of factors – ranging from historical circumstances and factor conditions to the nature of competition and the sociocultural infrastructure – needs to be considered when trying to understand the underlying reasons for the emergence and subsequent development of this so-called ‘à la Porter’ cluster in full (Küçüker, 1998, p. 10). From a theoretical point of view, the towel and bathrobe cluster in Denizli resembles a number of geographic clusters in Italy in respect of the largely spontaneous nature of its development, its specialization and its strong export orientation. An entrepreneurial outlook and the rapid pace of new business formation, especially via spin-offs, are other noteworthy commonalities. The exact nature of the link between the self-reinforcing dynamic attained by the cluster over the years and the sustainability of its competitiveness is of special interest when attempting to understand the relation between clustering and competitiveness more generally, and it is to this that we turn to in the final section of this chapter.

Concluding remarks and future prospects The analysis in this chapter has highlighted the important part played by historical circumstances, favourable factor conditions, related and supporting industries and a favourable context for firm strategy in the success of the Denizli cluster. Specifically, the low cost of labour, relatively cheap but high-quality raw materials (especially cotton), government incentives, the entrepreneurial ability of Denizli businessmen and a clear focus on quality have been instrumental in this success. Although some deficiencies remain, such as the lack of qualified personnel and capital and the need for infrastructural improvement, Denizli has been one of the world’s leading centres of towel and bathrobe production since the early 1990s. Its contribution to the Turkish economy is also noteworthy. For instance each year around 10 textile firms from Denizli are listed amongst the top 500 Turkish firms, ranked according to their sales revenues by the Istanbul Chamber of

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Commerce. In fact Denizli has been chosen as a model of local industrial growth by the State Planning Organization (TBMM, 2001a). The success of the Denizli firms has attracted further investment to the area, including banking facilities. As a result the cluster firms, which previously mainly relied on their own financial resources (and were proud of doing so), have gained access to external means of financing. This, however, caused severe financial – especially liquidity – problems for the firms in 2001, when the Turkish economy in general and banking sector in particular was hit by a major crisis (ibid.). There was perhaps no better test of the resilience of the cluster than a crisis of this scale, a ‘test’ that it managed to survive. In fact the February 2001 crisis came on top of a series of crises that hit the Turkish economy in the 1990s and badly affected many industries across the country. Specifically, in the early 1990s the Gulf crisis had a negative effect on profit margins. Then in 1994 the Turkish financial crisis had a particular impact on output, employment and domestic sales, and resulted in an increase in the cost of financing (Temel et al., 2002). This was followed by the Asian and Russian crises of the late 1990s. In response to all these crises the cluster firms developed the ‘Free Trade Zone’ and ‘Transformation 2000’ projects. The purpose of the former was to provide tax advantages to firms, and the second was aimed at improving their level of technology (Eraydin, 2002a). According to our interviewees, compared with many other regions of Turkey, Denizli was less damaged by the crises, mainly because the cluster was highly export-oriented and its exports were directed towards stable, developed market economies. Apparently they learnt the art of crisis management very well, which was a must under the circumstances. One of the interviewees stated that he had been working as a manager for seven years and could not remember a single year going by without a serious national economic crisis. Any discussion of the present situation of and future prospects for the cluster must include the strategies followed by the firms. There is an understanding amongst the firms that any strategy based on cost advantages such as cheap labour and low-cost inputs is not sustainable in the long term. According to the interviewees, the advantages of low-cost labour and good-quality but cheap raw materials were enough to secure a satisfactory export performance for the cluster firms until the end of the 1980s. Thereafter, however, new competitors emerged, especially in Pakistan, India and China, which prompted the Denizli firms to put more emphasis on quality as the price-sensitive segments were gradually lost to them. A major factor in the realization of this shift was the significant amount of capital that had been accumulated in the 1980s, when mostly standard products had been produced. This capital was used to finance new investments, especially in technology, thus enabling the cluster firms to improve the quality of their products. As touched on earlier, demanding international customers also played a key role in this respect, as evidenced by the following statement by

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an interviewee: ‘We have come to the point where we cannot compromise with quality. This we have learnt from our international customers. . .We do not run away from their tough requirements and stringent standards. When a customer demanded fireproof baby clothing made from terry fabrics, for instance, we worked on it and brought it about.’ The interviewees argued that they had improved the quality of their products to such an extent that producers in other regions of Turkey were finding it difficult to keep pace. They had also done much to improve service quality. The cluster firms are aware that their future prospects will not be bright unless they find more sustainable sources of competitive advantage. To this end they have not only improved their product quality but also increased their product range. In strategic terms there are two possible courses that the firms can take: develop a brand of their own, or become producers for global brands. The former is the subject of considerable debate amongst the cluster participants. Some of the interviewees were of the opinion that developing a brand was a must, while others considered it to be an unnecessary and unrealistic target. One of the managers in favour of developing a brand offered the following illustration of his point: ‘We sell a bathrobe to the USA for $30, and it ends up in a luxury store in New York where it is sold for $120.’ To capture some of the $90 margin, he argued, it was essential to build up a brand name. In fact some leading cluster firms have already made progress with this. There are, however, problems with marketing and developing professional strategies, which are in turn related to the limited availability of qualified personnel and finance: ‘Building a brand is expensive, requires time and finance. Most importantly, however, it requires an aesthetic, an ability to develop a style, a cultural base, and an ability and willingness to follow developments in the world.’ The major challenge, in other words, is to overcome the limitations imposed by the current resource base of many firms, especially with regard to qualified personnel. A related concern is the risk involved in building a brand, and to date only a few firms have been successful in this endeavour. One of our interviewees argued that this was a matter of specialization: ‘We tried to develop a brand and we went bankrupt. As Calvin Klein said, retailers should not attempt to be producers, and vice versa.’ In fact, because the sector is dominated by a large number of small firms it is unrealistic to expect that all firms will be able to develop widely known brands. According to one interviewee, it will take some time but it can be expected that about five or six strong brands will be established, and that will be enough to promote the image of Denizli in the world market.23 Another interviewee suggested that instead of individual firms developing brands of their own, it might be a better idea to promote the name of Denizli in the world market. The latter course and attempts by individual firms to build a brand of their own are not mutually exclusive, unless what is implied is the development of a single brand for the entire network of firms.24

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It is often claimed in the literature that clusters in developing countries are locked into serving as low-cost subcontractors to firms in developed economies, which is not always desirable. Moreover it is difficult for developing-country subcontracting firms to sustain their relative positions in the world market since they can easily be displaced by others offering even lower prices. The need to develop more sustainable sources of competitive advantage is also imposed by the changing circumstances in the business environment. Only if this is achieved can a subcontractor be an indispensable associate of a global firm. The following statement by an interviewee is informative in this respect: ‘If it turns into a relation based on mutual dependence, subcontracting is probably sustainable’, but this is only possible if subcontractors continuously improve their service and become irreplaceable. ‘We should avoid doing too simple things’, he continued, ‘we shall only have a chance in the future if we can produce textile items that low-price competitors cannot.’ Yet another issue that should be considered is that there is concern about the high degree of specialization in the Denizli economy,25 that is, it is dependent on the textile industry in general and the towel and bathrobe cluster in particular. Some organizations consider that the dominance of the towel and bathrobe cluster constitutes a serious constraint on the local economy and warn that the lack of variety is risky and might create problems in the long term (DTO, 2003; IAV, 1997). One suggestion is to encourage investment in the other sectors in which Denizli has a strong potential: food and beverages, iron and steel, marble and tourism. If a crisis should affect the cluster it would be reassuring to know that there were other areas to turn to, but our analysis shows that the benefits of clustering are significant. One should also be careful about sweeping generalizations such as the argument that the sector should be abolished since it is old-fashioned and mature and therefore has no future. This argument is raised for the textiles/ apparel sector more generally, which is one of the leading sectors in the Turkish economy. Italy offers an illustrative example of a country that has achieved a considerable degree of development as well as retaining an impetus for further growth despite its specialization in ‘old fashioned’ or ‘mature’ industries. It is how these industries compete – that is, their strategy – that really matters (Porter, 1990). Some researchers (for example Erendil, 1998) suggest that a likely consequence of the recent tendencies observed in Denizli could be a gradual loss of economies of agglomeration since, with the sector becoming more differentiated and segmented, interfirm relations will change and the necessity of collective action and collaboration will diminish. This reflects an incomplete evaluation of the reasons for geographic concentration: firms do not only agglomerate in order to cooperate. Rather there are gains to be had from being located close to competitors and sharing the same business environment, even if competing firms are unable and/or unwilling to cooperate when

The Towel and Bathrobe Cluster in Denizli 113

organizing production. Besides the available evidence suggests that the colocation of rivals might lead to differentiation but will not inevitably result in the dissolution of clusters (Baum and Haveman, 1997). In summary, circumstances are changing and it remains to be seen how the towel and bathrobe cluster in Denizli will react to recent challenges. Denizli has now reached the stage that can be observed in many other clusters in the world: having confronted the consequences of its initial attempts to integrate itself into foreign markets, it now faces the challenge of overcoming the negative factors associated with less developed countries and integrating itself into international markets by means of higher value-added products (Eraydin, 1997). Although Denizli has been described as a typical example of Porter-style clustering (Küçüker, 1998), it will have to find more sustainable sources of competitive advantage if it is to become a fully functioning, archetypal Porter cluster. This will be of determining importance in defining its relations with global producers as a local production centre. Transformation is necessary, but it will not happen automatically. Rather it will depend on firms’ willingness to change, the availability of qualified human resources and local (private and public) institutions; that is, following the right strategies in a business environment that is conducive to improvement. The analysis provided in this chapter has shown that there are reasons to be optimistic.

6 The Carpet Cluster in Gaziantep

For many centuries Turkey has been one of the world’s top exporters of carpets. It is competitive in all sections of the industry, although its position is especially strong in hand-woven wool carpets and machine-woven carpets. The main competitors in the hand-woven sector are Iran, India, Pakistan and China, while Belgium, the United States, the Netherlands, Germany and Italy are the leading competitors in the machine-woven sector. The monetary value of indirect exports of hand-woven carpets alone – that is, those sold to tourists visiting Turkey – amounts to more than $1 billion a year SPO (2001). As can be seen in Table 6.1, Gaziantep holds by far the largest share of employment in the Turkish carpet industry. It specializes in the production of machine-woven carpets and accounts for about 70 per cent of the country’s total production of items in this category (IGEME, 2002b). The leading export market is Saudi Arabia, followed by a number of EU countries (especially Germany, Britain, Greece and Italy), the United States, Russia, the CIS (especially Kazakhstan, Uzbekistan and Azerbaijan), and Eastern and Central Europe (mainly Romania) (SPO, 2001; ITC, 2002).1 Because of Gaziantep’s proximity to and historical ties with Middle Eastern countries there is considerable cross-border trade with that region. Carpets produced in Gaziantep are also sold to small foreign traders in Istanbul and Trabzon. The fact that Gaziantep is not amongst the traditional carpet-weaving centres of Turkey (Figure 6.1) adds another dimension to this already interesting case, that is, why did the machine-woven carpet cluster develop in Gaziantep rather than somewhere else in Anatolia, given the considerable number of long-established centres? This issue is a key subject of this chapter. Another concern of the chapter is to identify and analyse the cluster’s main sources of competitive advantage, as well as its evolution over time. This analysis will enable us to discuss the future prospects of the cluster in respect of the sustainability of these advantages, which will in turn further our attempt to understand the link between clustering and competitiveness more generally. 114

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Table 6.1 Employment in the Turkish carpet industry (ISIC 1722) Share of national employment in the sector (%)

Province Gaziantep Manisa Kayseri Usak Istanbul Afyon Isparta Adiyaman Konya Kocaeli Burdur Batman Bitlis C4EMP C8EMP

44.96 8.56 6.86 6.10 5.27 4.07 3.66 3.46 3.03 2.51 1.46 0.54 0.24 66.482 82.942

Location quotient1 20.1662 3.9834 5.1696 12.4834 0.2153 6.2326 7.2111 9.8507 1.2563 1.5281 4.7572 1.8940 1.0994

Notes: 1. Top ten provinces in terms of share of national employment and provinces with an LQ of more than one. 2. Concentration ratios for the first four and eight provinces, respectively.

Kastamonu Hereke Bursa Sivas Bergama Demirci Gördes Usak Izmir Kula Burdur

Kirsehir Aksehir Konya

Harput

Kayseri Aksaray

Isparta

Sanliurfa

Figure 6.1 Traditional Anatolian carpet-weaving centres Source: Adapted from Quataert (1999).

In order to put the analysis of the carpet cluster in Gaziantep into context, the next section presents a brief history of Turkish carpets, summarizes the origins and subsequent development of the cluster in Gaziantep, and provides an overview of the city’s economic structure.

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Origins and historical development A brief history of Turkish carpets The very first Turkish carpets were probably woven by Asian Turks some 2000 years ago. In Anatolia, carpet weaving dates back at least to the eleventh century and is believed to have been introduced by the Seljuks.2 The available evidence indicates that the central Anatolian towns of Kirsehir, Konya, Aksaray, Kayseri and Sivas, and the western Anatolian towns of Usak, Kula, Gördes, Izmir, Bergama, Demirci and Isparta were the first to become centres of carpet weaving. Art historians ‘point to “Turkey” carpets in the paintings of fourteenth century European artists as proof that these carpets were known, used and admired in the West not long after their development in Anatolia’ (Quataert, 1986, p. 474).3 In England, all Oriental carpets were called ‘Turkey carpets’ in this period, and ‘the first knotted carpets to be made in Western Europe, in Spain in the fifteenth century and in the late sixteenth century in England, were woven in patterns copied from Turkish carpets’ (Con, 1966, pp. 50–1). The sixteenth and seventeenth centuries were the golden times for Oriental carpets, most of which were exported to Europe from Turkey. During that time carpets were produced in Anatolia by villagers – both for their own use and for commercial purposes – and by paid workers in small workshops. There were larger workshops in cities, as well as those which produced ‘Ottoman carpets’ for the royal palaces (Erdmann, 1964). Istanbul was then the major trading centre for not only Turkish but also Persian and Afghan carpets, followed by Izmir4 and Cairo. This was destined to change in the nineteenth century, when trading in Oriental carpets shifted to Europe – London and Hamburg in particular (Ayata, 1987). In these centuries, carpets were accorded prime importance when decorating the house. Turkish carpets were regarded as ‘collectable’ and ‘luxurious’ items (Williams, 1967), and for a time fashion dictated that homes should have a Turkish corner, decorated with rugs in the approved Oriental manner. In Europe, most Oriental rugs were purchased by the upper classes until the middle of the nineteenth century, after which the growing middle classes, with their enhanced purchasing power, began to buy them too (Quataert, 1986).5 Britain’s high share of Ottoman carpet exports is partly explained by the fact that English firms and merchants were actively engaged in the organization of carpet manufacture and trade in Anatolia in the nineteenth century. These companies provided carpet weavers with yarn and patterns and exported the rugs on their behalf. Later, in 1908, six of the largest English firms operating in Anatolia merged to form the Izmir-based Oriental Carpet Manufacturers Ltd, which, in a short period of time pushed most of its competitors out of the market.6 By 1913 the company controlled three quarters of rug production in Anatolia (ibid.). However its operations were severely curtailed by World War I, the aftermath of which brought about the events that eventually led

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to the Turkish War of Independence and the further weakening of the position of the company. Unsurprisingly, the company withdrew from the Turkish market in the early years of the Republic. A noteworthy development in 1933 was the establishment of a stateowned enterprise, Sümerbank, one of whose main areas of activity was textiles in general and carpet production in particular. Rug weaving was spread among different subenterprises, which changed names and affiliations over the course of time. Rug weaving was organized regionally to cover the regions of Isparta (including Sandikli, Kula, Konya, Denizli, Tasköprü and Kütahya), Hereke (Yozgat, Niksar and Çanakkale), Diyarbakir (Erzurum, Van, Kars, Bingöl and Siirt) and Bünyan (Sivas, Kayseri, Kahramanmaras, Ordu and Malatya) (Küçükerman, 1987). During the 1950s, carpet weaving in Anatolia was still predominantly conducted in private homes. Specifically, in 1958 home production amounted to 1 449517 square metres, whereas the corresponding figures for workshop and factory production were 17 275 and 22 137 square metres respectively (Türkiye Ticaret Odalari, Sanayi Odalari ve Ticaret Borsalari Birligi, 1959). Between 1955 and 1975, hand-woven carpet production quadrupled to about four million square metres (Ayata, 1987). The fact that both state-owned and private enterprises had started to invest in yarn preparation facilities contributed to this increase, together with a boom in domestic demand triggered by urbanization and rising income levels. The same factors also led to an increase in the demand for machine-woven carpets, the level of production reaching 5413791 square metres in the early 1980s (Genç, 1983). The export-led development policies followed by Turkey by the early 1980s coincided with political problems in Iran and Afghanistan, which affected Turkey’s main competitors in carpet manufacturing and resulted in a substantial increase in Turkish exports of hand-woven carpets. There was also a considerable rise in exports of machine-woven carpets, which is attributed to the emergence of Gaziantep as a major centre of carpet weaving. The following analysis of the city’s economic history reveals some of the key factors that laid the foundations for this development.

Background to carpet weaving in Gaziantep Gaziantep (formerly Ayintab and then Antep) is said to be one of the oldest cities in the world, with about 5600 years of history (Göyünç, 1999). It is located at the crossing of the roads that link northern Anatolia with the south and Europe with the Middle East and Asia. The city was an important stopping point on the silk road, which guaranteed a vibrant commercial life (Alpargu, 1999). One of the first economic activities to develop in Antep was miscellaneous repair work for the passing caravans (Özsabuncuoglu et al., 1999). In the fifteenth century agriculture, animal husbandry, textiles and leather production were the key economic activities in the city (Çelik, 1999; Göyünç, 1999). Ottoman rule came to Antep in 1516 (Çelik, 1999) and the city was

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administratively classified as lying within the provincial boundaries of Aleppo. During the Ottoman era the city’s economy enjoyed further growth and textile production became of prime importance. Antep resisted French occupation in the aftermath of World War I, and the legendary success of the resistance movement caused the newly established Turkish Parliament to rename the city ‘Gaziantep’ in 1921 – the prefix Gazi means war veteran in Turkish. With the redrawing of the borders after the war, Gaziantep was no longer under the administration of Aleppo. At first this negatively affected its economy, but in a short period of time some commercial activities shifted from Aleppo to Gaziantep, enhancing the latter’s importance as a regional commercial centre (Özsagir, 1999). In the early years of the Republican period there were several attempts to boost the Gaziantep economy. In the mid 1930s (the etatist period), for instance, 36 local establishments made use of the provisions in the Law for the Encouragement of Industry, six of which were establishments in textile-related businesses (Gaziantep Halkevi Brosürü, 1935, p. 287). During these years the leading economic activities in Gaziantep were textiles and clothing (including garments, hats, yarn, towels, kilims, tablecloths and bedclothes), soap, leather, footwear, kitchenware (especially of copper), machinery production and maintenance, and comestibles such as pistachios, grape molasses, olive oil and baklava (layers of pastry with nuts). Gaziantepians kept a keen eye on the quality of the items they produced, and local craft associations regulated the production process and set standards for the final products, especially in the case of grape molasses, pistachios and kilims. These standards were closely observed by producers, resulting in higher quality and greater hygiene in the case of food and beverages. The local kilims were mostly sold in the Turkish market, especially in the Eastern Anatolian and Black Sea regions and in big cities such as Istanbul and Izmir. Items of wool and leather were the city’s, main exports, plus pistachios, tobacco and raisins (ibid., p. 290). In the 1950s Gaziantep made good use of the incentives provided under Marshall Aid to encourage the mechanization of agriculture (Eraydin, 2002b). The incentives also enabled further development of a historically important area of activity in Gaziantep: the manufacture and maintenance of miscellaneous machinery and transportation equipment. Another significant upturn in the economy took place in 1968, when Gaziantep was included amongst those provinces which were given special priority in the government’s regional development plan. In this period the Small Industry Development Centre (KÜSGEM) was established under a UN initiative. The centre was among the first of its kind in the developing world, and its location in Gaziantep was the result of a study by intergovernmental organizations that revealed the promising industrial potential of the city (Özsagir, 1999). The 1980s brought further development to the Gaziantep economy in the form of an export drive under the South-East Anatolian Project, which was one of the most comprehensive development projects in the world. The project

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particularly benefited agriculture, so any benefits that accrued to other sectors were indirect. With regard to the development of the carpet cluster, although kilims were produced in Gaziantep during the Ottoman and the early Republican periods the scale of production remained limited. In the 1950s only two factories were producing machine-woven carpets in Turkey, one of which was located in Izmir and the other in Demirci. However two of the 24 private firms producing yarn were situated in Gaziantep.7 The specific conditions that led to the emergence of the cluster and shaped its development will be analysed later in this chapter. Here it is sufficient to say that the Gaziantep machine-woven carpet industry emerged in the 1970s and production reached a significant level at the end of that decade. The sector’s prosperity grew as a result of an export drive in the 1980s, and in the 1990s the upgrading of technology led to improved quality. Regarding the general economic structure of Gaziantep, according to an SPO survey there are 6428 industrial establishments in the city, 6103 of which employ one to nine workers and 325 (two public and 323 private) employ 10 or more workers. Interestingly, 73 per cent of these firms were established after 1980. The total number of workers employed in these establishments is around 40 000, 53.62 per cent of whom work for the larger firms. This figure is even higher in the textile sector (70 per cent), where the larger firms also account for 60 per cent of value-added (Temel et al., 2002). Table 6.2 provides a breakdown of employment in Gaziantep by economic activity. As can be seen, the manufacture of carpets and rugs ranks highest in terms of both location quotient and share of national employment in the sector. However the structure of the Gaziantep economy is very diverse and the economy is not highly dependent on a single cluster, unlike in Denizli. Direct annual exports from Gaziantep amount to about $600 million. However it is estimated that this figure would rise to almost $1.5 billion if indirect exports via cross-border and other forms of informal trade were taken into account. The contribution made by textile/apparel-related businesses to Gaziantep’s exports is significant, amounting to 60 per cent of the total. The leading products in this category are synthetic yarn, cotton yarn, carpets and knitted garments. The top ten export markets are Syria, Italy, the United States, Saudi Arabia, the United Kingdom, Romania, Germany, France, Greece and Israel (TBMM, 2001b).

Sources of international competitive advantage Basic factors of production The materials required for carpet production, such as yarn and dyes, account for about 65 per cent of the total cost, and labour for around 17 per cent (SPO, 2001). Apart from jute yarn, all inputs imported, mainly from India and

120 Table 6.2 Employment in Gaziantep, by economic activity1

ISIC

Sector

1722 2310 2424

Manufacture of carpets and rugs Manufacture of coke oven products Manufacture of soap and detergents, cleaning preparations, etc. Manufacture of starch and starch products Manufacture of cordage, rope, twine and netting Manufacture of other food products n.e.c. (not elsewhere classified) Manufacture of grain mill products Research on and experimental development of NSE (Natural Sciences and Engineering) Manufacture of cocoa, chocolate and sugar confectionery Wholesale of agricultural raw materials and live animals Other non-store retail sale Manufacture of rubber tyres and tubes Manufacture of footwear Manufacture of musical instruments Manufacture of other fabricated metal products n.e.c. Manufacture of bakery products Manufacture of articles of concrete, cement and plaster Manufacture of knitted and crocheted fabrics and articles Manufacture of vegetable and animal oils and fats Manufacture of macaroni, noodles, couscous etc. Manufacture of accumulators, primary cells and batteries Preparation of textile fibres; weaving of textiles Wholesale on a fee or contractual basis Sale, maintenance and repair of motorcycles and parts Manufacture of machinery for food, beverages and tobacco Manufacture of plastic products Wholesale of other household goods

1532 1723 1549 1531 7310

1543 5121 5259 2511 1920 3692 2899 1541 2695 1730 1514 1544 3140 1711 5110 5040 2925 2520 5139

Location quotient

Share of national employment in the sectors (%)

20.1662 11.2128 6.1161

44.96 25.00 13.64

5.4365 4.6398

12.12 10.34

4.5655

10.18

3.7193 3.7170

8.29 8.29

3.1021

6.92

3.000

6.69

2.9901 2.887 2.8511 2.7815 2.7194

6.67 6.44 6.36 6.20 6.06

2.5569 2.5119

5.70 5.60

2.4562

5.48

2.3852

5.32

2.3466

5.23

2.2483

5.01

2.1873

4.88

2.1369 2.0138

4.76 4.49

1.9704

4.39

1.8184 1.7499

4.05 3.90

121 2022 3599 2812 1533 9212 2429 1513 3420 2219 2101 2710 2029 2926 2720 6303 2023 2893 8520 1721 4100 7250 2914 5232 5240 5211 1912 5260 9302 2930 2212 2109 2811

Manufacture of builders’ carpentry and joinery Manufacture of other transport equipment n.e.c. Manufacture of metal tanks, reservoirs and containers Manufacture of prepared animal feeds Motion picture projection Manufacture of other chemical products n.e.c. Processing of fruit and vegetables Manufacture of bodies (coachwork) for motor vehicles Other publishing Manufacture of pulp, paper and paperboard Manufacture of basic iron and steel Manufacture of other wooden products etc. Manufacture of machinery for textile and leather production Manufacture of basic precious and non-ferrous metals Other supporting transport activities Manufacture of wooden containers Manufacture of cutlery, hand tools and general hardware Veterinary activities Manufacture of made-up textile articles, except apparel Collection, purification and distribution of water Maintenance and repair of office and computing machinery Manufacture of ovens, furnaces and furnace burners Retail sale of textiles, clothing, footwear and leather goods Retail sale of second-hand goods Retail sale in non-specialized stores Manufacture of luggage, handbags etc. Repair of personal and household goods Hairdressing and other beauty treatments Manufacture of domestic appliances n.e.c. Publishing of newspapers, journals and periodicals Manufacture of other articles of paper and paperboard Manufacture of structural metal products

1.7443

3.89

1.7250

3.85

1.6726

3.73

1.6449 1.6404 1.6233

3.67 3.66 3.62

1.5873 1.5675

3.54 3.49

1.5147 1.4687 1.4490 1.4334 1.4027

3.38 3.27 3.23 3.20 3.13

1.4016

3.13

1.3979 1.3924 1.3800

3.12 3.10 3.08

1.3495 1.3303

3.01 2.97

1.2680

2.83

1.2558

2.80

1.2508

2.79

1.2379

2.76

1.2338 1.2315 1.2231 1.2104 1.1924 1.1923

2.75 2.75 2.73 2.70 2.66 2.66

1.1399

2.54

1.0772

2.40

1.0724

2.39

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Clusters and Competitive Advantage

Table 6.2 (Continued)

ISIC

Sector

2694 5020

Manufacture of cement, lime and plaster Maintenance and repair of motor vehicles Other service activities n.e.c. Wholesale of textiles, clothing and footwear Other business activities n.e.c. Manufacture of paints, varnishes and similar coatings

9309 5131 7499 2422

Location quotient

Share of national employment in the sectors (%)

1.0711 1.0431

2.39 2.33

1.0328 1.0323 1.0319 1.0292

2.30 2.30 2.30 2.29

Note: 1. Top 50 industries by share of national employment and industries with an LQ of more than one.

