are industrial clusters going international the case of italian smes in romania

8/14/2019 Are Industrial Clusters Going International the Case of Italian SMEs in Romania

1/13

1

UNIVERSITDELL'INSUBRIA

FACOLTDI ECONOMIA

http://eco.uninsubria.it

Antonio Majocchi

Are industrial clusters goinginternational? The case of Italian

SMEs in Romania

2000/12


2/13

2

In questi quaderni vengono pubblicati i lavori dei docenti dellaFacolt di Economia dellUniversit dellInsubria. La pubblicazionedi contributi di altri studiosi, che abbiano un rapporto didattico o

scientifico stabile con la Facolt, pu essere proposta da unprofessore della Facolt, dopo che il contributo sia stato discussopubblicamente. Il nome del proponente riportato in notaall'articolo. I punti di vista espressi nei quaderni della Facolt diEconomia riflettono unicamente le opinioni degli autori, e nonrispecchiano necessariamente quelli della Facolt di Economiadell'Universit dell'Insubria.

These Working papers collect the work of the Faculty of Economicsof the University of Insubria. The publication of work by otherAuthors can be proposed by a member of the Faculty, provided thatthe paper has been presented in public. The name of the proposer isreported in a footnote. The views expressed in the Working papersreflect the opinions of the Authors only, and not necessarily the onesof the Economics Faculty of the University of Insubria.

Copyright Antonio Majocchi

Printed in Italy in July 2000

Universit degli Studi dell'InsubriaVia Ravasi 2, 21100 Varese, Italy

All rights reserved. No part of this paper may be reproduced in anyform without permission of the Author.


3/13

3

ARE INDUSTRIAL CLUSTERS GOING INTERNATIONAL? THE CASE OF

ITALIAN SMEs IN ROMANIA

Antonio Majocchi

*

July 2000

The paper analyses the process of internationalisation realized by Italian SMEs coming fromindustrial districts and locating in the northwestern part of Romania. The case studies showhow small firms tend to replicate, on an international scale, the relationships developed inthe source districts, thus developing international networks that overcome the classicalhurdles to growth that mainly affect small firms.

Introduction

During the Nineties a growing number of studies have shown how internationalisation strategieshave been significantly pursued not only by large firms but also by an increasing number ofsmall and medium sized enterprises (SMEs). Consequently, a large number of studies havebeen devoted to analyzing this phenomenon (Fujita 1995a; Fujita 1995b, Kohn and GomesCasseres 1997, Khon 1997). Data show that this process of international growth issignificantly taking place in Italy, where local SMEs have expanded their presence not onlythrough the traditional means of exports but also through the establishment of foreign direct

investments (Mutinelli and Piscitello 1998). The analysis of the strategies of internationalisationrealised by the SMEs is extremely important for an economy such as the Italian one, where theindustrial structure is mainly based on small firms. However, the average small size of firms isnot the only feature of Italian firms, which show a high level of geographical concentration inareas generally defined as industrial districts. Economic literature on the industrial districtsdates back to the work of Marshall, but it is with special regard to the Italian experience that alarge of number of works have been devoted (Porter 1990, 1998, Lorenzoni and Lazerson1999, Baccarani and Golinelli 1993). This widespread interest on this aspect is mainly due tothe capacity that firms, operating within the industrial districts, have demonstrated in enteringinternational markets and in the role they have in developing employment. The importance of

districts within the Italian economy can be inferred by an analysis of some synthetic indicators:the Istat's (Italian Central Statistics Institute) 1991 census singled out some 200 industrialdistricts in which over 2 million workers are employed, a figure equivalent to 42.5% of overallfactory employment in Italy. Export data, regarding these local systems, are even moresignificant. Recent data on 60 major Italian districts, has emphasised that, in 1996, 30.5% of

Paper presented at the Asac-Ifsam joint conference, 8-11 July, 2000, Montreal, Canada* Universit degli Studi dellInsubria, Facolt di Economia, via Ravasi, 2 21100 Varese; E-mail:[email protected]


4/13

4

the total exports for Italian corporations was accounted for by corporations operating in oneof the 60 major districts. Therefore the importance of district-based companies is obvious interms of foreign market penetration skills.

