Industrial reorganization in developing countries: From models to trajectories

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World Development, Vol. 23, No. 1, pp. 149-162, 1995 Copyright 0 1995 Elsevier Science Ltd

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Industrial Reorganization in Developing Countries:

From Models to Trajectories

JOHN HUMPHREY* Institute of Development Studies, University of Sussex, U.K.

Summary. - The success of Japanese industry and of some industries in the Emilia-Romagna region of Italy in the 1970s and 1980s has stimulated interest in new models of industrial organization. Interest in applying such models in developing countries is increasing rapidly. Evidence from developing countries shows that models are a useful starting point, but that it is essential to consider the diversity of developing country experiences and to understand the processes by which firms and sectors are transformed. This paper focuses on the trajectories of change taken by firms which reorganize their production and by clusters of filTllS.

1. INTRODUCTION

The papers in this issue have been concerned with two major themes in industrial reorganization in the developing world - the use of so-called “Japanese” methods, Just-in-Tie (JIT) and Total Quality Management (TQM), to restructure the productive activities of enterprises, and the advantages accruing to firms located in industrial clusters. In the introduction to this issue, it was argued that these two themes are just two of a broader set of concerns about restructuring and competitiveness in the manufacturing industries. of developing countries. They have emerged, however, as important sources of inspiration for company strategies and industry policies in developing countries.

Most of the discussion about reorganizing industry in the developing countries has been driven forward by analyses of changes in industrially advanced countries. The current interest in reorganization within firms and the use of so-called “Japanese” methods derives from both the success of Japanese manufacturing and the spread of JIT and TQM in the West. Many Western companies are using “Japanese” methods in an attempt to meet Japanese competition. Similarly, the apparent success of small firms in industrial districts in various parts of Europe has begun to generate new thinking about the possibilities for small firm development and industry policy in developing countries. If small firms working in traditional sectors such as shoes were able to expand production and create employment in Italy in the 1970s and early 1980s (see Rabellotti’s paper in this issue), and if this success derives from the way firms cooperate with each other,

then the experience might provide the basis for a new approach to improving the performance of small- and medium-sized enterprises (SMEs) in developing countries. In the context of trade liberalization and the need to improve the competitiveness of manufacturing, there is increasing interest in the applicability of new approaches to production in developing countries.

New paradigms of industrial production in industrially advanced countries have been codified into a number of models - flexible specialization (Piore and Sabel, 1984), lean production (Womack, Jones and Roos, 1990), systemofacture (Hoffman and Kaplinsky, 1988), post-Fordism (Jessop et al., 1988) and industrial districts (Sengenberger and Pyke, 1991, among many others). These models are abstractions which highlight the elements which are presumed to be crucial to the success of a particular firm, sector or region. It is often claimed that the model represents a decisive break with established forms of production offering substantial improvements in performance.

This.paper is concerned less with the definition of models than the way in which firms and clusters and firms in developing countries evolve over time. It is more concerned with defining the trajectories of change and the factors responsible for them than with

* This work has been supported by finance from the Overseas Development Administration of the UK govem- ment. The ideas expressed in this paper owe much to the authors of the other papers contained in this issue, and in particular to Raphael Kaplinskv and Hubert Schmitz, who have been involved in an intense~interchange of ideas on the top- ics raised in this paper.

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defining models to which firms and sectors can aspire. Building on the findings of the papers in this volume, it considers the dynamics of the adoption of JIT/TQM within firms and sets out possible scenarios for the breadth of diffusion of JIT/TQM across manufacturing industry and the depth of its adoption within particular firms. It also considers the factors which cause the rapid growth of industrial clusters and the changes this causes. Finally, the paper examines the relation between the two largely distinct literatures on JIT/TQM and industrial districts.

2. NEW MODELS OF INDUSTRIAL DEVELOPMENT? JAPAN AND ITALY

The success of the manufacturing industries of Japan and Italy have proved attractive to those concerned with the problems of industry in developing countries. Manufacturing industries in developing countries face a number of challenges for which the Japanese and Italian (or more specifically the Emilian) experiences appear to offer responses:

- Reorganization along “Japanese” lines offers the possibility of increasing quality and productivity in larger firms. Firms in developing countries need to improve their performance. Liberalization policies are opening up previously protected domestic markets in developing countries, and exports to First World markets are likely to become increasingly dependent on improved variety, reliability and speed of delivery. In addition to offering rapid improvements in productivity and quality, reorganization offers the prospect of improved responsiveness and improved product variety without cost penalties. The need to make such improvements is felt not only in mass production industries, but across all of manufacturing, from one-off pro- ject work to continuous process operations (Bessant, 1991, pp. 24-33). Many JIT and TQM innovations are also more broadly applicable to the service sector. - Hitherto successful manufacturing exporters such as Korea and Taiwan are being forced to upgrade the quality and reliability of their products as lower wage manufacturers in East and Southeast Asia compete in lower market segments. Moving upmarket means having to match the standards of quality, reliability and delivery achieved by the advanced industrial nations. - Many developing countries are facing disloca- tion as a result of economic crisis and structural adjustment policies. Industrial clustering may provide an additional degree of flexible response in unpredictable and turbulent environments (Schmitz, 1989, pp. 24-26). - So far, assistance to the small-firm sector in less-developed countries has had disappointing

results. Small firms need to gain the benefits of link- ing to larger firms or clustering together in districts (Spiith, 1993, pp. 26-27). Small firms may also be more likely to provide better employment and working conditions if they are situated within clusters. The experiences of Japan and Italy have been codi-

fied into two widely diffused models of industrial development: the lean production model (Womack, Jones and Roos, 1990), and the industrial district model (Sengenberger and Pyke, 1991). The lean production model abstracts from the case of Toyota in Japan to define a set of principles which are held to be a new standard of best practice widely applicable across industries and across the world. According to Womack, Jones and Roos, “the fundamental ideas of lean production are universal - applicable anywhere by anyone - and that many non-Japanese companies have already learned this” (1990, p. 9). Lean production, therefore, constitutes a new production paradigm which should replace mass production wholesale. According to the authors, “Clearly, we think that it is in everyone’s interest to introduce lean production everywhere as soon as possible, ideally within this decade” (1990, p. 256). The belief in the new paradigm establishes a strong prescriptive element at the heart of this analysis. This is one of the reasons for the book’s enormous popularity.