Bangladesh, are readily available in Gaziantep. The regional economy8 holds a special position in input procurement, and the cluster firms procure most of their inputs in Gaziantep itself (Temel et al., 2002). Gaziantep enjoys labour cost advantages over other regions with a presence in the carpet sector. Although wages have risen in recent years, migration from nearby provinces and the high rate of unemployment in the region have kept wages low in relative terms (Eraydin, 2002a). This cost advantage proved helpful in the early stages of internationalization (the early 1980s). In fact, compared with competitors in developed countries there was a threefold advantage in this regard, although the cost of inputs was more or less the same (SPO, 1982). Gaziantep University offers textile-related courses, but there is no specific focus on carpets. Despite this and the lack of industry-specific research and education institutions, there is no shortage of skilled labour, thanks to intensive on-the-job-training (ibid.) and apprenticeships. The interviewees in our study agreed that the existence of a qualified labour force was a major advantage for the cluster. One interviewee recounted that when he decided to manufacture carpets in Aleppo he had to take some of his Gaziantepian workers with him: ‘You can acquire and use the latest technology anywhere in the world. But what matters the most is . . . a qualified labour force.’ As in Denizli, however, there is a shortage of professional managers in Gaziantep. As in the other clusters examined, finance is a problem for the carpet firms in Gaziantep. In a survey conducted by the SPO, the majority of firms stated that their initial investment had been financed by their own means, the main reason for this being the high cost of capital. The term ‘their own means’ refers to capital accumulated from previous business activities and family members’ savings (86 per cent), or funds borrowed from fellow townsmen

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(7 per cent) (Temel et al., 2002). It has been reported that the lack of finance is inhibiting the growth of the cluster (Eraydin, 2002a).9 On average, infrastructure is good in and around Gaziantep. The city is near the ports of Yumurtalik and Iskenderun, and the communications infrastructure and air transportation are considered satisfactory by the Gaziantep firms, although there is room for improvement in respect of motorways. The principal infrastructure-related problem is that faced by many businesses throughout Turkey: the high cost of energy (Temel et al., 2002). In summary, factor conditions are largely favourable for the Gaziantep carpet firms. The main inputs are available at competitive prices, there are labour cost advantages and a skilled labour force, and the infrastructure is generally adequate. However there is a need for industry-specific research and education institutions, and the costs of energy and finance are high.

Pressures to upgrade: firms’ strategies As noted above, carpets are produced in both large and small establishments in Gaziantep, although the larger firms account for the majority of exports (ibid.) Family firms dominate,10 and undeclared production is common. Interestingly, in the early 1980s the SPO (1982) reported that the number of firms in the Gaziantep carpet sector was ‘uncertain’. The number of looms used in carpet manufacture was, however, estimated at about 350, or more than half the total number of looms in the country at the time. Currently the factories scattered around Gaziantep are estimated to have around 1500–2000 looms (SPO, 2001), but according to the Gaziantap Chamber of Industry it is still difficult to give a reliable figure on the number of firms operating in the sector. Estimates range between 500 and 1000. The larger firms tend to conduct all the main aspects of carpet production in-house, including yarn manufacturing. In general, Gaziantep textile firms are far less likely to employ subcontractors than are their counterparts in Denizli. Specifically, only 3 per cent of the larger firms and about 7 per cent of the smaller ones engage in subcontracting relations (Temel et al., 2002, p. 68). Firms’ scepticism about subcontracting is mainly related to the fact that they prefer to maintain control over the key activities in the value chain. There is also concern about imitation, especially of new designs, and many of the larger firms have their own design units. Our interviewees also pointed out that the nature of the product, which is valuable and rather heavy, favours internalization of the key operations in the production process. There are, however, some exceptions to this general trend. Smaller firms, for instance, do employ outside designers. Packaging is almost always subcontracted, regardless of the size of the firm. When subcontracting relations do exist, they tend to be stable and long term for reasons of trust and consistency. ‘Unless prices change drastically’, one interviewee said, ‘I prefer to work with the same suppliers. It enables consistency, in terms of the colour of yarn for instance. Also, business transactions become much easier. You do not need a contract;

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a phone call is enough. Once an issue is agreed upon, you know that the promise will be fulfilled.’ Although the larger firms prefer to be vertically integrated, internalizing yarn manufacturing and design, extending the business into unrelated areas is considered unthinkable. In the words of one interviewee, ‘You have to run just to keep up with the developments in your own sector. This leaves no time even to think about other sectors, let alone investing in them.’ It is therefore not surprising that unrelated diversification is not common in the cluster. Paralleling their attitude towards diversification and subcontracting, the cluster firms are also reluctant to cooperate with each other: ‘We hear that it happens in Denizli, but it really does not happen here.’ The same theme came up in interviews conducted by Acar (2002, p. 168) in Gaziantep: ‘In Gaziantep, businessmen are highly competitive and individualistic’; and ‘Gaziantep’s businessmen find it hard to do things together; they are not used to co-operation.’ In these circumstances it is little wonder that an initiative to defend their common interests – a sectoral foreign trade company – did not work very well. Where it exists, cooperation is limited to ad hoc support, such as lending jute yarn to another firm when there has been a delay in the arrival of this imported product. There are, of course, formal mechanisms for cooperation in the form of business associations, the most influential of which are the Chambers of Commerce and Industry. Apart from the usual functions such as disseminating information among their members, these associations have recently assumed other tasks, including taking action against firms that export goods of inferior quality and hence damage the reputation of products made in the region (Eraydin, 2002a). The following remarks by an interviewee are informative in respect of the perceived dangers of cooperation: ‘We see each other socially. But there are things you cannot share with your competitors. There are issues that can be revealed and those that cannot be revealed. You cannot, for instance, say that “this market is very promising”, or “it is better to use this kind of input”.’ It is obvious from these statements that information on customers, markets and the production process is too valuable to be shared with rivals. Relatedly, when asked about their reasons for choosing the industry in which to invest, 70 per cent of the firms in an SPO survey cited ‘perceiving an opportunity and imitating others’ as the most important reason (Acar, 2002). In short, it can safely be said that competitive forces dominate in the carpet cluster in Gaziantep. In fact, according to one interviewee competition is ‘more than intense’. However, many of the interviewees argued that the competition was ‘sweet’, meaning that it might be intense but it was respectful and enjoyed by the competing firms. The firms in the cluster use state-of-the-art technology (SPO, 2001; IGEME, 2002b), but only 8 per cent engage in R&D on a regular basis, mainly in relation to quality control (Temel et al., 2002). Activities associated with creativity and

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innovation, on the other hand, are well above the Turkish average (Eraydin, 2002a). The main activities are related to product improvement, product variety, new product design, and adapting domestic and foreign rivals’ process technologies (Temel et al., 2002, p. 89). Firms operating in the textile sector report that the main sources of information on innovation are trade fairs (domestic, 75 per cent; international, 36 per cent), catalogues (55 per cent), government institutions (mainly TÜBITAK, KOSGEB, MPM and TSE, 8 per cent) and, importantly, other firms operating in the same sector (47 per cent) (ibid., p. 87). A final note on the strategies of the cluster firms is the relative importance attached to different competitive factors, which apparently differ from market to market. In this regard, one interviewee offered an example of a Japanese business associate: ‘The Japanese are very keen on quality. They came and visited our factory for five years before being convinced that we would always satisfy their quality requirement, but now they buy our carpets without coming here. I believe that they will not easily switch firms, even if a lower price is offered. In another market, however, price can be the number one competitive factor.’ Another interviewee pointed out that the nature of competition depends on the type of product and the market served: ‘Competition is more intense if you produce standard products. But if you specialize, differentiate your products, the nature of competition changes. You are no longer competing on the basis of price. To be able to jump into that level of competition, you need to invest in design and improve the quality of your products.’ Despite this, very few of the Gaziantep firms have tried to develop a brand of their own. Instead they have chosen to capitalize the advantages associated with the ‘made in Turkey’ label, which is a valuable asset in the carpet industry.

Related and supporting industries Without doubt, Gaziantep’s carpet cluster benefits from being part of the competitive Turkish housing/household goods cluster and from the strong reputation of Turkish carpets in the world market. Also, it is closely linked to the most competitive sector in the Turkish economy; that is, textiles and apparel (see Chapter 3). At the local level, the cluster enjoys the benefits associated with being surrounded by a network of competitive supporting industries and institutions (Figure 6.2). The yarn sector in particular is very competitive in Gaziantep and serves the needs of not only the carpet industry but also many other segments of the textile industry at the local, national and international levels. Of the many types of yarn produced in Gazintep, acrylic is the most economically important. In fact, with 56 specialist factories, Gaziantep is one of Turkey’s key locations for acrylic yarn production, primarily because of its proximity to Syria, the leading customer for such yarn. Yarn is also exported to many other countries, including France, Italy, Spain and the United Kingdom. As

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Clusters and Competitive Advantage

Textile/apparel cluster

Other textile items

Housing/household goods cluster

Machine-made carpets

Education, research and trade Institutions (e.g. Gaziantep Chambers of Commerce and Industry, Gaziantep University, KOSGEB)

Kilims

Design services

Machinery

Yarn

Dyes

Figure 6.2 Products made in the carpet cluster in Gaziantep, plus related institutions and sectors

the yarn sector is so strong the cluster firms do not have to worry about their main input. One interviewee said that there was no need for small carpet firms such as his to enter the yarn sector since Gaziantep’s yarn producers were very competitive. ‘In a sense, all the yarn factories in Antep are mine!’, he declared. Another closely related industry is Gaziantep’s highly dynamic machinery sector, which is especially competitive in machinery for yarn production.11 Other types of machinery are produced for the carpet, textiles, agricultural, automotive, woodworking, dyeing and packaging sectors (TBMM, 2001b). Importantly, new technology is developed locally and considerable attention is paid to R&D (Civan, 1999). All but one of the machines used in carpet manufacture are produced in Gaziantep, the exception being a particular type of electronic loom that is imported from abroad, mainly from Belgium and Germany. In summary, the carpet cluster has extensive complementary relations with other local manufacturing industries, almost all of which are internationally competitive. However, as in the case of the other clusters examined in this study, local institutions and/or government agencies have been slow to join the cluster dynamic. This is the subject matter of the next section.

The role of government As noted at the start of this chapter, during the Ottoman era the government paid close attention to carpet weaving, and there were workshops making

The Carpet Cluster in Gaziantep

127

carpets solely for the royal palaces. In the Republican period the state continued to have a presence in the carpet industry through Sümerbank-affiliated entities, mainly in Hereke and Isparta.12 The government also organized training courses13 and took steps to preserve traditional Turkish/Anatolian carpet motifs.14 Another measure that should be mentioned in order to understand the true contribution of the government to the Gaziantep carpet cluster is the SouthEast Anatolian Project, which is one of the most comprehensive development projects ever implemented in the world and includes the eight provinces of Adiyaman, Diyarbakir, Gaziantep, Kilis, Mardin, Siirt, Sanliurfa and Sirnak. Gaziantep’s share of the total economy of these provinces is significant, at about 30 per cent. The provinces are relatively underdeveloped and the average per capital GNP is half the Turkish average. The purpose of the project is to transform the region occupied by the provinces into an export-oriented area specializing in agricultural products.15 Apart from the general benefits the related measures will bring to the region, such as improved infrastructure, a specific contribution to the textile sector will be a significant increase in cotton production.16 With regard to the direct contribution of the Turkish government to the development of the carpet cluster in Gaziantep, this has been rather limited, which according to the interviewees is a good thing. In fact the near absence of government support is seen as one of the reasons why the sector has developed: ‘If the government is part of a business, things get complicated . . . Luckily this sector did not have much government intervention.’ The incentives provided by the government during the 1960s and 1970s under its regional development plan were barely taken up by the machinemade carpet sector.17 The export incentives provided in the 1980s might have helped, but the sector’s main export drive took place in the late 1980s, when the incentives had been cut considerably. Currently, some government help is available for imported raw materials that are used to produce items for export. For carpet producers, this is only relevant for jute yarn, and is more the concern of the Gaziantep yarn producers than the carpet firms. Besides, the degree of bureaucracy involved discourages the take-up of such help. Relatedly, one manager stated that he preferred to deal with a private bank, even though the cost of financing there was a little higher than at a state bank, since he did not want to deal with the bureaucracy. The only positive aspect of government action mentioned by the interviewees was that the harmonization of Turkish legislation with that of the EU (including patent law) had brought more discipline to the market since the mid 1990s. In summary, the contribution of the government to the development of the cluster has been very limited, and by and large the cluster firms have missed out on the export incentives provided by the state. In fact the interviewees’ expectations of the government were limited to ‘proper governance’ and ‘the removal of obstacles’ (TBMM, 2001b). The contribution of the local

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Clusters and Competitive Advantage

government has been even more meagre (Eraydin, 2002a), as in the cases examined in the previous chapters.

Reasons for geographic concentration Initially the industrial establishments in Gaziantep were concentrated in and around the city centre. In the 1950s the Sehreküstü district and Nizip Street and its environs became industrial spaces, and in the 1970s KÜSGET and Örnek Sanayi Sitesi industrial estates18 were established on the periphery of the city. Currently there are three small industrial estates containing thousands of small and medium-sized enterprises, mostly in the machinery, metal-working, transportation equipment and furniture industries, and three organized industrial zones for firms in the textiles, machinery, chemicals/plastics and food industries; that is, the leading businesses in the Gaziantep economy. In the city centre, Nizip Avenue and its environs are still popular areas for industrial establishments.19 Another central area, the Ünaldi-Sehreküstü district, is home to small and medium-sized lentil processing facilities and carpet factories. Interestingly, according to our interviewees carpet firms typically start their operations with an office in the city centre and manufacturing facilities in the Ünaldi-Sehreküstü district, but then move to KÜSGET and finally to one of the organized zones. In other words, Ünaldi-Sehreküstü and KÜSGET are seen as stepping-stones to the organized zone.20

The emergence of the cluster Before proceeding to the particular circumstances that led to the emergence of the carpet cluster in Gaziantep, it might be helpful to consider why handwoven carpet production mostly takes place in western Turkey in general and central Anatolian cities in particular. According to Ayata (1987), this is related to the nature of the land. Although land is not scarce in central Anatolia, few types of crop can be cultivated there (mainly wheat and barley), and in past days this left the peasants with plenty of spare time to engage in a variety of handicrafts, including carpet weaving.21 Thus the nature of agricultural production gave rise to the practice of carpet weaving in central Anatolia. In the case of eastern Anatolia, however, there are few historical records of carpet weaving as an important economic activity, apart from some production of kilims. Arguably, the fact that kilims were produced in Gaziantep facilitated the transition to the carpet sector. According to one of our interviewees, the main catalyst for the emergence of the cluster was the growth of cross-border imports of silk carpets for decorative purposes (usually for wall hangings and bedspreads). These were very popular, not only in the immediate region but also in the rest of the country. The interviewee thought that kilim weavers had begun to produce such carpets in Gaziantep in an attempt to capitalize on this trade. However they were unsuccessful and decided to concentrate

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on the production of regular carpets for floors, thus ‘building on their accumulated experience in kilim manufacturing’. Many of the interviewees underlined the importance of the existence of a textile sector in Gaziantep in general and the highly developed yarn and textile-machinery sectors in particular. Gaziantep’s master craftsmen had no difficulty copying looms and other carpet-manufacturing machinery imported from other parts of Turkey and abroad, so the transition to machine-woven carpet production was quite smooth. Another interviewee argued that a change in demand patterns had brought about the transition to carpet production, in that ‘if there is demand for a product and one firm succeeds in fulfilling this demand, others follow suit’. What we can infer from all this is that the emergence of the machine-woven carpet cluster in Gaziantep can be explained by a combination of factors: the existence of a number of related and supporting industries (the yarn and machinery sectors in particular), demand patterns, and ‘historical accidents’ such as the success of imported silk carpets. This explanation resembles Krugman’s (1991a) account of the emergence of the carpet cluster in Dalton in the United States, which is presented as a typical example of a historical accident triggering the beginnings of a cluster. It is also very informative in respect of cluster formation in general, especially when considered together with the emergence of the towel and bathrobe cluster in Denizli. In both cases there was a long history of textile production but the later specialization in a particular product group (towels and bathrobes in Denizli and machine-woven carpets in Gaziantep) was very much the result of a historical accident, the local availability of key resources and an entrepreneurial spirit. Successful ventures were noted by other potential entrepreneurs in the region who were motivated to replicate the success of their fellow townsmen. This in turn fed new business formation, initiating the self-reinforcing cycle described in Chapter 5. When links were established between the carpet firms that formed the core of the cluster and related/supporting industries and institutions, the benefits associated with external economies strengthened the self-reinforcing nature of clustering. Therefore, a phenomenon that looks like a purely chance event might in fact be explained by the specific attributes of the local environment, and accidents of history are successfully capitalized only when the environment is favourable. Amongst the factors that have helped Gaziantep’s carpet producers to prosper, the part played by the yarn and machinery sectors is of special importance. As mentioned earlier, the yarn industry is one of the oldest textile-related operations in Gaziantep, and it is very competitive. Similarly the machinery cluster, which is also a historically important field of activity in the city, has developed and specialized over time, reflecting the needs of the sectors that dominate the economy. Cooperative networks have also had a role in the development of the cluster, although not as much as in Denizli. For instance firms help each other in times of crisis. Strong ties with family

130

Clusters and Competitive Advantage

and friends, on the other hand, have been particularly influential in the process of new business formation. For example people who originally came from Besni (a town to the north-east of Gaziantep), who have a good reputation and prominent position in the Gaziantep carpet sector, have helped many of their relatives and friends to enter the business by providing them with guidance on the particular way of running a business in the cluster. Having a mentor to ask for advice not only facilitates entry but also improves the prospect of long-term success.

The benefits of clustering When asked about the advantages of Gaziantep as a business location, an entrepreneur from Besni explained that the lack of opportunities in Besni had forced him to move to Gaziantep, which offered more in the way of industrial pursuits. Since he was familiar with textiles and kilim production he had channelled his efforts in that direction. Relatives and friends with an established position in the city had helped him to set up his business. ‘It is good to know people working in the same area as you are. You ask for ideas, where to buy yarn, for instance. It is much easier to run your business when you have good contacts.’ Other advantages are the city’s good infrastructure, qualified workers, key location, accumulated know-how, including how to conduct international business activities, and the presence of related and supporting industries and institutions.22 The benefits associated with this environment are significant. For instance one interviewee mentioned that most of the entrepreneurs who had bought the necessary machinery in Gaziantep and started a new carpet-weaving business in another city had failed: ‘Stateof-the-art machinery alone is not enough for the success of a business. If you try to run the same business in Ankara, for instance, you might find it difficult. If a machine breaks down you may not even find someone to repair it.’ Another example relates to a carpet firm in Çankiri in central Anatolia: ‘The manager of this firm has to buy yarn from here. He calls us every day to keep up with the latest developments in the industry. He regrets that he did not establish the firm in Gaziantep.’ As a result, in the words of another interviewee, ‘the rationale that there are too many firms here, so I will go and establish my firm somewhere else’ does not work because the quality of the local business environment is paramount. There is also a concentration of firms in unrelated businesses, including, pasta and footwear. One reason for this, according to the interviewees, is that the local people have an entrepreneurial spirit: ‘If Gaziantepians smell an opportunity, they enter a business impulsively’.23 Apparently they have the courage to take risks – ‘If they have one million lira they do not hesitate to invest in a business that requires two million’ – because ‘an entrepreneurial mindset’ is instilled in them as children. There are some general benefits of clustering that are largely independent of the location in question, such as the proximity of related businesses, which

The Carpet Cluster in Gaziantep

131

ensures the smooth functioning of an enterprise. As mentioned earlier, all kinds of yarn are readily available in Gaziantep, and the exact quantity required can be bought at favourable terms and very quickly. This has cost advantages (especially in terms of transportation and storage costs), it is practical and it facilitates information flows among cluster participants. However opinions differ with regard to the benefits of proximity to rival firms. Some of the interviewees pointed to the danger of destructive price competition and the rapid imitation of new designs and best practices, whereas others emphasized the dynamism this brought to the sector by encouraging particiants to improve their competitive advantages. Nonetheless there was concensus that the colocation of rivals was advantageous for customers. As in the case of Denizli, it is the customers who visit the carpet firms in Gaziantep, rather than the other way round. One interviewee likened this to buying tomatoes in the local market, where there are numerous sellers and thus more choice. In fact the same logic applies to carpet manufacturers as they are customers of the yarn and machinery firms: ‘We have a chance to choose among the different alternatives. . .available in Gaziantep. We can get information on all the details and are able to make an educated decision.’ Another interviewee thought that colocation aided publicity: ‘It is difficult for a single firm to be known in the world carpet industry. But as Gaziantep is well-known, you can be known as a carpet firm from Gaziantep.’ Returning to the divided opinions on whether colocation resulted in dynamism or posed the threat of destructive price competition, the interviewees stressed that price competition was more likely to happen when there was stagnation in the market. Otherwise, as discussed in Chapter 5, the cluster environment might work against such competition, since the likely damage would be evident to the local actors and there might be social sanctions as well (see Chapter 8 for a detailed discussion of this issue). Another aspect of the proximity of rival firms is the flow of information. In the Gaziantep carpet cluster, information flows come mainly from customers, designers and suppliers. ‘Customers are very demanding in this sector. They force you to follow the most recent trends.’ As many of the smaller carpet manufacturers work with the same designers, key information on the most recent trends is quickly diffused. The same holds for yarn manufacturers and merchants. Moreover factories are located within a step of each other, managers and workers know each other, and the state of the business is a popular topic of conversation. As one interviewee put it, information flow is so speedy that ‘it would not be more rapid if it were broadcast on TV’. One further implication of this concerns the fact that preserving one’s reputation and behaving according to the norms prevailing in the cluster are of vital importance. It follows that any news of damage to reputation or deviation from the norms will disseminate rapidly as well. In the following section we shift our focus to another of the major concerns of this study: the likelihood of the cluster sustaining its success, which

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Clusters and Competitive Advantage

requires an analysis of the changes that have taken place in the environment and how the cluster has responded to them.

Concluding remarks and future prospects Our analysis of the history of the cluster has revealed that although textile production has a long history in Gaziantep it was not until the 1970s that the production of machine-woven carpets began in Gaziantep and the cluster emerged. The second half of the 1980s witnessed the internationalization of the cluster, and in the 1990s it transformed itself by upgrading its technology and improving the quality of its products. Meanwhile important developments were taking place in the external environment, some of which had a lasting impact on the cluster. For instance the Gulf crisis in 1991 affected the Gaziantep economy much more than elsewhere in Turkey because the city’s significant trade relations with the Middle East in general and Iraq in particular were severely damaged (Eraydin, 2002a). The cluster firms were, however, lucky to have several newly emerging markets that they could turn to in the meantime, the Russian Federation and the CIS in particular. The Gulf crisis was followed by a series of financial crises in Turkey in the 1990s and early 2000s, which worsened their existing problems (such as the high cost of financing) and badly affected their performance in terms of sales, profitability, investment and employment. Despite these setbacks the firms have maintained their key advantages: low-cost labour and high-quality products (Temel et al., 2002). The way in which the cluster firms have reacted to changes in external circumstances over time is reflected in their strategies. As mentioned when discussing the context for firm strategy, in its early stages of development the Gaziantep carpet sector had a rather poor reputation for quality. However, this is no longer the case, as since the 1990s firms have been forced to give priority to quality in the face of increased competition, especially from Belgium. Although Istanbul, Kayseri and Nigde have some presence in the machine-woven carpet industry, they have ceased to be key competitors: ‘These places are different from Gaziantep; they have a smaller number of very big, integrated firms’, one interviewee explained. The interviewees spoke positively about the strong competition from Belgium, whose entry into the CIS market, for instance, had forced them to pay more attention to quality in that market as well. Gaziantep has a cost advantage over Belgium and because of this some Belgian carpet firms are planning to invest in Gaziantep; in fact one of the leading yarn factories in Gaziantep already has a Belgian partner. In the mid-1990s new regulations on patents also triggered a change of strategy amongst the cluster firms. Before the proper enforcement of the patent law, copying was widespread and some firms even used the exact brand names of companies from which they had copied designs. Following the implementation of patent law, some firms were required to pay huge

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133

fines and others went bankrupt. One average, however, the firms adapted to the new circumstances very quickly and made original design a principal constituent of their strategy. In a very short period of time the cluster was transformed from one that stole designs from the leading firms in the industry to one that invested in, developed and exported creative designs. Although these developments have generally been welcomed by the cluster firms since it is recognized that design and quality are the real competitive factors that differentiate firms in an environment where inputs are available to all at more or less at the same terms, serious attempts to build brands have yet to take place in Gaziantep (a notable exception is Merinos). As noted earlier, the cluster firms instead capitalize on the good reputation of Turkish carpets in the world market. Some scholars (for example Temel et al., 2002) are sceptical about the competitive prospects of the cluster, given that developing and neighbouring countries are key export destinations for the cluster’s products. There are also problems with marketing and after-sales service (Eraydin, 2002a). The firms themselves, however, are very optimistic about their future prospects and expect Gaziantep to replace Belgium as the world’s leading centre for machine-woven carpet production within a couple of years, given that Belgian manufacturers have found it difficult to compete with Gaziantep across a broad range of products and have tended to narrow their range. Before closing this chapter it should be reiterated that the Gaziantep economy does not exclusively rely on one sector, unlike that of Denizli. It is envisaged that the structure of the economy will remain the same (Özsabuncuoglu et al., 1999) and that the food (flour, pasta, meat and related products, milk and related products, alcoholic beverages, olive oil), textiles (yarn, cotton fabrics, woollen fabrics, carpets), leather (leather processing, footwear), soap and miscellaneous machinery sectors will continue to prosper. Gaziantep’s success is of symbolic importance, given the low level of development attained by the other provinces in the region. In this regard Gaziantep is considered an important regional centre, and there might well be spillover effects on neighbouring provinces, as can already be observed in the case of Kahramanmaras. The analysis of the Gaziantep carpet cluster reinforces the main conclusions of the analysis of the towel and bathrobe cluster in Denizli. In both cases the quality of the local environment is of determining importance in respect of the nature and sustainability of competitive advantage. Moreover both clusters have accumulated considerable experience in the general field of activity, coupled with the local availability of resources and an entrepreneurial spirit. However competitive pressure is more pronounced in Gaziantep, and firms in the latter are much more reluctant to collaborate. Competitive pressure – both national and international – and how firms and entrepreneurs react to this pressure appear to be key factors in the dynamism of the Gaziantep cluster and the sustainability of its competitiveness. In fact the

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Clusters and Competitive Advantage

latter is one of the factors that differentiates the cluster from the furniture cluster in Ankara, the other being that Gaziantep has accumulated considerable knowledge and experience of conducting international business, an advantage that the cluster in Ankara lacks.