The majority of Italian industrial districts are to be found in sectors with a standard technologythat produce final consumer goods. These sectors are generally positioned in the maturityphase of the product's life cycle and are, therefore, growth-restricted and with a high priceelasticity. Consequently, Italian corporations operating in these sectors are heavily exposed tointernational competition and, in particular, to competition by companies belonging todeveloping areas with low labour costs. Many scholars, looking at the Italian experience, haveforecasted that the coming of globalisation would have forced the myriad of small district-based firms to merge into a few large enterprises. Against this changing scenario, whichoccurred during the second half of the Eighties and the Nineties, the solutions found by Italian

districts once again confirmed their great capacity for adapting to the new environment (Sabel,1996). This implied in-depth reorganisation and the search for new forms of organisation, bothat the local and international levels. The increasingly stiff price competition in the newly-industrialised countries compelled district-based companies to change their strategies, by nolonger wagering on cost leadership, but on product differentiation. An additional solution wasthe development of technological innovation in terms of marketing and distribution andproduction decentralisation on an international level. Concerning the latter development,aggregate data show that these kinds of strategies are increasingly being pursued by ItalianSMEs (ISTAT 1996, Varaldo and Ferrucci, 1997).

Whereas a large amount of work has been devoted to the strategies of companies actingwithin industrial districts - their international marketing strategies in particular - very few workshave considered the internationalisation production strategies realised by SMEs in general, andthose operating in industrial districts in particular. We have tried to analyse the process ofinternationalisation that is taking place. With this goal in mind we have analysed the Italianinvestments in Romania, this area being a typical target of the investments by Italian SMEs(Manea and Pearce 1999). More precisely, we have concentrated our attention on the Italianpresence in the northwest area of the country (county of Arad and Timis), where, according to

official data, there is the highest concentration of Italian investments by small and medium-sizedfirms mainly coming from the Veneto region, an area within Italy characterised by a highdensity of industrial districts.

This paper tries to address the following questions:Are the firms acting within the Italian framework of industrial districts following some peculiarpath of internationalisation?Secondly, is the geographical concentration of their investment a sign that the operationalrelationships developed within the local network of firms have been expanded even to other

geographical contexts?


5/13

5

Finally, we have tried to see how the firms we studied have succeeded in overcoming theclassical limits to growth that SMEs face, and that have been identified in the managementliterature as the scarcity of financial and managerial resources.

The work has been organised in the following way. The first part describes the methodologythat has been followed in the research. The second section describes the principal findings ofthe empirical research, followed in the third part by a discussion of the main results.

Methodology

The research followed a case studies approach (Eisenhardt 1989; Yin 1994). In February,1998, data on Italian firms in the northwestern part of Romania were collected by the localChambers of Commerce. From the lists of the 482 firms operating in the area, a group of 22companies that are part of a local network and with links to Italian industrial districts havebeen selected. The dimension of the sample have been chosen in order to allow an in-depthanalysis of cases.The link has been defined in quite a broad way, ranging from cases where theRomanian company is a subsidiary of an Italian corporation located in an industrial district tothose of firms with relevant participations of Italian capital and with some kind of agreementwith Italian partners located in an Italian industrial district. In order to catch one of the mainindustrial cluster characteristics the definition of agreement has been taken according to the

definition offered by Blankenburg Holm, Eriksonn and Johanson (1999), who define businessrelations within networks as those:

relationships between suppliers and customers imply(ing) that the two exchange partners co-ordinate a number of exchange and production activities in a way that increase theirinterdependence, thereby raising the joint productivity and creating relationship value

Once the sample has been defined, interviews with managers of the Italian counterpartwere conducted in Italy. The interviews allowed us to test a questionnaire that wasconsequently sent to the 22 firms in Romania at the end of 1998. In July, 1999, directinterviews were done with the representatives of the firms located in Romania or, whereexisting, with the local country mangers. When available, all the data collected in the interviewshave been checked with company reports and with all the official information available. Withinthe 22 firms 8 are companies with Italian capital and with an agreement with firms still locatedin Italy, while 14 are subsidiaries of Italian firms. Concerning the sector of activity, 5 firms areproducers of taps, household appliances and handle manufacturers, 3 are active in the marble-granite working sector, 8 in textile and clothing, and 6 in the footwear industry.