Lean production involves three related transformations - the reorganization of production along JIT/TQM lines, the transformation of design, and the development of new relations with suppliers. It focuses not only on the factory but also factors outside of the plant such as the design function and other firms. These interrelated changes are held to create a new production system, based on principles which contrast to Fordist mass production. The emphasis is on the proactive role of management of large firms who should reorganize production and design and develop supply chains, often with companies in which they have long-term relations and an equity stake.

Sengenberger and Pyke’s definition of an industrial district stresses relations between firms:

The crucial characteristic of an industrial district is its organization. That is to say that economic success for the industrial district has not come about through advanta- geous access to low-cost factors of production - cheap labor, land or capital but, rather from a particularly effective social and economic organization based on small firms. This organization may vary at the margins, but typ- ically there are a number of key elements which help to “explain”, or identify the most successful dis-

tricts.. .Perhaps paramount among these is the existence of strong networks of (largely) small firms which through specialization and subcontracting divide amongst themselves the labor required for the manufacture of particular goods: specialization induces efficiency, both individu- ally and at the level of the district; specialization com-

INDUSTRIAL REORGANIZATION 151

bined with sub-contracting promotes collective capabil- ity. Economies of both scale and scope are the result. It is the firm as part of, and depending on, a collective network which perhaps more than anything else incapsulates the essence of the district’s character (Sengenberger and Pyke, 1991, p. 1, stress in original).

Sengenberger and Pyke go on to identify key aspects of the structure of districts-networks of geo- graphically bounded, sectorally specific firms, ready to cooperate, characterized by entrepreneurial dynamism, ready to compete on the basis of attributes other than price (flexibility, speed or innovation, etc.), and employing a trained, adaptable and cooperative workforce (Sengenberger and Pyke, 1991, pp. Z-3).

In many respects, the industrial district model draws on the pioneering work of Piore and Sahel (1984), which translated the experience of the Third Italy into a model which purported not only to explain the success of industry in that region, but also to define the bases of a new paradigm of industrial production which would supplant mass production. Piore and Sabel argued that the vitality of small firms in the Third Italy lay in communities of enterprises grouped in particular locations. The competitiveness of these regions is based on cooperative competition between firms and the broad skills of the laboring community (Piore and Sabel, 1984, pp. 268-275). The firms in the districts are able to produce a broader range of products in smaller quantities and to speed up the process of innovation. According to Piore and Sabel, this represents an alternative to the dominance of mass production, which is based on the achievement of cost reductions through high-volume, standardized production in large firms employing deskilled labor.

Piore and Sabel tried to incorporate a wide variety of experiences (including that of Japan) into the flexible specialization model. For them, the principles of flexible specialization could be applied within large firms, and many of the elements of JIT/TQM could be subsumed within the general concept of flexible specialization. Given the emphasis they place on Italy, however, what most readers have taken from Piore and Sabel’s analysis is the idea of horizontal relations between “a core of more-or-less equal small enterprises” (Piore and Sabel, 1984, p. 265). This tendency has been heightened in discussions on developing countries by the fact that researchers working on small firms have been most drawn to the implications of flexible specialization for development policy. S&r&z’s important work on the relevance of the tlex- ible specialization paradigm to small-firm promotion in developing countries, for example, focused specifically on collective efficiency - the competitive advantage which clustering of firms derive from local external economies and joint action (Schmitz, 1989 and 1994).

Codifying experiences into models has many

attractions. Complex experiences are reduced to a number of interrelated elements, and clear relations between means and ends are laid out. This is attractive to policy makers, but it also has serious limitations:

- Models tend to take the form of snapshots of a production system at a given point in time. They freeze development at this point, and as a result it becomes outdated and abstracts from the process of change. In fact, the experiences upon which models are constructed continue to change. As a result, models often suffer from being out-of-date and fail- ing to capture the forces which lead to change. - In a number of instances, the models presented are strongly prescriptive. This is seen clearly in the case of lean production, which claims to codify a production system applicable to any industry in any part of the world. Clearly, the definition of a broadly applicable prescriptive model inevitably abstracts from the social context in which the model is developed. All models must abstract from social context to some extent, otherwise the system they describe would be totally context-specific and not qualify as a model at all, but the lean production approach involves a radical delinking of industrial organization and its social conditions, The social conditions for the implantation of lean production are not considered. Worse still, by not considering the social context of the model, the issues involved in repli- cating them in other contexts, or providing functional equivalents are not considered. Firms are led to consider techniques without considering such crucial questions as labor relations and incentives. These problems emerged clearly in the papers in this issue. - A further problem arises from the prescriptive approach. The lean production analysis concept focuses on factors which are in the power of management to change - the organization of production, design, and relations with suppliers. Factors which are outside management’s control are sys- tematically ignored, and little consideration is given to the fact that smaller firms have much less control over their environments than larger ones. The prescriptive approach puts the emphasis on management’s power to change companies. Failures are attributed to poor management. But policy makers concerned with the development of whole sectors of industry need to know what kinds of companies are more or less likely to reorganize and what factors influence the success rate of those who do try. It is well known that many companies attempting to introduce JIT and TQM fail, at least first time around, and the reasons for failure need to be explored. - Models concentrate on codifying practice at the point of origin of the model. When they are trans- ferred questions of process become more important. A focus on the end-state (the successful instances of


a particular model from which the model itself is derived) distracts attention from the key question for policy makers, which is how to move from where industry is now to where it would like to be in the future. This may involve adaptation of the model or fusion of the new model with elements of existing production systems.’ - Finally, some “models” are closer to a skt of stylized facts than a model. This is the case with certain analyses of Italian industrial districts. The “model” can be made to include so many features of actually existing industrial districts in Italy that what is essential and what is incidental for the growth of local clusters of firms exhibiting improved competitiveness without resource to wage cutting (a basic definition of the “high road” to competitiveness) is not clear. The analysis of successful industrial districts in various parts of Europe by Schmitz and Musyck (1993) finds at best patchy evidence of the institutional support which is a central feature of the Italian model, and Rabellotti’s paper in this issue shows that some of the key features of the industrial district model, such as sales consortia and active local government help, appear to be of little importance in the Brenta and Marche shoe clusters in Italy, even though the two clusters consist of highly successful small-firm exporters. The model can show why such features would contribute to the competitiveness of firms in the cluster were they to be present, but success appears not to depend on them. For these reasons, defining a model and then using

it as a blueprint for analysis and policy in another context is an exercise with severe limitations. Going beyond this involves analyzing what happens in the process of transferring models and what factors influence the speed and nature of adoption.2 The dynamics of the diffusion of organizational change within firms and the dynamics of the development of clusters of firms are considered in the following two sections.

