DEVELOPING AND SUSTAINING COMPETITIVE ADVANTAGE OVER ONE HUNDRED YEARS: EVOLUTION OF FAISALABAD’S TEXTILE

INDUSTRY CLUSTER IN PAKISTAN

Conference Paper

10th Annual Global Conference of

The Competitiveness Institute (TCI)

8-12 October, Portland, Oregon, USA

Submitted By:

Faheem ul Islam PhD (Cambridge Univ.)

Visiting Professor

Suleman Dawood Business School

Lahore University of Management Sciences

Opposite Sector “U”, DHA

Lahore, Pakistan

e-mail: faheemui@lums.edu.pk

Abstract:

Textile is an important industry of Pakistan. Many of the textile firms in the country are clustered in Faisalabad region and are successfully competing in distant local and international markets. This textile cluster has evolved over a period of one hundred years and presents an interesting case to study its evolution and the phenomenon of clustering in the context of a developing country. This paper profiles the development and the socioeconomy of Faisalabad's textile cluster and evaluates the benefits of agglomeration for large and small textile firms. The paper also investigates the validity of the cluster concept in the context of the developing economy. While findings of this study may not be generalized for all the contexts of clustering, substantive new insights into the phenomenon have been reached with interesting perspective for future research.

Developing and Sustaining Competitive Advantage over One Hundred Years: Evolution of the Faisalabad’s Textile Industry Cluster in Pakistan.

Theoretical views on the impact of clustering

With the growing interdependence of world economy much attention has been given to the concept and role of the industrial clusters in regional economic development (Marshall 1920, 1923; Weber 1929; Lloyd and Dicken, 1977; Enright 1990, 1998; Porter 1990, 1997, 1998, 2000; Krugman 1991, 1997; Harrison, 1992; Omahe, 1995; Saxenian, 1994, 1996; Pouder and St. John, 1996; Coyle 1997, 2001; Scot, 1998, 2001; Fujita, Krugman and Venables, 2000). The debate on how clustering impacts a constituent firm’s performance, however, presents varying theoretical views.

One, based on the works of Lloyed and Dicken (1997), Enright (1990), Krugman (1991, 1997), Omahe (1995), Coyle (1997, 2001), Porter (1990, 1997, 1998, 2000) Scott (1998, 2001), Fujita, Krugman and Venables (2000), maintains that efficiency in internal operations of firms is a necessary – but not sufficient – condition to compete globally. Factors external to the business, but internal to the regional economic foundation, are increasingly important for the creation of competitive advantage. Internationally successful industries of a country tend to be geographically concentrated or clustered. This happens because agglomeration economies, geographic concentration of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions lead to higher growth.

Porter (1990) saw the high productivity growth as the outcome of interactions between a ‘diamond’ of four factors: firm strategy, structure and rivalry; factor conditions; demand conditions; and related and supporting industries. The systematic nature of this diamond, according to him, produces clustering and, moreover, geographic concentration of the leading rivals in an industry magnifies and intensifies the interactions between the factors. “The process of clustering, and the intense interchange among industries in the cluster, thus works best where the industries involved are geographically concentrated” (Porter, 1990). Government, according to him, also plays a crucial role in the cluster development through its policies, support programs and establishing relevant institutions.

Clusters help firms achieve better competitiveness broadly in three main ways, asserts Porter (1998). First, they raise productivity by allowing access to specialized inputs and employees, enhancing access to information, institutions and public goods and by facilitating complementarities. Second, they increase firms’ capacity for innovation by diffusing technological knowledge and innovations more rapidly. Moreover, competitive pressure within each cluster increases firms’ incentives to innovate. Thus, they could be described as types of ‘learning’ regions, showing higher rates of technological and organization innovation and retaining their adaptability to unexpected exogenous changes

(Morgan, 1997; Asheim, 1997). The literature on innovation highlights the role of customers, suppliers, and universities in the innovation process, while the literature on the diffusion of innovation stresses such notions as demonstration effects, contagion, experimentation, and ease of observability that are clearly influenced by clusters (von Hippel, 1988; and Rogers, 1998). Firms within a cluster are also often able to more clearly and rapidly perceive new buyer needs. Third, clusters stimulate higher rates of business formation, as employees become entrepreneurs in spin-off ventures, since barriers to entry are lower than elsewhere (Martin and Moore, 2001).

Many other researchers have also discussed the role of ‘soft’ externalities in functioning of the agglomeration economies. These are the local social, institutional and cultural foundations of ‘clusters’, and other ‘untraded interdependencies’ amongst the firms making up a local cluster. Spillovers of knowledge, both tacit and of a more formal nature, and the associated notion of ‘collective learning’, have been identified as playing a crucial role in promoting innovation and entrepreneurial dynamism in the clusters (Keeble and Wilkinson, 2000). Porter (1998) describes free flow of information in all directions and cooperation as well as competition among participating firms as key to the phenomenon of successful clustering. Porter (1990, 1998), accordingly, emphasizes the importance of geographic concentration, since proximity greatly facilitates the flow of crucial business related information central to the capability to innovate. The clusters of competitive industry that achieve success are thus, vertically deep, involving many stages of the vertical chains and industries providing machinery and other specialized inputs (Porter, 1998). According to Porter (1990), as clusters develop, resources in the economy flow towards them and away from isolated industries that cannot deploy the resources as productively. As more industries are exposed to international competition in the economy, the more pronounced the movement toward clustering would become.