6/13

6

Results

The process of delocalisation of activities directed toward countries such as Romaniahas been generally interpreted as the result of strategies aimed just at looking for low costlabour. Our research tends to confirm this result, but in addition it casts some light on theimportance of the relationship developed within the starting district in order to fully understandthe strategies followed by the firms acting within the framework of the district. The Italianpresence in Romania is mainly distinguished by small and medium-sized corporations. BigItalian corporations are only marginally present. This tendency for small and medium-sizedcorporations to be in Romania implies relatively scanty resort to market penetration methodsperformed through the take-over of local corporations. Our analysis has identified three

different organisational strategies followed by the SMEs.

One strategy can be defined as a sort of transnational district. According to this model,which from some points of view resembles the one defined by Lorenzoni and Baden Fuller(1995), firms develop an international presence through their ability to co-ordinate aninternational network of partners. The difference between the Lorenzoni and Baden Fullermodel and ours is that in our case the network is co-ordinated in the centre by an SME whichis mainly domestic and not by a large multinational company, as in the cases they analyse.Moreover in our model the network is mainly located within industrial districts both at the local

and at the international level. The main characteristic of this kind of firm in our sample is thatthese companies replicated on an international scale the kind of intense relationships developedwithin the district. These corporations, that we can call the leader-corporations, have directaccess to the target market and have significantly developed marketing and merchandisingfunctions. They are distinguished by a high number of relations with other corporations andhave often autonomously started up production internationalisation processes either bytransferring plants or, more significantly, encouraging main partners-suppliers to follow asimilar route. The firms located at the centre of the network have intense sub-supplyrelationships with partners located both in the Italian and the Romanian districts. From a purelyformal point of view, the central firms have just a market relationship with these partners. The

research highlights how these relations are much deeper than appear at first glance. In thecompanies in question the greater part of production, excepting the higher range, is supplied byoutside contracting companies, located in both the local district and other countries, but mainlyconcentrated in the northeast part of Romania. In this case the companies basically carry outthe role of co-ordinator for other corporations, both in and outside the Italian district.Therefore, from a formal viewpoint the relations between the Italian companies, which we candescribe as the leader-companies, and the Romanian companies possess all the elements ofstandard supply relations. In some cases we have observed that these relations are extremelyflexible, without resort to the drawing up of contracts. From a material viewpoint, a truepartnership with these corporations is feasible. The leader-companies supply technical

consulting, by sending their staff on the spot for certain periods of time, including long periods.


7/13

7

They offer a marketing outlet to the partner corporations and can also supply equity andrequired technology, by way of leasing machinery, using the loan-lease formula. Therefore,relations between the leader-company and the partner corporations reproduce the relations tobe found inside the district, on an international level. The leader-company puts suppliers in

reciprocal competition both as regards prices and product quality, but this competition takesplace within a context of strong collaboration. The leader-companies, in the specific casesexamined, enjoy the cost advantages ensuing from the localization of the supplyingcorporations in Romania, without having to directly commit themselves as regards productioninternationalisation processes. Moreover, thanks to collaboration relations, the leader-company is able to guarantee suitable quality standards, as compared to outlet marketdemand. For their part the partner corporations can, in this way, guarantee a marketing outlet,thanks to the stability of their relations with the leader-company, while securing for themselvesthe technical consulting offered by the leader-company and making use of the opportunity toobtain human resources.

Figure n.1

The international network model: from district to district

The other two models singled out refer to the case of Italian corporations that havechosen to create brand-new corporations in Romania.

ITALIAN INDUSTRIAL

DISTRICT

INDUSTRIAL DISTRICT

IN ROMANIA

The leader company


8/13

8

On the one hand, there are 14 corporations which have attempted to tackle decreasesin prices enforced by customer corporations by decentralising production in Romania with themain target of curbing costs. This kind of strategy is standardly pursued by corporationsoperating in the textile-clothing and footwear sectors. In some cases, the privileged relations

which are to be found inside a district have been preserved through a company still operatingin Italy. The company in Italy has, in general, been assigned the task of undertaking thoseactivities held to be of a strategic nature, such as marketing, business relations managementand design and marketing, whereas production is entirely or partially decentralised toRomania. This model of expansion is quite a standard one and has been followed quiteextensively by large corporations. But, compared to the strategies usually observed whererelocalisation processes are being implemented (Dunning, 1993), this strategy stands outinsofar as the firms involved are SMEs which seem to move towards areas where theexistence of others companies allow for some of the typical processes implemented within theindustrial districts to be replicated.

