Enterprising Worlds: A Geographic Perspective on Economics, Environments & Ethics (GeoJournal Library)

Enterprising Worlds

The GeoJournal Library Volume 86 Managing Editor: Max Barlow, Toronto, Canada

Founding Series Editor: Wolf Tietze, Helmstedt, Germany

Editorial Board:

Paul Claval, France Yehuda Gradus, Israel Sam Ock Park, South Korea Herman van der Wusten, The Netherlands

The titles published in this series are listed at the end of this volume.

Enterprising Worlds A Geographic Perspective on Economics, Environments & Ethics

Edited by

JAY D. GATRELL Indiana State University, Terre Haute, Indiana, USA

and

NEIL REID The University of Toledo, Ohio, USA

A C.I.P. Catalogue record for this book is available from the Library of Congress.

ISBN-10 ISBN-13 ISBN-10 ISBN-13

1-4020-5225-1 (HB) 978-1-4020-5225-5 (HB) 1-4020-5226-X (e-book) 978-1-4020-5226-2 (e-book)

Published by Springer, P.O. Box 17, 3300 AA Dordrecht, The Netherlands. www.springer.com

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All Rights Reserved © 2006 Springer No part of this work may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying,microfilming, recording or otherwise, without written permission from the Publisher, with the exception of any material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work.

Dedications To my favorite editor, s., and our children, f., m. and e.—JDG To Lori and my beautiful daughters Kirsty and Fiona—NR

Table of Contents Acknowledgements .............................................................................................. xiii 1

Economics, Environments & Ethics J. Gatrell and N. Reid................................................................................... 1 1.1

About this book.................................................................................. 1

2

Industrial and Technology Clusters: An Everyday Topic of Popular Conversation Frank J. Calzonetti....................................................................................... 5

3

Which Mode of (CLUSTER) Promotion for which aspect of Entrepreneurship? A differentiating view on institutional support of automotive clusters M. Fromhold-Eisebith................................................................................ 13 3.1 3.2 3.3 3.4 3.5

3.6 4

The Dynamics of FDI of the TFT-LCD Cluster: A Study of Japanese Firms in Taiwan W.C. Wang.................................................................................................. 29 4.1 4.2 4.3 4.4 4.5

5

Abstract............................................................................................ 13 Introduction...................................................................................... 13 Differentiating variants of entrepreneurship .................................... 15 Differentiating types of cluster promotion....................................... 17 Impacts of public versus private cluster promotion on entrepreneurship.......................................................................... 19 3.5.1 Public top-down cluster promotion and entrepreneurship ....................................................... 21 3.5.2 Private bottom-up cluster promotion and entrepreneurship ....................................................... 23 Conclusions...................................................................................... 24

Introduction...................................................................................... 29 The Dynamics of Japanese FDI in Taiwan ...................................... 30 Methodology.................................................................................... 32 Flying-Geese Model and Scalar Fixes ............................................. 34 Conclusions...................................................................................... 36

Collaborating to Compete: The Case of Northwest Ohio’s Greenhouse Industry N. Reil and M. Carroll................................................................................ 41 5.1 5.2 5.3 5.4

Introduction...................................................................................... 41 Cluster-Based Economic Development ........................................... 42 Northwest Ohio’s Greenhouse Industry........................................... 45 The Development of Northwest Ohio’s Greenhouse Cluster........... 47 vii

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Table of Contents 5.5 5.6

6

Specialized Agriculture: Local Markets & Global Competitors in Ohio’s Greenhouse Industry E. W. LaFary, J. Gatrell, N. Reid and P. Lindquist .................................. 57 6.1 6.2 6.3

6.4 6.5

6.6 6.7 7

7.3 7.4

Introduction...................................................................................... 71 High technology and Urban Development: A Conceptual Review ...................................................................... 72 7.2.1 What is High Technology?.............................................. 72 7.2.2 High Technology in Developing countries ..................... 73 7.2.3 High Technology in India ............................................... 74 Bangalore: Transformation of a Garden City to the Silicon Valley......................................................................... 76 Conclusion ....................................................................................... 79

An Evolutional Model of U.S. Manufacturing and Services Industries J. Helsel, H. Kim and J. Lee ...................................................................... 83 8.1 8.2 8.3 8.4 8.5 8.6

9

Introduction...................................................................................... 57 Globalization, Local Dependence and Greenhouses........................ 58 The Greenhouse Industry: Background and Trends in Floriculture .................................................................................. 59 6.3.1 Floriculture Import Patterns ............................................ 60 6.3.2 Canada-US Floriculture Trade Patterns .......................... 61 Data and Methods ............................................................................ 62 Results.............................................................................................. 63 6.5.1 Globalization................................................................... 63 6.5.2 Markets and Sales ........................................................... 65 Discussion........................................................................................ 67 Conclusion ....................................................................................... 69

High Technology and Urban Development in Bangalore, India R. Kalra....................................................................................................... 71 7.1 7.2

8

Branding and Marketing: The First Cluster Project ......................... 51 Conclusion ....................................................................................... 53

Abstract............................................................................................ 83 Introduction...................................................................................... 83 Background...................................................................................... 85 Methodology.................................................................................... 87 8.4.1 Measure of Spatial Concentration ................................... 87 Analysis and Discussion .................................................................. 89 8.5.1 Industrial Profiles............................................................ 93 Concluding Remarks........................................................................ 94

Clusters and Local Economic Growth: Unpacking the Cluster Model Michael Taylor ........................................................................................... 99 9.1 9.2

Introduction...................................................................................... 99 The Processes and Drivers of the ‘Cluster’ Model ........................ 101

Table of Contents

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9.2.1

9.3

9.4 10

Towards Reconceptualising Enterprise, Entrepreneurship and Entrepreneurial Processes for Sustainable Futures: Contributions from Economic Geography R. Le Heron .............................................................................................. 119 10.1

10.2 11

Introduction.................................................................................... 119 10.1.1 Positioning my viewpoint and argument....................... 119 10.1.2 Economic and ecological processes in their institutional settings .......................................... 121 10.1.3 Competing narratives and different knowledge frontiers....................................................... 124 Further Directions .......................................................................... 127

Attitudes, Behaviours and Outcomes of Different Types of Entrepreneurs: Toward a Better Understanding of the Multiple Entrepreneurship Phenomenon C. Tamásy ................................................................................................. 131 11.1 11.2 11.3 11.4 11.5

12

The social construction of local economic processes: trust and reciprocity ...................................................... 102 9.2.2 Social capital: a chaotic concept ................................... 103 9.2.3 The over-simplification of the processes of learning, entrepreneurship and new firm formation ..................... 104 9.2.4 The fetishing of proximity ............................................ 105 9.2.5 The de-powering of network relationships.................... 106 9.2.6 The one-sided interpretation of institutional support .... 107 The deeper underlying problems of the cluster model................... 108 9.3.1 Normative instrumentalism........................................... 109 9.3.2 Time and the institutional instantaneous....................... 109 9.3.3 Complexity.................................................................... 110 Conclusion ..................................................................................... 111

Introduction.................................................................................... 131 Survey Design................................................................................ 132 Entrepreneurial attitudes and behaviours ....................................... 133 Outcomes of different types of entrepreneurs ................................ 135 Discussion...................................................................................... 141

The Business and Sustainability of Water Supply in Singapore: The Case of Hyflux S. Y. Wong ................................................................................................ 145 12.1 12.2 12.3 12.4 12.5

Introduction.................................................................................... 145 Restructuring Singapore Industry – the New industry Clusters ............................................................................ 147 The Economics and Politics of Water Supply – Catalysts of Water Industry ........................................................................... 148 The Water Solution – The Role of the State and Public-Private Partnership ..................................................................................... 150 The Birth of Hyflux – Building the Foundation from Home ......... 156

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Table of Contents 12.6 12.7 12.8

13

Entrepreneurship: New Means of Support for Community Colleges M. Rudibaugh........................................................................................... 165 13.1 13.2

13.3

13.4 13.5 14

Introduction.................................................................................... 165 Local Dependence.......................................................................... 165 13.2.1 Locality as Social Structure and Agent ......................... 166 13.2.2 Defining the terms of local dependence: Increased Partnerships................................................... 167 How Community Colleges Escape Local Dependence.................. 169 13.3.1 Customized Contract Training ...................................... 169 13.3.2 Technology Centers ...................................................... 170 13.3.3 Workforce Development Partnerships .......................... 170 13.3.4 Welfare-to-Work........................................................... 171 13.3.5 Business-Based Scholarship Programs ......................... 171 The Rise of the “Entrepreneurial” College .................................... 172 Summary and Implications ............................................................ 175

Globalization, Social Protest and the Militarized Landscape of Okinawa S. Banasick ............................................................................................... 177 14.1 14.2 14.3 14.4 14.5

15

Globalizing and Regionalizing the Technology and Services of Hyflux................................................................... 158 Hyflux and the Vision of a Global Hydro-hub............................... 161 Concluding Remarks...................................................................... 162

Introduction.................................................................................... 177 The Base Lease System and Economic Dependency..................... 178 Buying Security – the Political Economy of Compensation.......... 180 The ‘globalization’ of Nago City ................................................... 181 Conclusion ..................................................................................... 186

Paternalism and Struggle at Weirton Steel Corporation Aron Massey ............................................................................................. 191 15.1 15.2 15.3 15.4 15.5

Introduction.................................................................................... 191 Ernest Tener Weir: The Man Behind the Mill ............................... 192 E.T. Weir’s Mill Fosters Development in the Area ....................... 193 Struggle at Weirton Steel ............................................................... 196 E.T. Weir and Weirton Steel’s Struggles ....................................... 198

16

Ethics in Economic Geography Christine Tamásy...................................................................................... 201

17

Whose Development? The Tribal Involuntary Dislocation in the Sardar Sarovar Sutapa Chattopadhyay.............................................................................. 205 17.1 17.2

Abstract.......................................................................................... 205 Introduction.................................................................................... 205

Table of Contents 17.3 17.4 17.5

17.6 18

18.3

19.3

19.4

Introduction.................................................................................... 231 The conceptual framework of the institutional arrangement and regionally bounded institutions .......................... 232 Institutions relevant to microcredit in Argentina ........................... 235 19.3.1 The institutional arrangement and regionally bounded institutions ...................................................... 235 19.3.2 Microcredits .................................................................. 238 Conclusions.................................................................................... 239

Bread or Circus? The Economics of Mega-Sporting Events Jeffrey G. Owen........................................................................................ 243 20.1 20.2

21

Abstract.......................................................................................... 221 Concepts of Informality ................................................................. 222 18.2.1 International labor standards curb informalization........ 224 18.2.2 International labor standards lead to more informalization .............................................................. 225 18.2.3 Civic rights curb informalization .................................. 226 The case for a realist Marxist approach ......................................... 227

Building or Repairing Institutions: Microcredits in Argentina Martina Fuchs.......................................................................................... 231 19.1 19.2

20

Theoretical Framework.................................................................. 209 Uneven Development..................................................................... 210 Unsustainable Development .......................................................... 212 17.5.1 The people’s and NGOs resistance movements ............ 213 17.5.2 The interface between Resistance movements and Power .................................................. 215 Conclusion ..................................................................................... 216

Geographies of Informalization: Conceptual Dilemmas over Social Standards and Informalization of Labor Hege Merete Knutsen ............................................................................... 221 18.1 18.2

19

xi

Introduction.................................................................................... 243 20.1.1 The Fallacy of Economic Impact Studies ..................... 244 Conclusion ..................................................................................... 253

Social Entrepreneurship and Regional Economic Development: A Conceptual Framework Henry G. Rennie....................................................................................... 257 21.1 21.2

Abstract.......................................................................................... 257 Social Entrepreneurship and Business Entrepreneurship............... 258 21.2.1 Vision and Mission of Social Entrepreneurship............ 258 21.2.2 Strategy: Competitive versus Cooperative .................... 259 21.2.3 Governance ................................................................... 259 21.2.4 Funding ......................................................................... 259 21.2.5 Market........................................................................... 259

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21.3

21.4

21.5

Public-Private Partnerships, Externalities, & Economic Development ................................................ 260 21.2.7 Typology: Social Entrepreneurship and Business Entrepreneurship ........................................................... 260 Social Entrepreneurship and Economic Development................... 260 21.3.1 Economic Growth versus Economic Development....... 260 21.3.2 Social Welfare and Economic Development................. 261 21.3.3 Economic Efficiency..................................................... 262 21.3.4 Internalities versus Externalities and Economic Development ................................................................. 262 21.3.5 A Conceptual Framework Linking Society, Social Entrepreneurship, and Economic Development............ 262 Empirical Application of the Conceptual Framework: An Example............................................................... 263 Income and Costs of an Automotive Museum .............. 264 21.4.1 21.4.2 Economic Impact .......................................................... 265 Conclusions.................................................................................... 267 21.5.1 Conceptual Framework Applied ................................... 267 21.5.2 Social Entrepreneurship and Externalities .................... 268 21.5.3 Social Entrepreneurship Strategy and Economic Development Strategy................................................... 269

Acknowledgements The editors wish to acknowledge the assistance of the International Geographical Union’s Commission on the Dynamics of Economic Spaces, the conference sponsors (IGU, University of Toledo, Indiana State University, and Bowling Green State University), the editorial assistance of E. LaFary, the copyediting services of C. McGrew, and the financial support of the United States Department of Agriculture in association with the work of Reid, Lindquist, Carroll, Calzonetti, LaFary, and Gatrell. Additional administrative support was provided by our home institutions. Finally, the editors appreciate the support and assistance of the entire editorial team at Springer.

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1 Economics, Environments & Ethics J. Gatrell, Department of Geography, Geology & Anthropology, Indiana State University, Terre Haute, Indiana N. Reid, Department of Geography & Planning and The Urban Affairs Center, The University of Toledo, Toledo, Ohio

1.1 About this book Enterprising Worlds represents the culmination of several years of work by geographers, planners, and economists. The papers included in this volume represent the collective efforts of the International Geographical Union’s Commission on the Dynamics of Economic Spaces. This collection—like others that precede it— is the result of the 2005 annual meeting in Toledo, Ohio (USA). The papers have been selected based on their quality and potential contribution to the broader community of economic geographers and policymakers. As such, all papers have undergone peer review as part of the publication process. Finally, the papers have been selected from over 30 presented to demonstrate the inherent interconnectedness of these themes (and at times the conceptual tension that exists between ethics, economics, and the environment) insofar as these important issues shape the contours and cleavages of contemporary regional development. In particular, the papers in the collection represent the diversity of perspectives on these issues as interpreted by scholars situated around the world. While no doubt the papers are diverse, the authors provide insight into the workings of a variety of communities, regions, and nations as they seek to balance economic growth with the growing necessity to simultaneously promote ethical and sustainable regional development. As such, the collection is truly international in both scale and scope and provides the reader with a survey of emerging and established concepts, theories, and conflicts in economic geography. The collection has been organized into three broad sections. The first section examines the socio-spatial implications and policy issues surrounding “Localized Economic Development and the Cluster Approach.” The contributions are unique in that the cluster concept—adopted from economics and widely seen as a public policy panacea—is examined in place and practice from a geographic perspective. While many geographers are supportive of the notion of economic clusters, the papers illustrate that realizing promise of, and simultaneously rescaling, the concept of clusters as articulated in Porter’s (1990) The Competitive Advantage of Nations proves both difficult and problematic. Using a combination of case studies and extensive empirical analysis, economic development clusters are examined in 1 J. Gatrell and N. Reid (eds.), Enterprising Worlds, 1–4. © 2006 Springer.

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a variety of contexts and across multiple economic sectors in several papers. Each of these studies more or less benchmark industrial clusters at multiple scales—and each albeit unknowingly—demonstrates key silences within the theory that need to be addressed. For this reason, the section outlines the broad support the concept has received and its potential for unlocking a range of local economic development processes. Nevertheless, the section ends with a solid critique of the cluster approach and questions the utility of the explosion of geographic and economic literature that has emerged since the mid-1990s. Section 2—“Sustainability, Entrepreneurship, & Landscape”—examines two very distinct views of sustainable economic development. First, authors consider the classic question of the exact role of entrepreneurs in promoting and sustaining economic growth. Insofar as the role of entrepreneurs in the geography literature has been under studied, the papers explore a range of issues and considerations (conceptual, methodological, and practical) that must be addressed to articulate the uncertain and shifting geography of the entrepreneur. The papers consider the expansion of the entrepreneurial ethos in higher education, the ability of entrepreneurs to shape a single community, and sometimes serendipitous nature of the successful entrepreneur. Second, the section examines the environmental imperatives that shape local economic development and the key issue of sustainability. In once case study, the themes of the environment and the entrepreneur are considered within the context of water quality in a developing nation and enable the reader to understand the many barriers (and potential for success) that faces environmental entrepreneurs. In concert, the section provides the reader with a real sense of the breadth of research being performed under the rubric of “sustainability”. Finally, “The Impacts and Ethics of Economic Development” (Section Three) examines what an ethical economic geography might look like and how the deployment of a ethical framework might alter the economic landscape. The section begins with an examination of key concepts and contradictions that must be considered when seeking to establish an “ethical economic geography”. In a similar vein, subsequent papers examine the ethics of economic informalisation and structural reform in the developing world. The section ends with two interesting papers—both by economists—that consider the crucial question of economic development studies, their role in cementing support for costly initiatives, and their utility. Indeed, one chapter politely questions the efficacy of such studies within the context of project growth associated with the Olympic Games. In the end, Section Three identifies several themes within the nascent “ethics” literature in economic geography—transitioning economics, public policy narratives on development, and social capital—that can be used to shape future research.

1 Economics, Environments & Ethics

3

Table 1. Summary of Chapters

2 3

Author(s) Calzonetti Fromhold-Eisebith

4 5 6

Wang Reid & Carroll LaFary et al.

7 8

Kalra Helsel et al.

9 10

Taylor LeHeron

11

Tamasy

12

Yann-Wong

13 14 15 16 17

Rudibaugh Banasick Massey Tamasy Chattopadhyay

18 19

Knusten Fuchs

20

Owens

21

Rennie

Subject Clusters in Geographic Research Entrepreneurship & Clusters in the German Auto Sector Japanese FDI in the Taiwan LCD Industry Developing clusters from Scratch in Ohio Assessing and Benchmarking the Ohio Greenhouse Cluster High Technology Development in India Identifying the Geography of Manufacturing Clusters in the U.S. Questioning Clusters Reconceptualising Entrepreneurship in Economic Geography Attitudes and Behaviors of Entrepreneurs in Place An Environmental Entrepreneur in Singapore Entrepreneurial Colleges Sustainable Development in Okinawa Place-building and Industrialists Ethics in Economic Geography Development in India—Who’s Development? Informalising the Geography of Labor Volatility in Argentina Economic Institutions Economic Development Impacts Studies & The Olympics Social Capital and the Impacts of Economic Development

The 19 substantive contributions present a wide array of examples of the globalizing economy as it is experienced, charted, and assessed at multiple scales. The diversity of papers—while potentially distracting—underscore the contested definitions of ethics, environment, and development that exist in economic geography, as well as the potential to chart a new exciting research agenda for discipline. Additionally, the papers are inter-disciplinary and many are collaborative and illustrate the many skills and knowledges that are required to unpack and explore globalization.

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Finally, the intent of this volume is two fold. First, we hope the volume proves to be an interesting read that highlights the important scholarship of the authors. Second, we anticipate the volume will raise more questions than it answers and recognize that many silences (some we recognize and others that you may identify) exist within and between the papers. While any collection derived primarily from a conference is inherently uneven, the collection is thought provoking and should prove to be an engaging read for any economic geographer.

Source Porter, M. 1990. The Competitive Advantage of Nations. New York: Basic Books.

2 Industrial and Technology Clusters: An Everyday Topic of Popular Conversation Frank J. Calzonetti, The University of Toledo, Department of Geography & Planning and Office of Research, Toledo, OH

It is not often that major research themes in geography and regional science are central to national and international discussions of government leaders, the business press, and economic development practitioners working to improve national, regional, state, and local government economies. “Industry clusters,” but particularly its popular cousin “technology clusters” has moved from academia to enjoy widespread press, popular and practitioner attention in both developed and developing economies (see Taylor’s contribution in this book). This is no surprise. It is now recognized that innovation-driven sectors of the economy are yielding great returns and that many of the firms in these sectors are “clustered” in particular regions. Not only do industries in knowledge-driven sectors report higher value added than other manufacturing sectors, but wages rates and growth rates are higher as well (National Science Foundation, 2006, Chapter 6, 9). The NSF reports that over the period 1980–2003 world output by high-technology manufacturing industries grew at an inflation-adjusted average annual rate of 6.4 percent compared to 2.4 percent for other manufacturing industries. It is explained by the NSF and others that high technology industries are intensive users of research and development (R&D) that leads to innovation resulting in gains in market share, the creation of new markets, and the efficient use of resources. Regions with successful clusters are working to retain their advantage and others are seeking to create clusters as a path to economic growth and development. A cluster-based approach is now a mainstream strategy to promote regional economic development throughout all advanced economies and even by many developing countries (Martin and Sunley, 2003, 12). Although the theory and practice underlying the concept is not new to geographers and regional economists, it is not surprising that the concept is used rather loosely in the press, by those involved in economic development efforts (politicians, various board members, planners, economic development professionals), and perhaps by some in the halls of academia. Even serious scholars argue that the concept is vague and perhaps loosely applied. As shown in this book, the concept is wrapped around related concepts that may also have definitional problems or different interpretations such as “embeddedness,” “social capital,” “new economy,” “corporate complexes,” “entrepreneurship,” “spillovers,” “absorptive capacity,” “knowledge or learning regions,” and “technology-based development” to name just a few. However, most academics and practitioners do understand a cluster to be a concentration of interconnected companies, including suppliers and service providers, who are 5 J. Gatrell and N. Reid (eds.), Enterprising Worlds, 5–12. © 2006 Springer.