7 The Leather Clothing Cluster in Istanbul

The processing of leather and production of leather goods are traditional industries in Turkey, and Istanbul has historically been a centre of production and trade in this respect.1 This chapter examines the leather clothing cluster in Istanbul, which has gone through a strategic transformation over the past two decades. Interestingly, the change in the strategic orientation of firms has been accompanied by changes in the location of the industry within Istanbul, with the production and sales functions being concentrated in different locales. Specifically, the tanneries and factories are located in Tuzla, and firms that target the upper end of the market have retail outlets in Zeytinburnu while those which target the lower end of the market utilize the marketing channels in Laleli (Figure 7.1). The analysis of this cluster will therefore provide us with new insights into the evolution of competitive advantage in clusters and enable us to comment on the dynamics associated with the location of different activities in the value chain. Additionally, an analysis of the informal Laleli market will provide us with the opportunity to highlight a relatively understudied topic in the literature on clusters; that is, the fact that transnational linkages are formed not only by multinational enterprises but also by small entrepreneurs (Yükseker, 2003), and that informal transnational activities might also cluster in space. Since the emergence of informal cross-border trade from Laleli in the late 1980s after the collapse of the Eastern bloc, official statistics have failed to reflect the true export performance of the industry. It is estimated that informal trade in leather garments amounts to $2.5 billion, while registered exports of leather garments stand at $300 million (SPO, 2000). Istanbul accounts for more than 80 per cent of total Turkish leather exports (ITKIB, 2003), and it can safely be argued that this figure is much higher as most informal trade is conducted in Istanbul. According to official figures, Turkey’s current world export share in leather garments (SITC 84811) is around 10 per cent. Thus even if only registered exports are taken into account, it is clear that Turkey is among the top exporters in this product category, together with China, India and Italy (ITC, 2002). The leading registered 135

136 Clusters and Competitive Advantage

BLACK SEA

Zeytinburnu Kazliçesme Laleli Tuzla SEA OF MARMARA Figure 7.1

The Istanbul leather industry, production and sales sites

customers of Turkish leather garments are Germany, France, the Russian Federation, Spain, the United Kingdom, the United States, Austria, Switzerland, Belgium, Luxemburg and the Netherlands, while the main destinations for informal sales are the Russian Federation, the CIS and Eastern Europe. Turkey also imports some leather garments (valued at about $12 million) from India, China, Germany, Pakistan and Italy (SPO, 2000, p. 79).

Origins and historical development Leather making in Anatolia can be traced back to the Hittites (1400 BC), and it is known that the Asian Turks produced fine leather products at least 2400 years ago (Yelmen, 1992). Istanbul’s emergence as a leading centre of leather making, however, is mostly associated with the early Ottoman era.2 Ottoman rule started in Istanbul in 1453. The city became the capital of the Ottoman Empire a few years later and stayed so until the empire collapsed in the early twentieth century. The conqueror, Sultan Mehmet II, paid attention to the economic development of the city in general and that of the leather industry in particular. It was Sultan Mehmet who encouraged the founding of a leather industry in the district of Kazliçesme (Figure 7.1), which remained the heart of the industry for more than 500 years, until its move to Tuzla in the early 1990s (Yelmen, 1992; Kuban, 1996). There were about 360 tanneries in Kazliçesme in those early years, surrounded by workshops that specialized in the manufacture of products used in leather processing (Kömürcüyan, 1952; Yelmen, 1992). During the expansion of the Ottoman Empire, considerable progress was made by the

The Leather Clothing Cluster in Istanbul 137

tanning industry. In fact the sixteenth and seventeenth centuries were the golden years of the Ottoman leather industry,3 which made all the shoes and other leatherwear required by the empire’s far-flung armies (Union of Chambers of Commerce, Industry and Commodity Exchanges of Turkey, 1958, p. 3). Leather was used not only for footwear but also for clothing, saddlery, upholstery and bookbinding (Faroqhi, 2000; Mantran, 2001). Some items were produced especially for the Ottoman aristocracy, such as imperial gowns for sultans, leather saddlebags and leather-bound Korans. In the sixteenth century, leather making was also an important pursuit in Edirne, Kayseri, Ankara, Bursa, Konya, Tokat and Diyarbakir (Figure 7.2), but although the ‘various tanneries scattered all over Anatolia were in continuous operation to supply the needs of the vast territories of the Turkish Empire’ (Union of Chambers of Commerce, Industry and Commodity Exchanges of Turkey, 1958, p. 2), Istanbul was clearly the principal centre of leather trade and production (Faroqhi, 2000). While Istanbul’s tanneries were still concentrated in Kazliçesme in the eighteenth century, other processing units had sprung up in Eyüp, Tophane, Üsküdar and Kasimpasa (Yelmen, 1992). During this golden era, leather produced in Istanbul was exported to some European countries. In fact historical records reveal that the technological aptitude of the industry in this era was supreme (Adnan, 1935), and that some Istanbul craftsmen gained international recognition for their skills (Faroqhi, 2000). Moreover it was not uncommon for foreigners to go to Turkey to learn the methods and secrets of leather making, and in the eighteenth century a French doctor and an English citizen were rewarded for their success in this mission.4

Sinop Istanbul

Benderegli Iznikmid Kangri

Bursa

Ankara

Izmir Aksehir Konya

Kayseri

Burdur Seydisehir

Figure 7.2 Leading centres of leather production and trade, Turkey (current borders), sixteenth and seventeenth centuries Source: Adapted from Faroqhi (2000).

138 Clusters and Competitive Advantage

In the nineteenth century, however, the Ottoman leather industry started to decline, together with the empire itself. The gradual recession was a consequence of the reluctance of the industry to adopt new techniques and the absence of training (Union of Chambers of Commerce, Industry and Commodity Exchanges of Turkey, 1958), as well as the 1838 Ottoman– British Commercial Agreement, which brought about a vast increase in leather imports (Faroqhi, 2000). Another noteworthy event was the purchase of a leather-processing unit (named Debbaghane-i Amire) in Beykoz (Istanbul) by the government in 1810 to manufacture leather products for the Ottoman army. In 1882 a shoe factory was established next to this factory. In the Republican period, this was taken over by a state-owned enterprise, Sümerbank, to produce reasonably priced, good-quality shoes, suitcases and other items (SPO, 2000).5 In the early years of the Turkish Republic, before state planning was introduced, leather making maintained the nature of a craft activity,6 a notable exception being the activities of the giant Sümerbank. However in the 1950s, when the country’s economic policies were relatively liberal, there was a gradual development of the industry. This continued in the 1960s and 1970s, which were characterized by a planned approach to development. The industry accounted for a large proportion of employment in Istanbul in the 1950s and 1960s, followed by Balikesir, Bursa, Gaziantep and Izmir (mechanized), and Denizli, Maras and Usak (non-mechanized) (Union of Chambers of Commerce, Industry and Commodity Exchanges of Turkey, 1958; Sümer, 1969).7 Over time the city of Istanbul expanded into peripheral districts and Kazliçesme, the heart of the Istanbul leather industry, became a central district, creating problems for the producers located there. For instance it was difficult for them to enlarge their operations, and the pollution they created affected nearby residential areas (Canyoldas, 1969). To resolve these problems the Tuzla organized industrial zone project was launched in 1986 and completed in 1992. The move from Kazliçesme to Tuzla was, however, poorly handled and resulted in losses in production (SPO, 2000). The government’s export-oriented economic policies in the 1980s benefited the industry enormously in that producers made good use of the export incentives and tax rebates provided. The leather clothing industry in particular performed impressively in the world market, its world export share exceeding 20 per cent in the mid-1980s. From the second half of the 1980s, however, there was a decline in its relative position. To explore the reasons for this rapid increase and subsequent decline we need to investigate the industry’s sources of competitive advantage, which is the main subject of the following section. Before closing this section, a final note on the Istanbul economy is needed to complete the analysis of the context in which the leather-clothing cluster emerged and flourished. Table 7.1 provides an overview of employment in Istanbul by economic activity. It is clear that the Istanbul economy does not depend on a narrow range of activities. On the contrary, being the

139 Table 7.1

Employment in Istanbul, by economic activity1

ISIC

Sector

2421

Manufacture of pesticides and other agrochemical products Scheduled air transport Data processing Market research and public opinion polling Manufacture of games and toys Retail sale via mail order Other financial intermediation n.e.c. (not elsewhere classified) Motion picture and video production and distribution Research on and experimental development of SSH (Social Sciences and Humanities) Manufacture of electric lamps and lighting equipment Manufacture of knitted and crocheted fabrics and articles Other wholesale Sea and coastal water transport Security dealing activities Software consultancy and supply Radio and television activities Publishing of recorded media Life insurance Manufacture of luggage, handbags etc. Manufacture of watches and clocks Manufacture of insulated wire and cable Packaging activities Manufacture of jewellery and related articles Manufacture of television and radio transmitters Activities of other transport agencies Business and management consultancy activities Other manufacturing n.e.c. Wholesale of textiles, clothing and footwear Manufacture of other general purpose machinery

6210 7230 7413 3694 5251 6599 9211 7320

3150 1730 5190 6110 6712 7220 9213 2213 6601 1912 3330 3130 7495 3691 3220 6412 7414 3699 5131 2919

Location Share of national employment quotient in the sectors (%) 3.9830

97.50

3.9818 3.6333 3.5430

97.47 88.94 86.73

3.4993 3.4662 3.4340

85.66 84.85 84.06

3.4333

84.04

3.3519

82.05

3.3451

81.89

3.2861

80.44

3.2681 3.2374 3.2360 3.1894 3.1643 3.1047 3.0675 2.9101 2.9039 2.9005

80.00 79.25 79.22 78.07 77.46 76.00 75.09 71.24 71.08 71.00

2.8991 2.8966

70.97 70.91

2.8578

69.96

2.7631 2.7542

67.64 67.42

2.7304 2.6696

66.84 65.35

2.6625

65.18

140 Table 7.1

(Continued)

ISIC

Sector

6719

Activities auxiliary to financial intermediation n.e.c. Wholesale of machinery, equipment and supplies General secondary education Finishing of textiles Treatment and coating of metals; mechanical engineering Manufacture of office, accounting and computing machinery Other computer-related activities Manufacture of other articles of paper and paperboard Telecommunications Funeral and related activities Inland water transport Manufacture of bicycles and invalid carriages Manufacture of glass and glass products Manufacture of pharmaceuticals and medicinal chemicals Recycling of metal waste and scrap Wholesale of other intermediate products, waste and scrap Manufacture of other electrical equipment n.e.c. Building and repair of pleasure and sporting boats Dressing and dyeing of fur; manufacture of articles of fur Wholesale of metals and metal ores Manufacture of pulp, paper and paperboard Manufacture of plastics products Technical testing and analysis Financial leasing Advertising Manufacture of corrugated paper and paperboard Investigation and security activities Manufacture of paints, varnishes etc. Activities auxiliary to insurance and pension funding Other supporting transport activities

5150 8021 1712 2892 3000 7290 2109 6420 9303 6120 3592 2610 2423 3710 5149 3190 3512 1820 5142 2101 2520 7422 6591 7430 2102 7492 2422 6720 6304

Location Share of national employment quotient in the sectors (%) 2.5714

62.95

2.5677

62.85

2.5640 2.5592 2.5580

62.77 62.65 62.62

2.5275

61.87

2.5176 2.5153

61.63 61.57

2.5073 2.5038 2.4923 2.4890

61.38 61.29 61.01 60.93

2.4880

60.90

2.4802

60.71

2.4758 2.4210

60.61 59.26

2.4151

59.12

2.3894

58.49

2.3766

58.18

2.3543 2.3358

57.63 57.18

2.3318 2.2777 2.2695 2.2484 2.2365

57.08 55.76 55.56 55.04 54.75

2.2244 2.2102 2.2006

54.45 54.10 53.87

2.1974

53.79

141

3320 1810 2430 6309 3511 5139 2310 2511 9214 2913 2691 2912 3120 2413 1513 2720 6023 9249 2926 2732 3693 2221 3720 8511 3110 1729 3230 2929 3312 5143

Manufacture of optical and photographic equipment Manufacture of clothing, except fur clothing Manufacture of man-made fibres Travel agencies and other tourist assistance activities Building and repair of ships Wholesale of other household goods Manufacture of coke oven products Manufacture of rubber tyres and tubes Dramatic arts, music and other arts activities Manufacture of bearings, gears, gearing and driving elements Manufacture of non-structural, non-refractory ceramic ware Manufacture of pumps, compressors, taps and valves Manufacture of electricity distribution and control apparatus Manufacture of plastics in primary form Processing and preserving of fruit and vegetables Manufacture of basic precious and non-ferrous metals Freight transport by road Other recreational activities Manufacture of machinery for textile and leather production Casting of non-ferrous metals Manufacture of sports goods Printing Recycling of non-metal waste and scrap Hospital activities Manufacture of electric motors, generators and transformers Manufacture of other textiles n.e.c. Manufacture of televisions, radios, video recorders etc. Manufacture of other special purpose machinery Manufacture of instruments for measuring, testing etc. Wholesale of construction materials, hardware equipment etc.

2.1864

53.52

2.0945

51.27

2.0826 2.0754

50.98 50.80

2.0637 2.0605 2.0426 2.0426

50.52 50.44 50.00 50.00

2.0331

49.77

2.0307

49.71

2.0130

49.28

2.0053

49.09

1.9702

48.23

1.9544

47.84

1.9295

47.23

1.9196

46.99

1.9159 1.8957 1.8935

46.90 46.41 46.35

1.8739 1.8703 1.8564 1.8244

45.87 45.78 45.44 44.66

1.8204 1.7888

44.56 43.79

1.7848 1.7673

43.69 43.26

1.7411

42.62

1.7346

42.46

1.7323

42.41

142 Table 7.1

(Continued)

ISIC

Sector

2693

Manufacture of structural, non-refractory clay and ceramic products Manufacture of electronic valves and tubes Manufacture of footwear Manufacture of ovens, furnaces and furnace burners Real estate activities with own or leased property Renting of construction and civil engineering machinery Manufacture of musical instruments Manufacture of basic chemicals Real estate activities on a fee or contractual basis Washing and (dry-) cleaning of textile and fur products Manufacture of parts and accessories for motor vehicles/engines Non-scheduled air transport Manufacture of other fabricated metal products n.e.c. Manufacture of motorcycles Publishing of newspapers, journals and periodicals Casting of iron and steel Maintenance and repair of office and computing machinery Manufacture of soap, detergents, perfumes etc. Manufacture of gas; distribution of gaseous fuels through mains Social work without accommodation Service activities related to printing Other entertainment activities n.e.c. Manufacture of lifting and handling equipment Manufacture of machinery for metallurgy Manufacture of cutlery, hand tools and general hardware Manufacture of veneer sheets, plywood etc.

3210 1920 2914 7010 7122 3692 2411 7020 9301 3430 6220 2899 3591 2212 2731 7250 2424 4020 8532 2222 9219 2915 2923 2893 2021

Location Share of national employment quotient in the sectors (%) 1.7200

42.11

1.7135

41.94

1.6978 1.6764

41.56 41.04

1.6729

40.95

1.6643

40.74

1.6625 1.6622 1.6442

40.70 40.69 40.25

1.6355

40.04

1.6154

39.54

1.6150 1.5956

39.53 39.06

1.5530 1.5463

38.02 37.85

1.5122 1.5115

37.02 37.00

1.4944

36.58

1.4797

36.22

1.4193 1.4171 1.4084 1.3895

34.74 34.69 34.48 34.01

1.3842

33.88

1.3831

33.86

1.3617

33.33

143 3311 2922 5141 9241 2710 4540 9212 2519 7499 2219 5240 2320 8010 5219 2429 2696 6302 6021 7412 1532 1723 6303 4520 4510 5010 7310

5030 4530 2924 2812 8090

Manufacture of medical and surgical equipment Manufacture of machine tools Wholesale of solid, liquid and gaseous fuels and related products Sporting activities Manufacture of basic iron and steel Building completion Motion picture projection Manufacture of other rubber products Other business activities n.e.c. Other publishing Retail sale of second-hand goods Manufacture of refined petroleum products Primary education Other retail sales in non-specialized stores Manufacture of other chemical products n.e.c. Cutting, shaping and finishing of stone Cargo handling Other scheduled passenger land transport Accounting and auditing activities; tax consultancy Manufacture of starch and starch products Manufacture of cordage, rope, twine and netting Storage and warehousing Building of complete constructions or parts thereof Site preparation Sale of motor vehicles Research on and experimental development of NSE (Natural Sciences and Engineering) Sale of motor vehicle parts and accessories Building installation Manufacture of machinery for mining and construction Manufacture of metal tanks, reservoirs and containers Adult and other education

1.3488

33.02

1.3476 1.3444

32.99 32.91

1.3260 1.3246 1.3227 1.2755 1.2621 1.2464 1.2447 1.2445 1.2239

32.46 32.42 32.38 31.22 30.90 30.51 30.47 30.46 29.96

1.2124 1.1762

29.68 28.79

1.1731

28.72

1.1714 1.1681 1.1428

28.67 28.59 27.97

1.1286

27.63

1.1141

27.27

1.1034

27.01

1.0884 1.0810

26.64 26.46

1.0645 1.0566 1.0156

26.06 25.87 24.86

1.0150

24.85

1.0132 1.0111

24.80 24.75

1.0055

24.61

1.0015

24.52

Note: 1. Top 50 industries by share of national employment and industries with an LQ of more than one.

144 Clusters and Competitive Advantage

economic capital of Turkey and one of the largest cities in the world it hosts a huge variety of businesses. The main drivers of the economy are services (transportation, logistics and financial services in particular), textiles and apparel, glass, media and publishing, pharmaceuticals, leather, miscellaneous machinery and jewellery.

Sources of international competitive advantage Factor conditions The leather clothing industry largely uses domestically processed leather. The leather processing industry, however, imports more than 70 per cent of its raw leather from abroad (SPO, 2000). Moreover, given that total supply of raw leather in the world market has not risen to a large extent, Turkey has been compelled to increase its imports of semi- and fully processed leather (Öz, 1999; ITC, 2002). Raw leather is a by-product of the meat industry and is therefore procured from the animal husbandry sector. Most animal husbandry takes place in rural areas and not all slaughtering is formally registered in Turkey. Raw leather was an important export item until the 1960s, but thereafter the development of the leather goods sector resulted in an increase in domestic demand and a fall in exports.8 At the same time imports of raw leather rose considerably to $500–600 million,9 and the leather clothing industry became highly import-dependent in respect of its main input (SPO, 2000; ITC, 2002). As with the initial advantages derived from the availability of raw leather, those associated with cheap labour have reduced considerably. In 2000 the cost of labour in the sector fell between that in China and Pakistan on the one hand, and Italy and Germany on the other (SPO, 2000). Thus low-cost labour no longer constitutes a key advantage for Turkish leather clothing producers, which has strategic implications for the future prospects of the Istanbul cluster, as will be discussed at the end of this chapter. Financing difficulties and the high cost of energy, which create problems for many industries in Turkey, are of considerable concern to the leather clothing industry (SPO, 2000). There is a need for more working capital, as dictated by the dependency on imported raw leather and seasonal fluctuations in the demand for leather products (Öz, 1999). Finally, although there are quite a number of leather-related research and education institutions in Istanbul,10 the quality of the services they provide is hampered by their serious shortage of qualified personnel. To summarize, the original sources of competitive advantage for Turkish leather clothing producers – cheap, good-quality raw materials and low-cost labour – have eroded. Therefore it cannot be argued that the leather clothing industry derives advantages from basic and general factors. There have been

The Leather Clothing Cluster in Istanbul 145

attempts to develop competencies in factors that are more advanced and specific to the industry, but these have been tempered by the shortages of resources, particularly in respect of qualified human resources.

Context for firm strategy and rivalry The leather clothing cluster consists of a large number of small and mediumsized enterprises that are mainly family-owned. According to our interviewees, producing the best quality leather is still an art and requires the loving care of a master craftsman. This skill is passed on to apprentices, often from father to son. Unrelated diversification is rare, but vertical integration is quite common in that leather garment producers tend to own tanneries, and vice versa. Many firms also pursue forward integration strategies and own retail outlets in the Zeytinburnu and Laleli areas. The level of the technology employed by Turkish firms in the industry compares well with that of their main competitors (SPO, 2000) and advances in technology are closely followed. The managers of cluster firms are regular participants in international leather fairs and world-class leather fairs are organized in Istanbul, the most important being the International Leather Days (IGEME, 2002). The agency that organizes these, Ezgi Ajans, publishes a number of sector-specific periodicals and is the Turkish regional distributor of the major leather publications. Among the organized mechanisms for intra-industry cooperation are the Association of Leather Industrialists (TDSD), which is the major sectoral organization, and the Sectoral Foreign Trade Corporation of Leather Industrialists, which was established in the aftermath of the Russian crisis to promote exports and diversify the destinations of Turkish leather exports (SPO, 2000). One unsuccessful venture was the establishment of a workshop in which machinery and other equipment would be shared, thus optimizing their use. An examination of the nature of competition among the cluster firms provides a clue as to why this venture failed. Specifically, firms in the leather-clothing cluster are in strong competition with each other. Indeed this competition is so intense that it gives cause for concerns. For instance Kosar, the president of the TDSD, has stated that the tough competition among leather producers for imported skins and hides has caused the price of these items to rise considerably.11 The cluster is highly export-oriented and the producers export about 85 per cent of their output. They are, however, highly dependent on just two markets, namely Germany (registered exports) and Russia (informal trade), which makes them very vulnerable to fluctuations in demand in these countries. It was only in the late 1990s that they started to look for opportunities in other markets, the most likely candidates being the Far East, North America and Scandinavia (SPO, 2000). With regard to firms’ strategies, there has been a move towards the highquality, high-value-added end of the market. This was mainly triggered by

146 Clusters and Competitive Advantage

the Russian crisis and the increased competition in price-sensitive segments following the entry of China, India and Pakistan. Competition, however, is also tough at the upper end of the market, with competitors such as Italy, France and Spain, and the cluster firms are under severe pressure to develop sustainable competitive advantages in order to avoid being stuck in the middle (this issue will be discussed in more detail at the end of the chapter).

Related and supporting industries The best place to start the analysis of related and supporting industries is Istanbul’s textile/apparel cluster. This is one of the leading sectors in the Turkish economy, and Istanbul accounts for about 70 per cent of the exports of its products (ITKIB, 2003). Istanbul is also home to most of Turkey’s creative design and fashion-related businesses, which is certainly an advantage for garment producers, including those specializing in leather garments. The fact that Istanbul is a leading tourist centre has also helped the leather clothing industry to improve its position in international markets. Istanbul is not only competitive in leather clothing but also in the other segments of the leather industry, including leather processing, leather goods and accessories, fur clothes and footwear. All these are in turn linked to industries such as chemicals and leather machinery (Figure 7.3). The rest of this section will briefly consider each of these areas.