On the other hand, there are corporations which have entirely transferred all the valuechain to Romania. These companies have been typically located in a marginal situation withinthe framework of districts of origin. Once again, the SME corporations have shown atendency to replicate in Romania the district logic and behaviour as achieved in Italy. Thesecorporations, whose reference market was mainly the Italian district, are distinguished by arestricted number of relations with other corporations, and they mainly depend on the leader-corporations we have described above. These corporations, so as to avoid being cut off fromthe market by other corporations outside the district, have relocated in Romania. However,among these corporations some have seized this opportunity for internationalisation to achievea strategic expansion, by acquiring a more autonomous role as regards the corporations intheir district of origin. These firms maintained their strategic links with the central partners inthe Italian districts, but they were also able to become a reference point for a series of othercorporations in Romania. In so doing they perform the role of leader-company in their newtarget district, a role they were unable to perform in their district of origin, by diversifyingproduction, increasing the number of clients and reference markets, or directly penetratingtarget markets with autonomous trademarks, thus expanding merchandising and marketingstrategies.

Finally it is worth noting that, contrary to the traditional wisdom that states that smallfirms expand internationally mainly thanks to some local partner's help, no joint-ventures withlocal partners have been found in the sample analysed.

Discussion


9/13

9

According to Gomes-Casseres (1997, p. 36) small and medium-sized firms can bedivided in two groups with regard to their internationalisation strategies:

The first type of firm relies on its own capabilities to exploit market niches; thesecond tries to succeed in a larger market by using alliances to reach the requiredscale and scope.

The idea is that unless a company is a leader within a narrow market segment, smallfirms have to rely on external support, i.e. alliances, in order to expand internationally.

In the cases we analyse no firms were really market leaders. The companies in thesample seem to follow the classical model of international expansion as defined by the

international product cycle (Vernon 1966 and 1979). According to this model firms operatingin mature sectors expand their production abroad in order to keep up with the low-costcompetition from foreign producers. The choice of the entry mode in our sample seems todepend mainly on the position of the firms within the constellation developed in the originalindustrial districts. In the cases of firms in the centre of the network, internationalisation ismainly realised through the investments undertaken by suppliers; in all other cases, throughdirect investments. The more relevant aspect of this strategy is that even in the case ofinternationalisation through suppliers the process of expansion remains largely within theoriginal network. Firms in the districts do not outsource transactions outside what we can callthe soft-hierarchy of the network, realising a sort of internalisation within the constellationand not within the firms.

According to the theory of internalisation (Buckley and Casson 1991; Casson, 1992;Hennart 1991) internationalisation is realised through foreign direct investment when the firmshave some advantage that is not worth selling to the market i.e. when the hierarchy is moreconvenient then the market. In our cases firms in the sample avoid selling their technologybecause the competitive advantage they possess is the result of long-term supply relationshipsestablished with other firms acting within the framework of the Italian district. These kinds ofrelationships are a form of co-operation characterised by a high level of adaptability ofproduction by the seller to the request of clients, by the common sharing of technology, and bythe development of joint-decision making arrangements. These links are part of the realcompetitive advantage of the firms, an advantage that cannot be outsourced to otherproducers. Consequently, the firms tend to use direct investment as the main tool forinternationalisation while avoiding co-operation with local partners. This path of expansion isrealised either directly by the firms or, in the case of companies at the centre of the network,by supporting sub-suppliers in order to produce abroad.