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supported by various governmental and non-governmental institutions (particularly universities) that both compete with and cooperate with one another within a defined region. What may not be known to the casual observer is the corpus of theory and practice behind the technology cluster concept. A good review of this theory and practice is provided by a number of manuscripts and books, such as that provided by Cooke (2002), so it is not the purpose of this brief introduction to repeat this discussion. But for those new to the topic a few pages are provided on the topic to set the stage for the more focused chapters in this book. Michael Porter is generally credited for popularizing the industrial cluster concept. Writing about conditions that explained the competitive economic position of nations, he argued through examples that much of the economic power of most advanced countries was concentrated in a few districts that often had elements within four dimensions (Porter’s diamond) that affected regional competitiveness—factor conditions; demand conditions; firm strategy and rivalry; and supporting industries (Porter, 1990). “Technology clusters,” an extension of the industrial cluster concept, have in addition to the four dimensions of the Porter diamond the following elements: entrepreneurship, a source of innovation, sources of financial capital and social capital. Social capital describes the trusting relationships among individuals within organizations in a region that promotes the exchange of information and joint action for mutual benefit (Fountain, 1998; Saxenian, 1994). However well received Porter’s his 1990 book was to geographers and regional economists, most understood that the concept of an industrial cluster has been a topic of interest and development for much of the 20th century and perhaps could be traced to Ricardo’s early 19th century concept of comparative advantage (if a country has an absolute advantage over another in two different products, it should still focus on the product in which it has the strongest advantage). If this is a stretch, Marshall’s concept of the “industrial district” that capitalized on the value of skilled labor and traditions in addition to resource endowment as fostering a concentration of industrial activity is often referenced as the earliest recognition of the industrial cluster idea (Marshall 1891). While the role of agglomeration and external economies on the concentration of industry has been an area of intense academic focus throughout the 20th century (beginning with the work of Alfred Weber, 1909), much of this work centered on the external economies of scale resulting from the clustering of activity that benefited individual enterprises. Given the difficulty economists faced in introducing “technology” into their understanding of factors contributing to per capital economic growth (not recognized until explained by the Solow residual in 1957), it is not surprising that the role of technology and innovation along with other “softer” factors on regional performance has taken decades to unravel. Well prior to Porter’s popularization of the industrial cluster concept, others following the tradition of the economist Schumpeter, argued that the role of continuous innovation was central to the performance of firms and on the growth and development of industrial districts (e.g., Piore, M. and C. Sabel 1984). However, the relationship of

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innovation and technological advances on regional competitiveness, along with an understanding of the role of social capital, entrepreneurship and government intervention in the development, continuous support, and transformation of clusters continues to offer challenging opportunities for those studying clusters and particularly those interested in creating and promoting clusters. Much of the literature on the topic, including much of Porter’s work and many government sponsored reports, newspaper and magazine articles (see, for example Strempel 2005) focuses on mapping clusters or identifying factors that have contributed to successful clusters. Hundreds of industry cluster case studies have been described in both the academic literature and in various reports printed throughout the globe that are often the result of projects commissioned by states, regions, councils, districts, or municipalities. For instance, Michael Porter’s Cluster Mapping Project (2002) identified 12 specialized regional economies in the United States1 and the Brookings Institution identified 14 U.S. metropolitan concentrations of high technology industry “most frequently mentioned in the popular literature” (Cortright and Mayer 2001, 2).2 But others (who were not Harvard economists) working independent of Porter and did not receive such popular acclaim also identified clusters of technology-related activity driven by external economies through the interaction of related firms that took advantage of a division of labor in a region and the minimization of transaction costs (Scott 1988; Scott and Kwok 1989; and Coffey and Bailly 1991). Some clusters develop without direct public policy intervention or direction. In other cases, state or regional leaders work to create a cluster in a region that does not have much industrial or supportive activity related to the future cluster. “Created” clusters are often associated with rapidly expanding knowledge-based sectors that are heavily dependent upon universities, entrepreneurship and skilled labor. But, as shown by LaFray et al in this book and other examples (see, for example, Akoorie for a good study of the New Zealand thoroughbred industry other sectors such as agriculture can be a focus of a cluster promotion program). In either case, the model is based on the notion that knowledge spills over into a local region if that region has the capacity to “absorb” the knowledge created (Breschi and Malerba 2001). Throughout the 1980s and into the 1990s many regions were aspired to create new “silicon valleys” to capture part of the information technology boom and “biotechnology clusters” became fashionable as the growth of pharmaceuticals, medical equipment, and related technologies attracted widespread attention and huge public research investment (particularly in the U.S.). The latest trend is nanotechnology that is receiving tremendous public sector investment such that some say it will define the early part of the twenty-first century. As explained by FromholdEisebith in this book, there are different approaches to cluster promotion with “public top-down” and “private bottom-up” being two major categories. A common strategy in the creation of clusters is to encourage increased agglomeration economies around a promising regional core of activities rather than to build an

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entirely new foundation from which activities can flourish. This could be a major local industry, a major federal center, or even a major university research institute. It is less common, for regions to invest efforts to create clusters in an emerging technological area that needs to overcome both technical (involving investments in R&D) and competitive market conditions before profitable returns are realized. Creating clusters is quite popular, but has a questionable record of success, particularly where the task is to transform an “old economy” (industrial plants, hierarchical, skill-based, etc.) into a “new economy” (lifelong learning, risk-taking, teaming, etc) (Cooke 2002, 131-156). Such regions include those that are tied to traditional manufacturing or extractive industries that competed on the basis on proximity to local mineral resources, transportation assets or available labor. As these regional economies suffered with global competition (particularly in the case of rock bottom wages from developing countries) or declines in the price of the local raw material, creating new a new economy around a clusters was an attractive way to revitalize and diversity the region. “Declining” manufacturing regions pose special challenges (Boschma and Lambooy 2000; Asheim and Isaken 2002). Most important, local leadership must redirect thinking away from the view that competing on the basis of low-cost manufacturing or attracting new manufacturing operations will return the area to previous greatness. Even if leaders accept that a new model of development based upon the creation and support of innovative clusters is a means for local revitalization and transformation, the challenge is great if the area does not have knowledge creation sources or entrepreneurs with experience and staying power to develop technology through R&D before it is ready for the marketplace. Likewise, such regions are likely to have sparse investment funds or venture companies who have experience dealing with the uncertainty of technological risk in addition to the expected risk for all start-up businesses. Despite these challenges, many regions have worked and continue to work on creating new economy clusters in areas in decline and areas lacking a tradition of entrepreneurship, sources of innovation, and financial capital. Success has been reported, for example, in Finland’s efforts in building clusters centered on technology parks that link university research, industry laboratories, and linked companies. For instance, the city of Oulu has been able to transition from its traditional forest products industry to a cluster focusing on telecommunications, software, sensors, optoelectronics and lasers (Cooke 2002, 169-169). Other declining areas such as Appalachia in the U. S. (Feser and Goldstein, 2002) or cities tied to “industrial age” economies in Europe of North America have embraced the cluster approach with some success. For instance, Lehigh Valley Pennsylvania has moved away from its dependence on steel to life sciences that are grounded in university research centers at Lehigh University and elsewhere (Paytas, Gradeck and Andrews 2004, 16-17). If innovation is central to successful long-lasting clusters, a major question is determining the source of continuous innovation. The likely source of new knowledge creation is from research and development activities (Audretsch 1998, 20).

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Universities are prime candidates to produce research and development (R&D), but other sources are industry R&D laboratories, federal R&D laboratories, or even “decentralized industrial creativity” within the collective capacity of small firms within a region (Bellandi 1994 from Asheim 1995). As noted by Maskell (2001), the availability of specialized knowledge and the creation of new knowledge may attract firms from elsewhere into the region, may attract entrepreneurs into the region, and may create new firms through spinoff activities. A problem is that by most measures, knowledge creation is highly concentrated in particular metropolitan areas or regions of advanced economies. A major source of innovation in the U.S. is R&D and this is highly concentrated with the top 10 states accounting for almost two-thirds of total R&D (California accounting for more than twenty percent of the total). Of the 625 institutions surveyed by the National Science Foundation, the 20 leading institutions account for almost one-third of the total academic R&D spending (Shackelford 2004). R&D for important industries are also highly concentrated. For instance, three states (California, Massachusetts and Texas) account for over half of the nation’s R&D in the computer and electronic products industry and two states (New Jersey and Pennsylvania) provide one-third of the nation’s R&D in the chemical sector (National Science Foundation 2006, Chapter 4). National Institutes of Health funding is also highly concentrated as eight states account for over 18 percent of the total NIH. Recognizing the linkage between technology clusters and R&D, technology parks have grown in popularity across the globe as a way to create sources of innovation to support clusters of activity. According to the Association of University Research Parks, in North America there are 2,900 organizations/companies located in parks that support jobs for over 235,000 people with total investment exceeding $9 billion (Dean 2005). An important component in cluster formation is entrepreneurship that is required to take new ideas forward and develop them locally so they are introduced into the marketplace (Feldman and Francis 2004, 131). Independent of clusters entrepreneurship and small and medium sized business have been shown to be a major factor in job creation in the United States (Birch, 1981; Roacha, 2004). Although research shows that entrepreneurship is positively associated with economic growth, but outstanding questions remain on the relationship between clusters and entrepreneurship and particularly how entrepreneurship is measured (Rocha 2004). But fostering entrepreneurship is generally a central feature in cluster promotion efforts. A popular way to support entrepreneurship is through business incubators that provide opportunities for collaborative research with universities and industry, assistance with business plan development, legal assistance, IT assistance, mentoring, information about opportunities, and opportunities for entrepreneurs to sharpen their argument as they approach various sources of financial capital. For the most part, however, academicians and practitioners consider entrepreneurship in the context of new firm formation and not entrepreneurship within firms, universities, or research institutes (see Fromhold-Eisebith’s contribution in this book) that can have a profound impact on regional development.

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It appears unlikely that public policy interest in clusters will diminish. What is likely to happen is that the term “clusters” will lose its fascination as communities and regions fail to achieve outcomes as development plans fall short of expectations. Regional concentrations of economic activity will continue to exist as they have for centuries, but new terminology will replace “clusters” and perhaps capture the enthusiasm of academicians and policy planners in the process. The space limitation of this brief introduction can not possibly do justice to the breadth and depth of theory and practice reported on clusters. However, a reasonable question one may ask is with so much written and spoken about clusters, why is the topic still of great academic interest? Despite the volumes written on the topic, many challenging questions still remain and some are addressed in this book. These include (1) the need for more work on clusters in sectors that are generally outside major technology-based industries (see contribution by LaFary et al in this book); (2) a need for a deeper understanding of the different types of entrepreneurship and how they are promoted by clusters and different forms of cluster promotion (see Fromhold-Eisebith in this book); (3) guidance on how to promote clusters in rural areas lacking sources of innovation; (4) more guidance on ways to change development trajectories in declining manufacturing cities toward innovation-based cluster formation; (4) models of building new clusters in emerging technological arenas to gain an national/international advantage; (5) ways to use the knowledge created by local universities in areas that are unlikely candidates to absorb this new knowledge; (6) competitiveness of clusters in an increasingly global village; and finally (7) a need for longitudinal studies that show with detailed data on new firm formation, job creation, wage rates, and development (not just growth) how clusters have developed and performed over time. These are: Atlanta (Construction Materials; Transportation and Logistics; and Business Services), Boston (Analytical Instruments; Education and Knowledge Creation; and Communications Equipment), Chicago (Communications Equipment; Processed Food; and Heavy Machinery), Denver (Leather and Sporting Goods; Oil and Gas; Aerospace Vehicles and Defense), Houston (Heavy Construction Services, Oil an Gas, Aerospace Vehicles and Defense), Los Angeles (Apparel, Building Fixtures, Equipment and Services, Entertainment), Pittsburgh (Construction Materials, Metal Manufacturing, Education and Knowledge Creation), Raleigh-Durham (Communications Equipment, Information Technology, Education and Knowledge Creation), San Diego (Leather and Sporting Goods, Power Generation, Education and Knowledge Creation), San Francisco area (Communications Equipment, Agricultural Products, Information Technology), Seattle area (Aerospace Vehicles and Defense, Fishing and Fishing Products, Analytical Instruments), Wichita (Aerospace Vehicles and Defense, Heavy Machinery, Oil and Gas).

1

2

The 14 areas identified by the Brookings Institution study does not overlap with those of Porter either on the cities mentioned or their major product specialization. Brookings identified the following metropolitan areas: Atlanta (databases), Austin

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(semiconductors, computers, SME), Boston (computers, medical devices, software), Denver (data storage, telecommunications equipment and software), Minneapolis-St. Paul (computers, peripherals, medical devices), Phoenix (semiconductors), Portland (semiconductors, display technology, SME, EDA, wafers), Raleigh-Durham (computers, databases), Sacramento (computers, semiconductors), Salt Lake City (software, medical devices), San Diego (communications equipment), San Jose (semiconductors, computers, communications equipment, SME, EDA, data storage), Seattle (software), and Washington, D.C. (databases, internet services).

Sources Akoorie, M. E. M, 2000. Organizational Clusters in Resource Based Industry: Empirical Evidence from New Zealand. In Green, M. & R.B. McNaughton (eds.) Networks and Proximity, 133-164. Hampshire: Ashgate Publishing Ltd. Asheim, B. 1995. Industrial districts as ‘learning regions: A Condition for Prosperity. Paper presented at the conference of the IGU Commission on “interdependent and uneven development: Global-local perspectives.” Seoul, S. Korea. Asheim, B. T. & Isaksen, A. 2002. Regional Innovation Systems: The Integration of Local ‘Sticky’ and Global ‘Ubiquitous’ Knowledge. Journal of Technology Transfer 27: 77-86. Audretsch, D. B. 1998. Agglomeration and the Location of Innovative Activity. Oxford Review of Economic Policy 14: 18-29. Birch, D. A. 1981. Who Creates Jobs? The Public Interest 3-41. Boschma, R. & Lambooy, J. 2000. The Prospects of an Adjustment Policy Based on Collective Learning in Old Industrial Regions. Geojournal 49: 391-399. Breschi, S. & Franco M. 2001. The Geography of Innovation and Economic Clustering: Some Introductory Comments. Industrial and Corporate Change 10: 817-833. Coffey, W. J. & Bailly, A.S. 1991. Producer Services and Flexible Production: An Exploratory Analysis. Growth and Change 22: 95-117. Cooke, P. 2002. Knowledge Economies: Clusters, Learning and Cooperative Advantage. London: Routledge. Cortright, J. & Mayer, H. 2001. High Technology Specialization: A Comparison of High Technology Centers. Washington, D.C.: The Brookings Institution. Dean, W. 2005. What is a Research Park? Paper presented at the 2005 Annual Conference of the Association of University Research Parks, Raleigh, NC. Feser, E., Goldstein, H., Renski, H. & Renault, C., 2002. Regional Technology Assets and Opportunities: The Geographic Clustering of High-Tech Industry, Science and Innovation in Appalachia. Washington, D.C.: Appalachian Regional Commission. Fountain, J. E. 1998. Social Capital: A Key Enabler of Innovation. In L. Branscomb and J. H. Keller, eds. Investing in Innovation. Cambridge: The MIT Press: 85-111. Maskell, P., 2001. Toward a Knowledge-based Theory of the Geographical Cluster. Industrial and Corporate Change 10: 921-941. Martin, R. & Sunley, P. 2003. Deconstructing Clusters: Chaotic Concept or Policy Panacea? Journal of Economic Geography 3:5-35.

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Marshall, A. 1891. The Principles of Economics. London: Macmillan. National Science Foundation. 2006. Science and Engineering Indicators. Arlington, VA: The National Science Foundation. Paytas, J. Gradeck, R. & Andrews, L. 2004. Universities and the Development of Clusters. Washington, D.C.: U.S. Economic Development Administration. Piore, M. & C. Sabel. 1984. The Second Industrial Divide: Possibilities for Prosperity. New York: Basic Books. Porter, M. 1990. The Competitive Advantage of Nations. New York: Basic Books. Porter, M. 2002. “Regional Foundations of Competitiveness,” Future Competitiveness of Wales: Innovation, Entrepreneurship, and Technological Change. Rocha, H. O. 2004. Entrepreneurship and Development: The Role of Clusters. Small Business Economics 23: 363-400. Saxenian, A. 1994. Regional Advantage: Culture and Competition in Silicon Valley and Route 128. Cambridge: The MIT Press. Scott, A. J. 1988. Metropolis: From the Division of Labor to Urban Form. Berkeley and Los Angeles: The University of California Press. Scott, A. J. & E. C. Kwok. 1989. Inter-Firm Subcontracting and Locational Agglomeration: A Case Study of the Printed Circuits Industry in Southern California. Regional Studies. 23: 405-416. Strempel, D. 2005. Tech Cluster seeks national identity. Fairfield County Business Journal (week of July 4th).

3 Which Mode of (CLUSTER) Promotion for which aspect of Entrepreneurship? A differentiating view on institutional support of automotive clusters M. Fromhold-Eisebith, Dept. of Geography & Geology, University of Salzburg, Salzburg, Austria

3.1 Abstract Entrepreneurship is a major driver of regional economic development and restructuring. For analytical and practical promotion purposes, different facets of the notion should be identified. This chapter distinguishes between new firm formation entrepreneurship and innovation based growth dynamics of existing firms. It is argued that both entrepreneurship variants differ with regard to regional support requirements, also reflecting a different role of globalization. A connection is made with the currently popular practice of cluster promotion that regards agglomerations of value chain related firms as a suitable seedbed for entrepreneurial dynamics due to collaboration and other advantages. Cluster initiatives may be institutionalized in various ways, and it is reasoned that, depending on the institutional mode, either the one or the other variant of entrepreneurship is especially supported. This is discussed with respect to the distinction between publicly dominated schemes (like official cluster policies) and efforts that are privately initiated, financed and governed by firms (like thematic regional industry association). Drawing on insights gained from two European automotive cluster initiatives (a public one in Austria and a private one in Germany) it is shown how institutional differences create different support settings for entrepreneurship. Accordingly, public approaches rather favor new firm formation whereas private initiatives better support entrepreneurial dynamics in existing firms, which is relevant for policies.

3.2 Introduction Entrepreneurship creates crucial opportunities for economic growth and renewal by newly combining production factors and know-how, potentially inciting innovation (Busenitz et al. 2003; Shane 2003; Reynolds et al. 2005). Policy relevance especially emerges from implications of globalization: In high-wage countries the out migration of firms and workplaces towards cheaper locations has started to 13 J. Gatrell and N. Reid (eds.), Enterprising Worlds, 13–28. © 2006 Springer.

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hollow out the (regional) economic base, rendering the local activation of entrepreneurship an essential compensation strategy. The question is how to effectively support desired dynamics (Sternberg 2003, 2005; Gilbert et al. 2004; Audretsch et al. 2005). Recent research emphasizes the role of entrepreneurship for regional development and, likewise, its dependence from regional contexts (Nijkamp and Stough 2002; de Groot et al. 2004; OECD 2005). Hence, promotion should target factors like localization economies, social systemic frameworks and other locally bound assets (Wagner and Sternberg 2004). Generally, entrepreneurs tend to concentrate in some places (Sternberg et al. 2004; Sternberg and Litzenberger 2004), apart from international differences (identified by the Global Entrepreneurship Monitor GEM; see Reynolds et al. 2005; Sternberg and Wennekers 2005). As certain localities offer specifically favorable settings, scholars have started to combine issues of entrepreneurship with the cluster concept (Cooper and Folta 2000; Rocha 2004; Rocha and Sternberg 2005). Commonly understood as spatial agglomerations of value chain related firms and other organizations that derive economic advantages from co-location and collaboration (Martin and Sunley 2003, 10-13), clusters apparently provide a conducive seedbed for entrepreneurship. Empirical studies indicate positive correlations (Sternberg and Litzenberger 2004; Rocha and Sternberg 2005), yet causal relationships remain to be further explored. Three major research shortcomings are tackled in this chapter: First, studies on clustering and entrepreneurship have neglected to take a differentiated view on the latter (as conceded by Rocha and Sternberg 2005, 289). Most research only addresses the founding of new firms, although entrepreneurship also encompasses innovation-based dynamics of existing firms (Reynolds et al. 2004). Second, work has disregarded the variation of clusters according to sector, time phase and institutional specifities, which probably influence entrepreneurial impacts. The chapter thus follows recommendations to ‘focus on different types of clusters’ in this respect (Rocha and Sternberg 2005, 289). Third, entrepreneurship support has insufficiently been linked with cluster promotion, both from a conceptional and empirical perspective. Suggestions for entrepreneurship policies have just vaguely and not systemically been connected with ideas on cluster measures (Sternberg 2003). And literature on cluster initiatives or policies hardly explicitly addresses issues of entrepreneurship (OECD 2001; Nolan 2002; Raines 2002a; Sölvell et al. 2003; Andersson et al. 2004). The chapter distinguishes two variants of entrepreneurship and discusses which type of cluster promotion is more supportive in the one or the other case, juxtaposing two institutional modes that significantly differ with regard to entrepreneurial effects: public cluster policies versus private initiatives (Fromhold-Eisebith and Eisebith 2005). Theoretical reasoning is substantiated by project results gained from empirically investigating one public and one private cluster initiative in

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Europe, both referring to automotive supply sectors, which may control for sector specifities.1

3.3 Differentiating variants of entrepreneurship The notion of entrepreneurship is associated with a range of issues and various definitions (for overviews see Ripsas 1998; Praag 1999; Busenitz et al. 2003; Shane 2003). Accordingly, entrepreneurs are economic agents who are ready to take up risks and uncertainty, are innovators, industrial leaders, decision makers, managers, organizers and coordinators, employers of factors of production, arbitrageurs, alert discoverers, suppliers of financial capital, and/or allocators of resources among alternative uses. Apart from classical economics, new approaches emphasize social systemic, contextual, psychological and behavioral facets of entrepreneurs, advocating interdisciplinary theorizing (Ripsas 1998; Shane 2003). This offers scope for considering spatial contexts as regions seem to be the arena where major explanatory factors of entrepreneurship are co-located (Sternberg et al. 2004; Wagner and Sternberg 2004). Especially (social) networking requirements can be highlighted, which transform over time (Chell and Baines 2000; Lechner and Dowling 2003). Partners are needed for supporting the establishment of new firms (network founding hypothesis) and even more for sustaining success of enterprises (network success hypothesis) (Brüderl and Preisendörfer 1998). There is no common theory of entrepreneurship due to its manifold qualities, which allows to just broadly conceptualize it as ‘the discovery of opportunities and the subsequent creation of new economic activity’ (Rocha and Sternberg 2005, 269); or, even more simply, ‘entrepreneurship is about creating something new’ (Reynolds et al 2005, 208). It is manifested in several forms, foremost by the formation of new small firms. But not every such venture indicates a positive effort, triggered by opportunity. Labeled necessity entrepreneurship, it may also emerge from a situation of despair and lack of other options which provides less favorable prospects for success and development impacts (Sternberg and Wennekers 2005; Reynolds et al. 2005). Additionally, entrepreneurship is also expressed in outstanding growth dynamics and innovation-based success of longer existing companies or parts of them, hence an attribute of larger corporations (Rocha and Sternberg 2005). How to exactly draw the line between both variants is a matter of debate and can not be discussed here (criterion of age, of product life cycles?). Considering them as opposite ends of a continuum may suffice to use the distinction for analysis. 1

The project, financially supported by the ‘Stiftungs- und Förderungsgesellschaft der Universität Salzburg’, investigated the publicly established AutomotiveCluster(AC)Styria initiative, Austria, and the private industry association car/ competence center automotive region Aachen/ Euregio Maas-Rhein e.V., Germany. Special thanks go to my research partner Günter Eisebith.

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Table 1. External support requirements associated with the new firm formation and dynamic growth variants of entrepreneurship Aspect Infrastructure demand Relationships to universities/ public R&D

Requirements associated with new firm formation Basic start-up infrastructure (e.g. technology centre), additional to other structural features (transport, public amenities a.o.) Basic spin-off idea; sourcing of basic qualified personnel, including student workers; initial technical support (equipment) and consulting

Relationships to suppliers of goods/services

Building up suitable dyadic relationships to reliable suppliers ‘from scratch’ based on social contacts; ‘try and error’ processes shaping the network towards functional efficiency

Relationships to finance providers

Provision of sufficient amounts of founding, venture or risk capital

Links to markets

Support to build up a first customer base; help in establishing a reputation for initial marketing purposes

Impact of globalization

Given framework that forces firms to reactively find their niche of competitiveness Source: Depiction by the author

Requirements associated with dynamic growth of existing firms Overall structural features (transport, public amenities, a.o.), not changing much by virtue of added activities (Informal) consulting regarding additional know-how requirements; sourcing of additional, specifically qualified personnel for additional tasks Transformation and modification of a pre-existing approved functional network of suppliers and co-opeting partners, due to specifities of added activities; ‘snowball’ mechanisms of extension Either no additional capital necessary or provision of capital just to support new endeavors in the firm, easy accessible Support to enlarge the market by gaining additional customers; evolution of existing reputation towards new horizons Decisive challenge that makes firms act in order to stay competitive

Both types, new business formation and entrepreneurial dynamics in incumbent firms, can induce major local development impulses. Which one should be favored depends on regional preconditions and objectives. New start-ups may be prioritized in regions that are marked by a lack of businesses and/or a dominance of ‘old industry’ sectors, calling for fundamental structural renewal and diversification. Revitalization of mature firms is required where established companies face competitive challenges from globalization which force them to evolve in leapfrogging ways in order to stay ahead of followers. These differences should be regarded when conceptualizing promotion strategies. Recent research on entrepreneurship has not equally attended to the two variants but focused on new firm formation, especially in the cluster context (Andersson et al. 2004; de Groot et al. 2004; Sternberg and Litzenberger 2004; Reynolds et al. 2005; Rocha and Sternberg 2005). This manifestation of entrepreneurship is easier to statistically identify than the other one (Reynolds et al. 2004; Sternberg et al. 2004). Policy implications of

3 Which Mode of (CLUSTER) Promotion for which aspect of Entreprenuership? 17

that distinction have hardly been solicited, and entrepreneurship support is only seen as being directed towards the promotion of new companies (Gilbert et al. 2004). Differences between new firm entrepreneurship and innovative growth dynamics of existing firms matter with respect to (cluster-oriented) promotion. The two variants vary with regard to internal processes and, accordingly, to support requirements external to the firm: setting up a new business involves other qualities of relationships than organizing an innovative shift in an incumbent company. Respective issues could be addressed by the local institutional environment, possibly via an intentional (policy) strategy. The entrepreneurship variants are assumed to differ mainly in terms of infrastructure demand, links to universities/R&D, suppliers, finance providers, markets, and impacts of globalization (table 1). Young firms have more fundamental infrastructure needs and must establish new functional relationships to partners that help them find their niche in the global economy. Mature enterprises rather extend their scope emerging from existing operations without additional infrastructure requests. They rely on established, socially embedded networks, which must be adjusted to additional or changed activities in response to global challenges. These assumptions partly reflect empirical findings: Brüderl and Preisendörfer (1998) show that social networks are more important for the continuing success than for the formation phase of firms. Lechner and Dowling (2003) prove that, over time, the relative importance of reputational networks for firms decreases and of co-opetition networks increases; relational capability evolves from egocentric to sociocentric networking. Accounting for such distinctions, the two types of entrepreneurship require different promotion approaches.