3. REORGANIZING THE FIRM

The core of reorganization within the firm along the lines of JIT/TQM can be captured in the term “minimum factory,” suggested by Coriat (1991). The aim of manufacturing production is to produce goods which satisfy the customer at the minimum possible cost. The ideal factory should have every stage of production oriented toward this overall aim, and all activities in the plant should contribute to transforming inputs into finished products which attend customers’ needs. Any other activities are, in principle, a waste of resources. Such waste includes holding stocks, moving products around unnecessarily, producing items which are defective and reworking products. The ideal factory responds rapidly to customer demands, pro-

ducing rapidly a range of products which satisfies customers’ needs with the minimum possible inputs of energy, materials, capital and labor. This state of affairs is ideal, but it is one toward which efforts should be directed continuously.3

Moving to this goal requires more than just the introduction of specific techniques such as Statistical Process Control (SPC) or cellular production. It can involve reorganizing management structures so as to break down departmental boundaries and reduce hier- archies, and changing the jobs workers do and the incentives and controls applied to them. It also involves new approaches to design of products and process engineering. These changes have a profound impact on social relations within the firm and on relations between firms, and for this reason some writers predicted that the social embeddedness of Japanese management systems would prevent their transfer to the West. The evident success of Japanese transplant factories in North America and Europe, and the clear gains made by Western emulators show that the core principles of the Japanese management system can be applied in other institutional contexts. Japanese institutions need not be imitated -even Japanese firms in the West use JIT/TQM without resort to life-time employment and the seniority wage system - but firms must find other ways to develop new relations with workers and suppliers4

In the case of developing countries, the question as to whether firms are capable of adopting JIT and TQM has also been answered empirically. Elements of both are being adopted by a wide range of firms in a large number of countries, and not only in the first-tier newly industrialized countries (NICs) such as Brazil, Mexico and Korea. Posthuma in this issue shows this for the case of Zimbabwe, Harriss for the case of Indonesia, while Bessant and Kaplinsky’s paper points to adoption of JIT/TQM in the Dominican Republic. Management enthusiasm for JIT/TQM in developing countries is impressive, and there is ample evidence of a wide variety of JIT/TQM techniques being used in manufacturing.

The evidence from Third World countries also shows, however, that there is a high degree of diversity in the use of such techniques. Rold&n’s study of JIT in Argentina, for example, shows clearly that there is an enormous distance between the systemic adoption of JIT in leading firms and the limited use of specific JIT methods aimed at short-term cost reductions which she labels “crisis JIT” (Roldan, 1993). Other studies, too, show a wide degree of variation in intrafirm reorganization both within and between countries.5 There are companies which develop company-wide JIT/TQM in a systematic manner, as shown in Kaplinsky’s paper in this issue, but they may be the exception rather than the rule. The issue, then, is not simply one of whether firms adopt JIT/TQM, but the depth and effectiveness of this adoption.


How can we account for these differences between firms, and what importance do we ascribe to them? Are they merely the result of firms studied at different points in their process of innovation, or are the differences more deep-seated? Certainly, one would expect an unevenness of development, even if all firms are moving along roughly the same path. Empirical experience is bound to be diverse, particularly in the early stages of adopting new methods. During the early spread of Taylorism in the United States it is certain that firms adopted Taylor’s principles with varying degrees of efficiency and competence. Some firms would have misunderstood the principles or have been incapable of implementing them because of managerial, technical or labor relations problems. This would not have invalidated Taylorist principles or suggested that they could not be adopted in US engineering: Some differences, however, cannot be reduced to this. The attempt by Ford to transfer the mass production model from Detroit to Manchester in the pre-WWII period floundered because of the size and particular characteristics of the British market.’ The history of the diffusion of Taylorism and Fordism in developing countries is one of adaptations to local environments and partial use of techniques.

Some use of JIT/TQM is already evident in developing countries, but interpreting the possibilities for future development involves both examining the available empirical evidence and defining the factors which drive forward and shape change. The empirical evidence alone is compatible with quite different interpretations of where firms and sectors might be in five years’ time. Assumptions in five areas seem to be particularly important for defining the nature and speed of JIT/TQM diffusion:

- Competitive pressures: Competition is a great stimulus to JIT/TQM adoption. Are competitive pressures assumed to be widespread in Third World economies, or do they remain uneven between sectors even after liberalization? - JITITQM and meeting new competitive demands: Is JIT/TQM just one means of meeting certain competitive challenges or the best way to improve competitiveness across a broad range of industries and firms? - The difficulties involved in introducing JITi TQM: Is it easy to introduce once top management have made a commitment to it, or does it require both technical capabilities and shifts in social relations within firm (between different management levels and functions, and between management and labor)? - The extent to which JITITQM is seen as a strongly systemic: Is JIT/TQM a set of principles or techniques whose effectiveness depends to a large extent on the adoption of a complete package of interrelated changes? - Interfirm relations: Is the adoption of JIT/‘TQC

by one firm dependent on it redefining its relations with other firms (suppliers, customers and competi- tors). Three simplified scenarios for JIT/TQM spread -

rapid diffusion, steady diffusion and highly uneven diffusion - can be constructed based on these assumptions, and they will be considered in turn.*

(a) Rapid diflusion

The first scenario is one of a rapid diffusion of JIT/TQM and the systemic use of the principles of Japanese production management. This position can be supported by a number of arguments. First, there is evidence that the principles of JIT/TQM are applicable in a wide variety of industrial settings, from process industries through mass production, small- batch production to job shops (Bessant, 1991, pp. 24-33). The ideas of waste elimination, flow and quality-at-source are by no means confined to the large- scale production of items with limited variability. Second, it has been argued that many JIT techniques are relatively simple to introduce and can provide rapid improvements in performance. Hay, for example, claims that “Examples abound of companies making dramatic gains in two, three or more of these areas in only a few months. In addition, JIT is a low-cost or no-cost way of achieving these gains” (1988, p. viii). Indeed, it is not hard to find examples of spectacular gains being made by firms in relatively short periods of time. Firms often report major improvements in stocks, utilization of floor space and quality of production quite early on in the adoption of JIT/TQM (Bessant and Kaplinsky, and Posthuma, in this issue).