10/13

10

The relationships developed in the source districts help us to understand why theinternationalisation strategies are focused on a restricted area. Management literature hasclearly shown how the main limit to the international expansion of small firms is the shortage ofmanagerial skills. (Buckley and al.1997). Within small firms decision-making is often

personalised and relies on personal perception, therefore it is likely that (Aharoni, 1966) thedecision to go international and the management of international operations rely on decisionstaken without a proper evaluation of the alternatives. In this context the personal relationsdeveloped within the Italian districts with managers of suppliers, clients and competitorsstrongly influence these kinds of decisions. When the first-mover firms within the districtsmoved towards Romania, other companies followed within the network and in the othercompetitor networks (Knickerbocker, 1973). Moreover, if we take into account informationcosts, SMEs are at a disadvantage compared to large firms also regarding their capabilities incollecting information on the new business environment (Cafferata and Mensi 1995). Thissituation increases the uncertainty surrounding the investments. Since for small firms the

proportion of resources committed to a foreign direct investment is quite large, the risk alsoseems larger for SMEs then for big firms (Caves 1982). The concentration of firms in arestricted area helps firms to save on search costs and decrease the uncertainty surroundingthe investments. Finally, to go abroad requires adaptation and modification in terms ofmanagement, organisational routines and even of marketing and production technologies. Allthese modifications involve costs to the firms which would be hard to absorb given their limitedresources.

The path of expansion shown in our sample seems to indicate that the Italian firmsminimise these problems of risk and uncertainty through a model involving the common sharingof information through the network that made up the districts and through a step-by-stepprocess of internationalisation. From this point of view, the results of the empirical researchseem to confirm some of the main findings of the network theory concerninginternationalisation (Hkansson, 1982, Johanson e Vahlne 1977, 1990, Bjorkmann e Forsgren1997).

The process of international expansion in the cases we have analysed seems to be acumulative process. An international presence according to the model (Johanson andMattsson 1988) is the result of increasing market knowledge and consequent marketcommitment. According to this theory, the first approach to the international market is throughexports, therefore investments follow (Peterse and Pedersen, 1997). In our case investmentsand commitment to the foreign market are resource seeking, therefore exports are not the firstmeans of acquiring knowledge of the new environment. This knowledge is gained through thediffusion of the information not only within the firms but within the network of companies thathave initially been formed within the original districts. In our case international expansion hasbeen realised not only through the classical instrument of foreign direct investment but alsothrough partnership co-operation and sub-supply agreements. In this respect, the networkapproach seems best suited to evaluate this process. Internationalisation must be interpreted as


11/13

11

a process that regards not only one firm but the entire web of firms. The internationalexperience and the advantages of part of the network is then passed to the entire constellationand from constellation to constellation. The stability that characterised the relationship withinnetworks help the diffusion of information within the constellation. Geographical proximity at

source became, in this respect, an important point. Proximity not only reinforces therelationship among firms, thus facilitating the exchange of information, but also contributes tothe spread of imitation processes among the firms, and consequently to replicating aconcentration of firms in the Romanian area. In analyzing the internal process of decisionmaking that convinces the firms to go international, all the firms affirmed that an importantfactor was the existence of other partners or competitors from the same district following thesame route.

REFERENCES

Aharoni Y. (1966), The foreign investment decision process, Harvard University Press,Boston

Baccarani C. and Golinelli G. (1993), Tratti del divenire dei distretti industriali, Il QuadernodellIstituto Tagliacarne, n. 8; pp. 15 46

Bjorkmann I. e Forsgren M. (1997), The nature of the international firm. Nordic contributionto international business research, Munksgaard International Publisher, Copenhagen

Blankenburg Holm D., Eriksonn K. and Johanson J. (1999), Creating value through mutualcommitment to the business network relationship, Strategic Management Journal, n. 20, pp.467-486

Buckley P.J. and al. (eds.) (1997), International technology transfer by small and mediumsized enterprises, London MacMillan

Buckley P. J. e Casson M. (1991), The future of the multinational enterprise, MacMillan,London

Cafferata and Mensi (1995), The role of information in the internationalisation of SMEs: atypological approach, International Small Business Journal, vol. 13 no. 3, pp. 35-46

Casson M. (1992), Internalization theory and beyond New directions in internationalbusiness. Research priorities for the 1990s, ed. by P.J. Buckley, Edward Elgar, Aldershot, pp.4 - 27


12/13

12

Caves E.R. (1982a), Multinational enterprise and economic analysis, Cambridge UniversityPress, Cambridge MA