3.4 Differentiating types of cluster promotion As entrepreneurship assumingly profits from systemic advantages of industrial clustering (Rocha 2004; Sternberg and Litzenberger 2004; Rocha and Sternberg 2005), cluster initiatives should explicitly attend to entrepreneurial support, and vice versa. Before logically connecting the two strategic topics an explanation is given regarding what cluster promotion is and which institutional modes may be distinguished. Although the cluster notion and related policies are subject to fundamental criticism (Martin and Sunley 2003; Benneworth et al. 2003; Taylor in this book), the idea, popularized by Porter (1998, 2000a), has become a widely used guideline for supporting competitive, innovative regional and national economies (OECD 2001; Enright 2003; Sölvell et al. 2003; Andersson et al. 2004;). There is, nevertheless, no overarching strategic concept of cluster promotion. Approaches depend on place- and industry-specific conditions, economic history and structure, institutional and infrastructure endowments, cluster cycle phases, and national/regional

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(political) cultures (OECD 2001; Raines 2001 and 2002a; EU Commission 2002; Newlands 2003; Andersson et al. 2004). Still, it may be possible to depict ‘typical’ common features. Basically, objectives of cluster promotion draw on the conception of a cluster as a (subnational) regional agglomeration of value chain related firms and other organizations (like universities, R&D centers, public agencies) which derive economic advantages from co-location and collaboration (Martin and Sunley 2003, 10-13). Cluster advantages, on the one hand, relate to localization externalities, like specialized labor markets and infrastructure (Gordon and McCann 2000; Cooke 2002; Malmberg and Maskell 2002; Enright 2003). On the other hand, clusters favor interactive learning and knowledge creation through socially embedded, trustful linkages of involved actors (Maskell 2001; Cooke 2002; Malmberg and Maskell 2002; Wolfe and Gertler 2004). This calls for an integrated approach that combines various issues of industrial development (Nauwelaers 2001; Raines 2002b; Benneworth et al. 2003). Accordingly, cluster promotion may be defined as any coordinated set of measures that intentionally supports the development of an industrial agglomeration towards ideal features of a cluster in terms of a specialized, collectively innovative set of sector related industries and other organizations (Fromhold-Eisebith and Eisebith 2005, 1252). Implemented promotion strategies widely vary, but there are common characteristics (summarized from Boekholt and Thuriaux 1999; Cooke 2002; EU Commission 2002; Raines 2002a; Sölvell et al. 2003; Andersson et al. 2004): Usually, support builds upon and activates pre-existing potential of ‘proto cluster’ structures, notably a regional concentration of suitable actors, trying to strengthen that base. Measures facilitate the firms’ access to useful assets and include: 1. Fostering information exchange and collaboration between firms in order to encourage the pooling of resources, quality improvements and collective identities; 2. Establishing innovation-enhancing links of firms to regional universities and R&D centers that support the commercialization of research results, technology transfer, and the acquisition of highly qualified staff; 3.Actively marketing the specific industrial strengths and raising awareness inside and outside the region; 4. Locally providing specialized services and advice to firms (finance, marketing, design); and 5. Attracting selected industrial investors in order to fill identified gaps and weaknesses in local production systems; this may also include the set-up of additional infrastructure. Overall, cluster promotion focuses on ‚soft’ activities of contact facilitation, community building, moderation and consulting that address groups of firms in an integrated way and aim at improving regional systemic interaction (Boekholt and Thuriaux 1999; Nauwelaers 2001; Andersson et al. 2004). This requires participative strategies that involve public and private actors; several activities have to be combined. There is also the dynamic dimension of a ‘cluster policy cycle’ (Ben-

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neworth and Charles 2001; European Commission 2002; Sölvell et al. 2003). Often, a first diagnostic phase serves to empirically analyze cluster potential and requirements, followed by a prescriptive phase of policy design and an implementation phase (Raines 2002b). Despite of such commonalities, cluster promotion may be institutionalized in quite different ways. On the one hand, there exists a wide range of policy schemes that are imposed upon firms in a rather top-down way (Boekholt and Thuriaux 1999; Roelandt and den Hertog 1999; Porter 2000b; EU Commission 2002; Nolan 2002; Raines 2002a; Benneworth et al. 2003; Andersson et al. 2004). On the other hand, many coordinated efforts are mainly instigated, funded and governed bottom-up by companies, addressing the same set of objectives (Sölvell et al. 2003), like regional industry associations or competence networks. Thus, cluster support is not only a public domain but also emanates from local industrial communities themselves. This distinction between public (top-down) and private (bottom-up) cluster promotion affects patterns of effects because each institutional mode creates a particular governance setting, influences the behavior of cluster members, their interaction, rules of conduct, collective norms and conventions (as outlined in Fromhold-Eisebith and Eisebith 2005). The debate connects to the interesting issue whether cluster advantages are best supported by government agency at all (Formica 2003; Guinet 2003; Martin and Sunley 2003). Often, however, public and private schemes can not clearly be distinguished as they mostly combine both kinds of actors integrating their interests (Nauwelaers 2001; Raines 2001 and 2002a; EU Commission 2002; Rosenfeld 2003; Sölvell et al. 2003; Wolfe and Gertler 2004). Still, the distinction can be drawn according to which actors dominates finance and/or decision making (Fromhold-Eisebith and Eisebith 2005). How do the differences of public and private modes of cluster promotion affect the two variants of entrepreneurship distinguished before?

3.5 Impacts of public versus private cluster promotion on entrepreneurship The following sections combine theoretical reasoning with empirical findings from a recent investigation of differing patterns of effects of one top-down public and one bottom-up private automotive cluster initiative, ACStyria in Austria and car e.V. in Germany (Fromhold-Eisebith and Eisebith 2005; see also footnote 1). In both localities, representatives of 17-19 cluster member firms and 5-7 other actors (colleges/universities, chambers, support agencies) were interviewed in 2004/05. The regions are comparable in terms of population size (1.2 mio.), size of the major city (250,000 inhabitants), aspects of infrastructure endowment (technical universities) and other development features. The juxtaposed cluster initiatives, however, differ in terms of their (mainly) public or private nature and

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structural characteristics (number of members, composition, organization), which offers interesting insights. The Styrian (public) scheme, established in 1996, has gained major attention (SFG 2001; Tödtling 2001; Hartmann 2002; Sölvell et al. 2003, 66-69; Andersson et al. 2004, 190-193; Tödtling and Trippl 2004), in contrast to the German (private) one, established in 2001. Table 2. Institutional differences of public top-down and private bottom-up modes of cluster promotion Domain Institutional genesis and composition of the actor group

Structures of finance and decision making

Preferred target areas and support measures

Induced clustering effects of increased innovativeness and competitiveness

Qualities of public top-down approaches (e.g. official ‘cluster policies’) Emergence from wider public interest with regional policy objectives; good analytical and conceptual base of the initiative; inclusion of a wide range of non-networked actors within regional and sector group boundaries Public funding requires a wellprepared effort; possible attraction of additional external funds; stable financial base for a preset time period; centrally controlled by public authorities Strong strategic orientation regarding regional development; diverse set of measures enlarging the contact base, establishing infrastructure, enriching the cluster by attracting investors and newly established firms Good impact primarily on (material) agglomeration economies and on regional development as a whole; fostering of a wider scope of new contacts including a range of coordinated activities; creating possibilities of broader long term effects on innovativeness, competitiveness and restructuring in the entire region

Qualities of private bottom-up approaches (e.g. regional thematic industry associations) Emergence from perceived industrial needs; selective inclusion of ‘useful’ actors based on pre-existing contacts; network shaped according to suitable functional relationships, not formal boundaries, regarding regional and sectoral reach Private funding provides fast, flexible/volatile finance with longer term perspective; high direct involvement of members in decision making; good motivation and active participation of members Focus on determinants of success of included firms/sectors; measures effectuate functional collaborations relying on good cohesion of members; high programmatic and institutional flexibility and variability Good impact primarily on (immaterial) collective learning and socially embedded collaboration; fostering of deeper functional and innovation-related collaboration; short and longer term direct effects on innovativeness and competitiveness of the set of included firms

Source: Depiction by the author Both cluster initiatives address automotive supply firms, which possibly allows to discern differences associated with the public versus private dichotomy, controlling for the influence of sector specifities. Such specifities mark various cluster

3 Which Mode of (CLUSTER) Promotion for which aspect of Entreprenuership? 21

features like networking, structures of competition, demand for skills, for external partners, and the importance of policy and infrastructure frameworks (Andersson et al. 2004, 106f). Automotive sectors display specific organizational changes, a vertical disintegration of firms at different hierarchical ‘tiers’ of production (Hudson and Schamp 1995); and competitive pressures raise the importance of innovation, qualification and systemic collaboration of co-locating producers, suppliers and service providers (Schamp et al. 2004). Entrepreneurship is sector specific, too, as start-up opportunities, for instance, mainly exist in the provision of knowhow intensive services. In general, the distinction between public top-down and private bottom-up modes of cluster promotion affects several institutional features (table 2), influences ways of governance, rules of interaction, norms and cultures of collaboration and learning (Fromhold-Eisebith and Eisebith 2005). The next sections point out major implications for entrepreneurship. 3.5.1 Public top-down cluster promotion and entrepreneurship Public cluster support offers advantages especially for start-up entrepreneurship and can easily be combined with respective political goals. Emerging from wider interests, initiatives are designed to fulfill overarching development objectives (table 2), and for many years fostering start-ups has been particularly favored by (regional) governments (Gilbert et al. 2004). Approaches can synergistically be integrated into existing administrative structures. Yet, election- or party-related interests may bear negative impacts: Authorities, eager to create numerous new firms and glossy statistics for policy marketing reasons, neglect issues of quality and sustainability. A strategy may even be implemented just for the sake of publicity and without a real need for cluster support, which hampers success (Formica 2003). Strengths in actor inclusion add to favorable conditions for firm formation. Public schemes, as illustrated by ACStyria and its over 190 members, address a wide range of – often hitherto isolated – firms/organizations in target sectors. This expansive networking attitude corresponds to the contact requirements of new enterprises, easing their task to find business partners (table 1). They can choose from a large number of potentials which offers ‘trial and error’ options. Useful contacts, however, can only materialize when the cluster management sets the right scope of included sectors. If that scope is too small, systemic advantages will become less probable. Public promotion usually outlines the spatial reach of a cluster according to administrative boundaries (province, district) because of funding regulations. This may not comply with the ideal functional region of the cluster, and networking could be forced into non-optimal shapes. Regarding structures of finance, public cluster promotion typically relies on wellplanned efforts and sizable budgets (table 2). The venture capital needs of new enterprises (Table 1) can be tackled, additionally supported by good public contacts

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to various sources of finance. ACStyria, for instance, has acquired external (EU) funding in combination with domestic investments (SFG 2001). But public finance is usually only guaranteed for a thrust period of about three years, and the transformation into a privately (co-)funded initiative causes some rupture (as in the case of ACStyria), which could also trouble new firms. Decision structures leave little space for constructive direct participation by most member firms, which suppresses their motivation to really be active in the cluster. Often cultural barriers and a lack of trust mark the interaction of public organizers and private actors in cluster promotion (Nauwelaers 2001; Newlands 2003). This hampers positive influences especially on entrepreneurship in mature, self-confident companies. Getting to operational features, public cluster policies have a strong strategic focus and are well embedded into wider programs of locality development (Tödtling 2001; Sölvell et al. 2003). By linking different clusters in one region and building bridges to same sector initiatives in other parts of the country, they improve the base for new enterprises and networking. In the Austrian case, the automotive cluster is connected with Styrian schemes for other sectors (Tödtling and Trippl 2004) and with public automotive clusters in other states (‘triple a’; http://www.aaa.or.at/). Public programs often apply a broad, diversified set of measures including infrastructure projects like setting up education/research organizations or start-up centers. Activities of various administrative agencies can be connected in complementary ways and provide a suitable seedbed especially for new firm formation. Cluster effects like increased innovativeness, competitiveness and growth could indicate entrepreneurial achievements. To which extent do public initiatives actually promote such signs of entrepreneurship? ACStyria has in fact noticeably improved major externalities by an integrated focus on creating special infrastructure, supporting labor qualification and attracting new cluster firms, also drawing on the positive signal value of the renown scheme. Incited new contacts between clustered actors may pave the way for concrete collaboration to evolve later on. In particular young enterprises assumingly profit from offered infrastructure, new contact opportunities, and the reputation building and marketing value of the initiative. Looking at the facts, however, ACStyria has hardly created new automotive start-ups, yet acquired remarkable exogenous investments. This partly corroborates assumptions that public cluster policies encourage firm formation entrepreneurship. Contrariwise, the initiative has rarely been conducive to innovation-based entrepreneurship in mature firms. Many interviewed automotive suppliers are not driven by innovativeness and have hardly received impulses from their cluster membership. Apparently, public cluster institutions favor the creation of first hand contacts of a social rather than functional nature, which hardly triggers upgrading dynamics indicative of the second kind of entrepreneurship.

3 Which Mode of (CLUSTER) Promotion for which aspect of Entreprenuership? 23

3.5.2 Private bottom-up cluster promotion and entrepreneurship Recently, critics have contested that public agency can successfully encourage clustering (Enright 2003; Formica 2003; Guinet 2003). Private initiatives primarily funded and governed by companies, as the actual cluster agents, provide a viable alternative. Anyway, substantial shares of recorded cluster institutions have been (co-)initiated or (co-)financed by private actors (Sölvell et al. 2003, 10). These efforts address virtually the same objectives as public schemes, but a different institutional setting entails different implications and effects (table 2; Fromhold-Eisebith and Eisebith 2005). Private cluster initiatives emerge bottom-up from perceived real needs of a group of firms, which positively affects motivation and commitment of members, also stimulating entrepreneurial objectives. Right from the start a larger number of industrial actors is involved in conceptualizing and implementing the effort, in automotive sectors, for instance, producers, service providers, R&D firms and education/research organizations (as exemplified by car e.V.). Member composition and boundaries of participation tend to be less fixated in territorial and sector terms. Memberships evolve gradually by the entry of additional actors who are really interested in participating and expect to profit. The institutionalized cluster rather assumes a functional shape that reaches across sector and administrative borders, potentially benefiting its dynamics (Martin and Sunley 2003). Its form can better correspond with the ideal defined ‘by the distance and time that people are willing to travel for employment and that employees and owners of companies consider reasonable for meeting and networking’ (Rosenfeld 2003, 361). Private initiatives are also more open to extra-regional and international business contacts, which supports the firms’ innovativeness in a global-local context (Nauwelaers 2001; EU Commission 2002) and augments creative potential to be exploited via growth dynamics entrepreneurship. The attitude to mainly include ‘useful’ new actors, often based on pre-existing contacts, instigates collective efficiency and co-opetive relationships that inspire innovativeness (table 1). The resulting ‘club’ character (evident among the 60 members of car e.V.), however, may exclude promising actors. Private initiatives display a good member motivation due to participative structures of finance and decision making (table 2). In schemes like car e.V., substantial shares of actors are involved in planning activities or designing measures, trying to derive corporate advantages from that. This bolsters their identification with, and integration into the initiative, enhancing entrepreneurial effects. Funds, based on fees, increase correlated to memberships, but tend to be kept lean and require efficient spending, attentively observed by the members. The financial flexibility, however, bears dangers of volatility since the exit of members may unexpectedly reduce funds and put planned activities at risk.

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Regarding the strategic focus and measures, private initiatives are mainly driven by egotistic corporate interests. They focus on improving the regional framework of firm development, rather than strengthening the regional economy as such. Accordingly, entrepreneurship in the firm, in terms of internal dynamics, is favored against entrepreneurship in the region, in terms of new start-ups. Actors prefer measures that effectuate functional market-, cost- and innovation-oriented collaborations. They aim at modifying and enriching their networks as is required by mature enterprises (table 1). This includes connections to similar private or public cluster initiatives in other regions. There is, however, less interest to foster new firm formation or attract investors as these could be competitors: start-ups are not explicitly supported. Investment promotion and the set-up of infrastructure is left to other (public) agencies. The institutional features are reflected in outcomes like increased innovativeness and competitiveness of firms (table 2), indicating growth dynamics entrepreneurship. Private initiatives, instead of improving the material base conducive to firm formation, rather influence immaterial, systemic cluster qualities. Functional creative interaction of firms and other organizations is particularly promoted, as required for growth dynamics entrepreneurship (table 1). This is to some extent corroborated by the German case of car e.V.. The initiative especially fosters members’ motivation, participation, and the emergence of trust, sense of belonging and collaborative attitudes, which helps actors to join forces. Many firms have gained some value addition from the initiative already after a short time, like impulses on corporate innovativeness and other aspects of competitiveness (Fromhold-Eisebith and Eisebith 2005). The growth dynamic variant of entrepreneurship is particularly stimulated, whereas impacts on new firm formation entrepreneurship are practically absent.

3.6 Conclusions This chapter explores links between the topics of entrepreneurship support and cluster promotion, entertaining a differentiating view. The reasoning, first, suggests that issues of entrepreneurship should play a more important role in cluster strategies (confirming Sternberg 2003 and 2005) and vice versa, due to related regional systemic requirements. Second, it is argued that the understanding and proactive promotion of entrepreneurship should extend beyond new business formation, since crucial potential for regional development is also represented by innovation based growth dynamics of entrepreneurial incumbent firms. Third and foremost, the chapter puts forward that public (top-down) and private (bottom-up) modes of cluster promotion, marked by organizational and operational distinctions, differ in supporting those entrepreneurship variants: The material and infrastructure focus, new networking attitude and high marketing value of public cluster schemes create a good seedbed particularly for new start-ups. The good

3 Which Mode of (CLUSTER) Promotion for which aspect of Entreprenuership? 25

motivation and network effectuation yielded by private initiatives, in contrast, rather support entrepreneurial endeavors in more mature firms. This issue has mainly been discussed conceptually, while the attempt to empirically underpin assumptions by comparing two automotive cluster initiatives, a publicly established (Austrian ACStyria) and a private one (German car e.V.), has only been halfway convincing. The unexpected lack of start-up entrepreneurship also in the first case may, on the one hand, be explained by sector specifities: Currently options for new automotive firm formation are quite low in Austria or Germany because of an industrial shift towards locations in Eastern Europe and Asia. Yet, the pressure on automobile production systems to remain innovative and competitive especially encourages entrepreneurial dynamics in existing firms. On the other hand, insufficient empirical evidence may indicate that entrepreneurship has not especially been addressed by both of the cluster initiatives, hence not leading to remarkable outcomes. If this is done more consciously in the future, bearing the discussed variation of entrepreneurship in mind, results will probably improve. Eventually, it must be noted that clustering and entrepreneurship do not necessarily only represent a constructive coupling. Research also hints at cluster disadvantages, like pressured specialized local labor markets, high turnover rates and high costs, which hamper entrepreneurship (Cooper and Folta 2000). We definitely need to learn more about how cluster dynamics and variants of entrepreneurship actually interact, beyond statistical correlations, in order to get to viable policy recommendations.

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3 Which Mode of (CLUSTER) Promotion for which aspect of Entreprenuership? 27 Nauwelaers, C. 2001. Path-Dependency and the Role of Institutions in Cluster Policy Generation. In Cluster Policies – Cluster Development? ed. Mariussen, A. 93-107. Stockholm: Nordregio. Newlands, D. 2003. Competition and Cooperation in Industrial Clusters: The Implication for Public Policy. European Planning Studies, 11: 521-532. Nijkamp, P, and Stough, R. R., 2002, Editorial introduction: Special issue on Entrepreneurship and Regional Economic Development. The Annals of Regional Science, 36, 369371. Nolan, A. 2002. Public Policy on Enterprise Clusters and Networks, In Small Enterprise Development in South-East Europe: Policies for Sustainable Growth, eds. Bartlett, W., M. Bateman, M. Vehovec. 167-192. Boston: Kluwer Academic Publishers. OECD. 2001, Innovative Clusters: Drivers of National Innovation Systems. Paris: OECD. ———. 2005, Entrepreneurship: A Catalyst for Urban Regeneration. Paris: OECD. Porter, M. 1998. Clusters and the new economics of competitiveness. Harvard Business Review, December: 77-90. ———. 2000a, Locations, clusters and Company Strategy. In Oxford Handbook of Economic Geography, eds. Clark, G. L., M. P. Feldmann, M. S. Gertler. 253-274. Oxford: Oxford University Press. ———. 2000b, Clusters and government policy. Wirtschaftspolitische Blätter 47: 144-154. van Praag, C. M. 1999. Some Classic Views on Entrepreneurship. De Economist 147 (3): 311-335. Raines, P., ed. 2002a. Cluster Development and Policy. Aldershot: Ashgate. ———. 2001, The Cluster Approach and the Dynamics of Regional Policy-Making. Regional and Industrial Policy Research Paper No. 47. European Policies Research Centre. Glasgow: University of Strathclyde. ———. 2002b, Cluster policy – does it exist? In Cluster Development and Policy, ed. Raines, P. 21-33. Aldershot: Ashgate. Reynolds, P., N. Bosma, E. Autio, et al. 2005. Global Entrepreneurship Monitor: Data Collection Design and Implementation 1998-2003. Small Business Economics 24 (3): 205231. Reynolds, P., W. D. Bygrave, E. Autio, et al. 2004. Global Entrepreneurship Monitor 2003. Executive Report. Erwing and London: Babson College and London Business School, http://www.gemconsortium.org/download/1131360419062/ReplacementFINALExecut iveReport.pdf (last accessed 7 November 2005). Ripsas, S. 1998. Towards an Interdisciplinary Theory of Entrepreneurship. Small Business Economics 10: 103-115. Rocha, H. 2004. Entrepreneurship and Development: The Role of Clusters. A Literature Review. Small Business Economics 23 (5): 363-400. Rocha, H., and R. Sternberg. 2005. Entrepreneurship: The Role of Clusters. Theoretical Perspectives and Empirical Evidence from Germany. Small Business Economics 24 (3): 267-292. Roelandt, T. J. A., and P. den Hertog. 1999. Cluster Analysis and Cluster-Based Policy Making in OECD Countries. An Introduction to the Theme. In Boosting Innovation: The Cluster Approach, ed. OECD. 9-23. Paris: OECD. Rosenfeld, S. A. 2003. Expanding Opportunities: Cluster Strategies That Reach More People and More Places. European Planning Studies 11: 359-377.

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Schamp, E. W., B. Rentmeister, and V. Lo. 2004. Dimensions of Proximity in Knowledgebased Networks: The Cases of Investment Banking and Automobile Design. European Planning Studies 12: 607-624. SFG (Styrian Business Promotion Agency). 2001. Good Practice on Cluster Management. Report for the EU project ACENET – Accelerating the Establishment of Clusters and Company Networks. Graz: SFG. http://www.clusterlink.com/ACENET/new/Pdf_g_p/Styria.pdf (last accessed 7 November 2005). Shane, S. 2003. A General Theory of Entrepreneurship. The Individual-Opportunity Nexus. Cheltenham: Edgar Elgar. Sölvell, Ö., G. Lindqvist, and C. Ketels. 2003. The Cluster Initiative Greenbook. Gothenburg: Ivory Tower AB. http://www.ivorytower.se/eng/projgrnbk.htm (last accessed 7 November 2005) Sternberg, R. 2003. New Firms, Regional Development and the Cluster Approach – What Can Technology Policies Achieve? In Innovation Clusters and Interregional Competition, eds. Bröcker, J., D. Dohse, and R. Soltwedel. 347-371. Berlin: Springer. Sternberg, R. 2005. Entrepreneurship in German Regions and the Policy Dimension, In Local Heroes in the Global Village. Globalization and New Entrepreneurship Policies, eds. Audretsch, D. B., G. Heike, and C. W. Wessner. 113-144. New York: Springer. Sternberg, R., and S. Wennekers. 2005. Determinants and Effects of New Business Creation Using Global Entrepreneurship Monitor Data. Small Business Economics 24 (3): 193-203. Sternberg, R., H. Bergmann, and I. Lückgen. 2004. Global Entrepreneurship Monitor – Länderbericht Deutschland 2003. Cologne: University of Cologne. Sternberg, R., and T. Litzenberger. 2004. Regional Clusters in Germany – their Geography and their Relevance for Entrepreneurial Activities. European Planning Studies 12 (6): 767-791. Tödtling, F. 2001. Industrial Clusters and Cluster Policies in Austrian Regions. In Cluster Policies – Cluster Development? ed. Mariussen, A. 59-78. Stockholm: Nordregio. Tödtling, F., and M. Trippl. 2004. Like Phoenix from the Ashes? The Renewal of Clusters in Old Industrial Areas. Urban Studies 41: 1175-1195. Wagner, J., and R. Sternberg. 2004. Start-up Activities, Individual Characteristics, and the Regional Milieu: Lessons for Entrepreneuship Support Policies from German Micro Data. The Annals of Regional Science 38: 219-240. Wolfe, D. A., and M. Gertler. 2004. Clusters from the Inside and Out: Local Dynamics and Global Linkages. Urban Studies 41: 1071-1093.

4 The Dynamics of FDI of the TFT-LCD Cluster: A Study of Japanese Firms in Taiwan W.C. Wang, Institute of Public Affairs Management, National Sun Yat-Sen University, Taiwan

4.1 Introduction This chapter examines the dynamics of foreign direct investment (FDI) in the high tech Thin Film Transistor Liquid Crystal Display (TFT-LCD) industry. It is stretched from the case study of two global important actors of Japan and Taiwan, as the former possesses technologies of TFT-LCDs and the later strengthens in manufacturing. In the face of the global economy and intensified international competition, attracting highly qualified technology-based FDI for the ‘latecomer’ countries has, in recent years, played an important role as an increasing focus in assisting economic development (Hobday 1995a, 1997). FDI also can be built as inter-region resources sharing to establish a comparative advantage for bettering and enhancing their mutual market strength. As the TFT-LCD firms in Japan are strengthening on research and development, and Taiwan has the competitive advantage on high tech manufacturing. When these two regions connect together by the networking, FDI can bridge resources to increase both their comparative advantage to form a better competitiveness for both in the global market (Saxenian 1999). Japanese firms have long-term relationships with Taiwanese businesses pertaining to mutual international trade, and Japan is the main host of the foreign direct investors to Taiwan, such as in electronics, precision machinery, and automobile industries. Alone with the dynamics of economic development, contributions of Japanese FDI to Taiwan shift from labour intensive to more high tech industries. In 1995 Taiwan transferred technologies from Japan to commence the new industry of the TFT-LCD manufacturing. No more than a decade, Taiwan has been shifted into the world’s largest TFT-LCD producer in product value, as surpassing Japan in 2001 and overtaking South Korean in 2004. The extraordinary performance of the industrial TFT-LCD geography in Taiwan is considered that Japan’s foreign direct investors have played an important role (Hung 2002; Linden et al. 1998). However, why do Japanese firms choose Taiwan as the FDI destination to invest to? In addition, why do they particularly locate in Taiwan? What are the advantages provided by Taiwan for attracting Japanese TFT-LCDs inward investment? Also, what does Japanese FDI play a role for shaping the TFT-LCD industrial 29 J. Gatrell and N. Reid (eds.), Enterprising Worlds, 29–39. © 2006 Springer.