The other view, based on the studies and propositions of Held (1996), Pouder and St. John (1996), Steiner (1998), Martin and Sunley (2001) raises concerns related to the definition of the cluster concept, its theorisation, its empirics, the claims made for its benefits and advantages, and its use in policy making. Pouder and St. John (1996) assertthat the importance of geographic proximity may be only partial. The economies of agglomeration that initially draw firms together in a cluster subgroup of competitors eventually erode. During the origination phase of evolution, geographically clustered firms will experience greater cost economies and legitimacy than industry competitors that are outside of the cluster, there would be higher rate of new business formation in the cluster at the same time firms would achieve higher productivity and innovation levels compared with the non-clustered firms. But as the cluster grows, however, size, congestion, and saturation within many begin to ‘choke off’ the agglomeration economies. Over time, therefore, the clustered firms experience cost economies similar to the competitors out side the clusters. Restricted collective perspective of the clustered firms also gives rise to competitive ‘blind spots’ which eventually limit their innovative potential, strategic positioning and ability to adapt to sudden industry-wide changes compared with the firms outside the clusters.

The literature on clusters is also not clear about the link between the size of a firm and benefits of locating in a cluster. Enright (1998) presents successful regional clusters as alternatives to development via large, managerial firms. He also mentions that geographical proximity can influence vertical structure of industries. Spatial organization of the clusters becomes a substitute for both vertical integration and diversification (Goldstein and Gronberg, 1984). As a result, firms within a geographical cluster often exhibit lower levels of vertical integration and tend to have narrower scope than might be expected otherwise (Enright, 1998). Porter (1998) also agrees that access to inputs within a cluster is often more efficient or effective than vertical integration. The larger companies have to spread activities to source inputs and gain access to markets. Failure to do so will lead to a competitive disadvantage (Porter 1998).

Clustering in the context of developing countries

Much of the cluster studies have focused on advanced economies while agglomerations are also a significant feature of developing countries (Fisher and Reuben, 2000). Jamshed and Ghani (2004) also argue that clusters are prevalent both in developed and developing economies. Porter (1997, 1998) however, contends that clustering is normally pronounced in advanced economies, as is the depth and breadth of clusters. Developing countries’ clusters, according to him, are not well developed and they mostly compete in the world market with cheap labor and natural resources. Porter also asserts that clusters in developing countries tend to be shallow and rely primarily on foreign components. Often, firms are forced to vertically integrate. The relatively competitive companies in such locations tend to operate more like islands than participants in a cluster. Monopolistic behavior of the companies protected from competition also retards cluster development. Porter (1997) further mentions that, the economies with low productivity are characterized by little local rivalry. Price is the sole competitive variable, and the firms hold down wages in order to compete in local and foreign markets. The competition mostly involves imitation and minimal investment. Jamshed and Ghani (2004) cite the World Development Report (2002) to argue that developing countries lack the institutional arrangements for contract enforcement. In such situations trust as a substitute gains more prominence in functioning of the clusters in these regions. Porter (1997, 1998) further mentions that developing countries’ clusters involve fewer participants with different sociometrics. Communication in them is limited, and linkages between existing firms and institutions are not well developed. Yet, the traditional survival clusters of small enterprises in developing countries, such as footwear, clothing and woodworking, are explained in the very similar theoretical terms as the ones in advanced economies (Fisher and Reuben, 2000). Martin and Sunley (2001) describe Porter (1998)’s argument that the developing country clusters are ‘shallow’ and ‘hierarchical’ with competitive companies in such locations operating more like islands than competitive participants in the agglomerations. In many instances they do not make convincing examples of the new logic of knowledge-based competitiveness – repeatedly mentioned as integral to the cluster success - yet some of the literature explains them in almost identical social capital and learning terms (Martin and Sunley, 2001). At the same time, it is increasingly argued that the clusters are a significant feature of the developing economies (Martin and Sunley 2001) and many of the developing country clusters dominate world markets (Nadvi and Halder, 2002). Jamshed and Ghani (2004) argue that it is possible to achieve cluster

depth and specialization in related upstream and downstream industries in developing countries. Who further explain that the existence of cluster specific institutions and infrastructure eliminates the difference in development and growth process of clusters in advanced and developing economies. However, what is different is the kind of innovation that takes place and the path it follows.

Textile industry in Pakistan

The textile industry in Pakistan presents an interesting case to explore the phenomenon of clustering in a developing country. Though Pakistan is a transition economy, its textile industry is globally competitive. This South-Asian nation, presently, is the fourth largest producer of cotton in the world after USA, China and India. The country is also the fifth largest producer and the second largest exporter of cotton yarn in the world. It is also the fifth largest exporter of woven fabrics in the world (according to the All Pakistan Textile Mills Association Annual Report, 2006).