Limited empirical evidence at the firrn level can be seen as suggestive of a potential for widespread and rapid change if the following is assumed:

- that JIT/TQM is a new production system (see Kaplinsky in this issue) superior to Fordist mass production in a wide variety of situations; - that JIT/TQM is relatively easy to introduce and knowledge about how to go about introducing it is widely available: “there is no ‘mystery’ behind how these practices work. Indeed there are numer- ous ‘how-to-do-it’ cookbooks available that detail and describe in a very practical fashion how firms should go about introducing the new practices.. .the new practices are codifiable and accessible” (Hoffman, 1988, p, 54); - that competitive pressures in the economy are strong, so that firms which fail to introduce JIT/TQM are eliminated; - that the success of JIT/‘TQM depends on management, who have the power to introduce all the necessary changes. According to Williams and Haslam, this is the perspective taken by Womack Jones and Roos (1990), “In The Machine that


Changed the World differences in performance are confidently attributed to one active cause, differences in management practice” (Williams and Haslam, 1993, p. 14). Top management can change both internal practices and supplier relations by adopting the correct strategy and pursuing it with determination. If these assumptions were to hold, one might expect

rapid adoption of a broad range of JIT/TQM methods. The use of JIT/TQM would tend to be systemic - in other words an interrelated set of techniques aimed at achieving improved productivity, quality, flexibility of product mix, speed of innovation and responsiveness to customer orders would be adopted systemati- cally across company operations. Such a shift would represent a fundamental change in production paradigm and break from the basic principles of mass production. Unevenness of adoption would remain, but the direction of change and ultimate destination would be clear because there are no fundamental obstacles.

(b) Steady d$tiision

The “steady diffusion” scenario shares a number of the assumptions of the “rapid diffusion” position. It assumes that competitive pressures are strong and that JIT/TQM does represent a superior form of production widely applicable across industries. The steady diffusion scenario, however, emphasizes that adopting JIT/TQM requires broad and fundamental changes within companies for its full benefits to be obtained. Such changes are not easy to carry out and can be influenced by factors beyond the power of management to control.

The costs of acquiring competence in the use of JITRQM may be much higher than suggested by Hoffman above. Some of the technical problems encountered by firms are outlined by Fleury (in this issue). He argues that while leading Japanese firms compete on the basis of price, quality delivery time, range of products and capacity to make major innovations, most firms in Brazil are hardly able to compete effectively on price because they lack even rudimen- tary systems of cost calculation and control. Learning to compete on quality, delivery time, etc., involves the accumulation of management competence, which is a slow process. The difficulties such firms face when they need to acquire the capacity to make incremental technological change and reorganize their company structures are considerable. They may make progress toward systemic use of JIT/rQM with all the competitive advantages that this brings, but the process will be long and painful.

Messner’s analysis of the development of competitiveness in the Chilean wood products industry also stresses the difficulties firms face when attempting to export to developed country markets. Conforming to

new standards of product uniformity, narrowness of tolerances and reliability of delivery means new equipment, improved training, better engineering skills, etc. (Messner, 1993, pp. 122-127).

JITflQM also involves shifting social relations in the firm -team-working, shifts in the distribution of managerial functions, integration of quality maintenance and production work, reallocation of support departments to productive units, increased depen- dence on supplier firms, etc. - which may be more difficult to achieve than technical changes. Just to take issues concerning labor, firms need mechanisms to both motivate and control labor, and these are as much informal - based on the expectations of management and labor as to what is fair and reasonable - as for- mal, which makes redefining them complex. While firms do not have to opt for such practices as life-time employment, the seniority wage system and individu- alized appraisal, which are often seen as central to the Japanese system, they must find functional equivalents which will provide the same degree of control of and commitment to labor.‘O The ideal situation for management would be one where they can achieve, and reward, labor flexibility, involvement and performance and provide good prospects for long-term employment. Conversely, poor performance would be penalized. In practice, management’s freedom of action in this area is restricted not only by unions, but also established labor rights and payment systems.

The wider operating environment does not only impinge on labor relations. Kaplinsky’s paper in this issue stresses, in particular, the need for a supply of suitably qualified labor and for reliable suppliers. Firms may be able to cope with these problems to dif- fering extents, and this will influence the speed, extent and nature of adoption, Larger firms may well have the capacity both to influence the external environment and to cope with its effects. In the case of the supply of qualified labor, for example, larger firms may be able both to influence the policies of local education and training institutes and offset the inadequacies of such institutes by providing their own adult education and training to offset the local deficiencies.” Smaller firms and firms with few managerial resources will have much less control and therefore be in need of local institutional support (private and public). Similarly, large firms may find it easier to reorganize supply chains, although Bessant and Kaplinsky (in this issue) point to the difficulties facing large firms in the Dominican Republic when they sought reliable and frequent deliveries.

In spite of these obstacles, the “steady diffusion” scenario expects that progress will be made toward the systemic adoption of JIT/TQM. There are two reasons for this. First, competitive pressures are high, and the movement toward increased liberalization will tend to increase these pressures further. Trade liberalization is not the only factor in competitive intensity, of course,


but it is an important one in many developing countries, and it emerges clearly in the papers by Kaplinsky, Posthuma, Carrillo and Fleury in this issue.

Second, maintaining and increasing the gains from JIT/lYQM depend on a systemic approach. This drives firms forward once they embark on a process of change. While some firms approach JIT/TQM without clear ideas of objectives and strategy, they will acquire them through a process of trial-and-error and learning-by-doing. Once firms embark on the process of adoption they are driven forward by the clear advantages they gain and the logic of JIT/TQM adoption. The interdependence of JIT/TQM techniques means that adopting one creates problems which can only be resolved by another. For example, it is only when stocks are reduced and processes more closely integrated that machine breakdown becomes more dismptive. Hence preventive maintenance schemes become important. This tendency would be reinforced by the fact that firms adopt easier techniques first as part of a learning process. Once they have learned from simple processes -both the techniques and how to introduce organizational change (motivation, training, planning, engineering, etc.) - they can go on to the more complex. Similarly, once firms reorganize internally, they appreciate the need for good quality, frequent deliveries and so they are obliged to seek new relations with suppliers. At any one time some firms will have adopted a limited range of techniques, but they will tend to move toward systemic adoptions. The systemic nature of JIT/TQM means that firms will encounter similar problems and respond with similar solutions. The globalization of technology and the rapid spread of knowledge through transnational firms, consultancies and professional associations might also lead to further convergence in the paths fol- lowed by firms (Boyer and Freyssenet, 1993, pp. 29-3 1).

In spite of the fact that there are forces which homogenize the use of techniques and diffuse JIT/TQM widely, variations will continue to exist between firms, sectors and countries. The forces men- tioned send companies along the same path, but they will start at different times and learn at different rates.