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clustering? To reply those questions, this paper attempts to scrutinize the dynamics of the Japanese TFT-LCD FDI firms in Taiwan. This paper is then structured as following. Next section begins with a review of academic studies, embracing to the theory of flying-geese model and political geography on scalar fixes. Section three, the methodology of the research will be detailed. The following section is the results that materials are triangulated from the fields as the analytical qualitative records are discussed. Final section puts forward some conclusions and considers the practical implications of FDI on the sustainability of industrial clusters in host nations.

4.2 The Dynamics of Japanese FDI in Taiwan After World War II, Japanese FDI to Taiwan launched in 1952 and heated up while Taiwan instituted new initiative of ‘Statute for the Encouragement of Investment’. As Taiwan founded the world first ‘export processing zone’ in 1966, Japanese FDI came to enjoy the advantages of the low labour wages, no environment control, educated stable labours, especially the hundreds of thousands of available female labour, and supportively developmental government (Castells 2000b). With the policies of economic liberalization, Japanese FDI in Taiwan is largely expanded both in varieties of industries and amounts of capitals. This is transnationalism for impelling Japanese enterprises to seek their fitting institutions and cultural space, as the place for their producing activities of the global overall arrangement (Hsu and Saxenian 2000; Ley 1999; Mitchell 1995; Olds and Yeung 1999; Zhou and Tseng 2001). In this stands, we shall revisit East Asian development of flying-geese model, and frame the political geography theory on scalar fixes to clarify the dynamics of Japanese FDI into Taiwan TFT-LCD industrial clustering. With flying-geese immigrant competence metaphor, the model developed by Akamatsu (1962) interprets Japan’s industrial development and trade situation to develop the model regarding Japan and other Asian developing countries putting forwards of industrialization. This theory points out FDI and its importance in the international economic activity of trade structure. At flying-geese framework, an industry developed experiences the stages of importing, import substitution, export direction, and finally leading others to fly ahead (Korhonen 1994; Kwan 1994; Yamazawa 1990). Under such an evolutionary, the leading head of flyinggeese highly relies on heterogeneous than getting homogenous stage of ‘latecomers’ (Hobday 1995a). Since the late 1960s, the economic development in Japan and East Asian newly industrialized economies and the Association of Southeast Asian Country and Mainland China presents a kind of specific structure in their industrialization (Brohman 1996; Hill and Fujita 1996; Kim 1993; Kwan 1994). Kotler et al. (1997) also point out that there is an adjacent relation to the flyinggeese model that the manufacturing industry appears in the region of the Asia.

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Furthermore, Edgington and Hayter (2000) argue that such evolutional model of flying-geese appears also in geopolitics of the Asian countries. However, in the relevant research on high-technology or knowledge-based industries of recent years, the model is challenged and criticized (Hart-Landsberg and Burkett 1998). Research on the electronic industries shows it cannot fall into flying-geese competent model (Hart-Landsberg and Burkett 1998; Mathews 2001; Tung 2003). Thus, flying-geese model is generally considered not to support in development of high-tech industries. Furthermore, Sikorski and Menkhoff (2000) think flying-geese model is only convincing in the situation during 1987 to 1996, as financial crisis in 1997 thereafter Asian economies cannot be explained by the model. Nevertheless, a latest interesting work on the TFT-LCD relevant industry to explain flying-geese model of Japanese FDI in Taiwan, C. Wang (2004: 20-21) claims ‘there is a lack of the solid evidence to conclude that flying-geese theory goes bankrupt’. However, he does not provide solid empirical evidences to demonstrate how and what it is not bankrupt. Linden et al. (1998) examine strategies that Korean and Taiwanese firms and governments adopted to build globally competitive advanced display manufacturing capabilities in the face of Japan’s manufacturing advantages to question, ‘are flying geese moving targets or sitting ducks?’ They observe that the lead goose appears vulnerable. Interestingly, whether the dynamic of Japanese FDI in TFT-LCD industry explains the theory of the flying-geese model remain contests and deserve further rigorous examination. Deriving from a political economy perspective of Hobdays’s (1995b) work with Japan’s historic learning-based approach to industrialization and their empirical observations, Hayter and Edgington (2003) reflect on the effectiveness, problems and dilemmas of Japanese multinational enterprises in transferring such knowhow to the region summarized as a ‘reverse product cycle model’. This model portrays FDI as a ‘bargain’ between Japanese multinational enterprises and host countries, and which becomes more difficult to negotiate on political geography as FDI moves from low-skilled manufacturing to more innovative activities. Nonetheless, in Hayter and Edgington’s paper the empirical evidence provided in the Taiwan’s section is moderately limited. More recent as known as high-technology industries development in particularly the semiconductor industry development, there are more linkages and relationships between the US (Silicon Valley) and Taiwan (Hsinchu) (Hsu and Saxenian 2000; Mathews 1997, 2001; Saxenian 1999; Saxenian and Hsu 2001; W. Wang 2005), rather than Japan played the role. In addition, the dynamics of new emerging industries, particularly in TFT-LCD developmental scenario in Taiwan, there is a lack of concrete material in the Hayter and Edgington’s analysis. Articulating the requirement of heterogeneous advantages in flying geese model in development of ‘new economic geography’, scale can be applied and understood as a partial and temporary resolution of the tension of capitalism between homogenization and differentiation (Mamadouh, Kramsch, and Van der Velde 2004). Jonas (1994: 257) notes that many of the social objects that geographers encounter

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in research of multinational corporations have well-defined ‘scale of operation’. Even if a social entity does not have an adjective with an explicitly spatial connotation, it is clear that its attributes are affected by its scale of operation. ‘Scale of organization’ is then considered as ‘an attribute of agents (individuals or institutions, capitals or noncapitals) and concerns the behaviour of each in planning and acting throughout an area’ (Collinge 1999: 564). The ‘scale of operation’ is not only determined by the ‘nature’ of a social entity (a multinational, for example, typically operates at the international level), but also by how the space in which it operates is organized (Uitermark 2002: 746-7). Therefore, ‘scalar fixes’ thus aim to continue capitalist transformation and the rescaling of capitalist accumulation and to dominate and expand the regulation of ‘scale of operation’. ‘Scalar fixes’ therefore aim to restructure the ‘local’ for articulating the industrial clustering into the ‘global’ practices (Brenner 2001; Collinge 1999, 2005; Harvey 1982, 1985, 2003; Jessop 2000; MacLeod 1997; Swyngedouw 2000, 2004; Uitermark 2002).

4.3 Methodology Since 1980, with inflammatory landscape developed by high tech industries in personal computers and semiconductors, Taiwan has become an important location for producing information and communication related products (Castells and Hall 1994; Mathews 1997, 2001). Among those products, TFT-LCDs are necessitated to fulfill the global production chain. However, all the flat panel displays were imported from Japan and South Korea. For example, 49% of global market value of laptops in 1999 was made in Taiwan, but Taiwan splurged an approximately NT$ 3 billion dollars to procure the TFT-LCDs (Lee 1999). Japan possesses the foremost technologies and has already well-constructed the industrial structure and production chain in the industry. However, Japanese firms considered that they are the ‘national treasures’, and the technologies cannot easily to be transferred to overseas. Nevertheless, since 1995 Mitsubishi (Japan) initially transferred the TFT-LCD technologies to Chunghwa Picture Tubes (Taiwan). The rest Japanese firms those who have the technologies gradually transferring them to Taiwan, and/or strategically collaborating with Taiwan firms, such as Sharp (Japan) and HannStar (Taiwan), IBM Japan and AUO (Taiwan), and Fujitsu (Japan) and Chi-Mei (Taiwan). Furthermore, as Taiwanese enterprises largely and locally invest in the TFT-LCD industry, it attracts Japanese related firm’s cross-border direct investment over. Japanese thus TFT-LCD firms started to directly invest in Taiwan since 1997. The rescaling of the industrial governance puts Taiwan on the map of the TFTLCD economic geography. Especially, Tainan, in the south Taiwan, has then been sculpted as the world largest TFT-LCD cluster since the Southern Taiwan Science Park (STSP) was initiated by the government in 1997. Launched also at the time of 2000, where Japanese FDI also has stridden over, the Tainan Technology In-

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dustrial Park (TTIP), 30 minutes drive away from the nearby STSP. Interestingly, when looking into the Japanese geographical distribution in technology parks of the Taiwan’s most important industrial initiatives, until end of 2004 more than 80% of them are located in these two Tainan industrial initiatives (TTIP and STSP) (see Table 1.). Fourteen Japanese firms have been already encamped, and amongst the FDI firms ten of them are manufacturing the TFT-LCD related key components, such as glass substrates, polarizing films, and tubes. Endorsed by the Japanese FDI firms, Tainan is shaped itself as a new emerging node of the global TFT-LCD production chains. Table 1. Japanese FDI Geographical Distribution at Technology Parks in Taiwan Place North Taiwan Central Taiwan

Name of Japanese FDI Firm

Number All

Percentage

TFT- All LCD 0 5.9%

TFTLCD 0

5.9%

8.3%

5.9%

8.3%

Hsinchu Science Park Tosh Quartz** 1 (1980)* Central Taiwan Sci- Nitto 1 1 ence Park (2002) Yunlin Technology Asahi Glass 1 1 Industrial Park (2002) South Southern Taiwan Sci- Finex, Nitto, Sumika, Ni- 9 6 Taiwan ence Park (STSP) hon, Stanley, Lindo, Ulvac, (1997) Tosh Quartz, Sekiguchi Tainan Technology Toppan, Ulcoat, Toyo Ink, 5 4 Industrial Park (TTIP) Nippon Sheet Glass, Chaohe Gas (2000) * Number in bracket is the year when the park was established. ** Those firms in underline are not belongs to the TFT-LCD industry. Sources: Each Park’s business directory (2005)

52.9% 50.0% 29.4% 33.3%

The empirical fieldwork of research implemented uses a triangulation methodology. A structured questionnaire both in Mandarin and Japanese was sent to the all Japanese FDI practitioners and collected when face-to-face interviews were conducted. And, face-to-face interviews to the all practitioners, local government, administration of two industrial parks and the related local TFT-LCD firms were simultaneously implemented between March and September 2004. However, at the beginning contact with Japanese firms is difficult; especially the Japanese businessman is fairly conservative. Through the author well-built personal networks with the local government and administration of the industrial parks, all the questionnaires are returned. About thirty respondents were interviewed, each for approximately one and a half hours.

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4.4 Flying-Geese Model and Scalar Fixes The global TFT-LCD industry currently develops mainly in these three countries of Japan, South Korea, and Taiwan. In the ‘technology’ term, Japan is generally considered as essentially the leading country in the TFT-LCD technologies. Also, with the ‘flying-geese model’, Japanese firms FDI in the East Asian countries are supported to probe into the regional industry development. In addition, C. Wang (2004) argues that Japanese TFT-LCD firms exploit the strategies of FDI, technology transfer, and/or OEM in Taiwan to obtain their own necessary in panels and relevant components. The rest key components of the Japanese TFT-LCD firms, such as substrates, polarizer, colour filter and backlight technologies, shift standardized technology to Taiwan, in order to upgrade and advance themselves R&D to higher-level products. As a Japanese manager pointed out that, at present, in the panel manufacturing technologies, Japan holds the leading positions, because we have patent rights. ….. Japan may not be certain to lose its advantages after transferring technology to Taiwan, because more advanced technology will be promoted and upgraded by Japanese firms. For example, the new technology, OLED, is developed in the world cutting-edge in Japan, and it can be made for the bending panels. Our technical development is still faster and better than South Korea and Taiwan. Although Taiwan also develops in this respect, technology advantages are belongs to Japan. (Interview ST-1, 2004/3/17) It seems that the FDI in the TFT-LCD industry from Japan to Taiwan is to accord with to flying-geese principle. This is to say that the Japanese enterprise transfers technology to other latecomers, and then upgrades itself in the higher technological development. However, in the East Asia, South Korean and Taiwan are not actually following the development of Japan in the flying-geese linear geometry, as nowadays they are the main TFT-LCD producers in the world. Firstly, in the South Korean scenario, since 1990 highly relying on the government-supported and Chaebol-led development to TFT-LCDs, the Samsung (at the beginning transferring technologies from the US’s Corning), LG (later allied with Dutch Philip as LG-Philips), and Hydix successively invest in the large size of TFT-LCD panels via their own research and development of TFT-LCD production. Drawing back to 1999, Samsung and LG were already on a par with the Japanese leaders and are ahead in terms of production processes (Lee 1999). With more up-to-date fabrication lines, the Koreans are aggressively ramping up new facilities of next-generation, larger TFT-LCD panels, and South Korea is regarded to turn to the head of ‘flying geese’ (Lee 1999; Linden et al. 1998). The industrial relations among the South Korea, US (i.e. Corning), and Europe (i.e. Philip) are globally networked in the TFT-LCD production chain, rather only Japan plays the role to Korean development alone. Rather, the East Asia’s flying geese model can be accounted for the new industrial landscape of global TFT-LCD industry. In addition, it can be found that that Japanese panel manufacturer has not chosen to make a direct investment in South Korea. In the part of direct investment to

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Mainland China by the Japanese enterprises, there are fitted into components of the production chain in terms of cost consideration for comparative advantages for facing global competition. For South Korea, there is no inevitable relation of ‘following’ Japan. Secondly, regarding the case of Taiwan, Japanese enterprises transfer technology to and collect fees of patient rights from Taiwan. By strategic alliance in panel industry to develop the TFT-LCD products, the certain proportions of these products are vended back to Japanese firms to carry on their end of production chain. The geographical strategy aims to keep their dominance globally in this industry as the strength of ‘made in Japan’. This Japan-Taiwan alliance is the mutual interdependences on both side production structures for the TFT-LCD industrial development. Executives of electronic firms in the Tainan districts regard the point of view why do Japanese enterprises transfer TFT-LCD technologies to Taiwan: … because the cost in Japan is high; the labour cost is high. In addition, Japan has already been surmounted very obviously in the competition by South Korea. South Korea regards TFT-LCD as the national undertaking. In this regard, we [Japan] have to unite the secondary enemy [Taiwan] to encounter the main enemy [South Korea] .…... Another reason is to survive. When staying in Japan can not be survival, we shall go abroad. South Korea has not bought technology from Japan. ….… However, many panel factories in Taiwan bought technologies from Japan; here gradually turns great demand naturally. We come over. (Interview ST-2, 2004/4/26) Because the production cost has been too high, Japan has faded out gradually in this industry. It is much higher than South Korea and Taiwan. The cost has no way to the situation of dropping, thus we move outside bit by bit. By doing so, I think in addition that we are forced to face the competition, because the South Korean manufacturers chase up straight. South Korea has a strong anti-Japanese complex; I find it on intimate relations in Taiwan for Japanese to transfer technologies. We do not want to let South Korea to be the largest producers alone. In 2002, South Korea had been big alone by having 40% of the TFT-LCD market values. However, Japan declined gradually, so we have to move the TFT-LCD development to Taiwan by helping Taiwan to grow up to confront with South Korea. (Interview ST-10, 2004/3/17) Allied with Taiwan to counter competition from South Korea is the main purpose that Japan comes to here. (Interview A-9 2004/9/19) Therefore, in terms of facing the robust competitor of South Korea, Japanese attempts to dominate the early entry advantage of ‘scale of economy’ in the TFTLCDs. Technology transfer to and FDI in Taiwan aims to fix their ‘scale of production’ by such a geographical strategy. The largest producer, Taiwan, has still acquired to pay to Japan with the pretty a huge amount of patent rights. Such ‘sca-

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lar fixes’ in the globalizing competition, particular facing South Korea’s threats, helps Japanese firms to ‘seek survival’ and to extend their capitalism accumulation. Indeed, Linden et al. (1998) also pointed out that South Korea’s entry let Japanese more willingness to transfer technology of ‘national treasure’ to Taiwan. Japanese enterprises face the long-term economic declines and short of production competences, and these critical reasons lead unable or unwilling to continue and keeping the competition with essential advantage in TFT-LCD for large investment locally. Japanese companies satisfy the decision by way of permitting the licenses and OEM orders in technology to collaborate with manufacturers of Taiwan for global ‘scalar fixes’. For ‘scalar fixes’, the attention of geographers shifted to its social construction by the beginning of the 1990s. Definitely, in political geography, scale making is claimed as ‘an entangled and hybrid product of negotiation and contestation’ (Newstead, Reid, and Sparke 2003: 487). Aiming to in the capitalist dominance of industrial standardization in geographical fixes both in products and production process, Japan’s historic learning-based approach to attend the position of ‘an advanced country’ is captured beyond the ‘nature’ of flying geese model. Facing the weakening domestic economy, the structural transformation in order to manipulate and dominate the various scale of production, such as international standards, codes, patients, prices, and technologies know-how via ‘scalar fixes’, possibly juxtaposes Japanese capitalist domination.

4.5 Conclusions The scalar fixes on new economic geography in the explanation leads Japanese TFT-LCD firms FDI in Taiwan. Also, because ‘Taiwan has more relevant relationships with Japan after all (interview A-1, 2004/5/4)’, the Japanese enterprises have such a cultural advantage in Taiwan for FDI strategies on new economic space to establish both sides production of interdependences. So, the Japanese firms come over to Taiwan to produce network territories and ‘scalar fixes’ for the market deeper strength to expand Japanese enterprises TFT-LCD industry on the scale of the global market to ‘encounter competition from South Korea’. This relation of interdependences cannot be explained by the single direction of flyinggeese model. The flying-geese model with its long-term history in the evolutional process seems to meet difficulties to depict Taiwan TFT-LCD industry development. However, the main reason that Japan transferred technologies is Japanese enterprises facing domestic economic recession, South Korea rousing itself to catch up, and strong appeal of markets of Taiwan. Japanese enterprises adopt the strategies of FDI for capitalism accumulation of their ‘scalar fixes’, which keep Japan to dominate as a leader in the industry. Taiwan is considered as the wing of the flying-geese model of the formation in early days for industrialization, but, in a sense, no matter Taiwan it appears to be flat to fly to the situation that even surmounts with ‘flying-geese head’ obviously on economy or technology. By utilizing various types of strategic alliances to collaborate with Taiwanese enterprises, Japan enterprises at the early time originally transferred technology to Taiwan.

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Therefore, in terms of the depressions of Japanese domestic market for producers of the Japanese key components, they have to adjust themselves for the global overall re-arrangement of the market and scalar fixes to seek the most favorable market. Nevertheless, in the Tainan districts, the points related to traditional transition and capitalist restructure, conditions, and relationships, deserve further follow-up study.

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5 Collaborating to Compete: The Case of Northwest Ohio’s Greenhouse Industry N. Reid, Department of Geography and Planning The Urban Affairs Center The University of Toledo, Toledo, Ohio M. Carroll, Department of Economics Center for Regional Development Bowling Green State University, Bowling Green, Ohio “If we don’t pull together to identify and solve our own problems, we will surely lose a number of greenhouses” 1

5.1 Introduction Faced with increasing international competition that is threatening their livelihood a number of greenhouse owners in northwest Ohio have adopted a cluster-based strategy in an attempt to remain competitive. Initiated and designed by university researchers and supported by funding from the United States Department of Agriculture this strategy centered around getting individual greenhouse owners to work collaboratively to address industry-wide challenges. The challenges addressed by this strategy are too large or too complex for individual growers to tackles by themselves. Challenges such as high energy costs and the lack of a market presence are beyond the scope of individual greenhouse owners to address. Working together with other greenhouse growers in the region and identifying collaborative solutions to these industry-wide problems is probably the only mechanism by which these, and similar challenges, can be successfully addressed. However, getting individual greenhouse owners to work collaboratively with each other is a major challenge in itself. Historically, many of the growers in northwest Ohio are fiercely independent. They are used to working by themselves. Collaboration is not part of their vocabulary. As a result, the level of trust between greenhouse owners tends to be low. Most of the growers in the region compete with each other for market share. They view each other as competitors, not collaborators. However, overcoming this resistance to collaboration was critical if a cluster-based approach to addressing the challenges facing the industry was going to take root and evolve into a viable competitive strategy. 1 Dick Bostdorff, owner, Bostdorff Greenhouse Acres, Bowling Green, Ohio (Bowling Green State University, 2005).

41 J. Gatrell and N. Reid (eds.), Enterprising Worlds, 41–56. © 2006 Springer.

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In this chapter we describe the process used to get growers to think and act in a collaborative fashion and to assess the result of these efforts to date2. Following this introductory section the remainder of this chapter is organized as follows. In section 2 we describe the philosophy underpinning cluster-based economic development. This is followed, in section 3, by a description of the major competitive challenges facing northwest Ohio’s greenhouse industry. In section 4 we describe the genesis and evolution of northwest Ohio’s greenhouse cluster. Next, in section 5, we describe the first collaborative project undertaken by the cluster – namely branding and marketing. In section 6 we conclude with some thought regarding the evolution of the cluster to date and identify some of the major challenges for its future development.

5.2 Cluster-Based Economic Development Economic development strategies organized around a cluster-based approach are increasingly common. Currently, there are over five hundred such initiatives worldwide (Solvell et al, 2003). Communities from San Diego (SANDAG 2001) to South Africa (Sunday Times, South Africa 1997) are pinning much of their economic future on what they are calling cluster-based economic development, while industries ranging from thoroughbred horses (Akoorie 2000) to Formula One racing cars (Henry and Pinch 2001) are being produced by businesses that are part of an industrial cluster. Despite the popularity of cluster-based economic development there is an emerging literature that is highly critical of this particular approach (e.g., Martin and Sunley 2003, Taylor 2005). It is not the purpose of this chapter, however, to review or assess the validity of the anti-cluster literature. Our objective, here, is to simply outline the genesis and evolution of an effort to enhance the economic competitiveness of the greenhouse industry in northwest Ohio. We use the term ‘cluster” as the organizing framework for this effort. We will leave it to others to argue over whether what we are doing in northwest Ohio is really cluster-based economic development. Having said that, we believe that it is important that we outline our understanding of cluster-based economic development, and to define the concept as we have applied it to the northwest Ohio greenhouse industry. While there are an alarmingly large number of definitions of what is meant by an industrial cluster and cluster-based economic development (Martin and Sunley 2003) we used, as our starting operational definition, that provided by Porter (1998, 78):

2

The project described in this chapter is an ongoing one. The results reported here represent the status of the project at the time of writing. For the current status of the project please contact the authors.

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“Clusters are geographic concentrations of interconnected companies and institutions in a particular field . . . they include, for example, suppliers of specialized inputs such as components, machinery, and services, and providers of specialized infrastructure . . . many clusters also include governmental and other institutions – such as universities, standards-setting agencies, think tanks, vocational training providers, and trade associations – that provide specialized training, education, information, research, and technical support”. The secret to a successful cluster-based economic development strategy, in our opinion, is to marshal all the relevant stakeholders (primary producers, suppliers, universities, training providers, etc.) to work together to help an industry become more competitive in the market place. How is this achieved? As we sifted through the literature on cluster-based economic development we identified three key characteristics that we thought would be necessary if northwest Ohio’s greenhouse industry was going to be successful in utilizing a cluster-based approach to retain its competitive edge. Collective Efficiency: Collective efficiency (Schmitz 1995) is the competitive advantage that can be attained through the combination of external economies of scale and joint action. External economies of scale are very often passive and, as such, fall into the producer’s lap. Examples of external economies of scale include the existence of a specialized labor pool and support infrastructure such as a specialized supplier base (Fromhold-Eisebith 2006). External economies of scale can also manifest themselves when a region develops a reputation for being a producer of a particular good or service (e.g. automobiles in Michigan and steel in Pennsylvania). While external economies of scale are beneficial it is only when co-located companies engage in joint action that the full benefits of being in close geographic proximity are realized. As noted by Porter (1998, 88), “the mere colocation of companies, suppliers, and institutions creates the potential for economic value; it does not necessarily ensure its realization”. Similarly, Schmitz (1999, 1628) notes that “external economies are important to growth but are not sufficient to ride out major changes in product or factor markets; that requires joint action”. Unlike external economies of scale, joint action is active and requires the conscious and deliberate collaboration of producers. Joint action on the part of producers can result in a wide variety of benefits, including improved product quality (Nadvi 1999, Schmitz 1999), reduced manufacturing costs (Wolverhampton Telford Technology Corridor 2005), the sharing of expensive infrastructure (Meyer-Stamer 1998; Kennedy 1999), and enhanced marketing prowess (Cawthorne 1995; Lundequist and Power 2002). In our opinion, collective efficiency (external economies of scale plus joint action) is the defining critical ingredient of successful cluster-based economic development initiatives. The central focus of any cluster initiative, therefore, should be getting firms to work together to identify collaborative solutions to shared problems (Diez 2001).