Main production stages in textiles are cotton ginning, yarn spinning, weaving / knitting into fabric, processing and garment stitching. There were 495 textile mills in Pakistan at the end of 2005, of which 50 were composite (vertically integrated with spinning and at-least one other production stage) while 445 were spinning only units (see Table 1). In addition, there were 124 independent weaving plants and nearly 225,000 power looms, mostly installed in the last five decades (Lancerotto, 2002), in the Small and Medium Enterprise sector around the country.

Table 1

Installed Textile Units and Production Capacities (2005)

Source: Board of Investment, The Government of Pakistan

Sub-SectorNo of Units

Size (Installed Capacity) Production

1. Ginning 1221 5,488 Saws 10.314 M Bales

2. Spinning 445a) 9.217 million spindlesb) 147,852 Rotors

1.758 M. Kgs Yarn

3. Weavingi. Composite Unitsii. Independent Millsiii. Power Loom Sector

i. 50ii. 140 iii. 18,000

20,000 – 25,000 Shuttle-less looms225,000 Conventional Looms

5,600 M. Sq MT (Approx)

4. Finishing i. Organized Sectorii. Small Scale Sector

i. 106ii. 625

- 2,700 M. Sq. MT

5. Garment Units 5,000 450,000 Sewing Machines 650 M Pcs.

6. Terry Towels 400 7,600 Looms 55 M. Kgs.

7. Canvas 100 2,000 Looms 35 M. Kgs.

8. Knitwear 700 21,000 Knitting Machines 5.50 M. PCs.

Total textile related exports of Pakistan were US $10.1 billion in 2005-06. United States was the largest textile buyer from Pakistan, accounting for 29% of the industry’s exports, followed by the European Union countries, Hong Kong, Dubai, Saudi Arabia and China as the other major destinations.

Pakistan is divided, for administrative purposes, into four provinces (Punjab, Sindh, Balochistan, NWFP) and the AJK territory. These 5 regions are, in turn, divided into 85 administrative districts (34 in Punjab, 21 in NWFP, 14 in Sindh, 12 in Balochistan and 4 in AJK). Many of Pakistan’s textile firms have historically been concentrated in and around the city district of Faisalabad (See Table 2).

Table: 2

Top Districts in Terms of Investment in Textile Sector with Respective Employment and Numbers of Units (at end of 2004)

Rank District Province Investment(Rs. In million)

Employment(numbers)

No. of Units

1 Faisalabad Punjab 40,322 104,755 7,6792 Kasur Punjab 35,635 54,990 2,3623 Sheikhupura Punjab 29,089 33,719 2394 Karachi Sindh 16,151 47,842 4755 Haripur NWFP 13,230 4,792 386 Dadu Sindh 6,151 14,668 467 Lasbela Balochistan 5,046 4,144 248 D.G.Khan Punjab 4,599 7,305 959 Swabi NWFP 4,537 4,338 4010 Muzaffargarh Punjab 3,978 19,950 13711 Multan Punjab 3,871 18,258 1,46412 Bahawalpur Punjab 3,660 6,633 17813 Mirpur AJK 3,475 3,480 1514 Jhang Punjab 3,051 11,238 1,02415 Lahore Punjab 2,681 15,852 35316 Rawalpindi Punjab 2,593 4,981 3917 T.T.Singh Punjab 1,607 5,838 1,07118 R.Y.Khan Punjab 1,562 6,344 18419 Chakwal Punjab 1,538 3,381 620 Gujrat Punjab 1,375 2,268 12121 Gujranwala Punjab 1,250 10,654 1,96122 Vehari Punjab 1,202 5,701 171

Total 186,603 391,131 17,722Pak Total 197,671 443,056 19,295

% of Pak total 94.40% 88.28% 91.85%Faisalabad % of Pak 20.40% 23.64% 39.80%

(Source: Expert Advisory Cell, Ministry of Industry & Production, Government of Pakistan)

Profile of Fiasalabad’s textile cluster

A significant cluster

Faisalabad District, at the end of 2006, had the largest concentration of the textile firms in Pakistan. The district alone accounted for 20.40% of the total national investments in the textile sector, 23.64% of the total textile sector employment of the country and 39.80% of all the registered textile industrial units. Of the estimated 225,000 shuttle power looms installed in the country for weaving textile fabrics, more than half (150,000) were located in Faisalabad district (Lancerotto, F. 2002). In the past four decades growth in the number of firms entering in Faisalabad textile industry has been enormous, particularly at the small and medium industry scale (Jamshed & Ghani, 2004). Faisalabad also boasts the largest yarn market in Asia with over 400 shops concentrated on one street of the city.This agglomeration was also a major traded industry accounting for around 70% of the country's exports and 80% of the national sales of the locally produced cotton fabric (grey and processed / printed cloth). The location quotients of investment, employment and number of textile industrial units were also highly significant1 at 3.72, 1.89 and 2.60 respectively for Faisalabad's textile sector, confirming presence of a substantial cluster (see Tables 3 & 4).