Education and research institutions

Footwear

Industrial associations

Tourism cluster

Leather goods

Leather clothes

Textiles and apparel cluster

Fur clothes

Design

Accessories Leather processing Machinery

Chemicals

Figure 7.3 Products made in the leather clothing cluster in Istanbul, plus related institutions and sectors

The Leather Clothing Cluster in Istanbul 147

As mentioned earlier, the Turkish animal husbandry sector cannot meet all the raw material requirements of the leather processing industry, which is well developed and in Europe lies second only to Italy in terms of capacity. Moreover the technology it uses compares well with that of its main competitors (SPO, 2000). Although Turkey still exports processed leather, the value of imports far outweighs that of exports.12 The Turkish fur industry is concentrated in Istanbul and has obvious links with the leather clothing sector. As with the producers of leather garments, fur clothing producers have to import most of their raw materials because domestic supplies are insufficient. Nevertheless, the industry is competitive, and the quality of its products is quite satisfactory (Öz, 1999). The leather goods and accessories sector, which manufactures such items as suitcases, handbags, wallets, purses, belts and gloves, is also competitive. The origin of the sector is associated with saddlery, a traditional art in Turkey. In the Ottoman era the leather goods sector was concentrated in the Fatih district of Istanbul and was highly developed. Istanbul continues to dominate this product category.13 In recent years the industry has faced stiff competition, especially from South American and Far Eastern countries, as well as from industries that make similar products in other materials, such as plastic, textiles and aluminum. Despite this competition, exports have continued to increase.14 The sector is especially competitive in handbags, purses, wallets, belts and other accessories. Turkey’s export performance in footwear15 has improved over the years (SPO, 2000). Istanbul is the top location for footwear production, being geographically close to a number of key importers, such as the EU and the Russian Federation, and having several internationally competitive industries that are related to footwear.16 In the price-sensitive segment of the footwear sector, Turkey competes with Eastern Europe, China, Thailand, Tunisia and Morocco, while producers from Italy, Spain and Portugal are the main competitors at the upper end of the market.17 The contribution of the chemicals and leather machinery sectors to the development of the leather clothing industry is noteworthy. In the early stages of the leather clothing industry almost all its machinery was imported, but now some internationally competitive local firms are producing the required machinery, albeit on a small scale (Öz, 1999). The leather chemicals sector (including dyes) has also improved considerably. The leading firms in this sector spend about 2–3 per cent of their turnover on R&D, and some enterprises have foreign partners (such as BASF and Henkel) (SPO, 2000). In summary, Istanbul hosts a number of industries related to the leather clothing sector, most of which are internationally competitive. Apart from closely linked industries such as leather processing, leather goods, fur, footwear, leather-related chemicals and machinery, two other sectors – textiles/ apparel and tourism – have contributed substantially to the development of the leather clothing sector.

148 Clusters and Competitive Advantage

The role of chance and the government The most outstanding chance event for the leather clothing cluster was the emergence of a strong demand from the Russian market in the late 1980s, following the dissolution of the USSR. The tendency of developed countries to withdraw from the tanning process due to environmental concerns, plus Istanbul’s proximity to important markets for leather garments, can be viewed as other chance circumstances that have contributed to the development of the cluster. Regarding the part played by the government in the cluster’s development, it should first be stated that the economic importance of the industry has been appreciated since the beginning of the Republican period, as evidenced by the fact that the industry was pronounced to be of special importance at the 1924 Izmir Economic Congress. Later, in the 1980s, the industry was one of the top recipients of export incentives and tax rebates. The government has also established a free trade zone (located next to the Tuzla organized leather zone in Istanbul), which has facilitated the importation of raw leather and chemicals. Another noteworthy government-related development was the establishment of a customs union with the EU in 1996, which lowered the protection rate for the sector from about 15–20 per cent to zero for the EU countries and 6 per cent for the non-EU member countries.18 Despite the acknowledged importance of the industry, the government has failed to maintain a consistent policy towards it. Apart from governmentrelated problems that have affected all sectors by causing instability and uncertainty in the business environment, there have been some areas in which the leather industry has particularly suffered. The handling of the move from Kazliçesme to Tuzla is an interesting example in this regard. When the new facilities were being built in Tuzla, which took from 1986 to 1994, some manufacturers in Kazliçesme were unable to continue their production and therefore lost customers and time. Although the move was certainly necessary for environmental reasons, it was poorly handled. The ideal would have been a planned move following the completion of the new industrial zone with no interruption of the production process. Similarly the foot-dragging nature of the Turkish bureaucracy can prove costly for firms as raw leather can easily spoil if left in warehouses for too long and without special care while waiting to clear customs. Moreover the government has been slow to respond to the problems of the animal husbandry sector, which is a largely ignored economic area in Turkey. Better control mechanisms and education for those engaged in this activity is definitely required. There is also a part for the government to play in improving the current state of the sector-specific research and education institutions. Before closing our discussion on the role of government, it should be added that there have been some attempts to formalize the Laleli market. Even the cluster firms have been lobbying the government for this as the

The Leather Clothing Cluster in Istanbul 149

present practices are causing an accounting problem. That is, the importation of their main input, raw leather, is fully registered but most of their sales are not. This is evident in the total import/export figures for raw leather and leather garments, which imply an unrealistically high domestic consumption of leather garments. Moreover the firms cannot make use of the export incentives provided by the government, given that many of their exports are not registered. Their efforts to ensure that their sales are recorded, however, have yet to bear fruit. One specific regulation introduced to solve the problem required small informal traders leaving the country to declare their purchases at customs and fill in a form, which was then considered for approval by a customs officer. However this system did not work as planned because since the late 1990s cargo and transportation companies have dealt with the unregulated shipment of goods purchased in the Laleli market (Yükseker, 2003, p. 111).19

Reasons for geographic concentration The Tuzla–Zeytinburnu–Laleli triangle If we consider the Turkish leather industry as a whole we can see that geographic concentration holds even in the case of subsectors. Firms that process leather are gathered in Tuzla, Bursa, Bolu, Gerede, Çorlu and Usak; producers of shoe bases and uppers are concentrated in the Denizli region; and processing facilities that specialize in the production of leather for garments are concentrated in Tuzla (Istanbul), Menemen (Izmir), Çorlu (Tekirdag) and Usak (SPO, 2000). All subsectors of the industry are present in Istanbul. Tanneries and manufacturers of leather garments (these two areas of activity are typically internalized by firms) have been concentrated in the industrial zone in Tuzla since 1992, when they moved from their historical base in Kazliçesme (Zeytinburnu). These firms, however, kept a presence in the original area in the form of retail stores. Thus in the words of one interviewee, Zeytinburnu continues to be ‘a leather city’ and ‘the centre of gravity for the leather clothing cluster’. Finally, the nearby district of Laleli is the centre of informal trade. The emergence of Laleli as the heart of informal trade merits specific consideration as it raises interesting issues in terms of the debate on clusters in the literature. Laleli was a residential area until the 1970s, when Istanbul became a magnet for tourists from the oil-producing countries of the Middle East. These tourists were also significant customers for goods such as textiles and jewellery.20 Hotels and shops mushroomed in Laleli during this period; in fact the transformation of the district was so rapid that Laleli had become an entirely commercial locale by the early 1980s. The decline of the Arab tourist wave coincided with the collapse of the Eastern bloc in the late 1980s and an influx of tourists from the former soviet countries. Even

150 Clusters and Competitive Advantage

before that time traders from Eastern Europe had visited Istanbul to sell alcoholic beverages and various kitchenware items and to buy leather jackets, textiles, clothing and jewellery (sometimes via barter). This type of trade exploded after the collapse of the Eastern bloc (Yükseker, 2003). The traders now arrived in Istanbul with empty suitcases to be filled with textiles and leather garments for sale in retail markets back home. In a few years the magnitude of the trade was such that it accounted for a third of Turkey’s exports, although ‘the authorities on both sides found it expedient to treat it as suitcase trading’ (Keyder, 1999, p. 178).21 Shopkeepers in Laleli were allied with manufacturers who were very flexible and could quickly supply the goods requested by the traders. This practice created a transnational, informal economic network and Laleli became a ‘de facto free trade zone’ (Yükseker, 2003).22 According to Keyder (1999, p. 179), Laleli can be viewed as ‘a pre-modern bazaar’, to which ‘the silk road analogy applies in more ways than one’. It specializes in just a few goods (textiles, leather garments and footwear), its customers are relatively stable, and it offers the services required by traders, such as hotels and restaurants, resembling ‘the caravanserais of imperial Istanbul’ (ibid.). Trust in Laleli is based on goodwill, which can work perfectly well when there is a growing market and both sellers and buyers are satisfied with the current state of business, but can easily collapse when the market stagnates. While this happened after the Russian crisis, the system was soon rebuilt. Laleli can be defined as ‘an informal, transnational economic space’, where buyers and sellers are neither part of a common culture nor long have historical relations (Yükseker, 2003). Given that contractual relations do not exist and there are virtually no formal sanctions to apply if things do not work out as planned,23 it follows that a very particular type of trust does exist in this location.24 This differs not only from the type of trust observed in Italy, where it is said to be embedded in sociocultural relations and the particular history of the region, but also from the type of trust in Silicon Valley, where enforcement of the law substitutes for the lack of historical and social ties. A striking example of trust in Laleli was provided by one of our interviewees. A Russian customer he did not know came into his shop carrying a plastic bag full of US dollars. He ordered leather jackets, which he expected to be ready for collection in 10 days’ time. Although the parties were total strangers and the interaction between them was not documented in any way, the outcome was satisfactory for both: 10 days later the Russian customer arrived and the leather jackets were waiting for him. This was, said the manager, ‘the beginning of a good business relationship’. Such trust fits Dixit and Nalebuff’s (1991) game theoretic understanding of trust, in which previous contacts determine the outcome of subsequent ones. In Laleli the fact that the parties in question come from different countries is not important. What really counts is the trust built upon previous commercial interactions.

The Leather Clothing Cluster in Istanbul 151

Another dimension of the particularity of Laleli can be highlighted by comparing it with Trabzon, a city located on the Black Sea coast of Turkey. Trabzon was one of the first locales in Turkey to engage in shuttle trade with the former Soviet Union. This growing market, however, was usurped by Laleli (Yükseker, 2003) in the second half of the 1990s, for a number of reasons. First, a ‘chance event’ (Porter, 1990, 1998) or ‘historical accident’ (Krugman, 1991a) – the immigration of Bulgarian Turks in the late 1980s – provided Laleli with speakers of Slavic languages, which facilitated communication with the informal traders. Second, Laleli was located in a city that hosted hundreds of textile and leather firms, whose products were in great demand by the traders. Third, the growth of service providers such as transportation companies and travel agents in Laleli contributed further to the attractions of the district. Finally, intense competition – not only among producers/sellers but also among the traders – was amplified by the proximity of rival firms and traders. All this resulted in the emergence of a self-reinforcing system in Laleli that did not exist in Trabzon. Yükseker (2003, p. 107) argues that Istanbul’s larger producers of leather garments only began to take Laleli seriously after the 1994 financial crisis in Turkey. Our interviewees, however, said that 1992 was the year in which they first started to export via Laleli. The specialization that Yükseker mentions in respect of Laleli and nearby Zeytinburnu, however, does hold: Laleli specializes in lower-priced leather clothing while Zeytinburnu, the historical centre of the Istanbul leather industry, serves as the ‘shop window’ for the larger producers of leather garments, which in recent years have prioritized quality and design.25 Hence the concentration of groups of firms in the leather clothing sector is based not only on the separation of production and sales functions but also on strategic orientation in that firms that target the upper end of the market and those which focus on the lower end are located in different districts. A final point in this regard is an interesting comment by an interviewee about the tardy response of governmental bodies to the developments in these two districts. As well as failing to regulate the informal market that emerged in Laleli, the government was slow to build a proper international port in Zeytinburnu. Arguably, if Zeytinburnu had had a port when the informal trade started in the early 1990s, shuttle traders could have been channelled not only to Laleli but also to Zeytinburnu, and therefore would have been introduced to higher-quality leather products much earlier. This would have alleviated the need for the Istanbul manufacturers’ current efforts at image building, or rather image repair, in the former Eastern bloc countries.

Reasons for and the benefits of clustering As with the previous cases examined in this study, historical events played an important part in the emergence of the Istanbul cluster. The efforts of Sultan Mehmet II were significant in this respect, as discussed in the

152 Clusters and Competitive Advantage

beginning of this chapter. One specific factor that favoured the establishment of leather works in Kazliçesme was the ready availability of water there. Moreover, although raw leather was available almost everywhere in Anatolia, high-quality tannin, an essential ingredient of the tanning process, could be obtained only in a limited number of places, one of which was Istanbul.26 The initial factors that favoured the location, therefore, were factor conditions such as the availability of water, and historical events such as the Turks’ conquering of Istanbul. Tanneries were concentrated in certain locations in the Ottoman era as well, but were encouraged to move outside the city centres because of the unpleasant smell and pollution caused by their activities. Environmental concerns continue to be one of the main reasons why tanneries tend to concentrate in space, in that they are encouraged or required to operate in places permitted by the government. These are usually outside the city centres and the tanneries share the cleanup costs. The Istanbul leather producers were located in Kazliçesme for more than 500 years until their move to Tuzla.27 Subcontracting was very common (Yelmen, 1992, pp. 153, 161), and recommendation by key actors in the district was of great importance: ‘I used to try hard to convince a well-known master craftsman to use and recommend the machinery that I produced. His opinion was valued very much in Kazliçesme’ said one interviewee. The fact that they were in tough competition with each other did not prevent manufacturers from spending time together socially. They attended the same local cafes and restaurants, which helped them to keep up to date with what was going on and provided them with motivation. Although leather industrialists in Kazliçesme had a history of solidarity,28 the competitive pressures that existed paralleled those identified in the clusters examined in the previous chapters. One of our interviewees stated that ‘partnerships were rare in Kazliçesme and even these collapsed sooner or later’ since ‘the atmosphere of the place did not tolerate partnerships’. This is still valid for Istanbul’s leather industrialists, as repeatedly emphasized by the interviewees, who stated that Istanbul differs from Izmir (Istanbul’s major competitor in leather clothing) in this regard.29 Leather industrialists think that the ‘artistic nature’ of leather processing heightens the intensity of competition and is a major factor in the dominance of family businesses: ‘The craft, that is, the particular way of processing leather, is only taught to close members of the family who will take over the business’. Leather is an organic and diverse material, and the expertise of craftsmen with the necessary skills to ensure its proper treatment is a very valuable asset for leather firms. As a result they compete fiercely for such craftsmen. Another commonality of the Istanbul leather clothing cluster with the clusters previously examined is that specialization is a relatively recent phenomenon, despite the long history of the overall industry. According to our interviewees, the beginnings of this specialization date back to the late 1950s. Prior to that period, leather jackets were not commonly worn and

The Leather Clothing Cluster in Istanbul 153

were mainly associated with policemen, railway workers and lorry drivers. It was only after the introduction of a new dyeing method, which involved the use of chromium, that leather garments were seen as desirable by other customers. One of our interviewees, Hasan Yelmen, who is a chemical engineer and regarded as the father of the contemporary Turkish leather industry, was the first to use this technique in Turkey and paved the way for the specialization in leather garments. In the 1970s a growth in demand for these products, especially from Europe, prompted others to enter the sector. This coincided with the ready availability of high-quality but cheap sheepskin, which was the favoured leather for manufacturing garments. Meanwhile the firm Derimod pioneered the incorporation of design features into leather clothing. The cluster’s specialization in leather garments, therefore, was initially triggered by an entrepreneur and subsequently reinforced by changes in international demand. Demand patterns also played a crucial part in the development of the footwear sector. This time, however, the push was in the opposite direction in that the domestic demand for shoes was large and the footwear sector did not come under pressure to internationalize until the 1990s, when it began to face significant foreign competition in the domestic market. As a consequence the export-oriented leather clothing sector now dominates the leather industry, unlike in Italy, where the industry has a rather different structure. Some of the benefits of clustering are independent of the location in question and are related to the phenomenon of clustering itself, as analysed in the previous chapters. First, it is beneficial to customers since it enables them to see a wide range of alternative options in a short time. ‘This is where the heart of the industry beats’, one interviewee said, paralleling the comments of his counterparts in the other clusters examined, who emphasized the ‘market-like’ nature of clusters in the eyes of the customers. This factor also ensures a good price–quality ratio since customers can easily compare products in terms of value for money. The second benefit is the proximity of related and supporting industries. One interviewee, for instance, argued that ‘isolated’ firms in provinces such as Konya and Elazig were not so successful because ‘They could not even find a technician to repair broken machinery. Besides, they had to buy chemicals from here, plan everything in advance accordingly and bear the associated costs, whereas we can sometimes buy chemicals daily.’ Another interviewee was of the opinion that it was not only handy to have everything needed nearby, but also knowing that they were within reach gave added confidence. Yet another interviewee made an analogy with the human body: ‘All parts should function properly and only then can you talk about a healthy system.’ Overall, these points reinforce the finding of the previous cases examined, that the presence of related and supporting industries contributes positively to the development and competitiveness of clusters.

154 Clusters and Competitive Advantage

The third benefit is the proximity of rival firms. One interviewee considered that this benefit had been much more pronounced in the original location of the industry, Kazliçesme, where the factories had been even closer to each other. According to him, when rival firms are located close it is possible to see what is going on, whether new machinery has been bought and the types of dye competitors are using. The fourth benefit is that if success is achieved during the early stages of cluster formation, this initiates a self-reinforcing dynamic. For instance in Istanbul there were only a few firms specializing in leather-related chemicals in the 1950s, but with the leather cluster’s growing success their number increased considerably in the subsequent decades. The Istanbul leather machinery sector underwent a similar development. In the 1950s the sector consisted of nothing more than a number of craftsmen manufacturing some of the tools used in leather processing. From the 1970s onwards, however, machines imported from abroad were copied by Istanbul engineers, who continued to hone their skills and formed the foundation of today’s leatherrelated machinery sector. In the meantime the founders of the family businesses that dominated the cluster were taking steps to ‘professionalize the family business via a professionalization of the family’ (Bugra, 1994). This included sending members of the second and third generations abroad (usually to France or Britain) to complete their education in leather-related areas. Another factor in the self-reinforcement of the cluster was new business formation by spin-offs from leading firms, as well as by newcomers to the area who had heard about the opportunities it offered. An interesting finding in this regard, and one that also applies to the previous cases examined, is that a noteworthy number of cluster participants came from the same town, Egin, located near the Anatolian cities of Malatya and Sivas. (Recall that the town in question was Babadag in the case of the towel and bathrobe cluster and Besni in the case of the carpet cluster.) As with the other towns, Egin was a place with few opportunities and many of the younger generation were forced to leave to seek their fortunes. This not only suggests that entrepreneurship is triggered by difficulties and challenges but also illustrates the importance of contacts and fellow townsmanship, as well as the magnetic nature of clusters. The final observation on clustering is unique to Istanbul and is not found in the other clusters examined: there are certain costs that can be linked to ‘diseconomies of urbanization’. Despite its obvious advantages, Istanbul, being the largest city in Turkey, can be a very difficult place in which to conduct business. For instance the cost of living and therefore the cost of labour is higher than in many other locations in Turkey. Moreover leather firms are subject to stringent regulations, for example in terms of environmental protection, which is not necessarily the case for firms elsewhere. Nonetheless the disadvantages tend to be outweighed by the advantages. There is a pool of qualified workers to draw upon and no shortage of supporting industries

The Leather Clothing Cluster in Istanbul 155

and services, including transportation and logistics. According to the interviewees, what is even more important is that Istanbul has an ‘aura’ (echoing Marshall’s (1949) ‘something in the air’ hypothesis), a refined cultural environment and well-established international links. All this encourages firms to upgrade their activities and motivates people to realize their potential. As one interviewee put it, ‘it is a school’ in that ‘even while walking on the streets of Istanbul you can see a clothing item that inspires you’. The fact that leather firms do not contemplate relocating is related not only to Istanbul’s unbeatable advantages but also to their expectation that today’s few disadvantages will turn into tomorrow’s advantages (see the next section for more on this issue). Lastly, the presence of diseconomies of urbanization in Istanbul prompts the more general question of whether clusters in small cities are different in nature from clusters in metropolises but this matter will be left to Chapter 8.

Future prospects for the leather clothing cluster in Istanbul: stuck in the middle? As mentioned at the start of the chapter, Turkish exports of leather garments have levelled off in recent years, and there has been a considerable fall in Turkey’s world export share. Although some of the loss in registered exports can be explained by the activities of the informal economy in Laleli, the sale of leather garments via shuttle trade has also fallen considerably since the peak in the mid-1990s. In the meantime China, India and Pakistan have emerged as the new leaders of the leather industry in the price-sensitive segments, while the world export share of Italy, a noteworthy producer of design- and fashion-oriented leather garments for the upper end of the market, has remained relatively stable. The fall in Turkey’s relative position can be explained by the fact that the industry had to import more than half of its requirement of raw leather, by the rise in labour costs, and by the emergence of new competitors offering more competitive prices. In other words, Turkey’s heavy reliance on cheap raw materials and low-cost labour to provide it with competitive advantage was unsustainable in the long term. As a consequence the Istanbul leather garment producers came under pressure to find a more sustainable source of competitive advantage, otherwise they might well become ‘stuck in the middle’ (Porter, 1985). In order better to understand the gradual change in the strategic orientation of the Istanbul leather clothing firms, it is informative to look at the impact of the Russian market on the cluster. Prior to the emergence of the informal shuttle trade the firms mainly served the European market, where customers were highly demanding. This forced producers to improve the quality of their products, but when these customers were replaced by informal traders who required low-cost goods and were less concerned about quality, the latter

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inevitably deteriorated. Although the sacrifice of quality meant easy sales in the beginning and the charm of an easy life was hard to resist, this created a poor image for Turkish products that would prove difficult to counter (SPO, 2000). Moreover in the late 1990s, consumer demands in the Russian market started to change and the informal traders began to pay more attention to quality. In the meantime wholesalers and transportation companies were gaining a hold over the organization of the shuttle trade (Yükseker, 2003). Apart from the difficulty of re-establishing the neglected contacts with European customers, the leather clothing firms now had to improve their image in the Russian market, where in some of the more upmarket shopping centres signs stating ‘Turkish products are not sold here’ were placed in shop windows. The temporary shift to the ‘easy life’, therefore, proved costly for the cluster firms. Indeed some of them switched to Italian-sounding brand names in an effort to reverse the damage. Returning to the subject of new sources of competitive advantage, after the setbacks described above the leather clothing manufacturers drew on their accumulated experience and know-how and engaged in marketing and promotion efforts to improve the image of Turkish leather garments abroad. As a result, in the early 2000s the fortunes of the cluster firms started to pick up again and they managed to erase their low-quality image in the Russian market. Today the larger firms are targeting the upper end of the market and are second only to Italian firms in this sector (SPO, 2000; IGEME, 2002). Thus although it is still possible to cater to the lower end of the market, larger producers are producing and exporting high-quality fashion items as it is impossible for them to compete with Chinese, Indian and Pakistani leather garment producers in terms of price. A related issue is that currently the existence of stringent regulations on environmental pollution and working conditions puts the cluster firms in a disadvantageous position vis-à-vis firms in other regions that do not have to bear the associated costs. The two leather industrial zones in Turkey (Tuzla in Istanbul and Menemen in Izmir) have full cleanup facilities, the cost of which is inevitably reflected in the prices of the products manufactured in these zones. Although this situation is problematic in the short term as it hinders competition with other regions, it will in fact provide the manufacturers with a significant advantage in the long term, given that being ‘green and competitive’ is now viewed as the way forward (Porter and Van der Linde, 1995). In summary the analysis of the leather clothing cluster in Istanbul has highlighted three important points. First, it has given us the opportunity to consider the distinguishing characteristics of an informal, transnational economy (the case of Laleli), which is a rather understudied form of internationalization in the literature on clusters. Second, the analysis has revealed that the benefits of clustering seem to outweigh the diseconomies of urbanization currently faced by the cluster, given that the cluster persists

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and relocation is not on the agenda of the cluster firms, which moreover expect these disadvantages to turn into advantages in the near future. Accordingly it is preferable to work in a demanding environment provided that this channels the industry in the right direction, as in the case of the stringent environmental standards mentioned above. Finally, the examination of the leather clothing sector has provided us with the opportunity to take a closer look at ‘a cluster in transition’. We have seen that the manufacturers’ low price strategy resulted in their being ‘stuck in the middle’ when new competitors began to threaten them in price-sensitive markets. Moreover the pattern of demand has changed in their largest market, the Russian Federation. These developments, coupled with the 1998 Russian crisis, have forced producers to reconsider their low quality, low price strategy, and taught them the importance not only of product design and quality but also of diversifying their export markets. The changes observed in the competitive dynamics in this leading cluster of the Turkish economy are therefore very informative, but arguably some aspects of this, such as the pressure caused by the emergence of new competitors, are not specific to the Istanbul cluster.

8 Conclusions

This chapter will first discuss the theoretical implications of the key findings of the cluster analyses with respect to the ongoing debate in the literature on the competitiveness of clusters (see Chapters 1 and 2), and then consider the implications of the study in terms of policy.