(c) Uneven difSuusion

The uneven diffusion scenario shares many of the concerns about the difficulties of adoption outlined above, but in addition it makes three further assumptions: (i) that the systematicity of JIT/TQM is low (in other words, certain JIT/TQM methods will provide good results even if only some of the elements of the core system are introduced), (ii) that not all products need systemic JIT/TQM production to be competitive, and (iii) that the extent of change required in the

firm and their difficulty increase as the use of JIT/TQM becomes more systemic. The result would be that many firms would adopt some limited elements of JIT/TQM, but the systemic adopters would be much rarer. The forces pushing the limited adopters in the systemic direction would be weak, and offset by the barriers to systemic adoption. At the very least, extensive institutional support would be needed to ensure widespread diffusion of systemic JIT/TQM.

Ruas and Antunes (1991, p. 3) argue that a systemic approach to JIT/TQM is adopted by firms who have an active market strategy and seek to gain competitive advantage through a combined process of technical, organizational and cultural change which affects the whole enterprise. In contrast, the introduction of specific operational techniques such as statistical process control as a response to crisis situations is typical of firms with a passive market strategy. In the case of Argentine manufacturing, Rold6n (1993) has argued that “high-level” JIT (equivalent to systemic applica- tion) is found in only a few larger transnational companies. Nonsystemic applications of JIT/TQM, which offer some benefits, particularly for immediate cost- cutting, are found in many firms. The implication of Roldan’s analysis is that firms engaged in such a strategy do not gain the capacity to undertake systemic JIT/TQM at a later date. They are not on the bottom rung of the JIT/TQM ladder, as would be implied by the “steady diffusion” scenario. They are on a different and much shorter ladder altogether.12 Stopping at this point would be viable if benefits can be gained from such a partial adoption and if competition is based mainly on price and quality. Murray (1993) argues that this is precisely what happens to “mass producers” who adopt TQM. They pursue quality objectives, but within a mass production strategy which does not aim to increase flexibility, reduce lead times or bring innovations more quickly to market. In the context of company strategy as a whole (see the papers by Fleury and by Bessant and Kaplinsky in this issue) such a limited use of JIT/TQM would meet the aims of the firm at the time.

Companies using JIT/TQM have redefined what is needed to secure competitive advantage in a particular market. The critical success factors (see Fleury in this issue) have changed as companies have achieved better quality, greater product variety and reduced costs. In many markets, however, competitiveness may remain more narrowly based for a long time. This point is all the more valid if one considers parts of production processes rather than complete products. It is apparent that Japanese firms transfer “Japanese” practices to the West to a much greater extent in the motor industry than in the consumer electrical industry (Kenney and Florida, 1992). A large number of studies on Japanese firms in the electrical industries have shown little use of quality circles, k&en groups, team-working or systematic rotation of labor. Such


plants may have both quality-at-source and JIT, but this is achieved without team-working, etc. This has particular relevance for offshore assembly operations in the electrical and electronics industry. In other markets, particularly protected ones, competition may remain focused on price for a long time.13

The capacities of firms to respond to changing competitive conditions will also limit the spread of JIT/TQM. In many developing countries there are enormous differences between large and small firms, and between more technologically advanced sectors and backward sectors. A systemic approach requires the sophistication to monitor performance and set goals, to reorganize management, to invest heavily in labor’s capabilities and involvement, to change labor- management relations and to redefine management structures. It would not be surprising if such efforts were limited to larger firms and smaller firms integrated into networks of firms. In many small and medium-sized enterprises, one might expect either limited, narrowly defined adoption of certain JIT/TQM methods or partial changes which stop well short of company-wide change. If implementing JIT/TQM is complex and difficult precisely because it involves radical changes in managerial structures and new labor policies, many firms may be unable or unwilling to carry through the logic of JIT/“TQM.

The arguments put forward by Fleury (in this issue) could be interpreted in this way. Firms can only compete on the basis of quality, flexibility, delivery, etc. when they have the basics of production organization and cost control in place. Similarly, firms with a long history of quality control and cost analysis will be in a stronger position to implement certain aspects of JIT/TQM than firms which have no systems at allI Depending on the capabilities of firms and the characteristics of the market, competition in certain sectors may develop slowly, if at all, from a price basis toward quality, flexibility, delivery and innovation. In particular, in markets not subject to international competition, the limited capabilities of local firms might well inhibit nonprice competition,

If this scenario is correct, then differences in JIT/TQM use will tend to be persistent. The extent and nature of its use will vary according to the general environment in which firms operate, by sector and by firms within sectors. This suggests caution. On the one hand, it implies that studies of leading innovators may be deceptive. While they show the potential for change in any particular country, they may be leaders with very few followers coming behind. It is important to study what the majority of firms with limited managerial, technical and financial resources can gain from even limited forms of JIT/TQM, and to consider how such firms might be enabled to move beyond their current limitations. On the other, situations can change rapidly. Product characteristics which win markets one year may not do so the next. Trade liber-

alization or the emergence of new sources of supply for international markets can transform the competitive situation very rapidly.

4. THE TRANSFORMATIONS OF CLUSTERS OF FIRMS

The analysis of intrafirm reorganization in the pre- vious section revealed processes which cannot be. captured by best-practice, prescriptive models. The need to go beyond a model abstracted from the experience of industrially advanced countries is also evident in the discussion of clusters of firms. In this section, the industrial district model derived from the Italian (or Emilian) experience, will be considered in relation to the performance and transformation of clusters of firms in developing countries. It will be argued that the industrial district literature provides vital insights into the gains in competitiveness arising from interfhm networking, but that successful clusters of firms in developing countries diverge in important respects from the industrial district model, and that further elements are required to understand how and why clusters grow and change.