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Social Capital: A major barrier to joint action can be low levels of social capital within an industry. Social capital is defined by Putnam et al (1993, 67) as “features of social organization, such as trust, norms, and networks, that can improve the efficiency of society by facilitating coordinated actions”. Social capital plays a critical role in the development of any successful cluster-based economic development initiative (Hospers and Beugelsdijk 2003). For example, if competitors are going to engage in joint action it is imperative that a certain level of trust exist between them. However, it is not unusual for low levels of trust to exist between geographically proximate competitors. How can competitors be prompted into engaging in joint-action? There is growing evidence from the developing world that that an exogenous threat to the competitiveness an industry in a particular geographic region can be a catalyst for joint action to occur (e.g. see Meyer-Stamer 1998, Knorringa 1999, Rabellotti 1999, Schmitz 2000). For example, textile manufacturers in Santa Catarina, Brazil increased their level of cooperation in response to increased foreign competition that resulted from a decision by the Brazilian government to abandon its import substitution strategy and to open up its markets to foreign producers in the early 1990s (Meyer-Stamer 1998). In the footwear industry cluster in Agra, India cooperation between cluster members increased after the collapse of one of its major markets, the Soviet Union, as well as the decision by the Indian government to lower import tariffs in the early 1990s (Knorringa 1999). In the case of the surgical instruments cluster in Sialkot, Pakistan it was the need to improve quality to meet international quality assurance standards that prompted a move towards joint action (Nadvi 1999). Bottom-up Engagement: Much of the literature also emphasizes the need for a bottom-up approach to cluster-based economic development. Empowering business owners and/or decision makers to identify a collective pathway to higher levels of competitiveness is critical to cluster success (Reid and Carroll 2005). Indeed, company decision makers should be involved from the very beginning of any cluster initiative. Furthermore, they have to play a central role in design and ongoing direction of the cluster once it has been established (Cluster Navigators 2001). Unless those companies for whom the cluster strategy is designed to help play a central management and decision-making role we believe that the cluster will be doomed to failure and has little likelihood of any long-term sustainability. “Clustering is not a few deciding for many; it is an inclusive, collaborative process” (Cluster Navigators Ltd. 2001, 13). Successful clusters promote collective learning that is bottom-up and interactive in nature (Landabaso 1995).

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5.3 Northwest Ohio’s Greenhouse Industry Northwest Ohio’s greenhouse industry has a rich history, dating back to European immigrants who settled in the region during the 18th and 19th centuries. Today, the region (Figure 1) is one of the major producers of greenhouse produce in the United States. Lucas County, the center of the region’s greenhouse industry, ranks 4th in state and 94th in the nation in terms of the value of production of greenhouse produce. This places Lucas County in the top 4% statewide and the top 5% nationwide. Today, however, the economic viability of the northwest Ohio’s greenhouse industry is under threat from competing regions. In recent years, southern Ontario in Canada has emerged as major competitive threat to northwest Ohio’s greenhouse industry (Reid and Carroll 2005, LaFary et al 2006). This threat is both perceived and real. In a survey of northwest Ohio growers Canada was identified as the most significant competitor to northwest Ohio’s greenhouse industry (Reid and Carroll 2005).3 The perception that Canada is a major competitor to northwest Ohio’s greenhouse industry is validated by trade data. In 1995 Ontario had a positive trade balance with Ohio in floriculture products of $531, 186. By 2004 this trade gap had increased to 2,014,171 (Industry Canada 2005).4 Other challenges facing the industry include endemically high utility costs, the lack of a strong market presence, and the existence of price wars between local competitors. On the other hand, the industry has a number of strengths and opportunities that it could potentially capitalize on. These include a wealth of local grower knowledge and experience, considerable latent demand for the industry’s output, and the access to a significant scientific knowledge base available from locally-based university researchers, agricultural extension agents, and scientists from the USDA’s Agricultural Research Service (Table 1).

3

A mail survey of northwest Ohio greenhouse growers was conducted during the period, March-May 2004. The survey was conducted using the Dillman (1978) method. The survey was sent to all 82 growers in northwest Ohio. Twenty-seven surveys were returned, yielding a response rate of 33%.

4

All monetary values cited in this chapter are expressed in 2004 US dollars.

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Fig. 1. Northwest Ohio

Table 1. STRENGTHS

WEAKNESSES

Critical mass of growers Extensive grower experience and knowledge Predominantly family-owned and operated Large regional production capacity Access to local university, extension and Agricultural Research Service expertise

Historically, little collaboration between growers No identifiable market brands Lack of strategic marketing Small size of individual growers Generational nature of business Heavy reliance on traditional sources of fuel Old greenhouse buildings Dated production technology Limited access to capital THREATS

OPPORTUNITIES Increase collaboration with each other Capitalize on latent market demand Develop identifiable market brand and improve marketing Development of niche markets Alternative energy options available in region Facility modernization Adhere to higher quality standards

Global competition Price wars with regional competitors Big Box store purchasing agreements High utility costs

Given this competitive backdrop the authors received funding from the U.S. Department of Agriculture to assess the current economic state of northwest Ohio’s

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greenhouse industry and to identify, develop, and implement a strategy to address the competitive challenges facing the industry. After a careful assessment of the industry, and its attendant challenges, the authors identified a cluster-based approach as the most appropriate one for the industry. Would the threat posed by Canadian competition be of sufficient magnitude to constitute ‘the crises that much of the literature points to can act as a catalyst to joint action?

5.4 The Development of Northwest Ohio’s Greenhouse Cluster The decision to explore the possibility of establishing a greenhouse cluster in northwest Ohio occurred during the summer of 2004. During the previous year, a survey of northwest Ohio growers had been conducted. The survey results indicated an industry that was facing a multiplicity of competitive challenges. To respond to these challenges we decided to explore the possibility of developing a cluster-based economic development strategy for the industry.

Table 2. Year 2003 2004

Month August MarchMay August August October

2005

December January January May August August November

Milestone First year of funding received from the USDA Mail survey of 82 northwest Ohio growers completed Second year of funding received from the USDA Four-day Visit by authors to the West Midlands region of England to learn more about cluster-based economic development Presentation of cluster concept made by CST to 8 northwest Ohio growers Follow-up meeting between CST and 8 northwest Ohio growers Presentation of cluster concept by CST made to winter conference of Toledo Area Flower and Vegetable Growers Association Cluster Advisory Board established Project Manager hired Cluster Champion hired Third year of funding received from USDA Branding and Marketing consultants hired Maumee Valley Growers established

Before embarking on the development of the northwest Ohio greenhouse cluster, we spent four days in the West Midlands region of England learning about clusterbased economic development (Table 2). While we had read a considerable amount of literature (both academic and practitioner-based) on cluster-based economic development they felt that spending time in a region that was in the process of actually implementing the approach would be of great value. An existing working

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relationship between economic development agencies in both regions, the Regional Growth Partnership (www.rgp.org) in northwest Ohio and Black Country Investment (www.bci-uk.com) in the West Midlands) made it relatively easy to organize such a visit. While in the West Midlands we met with approximately twenty-five individuals associated with the region’s various cluster initiatives. This included a meeting with the leader of the region’s Cluster Strategy Team and a day in the field with the Champion of the Advanced Engineering Cluster (www.ae-cluster.co.uk). Upon returning from the West Midlands we arranged a meeting with a group of eight northwest Ohio greenhouse growers (Table 2). The purpose of this meeting was to present the concept of cluster-based economic development to the growers and to assess their interest in pursuing this as a strategy for their industry. We also presented information and data on the nature of the competitive threat posed to their livelihood from the greenhouse industry in southern Ontario. In doing so, we made the case that the future economic success (in some cases survival) of northwest Ohio greenhouse growers lay in their willingness to work together to solve commonly-shared problems. We also outlined the support infrastructure that would be necessary to support a fully functioning greenhouse cluster in northwest Ohio, including a project manager, Champion, and advisory board. The growers invited to attend this meeting were carefully chosen with assistance from locallybased Agricultural Research Service (ARS) agents. The growers in attendance had a reputation as being among the most innovative and open-minded in the region and were, therefore, most likely to be receptive to the idea of pursuing a cluster-based strategy for their industry. The meeting started off in a fairly tense fashion. Despite their open-mindedness, some of the growers in attendance were suspicious of the ability of academics to bring anything of value to the table. However, we were able to convince the growers that if they wished to consider pursuing a cluster-based strategy for their industry that it would be very much a bottom-up, grass roots initiative. In other words, we told that the growers themselves would be very much in control of the structure, direction and forward momentum of the cluster. After much discussion, the growers in the room admitted that they did face an uncertain future and that the idea of co-operating to solve industry-wide problems was worth additional consideration. Those in attendance agreed to consider the possibility of implementing a cluster-based approach to raise the competitiveness of northwest Ohio’s greenhouse industry and to reconvene in a month or so for additional discussion. This follow-up meeting occurred in December 2005 (Table 2). At that meeting the growers agreed to move forward with the implementation of the northwest Ohio greenhouse cluster. The growers suggested that we present the concept of cluster-based economic development to the winter conference of the Toledo Area Flowers and Vegetable Growers Association. This would allow a larger number and variety of growers to learn about the concept. This presentation was made in January 2005 (Table 2, Carroll and Reid 2005).

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Having received the permission of the region’s key growers to implement a cluster-based strategy with respect to the greenhouse industry the next step was to establish the infrastructure necessary to run the cluster. The basic infrastructure comprises a Cluster Strategy Team, Advisory Board, a Project Manager, and a Champion. Cluster Strategy Team – the role of the Cluster Strategy Team (CST) is to develop a vision for the cluster and to identify strategies for implementing the vision. The CST is also responsible for monitoring the progress of the cluster and making, where necessary, mid-course adjustment in both vision and strategy. Initially, the CST comprised the authors, but later grew to include the Project Manager, the Champion, and three growers. The CST meets monthly (between Advisory Board meetings). Ideas generated by the CST are taken to the Advisory Board for discussion and approval. Project Manager – the Project Manager fulfills a multiplicity of functions. His primary role, however, is to facilitate the smooth functioning of the cluster and to make sure that the all the participants (Cluster Strategy Team, Advisory Board, Champion, Growers, and any hired Consultant) are working in unison toward the common goal of advancing the cluster. He or she is responsible for ensuring that everyone is on the same page and in agreement with the overall vision, current status, and next steps in the evolution of the cluster. The Project Manager also acts as the liaison between the cluster and outside consultants (private or public sector) that are utilized by the cluster. Given these duties, the Project Manager requires a unique set of skills. He needs excellent brokering and communication skills. An understanding of the language and workings of both the public and private sectors is important. Given the structure of northwest Ohio’s greenhouse industry an intimate knowledge of the unique challenges facing small family-owned businesses is also useful. As the overall goal of the greenhouse cluster is to contribute to the economic development of northwest Ohio the Project Manager also needs a working knowledge of economic development theory and practices. The Project Manager hired for the northwest Ohio cluster is Mr. Joe Perlaky. Hired in January 2005 (Table 2), Mr. Perlaky has all the skill sets required for this position. Having run his own dry-cleaning business for almost twenty years, he understands the challenges of running a small business. He is also intimately knowledgeable of the fields of both economic development theory and practice. He is a graduate of the University of Oklahoma’s Economic Development Council Institute and has held a number of practitioner posts, including Commissioner of Economic Development for the City of Toledo. Advisory Board – the Advisory Board was established in January 2005 (Table 2) and is the decision-making body of the greenhouse cluster. The Board comprises fifteen members. Eight of the members are owners of greenhouses. The Cluster

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Strategy team and Project Manager are also members. Other stakeholders who are represented are the Regional Growth Partnership, Ohio State University Agricultural Extension Service, and Congresswoman’s Marcy Kaptur’s Office. Advisory Board meetings are held once a month. These meetings are open and are attended by a number of interested stakeholders who are not members of the Advisory Board. Average attendance at Advisory Board meetings is approximately twentyfive people. Advisory Board meetings are chaired by the Cluster Champion. The numerical dominance of growers on the Advisory Board is in keeping with the bottomup philosophy of the cluster. Only growers are eligible to vote when decisions are made with respect to cluster activities. Indeed, when a vote is called for all growers present, even those who are not members of the Advisory Board can vote. For example, when the deciTable 3. NORTHWEST OHIO GREENOUSE CLUSTER ADVISORY BOARD Name Dick Bostdorff Michael Carroll Bill Dearing Mary Donnell

Title Owner Assistant Professor Owner Director

Beth Fausey

Floriculture Program Manager Owner Owner Owner Project Manager Special Assistant Associate Professor Owner Owner Director, International Development Owner

Mark Hecklinger Tony Keil Walt Kruger Joe Perlaky Lindsay Potts Neil Reid Don Schmidlin Alan Schmidt Lee Springer Tom Wardell

Organization Bostdorff Greenhouse Acres Bowling Green State University Dearing Greenhouse Ohio State University Agricultural Business Enhancement Center Ohio State University Agricultural Business Enhancement Center Hecklinger Greenhouse Inc. Louis Keil & Sons Lakewood Greenhouse Inc. University of Toledo Congresswoman Kaptur’s Office University of Toledo Schmidlin Greenhouse Inc. Schmidt Brothers Inc. Regional Growth Partnership Wardell’s Farm Market

sion was made to engage a company to do branding and marketing for the cluster it was made by all the growers present at that particular meeting. Likewise, it was the growers who chose the individual who would function as Champion for the cluster.

Champion – the role of Champion is to work with growers to identify opportunities for collaborative problem solving. We adopted our model of the role of Cluster Champion from our visit to the West Midlands (Table 2) as well as other operational clusters that we had some familiarity with (e.g., Yorkshire Forward 2006, Nettles 2003). As such, the Champion needs to have an extensive knowledge of the greenhouse industry, must be trusted and respected by the growers, have excellent communication skills, and must be capable of innovative thinking. Much of the time of the Champion is spent in the field visiting and talking with growers.

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The individual identified by the growers to fill the role of Cluster Champion was Dr. Dean Krauskopf. Dr. Krauskopf has a Ph.D. in horticulture from North Carolina State University and has over twenty-five years experience working in the greenhouse industry. At the time of his appointment as Cluster Champion Dr. Krauskopf was employed as Integrated Crop Management Educator for Michigan State University (MSU) Agricultural Extension Service. Choosing a Michigan State University extension agent as the Champion for the northwest Ohio greenhouse cluster was intriguing and presented both challenges and opportunities. On the one hand, was there a conflict of interest in having Dr. Krauskopf serving greenhouse industries in two economically competing regions? Would the MSU Extension Service allow Dr. Krauskopf to go south of the border and assist growers in a geographically adjacent state? On the other hand, the possibility to have Dr. Krauskopf serving both northwest Ohio and southeastern Michigan’s greenhouse industries opened up the future possibility of cross-border cooperation between greenhouse growers in these geographically adjacent regions. Many of the challenges (e.g. Canadian competition and high energy costs) are faced by growers in both regions. MSU Extension Service agreed to Dr. Krauskopf serving as Champion for the northwest Ohio greenhouse cluster and he began his duties in May 2005 (Table 2)

5.5 Branding and Marketing: The First Cluster Project Having established the basic infrastructure to operate the northwest Ohio greenhouse cluster the next step was to operationalize the cluster by identifying and implementing the first cluster project. In the minds of the CST the first cluster project was critical. It had to be successful. Failure on the first project would make it extremely difficult to retain grower interest in the cluster approach (Cluster Navigators Ltd. 2001). To be deemed a success by the growers the first project had to bring demonstrated value to the industry. Just as important, it had to demonstrate the benefits of joint action. It also had to have the potential to engage as many of the region’s greenhouse growers as possible. Many growers were still not on board with the cluster initiative. If the first project could increase grower buy-in to the initiative this would increase the likelihood of success with future projects. After much discussion the growers on the Advisory Board identified branding and marketing as the focus of first project. This focus was chosen for a number of reasons. First, the growers recognized that there was a need to develop a brand for their industry and then to capitalize on that brand via a comprehensive marketing strategy. Lack of satisfactory marketing expertise had been identified as a significant barrier to expansion by 65% of the region’s growers who had responded to the 2004 survey. Second, the growers on the Advisory Board felt that the first project had to be non-threatening in nature. The level of existing joint action by

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the region’s growers was minimal. Levels of trust were low. A project requiring growers to engage in joint action that necessitated the sharing of information, for example, would have met with resistance by the vast majority of growers. Participating in the development of a joint branding and marketing strategy, however, was one that the growers felt had the greatest chance engaging the largest number of growers and had a good chance of producing results (i.e. increased sales) that would resonate positively with growers. Branding the industry was as much about building up levels of social capital and moving towards the creation of a collective identity (Fromhold-Eisebith 2006) for the industry as it was about selling more bedding plants and hanging baskets. In keeping with the cluster philosophy of solving industry-wide problems with local expertise the Advisory Board chose a locally-based branding and marketing firm to develop a brand and comprehensive marketing strategy for the cluster. The company chosen, Thread, has an impressive client list that ranges from local police departments to multinational automotive firms Thread (www.experiencethread.com) were officially engaged by the cluster in August 2005 (Table 1). The first task undertaken by Thread was to develop a brand name, logo and positioning statement for the northwest Ohio greenhouse cluster. In order to be successful in brand development it was essential that Thread had a clear understanding of the nature of northwest Ohio’s greenhouse industry. Two Thread employees, therefore, spent several weeks in the field accompanying the Cluster Champion on his visits. This gave Thread the opportunity to speak to growers, to gain insights into the nature of the industry, and to promote the branding effort. Visits to growers were followed by demographic analysis of the greenhouse industry’s customer base and the development and market testing of a variety of logos, positioning statements, and names for the cluster. Working with the cluster Advisory Board, Thread developed a name (Maumee Valley Growers), logo, and positioning statement (Choose the Very Best) for the cluster (Figure 2). Beginning in November 2005 (Table 1) the northwest Ohio greenhouse cluster started operating under the umbrella of Maumee Valley Growers (Limpf 2006, McKinnon 2005).5 The Advisory Board is now working with Thread to develop a marketing strategy for the industry. They are also in the very beginning stages of working on their second project – addressing the issue of high energy costs that are crippling the profitability of many northwest Ohio growers.

5

The appellation, Maumee Valley, refers to the valley of the Maumee River that starts in Fort Wayne, Indiana and flows through northwest Ohio before draining into Lake Erie.

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Fig. 2. Branding Logo for Northwest Ohio Greenhouse Cluster

5.6 Conclusion Greenhouse growers in northwest Ohio have taken the first steps to increasing their competitiveness by forming an industrial cluster. The essence of the cluster is to have growers engage in join action in order to address industry-wide challenges that individual greenhouse owners are incapable of addressing by themselves. The first project undertaken by the growers in the cluster was to develop a name, logo, and positioning statement that will form the foundation for the development of a recognizable brand and associated marketing strategy. The Maumee Valley Growers are now at the very beginning stages of addressing high energy costs facing the industry. Northwest Ohio has some of the highest utility costs in the country (Chavez 2005). It places growers at a significant competitive disadvantage vis-à-vis southern Ontario, other regions of Ohio, and other regions of the United States. Maumee Valley Growers have a number of challenges ahead of them. There is a need to engage more growers in the activities of the cluster. The level of knowledge about the cluster-based initiative varies significantly. Growers who are members of the Advisory Board are highly engaged and committed to the project. At the other extreme, there are some growers who have very little knowledge about the activities that have been taking place during the last twelve months. To increase interest in and commitment to the initiative Thread are supplementing the field visits of the Champion with their own visits to local greenhouses. Press coverage is also generating interest among growers (Limpf 2006, McKinnon 2005, Port Clinton News Herald 2005). Also, the decision to make energy costs the focus of the second cluster project is generating new interest. Growers who have never been at the table previously are now attending meetings because the issue of energy costs is being discussed. This suggests that grower involvement in the clus-

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ter may vary project by project. For some, Canadian competition may be the crisis that brings them to the table; for others the crisis may be high energy costs. Securing the integrity of the brand will also be a challenge for Maumee Valley Growers. The positioning statement, Choose the Very Best, implies that the product sold by a member of Maumee Valley Growers is of high quality. How, and by whom, is this quality assurance policed? This is an issue that is under discussion by the Advisory Board. Securing ongoing funding for Maumee Valley Growers is another challenge facing the cluster. At the time of writing the project has received three years of funding from the US Department of Agriculture and another year is in the latter stages of the approval process. The expectation, however, is that federal funds for this project will dry up some day. The Advisory Board is already engaged in discussion of how the Maumee Valley Growers can become a self-sustaining financial entity. It is hoped that if the value of joint action can be demonstrated by the growers that this will be sufficient to allow Maumee Valley Growers to be supported by membership fees.

Acknowledgments This research was supported by a grant from the United States Department of Agriculture. Additionally, the research is part of a larger collaborative initiative that includes partners from The University of Toledo, The Ohio State University, and Bowling Green State University. Likewise, the research team included the Toledo Botanical Gardens.

Sources Akoorie, Michele, E.M. 2000. Organizational clusters in a resource-based industry: Empirical evidence from New Zealand. In Milford B. Green and Rod B. McNaughton (eds.). Industrial networks and proximity. Burlington, VT: Ashgate, 133-164. Black Country Investment. 2006. www.bci-uk.com. Last accessed 14 February 2006. Bowling Green State University, 2005, Sowing seeds for Maumee Valley growth. Office of Marketing & Communications, BGSU, 17 November. www.bgsu.edu/offices/mc. Last accessed 14 February 2006. Carroll, M.C. and N. Reid. 2005. Competing successfully in a global marketplace. Paper presented at the Toledo Area Winter Greenhouse Conference, Monclova, Ohio, 13 January 2005. Cawthorne, P.M. 1995. Of networks and markets: The rise and rise of a south Indian town, the example of Tiruppur’s cotton knitwear industry. World Development, 23(1): 43-56.

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Chavez, J. 2005. Edison power users captive to high rates. Toledo Blade. 30 October (www.toledoblade.com) Last accessed, 14 February 2006. Cluster Navigators Ltd. 2001. Cluster Building: A Toolkit. Prepared for New Zealand Trade and Enterprise, 40pp. Diez, M.A. 2001. The evaluation of regional innovation and cluster policies: Towards a participatory approach. European Planning Studies, 9(7): 907-923. Dillman, D. 1978. Mail and Telephone Surveys: The Total Design Method. New York: Wiley. Fromhold-Eisebith, M. 2006. Which mode of (cluster) promotion for which aspect of entrepeneurship? In J.D. Gatrell and N. Reid (eds.) Enterprising Worlds: A Geographic Perspective on Economics, Environments, and Ethics, Springer: Dordrecht, xx-xx. Henry, N. and S. Pinch. 2001. Neo-Marshallian nodes, institutional thickness, and Britain’s ‘Motor Sport Valley’: Thick or thin. Environment and Planning A: 33: 1169-1183. Hospers, G. and S. Beugelsdijk. 2002. Regional cluster policies: Learning by comparing? Kylos, 55(3): 381-402. Industry Canada. 2005. Strategis: Canada’s Business and Consumer Site. http://www.strategis.gc.ca. Last accessed 14 February 2006. Kennedy, L. 1999. Cooperating for survival: Tannery pollution and joint action in the Palar Valley (India). World Development, 27(9): 1673-1691. Knorringa, P. 1999. Agra: An old cluster facing new competition. World Development, 27(9): 1587-1604. LaFary, E., J.D. Gatrell, N. Reid, and P. S. Lindquist. 2006. Green (house) industries: Local markets and global competitors. In J.D. Gatrell and N. Reid (eds.) Enterprising Worlds: A Geographic Perspective on Economics, Environments, and Ethics, Springer: Dordrecht, xx-xx. Landabaso, M. 1995. The promotion of innovation in regional community policy: Lessons and proposals for a regional innovation strategy. Paper presented at the International Workshop on Regional Science and Technology Policy. Himeji, Japan, 13-16 February. Limpf, L. 2006. Greenhouses see benefits of forming a cluster. The Press (Millbury, Ohio). (www.presspublications.com) Last accessed, 14 February 2006. Lundequist, P. and D. Power. 2002. Putting Porter into practice? Practices of regional cluster building: Evidence from Sweden. European Planning Studies, 10(6): 685-704. Martin, R. and P. Sunley. 2003. Deconstructing clusters: Chaotic concept or policy panacea. Journal of Economic Geography, 10(6): 685-704. McKinnon, J. 2005. Greenhouses in area tend to marketing. Toledo Blade, 8 December (www.toledoblade.com) Last accessed 14 February 2006. Meyer-Stamer, Jorg. 1998. Path dependence in regional development: persistence and change in three industrial clusters in Santa Catarina, Brazil. World Development, 26(8): 1495-1511. Nadvi, K. 1999. Collective efficiency and collective failure: The response of the Sialkot surgical instrument cluster to global quality pressures. World Development, 27(9): 1605-1616. Nettles, C.L. 2003. Fostering Cluster Development in Wisconin, Wisconsin Department of Commerce. Port Clinton News Herald. 2005. Growers organization put together for area. Port Clinton News Herald, 31 December (www.portclintonnewsherald.com) Last accessed, 14 February, 2006.