Theoretical implications The emergence of clusters At the beginning of this book we discussed some alternative theoretical approaches to how and why a cluster emerges in a particular location. The main triggers might be historical accidents, demand patterns and the prior existence of related and supporting industries and special inputs, including labour (Marshall, 1949; Krugman, 1991a; Porter, 1998). In general the emergence of the clusters examined in this book can be related to one or more of these, but additional factors also play a part. In the case of Ankara it was the declaration of the city as the capital of the Turkish Republic, its central location and climate, and the presence of a related industry (construction) that triggered the emergence of the furniture cluster. For the Denizli towel and bathrobe cluster it was the city’s good location, historical circumstances, the availability of inputs, the prevailing demand patterns and the presence of an entrepreneurial spirit. A similar set of forces triggered the development of the leather clothing cluster in Istanbul, for which a specific chance event, Sultan Mehmet II’s particular interest in the sector, was also very important. Finally, the emergence of the carpet cluster in Gaziantep was linked to its key location, the availability of inputs, the presence of related industries (yarn and textile machinery) and an entrepreneurial spirit, as well as a ‘historical accident’: the long-established border trade with Syria.1 Although these findings are generally in line with those in the literature, additional factors have been revealed. For example an examination of other centres of production shows that similar conditions, such as a long history 158

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in textiles or leather and the presence of inputs and several related industries, pertain in other locales in Turkey, prompting the question of whether chance events were the determining factors in the emergence of the competitive clusters. This contention is argued against in Chapter 6, which discusses how Gaziantep emerged as the leading location for machine-woven carpets when there was no tradition of carpet weaving, apart from kilims. In this particular case the importance of historical accidents is clear, since the event that triggered the emergence of the cluster was the growing demand for silk carpets imported via Syria. It is notable that this chance event was capitalized on in Gaziantep and not in another Eastern Anatolian city that also engaged in cross-border trade. This can be attributed to the entrepreneurial spirit of Gaziantepians, which was in turn reflected in the city’s favourable business environment. As discussed in Chapter 6, it may well be that such historical accidents happen all the time, but they trigger the emergence of a cluster only if the local business environment is conducive to growth. Another interesting issue revealed by the case studies is that although the production of textiles and leather had a long history in the clusters examined, specialization had only taken place recently. The real impetus began in the 1970s in all three cases, triggered by different combinations of circumstances (on top of those which favoured the general area of activity), namely entrepreneurship and demand patterns (mainly international) in the towel and bathrobe cluster; chance events, entrepreneurship and demand patterns (both national and international) in the carpet cluster; and chance events, entrepreneurship and demand patterns (mainly international) in the leather clothing cluster. This observation adds a new insight to the contributions in the literature, although the general theme is in line with the notion of ‘the process of becoming specific’ (Storper, 1999). Another issue that has been highlighted is the possibility that once a cluster begins to form a self-reinforcing dynamic comes into play and locks the activity into the location even if the initial conditions change (Arthur, 1985). This is exemplified by the cases of the towel and bathrobe and leather clothing clusters in that the basic conditions that triggered their emergence no longer provided them with a clear advantage. Apparently the benefits of clustering (see below) are strong enough to ensure the continuity of the cluster even if the initial advantages diminish in importance or disappear. The final point on the emergence of clusters is that it is often a methodological challenge to identify the historical triggers. The present study benefited from the fact that specialization in the products in question was a relatively recent phenomenon, so the scarcity of written documentation was countered by the availability of people who had witnessed the early stages of the clusters’ development. This underlines the importance of oral history and the necessity of documenting this history while it is still possible.

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The costs and benefits of clustering The findings from the case studies in respect of the costs and benefits of clustering are generally in line with those in the literature in that the proximity of related and supporting industries has been found to be very beneficial and the benefits of clustering for customers are large, while the proximity of rival firms generates both costs and benefits. When it comes down to the details, however, some interesting issues emerge. For instance clusters are convenient not only for customers since they reduce the likelihood of arbitrage as well as search costs, but also for the firms themselves since clusters are treated as markets to be visited, rather than the firms having to visit the customers. Similarly, the beneficial effects of the proximity of related and supporting industries include not only static aspects such as reduced transportation and transaction costs but also more dynamic ones, such as the contribution it makes to innovation and growth. The perceived costs and benefits of in-cluster rivalry, on the other hand, are far from uniform. Before analysing the details of this issue, the perceptions of cluster firms with regard to competition from other regions of Turkey should be mentioned. The managers interviewed in the furniture cluster, for instance, stated that they competed with Istanbul producers in the market for quality furniture and with the other locales such as Inegöl in the price-sensitive segments. The Istanbul leather industrialists saw Izmir as their main competitor in leather clothing, but other regions could cause trouble in price-sensitive markets by means of unfair competition. Finally, managers in the towel and bathrobe and carpet clusters perceived competitors in other regions as ‘different’ in the sense that they were isolated and very large, and therefore were not direct competitors. In-cluster rivalry is very intense in all four cases examined in this study. In fact, competitive forces are much more pronounced than cooperative ones, supporting the finding by Saxenian (1994) and Porter (1998). As noted in the literature, in-cluster rivalry can be personal and emotional, and is sometimes triggered by envy (Schoeck, 1966; Klein, 1975) and a desire to look good in the local community (Porter, 1998). A repeated theme raised by the interviewees is that the success of rival firms acts as a motivator and thus stimulates growth. Since the rival firms are working under the same conditions, firms have little excuse ‘if the neighbouring company is exporting, say, to France, but you cannot’. This not only stimulates motivation but can also increase confidence since, as one manager stated, ‘you learn not only about the opportunities themselves but also about the fact that they can generate fruitful results’. These observations provide support for the emphasis in the literature on the motivating nature of competition (Porter, 1990, 1998) as well as the importance of learning, tacit knowledge and information spillovers (Camagni, 1991; Brusco, 1996).

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The fact that information spreads rapidly in a cluster, on the other hand, raises the issue of what information should be shared with competitors and what should not. In the case of the Turkish clusters examined, we have seen that information on products and markets is crucial for success, and hence it is considered inappropriate to share such information with competitors. The greatest disadvantage of the proximity of rivals, according to the managers interviewed, is the rapid pace of imitation. Imitating best practices is easier in a cluster, being facilitated by the rapid flow of information through social networks. In-cluster competition, therefore, has advantages (it brings dynamism and stimulates innovation) and disadvantages (for example imitation by competitors is easier). However, even the problems associated with the ease of imitation might provide benefits in the long term since firms are inevitably pushed to develop sustainable competitive advantages. It is also possible that the cluster environment prevents destructive price competition, given that the likely costs of this are obvious to all and social sanctions may be imposed on those who start a price war (Dei Ottati, 1994). This points to the self-disciplining aspect of clustering, as observed in the case of the towel and bathrobe cluster in Denizli, where there is an unspoken consensus on the approximate price that should be charged for a typical bathrobe. In other words competition is good, provided that it is ‘sweet’. As the case of the furniture cluster in Ankara illustrates, however, there is also a possibility that it can turn into destructive competition. The challenge is to identify the circumstances that cause in-cluster competition to evolve towards either of these variants, which will be discussed in the next subsection. The analysis in this study has provided some insights into the nature of localized competition as well. According to Baum and Haveman (1997), local competition can lead to the differentiation of some product dimensions. This finding derives from a study of the hotel industry in Manhattan, where hotels are different in size but similar in terms of their price range. The leather clothing cluster in Istanbul confirms this finding since the firms there are concentrated in terms of their strategic orientation. The analysis of the Gaziantep carpet cluster, on the other hand, has revealed that carpet firms of similar size tend to concentrate in space and that smaller ones dream about upgrading their location to the industrial zones that house the larger carpet firms. Another related issue is the assertion that clustering is linked to production divisions (Steinle and Schiele, 2001). Both the Istanbul leather clothing cluster and the Gaziantep carpet cluster provide evidence against this contention in that most of the firms are vertically integrated but remain clustered. The furniture cluster in Ankara, though in line with this contention given that the firms specialize in different areas of the furniture business (each of which is concentrated on a street-by-street basis), is not competitive in international markets. Apparently clustering offers benefits in addition to reducing transaction costs.

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The self-reinforcing nature of clusters brings added benefits, which is why ‘the logic that it is a better idea to establish a new firm in another location since there are too many firms here does not work’, as one of the interviewees put it. Accordingly, ‘it is costly to be outside, remote from the center of activity’, the associated costs usually being in the form of unanticipated productivity penalties (Porter, 2000). The self-reinforcing dynamic in clusters, which also has the potential to turn the location into a magnet, is fed by information spillovers. In the Turkish clusters, spillovers related to the strategic orientation of firms can be even more important than technological spillovers. This is in line with the finding by Beal and Gimeno (2001) that information spillovers on marketing strategies are more important than technological spillovers for US software firms. In a similar vein, the Turkish clusters underline the importance of strategic innovation as well as technological innovation. When these thoughts are brought together with the fact that the major sources of learning are competitors, customers and firms in related industries, the importance of tacit knowledge (Becattini and Rullani, 1996; Brusco, 1996) and collective learning (Camagni, 1991) becomes apparent. A related observation is that a disproportionate number of entrepreneurs in each of the competitive Turkish clusters examined came from a single town in the regions in which the clusters are located: Babadag in the case of the Denizli towel and bathrobe cluster, Besni in the case of the Gaziantep carpet cluster and Egin in the case of the Istanbul leather clothing cluster. The fact that these small Anatolian towns offer few opportunities for the younger generation, and therefore the latter have to leave to seek their fortune, suggests that entrepreneurship might be triggered by harsh conditions. What is more important for our purposes, however, is that it also illustrates the key role played by social relations and contacts – in the form of fellow townsmanship in our example – in the process of new business formation that feeds cluster development. A much-debated topic in the literature on clusters is the part played by trust. Two of the cases examined in this book have provided interesting insights in this regard. In Denizli, trust is clearly manifest in the so-called ‘Babadag banknote’ (see Chapter 5). This type of trust, which is culturally embedded in the locale, has been well studied in the literature (Granovetter, 1985) and is mostly exemplified by clusters in ‘Third Italy’. It is also clear that contract-based trust can function well, too, if supported by the proper enforcement of law (Cohen and Fields, 1999). However the type of trust witnessed in Laleli, the centre of informal trade in the Istanbul leather clothing cluster, does not fit either of these two types of trust. Given that in Laleli trust-based relationships are established between two parties who start off as total strangers to each other and come from different countries, often Turkey and the Russian Federation, it is obvious that such relationships are not culturally embedded in the locale. At the same time, the fact that Laleli is an informal market means that the kind of trust observed there is not the

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same as that in Silicon Valley either, where written contracts and proper enforcement of the law substitute for the lack of culturally embedded trust. Among the available theoretical perspectives, the most suitable for explaining the type of trust that exists in Laleli is game theory (Dixit and Nalebuff, 1991). That is, trust is built up and reinforced by repeated interactions between two parties, whose previous contacts and the results of these determine the outcome of subsequent ones. The fact that the parties involved come from different countries does not appear to matter (see Chapter 7). The case of Laleli is also informative in respect of a relatively less studied subject in the literature: the informal international business activities in this locale are conducted exclusively by small informal entrepreneurs (Yükseker, 2003), indicating that such activities might also tend to cluster in space. The importance of entrepreneurial activity more generally is emphasized by the case studies in this book. In particular, it has been entrepreneurs who have mobilized the potentials that exist in the location for their particular area of business. This brings us back to the importance of the quality of the local business environment, which will be discussed in the next subsection.

Clusters and competitive advantage The clusters examined in this book are largely dominated by small and medium-size enterprises, although a few larger firms also exist, especially in the furniture and carpet clusters. There is a large degree of specialization in the furniture and towel/bathrobe clusters, whereas the key processes in the value chain have been internalized by many of the firms in the carpet and leather clothing clusters.2 The part played by entrepreneurship has been important, especially in the more competitive clusters. All four clusters have had the opportunity to benefit from the export incentives provided by the Turkish government, and the firms located in Denizli and Gaziantep from the assistance offered to less developed regions. The firms in the Istanbul leather clothing cluster and the Denizli towel and bathrobe cluster have made good use of these incentives, but those in the Ankara furniture cluster have been unable to do so because of their low level of internationalization. The Gaziantep carpet cluster firms have also benefited little from the incentives as their development started too late. There are competitive forces in all four clusters, and differing degrees of cooperation and competition. For example small firms in Denizli joined forces to form a sectoral foreign trade corporation that has enabled them to break export performance records, but successful entrepreneurs in Gaziantep are sceptical about cooperating with each other. All but one of the clusters have integrated themselves into international markets, but the forms of integration differ. The most interesting case in this respect is that of Laleli, as discussed above. One general conclusion that can be drawn from the analysis is that the contention that clustering is a widespread phenomenon in both developed and developing economies finds support from the case of Turkey (see Chapter 3),

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which is a middle-income developing country. Another general conclusion relates to the argument about the existence of different types of ‘sticky places’ (Amin and Robins, 1990; Markusen, 1996a), which is also confirmed by the Turkish results. With regard to the competitiveness of clusters, on the other hand, our analysis shows that not all geographic clusters are internationally competitive. In fact, understanding the link between clustering and competitiveness – in the sense of whether or not there are commonalities among clusters in respect of their ability to develop sustainable competitive advantages that also differentiate them from less competitive clusters – has been a central concern of our analysis. What follows is a discussion of the key issues raised by this analysis. A comparison of the four Turkish clusters reveals that some popular explanations of competitiveness in the literature – such as the dominance of competitive clusters by flexible, family-run, small and medium-sized enterprises and the existence of flexible specialization – do not necessarily hold, as also found by Amin (1994) in the case of Italy. For example the relatively less competitive furniture cluster in Ankara is dominated by small and mediumsized enterprises that are mostly family-owned and are engaged in intense subcontracting relations with other firms. On the other hand the firms in the successful Gaziantep carpet cluster and the Istanbul leather clothing cluster are rather sceptical about subcontracting. Hence they are hardly flexibly specialized but are nonetheless highly competitive. In the clusters examined, therefore, the existence of flexible specialization is not a differentiating factor in export performance. With regard to the explanation that the success of clusters can depend on interfirm cooperation, competitive forces rather than cooperative ones are pronounced in the less competitive furniture cluster, but to differing degrees this also applies to the competitive clusters in this study (carpets and leather clothing in particular). It follows that the existence of strong cooperative mechanisms (examples of which are seen in one of the competitive clusters: towels and bathrobes) in and of itself cannot differentiate the relatively more competitive cases from the less competitive ones either. Consequently it is not only clear that spatial clustering alone does not guarantee competitiveness, but it is also obvious that some of the popular explanations of the competitiveness of clusters in the literature are not always convincing. In order fully to understand what the Turkish cases tell us about the competitiveness of clusters, let us consider the commonalities among the competitive cases: a long history in the general field of activity, a good resource base in the initial stages of development, an entrepreneurial outlook, the presence of related and supporting industries, competitive pressure, including exposure to international competition, and accumulated know-how, especially in respect of the process of internationalization. When all these factors are present and interact with each other, the local business environment is conducive for growth in the sense that it fosters continuous upgrading.

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For example, if we take a closer look at one of these factors, accumulated know-how about the process of internationalization, we can see that this necessitates the presence of entrepreneurs who are both willing and able to internationalize. Being able to internationalize in turn means that there must be a base to tap into, and such a base will include the factors listed above. Conversely, in the absence of willing entrepreneurs it is unlikely that knowledge accumulation and collective learning (Camagni, 1991) will take place in the location. Why is it that entrepreneurs exist in certain locations but not in others? This, as mentioned above, relates to the attributes of the local business environment in general and the nature of competition in particular. The importance of the quality of the local business environment is evidenced by the Ankara furniture cluster’s failure to internationalize, even though some of the managers interviewed there were in fact quite eager to do so. In contrast the Istanbul leather producers have long been engaged in international activities, and in the case of the Gaziantep carpet cluster there has been a long history of international trade in the region, mainly of the cross-border type. Meanwhile the Denizli towel and bathrobe manufacturers have made good use of their renowned entrepreneurial abilities and exposure to international activities via guest workers in Europe and the tourism sector. The Ankara furniture cluster’s main connection with international markets, on the other hand, has been indirect: via the construction industry. In addition the national demand for its products has been large (paralleling the case of the footwear sector in Istanbul, see Chapter 7), thus diminishing the need to internationalize, and the cluster has experienced little competition from other locations until very recently. Now, however, Istanbul is replacing Ankara as the leading site for furniture production in Turkey, since the former offers a better environment for internationalization in terms of both infrastructure and contacts. The forces that work to enhance the competitiveness of a cluster (such as the rapid flow of information) can also work in the opposite direction, since not only positive factors but also negative ones can be magnified in a cluster environment. A prominent firm in the furniture cluster, for instance, tried to internationalize but this turned into a disaster when conflicts with a client and the resultant law suit eventually led to the bankruptcy of one of its affiliated firms. Such stories spread rapidly in clusters and act as a disincentive to other firms. As noted above, cooperation is not a necessary condition for a cluster to be competitive and competitive forces can be more important in this respect. However there is intense in-cluster competition in the furniture cluster, so obviously the existence of intense competition is no guarantee of competitiveness either. This prompts the question of how and when competitive pressure leads to ‘sweet’ or to destructive competition (the term ‘sweet competition’ is borrowed from Gaziantep entrepreneurs, who often use it to describe the type of competition that prevails in that city). Why is it that the

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cluster environment has served to prevent destructive price competition in the towel and bathrobe cluster but not in the furniture cluster? This cannot be explained only by context-specific circumstances such as intense competition creating problems in times of crisis and/or when the market is stagnant but returning to normal when the situation improves. Rather, other aspects of the local business environment seem to matter as well. In other words the existence of competitive pressure is likely to generate positive outcomes when it is embedded in a favourable local context. Of particular relevance here is how local entrepreneurs respond to competitive pressures. We know from the experiences of the Turkish clusters that certain strategic paths, such as taking an opportunistic stand even if it is temporary or failing to decide which path to follow, can prove costly for firms in the long term. However the development of sustainable competitive advantages (in the form of investing in brand development and/or becoming an irreplaceable subcontractor) enables resilience even in times of crisis. Therefore the strategic orientation of firms is an essential factor in competitiveness, and this is in turn shaped by the attributes of the local business environment. The challenge, then, is to identify the factors in the business environment that account for the observed divergence in the strategic orientations of firms and pave the way for differing degrees of competitive potential and performance. According to Porter (1990, 1998) these are factor conditions, local demand conditions, related and supporting industries, and the context for firm strategy. In the case of the Turkish clusters, one more can be added: international demand. International demand has been found to play an important role in the highly competitive towel/bathrobe and leather clothing clusters, providing support for those who argue that international forces (including international demand) must be taken into account for a thorough understanding of competitive advantage (Dunning, 1993; Rugman and D’Cruz, 1993; Rugman and Verbeke, 1993). We have seen that international demand can trigger the transformation of a cluster (for example in respect of its specializing in a particular area of activity) and of its competitive advantages. In other words, what is suggested by the Turkish cases is that the importance of local circumstances in defining a cluster’s sources of advantage does not preclude the possibility that other forces, including international demand and international competition, might play key roles in its subsequent transformation. This interesting point can be linked to another criticism of Porter’s framework (Stopford and Strange, 1991; Bellak and Weiss, 1993), namely that it cannot be applied universally without modification as it has been derived from an analysis of developed countries. This raises the possibility that the importance of international demand to the Turkish clusters might be a departure from the situation in developed country clusters. As a final note in this regard, some of the less emphasized areas in Porter’s framework, such as history, an entrepreneurial spirit, accumulated know-how and social networks, have also been found to play important roles in the Turkish clusters. Overall, however,

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the evidence obtained from the Turkish cases strongly supports Porter’s (1998) main idea that the phenomenon of clustering is a manifestation of the importance of the local business environment. The next subsection is devoted to a discussion of this matter in terms of its impact on competitive advantage.

Sustainability of competitive advantage and strategic transformation One issue that should be clarified for a better understanding of the strategic orientation of firms and the sustainability of competitive advantage is the process of imitation. We have seen that the towel/bathrobe and leather clothing clusters have found it difficult to compete with China, India and Pakistan on the basis of low-cost labour and inputs. The Gaziantep carpet producers, on the other hand, still have a labour cost advantage over their main competitor, Belgium, and are likely to capitalize on this until they are challenged by other competitors. However, inexpensive labour and low-cost inputs are easy to imitate in relative terms, hence advantages based on such factors are unlikely to be sustainable in the long term. This does not mean that cost advantages are not sustainable, but what really matter are the sources of a cost advantage and the ease of its imitation. In other words, if a cost advantage is based on productivity or a technological breakthrough it may well be sustainable for a long time, as the Japanese experience illustrates (Öz and Wasti, 2001). A related issue is the necessity or otherwise of developing a brand. The views of our interviewees on this ranged from it being absolutely necessary and unavoidable to an unrealistic dream since it would require a huge investment. Once again, this boils down to the sustainability of advantage. In fact the development of a brand can be seen as an attempt to develop a sustainable competitive advantage. The experience of some firms in the towel and bathrobe cluster, on the other hand, has shown that it is also possible for firms to become irreplaceable subcontractors for international partners without developing a brand of their own (see Chapter 5). Both paths seem feasible, provided that the associated advantages are sustainable. In the competitive clusters examined in this study, in general exportoriented firms are aware of the importance of strategy and some have already adopted strategies to develop sustainable advantages. The domestically oriented firms in the furniture cluster, on the other hand, continue to rely on easy-toimitate cost advantages, and the pursuit of more sustainable sources of competitive advantage, such as productivity, technology and design capability, remains an exception. Although increased competition has recently triggered a process of upgrading, the local business environment is rather unfavourable at present (see Chapter 4), making it difficult for the cluster to break out of its negative loop. An interesting question at this point is what factors are likely to prompt a move to develop more sustainable competitive advantages? In the Gaziantep carpet cluster, competition from Belgium and the patent law were the main

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triggers. The transformation of the towel and bathrobe cluster, whose firms chose to serve ‘difficult customers’ in stable markets, was mainly shaped by the growing international demand for high-quality products. Finally, the transformation of the leather clothing cluster was linked to changes in international markets in that the cluster observed a temporary shift to the price-sensitive market segments and then returned to the upper end of the market. Therefore factors such as international demand patterns and competition, regulations, the strategic priorities of firms and the response of firms to changing market opportunities may trigger the transformation of a cluster. As exemplified by the leather clothing cluster, however, this transformation is not always progressive – that is, moving towards the upgrading of competitive advantage – and a shift in the opposite direction is possible. It seems that clusters are competitive only if the right strategies are followed in an environment that is conducive to upgrading.3 What is needed is a detailed exploration of the functioning of this process. Our analysis of the Turkish clusters’ experiences is a step in that direction. Needless to say, whether the conclusions reached are specific to Turkey and/or developing countries or speak for the competitiveness of clusters more generally is a matter for further research, especially in other developing countries.

Policy implications A striking feature of the economic geography of the world is its uneven distribution (Henderson et al., 2000), a phenomenon that has been a central concern not only for economic actors but also for governments. A thorough understanding of the competitiveness of locations is essential for companies, whose success ultimately depends on their ability to create and sustain competitive advantage. In turn the location decisions of companies have important implications for government policy, since some locations will prosper and attract more investment (both national and international) than others. To understand the implications of the analysis in this book for policy making, the systemic nature of competitive advantage should be underlined. If sources of advantage are defined as factors that interact with each other in complex ways to form a unique system, it follows that it will be difficult, if not impossible, to transfer this system to another location, which is in fact the very reason why the resulting competitive advantage is sustainable. What is possible is to mobilize the potential that exists in a location for a particular area of activity with the help of suitable strategies. The focus of this, as suggested by the analysis in this book, should be on improving the local business environment. The government, for instance, might take steps to improve sector-specific research and education institutions. Putting in place standards and regulations that signal a way forward for sustainable competitiveness – as the environmental standards did for the leather clothing cluster and the patent law did for the carpet cluster – would also help in this

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endeavour. Another important task for the government is to ensure the proper functioning of competition as well as that of related and supporting businesses. Encouraging new business formation, facilitating international trade by cluster firms and promoting the location as the centre of the area of activity in question are also likely to provide benefits for all cluster participants. In the Turkish context, the attempts to promote Gaziantep and Denizli via marketing programmes could be supported by government institutions. Most importantly, an understanding of the key issues in the sustainability of competitive advantage, which will necessitate a shift in mindset, needs to be developed and understood by all cluster participants. For their part, companies should seek challenges that will require them to upgrade. They should join in cluster development efforts by, for instance, taking an active part in promoting industry-specific education and research centres by granting scholarships and research funds, increasing on-the-job training and encouraging government research institutions to conduct commercially relevant research projects. The approach suggested here has implications for a location’s chance of attracting foreign direct investment (FDI) as well. FDI, just like regional and national investment, may be attracted to a location because of its magnetic effect, and then to fill in ‘the missing links’. Both of these can potentially contribute to a cluster’s development, which will in turn reinforce its status as a magnet for the given area of activity. It is difficult to predict the time needed for a location to become a magnet, but it took the Denizli towel and bathrobe business about 20 years, working from a firm base and long tradition of textile production. Given the link between clustering and competitive advantage, there is a need to coordinate all the cluster participants to ensure sustainable development. There is evidence to suggest that a clear vision and an explicit framework for future development can help to improve cluster competitiveness. For example Sölvell et al. (2003) argue for the necessity of highly organized efforts to increase the competitiveness of clusters, which should eventually institutionalize. The leading role in such an initiative might be assumed by public and/or private institutions. There is agreement that a catalyst is needed to facilitate the development of clusters, but the exact nature of this is still subject to debate. In California it has been firms themselves that have taken the initiative, and the role of state institutions such as universities has been mainly facilitative. In Baden-Württemberg, in contrast, the state government has been of major importance in developing institutional mechanisms to support local clusters (Raco, 1999). Although opinions differ on whether public or private institutions should assume the leading role in cluster development initiatives, there is consensus on the necessity of ensuring the broad involvement of cluster participants which has been found to be among the commonalities of successful clusters (Porter, 2000; Sölvell et al., 2003). The analysis in this book clearly points to the need for microeconomic government policy. This does not mean that macroeconomic policies are

170

Clusters and Competitive Advantage

unimportant, but it seems that they are not sufficient to ensure the sustained competitiveness of clusters. There is also a need to avoid overreliance on macroeconomic variables such as devaluation and wage rates and to focus instead on the true sources of competitive advantage. Unfortunately governmental institutions have usually been the last to join in the fostering of a cluster dynamic in Turkey. When a contribution has been made it has been rather ad hoc and mostly induced by the central government. In some developed countries local governments have played an active part in improving the business environment so as to foster cluster development, a typical example being the abovementioned case of Baden-Württemberg in Germany (Raco, 1999), whereas similar tendencies to those observed in Turkey can also be seen in other developing countries (Nadvi, 1994; Schmitz, 1999). As the story of Denizli is similar to that of the clusters in ‘Third Italy’ in many respects – including a long history in the area of activity, specialization in a mature industry, the rapid pace of new business formation, the coexistence of cooperation and competition, and an export-oriented outlook – the possibility exists of well-developed clusters becoming established in other developing countries. Moreover the case of the Gaziantep cluster is of symbolic importance for relatively backward regions, given that it constitutes a success story in an otherwise underdeveloped area (south-east Turkey) and has already generated externalities for neighbouring provinces. A related issue that was touched upon in Chapter 5 is the rather sceptical attitude towards dependence on a single industry in a location (IAV, 1997; DTO, 2003). This is seen as a sign of danger in the case of Denizli, especially given that the dependence is on a mature and ‘old-fashioned’ industry. It follows that the same danger may not be valid in the case, say, of Silicon Valley. As stated in Chapter 5, although it would be reassuring to have other lines of business to turn to in the event of a crisis affecting the towel and bathrobe cluster, the benefits of clustering are significant. Moreover, as the case of Italy illustrates, it is perfectly possible to develop sustainable competitive advantages in mature and old-fashioned industries. What really matters is how you compete in these industries (Porter, 1990). Therefore cluster-based initiatives should not be limited to high-tech pursuits but should also include traditional industries. It is normal that a smaller city will have only one or two leading clusters. Apart from the strategic issues discussed above, the presence of small city clusters are important from a methodological point of view since they provide a natural laboratory for studying localized economies. In the context of the present study, urbanization economies probably played a role in three clusters – those in Istanbul (the economic capital of Turkey), Ankara (the capital) and Gaziantep (a regional centre) – so when benefits specific to a location are considered this fact should be taken into account. In the case of Denizli the localization of the economy took place in the absence of urbanization. Some diseconomies of urbanization have been observed in big city

Conclusions

171

clusters. Being located in a big city, for instance, limited the opportunities for expansion for both the Ankara furniture cluster and the Istanbul leather cluster. Consequently some firms from the furniture cluster relocated in and around Akyurt on the outskirts of the capital, and all the Istanbul tanneries moved from Kazliçesme to Tuzla. A noteworthy observation in this respect is that in both cases the firms maintained retail outlets in their original areas of concentration, reflecting, among other things, the importance attributed to tradition and the convenience of customers. In the case of the Istanbul leather garment sector, the high cost of labour and stringent environmental regulations are perceived to be facilitating unfair competition from other leather production locales in Turkey. However relocation to another city is unthinkable, according to the managers interviewed, not only because the advantages of the current location outweigh the disadvantages, but also because it is expected that today’s disadvantages will turn into advantages in the long term. The point made by one interviewee that the aura of Istanbul forces individuals to fulfil their potential again highlights the importance that the quality of the local business environment has in the development of sustainable competitive advantages. This does not mean that similar motivating forces do not exist in smaller cities, as is evident from the fact that environmental issues are high on the agenda of the Denizli firms. Moreover there might be additional forces that stem from being located in a small city. In Denizli, for example, the manufacturers feel part of their city and want to invest in it by enlarging their businesses (Mutluer, 1995), spurred on by peer pressure and the desire to look good in the community. One challenge faced by clusters in smaller cities is attracting talent to the area, so local institutions and firms should join forces to bring this about. To conclude, the growing literature on clusters can contribute to a better understanding of competitive advantage, and insights from the management literature can contribute to a better understanding of the competitiveness of locations and thus to the broader debate on the micro-foundations of economic development. There is ‘gold to mine’ in applying management concepts to the analysis of locations’ competitiveness, and the findings may provide novel and valuable insights that will help to correct the uneven distribution of economic activity in space.