The industrial district model has provided many new insights. It has put a new perspective on the competitiveness of small firms and the bases of competitiveness more generally, and it has opened up new possibilities for policy intervention. At the same time, setting up, the model in this way has three important consequences for the direction of research in developing countries. First, industrial districts are defined in terms of small firms. While Piore and Sabel do refer to large firms in industrial districts (1984, p. 28), they, like Sengenberger and Pyke, stress the role of small firms, contrasting small firms and mass production. This view of industrial districts as consisting of small firms was taken up in influential work on Cyprus sum- marized in Murray (1991), and it has obscured the possible role of large firms in districts. This tendency is reinforced by the fact that the industrial district model has proved to be of particular interest to researchers and policymakers concerned with small and medium- sized enterprises in developing countries. Schmitz’s (1989) seminal discussion of the relevance of the flexible specialization model for developing countries specifically considers it in relations to small firm development. Second, this view of industrial districts emphasizes the context within which small firms operate and the relations between them, at the expense of analyzing the internal structure of the firms concerned. While Piore and Sahel do pay some attention to flexibility and innovation within the firm, the industrial district model focuses almost exclusively on relations between firms and the characteristics of the district as a whole. In the Italian industrial districts many of the firms are sophisticated producers, and to some extent

INDUSTRIAL REORGANIZATION 1.57

their technical competence can be taken for granted, but in developing countries this cannot be assumed. Third, the industrial district model plays down the role of factors external to the district. In the Italian case, the development of sales consortia and strong competitive positions may mean that districts have control over their markets and can maintain their characteristics in spite of market changes. In developing countries, however, external factors seem to have a powerful influence on the way clusters develop, as will be shown below.r5

The empirical evidence, seen in the papers by Schmitz, Cawthome and Rabellotti in this issue, and more broadly in the review by Nadvi and Schmitz (1994), provides ample proof that clusters of sectorally specialized enterprises can compete success- fully in international markets, and that within these successful clusters there are small firms. The evidence also shows, however, some features which fall less obviously within the industrial district model:

- Clusters seem to combine networking and interfirm cooperation on the one hand, with low wages on the other. Schmitz (in this issue) concludes that wages have not risen in the Sinos Valley shoe cluster, even though production and employment have risen remarkably, and Cawthome (in this issue) argues that the Tiruppur knitwear cluster is still characterized by sweatshops and low wages. Export success, rapidly increasing output and (in the case of the Sines Valley) a clear movement up-market, has provided limited benefits for labor. - It is common to find large firms emerging in industrial districts. In many cases these firms grow from being small firms as a result of the entry of firms into export markets. Schmitz (in this issue) found that large firms had emerged in the Sinos Valley shoe industry during the export boom of the 1970s and early 1980s. Smyth (1992) notes the same pattern in the case of the Rattan industry in Indonesia. These large firms may play a dispropor- tionate role in exporting, although the evidence is contradictory (see note 16 below). - As large firms emerge in clusters, the pattern of linkages between firms may also alter. Schmitz (in this issue) found that large firms tended to become vertically integrated and to reduce their linkages to other firms in the cluster. Similarly, Kattuman argues that as the largest firms in the Ludhiana cycle-making cluster in India expanded, they reduced the intertirm linkages which had been an important part of their early success (1994, p. 14).16 These findings do not “disprove” the industrial dis-

trict model, but they show how necessary it is to go back to the factors which offer competitive advantages to clusters of firms and how these might be transformed by changes in the external environment. Under what circumstances do clusters of firms acquire the characteristics of an industrial district, and will these

characteristics be developed wholesale or piecemeal? Schmitz uses the term “collective efficiency” to

denote the gains made by firms which cluster together. This concept has two aspects (1994, p. 6):

(a) unplanned external economies arising from agglomeration. These include a supply of suitable labor, and easy access to suppliers of raw materials, components, and new machinery, and to second- hand equipment and spare parts; (b) the “consciously pursued joint action through business associations, producer consortia and the like” (1994, p. 6). The second aspect of collective efficiency can

itself, however, be broken down into two elements: b(i) Cooperation between individual firms either vertically - as in the “stage firms” described by Rabellotti (in this issue), -or horizontally as in the sharing of equipment or orders. b(ii) Collective action by groups of firms in the cluster or by local institutions. Employers’ associations, trade groups or local governments may act to improve conditions for firms in the cluster. This would involve lobbying governments, providing information and services, setting up trade fairs or technical institutes, etc. These aspects of collective efficiency may also cre-

ate what Rabellotti (in this issue) refers to as the “industrial atmosphere effect,” where entrepreneurs cooperate and compete simultaneously, promoting the rapid spread of ideas and improvements in performance. As Schmitz has pointed out, however, (1994, p. 4), clustering by itself does not produce these gains. While type (a) gains may occur without conscious effort, collective efficiency gains of types b(i) and b(ii) above have to be constructed. One element in this construction which arises clearly in the papers by Schmitz and Cawthome in this issue is access to export markets. The integration of clusters of firms into intema- tional markets is not the only factor promoting rapid changes in clusters, but it emerges as an important one in many clusters in developing countries. Entry to such markets can dramatically change the product characteristics firms must produce and also shift the range of opportunities open to firms.

One way of considering the impact of new markets is to use the concept of global commodity chains developed by Gereffi and others.” The notion of commodity chains draws attention to the fact that economic networks span national boundaries, and that new and complex forms of division of labor are emerging. Local economies may be integrated into chains of design, manufacture and sales which span continents, and the organization of production for some commodities may be coordinated by buyers or intermediaries rather than manufacturers. A commodity chain is a set of activities involved in the production and commercialization of a particular commodity, and it consists of a set of networks. In the

1.58 WORLD DEVELOPMENT

case of footwear, these would be a raw materials supply network, a production network, an export network and a marketing network (Gereffi, 1992, p. 96). Firms can straddle these networks, be involved in only one of them or act as a coordinator between them. Within each network there will be different market niches corresponding to different products.

A focus on commodity chains offers two advantages for the analysis of clusters of firms in a locality. First, it locates the cluster firmly in the wider context, and second, it defines some of the possible opportunities for upgrading the activities of the cluster (assum- ing more of the functions in the chain, by making more direct links to the final market, for example, or moving between market niches). Gereffi distinguishes between two types of global commodity chains - “producer-driven” and “buyer-driven”:

In producer-driven commodity chains, large transnational manufacturers play the central roles in co-ordinat- ing production networks (including their backward and forward linkages). This is characteristic of capital- and technology-intensive industries such as automobiles, air- craft, computers, semiconductors and heavy machinery. In buyer-driven commodity chains, on the other hand, large retailers, brand-named marketers, and trading companies play the pivotal role in setting up decentralized production networks. This pattern of trade-led industrialization is common in labor-intensive consumer goods industries such as garments, footwear, toys, housewares, and consumer electronics (Gereffi, 1994, p. 17).

The clusters analyzed by Cawthome and Schmitz fall clearly into the buyer-driven commodity chain category. The growth of the Sinos Valley shoe cluster and, to a lesser extent, the Tiruppur knitwear cluster has been driven forward by export markets. The arrival of foreign buyers imposes new quality demands, differentiating the firms in the cluster and changing the advantages and disadvantages of networking on the one hand and integration on the other. The nature of the demand from these markets has crucial impact - if the demand is for high-volume, standardized goods, this may encourage the emergence of large Fordist firms, as occurred in the Sinos Valley in the 1970s. This changed the characteristics of firms in the cluster quite markedly, as Schmitz describes. Interfirm linkages declined in importance as the giant firms verticalized their operations.