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Porter, M. E. 1998. Clusters and the new economics of competition. Harvard Business Review, November-December, 77-90. Putnam, R.D., R. Leonardi, and R.Y. Nanetti. 1993. Making Democracy Work. Princeton, NJ: Princeton University Press. Rabellotti, R. 1999. Recovery of a Mexican cluster: Devaluation bonanza or collective efficiency. World Development, 27(9): 1571-1585. Reid, N. and M. Carroll. 2005. Using cluster-based economic development to enhance the economic competitiveness of Northwest Ohio’s greenhouse nursery industry. Papers and Proceeding of the Applied Geography Conference 28: 309-319. Regional Growth Partnership. www.rgp.org. Last accessed 14 February 2006. SANDAG. 2001. San Diego regional employment clusters: Engines of the modern economy. SANDAG Info, No. 1, 1-31. Schmitz, H. 2000. Does local co-operation matter? Evidence from industrial clusters in South Asia and Latin America. Oxford Development Studies, 28(3): 323-336. Schmitz, H. 1999. Global competition and local cooperation: Success and failure in the Sinos Valley, Brazil. World Development, 27(9): 1627-1650. Schmitz, H. 1995. Collective efficiency: Growth path for small-scale industry. The Journal of Development Studies, 31(4): 529-566. Solvell, O., G. Lindqvist, and C. Ketels. 2003. The cluster initiative greenbook. Ivory Tower AB: Stockholm. Sunday Times, South Africa. 1997. Industry’s clusters get their act together. 17 August. www.bttimes.co.za/97/0817/survey/survey5.htm. Last accessed 14 February 2006. Taylor, M. 2006. ‘Clusters’: The mesmerizing mantra. In J.D. Gatrell and N. Reid (eds.) Enterprising Worlds: A Geographic Perspective on Economics, Environments, and Ethics, Springer: Dordrecht, xx-xx. Thread. 2006. www.experiencethread.com. Website of Thread Consulting Firm. Last accessed 14 February 2006. Wolverhampton Telford Technology Corridor (WTTC). 2005. Local companies collaborate to fight low cost, overseas competition. WTTC News Release, 24 June. www.aecluster.co.uk. Last accessed 14 February 2006. Yorkshire Forward. 2006. www.yorkshire-forward.com. Last accessed 14 February 2006.

6 Specialized Agriculture: Local Markets & Global Competitors in Ohio’s Greenhouse Industry E. W. LaFary, University of Auckland, Auckland, New Zealand J. Gatrell, Indiana State University, Department of Geography, Geology, and Anthropology, Terre Haute, Indiana N. Reid, The University of Toledo, Department of Geography & Planning and The Urban Affairs Center, Toledo, Ohio P. Lindquist, The University of Toledo, Department of Geography & Planning, Toledo, Ohio

6.1 Introduction The geography of globalization and the implications it has upon business have been widely examined. However, the examination of practices relating to local entrepreneurs has been overlooked when observed from the context of the global marketplace as well as within current literature about place competition (see Cox and Mair 1988; Cox 1998). The contradictions between the ability for capital to move freely and the place-bound character of large immobile investments are clear (Phelps and Raines 2003). Yet, not so evident are the practices of the local firm that can either take advantage of or ignore emerging global markets. The greenhouse industry has historically been reliant upon retailers and wholesalers located in close proximity. However, with the development of technologies that allow for sensitive products such as flora to be shipped at continually increasing distances1, Ohio growers now find competition from neighboring counties, states, and foreign countries--particularly Canada (LaFary et al 2005; Reid and Carroll 2005). Moreover, the industrial geographies of globalization have focused almost exclusively on mainstream economic activities such as manufacturing and/or so-called emerging new economic sectors such as information technologies. A resultant consequence is research into activities of entrepreneurs situated at the economic margins has gone unnoticed. For this reason, we investigate the local and global dynamics facing Ohio greenhouse growers and their entrepreneurial practices unlocking the existing silences observed in the literature. Ultimately, the concepts of local dependence, globalization, and operational responses from the Ohio greenhouse industry in the global marketplace will be examined.

1

See Beyers and Lindahl (1996) for a discussion of time-space compression and the ability of firms to effectively escape local dependence and/or maintain long distance transactions.

57 J. Gatrell and N. Reid (eds.), Enterprising Worlds, 57–70. © 2006 Springer.

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6.2 Globalization, Local Dependence and Greenhouses In Ohio, globalization has become synonymous with emerging trade agreements, specifically, the Central American Free Trade Agreement (CAFTA) or the earlier North American Free Trade Agreement (NAFTA). These trade partnerships (or treaties) have created an environment of uncertainty for Midwestern states traditionally touted as manufacturing centers. While much has been written on the geographies of manufacturing and the impending threats associated with access to cheap labor (think Ross Perot’s infamous “Giant Sucking Sound”), the hidden anxieties of agriculture remain understudied. But, the plight of agriculture has not gone unnoticed. Indeed, Ohioans and their congressional delegation—led by Representative Marcy Kaptur—have begun to focus energies on preserving and expanding agricultural industries as well as developing strategies to penetrate the new and restructured nature of the global agricultural marketplace. Fig 1.

As part of the policy efforts to expand agri-industries, a 2003 special research grant from the United States Department of Agriculture funded a team of scholars

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to investigate the economic conditions of the northwest Ohio greenhouse industry. The objective of the project was to benchmark the status and overall trajectory of the industry as well as elucidate the geographies of emerging and restructuring floriculture markets. In 2004, the study was expanded to include the entire state. In tota, these efforts represent an initial accounting of the state of the industry and an effort to define the industry’s potential as an “economic cluster” for the purpose of improving its overall competitiveness. This chapter will use survey data to discuss the overall degree of globalization of Ohio firms, sketch the extent of grower anxiety over broader competition (i.e., globalization), as well as detail the strategies of firms to increase productivity and overall competitiveness.

6.3 The Greenhouse Industry: Background and Trends in Floriculture The greenhouse industry is an important, however, neglected industry as seventyfive percent of all U.S. households participate in activities related to gardening. American households spent an average of $449 on lawns and gardens during 2004, resulting in annual sales of $36.8 billion. Floriculture crops include a wide range of products associated with the sector, including bedding plants, potted flowering plants, foliage plants, and cut flowers2. Like the rest of the industry, this particular segment is growing. Between 1995 and 2004 the total value of U.S. floriculture sales increased twenty-three percent to just over $5 billion (Figure 2). This evolvement is reflected in the fact that, in recent years, American households have increasingly purchased more of the industry’s products. Between 1995 and 2002 the amount of money the average household spent on floriculture crops increased more than seventeen percent from $48.34 per year in 1995 to $56.70 per year in 2002. Furthermore, it is estimated that Americans spend two to three times more on outdoor plants than consumers in other industrialized countries (AgriFood Trade Service, 2000). These characteristics make the United States an attractive target for floriculture industries in other countries.

2

Floriculture production corresponds with Harmonized System (HS) codes 0601 bulbs, tubers etc, chicory plants & roots nesoi), 0602 (live plants nesoi, cuttings etc., mushroom spawn), 0603 (cut flowers & buds for bouquet etc., prepared), and 0604 (foliage, grasses etc. for bouquets etc, prepared) . The Harmonized System is an “international commodity classification (with six digit codes) developed under the auspices of the World Customs Organization (WCO) , an independent intergovernmental body former called the Customs Cooperation Council” (Industry Canada 2005).

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Fig. 2. Value of Floriculture Sales in the United States, 1995-2004 (2004 U.S. dollars)

Sales ($ thousands)

6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000

19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04

0

Year

SOURCE: United States Department of Agriculture 2004b

6.3.1 Floriculture Import Patterns In recent years, competition within floriculture has become increasingly global in nature. Producers in one geographic region of a country are as likely to be competing with growers in another country as with firms inside their own national boundaries. Between 1994 and 2003 imports of floriculture produce increased over forty-one percent to nearly $1.3 billion (United States Department of Agriculture 2004a). The majority of floriculture imports (84%) into the United States represent only four competing countries in Canada (29.3%), Colombia (27.8%), the Netherlands (18.5%), and Ecuador (8.5%). During the period 1994-2003 the most significant gains in terms of accessing the U.S. floriculture market has been made by Canadian growers (Figure 3). Canadian floriculture exports to the United States increased from just under $140 million in 1994 to nearly $340 million in 2003--an increase of 143.4%. Furthermore, Ecuadorian floriculture exports to the United States demonstrated marked gains during the same period increasing from more than $30 million to nearly $110 million. However, Colombia and the Netherlands experienced only modest increases. U.S. floriculture imports are nearly evenly divided between nursery stock (51%) and cut flowers (49%). The origins of nursery stock and cut flower imports differ dramatically, however. The primary sources of nursery stock imports (including bedding plants, bulbs, and live trees) are Canada and the Netherlands. Canada accounts for 48.5% of nursery stock imports to the United States, while the Netherlands accounts for 25.7%. Penetration of the U.S. cut flower market is dominated by Colombia. More than fifty-six percent of U.S. cut flower imports come from Colombia. Smaller, but nevertheless significant shares come from Ecuador (17.3%) and the Netherlands (11.1%).

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600 400 200

2003

2002

2001

2000

1999

1998

1997

1996

1995

0 1994

Floriculture Imports ($millions)

Fig. 3. Origin of Floriculture Imports to the United States, 1994-2003 (2004 U.S. dollars)

Year Canada

Colombia

Netherlands

Ecuador

Source: United States Department of Agriculture 2004a

6.3.2 Canada-US Floriculture Trade Patterns The impending Canadian penetration of the U.S. floriculture market (Figure 4) is one of the most significant developments within the respective industry in recent years. The United States is, indeed, the primary destination for Canadian floriculture exports. In 2004, Canada exported $342,988,793 of floriculture crops to the United States. This represented 97.9% of Canadian floriculture exports (Industry Canada 2005). Whilst Canadian floriculture producers have successfully made inroads into the U.S. market, the same cannot be said with regards to the ability of U.S. producers to access the Canadian market. The result is an ever-increasing trade imbalance in floriculture. Between 1995 and 2004, Canada’s trade surplus with the United States in floriculture products increased from $44.6 million to $213.4 million. Canadian access to U.S. markets has been assisted by a number of factors. Initially, the 1994 passage of the North American Free Trade Agreement (NAFTA) made it easier for Canadian producers to enter the U.S. marketplace. Subsequently, Canadian penetration of the U.S. floriculture market has been aided by the fact that, during the period 1995-2002 the U.S. dollar was strong relative to the Canadian dollar. However, (2003-2005) the Canadian dollar has gained strength in terms of value compared to the U.S. dollar. The strengthening Canadian dollar coincides with a flattening-off of Canadian floriculture exports to the United States. If the Canadian dollar continues to increase its global value, the Canadian floriculture export market could be significantly depressed. The critical

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value, at which Canadian floriculture exports to the United States could be severely compromised, is generally thought to be $US1 to $C1.25 (Ontario Horticultural Crops Research and Services Committee 2003). This critical value was reached in late-October 2004 (Bank of Canada 2005). Thus, the continuation of the Ohio Greenhouse Survey is necessary to monitor the Canadian-U.S. floriculture trade dynamics.

400 300 200 100 0

19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04

Value of Trade ($millions)

Fig. 4. Canada-US Floriculture Trade, 1995-2004 (2004 U.S. dollars)

Year Canada>US

US>Canada

Source: Industry Canada 2005

More than half of U.S. floriculture imports from Canada come from Ontario. Other major exporting provinces are British Columbia (19.8%), Quebec (9.5%), and New Brunswick (8.4%). These origin regions reflect the geography of Canadian floriculture production. The major U.S. destinations for Canadian floriculture exports are states concentrated around the Great Lakes region (Source: Industry Canada, 2005).

6.4 Data and Methods A sample of 500 potential respondents was extracted from OFA-an association of floriculture professional members’ mailing list. Respondents received a nominal stipend of twenty-dollars for participation. Questions were developed to unpack the current practices and to reveal the status of Ohio’s greenhouses. Production methods and materials, employment trends, as well as financial aspects, were used to derive Ohio’s greenhouse geography. The survey was comprised of 59 questions. OFA and the United States Department of Agriculture (USDA) were instrumental in developing widespread interest in the study. In particular, OFA utilized its mailing list to encourage participation from members. The Toledo

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Botanical Gardens mailed 500 copies of the survey to respondents. The response rate was 24.2% (n=121). Following the return of surveys, respondents were categorized by region. Specifically, 5 Ohio regions were identified based on the defined as Northwest (NW) (Toledo-Lima-Findlay), Northeast (NE) (ClevelandAkron-Canton), Central (Columbus-Delaware-Newark), Southeast (SE) (Cincinnati-Dayton), Southwest (SW) (Wheeling, WV; Weirton, WV; Huntington, WV; Parkersburg, WV). Finally, the responses were entered into an electronic database to enable statistical analyses.

6.5 Results The results are organized around two themes: Globalization and Markets & Sales. Each of these themes address various facets of the global conditions facing local firms and are used to elucidate firm response to changing and emerging markets as well as global competition. 6.5.1 Globalization To understand the overall perceptions of firms with respect to the trajectory of the industry and their position in the global market, key questions were selected to determine the overall perceived “degree” of competition from non-local firms with an emphasis on Canadian firms. Additionally, the survey explores the importance of and potential for Ohio growers to develop niche markets to increase the overall competitiveness of the industry. Of primary importance to this research is the perception of growers concerning the global marketplace insofar as how NAFTA—and now CAFTA—have altered the economic landscape. Specifically, we are concerned with the perceived competitive threat of non-local firms. Based on survey responses though, it is evident that all growers perceive their primary competitive to be firms located locally (Table 1). Four of five regions indicated that more than two-thirds of firms perceive local competition as moderate to high. The exception, the southwestern region, had very few respondents and thus, a lowered level of recognized competition from local businesses might be expected given the limited number of respondents (and total firms based on a survey of the OFA directory). Yet, Ohio firms do recognize the importance of non-local firms (see Table 2). The research unexpectedly indicated that the perceived competition from Canada was low to moderate. That is to Table 1 Region

Perception of Competition from Local Area Moderate 6

Total

Northwest

Low 7

High 8

21

Southwest

7

21

5

33

Northeast

9

13

10

32

Southeast

4

0

0

4

Central

4

7

6

17

Ohio

31

47

23

N= 107

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the research team—based primarily in Northwest and Central Ohio—had say, Ohio growers recognized the potential for Canadian firms to penetrate local markets—however; the overall impact was not as severe as anticipated. Indeed, expected NW growers to be especially concerned with potential competition from the north given the region’s proximity to Canada and heightened awareness of NAFTA and related trade issues. While fifty-five percent of firms in the NE see Canada as at least a moderate threat, only twenty-two percent of growers in the northwestern region have the same outlook. In fact, only six percent of NW enterprises see Canada as a highly competitive market compared to nearly a quarter of each of the southwestern, northeastern, and central regions’ greenhouse firms (Table 2). The survey further suggests that distance-decay may be a factor in terms of international competition. That is to say, surveyed firms as only fifteen percent of respondents feel that countries other than Canada compete in their markets--with Mexico being dominant. Further, only four percent of Ohio firms perceive competition from countries outside North America as high. In spite of the survey responses, the empirical evidence demonstrates that Ohio floriculture exports remain stagnant and imports—particularly from Canada and to a lesser extent Ecuador—are steadily increasing their share of U.S. floriculture markets (see Reid and Carroll 2005). In short, Ohio growers have not fully engaged in export markets and may have been slow to respond to the expansion of imported goods. Table 2 Perception of Competition from Canada

Region

Total

Low

Moderate

High

Northwest

14

3

1

19

Southwest

18

6

6

30

Northeast

14

9

8

31

Southeast

2

1

0

3

Central

8

5

4

17

Ohio

56

24

19

N= 99

One approach toward expanding the capacity to export greenhouse goods and/or improve the overall competitiveness domestically—thereby decreasing imports is the formation of a greenhouse grower co-operative. Indeed, the cooperative (or coalition) strategy has been effectively used by the Canadian industry. Traditionally, the co-operative approach has been organized around reducing input costs or coordinating market delivery (outputs). In the case of Ohio growers, either or both co-op strategies may be useful. Indeed, the internal need already exists as the respondents indicate that fuel prices (i.e., inputs) are of high concern to the respondents. In response, Ohio growers indicated they would, for the most part, utilize co-ops to purchase soils, fuels, and potting containers. However, some respondents reported the possibility of marketing and labor pooling through the

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competitive partnership. Interestingly, the desire to create a cooperative varies, in some instances, drastically by region (Table 3). Overall, about sixty-four percent of Ohio firms are interested in creating a co-op (either input or output based). Yet, a tension exists between growers insofar as they perceive each other as the primary competition—not non-local growers. For this reason, the formation of a true cooperative arrangement may prove difficult, as growers must partner with local competitors. Interestingly, those regions (i.e., northeast and central) that perceive market threats beyond the local scale appear more likely to pursue cooperative agreements. Hence, firms that have come to recognize the highly competitive and more global (or at-least less local) scale of the floriculture market appear to be taking the initial step of reconsidering the possibility of restructuring their organizations. In the end though, the survey data suggests that the implementation of a cooperative intended to further the Ohio greenhouse industry has the potential to address key concerns of growers including the development of niche markets, modernization of equipment, expansion of production capacity, and reduction of costs. Table 3 Interest in Creating a Cooperative

Total

No

Yes

Northwest

8

11

19

Southwest

12

14

26

Northeast

11

16

27

Southeast

0

4

4

Central

1

13

14

Ohio

32

58

N=90

Finally, the NW region has begun to respond to the new global environment by embracing the industrial cluster model to improve the competitiveness of the industry. The latest efforts of NW Ohio are the results of a sustained educational effort to increase awareness of new market structures and competitive structures. In future years, the NW cluster will begin aggressively “branding” the industry in an attempt to define and capture niche markets.

6.5.2 Markets and Sales More than seventy percent of growers responded that competition from the local area was at least moderate. In fact, nearly one-quarter of respondents rate local

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competition as high. These findings are expected given that nearly ninety-five percent of all Ohio greenhouse firms participating in the study sell at least thirty percent of finished products locally (Table 4). Less than one out of four firms sold products to neighboring states; while, seven percent of respondents reported selling their finished products to states not bordering Ohio. Perhaps most surprising is the finding that only one grower indicated sales outside of the United States. These findings clearly demonstrate the local dependence of the Ohio greenhouse industry. Further, these results are denotative that the treatises formed by the United States and its neighboring nation-states are having at most a moderate impact upon Ohio growers’ perceptions of the emerging, in fact existing, global marketplace. The realization that the state’s greenhouse firms are not responding to the influx of Canadian and increasingly Latin American and Scandinavian products illustrates the industry’s need to increase educational efforts as well as to explore markets outside of traditional socially constructed borders. Many firms in Ohio have attained increased sales during the past five years. More than fifty-seven percent of respondents affirmed increases during the same timespan. Ironically, production capacity and the firm’s length of operation do not, in the case of this survey, equal increased sales (Table 5). In fact, the northwest (NW) and northeast (NE) regions of the state house the enterprises with the greatest amount of production area as well as the longest running operations. However, the region with the smallest production centers, all operating less than 10 Table 4

Total

Percentage of Sales to Local Customers

75%

Northwest

2

1

2

15

20

Southwest

2

1

1

29

33

Northeast

4

4

3

21

32

Southeast

0

0

0

4

4

Central

1

3

0

13

17

Ohio

9

9

6

82

N= 106

years, boasts the largest increase in sales. Three of four firms in the southeastern (SE) domain have grown sales of at least 40%. There are, of course, a number of plausible explanations. A new business has great potential to grow small sales recorded from its genesis. But more likely is that these new firms utilize the mostmodern translucent building materials as well as employ automated production methods.

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Table 5

Region

Total

Percent of Sales Increase Since 2000

No Change

Decreased

Increased

Northwest

7

2

13

22

Southwest

10

3

23

36

Northeast

7

9

16

32

Southeast

1

0

3

4

Central

4

4

9

17

Ohio

29

18

64

N= 111

6.6 Discussion As the results indicate, globalization and local responses to it are complex and inherently uneven. For this reason, the Ohio greenhouse growers have adopted a multi-pronged approach towards addressing new market structures. The mixed responses and uneven knowledge about globalization and potential competition from nearby (in relative terms) Canadian firms demonstrates the contradictory nature of capital that on the one hand produces mobile investment and on the other a sense of place that creates firm inertia—a resistance to change. Or as Phelps and Raines (2003) suggest, globalization produces a tension between mobility and embeddedness—or what Harvey has called structured coherence. The challenge facing Ohio Greenhouses and the primary problem facing the USDA research and policy team is the degree to which Ohio Growers can restructure the region’s space-economy and promote economic expansion and stability throughout the high tech agricultural sector. A result of the inherent tension between local places and global spaces, policies, and programs, research initiatives like this one emerge to re-shape, nudge, and restructure local/regional space economies. Over the past twenty-five years, this strain has been examined from a variety of perspectives and has become an increasingly nuanced conceptual terrain. In the late-1980s and early-1990s, initial responses to globalization focused on growth coalitions that partnered capital and labor to promote local investment (Cox and Mair 1988, 1991) and the general place competition (Robinson and Sadler 1985). By the 1990s, discussions of local dependence and capital investment had been re-made under the guise of the entrepreneurial state (Eisinger 1989, 1998). In the late-1990s, the competition for local

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investment benefited from a re-scaling of local politics vis-à-vis networks of association that allow localities and capital to “go global” or “go local” (Cox 1998). By the 21st century, the discussion had been influenced by the cultural turn and sought to re-interpret local politics through a cultural lens (McCann 2002; Gatrell & Reid 2002; Reese & Rosenfeld 2001; Molotch et al 2000). Concomitantly, the applied economic development community began to coalesce around the theme of industrial clusters. The cluster-approach articulated by Porter (1990) and now widely adopted by the policy community, seeks to align local resources around a single (or few) economic assets to develop a competitive advantage in the global marketplace. In many respects the applied community has now adopted Cox & Mair’s maxim of local cooperation for global competition in an attempt to maintain and expand local/regional economies.3 Despite the plethora of information on the global competition for capital investment, it is increasingly clear that the linkage between “what we know about globalization” and “what we do about ‘it’” is imprecise. That is to say, place-based policy efforts to mitigate negative externalities associated with global markets structures are often imperfect—or to use Nick Phelps’ and Andy Wood’s (2005) phrase-ology “Lost in Translation”. That is, the ability of policy makers to develop effective policy instruments is inherently limited and muted. Simultaneously, the ability of research to obtain good data on the “globalization-thing” (as one greenhouse grower referred to it) on the ground and in place is limited. For this reason, the current research—like all sectors or place-based case studies—is necessarily uneven. Whereas some firms recognize the need to modernize, invest, and create collaborative marketing or input arrangements, the impact of globalization across Ohio has produced a high level of uncertainty with respect to the development of appropriate statewide policy regimes. Moreover, the plight of the industry is further complicated by the varying levels of firm awareness of the potential impact of Canadian floriculturalists. Consequently, restructuring the space-economy of the industry requires a more precise understanding of the issues facing growers on the ground and how these issues differ within and between regions. For example, many growers see zoning (over 30 percent) and land use regulations (approximately 60 percent) as a key determinant of firm competitiveness. Similarly, local tax policies (most notably “real” property tax)—which are controlled by local governments—are a major concern for over 80 percent of growers. Yet, the “local” zoning, regulation, and tax policies of eighty-eight Ohio counties are seldom a recognized impediment to global capital as these are “too local.” At any rate, the research policies and politics of economic development are highly variable.

3

For the purposes of clarity, we have purposefully avoided the language of neo-liberalism. While the literature on neo-liberalism informs the local politics of economic development, the practices—in place—are often too far removed (in scalar terms) from policy discussion situated at the nation-state scale.

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6.7 Conclusion The research indicates that globalization has influenced the market structure, sales, and firm strategies of Ohio growers. However, the specific strategies used by firms vary somewhat between regions. While the observed regional variation is less pronounced than expected, the differences provide key insights into the highly dynamic nature of local politics and the wide-ranging factors that influence individual firms. In the end, the geography of greenhouse firms sketched in this paper demonstrates that the exact linkage between local practice and global structures is imprecise. Nevertheless, the research does demonstrate the importance of reconsidering the wisdom of deploying eighty-eight individual policy regimes and the potential importance of engineering more flexible “glocal” structures. Acknowledgments This research was supported by a grant from the United States Department of Agriculture. Additionally, the research is part of a larger collaborative initiative that includes partners from The University of Toledo, The Ohio State University, and Bowling Green State University.