Appendix 1 Top Five Industries in Terms of Location Quotient, by Province

Location Quotient

Province

ISIC

Industry

Adana

1310 7111 2699

Mining of iron ores Renting of land transport equipment Manufacture of other non-metallic mineral products n.e.c. (not elsewhere classified) Other credit granting Manufacture of other special purpose machinery Extraction of crude petroleum and natural gas Manufacture of carpets and rugs Manufacture of metal tanks, reservoirs and containers Manufacture of other electrical equipment n.e.c. Cargo handling Production, processing and preserving of meat and meat products Manufacture of other transport equipment n.e.c. Manufacture of refractory ceramic products Cutting, shaping and finishing of stone Manufacture of prepared animal feeds Manufacture of other textiles n.e.c. Other scheduled passenger land transport Other credit granting Other non-scheduled passenger land transport Retail sale in non-specialist stores (food, beverages or tobacco) Manufacture of articles of concrete, cement and plaster Manufacture of basic precious and non-ferrous metals Manufacture of accumulators, primary cells and batteries Veterinary activities Retail sale of automotive fuel Mining and agglomeration of lignite Non-scheduled air transport Manufacture of prepared animal feeds

Adiyaman

Afyon

6592 2929 1110 1722 2812 3190 6301 1511

Agri

3599 2692 2696 1533 1729 6021 6592 6022 5211

Aksaray

2695 2720 3140

Amasya

8520 5050 1020 6220 1533

172

6.6638 3.1372 2.7936 2.7383 2.5823 52.0188 9.8507 4.8942 4.7601 4.6362 23.2740 21.5738 20.0408 11.4229 9.7248 5.4175 5.3905 3.4984 3.4391 3.2143 3.2742 3.1340 3.0937 2.6625 2.6078 8.6137 5.9153 5.5971

173

Ankara

Antalya

Ardahan

Artvin

1410 6303 8022 9220 4020 7210 7493 5510 6304 5110 1410 9000 6303 1520 5211 2429 7494 1320 2511 7130 2010 4010

Aydin

Balikesir

8520 1514 6592 9213 6022 4550 1421 3710 1514 1512

Bartin

Batman

3511 6022 1554 1410 2029 1110 7010 1554

Quarrying of stone, sand and clay Other transport-supporting activities Technical and vocational secondary education News agency activities Manufacture of gas; distribution of gaseous fuels through mains Hardware consultancy Building cleaning activities Hotels and other providers of short-stay accommodation Travel agencies; tourist assistance activities n.e.c. Wholesale on a fee or contractual basis Quarrying of stone, sand and clay Sewage and refuse disposal, sanitation etc. Other transport-supporting activities Manufacture of dairy products Retail sale in non-specialist stores (food, beverages or tobacco) Manufacture of other chemical products n.e.c. Photographic activities Mining of non-ferrous metal ores, except uranium and thorium Manufacture/retreating of rubber tyres and tubes Renting of personal and household goods n.e.c. Saw milling and planing of wood Production, collection and distribution of electricity Veterinary activities Manufacture of vegetable and animal oils and fats Other credit granting Radio and television activities Other non-scheduled passenger land transport Renting of construction or demolition equipment with operator Mining of chemical and fertilizer minerals Recycling of metal waste and scrap Manufacture of vegetable and animal oils and fats Processing and preserving of fish and fish products Building and repair of ships Other non-scheduled passenger land transport Manufacture of soft drinks; production of mineral waters Quarrying of stone, sand and clay Manufacture of other products of wood, etc. Extraction of crude petroleum and natural gas Real estate activities with own or leased property Manufacture of soft drinks; production of mineral waters

3.3602 3.1155 8.2229 7.7405 5.6415 5.0227 4.9979 7.4079 6.8915 3.9865 2.5891 2.1475 4.4466 3.3850 3.1162 2.7046 2.6988 81.6317 3.4262 2.5478 2.3643 1.9781 4.3489 4.3319 4.2364 4.0281 3.6914 46.2726 14.0406 12.2692 10.3645 8.5857 22.5768 7.9821 7.8794 5.4470 4.2425 101.1813 6.7218 5.7433

174 (Continued)

Province

ISIC

Industry

1531 2695

Manufacture of grain mill products Manufacture of articles of concrete, cement and plaster Manufacture of soft drinks; production of mineral waters Other supporting transport activities Quarrying of stone, sand and clay Wholesale of food, beverages and tobacco Wholesale of solid, liquid and gaseous fuels etc. Processing and preserving of fish and fish products Manufacture of vegetable and animal oils and fats Quarrying of stone, sand and clay Hardware consultancy Manufacture of non-structural, non-refractory ceramic ware Renting of office machinery and equipment (incl. computers) Manufacture of other textiles n.e.c. Other scheduled passenger land transport Production, collection and distribution of electricity Manufacture of builders’ carpentry and joinery Storage and warehousing Renting of personal and household goods n.e.c. Manufacture of soft drinks; production of mineral waters Retail sale in non-specialist stores (food, beverages or tobacco) Manufacture of grain mill products Manufacture of weapons and ammunition Tanning and dressing of leather Manufacture of ovens, furnaces and furnace burners Manufacture of fertilizers and nitrogen compounds Manufacture of other food products n.e.c. Manufacture of prepared animal feeds Manufacture of starch and starch products Manufacture of insulated wire and cable Manufacture of carpets and rugs Manufacture of soft drinks; production of mineral waters Non-scheduled air transport Technical testing and analysis

Bayburt

1554

Bilecik

6303 1410 5122 5141 1512 1514 1410 7210 2691

Bingöl

7123 1729 6021 4010

Bitlis

2022 6302 7130 1554 5211

Bolu

1531 2927 1911 2914 2412

Burdur

Bursa

1549 1533 1532 3130 1722 1554 6220 7422

Location Quotient 2.9840 2.8912 13.5775 4.9170 4.9049 3.8768 2.1657 31.4339 12.7916 9.1630 7.5820 6.0027 30.2392 8.5139 4.5203 3.0819 2.8696 18.6366 3.8351 3.2595 2.4446 2.4065 17.3655 13.8280 12.4335 8.3222 3.8629 5.5623 4.9242 4.8507 4.7572 4.7016 12.5064 9.2116

175 1711

Çanakkale

2922 8010 6592 1512 1552 1320 2699

Çankiri

1422 2101 2692 2921 4010

Çorum

Denizli

1542 2213 1020 1533 1410 1723 1711 1721

Diyarbakir

Edirne

Elazig

1531 1421 1110 8519 2320 9309 8010 6592 1520 3699 9309 6022 1320 2692 2320 1533 4010

Preparation and spinning of textile fibres; weaving of textiles Manufacture of machine tools Primary education Other credit granting Processing and preserving of fish and fish products Manufacture of wines Mining of non-ferrous metal ores, except uranium and thorium Manufacture of other non-metallic mineral products n.e.c. Extraction of salt Manufacture of veneer sheets, plywood, laminated board etc. Manufacture of refractory ceramic products Manufacture of agricultural and forestry machinery Production, collection and distribution of electricity Manufacture of sugar Publishing of recorded media Mining and agglomeration of lignite Manufacture of prepared animal feeds Quarrying of stone, sand and clay Manufacture of cordage, rope, twine and netting Preparation and spinning of textile fibres; weaving of textiles Manufacture of made-up textile articles, except clothing Manufacture of grain mill products Mining of chemical and fertilizer minerals Extraction of crude petroleum and natural gas Other human health activities Manufacture of refined petroleum products Other service activities n.e.c. Primary education Other credit granting Manufacture of dairy products Other manufacturing n.e.c. Other service activities n.e.c. Other non-scheduled passenger land transport Mining of non-ferrous metal ores, except uranium and thorium Manufacture of refractory ceramic products Manufacture of refined petroleum products Manufacture of prepared animal feeds Production, collection and distribution of electricity

9.0954 6.6800 4.9752 20.6905 12.0540 11.5251 10.1643 7.2595 64.2610 11.6765 10.1213 3.8295 2.5244 40.9227 15.2778 6.9651 5.2529 5.1046 28.3713 12.2743 7.6795 5.7509 5.5022 34.1803 3.7321 3.4040 3.3416 2.6723 7.7707 6.6573 3.7295 3.5979 3.5880 27.2880 9.0640 8.4034 5.0749 4.4916

176 (Continued)

Province

ISIC

Industry

Erzincan

1310 1320

Mining of iron ores Mining of non-ferrous metal ores, except uranium and thorium Manufacture of basic precious and non-ferrous metals Other mining and quarrying n.e.c. Other scheduled passenger land transport Extraction of salt Research on and experimental development of NSE (Natural Science and Engineering) Mining and agglomeration of lignite Other service activities n.e.c. Manufacture of cocoa, chocolate and sugar confectionery Manufacture of fertilizers and nitrogen compounds Mining of chemical and fertilizer minerals Sewage and refuse disposal, sanitation etc. Manufacture of watches and clocks Quarrying of stone, sand and clay Manufacture of carpets and rugs Manufacture of coke oven products Manufacture of soap, detergents, perfumes etc. Manufacture of starch and starch products Manufacture of cordage, rope, twine and netting Manufacture of other food products n.e.c. Mining of non-ferrous metal ores, except uranium and thorium Other supporting transport activities Manufacture of soft drinks; production of mineral waters Other non-scheduled passenger land transport Manufacture of cement, lime and plaster Mining of non-ferrous metal ores, except uranium and thorium Processing and preserving of fruit and vegetables Production, collection and distribution of electricity Wholesale of food, beverages and tobacco Travel agencies; tourist assistance activities n.e.c. Retail sale in non-specialist stores (food, beverages or tobacco) Production, collection and distribution of electricity

2720

Erzurum

1429 6021 1422 7310 1020 9309 1543

Eskisehir

2412

Gaziantep

1421 9000 3330 1410 1722 2310 2424 1532 1723

Giresun

1549 1320 6303 1554

Gümüshane

6022 2694 1320 1513 4010

Hakkari

5122 6304 5211 4010

Location Quotient 24.8875 19.1248 9.0355 7.2891 6.9192 9.7769 8.0999 6.5639 5.4203 2.8477 15.6866 14.5554 12.4919 12.2847 4.4178 20.1662 11.2129 6.1161 5.4365 4.6398 9.5858 4.3470 3.7061 3.2748 3.0346 11.3555 7.0442 4.4383 3.0276 2.5745 3.7886 3.6207 3.4425

177

Hatay

Içel

Igdir

Isparta

Istanbul

Izmir

Karaman

Kars

2022 9241 9000 2023 1514 2320 5040 7111 7495 7123 6301 5110 1422 1729 2429 5240 8520 1421 2926 1722 1911 3599 2421 6210 7230 7413 3694 1600 7122 5259 7492 1429 6022 5121 5040 1020 8520 2429 1422 2699 7130 4010

Manufacture of builders’ carpentry and joinery Sporting activities Sewage and refuse disposal, sanitation etc. Manufacture of wooden containers Manufacture of vegetable and animal oils and fats Manufacture of refined petroleum products Sale, maintenance and repair of motorcycles Renting of land transport equipment Packaging activities Renting of office machinery and equipment (incl. computers) Cargo handling Wholesale on a fee or contractual basis Extraction of salt Manufacture of other textiles n.e.c. Manufacture of other chemical products n.e.c. Retail sale of second-hand goods Veterinary activities Mining of chemical and fertilizer minerals Manufacture of machinery for textile and leather production Manufacture of carpets and rugs Tanning and dressing of leather Manufacture of other transport equipment n.e.c. Manufacture of pesticides and other agrochemical products Scheduled air transport Data processing Market research and public opinion polling Manufacture of games and toys Manufacture of tobacco products Renting of construction machinery and equipment Other non-store retail sales Investigation and security activities Other mining and quarrying n.e.c. Other non-scheduled passenger land transport Wholesale of agricultural raw materials and live animals Sale, maintenance and repair of motorcycles etc. Mining and agglomeration of lignite Veterinary activities Manufacture of other chemical products n.e.c. Extraction of salt Manufacture of other non-metallic mineral products n.e.c. Renting of personal and household goods n.e.c. Production, collection and distribution of electricity

2.1415 2.0951 8.9314 4.9557 4.3501 3.9239 3.1783 28.1535 9.0340 8.2774 6.7404 5.1401 24.8973 17.5432 6.8240 4.9094 3.4114 31.1074 7.7432 7.2111 6.3583 5.0527 3.9830 3.9818 3.6333 3.5430 3.4993 13.7714 7.3957 5.5086 5.4076 5.1526 5.6724 4.8861 4.1601 3.9928 3.8784 7.7788 7.4759 6.4409 5.2590 4.5875

178 (Continued)

Province

ISIC

Industry

Kastamonu

1320

Mining of non-ferrous metal ores, except uranium and thorium Processing and preserving of fish and fish products Manufacture of refractory ceramic products Manufacture of builders’ carpentry and joinery Manufacture of veneer sheets, plywood, laminated board etc. Manufacture of sugar Mining of iron ores Manufacture of starch and starch products Sewage and refuse disposal, sanitation etc. Manufacture of carpets and rugs Other credit granting Extraction of crude petroleum and natural gas Manufacture of other transport equipment n.e.c. Technical testing and analysis Manufacture of accumulators, primary cells and batteries Manufacture of coke oven products Manufacture of refined petroleum products Production, processing and preserving of meat etc. Manufacture of pharmaceuticals, medicinal chemicals etc. Manufacture of cement, lime and plaster Manufacture of wines Quarrying of stone, sand and clay Manufacture of agricultural and forestry machinery Life insurance Manufacture of grain mill products Manufacture of motorcycles Manufacture of refractory ceramic products Manufacture of basic precious and non-ferrous metals Manufacture of refined petroleum products Mining and agglomeration of lignite Manufacture of fertilizers and nitrogen compounds Manufacture of starch and starch products Research on and experimental development of SSH (Social Sciences and Humanities) Other non-scheduled passenger land transport Inland water transport Manufacture of weapons and ammunition Manufacture of cocoa, chocolate and sugar confectionery

1512 2692 2022 2021 Kayseri

Kirklareli

Kirikkale

1542 1310 1532 9000 1722 6592 1110 3599 7422 3140 2310 2320 1511 2423

Kirsehir

K. Maras

Kocaeli

Konya

2694 1552 1410 2921 6601 1531 3591 2692 2720 2320 1020 2412 1532 7320 6022 6120 2927 1543

Location Quotient 17.2279 16.3051 9.1138 3.9766 3.3318 25.1365 13.8427 10.2831 6.1036 5.1696 18.1451 10.6959 8.9950 7.5713 5.7115 29.2998 21.3521 11.1442 6.9761 3.9358 19.4470 4.5353 3.9829 3.5064 3.4330 11.9977 9.2978 9.0733 7.0529 6.7194 24.3247 8.2925 6.2371 5.0692 4.7422 29.2171 5.9826

179

Kütahya

3591 1533 2921 1020 1429 1421 2691 1320

Malatya

5251 7310 8520 7493 7123

Manisa

2692 4550 1020 1542 3312

Mardin

1421 1110 2694 1531 6021 3512

Mugla

1429 5510 1020 3320 Mus

Nevsehir

6302 3691 5211 1531 3130 1552 2691 3420 2692 2699

Manufacture of motorcycles Manufacture of prepared animal feeds Manufacture of agricultural and forestry machinery Mining and agglomeration of lignite Other mining and quarrying n.e.c. Mining of chemical and fertilizer minerals Manufacture of non-structural, non-refractory ceramic ware Mining of non-ferrous metal ores, except uranium and thorium Retail sale via mail order Research on and experimental development of NSE Veterinary activities Building cleaning activities Renting of office machinery and equipment (incl. computers) Manufacture of refractory ceramic products Renting of construction equipment with operator Mining and agglomeration of lignite Manufacture of sugar Manufacture of instruments for measuring, testing etc. Mining of chemical and fertilizer minerals Extraction of crude petroleum and natural gas Manufacture of cement, lime and plaster Manufacture of grain mill products Other scheduled passenger land transport Building and repair of pleasure and sporting boats Other mining and quarrying n.e.c. Hotels and other providers of short-stay accommodation Mining and agglomeration of lignite Manufacture of optical instruments, photographic equipment Storage and warehousing Manufacture of jewellery and related articles Retail sale in non-specialist stores (food, beverages or tobacco) Manufacture of grain mill products Manufacture of insulated wire and cable Manufacture of wines Manufacture of non-structural, non-refractory ceramic ware Manufacture of bodies for motor vehicles etc. Manufacture of refractory ceramic products Manufacture of other non-metallic mineral products n.e.c.

5.8347 4.8738 4.8716 28.3098 18.4535 12.5454 8.0114 7.3370 8.1850 7.4615 5.2587 4.8635 4.6570 9.7505 9.3036 6.6896 6.6454 6.6454 24.4693 8.3912 4.0050 3.1403 2.6008 11.8470 8.1659 7.2328 5.9185 5.2021 14.0483 5.2435 3.2656 2.8777 2.8525 59.3168 14.3179 9.8496 9.5661 7.1356

180 (Continued)

Province

ISIC

Industry

Nigde

1429 1911 2695

Other mining and quarrying n.e.c. Tanning and dressing of leather Manufacture of articles of concrete, cement and plaster Research on and experimental development of NSE Manufacture of made-up textile articles, except clothing Manufacture of other food products n.e.c. Building and repair of ships Quarrying of stone, sand and clay Manufacture of bakery products Manufacture of plastics in primary form Manufacture of other food products n.e.c. Manufacture of machinery for food and tobacco processing Motion picture and video production and distribution Sporting activities Quarrying of stone, sand and clay Manufacture of starch and starch products Other manufacturing n.e.c. Manufacture of man-made fibres Manufacture of other products of wood, etc. Manufacture of motorcycles Renting of office machinery and equipment (incl. computers) Manufacture of basic chemicals (excl. fertilizers and nitrogen Other non-scheduled passenger land transport Manufacture of veneer sheets, plywood, laminated board etc. Recycling of non-metal waste and scrap Extraction of crude petroleum and natural gas Manufacture of basic chemicals, excl. fertilizers and nitrogen Other non-scheduled passenger land transport News agency activities Production, collection and distribution of electricity Processing and preserving of fish and fish products Manufacture of refractory ceramic products Manufacture of non-refractory clay and ceramic products

7310 1721 Ordu

Rize

1549 3511 1410 1541 2413 1549 2925 9211

Sakarya

Samsun

9241 1410 1532 3699 2430 2029 3591 7123 2411 6022 2021

Siirt

3720 1110 2411 6022 9220 4010

Sinop

1512 2692 2693

Location Quotient 20.9229 12.7957 4.3250 4.2482 3.4642 4.2547 3.5830 3.3016 2.5008 2.3887 9.4490 6.0872 3.3329 2.8142 2.1821 23.8513 6.8228 5.7875 5.0208 3.2525 6.0494 3.9064 3.5411 3.3608 2.8387 56.0627 7.0898 7.0156 4.4111 2.7454 78.9327 30.5443 4.6182

181

Sirnak

3512 6303 1030 5211 2010 6303 6719

Sivas

1310 1422 1554 9220 4010

Tekirdag

Tokat

Trabzon

1552 6592 3720 2921 1520 2692 1552 3599 1723 1533 3511 1512 1549 6420 1721

Tunceli

1422 7250 4010 7414

S. Urfa

1729 5110 1541 7123 5240 1554

Building and repair of pleasure and sporting boats Other supporting transport activities Extraction and agglomeration of peat Retail sale in non-specialist stores (food, beverages or tobacco) Saw milling and planing of wood Other transport-supporting activities Activities auxiliary to financial intermediation n.e.c. Mining of iron ores Extraction of salt Manufacture of soft drinks; production of mineral waters News agency activities Production, collection and distribution of electricity Manufacture of wines Other credit granting Recycling of non-metal waste and scrap Manufacture of agricultural and forestry machinery Manufacture of dairy products Manufacture of refractory ceramic products Manufacture of wines Manufacture of other transport equipment n.e.c. Manufacture of cordage, rope, twine and netting Manufacture of prepared animal feeds Building and repair of ships Processing and preserving of fish and fish products Manufacture of other food products n.e.c. Telecommunications Manufacture of made-up textile articles, except clothing Extraction of salt Maintenance and repair of office and accounting machinery Production, collection and distribution of electricity Business and management consultancy activities Manufacture of other textiles n.e.c. Wholesale on a fee or contractual basis Manufacture of bakery products Renting of office machinery and equipment (incl. computers) Retail sale of second-hand goods Manufacture of soft drinks; production of mineral waters

4.3992 4.2412 777.4033 3.0584 2.8856 2.4512 2.2447 49.4867 9.2920 4.2911 3.6291 3.1514 25.8270 12.2284 9.1812 6.6159 4.1556 16.3351 10.8813 9.2227 7.4418 7.0354 11.5556 11.3632 6.3960 4.5488 2.1843 10.4205 5.5124 4.5307 4.3337 3.3449 7.0048 4.7122 4.2859 4.1156 3.5961

182 (Continued)

Province

ISIC

Industry

Usak

2430 1911 1711

Manufacture of man-made fibres Tanning and dressing of leather Preparation and spinning of textile fibres; weaving of textiles Manufacture of carpets and rugs Finishing of textiles Other wholesale Publishing of recorded media Retail sale of second-hand goods Primary education Wholesale of agricultural raw materials and live animals Other non-store retail sale’ Mining of non-ferrous metal ores, except uranium and thorium Manufacture of grain mill products Manufacture of agricultural and forestry machinery Mining and agglomeration of lignite Mining and agglomeration of hard coal Cargo handling Retail sale via mail order Manufacture of machinery for metallurgy Building cleaning activities

Van

Yozgat

Zonguldak

1722 1712 5190 2213 5240 8010 5121 5259 1320 1531 2921 1020 1010 6301 5251 2923 7493

Location Quotient 88.2922 37.5450 25.3057 12.4834 8.7605 94.9212 32.9473 30.4632 27.9796 10.6603 10.6453 7.3305 5.1166 2.9186 2.6102 43.6150 6.9926 3.9650 3.2441 2.6490

Appendix 2 A Brief Description of Fuzzy-Set Analysis When applying the technique that Ragin (2000) introduces in his book Fuzzy-Set Social Science, the first task is to assess the degree of fuzzy membership for each of the variables included in the analysis. Theoretical knowledge guides the identification of the maximum (fuzzy membership score 1) and minimum (fuzzy membership score 0) scores as well as the boundaries of the categories in between. Amongst the latter the ‘crossover point’ (that is, the raw score corresponding to 0.5 in terms of the fuzzy membership score) is of special importance, since scores of less than 0.5 but greater than 0 represent objects that are more out of the set than in it, and vice versa. As in the case of crisp sets of Boolean algebra, fuzzy sets can be negated. Predictably, in the former negation switches membership scores from 1 to 0 and from 0 to 1, whereas in the latter the membership of a case in the negation of fuzzy set A is calculated by subtracting its membership in set A from 1. In similar vein, it is possible to calculate ‘logical AND’ and ‘logical OR’ with fuzzy sets. Specifically, logical AND is calculated by taking the minimum whereas logical OR is calculated by taking the maximum of each case in the sets that are intersected. The general principle regarding the ‘necessary conditions’, which are of vital importance in the method developed, holds both for crisp and fuzzy sets: whenever a causal condition is necessary for an outcome, instances of the outcome will form a subset of instances of the causal condition. Arithmetically this translates into the following: set A is a subset of set B if the membership scores of cases in set A are less than or equal to their respective membership scores in set B. In other words, to demonstrate necessity the researcher must show that the outcome is a subset of the cause. The application of the subset principle when assessing the ‘sufficient conditions’, on the other hand, requires the researcher to show that the cause is a subset of the outcome, again by applying the arithmetic relationship ‘less than or equal to’. Finally, Ragin (2000) suggests that probabilistic criteria can be used in a fuzzy set analysis to assess necessity and sufficiency. Thus it is possible to introduce new concepts that imply, for instance, quasi-sufficiency of causal conditions using linguistic qualifiers (benchmarks) such as ‘more often than not’, ‘usually’ and ‘almost always’. It is then possible to use the conventional statistical analysis for proportions to assess whether the observed rate is significantly greater than the benchmark, using probabilistic criteria.