This outcome is not the only possible one. It may occur but not persist. Patterns of demand may change, and firms in the cluster may attempt to reposition themselves, either moving into different market niches or redefining their position within the commodity chain. A combination of both of these factors led to a redefinition of relations within the Sinos Valley shoe cluster, as firms moved up-market. Similar processes are evident, although less clearly defined, in the case of the Tiruppur knitwear cluster. Alternatively, large

firms may not emerge at all when export markets are opened up. Knorringa (1993) describes a pattern of differentiation in the case of the shoe cluster in Agra in Northern India in which small firms producing for higher value export niches relied on expanded small firm networks. In other words, they sought to special- ize as a route to improving quality and speed of response to orders.

The arrival of foreign buyers can create benefits and opportunities for many firms. It can help to pro- mote collective action particularly in pursuit of better transport, improved customs, information on external markets and standards, and trade fairs. When export demand is for mass produced items, such as cheaper shoes and simple textiles it will not necessarily lead directly to increased interfirm linkages, but such linkages may arise indirectly as more firms in the cluster gain information on export markets and respond proactively to the opportunities available. In this case, the ability of local institutions to support initiatives taken by firms to improve their production and design capabilities, and the underlying bases for interfirm cooperation (kin networks, strong social interaction), become important. These are the elements which may enable clusters to redefine their positions within commodity chains. These were the factors which enabled the Sinos Valley cluster to shift from one-market niche to another.‘*

The trajectory of development of the cluster will be the outcome of an interaction between the firms and institutions in the cluster and the other elements in the commodity chain. Whether or not insertions into a commodity chain will create development potential for a cluster will depend on both its position in the chain and the capacity of firms and institutions to make use of or create sources of competitive advantage and opportunities for upgrading. The degree of variety in the development of clusters integrated into buyer-driven supply chains is likely to be high.

Integration of firms into producer-driven commodity chains will have different effects, involving links between firms in the cluster and larger firms, who may be located elsewhere. This may lead to a decline in intracluster linkages. In more technically sophisticated sectors in which larger firms have a more important role in organizing supply chains and defining the final product (auto parts, for example), shifts in competitive strategy can lead to large firms establishing closer links to some small firms and offering technology and technical assistance. This leads to a restructuring of cluster networks, with some firms entering new networks not based in the cluster. They will continue to gain from the cluster’s unplanned external economies (unless they relocate toward a large customer outside the area), but interfirm exchanges will decrease and the commitment to collective associations may be undermined. This may leave other firms in the cluster at a considerable disadvantage as the

INDUSTRIAL. REORGANIZATION 159

more competent firms are locked into new networks. A variety of possible cluster trajectories thus

emerges. Some clusters of firms in developing countries may indeed acquire the characteristics of the Italian industrial district. Nadvi (1992) provides a description of the surgical instruments cluster in Sialkot which stresses large numbers of small firms engaged in extensive interfirm exchanges of service, horizontally and vertically, active producer associations, supportive local and regional governments, and the clusters’ powerful position in the world market for basic surgical instruments. Other clusters may segment into disconnected networks of large and small firms (as in the case of Tiruppur in the mid-1980s). Other clusters may segment according to whether firms are integrated into the supply chains of larger firms. Finally, some clusters may not develop at all. They will continue to be agglomerations of firms enjoying the external economies of agglomeration but without the interhrm linkages which are at the heart of the industrial district model. The interaction between local capabilities and local response to opportunities, on the one hand, and the impact of integration (or lack of it) into commodity chains on the other will deter- mine which path is taken.

5. INDUSTRIAL DISTRICTS AND INTRAFIRM REORGANIZATION

It was argued that the literature on reorganization within firms and on industrial districts have been largely distinct, in spite of the initial attempt by Piore and Sabel (1984) to encompass both within a single model, flexible specialization. The analysis of JIT/TQM has focused on internal restructuring, and consideration of supply chains has tended to be both secondary and viewed from the perspective of organizing subordinate enterprises. In contrast, the industrial district model has focused on small firms. It has tended to separate the issues of large firms and their suppliers and industrial districts. Sengenberger in the context of Europe (1988, p. 254), and Spath for Latin America (1993, p. 27), distinguish two separate models for small firm development-the large firm “fostering” model and the “small firm community model.” This distinction separates large and small firms and hinders discussion of the relationship between networks of large and small firms and clusters of firms.

The analysis of the trajectories of JIT/TQM diffusion and clusters of firms in developing countries suggests points at which the two literatures intersect:

- Messner’s (1993) study of the wood products industry argues that firms need to reorganize internally and redefine their links with other firms simultaneously. Each is a precondition for the other. He argued that when small and medium-sized Chilean firms turn their minds to meeting international stan-

dards of efficiency and quality, they modernize sequentially. First, they incorporate new technology, resolve commercialization problems and invest in human resources. Second, they constitute strategic interfirm groups which establish both horizontal and vertical structures which improve their overall supply capacity and create internal pressures for improvement through emulation and the propagation of innovations (Messner, 1993, p. 127). The two features are interdependent. Each firm can only restructure so far without developing links with other firms. Firms which are inefficient and unreliable (for quality and delivery) do not make good partners. If one small firm has to make a rapid commitment to obtain a larger order, for example, it must trust other firms to keep their commitments to produce part of it. Such trust depends, in part, on the mutual recognition of the competence of each enterprise in the network. All must be able to meet the new standards. This, in turn, is achieved not only through internal reorganization and reequip- ping, but also through networks which provide help, enable equipment to be used or purchased col- lectively, and spread learning rapidly around the participating firms. - Larger firms can also benefit from emulation and exchanges of information, The growth of networks of large firms for exchanges of information (such as the IS0 9OOfl group in the Campinas area of Brazil) is an illustration of how much firms can learn from each other. Visits to other firms (within the country and abroad) are another mechanism to obtain information used by firms of all sizes (Fleury and Humphrey, 1993, p. 66). Firms realize increasingly that they have much to learn, that learning is continuous, and that they can learn much from each other. At the policy level, it is clear that intrafirm reorganization is most effectively supported when firms are seen as parts of networks rather than as isolated units. One of the key features of the demonstration factories in the Dominican Republic (Bessant and Kaplinsky, in this issue) is the idea that firms can be influenced most by changes taking place in their rivals. This applies as much to large firms as to small. Similarly, the Brazilian Programme for Quality and Productivity is centered on the activities of sectoral organizations, because much of the support for change and much of the impulse for change must come from within the sector. - The development of JIT/TQM within the firm leads to some pressures for greater quality of inputs and increased frequency and reliability of delivery. Working with JIT/TQM greatly increases the costs of having poor quality or irregular supplies. JIT/TQM tends to be adopted first by larger, more technically and organizationally competent companies, as was argued above in section 3. These firms