Sources Agri-Food Trade Service. 2000. The U.S. Market for Floriculture and Environmental Horticulture. Agriculture and Agri-Food Canada. (http://atn-riae.agr.ca/). Last accessed July 15, 2005. Bank of Canada (http://www.bankofcanada.ca/). Last accessed 5 July 2005. Cox, K. 1998. Spaces of dependence, spaces of engagement and the politics of scale. Political Geography 17:1-28. Cox, K. & Mair, A. 1991. From localised social structures to localities as agents. Environment and Planning A 23:197-231. Cox, K. & Mair, A. 1988. Locality and community in the politics of local economic development. Annals of the Association of American Geographers 88:307-325. Eisinger, P. 1998. City politics in an era of federal devolution. Urban Affairs Review 33: 308-325. Eisinger, P. 1989. The Rise of the Entrepreneurial State. Madison: University of Wisconsin Press. Gatrell, J. & Reid, N. 2002. The cultural politics of economic development: The case of Toledo Jeep. Tijdschrift voor Economische en Sociale Geografie 93:397-411. Industry Canada. 2005. Strategis: Canada’s Business and Consumer Site. (http://www.strategis.gc.ca/). Last accessed 25 May 2005. LaFary, E., Gatrell, J., & Griffey, S. 2005. Green(house) geographies: Metropolitan and non-metropolitan differences in the Ohio Greenhouse Industry. Proceedings of the Applied Geography Conference 28: 301-308. McCann, E. 2002. The cultural politics of local economic development: meaning-making, place-making, and the urban policy process. Geoforum 33:385-398.

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Molotch, H., Freudenburg, W. & Paulsen, K. 2000. History repeats itself, but how? City character, urban tradition, and the accomplishment of place. American Sociological Review 65:791-823. Ontario Horticultural Crops Research and Services Committee. 2003. Ontario Greenhouse Floriculture Research and Services Subcommitee. Ministry of Agriculture, Food and Rural Affairs, Government of Ontario. . (http://www.gov.on.ca). Last Accessed 15 July 2005. Phelps, N. & Raines, P. The New Competition for Inward Investment. Cheltenham: Edward Elgar Publishing Limited. Phelps, N. & Wood, A. 2005. Lost in Translation. Paper presented at the annual meeting of the AAG, Denver, CO. Porter, M. 1990. The Competitive Advantage of Nations. New York: Basic Books. Reese, L. & Rosenfeld, R. 2001. Yes, But...: Questioning the Conventional Wisdom About Economic Development. Economic Development Quarterly. 15:299-312. Robinson, F. & Sadler, D. 1985. Routine action, reproduction of social relations, and the place market: Consett after closure. Society and Space 3:109-120. Reid, N. & Carroll, M. 2005. Using cluster-based economic development to enhance the economic competitiveness of Northwest Ohio’s greenhouse nursery industry. Proceedings of the Applied Geography Conference 28: 309-319. Statistics Canada. 2002. 2001 Census of Agriculture. (http://www.statcan.ca). Last Accessed 28 June 2005. Swyngedouw, E. 1997. Neither global nor local: 'Glocalization' and the politics of scale. In Cox K. (Ed.) Spaces of Globalization: Reasserting the Power of the Local. New York: Guilford. United States Department of Agriculture. 2004a. Floriculture and Nursery Crops Situation and Outlook Yearbook. Washington, D.C.: U.S. Government Printing Office. United States Department of Agriculture. 2004b. Floriculture and Nursery Crops Outlook. Electronic Outlook Report for the Economic Research Service. United States Department of Agriculture, September 23 (www.ers.usda.gov). Last accessed 25 May 2005.

7 High Technology and Urban Development in Bangalore, India R. Kalra, Department of Geography, Kent State University, Kent, Ohio

7.1 Introduction Today we are living in a global village. In such a village the distances have shrunk due to the increasing spatial interaction in terms of economic, social and political dimension at the global scale. Global village is a complex, fast paced society dependent upon extremely advanced technology, and a post materialist value system (Toffler, 1990). A characteristic of this society has been the transformation of the ‘structure’ and ‘scale’ of human relationship, that is the social, economic, political processes now operate at a global scale with a consequent reduction of other geographical scales such as national, regional or local (Johnston, 2000). The world has become a homogenized place and the term nation-state is a little irrelevant since the tastes of human beings have become analogous and are satisfied through the provision of standardized global products created by global corporations who owe no allegiance to any nation, state or place. Another dimension of this process has been the new phenomena of: ‘high technology’, ‘increased trade’, ‘concentration of capital’, ‘migration of people’, ‘development of advanced technologies’, and ‘changing values and norms’ (Marcuse and Kempen, 2000). High technology has had a major impact on the process of global urbanization. Multinational corporations have established operations in major cities around the globe to exploit the international spatial division of labor. Nations and regions have been connected in a new economic relationship and have transformed the city’s economic, urban and social structures. An impact of this global process has been the change in the mix and composition of economic activities (Malecki 1997). As part of this process, cities are being engulfed by firms located especially in the developing regions for outsourcing and back office processing jobs where there is an abundance of cheap but intellectual skilled labor creating spatial inequality within the city. The global distribution of high technology industry is an outcome of business decisions (Choi 2003). Today countries are linked through the location of various branch plants that exploit the international spatial division of labor to its fullest extent. The adoption of new technology produces ‘new structures’, ‘geographical arrangements of economic activities’, products and processes (Dickens 2003). 71 J. Gatrell and N. Reid (eds.), Enterprising Worlds, 71–81. © 2006 Springer.

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The integration of the Indian economy with the world economy manifested several spatial changes such as the increasing specialization of urban regions, growing urban interdependencies, new patterns in the spread of technologies, changes in the product-mix of regions and changes in the sectoral mix of the economy. In the process of urban economic development cities interact and transmit productivity via inter-urban and intra-urban interdependencies. Many studies have been conducted on inter-urban disparities, but, this study tries to divulge the impact of high tech firms on the city of Bangalore. It seeks to reveal the extent of high tech firms in creating a new socio-economic landscape within the second largest city of South India now often called the IT Capital of India.

7.2 High technology and Urban Development: A Conceptual Review 7.2.1 What is High Technology? High technology has largely been defined as the application of intensive research and development in the creation and manufacture of products of an advanced scientific and engineering in process. Schmookler (1996) defines technology as the social pool of knowledge of the industrial arts. The Organization for Economic Cooperation and Development (OECD) (1985) considers high tech as industries like aerospace, computers and office, communications equipment, semiconductors, electrical machinery, pharmaceuticals and science instruments. Malecki (1985, 1997) on the other hand, views high technology as technological change administered by the construction of knowledge, its application and diffusion in the economy. He argues that the intensity of research and development and the technical workers in the work force are the best indicators of high technology. So the typical high tech industry includes jobs in electronics, high tech electronics manufacturing, software and computer related services, telecommunications, data processing, information services, biomedical, electro medical services, research and development, percentage of technical workers (scientist, engineers and technicians) and the degree of novelty and invention (Atkinson and Gottleib 2001; Malecki 1997; Choi 2003). Chapple et al. (2004) defines high technology as manufacturing and service producing industries with 9 % of the workforce in science, engineering and computer professional jobs. This study defines high technology as a combination of information technology, hardware, software and services, business process outsourcing (BPO), computer chips, telecommunications, data processing, electronics industries and research and development which are reasonably predominant in the city of Bangalore.

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Technology and technological progress has always been a crucial factor in a region’s economic growth. Various empirical studies have been done to understand the role and impact of high technology in reconfiguring regional development. It has been revealed that cities with higher concentrations of skilled workers and professionals have high probabilities of high tech agglomerations. It can be argued that the impact of high technology can be visible in three different ways in terms of regional development. First, high technology activities have become major factors of employment growth in developed as well as developing nations; second, high technology industries have led to exclusive patterns of geographical development such as the coastal regions of China, California, Pacific Northwest, New England, New Jersey and Texas in the US, and selected cities in India such as Bangalore and Hyderabad are examples of exclusive centers of high technology industry location, and third within such agglomerations, specialization is often the rule as different places within these locations specialize in different high technology activities (Fellman, Getis and Getis 2004). In the modernizing world leading cities are linked to one another by the flow of goods, information and people which forms a major part of the configuration of the world urban economic structure (Shin and Timberlake, 2000). Today any hightechnology city needs to satisfy the following conditions of: 1) linkage with universities to provide highly educated and technically skilled labor, 2) a modern and developed infrastructure that includes effective telecommunication capabilities, 3) a cost effective transportation infrastructure which connects with national and international markets, 4) flow of capital to support a strong research and development base; 5) an attractive living environment and a good standard of living, and last but not the least it needs to have an assertive economic development force that comprehends how technology generates growth (Edwards, 1999). The technological revolution today is centered on information technologies and is redesigning and restructuring the society and creating a new bond between the economy, state and society (Castells 1996). 7.2.2 High Technology in Developing countries The transfer of high technology industry to developing countries has become attractive to transnational corporations. Newly industrialized countries often offer a labor force that is both educated and cheap. The corporations retain the know-how and profit of their technologies and get the labor oriented work performed for a lower cost. The diffusion of high technology in many less developed countries in Africa, Asia, and Latin America was quite low in the early 1990s, but with rising economic globalization these countries are beginning to catch up with technology. Today, many of the less developed regions have emerged in Asian countries. Thailand, Singapore, Hong Kong, Malaysia and Taiwan have become examples of such technology induced transformations. At its brightest, high technology is leading poor nations to prosperity as has been the case in China, India and Malaysia (Chesnais, 1986; Malecki, 1997). High technology has led to a decline in the

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manufacturing sector and has increased the dominance of service sector, not only in the Western world but also in many Asian cities in addition to Tokyo, Singapore, Hong Kong, Nanjing, and Shanghai. Consequently, this trend has impacted Indian cities too especially Bangalore in Karnataka and Hyderabad in Andhra Pradesh. A UNDP (United Nations Development Programme) study has identified Bangalore as one of the world class technological hubs which poses competition to the Silicon Valley (USA) and various other regions in Europe and Japan. Today high technology industries are transforming the physical, economic, cultural and also the social setup of cities. Hence, the cities are becoming wealthy; opportunities are increasing and attracting multinational firms due to various factors prevalent in that particular city. However, high technology not only transforms the region but also poses challenges for local and national government as they need to have appropriate infrastructure facilities (Udo and Edoho, 2000). Shachar and Felsentein (1992) found that high technology is located only in those regions which have the added local advantages like the availability of educational institutes. Many social scientists argue that high technology not only results in increased growth but also increased inequity and impacted innovation especially in developing countries (Kaushik et al. 2004). Several developing countries are characterized by rapid urbanization, macrocephalic urban systems, high urban densities and various socio economic and environmental problems (Scott and Storper, 2003; Lipton, 1997). As a result of these issues, high technology may not necessarily bring the same level of benefits. There are dynamic benefits in terms of Information Technology as it increases growth especially in the field of education. Pohjola’s (2000) cross country regression analysis concluded that Information technology had positive impacts on the developed (OECD) countries but not in developing countries. Today state and local governments all around the world are playing a vital role in encouraging high tech economic development (Choi, 2003). But the developing countries need to be incredibly cautious in adopting and further adapting western technology. Socio- economic and cultural conditions in the host country are distinct and so the high technology innovation may stress the existing urban and social infrastructure giving rise to a mismatch in culture (Melih, 1996). On the other hand the high-tech industries are generating and promoting regional disparities at the inter regional and intra urban level in terms of income, purchasing power, life style and other socio-economic indicators (Joseph, 2002). 7.2.3 High Technology in India India is a subcontinent with huge inter and intra- urban disparities. After India’s independence in 1947 and from the year 1951 onwards the government paid particular attention to promote a ‘balanced regional development’ through the implementation of various Five-Year Plans. The central and the state government took

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initiatives to minimize imbalances within sectors between ‘small and large manufacturing units’, ‘between small and large farmers’, between ‘lagging and fast growing regions’ by utilizing taxes, providing incentives and implementing development programs. Kurian’s (2002) analyzed the fifteen selected states of India representing 95.5 percent of the total population. The analysis was performed using various socio economic indicators and the states were divided into two groups i.e. forward (developed) and backward (less developed). The forward group comprised of Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Maharshtra, Punjab and Tamil nadu whereas the backward group consisted of Assam, Bihar, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh and West Bengal. These two groups of regions were at different levels of development but efforts were being made by the public and private sectors to minimize these disparities. At the time of India’s independence, more than 80 percent of the population was employed in agriculture which has now reduced to less than 60 percent? Also the percentage of people below poverty level has declined from 51.3 in 1977-78 to 26.10 percent in 1999-2000 in India (Kurian, 2002). Urbanization in India has been on the rise since independence. As the number of cities with a million people has increased from 1 in 1901 to 23 in 1991. Of these million cities Mumbai, Kolkatta, Delhi and Chennai are the cities with high rates of urban growth. These cities are the locations where rapid urban economic development is taking place and is competing to become global cities. Also, new cities such as Hyderabad, Bangalore, and Lucknow are now rising as the new million cities (cities with million people). Indeed, development and urbanization is picking at a very fast pace but is unevenly dispersed across geographical space as some regions are growing at a faster pace whereas others are slow. The Indian economy has virtually transformed from an inward-oriented, closed economy to a liberalized and an export-oriented economy (Basu, 2004). The process of economic liberalization started in India in the year 1991 which brought about drastic changes in the Indian economy. These policies began to liberalize imports and encourage exports and led to the opening of the economy with a focus on integrating the Indian economy with the world economy especially with the system of transnational corporations engaged in finance, telecommunications and high technology sectors. It was an economic revolution which emphasized on decreasing the barriers and to set up greater public and private sector cooperation (Kuttaih et al. 2000). This is an interesting revolution which has taken place in India in terms of the development of IT (Information technology) sector. Inspite of India’s low level of income and economic development it has stood out in terms of high technology development (Information Technology) (Srinivasan, 2004). The size of Indian economy increased from $62.9 billion in the year 1970 to $532.5 billion in the year 2002. So as India deregulated its economy and attracted foreign investment it further spread inter regional disparities and uneven growth, as the regions which were economically and socially well off gained at the expense of other regional economies in India. Two cities Mumbai in the western part

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of the country, and Bangalore in the southern part (i.e. the software district of Bangalore) has done much better than the eastern half in India (Stutz and Warf, 2005). The IT (Information technology) industry reflects the tendency to agglomerate in major cities with a strong bias towards South India. According to the National Association of Software and Services (NASSCOM) analysis in 2002, Bangalore leads in terms of the numbers of Information technology headquarters. Inter regional disparities exist not only at the level of IT firms, high tech centers but also there is an unevenness in the number of engineering colleges which are leading in the southern region (Karnataka, Tamil nadu, Andhra Pradesh, and Kerala) as compared to the northwest and eastern regions in India. So one can argue that IT agglomeration in southern India is due to the abundance of the availability of skilled labor (Aranya, 2003). Currently, the number of overseas offices of Indian Information technology has increased from 167 in 1995 to around 750 in 2000 (NASSCOM). As a result of economic reforms multinationals were allowed 100 percent ownership of subsidiaries in India and this eased the entry of IBM, ORACLE, SAP, Microsoft and Sun which have established joint ventures since then. It was the economic reform which emphasized on decreasing the barriers and to set up greater public and private sector cooperation that led to such changes (Kuttiah et al. 2000). The size of Indian economy increased from $62.9 billion in the year 1970 to $532.5 billion in the year 2002.

7.3 Bangalore: Transformation of a Garden City to the Silicon Valley Amongst all the Indian cities of India, Bangalore has the largest number of high tech firms and is the fastest growing technology hub (Human Development Report, 2001). It is the capital city of Karnataka, and the fifth largest city of India. It is located in the heart of South India and was often called as the Garden city and the Pensioner’s Paradise (Census of India, 2001). It lies in the interior of the Deccan peninsula and is surrounded by cities like Chennai in East, Mysore to its South West, and Hyderabad to the North. The salubrious climate of Bangalore has played a vital role in making it the technological hub of the country. The attractive climate has induced people from other states to migrate and thus led the population of Bangalore to grow since 1901 from 228,000 to 7.5 million in the year 2001 (Census, 2001). The population density of Bangalore was 10,710 per sq km in 2001. In 1949 there were seven wards which have increased to 100 wards in 2001 census in Bangalore. Another dynamism of Bangalore is its economic structure. Since the 1990’s, Bangalore has earned the reputation of a city specializing in the areas of research and development, electronics and software production. Initially, the presence of the Indian Institute of Science (IIS) along with the increasing investments by the Central government in Research and Development establishments such as Indian

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Space Research Organization (ISRO) gave the city of Bangalore the nickname of ‘science city’ (Heitzman, 2001). The Information Technology (IT) industry has grown tremendously which reflected in its revenues which grew from $5.7 billion in the year 1991-2000 of which $4 billion represented the exports according to the National Association of Software and Services Companies industry trade group (Rosenberg, 2002). Today, Bangalore is considered to be the heart of India’s booming software industry which had an increase in its exports to the tune of $6.2 billion in 2000-01 which means that there has been an increase of around 50 percent a year from $734 million in 1995-96. Hence, Bangalore has become a very important case study to understand how these high tech firms have transformed the social and economic landscape of the city. Eisebith (2002) studied Bangalore as a model of high technology growth in India. She demonstrated that first its success is based upon the internal networks of technological actors, local relationships between innovation stimulation and support which characterizes successful regions in developed countries; second, Bangalore is an example of an unplanned technology region which shows characteristic of industrial districts as identified in developed countries; third Bangalore is a model where regional relations construct the fabric of mutual encouragement, support and social coherence in order to attain innovation based economic development. The department of Information Technology in Bangalore proposes that almost every week there are several multinational corporations either establishing a joint venture or a branch plant in Bangalore. The presence of so many foreign investors and multinational corporations has put pressure on land prices and this has led to a dramatic rise in the land values especially near the IT corridor. The government of Karnataka has demarcated this IT corridor which extends from Whitefield to Koramangala, Indiranagar, Hosur Road, HSR layout, Electronics city, J.P. Nagar and Banashankari. (Department of Information Technology, Bangalore). This has further led to rise in the real estate value in several wards of Bangalore city. In the last few years there has been a doubling of real estate prices in the central and eastern part of the city as compared to the western part. The rise in IT has also led to the rise in land prices especially between 1992 and 1996. In 1995 the land prices rose at least by 50 percent and in many areas it rose by 300-400 percent. Land opportunists were definitely behind this rise with the incoming of the non resident Indian s and employees of the multinational corporations. There was a rise of multistoried posh housing apartments which were an attraction for the new rising upper middle class. But there has been many land purchases which involved under the table land deals especially in the southern part of the city (Heitzman, 2004). The city is surrounded by various billboards which advertise luxury apartments and direct flight to Frankfurt and a range of global destinations.

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Another interesting phenomenon is to observe how the infrastructure expenses in the Bangalore Municipal Corporation have altered in these IT Corridors. The Table: 1 reveals percentage of infrastructure to total expenditure in the IT wards for the year 2002-2005 and reveals very interesting patterns. Table 1. Expenditure on Infrastructure to total expenditure in Bangalore Municipal Corporation IT Corridor JP Nagar Jayanagar Koramangala Airport Ulsoor

2002-03 74.86 77.99 23.63 95.30 93.39

2003-04 90.79 20.62 88.78 85.21 92.58

2004-05 80.90 50.79 70.87 95.95 91.23

Source: Data provided from Bangalore Mahanagar Palika, Bangalore. (Note: All numbers are in percent) First the airport ward had the maximum expenditure on the infrastructure facilities. This expenditure was the highest during 2002-03 and 2004-05. The other ward which had the highest expenditure on infrastructure was Ulsoor which was adjacent to the IT corridors. Thus, although the expenditure pattern on infrastructure varies among the wards a concentration can be observed near the airport and IT corridors. The city of Bangalore is the hot spot of IT (Information technology) headquarter location but the growth in the city of Bangalore is not equitable and is rapidly creating economic and social segregation in the various wards of the city. Madon (2001) draws attention to three major issues related to social inequities. First, there exists gross inequality between groups of diverse socio-economic status within the city of Bangalore and in the state of Karnataka. Second there is extreme poverty amongst the inhabitanats. Third, there is an acute problem of the availability of civic amenities both in the city of Bangalore as well as in the state of Karnataka which is a great cause of concern. This trend also reveals inequity in infrastrucure expenditure between wards and also differnces in land values between the wards where IT firms are located and where they are not located. Upadhaya (2003) has revealed that high technology’s well paid and cosmopolitan work force is creating a new category of enterpreneurs who are emerging from the middle class and has called them middle class millionaires. Added to this cohort are the returning Indian diaspora of high technology workers from Europe and North America bringing entrepreneurial experience, capital to invest and managerial skills. Both these groups of skilled workforce and their adeptness to western culture has led to a social transformation as the working and middle class

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are becoming suddenly rich and creating a widening gap between the work force employed in high tech and non high tech firms. This widening income disparity is revealed in the preferences, tastes and consumption patetrns of this new class of middle class millionaires who demand western styled commercial busineses outlets, large malls, recraetional facilities, and pubs, and hotels serving internatioanl cuisine. There has been an increase in the demand for western styled houses which were offered by the private builders. This has become quite evident with the rise of multinational corporations (Nair, 2005). Aranya (2002) has demarcated the inequalities in Bangalore’s urban economy and explained the transforming spatial structure of the city with the growth of the information technology sector. She has tried to shed light on the spatial disparity in the city of Bangalore and has divided the development of the information technology sector into four phases : firstly the phase of startups and location of multinational subsidaries (mid 1980’s-1990’s), second phase of the establishment of brand capability (1991-96), third phase of Y2K related boom and dot.com bust (1996-99) and finally the phase of business recovery and peripheral spatial growth (1999-till date). So, while we recognize that the high technology sector has creating significant beneficial changes, it also clearly has accentuated existing socio economic disparities and may firther widen the existing disparities. Thus, the high tech firms without question are shaping and reconstructing the urban, social and economic space of the city but at the same time it has led to an increase in the level of disparity between wards ( intra urban level).

7.4 Conclusion High technology has been defined as the application of intensive research and development in the creation and manufacture of products of an advanced scientific and engineering in nature and process. In the process of globalization the international spatial division of labor has reached beyond national boundaries to exploit the availability of low wages, skilled labor force, English speaking population, cheap land prices, low real estate values, infrastructure facilities, and attractive climate. Bangalore is an excellent example of the location of high technology where the multinationals have reached to take advantage of the benefits of such economic opportunities by setting up joint ventures and branch plants in the areas of high technology. An objective of this paper has been to analyze the impact of high technology cluster on the local social structure at the intra urban scale (wards) in Bangalore. An analysis of the expenditure pattern on infrastructure suggests that more endowed and attractive wards such as the airport and IT corridors have taken away a major share of the resources for investment. The rise of the middle class millionaire and the returning Indian Diaspora from the Western nations have created a widening disparity within the social groups by their demand for Western styled malls, shop-

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ping outlets, luxurious houses, entertainment facilities, tastes, preferences and consumption patterns. This disparity has created a ‘demonstration effect’ leading the local government to address the issue of social equity at the intra urban scale. This exploratory study suggests some future questions of research: (1) what processes explains the intra urban disparities within social groups in Bangalore city due to the location of high technology? 2) Can the extent of social inequality be measured using geographical information systems and statistical methods for analyzing the spatial pattern of social and spatial inequality? And 3) what policy suggestions can the study make to minimize the disparities between social groups at the ward level for improving the quality of life.

Sources Aranya, R. 2003. Globalization and urban restructuring of Bangalore: India. 39th ISOCARP congress. Atkinson, R.D. and Gottlieb, P.D. 2001. The metropolitan new economy index. Washington D.C: Progressive Policy institute. Basu. K (Ed.) 2004. India’s emerging economy: performance and prospects in the 1990’s and beyond. Cambridge Massachusetts: IT press Choi, B.R. 2003. High technology Development in Regional Economic Growth. England: Ashgate Publishing Company. Castells, M and Hall 1994.Technopoles of the World: the making of the 21st Century Industrial Complexes. London/New York: Routledge. Chapple. K. et al. 2004. Gauging Metropolitan “High tech” and “I Tech” Activity. Economic Development Quarterly.18 (1):10-29. Chesnais.F 1986. Science Technology and Competitiveness. STI Review (1):86129. Dickens, P 2003. Global Shift: Reshaping the Global Economy Map in the 21st Century. Guilford Publications, Inc. Fellman, J.D., A. Getis, and J. Getis 2004. Human Geography: Landscape of Human Activities, Eighth Edition, Mc Graw Hill, Boston Fromhold-Eisebith, M 2002. ‘Regional Cycles of Learning: Foreign Multinationals as Agents of Technological Upgrading in Less Developed Countries’, Environment and Planning, A 34: 2155-2173. Heitzman, J. 2001.Becoming a Silicon Valley: Bangalore as a Milieu of Innovation. Seminar. 503(July):299-330. Heitzman (2004). Network city: Planning the information society in Bangalore. New Delhi: Oxford University Press. Johnston, J. et al., (eds.) 2000. Dictionary of Human Geography, Blackwell Publishers. Joseph. K.J. 2002. Growth of ICT and ICT for development. World Institute for development economics research. Discussion paper no.2002/78.