Table: 3

Significance of Textile Industry in Top Five Districts of Pakistan

Investment(Rs in million)

Employment(numbers)

No. of Units

DistrictTotal In

TextileText. % of Total

Total In Textile

Text. % of Total

Total Text. Text. % of Total

Faisalabad 59,516 40,322 67.75 130,867 104,755 80.05 10,212 7,679 75.20Kasur 50,666 35,635 70.33 70,300 54,990 78.22 3,788 2,362 62.35Sheikhupura 47,804 29,089 60.85 67,960 33,719 49.62 2,861 239 08.35Karachi 95,020 16,151 17.00 129,848 47,842 36.85 1,179 475 40.29Haripur 28,633 13,230 46.21 14,518 4,792 33.01 235 38 16.17

(Source: Expert Advisory Cell, Ministry of Industry & Production, Government of Pakistan)

At the core of the cluster was the large weaving industry, dominated by 15,000 power looms units, mostly small enterprises (with 20 or less looms installed and a few firms having as much as 50 to 240 looms), and 32 independent weaving factories. While the cluster accommodated nearly 83% of all the country’s small to medium-scale textile production businesses, only 6% of the country’s 495 mill-sector large textile units were established in Faisalabad. The weaving cluster was supported down-stream by 210 fabric processing units, 700 cloth exporters and nearly 300 national wholesalers of fabric. On

1 Location quotient of more than 1.00 of a factor, such as employment in a particular industry, signifies existence in a region of a country of higher than the national concentration of that industry.

the up-stream there were 210 sizing units and nearly 800 merchants of the largest yarn market in Asia.

Table: 4

Location Quotient of Faisalabad's Textile Sector

Investment(Rs. In million)

Employment(numbers)

No.of Units

Pakistan Total 784,946 10,43,790 66,799Pakistan Textile 197,671 443,056 19,295Pak. Textiles as % of Total - (a)

25.18% 42.45% 28.89%

Faisalabad Total 59,516 130,867 10,212Faisalabad Textile 40,322 104,755 7,679Faisalabad Textiles as % of Total - (b)

67.75% 80.05% 75.20%

Faisalabad Location Quotient = (b) / (a)

3.72 1.89 2.60

(Source: Expert Advisory Cell, Ministry of Industry & Production, Government of Pakistan)

Cluster participants

Faisalabad cluster evidently had a large number of participants, nearly 20,000 textile related entities (mostly small cotton weaving units), small and large production firms, service establishments, support institutions, traders and suppliers (see Table 5). The weaving processes adopted in Faisalabad were mostly traditional. Majority of the small weavers in the cluster used conventional power looms of various widths. Projectile type looms manufactured by Sulzer Ruti were most common with the medium sized independent weavers. Only few of the medium and many large firms had also installed air-jet technology in weaving. Garment manufacturing, hosiery and knitting in Faisalabad represented largely independent production networks.

Emergence of the cluster

Seeds of Faisalabad’s textile cluster were sown at the turn of 20th century with construction of the Lower Chenab canal to cultivate barren lands of the region. This resulted into many fold increase in the production and export of cotton from the region. Industrial production of yarn and fabric started in the region in 1930s with the establishment of the first textile mill in 1934. The Sheikhs clan from Chiniot (a town near Faisalabad), renowned for their commercial acumen, started to establish yarn trading businesses in Faisalabad which eventually grew to become the largest yarn market in Asia.

Table: 5

Participant Firms in the Faisalabad Textile Cluster

Textile Sub-Categories No. of Firms1 Cotton ginning and pressing 262 Cotton waste processing 533 Doubling of yarn 224 Embroidery 215 Hosiery products 3016 Ready-made garments 407 Sizing of yarn 1198 Textile machinery, parts and service 1979 Textile processing (printing, dyeing & finishing) 21010 Textile Spinning 4212 Textile Composite 413 Textile weaving (independent units) 3214 Textile weaving (power looms) 15,000*15 Textile Exporters 70016 Yarn Merchants 80017 Fabric Whole Sellers (Domestic market) 30018 Textile Chemicals & Dyes Manufacturers 919 Whole Sellers of Textile Chemicals & Dyes 20020 Textile Knitting (fabric and apparel) 621 Other Textile Firms (e.g., carpets, canvas, towel) 60

Source: Directorate of Industries, Government of Punjab & Textile Commissioner's Office*Note: Many small-scale enterprises do not register with government departments for tax purposes. While 6842 power-loom units are registered, the Textile Commissioner's Office estimates around 15,000 such enterprises in Faisalabad. Same number is stated by the Power Loom Operator's Associations in Faisalabad.

Growth of the textile industry in the region got a significant boost in 1950s when the government of the time declared the region an industrial zone and provided tax holiday for new factories to be established there. In the same period three major textile composite mills were established in the city, Nishat Mills, Kohinoor Textiles and Crescent Mills, which till date remain among the largest textile groups in the country. These mills were established through a Japanese assistance program under which the machinery was provided on very cheap yen loan and land almost free by the government. In the following three decades small-scale power loom sector flourished in Faisalabad. It was aided by the government policies that declared, initially, units up to 4 looms and then increased to 40, looms as cottage industry and hence exempt from taxes and stringent labor regulations. These policies also brought an end to the era of the integrated composite textile mills, as these could not compete with the low cost fabrics produced by the small power loom operators.