may well have suppliers whose main competitive close by, they are well placed to meet both the new advantage has been cost. In developing countries, delivery demands of large firms and establish a poor quality suppliers are a particularly serious closer working relationship. problem. Kaplinsky’s paper discusses this point, - The activities of large firms can be of benefit to and Schmitz and Rabellotti argue that larger firms firms in the cluster other than their suppliers. If, for had vertically integrated production in the shoe example, large firms take steps to improve raw clusters in Brazil and Mexico respectively because materials supply and the infrastructure of the of supplier problems. If and when these larger firms district, then small firms will benefit as well. The seek to develop high-quality suppliers as part of a supplier (large or small) who is forced to improve JIT/TQM strategy, being in a cluster may be advan- quality by a large customer will also have small cus- tageous to both large and small firms. First, if large tomers. As a result, the quality of inputs for small firms do wish to deverticalize, they will find it eas- firms will also be improved. A case in point would ier if they are within a cluster. JIT supply greatly be the tanneries discussed by Schmitz. If larger shoe benefits from having local suppliers, and large firms producers in the Sinos Valley force an improve- can channel their efforts to improve the perfor- ment in the quality of leather, this helps all the pro- mance of suppliers through the collective organiza- ducers in the Valley. tions of the cluster (technical institutes, training In order to achieve competitiveness, firms of all bodies, etc.). The small suppliers, also gain in sizes need to reorganize internally and externally. In capacity and in flexibility if they are organized in facing this challenging task, they are stronger if they networks. In addition, the large firm will have its are not isolated. Firms which know how to establish suppliers at hand and also have a greater number of constructive relationships with other firms and are potential suppliers from which to choose. Clusters able to learn from others will have an advantage. This provide ready-made networks for firms wishing to has clear implications for the discussion of trajectories deverticalize. Second, small firms in a cluster will of change. On the one hand, the spread and depth of have better conditions to respond to the increas- diffusion of JIT/TQM will be. greater if firms can learn ingly exacting demands of large-firm customers from each other and can establish closer relations. On than would isolated small firms. They may have the other hand, clusters of firms will improve their support from collective organizations and the local competitiveness if the restructuring of larger firms state: local equipment suppliers, technical centers, acts as a catalyst for the improvement of the effective- access to credit, etc. At the same time, being located ness of the cluster as whole.

NOTES

1. See Boyer and Freyssenet ( 1993) for a discussion of the notion of hybridization-that new production systems develop in preexisting contexts which shape the development of the new. The new combines with the old rather than replacing it.

2. It can be argued that a clear understanding of the model only becomes possible when transfer to another context has taken place. The transfer strips off the inessential and shows what survives in different contexts. In other words, the “Japanese” model could only be properly known once it had spread outside of Japan.

firms in Brazil, and Posthuma’s study of six firms in Zimbabwe in this issue. In both cases, there is considerable variation in level of JIT/TQM use and the extent to which management are committed to following through the logic of JIT/TQM. There is evidence of the same patterns of use in industrially advanced countries. In Britain, for example, there is ample evidence that firms are much more likely to adopt the “easy” techniques than those which require greater investment, reorganization and commitment (Oliver, 1990, p. 34).

3. This is not to say that there are not tradeoffs between, for example, stock reduction and flexibility. Perhaps one of the interesting features of current thinking in Japan is the recognition that certain JIT/TQM principles can only be pushed so far. See, for example, Nomura (1993).

6. See Edwards (1979) for an account of the various strategies ta control labor tried and abandoned by firms in the United States in the early part of the 20th CenNq.

4. See Kenney and Florida (1992) and Oliver and Wilkinson (1992) for a discussion of Western variants of the Japanese model. On the extent to which new relations between management and labor involve coercion as much as consent and cooperation, see Humphrey (1994).

7. Tolliday’s analysis effectively demolishes the interpre- tation of these events offered by Womack, Jones and Roos (1990), which was that local managements and unions together conspired to sabotage the Fordist approach. All the evidence is that Ford refused to adapt the plant to local conditions in spite of a clear need for this, expressed by the man- agers sent from Detroit to implant the Fordist model (1993, pp. 16-19).

5. See Fleury and Humphrey (1993) on the cases of 20 8. The construction of these scenarios takes ideas from


Kaplinsky (in this issue) and Boyer and Freyssenet (1993). In the First World literature, technical competence is taken for granted, and the main barriers to JITFQC are seen as

9. See Bessant (1991) and Kaplinsky (1994) for thorough organizational and social. The technical question remains discussions of JIT/TQM as a new production paradigm. important in the Third World.

10. For a discussion of the means by which labor’s involvement and control has been achieved in Brazil, see Humphrey (1993).

11. Examples of large firms controlling environmental variables include choosing the location of new plants so as to gain transport and education advantages (Ford at Hermosillo), and imposing new industrial relations practices on local unions (Japanese auto transplants in the United. Kingdom).

12. See Kaplinsky’s analysis of paths of JIT/TQC adoption in this issue.

13. Schmitz’s paper in this issue shows how intense price competition in international markets from low-wage producers such as China makes price-based competitiveness increasingly precarious for countries whose wages are higher. Producers are forced to compete on other attributes.

14. This point is particularly relevant for the Third World.

15. To some extent the recent difficulties of the European industrial districts (Bianchi, 1993) has focused more attention on the dynamics of development and transformation, but in the initial analyses of districts, the emphasis was on their ability to maintain their structure while flexibly responding to external conditions.

16. In the case of Ludhiana, this point is hotly disputed. For a different account, which stresses the continuing importance of small firms in the supplier chains of larger firms, the export success of small firms and the role of the state in fostering the emergence of large firms, see Tewari (1993).

17. See Gereffi and Korzeniewicz (1994).

18. This does not mean that clusters must be based on strong kin or ethnic ties. Messner (1993) provides an account of how firms in the Chilean wood products sector have responded to the challenges posed by export markets by developing interfirrn cooperation and division of labor and creating their own sectoral organizations.

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Industrial reorganization in developing countries: From models to trajectories

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