183

Notes and References 1

Introduction: A Background to Clusters

1. It is certainly not the aim here to provide full coverage of the extensive literature on the many aspects of clustering. The works cited in the following pages should therefore be considered as just some examples of the major contributions that have aided our understanding of the subject. 2. Examples of ground-breaking books in the new genre are Harvey’s The Limits of Capital (1982), Massey’s Spatial Division of Labor (1984) and Smith’s Uneven Development (1984). 3. The collapse of the socialist bloc cast some doubt on the credibility of Marxist theory and its application to economic geography. Neo-Marxist works nonetheless continue to be an influential part of the economic geography literature (Bryson et al., 1999). 4. Different studies focus on different dimensions of urbanization, including increasing returns, services, infrastructure and access to inputs and markets. Here we shall concentrate on the most relevant studies for our purposes: those which distinguish urbanization from localization. 5. See, among others, Henderson (1988, 2000), Sveikauskas et al. (1988) and Nakamura (1985). 6. Since it is impossible to express these factors mathematically, Krugman (1995) thinks that they are best left to sociologists. In his view there is no alternative to models, and all thinking involves implicit modelling. However it should be borne in mind that models are merely metaphors that enable us to understand certain aspects of reality, rather than portraying the reality itself. Economic geographers, on the other hand, think that the factors that are omitted from formal models play a key role in determining the spatial agglomeration of economic activity (Martin, 1999). 7. The examples in this section have been chosen from more recent studies. Of course there are many older studies of the geographic concentration of individual industries that provide detailed information on and insights into the emergence and development of clusters. Two classic examples are those of the US shoe and leather industries (Hoover, 1937) and the US aircraft industry (Cunningham, 1951). 8. The products in question are dyes (Basel in Switzerland), pharmaceuticals (Basel, New York and New Jersey), packing and filling machinery (Bologna in Italy), continuous synthetic fibres (Fukui, Ishikawa and Toyama in Japan), musical instruments (Hamamatsu in Japan), ceramic tiles (Sassuolo in Italy); Scotch whisky (Scotland), factory automation equipment (Turin, Milan and Piacenza in Italy), motion pictures (Hollywood), optics (Oberkochen and Wetzlar in Germany), cutlery (Solingen in Germany), woollen textiles (Prato in Italy) and watches (Geneva and Jura in Switzerland). Enright (1990) also includes shorter abstracts of other case studies in the appendix: freight forwarding (Basel in Switzerland), stone and stonework (Carrara in Italy), aerospace (Los Angeles), ski boots (Montebelluna in Italy), pens and pencils (Nuremberg in Germany), media (Munich in Germany), carbon fibres (Osaka in Japan), footwear (Pusan in South Korea), electronics (Silicon Valley in the United States) and textile machinery (Zurich and St Gallen in Switzerland).

184

Notes and References 185 9. For example in her analysis of districts in Tuscany – including Empoli (clothing), Santa Croce (leather tanning), Prato (textiles), Poggibonsi (furniture), Monsummano (footwear), Carrara (marble and building stone) and Arezzo (jewellery) – Dei Ottati (1996) focuses on changes in the competitive context and the strategies adopted by local firms, and concludes that a transformation occurred with respect to strategies for product diversification, innovation and quality upgrading. Crestanello (1996) is also optimistic about the continuing success of the clusters in Veneto and Tuscany, as are Brusco et al. (1996), who argue that the ongoing success of the clusters in Emilia-Romagna has shown that competitiveness is not rendered invalid by high labour costs. Becattini (1990), on the other hand, points to some signs that Italian clusters have found it difficult to adjust to fluctuations in external conditions, particularly the growth of unemployment. 10. The distinguishing feature of the clusters in South Korea, which is classified as a newly industrialized country, is that small and medium-sized enterprises are hierarchically networked and spatially clustered around large enterprises and industrial conglomerates (chaebols) (Nadvi, 1994). 11. In his 1990 study Porter writes of clusters as groups of related industries, regardless of geographical location, and stresses that such clusters tend to be localized in space. Thus a distinction should be made between how Porter uses the term cluster in his 1990 study (closer to networks) and in his 1998 study (geographic clusters). See Chapter 2 for a discussion of this issue. 12. For more on defining clusters see the methodology section in Chapter 3, which discusses the scope and boundaries of clusters. 13. This in turn means that old Fordist regions have undergone a major restructuring, which can be interpreted as a Schumpeterian process of localized creative destruction. The consequences of this have been serious enough to cause a ‘second industrial divide’, according to Piore and Sabel (1984), who claim that flexible specialization is a reaction to the ‘crisis of Fordism’ and can be considered as a partial return to more craft-based modes of production, where there is ‘cooperative competition’ among smaller firms, greater reliance on social relationships (particularly trust) as a means of organizing transactions, and flexible manufacturing equipment and techniques. 14. The two perspectives covered in this section have parallels with the overall approach in the management literature. 15. Krugman’s (1991a) colourful account of the emergence and development of the carpet industry in Dalton is just one of many interesting examples that point to the importance of historical accident in the initiation of a cluster. 16. This also points to the necessity of making a distinction between business and social networks, whose relative importance might result in different kinds of cluster (McDonald and Vertova, 2002).

2

Clusters in the Management Literature

1. With regard to the latter, McCann and Fingleton (1996) found tighter linkages following the adoption of just-in-time production by a small sample of Scottish electronic firms. 2. Relatedly, Parkin (1999) presents a game theoretic model that demonstrates that interfirm cooperation is best fostered by repeated contact, which is in turn reinforced by geographic proximity. 3. The temporary loss of custom that Swiss watch producers suffered as a result of the new technology introduced by Japanese companies is an interesting example in this respect.

186 Notes and References 4. A likely explanation of such concentration is that other areas lack the necessary infrastructure, institutions and suppliers. Remedying this would be inefficient and costly, so concentration in a number of metropolitan areas is preferred, according to Porter (1998). Germany, Italy, Switzerland and the United States provide good examples in this respect. 5. See Öz (1999), Davies and Ellis (2000) and Konsolas (2002) for comprehensive reviews of this debate. 6. Specifically, cluster charts were prepared for the years 1980, 1985 and 1990; clusters were classified as ‘strong’, ‘fairly strong’, ‘potential’ or ‘latent’; and since Porter’s methods laid too little emphasis on international aspects in the case of a small open economy, ‘international business activities’ was added as a third outside force (Rouvinen and Yla-Anttila, 1999). 7. Padmore and Gibson (1998) view the branches of firms operating outside the target region as important sources of technology and skills. 8. The case of Ireland is relevant in this regard in that the substantial increase in FDI has been instrumental in the noteworthy growth achieved by the country in recent years. 9. For example some firms (both foreign and American) choose to establish a presence in Silicon Valley in order to keep up with the latest developments in the industry. 10. Porter (1996, p. 89) poses the related research question of why smaller countries, such as Austria, Chile, Denmark, Hong Kong and Singapore, and large countries where much policy is made at the state level, such as Germany and the United States, seem to have economic advantages over other large countries. 11. An entire issue of the Review of Black Political Economy was dedicated to this debate.

3

Industrial Clusters in Turkey

1. The house building sector of this industry is linked to the competitive housing/ household goods cluster. 2. The mathematical expression for the LQ is LQ (Xik/Xk)/(Yi/Y), where Xik is employment in sector i in region k, Xk is total employment in the region, Yi is national employment in sector i and Y is total national employment. If the value of this ratio is greater than one, the region’s share of the activity in question is greater than the national average, which indicates the existence of spatial concentration (Üser, 1983). 3. Indices that measure the geographic concentration of establishments – C4EST and C8EST – are also used by Enright (1990). 4. According to their results, agglomeration forces appear to have a stronger effect at the four-digit industry level (Maurel and Sedillot, 1999). 5. It should be remembered that in this study clusters are not necessarily restricted to small firm agglomerations, as discussed in Chapter 1. 6. The related and supporting industries of a four-digit industry, as well as other clusters and institutions that are linked to it, are examined separately for each case study in the following chapters. 7. A review of the literature reveals that not many studies have focused specifically on the overall spatial patterns of Turkish industry. Üser’s (1983) dissertation and Eraydin’s (1997, 2002a, 2002b) works are notable exceptions. For a recent contribution see Akgüngör (2003). 8. All the necessary data are available for the year 1992 and have been obtained from the State Institute of Statistics.

Notes and References 187 9. The list obtained by using the C8EMP indices is very similar to that obtained from the C4EMP indices, and hence is not reported here. 10. The Istanbul metropolitan area consists of Istanbul, Kocaeli, Sakarya, Tekirdag and Bursa, the Izmir metropolitan area of Izmir, Manisa, Aydin and Denizli, the Adana metropolitan area of Adana, Mersin and Hatay, and the Ankara metropolitan area of Ankara and Kirikkale. The Regional centres are Kayseri, Gaziantep, Konya, Samsun and Eskisehir (Eraydin, 2002a). 11. The conclusions are the same if these groups are treated as proportions and the standard statistical techniques are applied. 12. See Appendix 2 for a brief description of this method. 13. With regard to ‘suspect cases’, the category ‘other textile products’, for instance, might refer to different types of item in the SITC and ISIC systems. 14. Following Ragin (2000), a benchmark proportion of 0.80 is used to represent the linguistic qualifiers ‘almost always necessary’ and ‘almost always sufficient’, and a benchmark proportion of 0.65 is used to represent the linguistic qualifiers ‘usually necessary’ and ‘usually sufficient’. 15. In recent years, considerable attention has been paid to the relationship between geographic concentration and trade, and an extensive body of literature has emerged to address various aspects of the issue (see for example Ellison and Glaeser, 1999; Krugman, 1991a; Maurel and Sedillot, 1999; Midelfart-Knarvik et al., 2000). Jaffe et al. (1993, p. 578) compare the geographic location of patent citations with that of the cited patents, and conclude that ‘paper trails’ left by knowledge spillovers in the form of citations are indeed geographically concentrated. 16. Schmitz (1999) has used a survey to investigate whether enterprises in the exportoriented Sinos Valley in Brazil have stepped up their cooperation in response to intensified global competition in leather footwear. 17. In the second part of his study on geographic concentration, Enright (1990) conducted qualitative case studies to investigate the possible contribution of clustering to international competitiveness. Roelandt et al. (1999) have combined quantitative and qualitative methods by using monographic case studies and input – output tables. Similarly Ziona (2000) argues for the use of quantitative techniques to identify clusters, and qualitative techniques to analyse them. 18. In terms of methodology the present study resembles Enright’s (1990) approach. 19. A cluster map is a graphic way of portraying the various components of a cluster and identifying how they relate to each other. This study follows Porter’s (1998, 2000) approach, which first identifies the main product categories and then the links between inputs and products in these categories. The map also portrays the relations between producers and their supporting government agencies, universities, research centres and trade associations. Other clusters that are linked to the cluster in question are included as well. Porter’s cluster diagram therefore maps not only the input – output structure but also the local infrastructure that supports the cluster and its relations with other clusters. For a discussion of alternative cluster mapping techniques see Ziona (2000).

4

The Furniture Cluster in Ankara

1. The limited degree of international trade by cluster firms is manifest in the general lack of cooperative relations with foreign companies, although there are exceptions, such as in Casa and Balikçioglu. 2. It is interesting to note that construction is one of the activities with which Turkish entrepreneurs have often begun their commercial activities. It was Ankara in the

188 Notes and References

3.

4. 5. 6.

7.

8.

9.

10.

11. 12. 13. 14.

1920s that one of the most prominent figures in Turkish business history – Vehbi Koç, a small grocery store owner – changed his fortune by becoming active in the government’s project to reconstruct the city (Öz, 1999). Koç was at the right place at the right time and made good use of Ankara’s emergence as the capital of the newly established republic (Bugra, 1994), which also provided unique opportunities for many other businessmen. Interestingly the Turkish government did not attempt to encourage the development of industry in Ankara at the time, given that the city was booming anyway. The First Five Year Industrialization Plan (1934–38) did not envisage that any of the 18 planned factories would be located in Ankara. Another industry that emerged in Ankara in the early republican era was defence, which was established next to the railway and eventually spread over an area from the railway station in the west to Kirikkale in the east (Tekeli, 1994, p. 177). An industrial census conducted in Ankara in 1968–69 showed that Siteler’s share of furniture making in the city was more than 70 per cent (Tekeli, 1994). Although the survey was conducted in the early 1990s, we have little reason to believe that there has been a dramatic change in this regard. The Department of Wood Product Industrial Engineering at Hacettepe University and the Department of Furniture and Decoration at Gazi University are amongst the most noteworthy. METU and the Bilkent University of Ankara also have well-developed departments of industrial engineering and industrial design. Some workshops only produce semifinished furniture (so-called ‘furniture in the rough’) and sell them to other firms for further processing. Most of these workshops are located on Eregli Street in Siteler. Under Turkish regulations, 10 or more SMEs (firms employing up to 200 workers) in the same or very closely related sectors can come together to form a sectoral foreign trade organization. The benefits of this are manifold, including credit on favourable terms, tax rebates, and financial support for fairs, R&D, waste management and market research (OAIB and KOSGEB, 1996). It is the policy of KOSGEB to locate its branches in places where there is a concentration of industrial activity. This makes it easier to communicate with firms, whose managers can visit the centre with the minimum expenditure of time and resources. The services provided by KOSGEB include short training programmes and financial contributions to travel expenses for firms that participate in international furniture fairs. IGEME serves as an export promotion centre for many industries, one of which is the furniture industry. Information dissemination (especially on potential export markets) and encouraging Turkish firms to enter international markets (for instance by supporting their participation in international fairs) are amongst the key functions of the organization. A similar role is played by the regional export union, the OAIB. When MNG constructed the Topkapi Hotel in Antalya, for instance, most of the furniture was imported from Ankara. Some firms have installed lifts to ease this problem. For instance Eczacibasi has entered the sector via a joint venture with the German kitchen producer Bulthaup, and Koç under license by Alno. Although the lack of original design is clearly one of the major problems of the cluster firms, the Turkish furniture industry is one of the few industries where the employment of designers is high in relative terms (Er, 1994).

Notes and References 189

5

The Towel and Bathrobe Cluster in Denizli

1. The towel and bathrobe industry is represented in different SITC categories, including SITC 65212 (cotton terry towels etc.), SITC 65213 (other cotton terry towelling etc.), SITC 65496 (terry fabrics other than cotton), SITC 84169 (other male underwear etc., not knitted), SITC 84289 (other female underwear etc., not knitted), SITC 84389 (other male underwear etc., knitted), SITC 84489 (other female underwear etc., knitted). While interpreting the comparisons in this paragraph, it should be taken into consideration that the latter four categories include bathrobes and some other related products. 2. There are a small number of very large and successful towel and bathrobe producers (such as Yesim Tekstil and Özdilek) in Bursa, while Denizli hosts a large number of smaller firms. 3. In 1946 the towns that hosted most of these cooperatives were Babadag (1803), Buldan (1317), Kizilcabölük (1149) and Denizli itself (634) (Mutluer, 1995). An interesting example was the establishment of a textile firm in 1954 by 50 individuals from Babadag. Many of the founders of this firm later became the founder-managers of today’s leading textile firms in Denizli (Erendil, 1998). 4. The development plan for the 1960s and 1970s put specific emphasis on regional development. Denizli was included in the scheme from 1973–81. The policies adopted in accordance with the scheme involved channelling public investment to the regions and providing incentives for private sector investment. 5. Denizli ranked seventh amongst the Turkish provinces with citizens employed as guest workers abroad. Although some of the enterprises established by these workers failed to survive and only one of the surviving ones is textile-related, the guest workers’ remittances brought dynamism to various areas of the Denizli economy in the 1970s. 6. Until 1994, the year in which the Aegean Garment Producers’ Association commenced its operations, Yasar Holding was the major trading company in Denizli (Erendil, 1998). 7. Here the term ‘regional economy’ includes Denizli, Isparta, Burdur, Afyon, Konya, Antalya, Aydin, Izmir, Usak, Manisa and Mugla. 8. In 1992 Pamukkale University was established to further Denizli’s social and economic development. Previously, the facilities located in Denizli were affiliated with Dokuz Eylül University in Izmir. The university has a textile engineering department as well as fashion/design-related occupational schools. 9. This is in line with Bugra’s (1994) findings for larger family businesses in Turkey. 10. Ironically it is Denizli, and not the neighbouring province of Aydin, that has established a presence in the wine industry. 11. Research suggests that the younger generation tends to put more value on status symbols (Eroglu, 1998). 12. Those cluster firms which do engage in R&D activities make use of private institutions (53 per cent), their own R&D units (30 per cent), KOSGEB (12 per cent), universities (12 per cent) and chambers of commerce or industry (6 per cent) to carry out these activities (Temel et al., 2002). 13. Their interest in international fairs in particular is strong. Denizli firms were amongst the first to attend such fairs and continue to be one of the largest groups from Turkey at the annual Heimtex fair in Frankfurt, Germany.

190 Notes and References 14. In recent years about 200 Denizli firms a year have made use of Eximbank credits, amounting to $100 million. The credits are mostly short-term (six-month) loans (TBMM, 2001a). 15. One hundred and ninety- four textile-related firms in Denizli made use of the incentives between 1980 and 1993 (Sahin, 1997). The number of grants provided between 1990 and 1997 to Denizli firms reached 907, 67 per cent of which went to textile firms, mostly for modernization-related investment. Most of these incentives were granted in 1995, which can be associated with the high expectations of Turkey’s customs union with the EU (IAV, 1997). 16. However one interviewee disputed the claim that Denizli contributed a lot to state revenues but received little in return. According to him, this claim was based on the fact that Denizli’s share of public investment was only low in comparison with that received by the nearby provinces of Aydin and Isparta, which attracted higher shares for political reasons. 17. A similar tendency prevailed in other textile towns in Denizli province; that is, Buldan and Tavas. 18. At the age of 15 one prominent Babadag entrepreneur, Ahmet Nazif Zorlu, first moved to Trabzon, where he became involved in commercial activities, and then to Bursa, where he established a textile firm with his brother. The firm currently holds a strong position in household textile items, particularly bedclothes and curtains. Apart from its textile investments in the Thrace and Aegean regions, the firm has entered into the consumer electronics sector by acquiring Vestel. 19. There are also ‘non-textile towns’ in Denizli province. First, Yesilyuva (AcipayamDenizli) is the centre of the Turkish footwear industry, accounting for almost 80 per cent of total domestic production. The beginnings of this date back to the middle ages (Akaydin and Ay, 1998), when a master craftsman called Ahi Kaysar taught the craft to the residents of the town. The shoemakers prospered remarkably over the centuries, and by the 1970s their only rival was the Beykoz Sümerbank shoe factory in Istanbul. Today there are more than 500 workshops, many located in the basements of residential buildings (echoing Italy). The products are mostly aimed at middle- and lower-middle-class, price-sensitive customers. Second, Yatagan is the centre of the cutlery industry. The beginnings of cutlery production in Yatagan go back to the Seljuks; specifically to one of Sultan Keykubat’s commanders, Osman Bey, who is believed to have initiated the venture. In the Ottoman era Abdi Bey, who was equipped with the technical details of cutlery production, went to Yatagan and contributed to the further development of the business in the region. Currently there are numerous manufacturers and two important cutlery-related organizations: a cooperative and a marketing firm called Yabeltas. The 85 partners in Yabeltas are mostly Yatagan-born guest workers in Germany. Yatagan cutlery is exported to the Middle East, the CIS, Eastern Europe and Italy. There are also informal exports via small traders, mostly from Russia. The town holds a particularly strong position in two products: stainless steel knives and special scissors for trimming wool. There are also producers specializing in wooden and plastic handles for knives, and in tools and machines used in different stages of cutlery production. The industry is now in transition from home/workshop production to small factory production. The aim is to outcompete the cutlery cluster in Solingen, Germany. Finally, the stoneware/earthenware industry is another important economic activity in Denizli with deep historical roots. The ancient city of Hierapolis was surrounded by small marble carving units – a primitive cluster called ‘Marble

Notes and References 191

20. 21.

22.

23. 24.

25.

6

Hierapolis’. Today there are 10 marble and two glass production plants in Denizli that use state-of-the-art technology and export their products to many countries around the world. The city also hosts five cement and four brick factories (TC Denizli Valiligi, 1998). One of the leading cluster firms, Küçüker, reported that towel production in this firm began in 1975 and exports of towels in 1979. Middlemen, especially yarn merchants, have good contacts with key suppliers in Denizli and elsewhere. One particular veteran yarn merchant from Denizli, for example, has well-established relations in Sultanhamam (Istanbul), which is viewed as the heart of the yarn market. Such contacts help to secure a competitive price for good-quality yarn as well as timely delivery. Many of the cluster firms employ ‘merchandise managers’, who act as contacts between the firm and its customers. For instance they follow up orders on behalf of customers, and in this regard they work like outsiders with respect to the firm. In fact Sümerbank and some privately owned cluster firms such as Küçüker have functioned as schools in that some of their employees later became founders of new firms in the cluster. The question that arises here is how many firms will be required to try to build up a brand in order to produce about six successful brands. Given that many of the cluster firms are engaged in subcontracting relations with other firms in Denizli, it is likely that most of the evolving brands will in fact represent one or more networks. It has been argued that the high degree of specialization is related to the fact that Denizli lies within the periphery of the Izmir metropolitan area (Temel et al., 2002).

The Carpet Cluster in Gaziantep

1. The principal markets for Turkish hand-woven carpets are Germany, the United States, Japan and Switzerland (ITC, 2002). 2. The eight so-called ‘Konya carpets’, which are amongst the oldest knotted carpets found to date, hold a prominent position in art history and have been described as ‘the most famous carpets of the world’ (Erdmann, 1964, p. 93). Apart from the Konya carpets, Anatolian carpets with figures of animals (birds in particular) were also well known during the early periods. These were probably produced in western Anatolia, possibly in Bergama and Usak. 3. One type of Anatolian carpet was even called ‘Holbein carpet’ because it appeared so often in that artist’s paintings. 4. Carpet exports from Izmir went by sea to Venice. 5. A significant proportion of exported carpets were shipped from Izmir, which was once known as Smyrna, and in some countries ‘Smyrna rugs’ became synonymous with Turkish carpets (Con, 1966). Most of these went to Britain, either for domestic sale or re-export (Quataert, 1986). 6. The firm set up 17 rug workshops in various locales in Western and Central Anatolia and owned three yarn factories – two in Izmir and one in Bandirma. The yarn that was spun and dyed at these factories was distributed to affiliated workshops in major rug-weaving centres such as Izmir, Sivas, Burdur, Isparta and Kahramanmaras. In the remaining centres, which eventually numbered 14, the firm chose to establish only agencies (Küçükerman, 1987). 7. In 1957 Gaziantep accounted for 5.4 per cent of the total yarn production in Turkey (Türkiye Ticaret Odalari, Sanayi Odalari ve Ticaret Borsalari Birligi, 1959, p. 21).

192 Notes and References 8. The regional economy consists of Gaziantep, Diyarbakir, Mardin, Urfa, Adiyaman, Elazig, Kilis, Bitlis, Van, Adana, Hatay and Içel. 9. In relative terms, however, problems related to demand, competition and uncertainty outweigh the difficulties with finance (Acar, 2002). 10. In fact there is only one firm with a different structure. This is owned by an American of Persian origin. 11. The machinery cluster is located in Örnek Sanayi Sitesi. 12. The Isparta factory produced yarn used in carpet weaving and subcontracted carpet production to independent weavers. The Hereke factory, which had been producing carpets since 1891, had a production workshop, a dye preparation unit and a design unit, and organized training courses for those interested in learning to weave. Production in these factories, however, was limited. For example in 1958, of the 1488929 square metres of carpet produced in Turkey that year, only 27473 square metres came from these two factories (Türkiye Ticaret Odalari, Sanayi Odalari ve Ticaret Borsalari Birligi, 1959, p. 67). 13. The government has organized such courses – including in prisons – since the 1940s. Upon completion of the courses, looms are presented to successful students. 14. Hand-woven and machine-woven carpets are not perfect substitutes. For instance Germany, the leading importer of hand-woven carpets, has a very well developed machine-woven carpet industry. Promoting hand-woven Turkish carpets and traditional Turkish motifs in the world market is likely to have a positive spillover effect on the machine-woven carpet sector. Similarly, supporting original contemporary designs developed by rural carpet weavers can keep the latter in business and aid the work of professional artists specializing in carpet design. 15. The project includes the eventual construction of 21 dams and 17 power plants, which will contribute immensely to the development of agricultural activities in the region and help to solve Turkey’s energy problems. 16. It is estimated that wheat and cotton will together account for about 50 per cent of total agricultural production in the region. 17. The yarn sector, on the other hand, made good use of the incentives. 18. Örnek Sanayi Sitesi, where the machinery cluster is located, was established under the auspices of the Turkish government and UNIDO. 19. About 150 firms are located in this part of Gaziantep, most of them in the footwear, flour, carpet, yarn and metal manufacturing sectors. 20. Likewise small and medium-sized enterprises in the footwear cluster around Nizip Street aspire to move to the organized zones. 21. Ayata (1987) found that 40 per cent of the entrepreneurs and 60 per cent of the producers in the Kayseri carpet sector came from a mountainous district called Hacilar near Mount Erciyes in Central Anatolia, where arable land was scarce. This echoes the case of Babadag in Denizli and Besni in Adiyaman. See Chapter 8 for a discussion of this issue. 22. Another factor in the attractiveness of Gaziantep may be the fact that Gaziantep was relatively safe from the Kurdish uprising that began in the late 1980s. 23. Several of the interviewees argued that the Gaziantepians’ entrepreneurial spirit is inherited from minority groups that lived in the city in the past, Armenians in particular (see also Quataert, 1999).