To support the large number of weaving units, yarn sizing and fabric processing establishments also sprang up. Alongside production and processing of fabric, specialist machinery supply and service establishments, suppliers of textile industry related chemicals and products also mushroomed in the region. A large number of national traders and exporters of fabrics and textile products, who had established in Faisalabad over the years, sold cotton fabric and textile products to other regions.

A survey report of 7600 manufacturing units, done by the Department of Industries of the Government of Punjab in 2002, reveled that the new textile business formations in Faisalabad started to accelerate in 1965-69 period and seemed to had peaked in 1985-89 period when maximum number of businesses were established in the district. Nearly 89% of the textile businesses operating in Faisalabad were established in just two decades from 1975 to 1994. Very few new textile businesses have been established in the region after 1994 (see Figure 2). The city and its infrastructure, such as roads, industry sites, utilities etc., was saturated and could not support any further rapid increase in new businesses in the District. The land had become short in supply in the District and its prices had also risen sharply making it very expensive to establish new businesses there compared with the non-clustered locations in the country.

Figure: 2

Establishment of New Textile Businesses in Faisalabad

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Networks and linkages – 'as many sons as many factories'

There were two types of significant networks and linkages evident in the Faisalabad cluster, one of vertical nature between the buyers and suppliers and second among the members of few close families and clans that dominated textile business in the region. Power in the value chain, in case of small producers, seemed to reside more with the

suppliers of yarn and cloth merchants and exporters – who, in addition to holding the crucial raw materials or links to foreign and local markets, also provided the financing and assumed the risk through extending credits to the weavers. These traders were members of strong associations that facilitated regulation and mediation or arbitration, in the trust based businesses. These traders also influenced the production chains to develop efficiencies and quality to ensure continuity and success of their own trade. The yarn merchants were also mostly Sheikhs from Chiniot, and common cultural background facilitated building of trust and cooperation.

At the same time few families or clans dominated the success stories in the textile production scene in the region. These families had built networks of their own, having established yarn production, sizing, weaving, processing and fabric trading businesses by various family members and trading mostly with each other and with friends. These large successful textile groups, mostly, had various production stages, as separate business entities, owned by various family members instead of vertical integration.

Crucial business related information, then, was mostly exchanged within these sub networks and at transaction stages of the networks of the smaller businesses. Since these sub-networks were, in fact, competing with other such networks, with mostly similar products and basic technologies, getting new crucial business related information and then protecting it from becoming known to others was essential for profit seeking motives. To ensure control, all successful textile businesses were closely managed by close family members and their key trusted managers only. Growth of the successful businesses required availability of the family members to manage it – it was thus common among the large business families to establish as many factories as the number of sons.

Self-reliance of small businesses

A unique aspect of the small business growth in the Faisalabad’s cluster had been the self-reliance. The banking system in Pakistan, like other developing countries, favored large clients. The small businesses then had to depend on personal and close family resources of the entrepreneurs or that of the trade creditors. The small weavers in Faisalabad had, almost all, invested personal funds into machinery and facilities. No borrowing and hence no interest and thus less business risk. Non-availability of institutional funds may have impeded growth and development of the sector, but personal investments seemed to have reduced risk as well as costs and increased resilience of the sector.

Achieving economies of scale

Co-location of the large number of power looms, sizing units, fabric processors, yarn merchants, cloth traders and relevant suppliers allowed the small weavers to challenge the large integrated textile mills. National share of fabric production by the large-scale mill-sector firms reduced from almost 50% in 1971 to nearly 10% in 2003, when manufacturing of cloth increased almost five fold in the same period. The small-scale weavers, who had lower overhead costs compared with the larger firms, were also

flexible with smaller production runs suited for the piecemeal orders from the market. The costs were further reduced by using contract labor for production and not having to store inventories of raw materials and finished goods as yarn was supplied by the buyers with confirmation of the orders. Availability of the yarn and other inputs was ensured by the proximity of large number of merchants. The size of economic order quantity was also reduced considerably by local availability of the materials, shorter period of supplies and cheap modes of transport through donkey carts. Feedback from the market was also immediate, due to the proximity, and corrective measures could be implemented to ensure quality. Much of the exchange between the various stages of production and trade was based on trust requiring little or no paper work, thus increasing transaction speed at the same time reducing administrative costs. The large buyers of fabric also booked many power loom operators to manufacture the cloth, while sizing and processing facilities were close by – thus able to ensure consistency of the quality of fabric even though produced by different weavers.

Diffusion of innovation

The larger textile firms in Faisalabad and in other parts of the country had been the importers and adapters of new weaving and other textile related technologies. These large firms also mostly exported their manufactured products and faced constant pressure from the small-scale manufacturers as well as from sophisticated foreign buyers to improve quality and complexity of the fabrics. As a result the large firms in the country, which also had the resources, first imported expensive machineries along with the facilities by foreign suppliers to train local technicians and operators. These machines were then, after few years, sold at cheaper rates to the local small weavers when the large firms upgraded to newer technologies. In the meantime a large pool of mechanics and operators got trained on the technologies and who then provided support to the small-scale operators.

Soft Externalities

The business related cooperation in Faisalabad had been facilitated by the community or family ties and shared local identities. Spillovers of the crucial knowledge had also been mostly restricted within the family or business sub-networks. These spillovers, thus, at best led to passive advantages of clustering. They largely arose at the level of transactions in goods and services, and to a lesser extent in the transformation of inputs into outputs. The information spillovers also remained limited in origin and diversity and inter-firm co-operation did not cross local borders, especially for the small businesses.