Dunning J. (1993), The globalization of business, Routledge, London and New York

Eisenhardt K. M. (1989), Building theories from case studies research, Academy ofmanagement Review, 14 (4), pp. 532-550

Fujita M. (1995a), Small and medium-sized transnational corporations: trends and patterns offoreign direct investment, Small Business Economics, n.3, Vol. 7, pp. 183 - 204

----- (1995b), Small and medium-sized transnational corporations: salient features, SmallBusiness Economics, n.4, Vol. 7, pp. 251 - 271

Hkansson H. (1982), International marketing and the purchasing of goods. An interactionapproach, John Wiley, Chichester

Hennart J.F. (1991), The transaction cost theory of the multinational enterprise, The natureof the transnational firm, C. N. Pitelis e R. Sugden, eds., Routledge, London and New York,pp. 81 - 116

Johanson J. and Mattsson L.G. (1988), Internationalisation in industrial systems. A networkapproach, Strategies in Global Competition, Ed. by N. Hood e J.E. Vahlne, pp. 287 314

Johanson J. and Vahlne J.E. (1977), The internationalisation process of the firm. A model ofknowledge development and increasing market commitment, Journal of InternationalBusiness, vol. 8, no. 2, pp. 23 32

------ (1990), The mechanism of internationalisation, International Marketing Review, vol. 7no. 4, pp. 11- 24

Knickerbocker F. T. (1973), Oligopolistic reaction and the multinational enterprise, HarvardUniversity Press, Boston

Kohn T.O. (1997), Small firm as international players, Small Business Economics, n.1, Vol.9, pp. 45- 51

Kohn T. O. and Gomes Cassares B.(1997), Small firms in international competition: achallenge to traditional theory? P.J. Buckley et al. (eds.), International technology transfer bysmall and medium sized enterprise. Country studies, London, MacMillan

Kogut B. e Singh H. (1988), The effect of national culture on the choice of entry model,Journal of international business studies, Vol. 12, no. 3, pp. 305 322


13/13

13

ISTAT (1996), Rapporto annuale. La situazione del Paese nel 1995, Istat, Roma

Lorenzoni G. Lazerson M. H. (1999), The firms that feed industrial district a return to theItalian source, Industrial and corporate change, June , Vol. 8 n. 2, pp 235-266

Lorenzoni G. e Baden-Fuller C. (1995), Creating a strategic center to manage a web ofpartners, California Mangement Review, Vol. 37, n. 3, Spring, pp. 146 - 163

Manea J. and Pearce R. (1999), Transnational corporation strategies in industrial transition:the case of Romania, Discussion papers in international investment & management, TheUniversity of Reading, Reading

Mutinelli M. e Piscitello L. (1998), FDI strategies by Smes: evidence from the Italian case,Proceedings of the 23rd annual EIBA Conference, Stuttgart, December 14-16, 1997,

pp.251-280

Petersen B. and Pedersen T. (1997), Twenty years after. Support and critique of theUppsala internationalisation model, Bjorkmann I. and Forsgren M. (1997), The nature of theinternational firm. Nordic contribution to international business research, MunksgaardInternational Publisher, Copenhagen, pp. 117 - 133

Porter M. E. (1990), The competitive advantage of the nations, Macmillan Press, Basingstoke

------ (1998). Clusters and the new economics of competition, Harvard Business Review,Nov-Dec, pp. 77-90

Sabel C. (1996), Learning-by-monitoring: the dilemmas of regional economic policy inEurope, in: network of enterprises and local development, OECD, Paris, pp. 23 - 51

Varaldo R. e Ferrucci L. (edited by) (1997), Il distretto industriale tra logiche di impresa elogiche di sistema, F.Angeli, Milano

Vernon R. (1966), International investment and international trade in the product cycle,Quarterly Journal of Economics, vol. 80, 1966, pp. 190-207

---- (1979), The product cycle hypothesis in a new international environment, OxfordBulletin of Economics and Statistics, n. 4, pp. 255 - 267

Yin R. K. (1994), Case study research. Design and methods, Sage Publications, ThousandOaks

are industrial clusters going international the case of italian smes in romania

Documents