7

The Leather Clothing Cluster in Istanbul

1. Other leading locales are Izmir, Usak, Manisa, Bolu, Bursa, Denizli and Tekirdag. 2. Istanbul was also among the main commercial centres for commodities such as raw leather, processed leather, fur, silk and spices in the Byzantine era (Mantran, 2001).

Notes and References 193 3. By the seventeenth century the number of tanneries in Istanbul had risen to about 700. 4. Specifically, a French physician went to Turkey in 1737 and travelled around the country to learn the secrets of tanning and leather manufacture. ‘The records further show that an Armenian also came to Turkey from England to find out the secrets of making colored (yellow and red) morocco leather. This type of soft leather has since then become known in England as Turkish leather’ (Union of Chambers of Commerce, Industry and Commodity Exchanges of Turkey, 1958, p. 4). 5. The leather industry was still of prime importance in the late Ottoman era, as evidenced by the sectoral distribution of industrial establishments in Turkey in 1915: of the 264 enterprises that employed ten or more workers, 13 were in the leather industry (Ökçün, 1971), which is a significant figure given that the sector was dominated by small firms. 6. There were 17 leather factories and about 100 small tanneries in Kazliçesme in the late 1920s (Yelmen, 1992). 7. Yelmen, the father figure of the Turkish leather industry, argues that the official figures underestimate the size of the Istanbul leather industry, whose dominance was arguably even more pronounced from the 1960s (Sümer, 1969). 8. Since 1985 raw leather exports have been subject to restrictions and special permission is required to export this valuable material. There are similar regulations in other countries, given the shortage of the material. Archival records indicate that exports of high-quality raw leather were also restricted during the Ottoman era (Faroqhi, 2000). 9. Turkey is the top importer of untreated sheepskin and lambskin, the main types of leather used by the leather clothing industry, and ranks fifth in the importation of processed sheepskins and lambskin (ITC, 2002). 10. UNIDO and the FAO supported the founding of a leather research institution in Pendik (Istanbul) in the late 1960s. In 1985 Istanbul University launched a two-year undergraduate programme specializing in leather-related issues. In 1991 the same university established a centre for leather R&D and education. Other institutions followed suit in subsequent years, and now 15 programmes are offered by various Turkish universities. In addition there are four leather-related occupational schools, five schools for footwear-related subjects and eight that specifically focus on leather garments (two of the latter are located in Istanbul: the Rüstü Üzel Anatolian High School and the Besiktas Ortaköy Industrial Occupational School). KOSGEB established the Istanbul Leather Specialization Centre to support small and medium-sized enterprises, and there are four foundations (VAGEF, TASEV, HASEV and the Turkish Leather Foundation) that aim to improve the state of the Turkish leather industry, all of which are located in Istanbul. 11. Yükseker (2003) notes that relations among informal traders engaged in the same area of activity are also characterized by competition rather than cooperation. 12. The annual import figure is about $250 million, whereas exports amount to about $55 million (SPO, 2000). 13. The leather goods industry overwhelmingly comprises small firms, which also make products in imitation leather. 14. In the late 1990s exports reached $200 million, if informal trade is included (SPO, 2000). 15. The category ‘footwear’ includes not only leather shoes but also those made of other materials, as well as slippers. 16. In the early 1990s Istanbul footwear producers joined the informal Laleli market, and since then the scale of unregistered exports has been significant. For instance

194 Notes and References

17.

18.

19. 20.

21.

22. 23.

in 1996, which was one of the most successful years for the Laleli market, informal footwear sales amounted to $350 million, compared with $150 million for registered exports (Yükseker, 2003). According to the SPO (2000, p. 146), on average the export price of Turkish shoes is 25 per cent lower than the EU price and 70 per cent higher than that of some countries in the Far East. The customs union has benefited non-EU countries more, given that the leading countries from which Turkey imports leather clothing are India and China (SPO, 2000). In the not too distant future, however, it is likely that this informal transnational economy will be regulated (Yükseker, 2003). The Grand Bazaar and its environs have been the preferred location for Istanbul’s highly developed jewellery sector for centuries. Turkey is amongst the world’s top ten importers of gold, which is mainly used for the manufacture of jewellery. Gold is also a popular investment good (coming third after bank deposits and real estate), and the sector accounts for 2 per cent of GNP (Istanbul Altin Borsasi, 1999). Also, silver jewellery is an important product in the jewellery quarter in the Grand Bazaar, which controls 90 per cent of silver jewellery production and trade in Turkey. There are about five wholesalers, 100–150 workshops and 150–200 shops specializing in silverware in and around the bazaar (ibid.). The concentration of the cinema industry in and around Yesilçam Street provides another interesting case of clustering in Istanbul. Located in Beyoglu, the cultural centre of Istanbul, Yesilçam Street and its environs were the preferred choice for the owners of cinemas and importers of foreign films. Over time local film companies began to flourish in the area as well, forming their own cluster in the district. Film companies typically had a producer, a manager, an accountant and several clerical personnel. Each had a warehouse for storing films and material such as posters. Cluster participants such as producers, bankers, actors and actresses attended the same local restaurants, bars and cafes (such as Bap Cafeteria, Haci Salih, Özsüt and Melek), where they would talk about work-related matters, memories and the like. Sener (1971) notes that cafes such as Ata’nin Kahvesi and Sanat Kahvesi acted as contact points. It was known who attended which cafes: ‘If you are looking for a producer, for instance, you go and check the cafe that he attends. Even if he is not there, they will know where he is. Or you just leave a message’ (ibid., p. 3). There were also key individuals who performed certain functions. For example one man was skilled in clearing imported films through customs, and a leading banker played a key role in financing film projects. Related and supporting businesses and services were also present in the area, including hairdressers, transportation companies and tailors. Over the years virtually all the remaining residential buildings in Laleli were converted into shops and warehouses. The number of shops targeting informal traders had reached about 10000 when the market peaked in the mid 1990s (Yükseker, 2003). For a comprehensive analysis of the shuttle trade between Laleli and Moscow see Yükseker (2003). This can also open the way for criminal organizations. In fact the Turkish and Russian mafias have begun to play a role in the market. This is associated with the recent involvement of wholesalers and transportation companies in the later stages of the value chain.

Notes and References 195 24. The fact that the parties to a typical transaction are of the opposite sex introduces another dynamic in that the customary long-term, stable relationship with the commercial partner might take the form of an emotional relationship (Yükseker, 2003). 25. Another sector with scattered concentrations in Istanbul is footwear. The historical location for footwear producers in Istanbul was Gedikpasa, which became a central district as Istanbul expanded outwards, whereupon some producers chose to move to other areas, such as Ikitelli and Yeni Bosna. Nowadays, apart from being able to offer low prices, these producers are very flexible thanks to the existence of the informal economy (which facilitates labour movements, for instance) and the presence of many other producers and suppliers, which is conducive to close subcontracting relations. Although Gedikpasa mainly serves the price-sensitive end of the market, higher-quality shoes produced by larger firms are sold to former republics of the Soviet Union, usually via registered exports (Yükseker, 2003). The larger producers are scattered around the city and have only recently targeted the upper end of the market (SPO, 2000). 26. Tannin was such a valuable compound that leather producers in Çesme (Izmir) and Istanbul were not very willing to sell it to producers located elsewhere in Anatolia (Faroqhi, 2000). 27. Yelmen (1992) identifies seven phases in the historical development of Kazliçesme. The first stage was dominated by a number of leading factories, some of which were owned by minorities, particularly Jews, Armenians and Greeks. The second stage began in the 1950s and was dominated by the first generation of Turkish leather industrialists. The third and fourth stages can be considered as succession periods, during which management was transferred to the second and third generation of family members, respectively. New entrants to the sector – migrants from Eastern Turkey – marked the beginning of the fifth stage, and the sixth stage is associated with the boom in demand in the 1970s, as a result of which some leather producers moved from Kazliçesme to the nearby town of Çorlu to enlarge their businesses. Kazliçesme was a rather crowded and compact place, occupying roughly 100000 square metres of land, and there were few opportunities for enlargement. Çorlu, which had always been an important supplier of raw leather was the preferred location for tanneries that wished to enlarge their businesses since it was very near Istanbul and had the necessary water supply. The last stage that the district went through was the exodous from Kazliçesme to Tuzla in the early 1990s. At that point there were about 200 leather firms in Kazliçesme, as well as firms specializing in related machinery and chemicals, plus sectoral associations, banks, warehouses and restaurants. 28. Tanners were among the leading members of an organization called Ahilik, which defined the rules that governed all business activities and therefore played an important part in Ottoman economic life until at least the eighteenth century (Yelmen, 1992). 29. For example the Izmir leather producers joined forces to import raw leather and chemicals.

8

Conclusions

1. The factors that played a part in the emergence of other clusters touched upon in this book are similar, including chance events in the case of the Tavas men’s outwear cluster, and historical circumstances in the Yatagan’s cutlery cluster (see Chapter 5). 2. Relatedly, the case of the Istanbul leather clothing cluster provides evidence against Cohen and Field’s (1999) argument that clusters in the same business

196 Notes and References around the world resemble each other closely in terms of industrial and social structure. The Istanbul leather firms prefer to internalize the key operations in the value chain, unlike their Italian counterparts in Santa Croce, for instance, which are flexibly specialized (Amin, 1994). 3. A related and interesting point for further research is how a certain strategic path is agreed upon for a network of firms as a whole.

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Index agglomeration, 2–5, 21–3, 35, 80, 112 see also clusters; industrial districts Aleppo, 118, 122 Amin, A., 10, 11–12, 18–19, 81, 164, 196n, 197 Arthur, W. B., 17–18, 159, 197 Australia, 28 Babadag, 84, 100–2, Figure 5.2, 104, 105, 162 Baden Württemberg, 19, 169, 170 Baum, J. A. C., 20–1, 161, 198 Becattini, G., 14–15, 162, 198 Belgium, 114, 126, 132, 133, 167 brand-building, 100, 111–12, 125, 132–3, 166, 167–8 British Columbia, 30 Brusco, S., 9, 14–16, 160, 162, 199 bureaucracy, 41, 74, 99, 100, 127, 148 Bursa, Table 3.4, 52, 61, Table 4.2, 84–5, 86, 102, 103, 105, 137, Figure 7.2, 138, 149 buyer–supplier relations, 21, 29, 103, 123, 130–1 see also subcontracting; transaction costs Byzantine Empire, 86, 192n Canada, 27, 28, 30, 32, 34, 60, Table 4.1 case study approach, 55–6, 187n chance events, 17–18, 25, 36, 79, 105, 129, 148, 151, 158–9 China, 34, 60, Table 4.1, 84, 91, 110, 114, 135, 136, 144, 146, 147, 155, 167, 194n CIS (Commonwealth of Independent States), 61, 114, 132, 136, 190n clusters big cities v. small cities, 170–1 boundaries, 46–7

costs and benefits, 1–2, 79–81, 106–7, 130–2, 152–5, 160–3 definitions, 8–11 developed countries, 5–6 developing countries, 6–8 dissolution, 18–19, 112–13 emergence, 17–18, 26–7, 63–4, 85–8, 100–6, 136–8, 149–52, 158–9 industrial organization, 22–3 magnetic nature, 34, 107–9, 154, 162, 169 market-like nature, 3, 74, 108, 151, 153, 160 scope, 47–8 self-disciplining nature, 22, 106–7, 160 self-reinforcing nature, 25, 34, 107–9, 129, 130–1, 154, 162, 169 transformation, 79–81, 113, 132–3, 145–6, 155–6, 167–8 types, 9, 22–3, 164 see also under individual names cluster initiatives, 169–70 collective learning, 16, 19, 160, 162 competition destructive, 18, 71, 72, 81, 124, 131, 145, 161 in-cluster, 20–1, 23–4, 25, 29, 30, 70–1, 95–6, 106, 124, 131, 145, 152, 154, 160–1, 165–6 the carpet cluster, 124, 131 the furniture cluster, 70–1 the leather clothing cluster, 145, 152, 154 the towel/bathrobe cluster, 95–6, 106 see also local competition; price competition construction industry, 44, 63, 65, Table 4.3, Figure 4.1, 73, 77, 79, 158, 165, 188n 215

216 Index

cooperation, 14–16, 19, 160, 164–5 the carpet cluster, 123–4, 130–1 the furniture cluster, 70–1 the leather clothing cluster, 145, 152–4 the towel/bathrobe cluster, 95, 106 cooperatives, 87, 189n costs energy costs, 69, 91, 93, 123, 144 labour costs, 68, 71, 81, 90–1, 96, 109–11, 122, 144, 155, 167 transaction costs, 13, 15, 22, 24, 160, 161 cotton, 85–6, 88, 90, Figure 5.1, 104, 109 Coventry, 29 cross-border trade, 114, 128, 158–9, 165 culture, 14, 30 cutlery, 58, Table 5.1, 88, 190n

Emilia-Romagna, 15, 185n see also Italy; Santa Croce; Third Italy energy, 69, 91, 93, 123, 144 Enright, M., 3, 4, 5, 18, 22, 26, 45, 46, 47, 184n, 187n entrepreneurship, 7, 9, 10, 12, 21, 26, 31, 93–4, 100, 101–2, 104–5, 107–9, 129–30, 133–5, 149–51, 152–3, 154, 158, 159, 162–3, 164–6, 187n, 190n, 192n see also family business environmental regulations, 148, 152, 156, 157, 171 envy, 94, 160 Eraydin, A., 48, 52, 91, 95, 96, 104, 108, 110, 113, 118, 122, 124, 125, 128, 132, 133, 201 European Union (EU), 32, 39, 40, 45–6, 60, 61, 84, 103, 114, 127, 147, 148, 155–6, 190n, 194n

De Ottati, G., 18, 22, 161, 200 design, 68, 71, 82, 123, 125, Figure 6.2, 127, 131, 133, Figure 7.3, 146, 155 diamond framework applications, 27–30 critiques, 30–6 elements, 25–6 empirical tests, 27–30 diversification, 41, 70, 112, 123–4, 145 dispersion, 18–19, 46 domestic rivalry the carpet cluster, 124, 131 the furniture cluster, 70–1 the leather clothing cluster, 145, 152, 154 the towel/bathrobe cluster, 95–6, 106 Dunning, J. H., 23, 33–5, 166, 201 dyes, 84, 85, 86, 96, 98, 102, 106, 119, Figure 6.2, 126, 147, 154

family business, 41, 70, 92–3, 123, 145 FDI (foreign direct investment), 23, 26, 33–5, 169, 186n fellow citizenship, 93, 95, 102, 104, 106, 108, 122, 129, 130, 154, 162 financing, 69, 74, 82, 91, 98–9, 109, 122–3, 132, 144, 192n flexible specialization, 12–14, 81, 161, 164, 195n–6n food/beverages, 42, Table 3.1, 44, 62, 88, 112, 117–18, 130, 189n footwear, 7, Figure 1.2, Figure 1.3, 10, 11, 16, 30, 88, Table 5.1, 118, Table 6.2, 130, 133, 137, 138, Table 7.1, 146, Figure 7.3, 147, 149, 150, 153, 165, 184n, 187n, 190n, 192n, 193n–4n, 195n Fordism, 12–14, 21 France, 47, 66, Table 4.1, 61, 84, 119, 125, 136, 146, 154 fur industry, 147 fuzzy methods, 54–5, 183, 187n

economic geography, 3, 5 economic development, 3, 26–7, 35–6, 168–71

game theory, 150, 163, 185n GAP (South-Eastern Anatolian Project), 118–19, 127

Index 217

Germany, 5, 47, 60, Table 4.1, 61, 69, 73, 84, 85, 87, 88, 91, 104, 105, 114, 119, 126, 136, 144, 145, 170, 184n, 186n, 190n, 191n, 192n Granovetter, M., 15, 162, 203 Grant, R. M., 30, 31, 203 grey economy, 40, 74, 99, 123, 135, 148–51, 162–3 Haveman, H. A., 20–1, 161, 198 historical accidents, 17–18, 25, 36, 79, 105, 129, 148, 151, 158–9 Hollywood, 12, 184n see also Yesilçam Hong Kong, 28, 186n human resources, 31, 74, 87, 91, 96, 104, 111, 113, 145, 151 see also labour costs imitation, 71, 81, 96, 107, 111, 123, 131, 161, 167–8 see also information spillovers; competition India, Figure 1.3, 84, 91, 110, 114, 119, 135, 136, 146, 155, 156, 167, 194n industrial districts definitions, 8–11 examples, 9, 11, 184–5 types, 9, 11–12 industry associations, 70, 94, 95, 100, 104, 124, 145 see also cooperatives information spillovers, 2, 16, 21, 22, 23, 24, 25, 26, 29, 70–1, 72, 81, 95–6, 106–7, 124, 125, 131, 145, 160, 161, 162, 165, 187n, 188n see also knowledge infrastructure, 69, 91, 104, 123, 127, 154–5, 171 inner cities, 36 innovation, 1, 10, 15, 16–17, 19, 24, 26, 27, 31, 94, 106, 107, 125, 160, 161, 162, 185n see also information spillovers; R&D; technology international business, 23, 32, 33–5, 41–4, 52–4, 60–1, 81, 82, 84–5,

87–8, 98, 102, 105, 114, 119, 135, 145, 149–51, 164–5, 166 international demand, 105, 116, 132, 149–51, 153, 155–6, 159, 166 Ireland, 27–8, 28–9, 34, 186n Italy, 5, 6, Figure 1.2, 11–12, 13, 14, 15, 19, 30, 60, Table 4.1, 61, 73, 84, 88, 91, 109, 112, 114, 119, 125, 135, 136, 144, 147, 153, 155, 156, 162, 164, 170, 184n, 185n, 190n see also Emilia-Romagna; Third Italy; Santa Croce Izmir, 37, 48, Table 3.4, 52, 61, Table 4.2, 84, 86, 87, 91, 103, 104, 107, Figure 6.1, 116, 118, 119, Figure 7.2, 138, 148, 149, 152, 156, 160, 187n, 189n, 191n, 192n, 195n Japan, 5, 9, 10, 21, 23, 32, 61, 88, 125, 167, 185n, 191n jewellery, Figure 1.1, Table 7.1, 194n just-in-time (JIT), 10, 21, 185n Kazliçesme, Figure 7.1, 136–8, 148, 149, 152–3, 154 knowledge, 2, 14–15, 16–17, 23, 24, 27, 79, 81, 104, 108, 160, 162, 165, 187n codified, 14–15, 17 tacit, 14–15, 17, 160, 162 see also information spillovers KOSGEB, 64, 71, 73, 104, 125, 188n, 189n, 193n Krugman, P., 5, 17, 46, 79, 102, 129, 151, 158, 184n, 185n, 187n, 205 labour costs, 68, 71, 81, 90–1, 96, 109–11, 122, 144, 155, 167 Laleli, 58, Figure 7.1, 135, 148, 149–51, 162–3 learning region, 16–17, 19, 160, 162, 165 local competition, 20–1, 161 the carpet cluster, 124, 131 the furniture cluster, 70–1

218 Index

local competition – continued the leather-clothing cluster, 145, 152, 154 the towel/bathrobe cluster, 95–6, 106 see also competition; price competition local networks, see networks location quotient (LQ), 45, 46, 48, 186n lock-in, 17–18 London, 10, 29 Lösch, A., 2–3, 206 machinery, Figure 1.2, Table 3.1, 44, 73, 96, Figure 5.1, 98, Figure 6.2, 118, 126, 129, Figure 7.3, 147, 192n, 195n marketing, 21, 24, 26, 58, 70, 72, 74, 82, 87, 91, 92, 102, 106, 111, 133, 135, 156, 162, 169, 190n Markusen, A., 9, 35–6, 164, 206 Marshall, A., 1–2, 9, 10, 12, 14, 17, 155, 158, 206 methodology, Figure 3.4, 159 cluster analysis, 55–7 fuzzy methods, 54–5, 183, 187n geographic clusters, 45–8 international competitiveness, 41–2 Mexico, 7, 34 milieu approach, 16–17, 185n multinational enterprises (MNEs), 5, 6, 10, 12–13, 23, 27–8, 30, 32, 33–5, 92, 96, 135 Nadvi, K., 6, 7, 170, 185n, 207 Nazilli, 93, 107–8 networks, 10–11, 12, 15, 16, 21–2, 23, 24, 58, 106, 107, 129, 149–51, 161, 166, 185n definitions, 10–11 social v. business, 15, 16, 22, 185n transnational, 12, 149–51 new economic geography, 5 New Hampshire, 29–30 New Zealand, 27, 28 OECD, 31, 91 oral history, 159

organization theory, 20–3 Ottoman Empire, 37, 86, 87, 102, 116, 117–18, 126, 136, 147, 152, 190n, 193n, 195n Pakistan, 7, 84, 91, 103, 110, 114, 136, 144, 146, 155, 156, 167 Perroux, F., 3, 10, 208 political cultures, 14–16 population ecology, 20–1 Porter, M. E., 5–6, Figure 1.1, 10, 11, 20, 25–36, 41, 70, 79, 112, 155, 156, 158, 160, 162, 166–7, 169, 170, 208–9 price competition, 71, 80–1, 82, 106, 125, 131, 145, 155–6, 161, 165–6 productivity, 4, 13, 26, 29, 35, 56, 92, 162, 167 Putnam, R. D., 15, 209 quality, 1, 13, 67, 71, 73, 74, 79–80, 82, 86, 88, 92, 94–5, 96, 100, 102, 104, 105, 106, 108, 109, 110–11, 118, 119, 124, 125, 132–3, 138, 144, 145, 147, 151, 152, 153, 155–6, 168 Ragin, C. C., 54–5, 183, 187n R&D, 5, 94, 105, 124, 126, 147, 188n, 189n see also innovation; technology regional policy, 3, 6, 35–6, 87, 99, 118, 127, 148, 163, 168–71, 188n, 189n see also GAP (South-Eastern Anatolian Project) regional theories, 3–4 Route 128, 10, 22–3 Rugman, A. M., 5, 30, 32, 33–5, 166, 210 Russian Federation, 40, 61, 73, 110, 114, 132, 136, 145, 146, 147, 148, 150–1, 155–7, 162–3, 190n, 194n Santa Croce, Figure 1.2, 10, 11–12 see also Emilia-Romagna; Italy; Third Italy Saxenian, A., 10, 22–3, 160, 210

Index 219

Schumpeter, J. A., 3, 16, 185n, 210 shoes, see footwear Silicon Valley, 9, 10, 15, 16, 17, 22–3, 47, 163, 184n, 186n Siteler, 62, 63–5, 68, 69, 71, 73, 74, Table 4.4, Table 4.5, Table 4.6, Table 4.7, Figure 4.2, 80, 188n spillovers, see information spillovers social capital, 15, 162–3 social networks, see networks Storper, M., 14, 16, 17, 159, 212 subcontracting the carpet cluster, 123–4, 131, 164, 166, 192n the furniture cluster, 70, 72, 77, 82, 164, 166 the leather-clothing cluster, 145, 152, 153, 164, 166, 195n the towel/bathrobe cluster, 87, 92, 95, 103, 104, 106, 107, 108, 112, 164, 166, 191n see also buyer–supplier relations; transaction costs Sümerbank, 87, 102, 117, 127, 138, 190n, 192n Switzerland, 5, 47, 88, 136, 185n Syria, 119, 125, 158–9 see also Aleppo

Trabzon, 151 transaction costs, 13, 15, 22, 24, 160, 161 see also buyer–supplier relations; subcontracting transportation, 2, 4, 21, 42, 72, 79, 96, 98, 104, 106, 108, 118, 123, 128, 131, 144, 149, 151, 155, 156, 160, 194n triad, 32 Toyota, 9, 21 trust, 14–16, 150, 162–3 TÜSIAD, 38, 41 Tuzla, 58, Figure 7.1, 148, 149, 156

tacit knowledge, see knowledge technology, 4, 10, 16–17, 22–3, 24, 26, 27, 82, 84, 94, 104, 110, 119, 122, 124, 126, 132, 145, 147, 153, 167, 185n, 186n, 191n see also information spillovers; innovation; knowledge; R&D Third Italy, 6, 11, 12, 13, 19, 162, 170 see also Italy; Emilia-Romagna; Santa Croce tourism, 88, Figure 5.1, 98, Figure 7.3, 146, 147, 149, 165

Verbeke, A., 5, 30, 32, 33–5, 166, 210

UK, 5, 24, 60, Table 4.1, 61, 84, 114, 116, 119, 125, 136, 154, 184n, 191n untraded interdependencies, 17, 19 urbanization, 4, 36, 58, 154–5, 170–1 USA, 5, Figure 1.1, 29–30, 60, Table 4.1, 61, 63, 84, 103, 105, 111, 114, 119, 129, 136, 184n, 186n, 191n see also Hollywood; New Hampshire; Silicon Valley

Weber, A., 2, 213 World Bank, 38, 40 yarn, 87, Figure 5.1, Table 5.2, 107–8, 119, 125–6, Figure 6.2, 129, 133, 158, 191n, 192n Yesilçam, 194n Zeytinburnu, 58, Figure 7.1, 145, 149, 151