Key contribution of the traders and the merchants

The traders have had significant contribution towards development of Faisalabad as a successful cluster of textile production. These traders, including yarn merchants andfabric wholesalers and exporters, had following key contributions in the cluster;

Ensured ready availability of yarn and supplies at competitive prices. Provided financing and credits, crucial for business flow, to small weavers.

Sustained trust in the inter-firm relations that facilitated collective efficiency. Organized joint action of local firms and so enhanced their ability to cope with the

requirements of quality and speed to compete in the liberalized world. Enhanced co-operation among the cluster members that led to improved

performance of the region. Had been instrumental in facilitating vertical co-operation of the firms

specializing in various stages of fabric production to achieve scale economies.

Targeting local as well as export markets

The larger weavers had been exporting almost all of the fabric they produced. The cluster of smaller weavers in Faisalabad, on the other hand, consistently exported around 50% of the cloth they produced and the rest had been sold to the domestic customers. Simultaneous presence in the dynamic segments of domestic market alongside with exports apparently helped the cluster of small scale weavers adapt more quickly to the changing and ever demanding markets. An important feature of the learning relationship between the new exporters and their foreign buyers was the small-scale nature of contracts and a "customization of fit" between the producer and the feedback-giving intermediary that suited small scale weavers better than the bigger ones with modern faster machines that could weave larger production runs only.

Role of the government, passive yet crucial

The government’s role in development of Faisalabad’s cluster could at best be described as a passive one. At one hand, the government worked to provide some basic utilities and services but did not build essential and efficient business related or civic infrastructure needed for a large export oriented industrial city, thus impeding its growth. On the other hand, corruption and improper imposition of taxes and regulations worked to stifle development of the textile businesses.

None-the-less, these were the various government policies that crucially helped the emergence and development of the large cluster of small-scale weavers in Faisalabad. Construction of the Lower Chenab canal and establishing the city of Faisalabad, by the British Colonial Government, started the rapid growth of cotton and textile in the region in early part of the 20th century. Then the policies of the Government of Pakistan in the 50’s, to declare the region as an industrial zone and to provide tax holidays for new start-ups, resulted in rapid growth of the textile activity. Further policy decision of the Government after the 60s to declare small textile units as cottage industry and exempting them from taxes and labor regulations led to the demise of the composite integrated textile mill and resulted into mushroomed growth of the small-scale weavers.

‘Collective Actors’ bridging the governance gaps

As described earlier, few families / communities dominated textile trade and production in the cluster. These families, their figure-heads and patriarchs helped to facilitate a business environment of trust and cooperation in the cluster. In addition, there were at

least seven main textile trade and industry associations in Faisalabad, which had been acting to bridge gaps in facilitating development of the business activities.

One remarkable collective effort had been the establishment of the Faisalabad Dry Port, to handle import / export goods, by a trust comprising of the prominent textile industrialists from Faisalabad and the establishment of Khuriyanwala Industrial Township, 20 kilometres from the centre of the city, over an area of 3,700 acres.

Merging of business with politics – creating ‘businesspoliticians’

A number of the prominent textile industrialists from Faisalabad had also became active politicians. All the elected members of the national and provincial assembly seats from Faisalabad in 2005 were from one or other prominent textile family groups. These businessmen cum politicians were holding important portfolios at various levels of the government that directly affected industrial activity, trade in textiles, and regional development. Holding of important political portfolios had placed these leaders in strong positions to acquire resources and opportunities for their own businesses as well as for the clustered members – who were their political support and the vote bank. This aspect gave a total new dimension to the phenomenon of clustering – not considered adequately in earlier clustering literature. Larger successful firms in developing country clusters, according to Porter (1997), tend to operate more like islands than participants in a cluster – and such participation has largely been described in terms of trade, business cooperation and knowledge sharing. In the role as politicians, the owners of large successful firms of Faisalabad however provided crucial leadership to the cluster at the national level and at the same time acquired advantages of location for themselves as well as for their business interests. The Export Processing Zone, textile labs and other projects had been approved many years ago for Faisalabad and other cities like Karachi. While these projects were implemented in Karachi quickly and had helped textile and other firms there – none were even started in Faisalabad. Some had attributed this government inaction to the lack of political support for Faisalabad. After 2002, when Faisalabad’s business personalities achieved important political portfolios, these delayed projects and even newer ones like establishment of the Textile City had started to be implemented rapidly. Work for re-building of roads and civic infrastructure in the city had also started on a quick pace.

Effects of the family groups' control of the industry on the cluster

Three family clans; 'Arain', 'Chinioti Sheikhs' and 'Jalundhari Sheikhs' controlled the largest business groups in Faisalabad and also dominated the trade / industry bodies as well as the political scene of the District. Members of these clans operated large export houses, weaving, processing, spinning, knitting and garment manufacturing businesses in the cluster. These entrepreneurs gave preferences to others of their clan members for buying and selling of the products. The local collaborations, partnerships and joint ventures also existed mostly among the family members. These three clans also cooperated for inter-clan rotation of the important offices of the major textile industry and trade bodies in Faisalabad, besides holding all the important elected political positions. The more established leaders patronized the smaller entrepreneurs, mostly

belonging to their own clans, in dealing with government agencies and in seeking continuous business orders, especially for exports. In return, these small entrepreneurs organized popular support for their patrons who intended to seek important political and trade offices in the District.

On the more positive side, these intra-clan networks worked to establish textile value chains, sustained trust and patronage that lowered costs and facilitated flexibility in transactions. Intra-clan and inter-clan norms of relationships and patronages had also helped to regulate the local business environment in the absence of effective rule of law and order. The large family owned businesses also invested to introduce expensive modern technologies in the cluster. After getting elected to the important political positions, the local clan leaders had also initiated a number of major textile related projects in Faisalabad.

These family groups' controls depicted many downsides as well. These controls impeded free business environment in the cluster and created deep market distortions. Most of the export orders, prime lands for industries, institutional funds, growth opportunities and government subsidies were continuously cornered by a handful of influential clan members. Even the new cluster initiatives were, in fact, designed as further opportunities to grab more lands, resources and trade subsidies by a few who held control over the political and the business environment. It was primarily for these reasons that a number of large businesses, who could not, or did not want to muster political powers, moved out of the Faisalabad textile cluster and no outside party invested into any major project in the District. Influence of the large clans also festered corruption and made it difficult for small entrepreneurs to grow large only through fair business means. Membership of an influential clan and strong political influence or patronage had become necessary pre-conditions for moving up from small scale to large scale of textile business in Faisalabad.

Growth of the clan only owned businesses was also adversely affected in the absence of strategic alliances and collaborations with other national and foreign entities that could infuse new technologies and open new opportunities. The influential clan leaders also relied only on their sons or close family members for business leadership roles to maintain their spheres of social and political dominance, which further constrained growth opportunities for larger businesses. As a consequence, no textile enterprise from Faisalabad could become a sizable international firm even after decades of existence and growth.

Corruption and vested interests also restrained the local business leaders and senior Government officials from instituting any significant viable plans and policies to develop the cluster related infrastructure and its business environment. There was also no major initiative undertaken to improve technology or working of the small scale power loom sector, which constituted bulk of the enterprises and output in the cluster. Consequently, corruption and market distortions were among the thriving endogenous aspects of the cluster spillover. The cluster therefore, continued to produce mostly cheap and poor quality narrow width cotton fabric using low productivity power looms based on primitive technology.

Advantages for Large versus Small Firms in Faisalabad:

The large and small textile firms in Faisalabad were essentially involved in very different products, processes and scales of production. The clustered location offered some specific benefits for the large firms, in terms of political advantages, opportunities to establish quality processing and printing units for fabrics woven by the local power loom units and exporting of the fabric. These opportunities were however, limited and enough only for a small number of large businesses to have an advantage of the location. A few clans dominated the business and political scene in Faisalabad and their leaders had, in fact, cornered almost all the specific opportunities of location that existed for the large-scale firms. Most of the large textile firms of the country were therefore, located in other regions. Largest, most modern and most profitable textile firms of the country were, in fact, not located in Faisalabad. Karachi and Lahore regions were ahead of Faisalabad in the scale and the quality of the cotton fabric processing facilities; Lahore District had the largest number of the modern shuttle-less and air-jet weaving machines installed; and Kasur and Lahore Districts had the largest number of spinning mills. New expansions of the spinning and the shuttle-less weaving units in the country were also mostly taking place away from Faisalabad.

The situation for the small scale power loom weaving was however, very different. Vast majority of the power looms operating in the country were installed in Faisalabad District. The cluster of small / medium sized weavers in Faisalabad produced nearly 80% of the cotton fabric in the country. The region also accounted for nearly 70% of the cotton fabric exports from Pakistan. Clearly then, the cluster offered significant advantages for small scale weaving of cotton cloth. The small and medium scale weavers in Faisalabad were making small number of products - but their characteristics were subject to frequent changes. Co-location of the large number of power loom units in Faisalabad helped to create scale economies for up-stream sizing units, suppliers and yarn merchants as well as down-stream for fabric processing and trading. Close proximitywith the up-stream and down-stream producers / traders enhanced inter-firm networking and facilitated exchange of information between the firms and their customers while reducing transaction costs. The large textile firms needed longer lead time and relatively large minimum order - while the small weavers proved to be more flexible needed less lead time and could produce smaller orders. This factor proved to favor the small weavers compared with the large mill-sector ones in cloth manufacturing. An important feature of the learning relationship between new exporters and their foreign buyers was the small-scale nature of the contracts and a customization of fit between the producer and the feedback-giving intermediary that suited the small scale weavers better than the bigger ones with modern faster machines that could weave larger production runs only.

Clustering had also helped the small enterprises to overcome the growth constraints and helped them to compete in distant markets, nationally and abroad. The traders connected the cluster to sizeable distant markets as well as to sophisticated customers. They also organized vertical production chains by linking various specialized production stages,

provided funding to these production chains, assumed risk and sustained trust in the inter-firm relations. These traders also passed crucial technical information from sophisticated markets to the small clustered producers to improve quality and efficiency factors. The cluster was supplying to the domestic market as well as exporting to foreign countries which helped to diversify risks, access sophisticated knowledge and grow rapidly. Value chains of the small specialized units linking various production stages also allowed flexibility to adjust quickly to the changing market conditions. Collective actors, such as the trade associations and the business trusts organized and led by successful local business leaders helped to provide more secure and better operating environment for the small textile businesses in Faisalabad, compared with the rural regions of the country. Faisalabad also offered advantages in price, availability and quality of auxiliary and ancillary services for the small weavers. The large number of small weavers, however, essentially needed some large firms to provide the specialized processing facilities at the location, which were costly and had large scale economies. Few hundred power-loom weavers were needed for supplying to a mid-sized down-stream processing unit. At the same time an upstream sizing unit needed to service between 100 and 200 power-loom weavers to sustain. These large differences in scale-economies between the various production stages in cotton fabric manufacturing was among the key factors that deterred replication of the cotton weaving cluster at other locations.

Conclusions and perspectives for future research

The Faisalabad textile cluster, after the establishment of first textile mills in mid 1930s, grew rapidly over a period of six decades and developed to become highly competitive in the domestic and international markets. The agglomeration, however, remained shallow as well as narrow in breadth, having advantages only in producing low price, low to medium quality grey and processed cotton fabrics. This supports the view of Porter that clusters of developing economies compete in the world mostly with cheap labor and natural resources. Self-reliance of the entrepreneurs and the collective action, however, mitigated the aspects of the lack of cluster specific public goods.

The cluster depicted, to some extent, presence and interaction of all the four elements of Porter’s diamond: context for firm strategy and rivalry; factor (input) conditions; related and supporting industries; and sophisticated demand conditions - but some have been more dominant than others. In the emergence phase of the cluster factor (input) conditions were more dominant. After the decade of 60s extensive co-location of related and supporting industries became, and remained, the dominant factor in the success of the cluster.

The role of Pakistan’s Government was passive yet it was critical for the development of the cluster. The polices of declaring Faisalabad a tax free investment zone in 1960s and then granting a cottage industry status to the small power loom units, and hence exempting them from taxes as well as stringent labor regulations spurred the explosive growth of the small weavers in the region.

This study, contrary to the earlier views about developing country clusters, found very little vertical integration in Faisalabad's textile cluster. Dominant type of innovation prevalent in the textile industry in Faisalabad was process innovation - achieved primarily through technologies imported initially by large firms. No radical type of innovation, however, emerged from the cluster.

The small weavers in Faisalabad were making a narrow range of products - but their characteristics were subject to frequent changes. Their agglomeration with up-stream and down-stream producers / traders, hence, enhanced inter-firm networking and facilitated exchange of information between the firms and their customers while reducing the transaction costs. Cost reductions and information spillovers facilitated by the community ties and the shared local identities were the dominant type of advantages. They largely arose at the level of transactions in goods and services, and to a lesser extent in the transformation of inputs into output. The information spillovers also remained limited in origin and diversity and the inter-firm co-operation did not cross local borders, especially for the small businesses. Vertical cooperation, rather than horizontal, was mostly prevalent in the cluster.

Faisalabad's cluster had large number of participants which mostly were small firms. The business scene in the cluster was, however, dominated by few business families or clans that also owned most of the successful large firms in the region. These families tended to collaborate for business, only among their family members. Leaders of these business families also dominated the political scene of the region and provided patronage to the small entrepreneurs who were their clan members and who, in turn, provided the political support to these leaders.

This study only partially supported the view of Porter that relatively competitive companies in developing economy clusters tend to operate more like islands than participants in such locations. The large and successful firms in Faisalabad had few transactional links with the small-scale weavers at the production stage. The larger businesses however, had established down-stream higher quality processing facilities, which required big investments, and fabric export houses. Owners of the large successful textile firms also provided crucial leadership in political as well in collaborative actor bodies. This was a key factor for the development and smooth functioning of the cluster in the environment of weak rule of law and government inaction.

Findings of the research supported the propositions that the economies of agglomeration that initially draw firms together in a cluster subgroup of competitors eventually erode. The clustered location in Faisalabad grew mostly in the two decades, from 1975 to 95, and now seemed saturated in terms of space and facilities. The clustered location offered no significant advantages to large textile firms compared with other locations in the country. There were opportunities in Faisalabad for only few large firms to establish downstream finishing and processing operations that required large capital outlay. There were however, significant benefits in the cluster for small textile firms. The agglomeration had helped the small enterprises to overcome the growth constraints and had helped them to compete in distant markets, nationally and abroad. The traders had

not only connected the cluster to sizeable distant markets as well as to the sophisticated customers, they had also organized vertical value chains by linking various specialized production stages, provided funding to these production chains, assumed risk and helped sustain trust in inter-firm relations. These traders also passed crucial technical information from the sophisticated markets to the small clustered fabric producers to improve the quality and efficiency factors.

While findings of this study may not provide a complete body of knowledge that can be generalized for all the contexts of clustering, substantive new insights into the phenomenon of clustering have been reached that identify interesting perspectives for future research.

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