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Melih, K. 1996. Information technology transfer to a developing country: Executive information systems in Turkey. Information Technology and People. 9 (3): 55-84. Kurian. N. J. 2002. Growing Inter state disparities. Seminar.509. Kuttaiah, K. and Sommers, G.G 2000.East meets West in Bangalore: The impact of Economic Change on the Built Environment. In Graham P. Chapman, Ashok. K. Dutt. and Robert. W. Bradnock Urban Growth and Development in Asia: Volume1: 307-322: USA. Ashgate Publishers. Madon, S. 2004. Bangalore: Internal disparities of a city caught in the Information age. In Stephen Graham(Ed). Cyber cities reader. London & New York: Routledge. Malecki, E.J 1985. Industrial Location and Corporate organization in High technology industries. Economic geography 61(4): 345-369. Malecki, E. J. 1997. Technology and Economic development. New York: John Wiley and Sons. Marcuse, P. and Kempen, R.V (Eds.) 2000.Globalizing Cities: A New Spatial order? USA: Blackwell Publishers. Nair. J. 2005. The Promise of the Metropolis: Bangalore’s twentieth century. New Delhi: Oxford University Press. Kraemer. K.L. and Dedrick. J. 2000. Information technology and economic developments: results and policy implications of cross –country studies. In M. Pohjola (Ed.), Information technology, productivity, and economic growth PP.259-279. New York: Oxford University Press. Rosenberg. D. 2002. Cloning Silicon Valley: The next generation high-tech hotspots. New York: Pearson Education Schmookler, J. 1966. Invention and Economic Growth. Cambridge, MA: Harvard University press. Scott A.J. and Storper. M. 2003. Regions, Globalization and Development. Regional Studies, 37, 6-7: 579-593. Srinivasan, T.N. 2003. Integrating India with the World Economy: Progress, Problems, and Prospects In Anne O. Krueger and Sajjid Z. Chinoy (Eds.) Reforming India's external, financial, and fiscal policies. Stanford: Stanford University Press. Stutz .F.P. and Warf, B. 2005. The World Economy; Resources location, trade and development. New Jersey: Prentice Hall. Toffler, A. 1990. Powershift: Knowledge, Wealth, Power, at the Edge of the 21st Century. New York: Bantam Books. Udo. G. and Edoho, F.M. 2000. Information technology transfer to African nations: An economic development mandate. The Journal of Technology Transfer.25 (3):329-342. Upadhaya.C. 2003. Middle class Millionaires: IT enterpreneurship and the prodcution of the global Indian. Paper presented at Hindu College,University of Delhi,India.

8 An Evolutional Model of U.S. Manufacturing and Services Industries J. Helsel, H. Kim, and J. Lee, Kent State University, Kent, Ohio

8.1 Abstract This study uses the Getis-Ord local Gi* statistic and county-level employment data from 1990, 1997, and 2003 to analyze the evolution of spatial clusters or “hotspots” in the manufacturing and services sectors. We find evidence of similar patterns of clustering in both sectors. In most cases, these clusters appear to be growing or stagnant, rather than diminishing. Interestingly, the growth of some service sector clusters appears to pre-date the growth or the decline of co-located manufacturing clusters. Finally, we include a closer examination of regional economic profiles of the Northeast Ohio cluster as an illustration for further studies of other regions.

8.2 Introduction Between 1997 and 2003, the manufacturing sector in the United States has lost more than 3 million jobs, a decrease of 16.7 per cent, and the level of manufacturing employment is now at its lowest point since 1958 (Bivens, 2004). In contrast, employment in the services sector increased by 13.2 per cent during the same period, and by 17.9 per cent from 1990 to 1997. Economists are increasingly concerned that the dramatic expansion of the services sector is at the expense of manufacturing sector, particularly as the share of total labor employed. It poses a threat to the nation’s economic strength and standard of living. This concern stems from the belief that it is the manufacturing sector, not the services sector, which drives an economy. In a study commissioned by the Council of Manufacturing Associations, Joel Popkin and Company (2003) contend that “manufacturing spawns more additional economic activity and related jobs than does any other economic sector” and that “America’s unprecedented wealth and world economic leadership are made possible by a critical mass of manufacturing.” The idea of manufacturing as the key industrial sector in determining the overall rate of economic growth is certainly not new. In the late 1960s, Cambridge economist Nicholas Kaldor formulated three propositions, usually referred to as Kaldor’s laws, which relate a well-developed manufacturing sector to higher stan83 J. Gatrell and N. Reid (eds.), Enterprising Worlds, 83–97. © 2006 Springer.

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dards of living. For example, Kaldor’s first law holds that economies with high growth in manufacturing typically experience higher economic growth than economies in which the manufacturing sector grows more slowly. Since then, many empirical investigations have been conducted to test Kaldor’s laws on country-level data. Only a few studies have used sub-national data. Among the latter, Bernat (1996) took a fresh look at the role of manufacturing using state-level data for the U.S. An important corollary contribution of Bernat’s paper was its application and economic interpretation of spatial econometric techniques to detect statistically significant clustering in the geographic distribution of the dataset. Gross state product growth rates originating in both the manufacturing and the services sectors showed evidence of spatial autocorrelation and heterogeneity. These findings have important implications for regional economic development and for the administration of appropriate public policies to spur the economic growth of lagging regions. Policymakers, as well as researchers in both regional and organizational science, have come to regard the agglomeration and clustering of economic activities as a vital source of local economic development. What makes this phenomenon so remarkable is that it represents a shift in focus from the traditional focus on the firm and firm-specific resources to inter-organizational networks, geographic proximity, and innovation through knowledge transfers. The current paper extends the previous literature on the role of manufacturing and services in regional economic development by using exploratory spatial data analysis and cluster analysis on county-level data to further investigate the spatial distribution of the manufacturing and services sectors and the formation of industrial clusters. Furthermore, we examine the evolution of these clusters over time, from 1990 to1997, and from 1997 to 2003. Finally, we zoom in on a cluster of counties in Northeast Ohio with significantly greater than national average employment levels in both manufacturing and services. This detailed profile of the evolution of industrial activities will serve as an exemplar for the direction of further research into other regions. The remainder of this paper is organized as follows: Section 2 presents an overview of some of the theories and issues that inform the formation of industrial clusters. Section 3 describes the data and methodology, including a discussion of the test statistic used to determine the presence of spatial clusters. Section 4 analyzes the results of the evolutional model. Concluding remarks and future research objectives are provided in section 5.

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8.3 Background As early as 1900 and 1905, the Census of Manufactures documented that U.S. industrial activities have a tendency to concentrate in certain geographic areas (Shelburne and Bednarzik, 1993). This spatial embeddedness was recognized by Alfred Marshall (1920), who coined the term “economies of localized industries” to describe the benefits accruing to firms located within an “industrial district,” a geographically concentrated cluster specializing in the production of a narrowly related sets of goods. According to Marshall, increasing returns can arise not only internally, but also from external sources. Firms that are clustered together have the benefit of access to specialized suppliers, skilled labor, and an environment conducive to the spillover of technological knowledge from one firm to the other. Thus, external economies accrue from the cost savings that are the result of resource-sharing and information exchange within a localized industrial environment (Cohen and Fields, 1998).1 Krugman (1991) revisits the notion of increasing returns. In his “New Economic Geography” model, opposing forces of agglomeration (also called centripetal forces) and of dispersal (also called centrifugal forces) interact to determine city size and location. Centripetal forces include market-size external economies (backward and forward linkages, thick labor markets), natural site advantages, and pure external economies (knowledge spillovers). Centrifugal forces include dispersed natural resources, market-mediated forces (transportation costs, urban land rent), and non-market forces (congestion, pollution). According to Porter (1990), firms can trace their success to the interaction of four conditions, the “Diamond of Advantage”: (1) firm strategy, structure, and rivalry; (2) factor conditions; (3) demand conditions; and (4) the presence of related and supporting industries. While his original thesis concerned the competitive advantage of nations, he soon realized that the majority of economic activity takes place at the regional level. This is reflected in his definition of industry clusters as “geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions (e.g., universities, standard agencies, and trade associations) in particular fields that compete but also cooperate” (Porter, 1998). The regional science literature abounds with well-known industrial clusters, including computers and software in Silicon Valley, biotechnology in Boston’s Route 128, aerospace and software in Seattle, and automobiles in Detroit (Feser, Sweeney, and Renski, 2005). The relationship among firms in a cluster can be 1

The terms economies of scale, scale economies, and increasing returns (to scale) are often used interchangeably. Internal increasing returns, stemming from the internal operations of a firm, lower per-unit cost by extending the downward slope of its average long-run cost curve over a greater quantity of output. External increasing returns result in a downward shift of the average long-run cost curve.

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classified as either vertical or horizontal. A vertical association among firms exists when they engage in typical direct buyer-seller transactions, such as in supply chains. Many supply chains develop around large anchor firms. A horizontal association among firms exists when they are connected by a common set of customers, have common infrastructure needs, or share a demand for similar technologies, distribution channels, skilled workers and other resources (Carnegie Mellon, 2002). Clusters develop because they increase firms’ ability to compete in an increasingly global market. Firms recognize that they can achieve more together than they could individually. Clusters allow businesses access to more suppliers and customized support services, to better skilled and experienced labor pools, and to greater opportunities for transfer of information and knowledge. The advantages of spatial concentration of industrial activities due to scale economies are often referred to as agglomeration economies. Sohn (2004) classifies these advantages as intra-industrial and inter-industrial. Intra-industrial concentration means that firms reap the benefits of a well-established infrastructure by locating in an area where there are already a large number of establishments in the same industrial sector. Inter-industrial concentration derives its benefits from backward/forward linkages. Agglomeration economies may enhance a region’s industrial development and potential for economic growth. While many industrial clusters are self-organized, most state and local governments are actively engaged in the development of policies and strategies to capitalize on existing strengths, strengthen emerging clusters, or even build new clusters from the ground up. Increasingly, these governments partner with local colleges and universities in their development efforts. In some instances, universities independently engage in initiatives to promote cluster development in their area. Often, one of the challenges facing the successful implementation of such cluster development efforts is the ability to simply identify the locations of industry clusters. When clusters are seen as predominantly linked horizontally, research has focused on input-output analysis or similar techniques to reveal what in the strategy literature are called “value chain” linkages between firms or sectors. Qualitative research, particularly case study research, has been used to identify the codified or tacit transfer of knowledge and information among firms that would indicate the existence of industrial clusters. Only recently has there been more emphasis on research attempting to account for sub-regional localization patterns and spatial cluster analysis (Feser et al., 2001). Certainly, the crucial linkages between companies in an industrial cluster are not necessarily all location-dependent. In an increasingly global economy, many firms find that their membership in global production networks is as important to their competitiveness as their membership in any local ones. However, colocation has been identified as an important source of the externalities and spillover effects that drive industrial clusters. Our study attempts to identify geographic concentrations of manufacturing and service sector activities and analyze

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their evolution over time as a first step towards recognition and measurement of such externalities and spillover effects.

8.4 Methodology This study draws on annualized employment data obtained from the U.S. Bureau of Labor Statistics (BLS) through its Quarterly Census of Employment and Wages (QCEW) program, also known as ES-202. The QCEW program comprises those positions that are covered by unemployment insurance (UI). It measures employment by place of work, as opposed to place of residence, and may include multiple job holdings where they exist. Counties are used as the primary spatial unit of analysis. Contingent on data availability and restrictions2, employment figures were collected for the manufacturing and services sectors in more than 3,000 counties, covering the 48 continental states and the District of Columbia, for the years 1990, 1997, and 2003. In some instances, the data were modified in order to accommodate the statistical calculation of spatial autocorrelation. For example, adjustments must typically be made for states such as Virginia where a small county is located entirely within another county. The usual solution is to consider these counties as a single spatial unit for both analysis and visualization. The North American Industry Classification System (NAICS) codes were used at the 2-digit level to classify and aggregate the employment data as either manufacturing (NAICS codes 31-33) or services (51: Information; 52-53: Financial activities; 54-56: Professional and business services; 61-62: Education and health services; 72: Accommodation and food services; and 81: Other services).3 8.4.1 Measure of Spatial Concentration There are a number of exploratory spatial data analysis (ESDA) techniques that can be used to assess spatial association or spatial autocorrelation in a georeferenced dataset. Global measures of autocorrelation (e.g., Moran’s I, Geary’s C Ratio, or the general G statistic) calculate one statistic for the entire study area. However, since spatial processes are likely to be heterogeneous within the distribution itself, local indicators of spatial association (LISA) measures, which can detect spatial autocorrelation at a local scale, have gained increasing acceptance (Anselin, 1995; Unwin, 1996; Lee and Wong, 2001).

2

3

BLS withholds publication of UI-covered employment data for any industry level when necessary to protect the identity of cooperating employers. Prior to 2001, the ES-202 program used the Standard Industrial Classification (SIC) system. The data from 1990 and 1997 were reconstructed to conform to the 2002 version of the NAICS.

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The purpose of this paper is to identify geographic concentrations of counties with comparatively high levels of manufacturing and/or employment levels of service sector, and to analyze their changes over time. To do so, we use the Getis-Ord Gi* statistic, a LISA measure that is particularly suited to the detection of “hotspots” or spatial clusters around an individual location (Ratcliffe and McCullagh, 1999). The Gi* statistic is a multiplicative measurement of geographic concentration, developed by Getis and Ord (Getis and Ord, 1992, Ord and Getis, 1995; Getis and Ord, 1996). The value of Gi* for each county is based on sector employment of the county itself as well as that of neighboring counties. Thus, whereas measures such as the simple location quotient, the local Gini coefficient (Krugman, 1991), or Ellison and Glaeser’s (1997) index of localization would detect concentrations of sector activities within counties, Gi* provides a methodology that allows us to acknowledge spatial concentration that crosses county boundaries (Feser, Sweeney, and Renski, 2005). “Hotspots” in the geographic distribution of manufacturing and services activities are identified by finding the locations of clusters with high county employment values compared to the U.S. average county-level of employment for the sector in question. To calculate the Gi* statistics, we construct a symmetrical binary matrix of spatial weights (wij) to summarize the spatial association among adjacent counties. The specification of neighboring counties j to county i is based on the queen’s case of neighbor relationship, which considers all surrounding counties as neighbors of i as long as they touch each other even at a point (Lee and Wong, 2001). A value of unity is assigned to neighboring counties, and a value of zero to non-neighboring counties. The spatial weights matrix includes wii = 1. For each county, the Gi* statistic for a given industrial sector is then calculated by comparing the local mean employment (county i’s and all of its neighbors) to the global mean (for all counties in the continental U.S.), and is expressed in standard deviations from the mean, as follows:

Gi * =

∑

j

wij x j − Wi x

nS1i − Wi 2 s n −1

, for all j

(1)

where: x represents sector employment; wij is the spatial weight that defines neighboring counties j to county i; Wi is the sum of weights wij; x represents the mean of county-level sector employment for the U.S. as a whole.

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[i.e., x = (

∑

j

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x j ) /(n − 1) ];

S1i = ∑ j wij ; 2

s 2 = (∑ j x 2j / n − 1) − ( x ) 2

In essence, (and assuming Gi* is distributed close to normally), the results can be roughly interpreted as z-scores along a normal curve. Z-scores above 1.96 are statistically significant at the 0.05 alpha level, so that a county with a Gi* statistic in the manufacturing sector greater than 1.96 evidently has a higher employment level in that sector than one would expect if the overall pattern were a random one. Such a county is considered part of a “hotspot”. Counties with Gi* values between 1 and 1.96 are interpreted as being “warm” or part of a “potential hotspot”.

8.5 Analysis and Discussion In order to more effectively analyzing the results visually, Figure 1 provides a reference map of the 48 continental states and the District of Columbia. The states and the district are divided into eight regions that are commonly used by the Bureau of Economic Analysis. The results of the Gi* -based “hotspot” analysis are summarized in Figures 2 through 7. Figures 2, 3 and 4 show a temporal evolution in the distribution of hotspots and potential hotspots for the manufacturing sector. Gi* statistics are plotted for 1990, 1997, and 2003, with the darkest shaded counties indicating hotspots and the lighter shaded counties representing potential hotspots.

Far West

Rocky Mountain

New England Mideast

Plains Great Lakes

Southwest

Figure 1: Economic Regions in the U.S.

Southeast

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Manufacturing: 1990 Gi* 1.96

Figure 2: Manufacturing Employment, 1990

Manufacturing: 1997 Gi* < 1 1 < Gi* < 1.96 Gi* > 1.96

Figure 3: Manufacturing Employment, 1997

The largest cluster, in terms of geographic area, is located in the Los Angeles/San Diego and Phoenix/Tempe areas (Far West and Southwest regions). Since our analysis did not control for the differences in the geographic areas of counties, this outcome is not surprising. It is interesting to note, however, that these clusters show

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Manufacturing: 2003 Gi* < 1 1 < Gi* < 1.96 Gi* > 1.96

Figure 4: Manufacturing Employment, 2003

consistent expansion over time, with potential hotspots heating up into hotspots farther east and north into Arizona and California, respectively, between 1990 and 1997; and again further north into California from 1997 to 2003. Furthermore, a potential hotspot is evident in 2003 north of the existing hotspot in Arizona up to the Utah border and into Nevada. Also in the Far West region, there is a manufacturing cluster in the Silicon Valley/Bay Area that has remained stable over time. On the other hand, a potential hotspot in northwest Oregon and a hotspot in

Services: 1990 Gi* < 1 1 < Gi* < 1.96 Gi* > 1.96

Figure 5: Services Employment, 1990

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Services: 1997 Gi* < 1 1 < Gi* < 1.96 Gi* > 1.96

Figure 6: Services Employment, 1997

northwest Washington show signs of increasing manufacturing employment relative to the national average over time. The Southwest region, other than the Phoenix/Tempe cluster already mentioned and significant but stable clusters in the Houston and Dallas/Fort Worth areas, is rather devoid of manufacturing clusters, as are the Rocky Mountain and Plains

Services: 2003 Gi* < 1 1 < Gi* < 1.96 Gi* > 1.96

Figure 7: Services Employment, 2003

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regions. A potential hotspot heated up into a hotspot over time in the Minneapolis/St. Paul area as well as in the Pittsburgh area. A manufacturing hotspot that shows signs of cooling down is noticeable along the border of Illinois and Missouri. Service sector clusters are shown in Figures 5 through 7. As expected, the geographic pattern of the distribution of services hotspots and potential hotspots over time and space fairly mimics that of the manufacturing sector, although the services clusters tend to be larger. As with manufacturing, the largest services clusters in terms of geographic area are found in California and Arizona, with these clusters also showing substantial evolution from potential hotspots into hotspots over time. What is interesting to note, however, is that these services hotspots and their evolution appear to pre-date the evolution in manufacturing employment. Similarly, the evolution of an expanding services hotspot in the Denver area predates a small potential manufacturing hotspot that first becomes evident there in 1997. In contrast, a potential manufacturing hotspot in northwest Utah in 1997 and 2003 coincides with the approximate geographic location of a service sector potential hotspot that does not appear until 2003. Furthermore, it should be noted that in the Pittsburgh area, where manufacturing is heating up, services appear to be cooling down. 8.5.1 Industrial Profiles Among the identified clusters, we closely examine the cluster of counties with greater than average employment in Northeast Ohio. We track changes over time for key industry groups in the manufacturing and services sectors. These industry groups are identified at the 3-digit level of the NAICS codes for manufacturing. From 1990 to 2003, Northeast Ohio has seen growth in a number of service industries, at the expense of manufacturing. As shown in Table 1, the greatest increases occurred in management services, followed first by accommodation and food services, and then by educational services. Information services declined throughout. These changes resulted in a slight shift in the relative employment shares of the services industries for these counties. Among the various manufacturing sectors, only textile mills had increased employment; however, even now their relative share in manufacturing employment for the region is insignificant. Almost without exception, other manufacturing industry groups exhibit a general trend of increasing decline. When compared to the changes in median household income in Northeast Ohio, the number of employees in manufacturing and those in the services sectors show contrasting trends. Given these trends, services sectors may have contributed more to the increase in median household income than manufacturing sectors.

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Table 1: Manufacturing and Services Hotspots in Northeast Ohio, 1990-2003

NAICS 311 312 313 315 321 322 323 324 325 326 327 331 332 333 334 335 336 337 339

1990 1997 Change 2003 Employees Share Employees Share Employees Share 1990-1997 1997-2003 1990-2003 11,393 4% 10,085 4% 10,019 5% -11% -1% -12% 2,564 1% 834 0% 1,171 1% -67% 40% -54% 86 0% 126 0% 354 0% 47% 181% 312% 2,562 1% 831 0% 675 0% -68% -19% -74% 2,040 1% 1,910 1% 1,828 1% -6% -4% -10% 8,668 3% 8,317 3% 7,324 3% -4% -12% -16% 10,672 4% 11,315 4% 8,716 4% 6% -23% -18% 5,679 2% 954 0% 593 0% -83% -38% -90% 20,870 7% 20,049 7% 18,177 8% -4% -9% -13% 28,499 9% 28,365 10% 21,025 10% 0% -26% -26% 5,054 2% 5,039 2% 3,819 2% 0% -24% -24% 27,352 9% 22,381 8% 14,217 7% -18% -36% -48% 53,320 18% 50,624 19% 41,673 19% -5% -18% -22% 34,110 11% 33,822 12% 23,915 11% -1% -29% -30% 14,700 5% 10,939 4% 8,858 4% -26% -19% -40% 13,837 5% 12,604 5% 9,083 4% -9% -28% -34% 43,367 14% 36,933 14% 28,350 13% -15% -23% -35% 5,533 2% 3,237 1% 2,879 1% -41% -11% -48% 11,922 4% 11,774 4% 11,082 5% -1% -6% -7%

Total (Manufacturing)

302,692

Median Household Income Changes Total (Services) 51 52 53 54 55 56 61 72 81

405,793 34,783 54,236 20,815 49,388 3,727 61,279 72,861 67,501 41,203

270,661

9% 13% 5% 12% 1% 15% 18% 17% 10%

510,587 31,859 62,392 20,640 61,428 22,342 85,995 78,012 100,704 47,215

214,304

6% 12% 4% 12% 4% 17% 15% 20% 9%

538,992 30,417 71,065 20,218 64,754 28,027 79,007 99,205 102,294 44,005

6% 13% 4% 12% 5% 15% 18% 19% 8%

-11%

-21%

-29%

29% 26% -8% 15% -1% 24% 499% 40% 7% 49% 15%

13% 6% -5% 14% -2% 5% 25% -8% 27% 2% -7%

46% 33% -13% 31% -3% 31% 652% 29% 36% 52% 7%

Note: The Northeast Ohio cluster includes Portage, Summit, Cuyahoga, Geauga, Medina, Lake, Lorain, and Wayne counties. As can be seen from Figures 8 and 9, Cuyahoga county is the largest employer of both manufacturing and services employees. Summit county is the second largest. However, in both counties there have been substantial reductions in manufacturing employment, offset by steady increases in services.

8.6 Concluding Remarks This study uses cluster analysis with county-level data to explore the temporal evolution of spatial hotspots and potential hotspots in the manufacturing and services sectors. With the help of the Getis-Ord Gi* statistic as a LISA measure,

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Figure 8: Northeast Ohio Cluster, Manufacturing Employment

Figure 9: Northeast Ohio Cluster, Services Employment

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existing and emerging hotspots were identified. We modeled the diffusion of manufacturing and services clusters over a geographic area over time, using discrete moments in time. It is important to realize that the multi-county spatial concentrations of manufacturing and/or services employment that were identified here provide no information concerning the economic and geographic factors behind the spatial distribution. The results are preliminary and exploratory; however, they are intended to provide important inputs into further investigation of the significance of a growing manufacturing and/or services sector for a region’s economic well-being. Using our examination of the industrial profiles in Northeast Ohio as an example, other identified clusters may be studied in a similar manner in order to identify clues to the driving forces of regional economic growth or decline. Our future research efforts related to this study are to explore data of even finer spatial resolution. In addition, we plan to take into account in the analysis both economic and regional spatial characteristics that may affect the formation of industry clusters, or conversely, the lack thereof. The refinement of the temporal resolution, perhaps using yearly data and the investigation of variables other than employment to measure manufacturing and/or services activities (e.g., value added) should reveal more clues to the dynamic inner working of regional economies at the identified clusters. While the results of our study are based on raw employment numbers, it will be desirable to expand this study by controlling the employment data by population or other economic factors so to extract clusters for more direct comparisons. Finally, we plan to carry out detailed industrial profiling of “discrete industrial complexes”, i.e., algglomerations based on value chains derived from analysis of input-output data in Feser, Sweeney and Renski (2005).

Sources Anselin, Luc. 1995. “Local Indicators of Spatial Autocorrelation – LISA,” Geographical Analysis, 27, 93-115. Bernat, G. Andrew. “Does Manufacturing Matter? A Spatial Econometric View of Kaldor’s Laws,” Journal of Regional Science, 36, 463-477. Bivens, Josh. 2004. Shifting Blame for Manufacturing Job Loss: Effect of Rising Trade Deficit Shouldn’t Be Ignored. Washington, D.C.: Economic Policy Institute (Briefing Paper #140). Carnegie Mellon Center for Economic Development. 2002. Cluster-Based Community Development Strategies: A Guide for Integrating Communities with Regional Industry Cluster Strategies. Available at <www.smartpolicy.org>. Cohen, Stephen, and Gary Fields. 1998. “Social Capital and Capital Gains, or Virtual Bowling in Silicon Valley” . Berkeley Roundtable on the International Economy. Berkeley: University of California.

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Ellison, Glenn, and Edward L. Glaeser. 1997. “Geographic Concentration in U.S. Manufacturing Industries: A Darboard Approach,” Journal of Political Economy, 105, 889927. Feser, Edward J., Kyojun Koo, Henry C. Renski, and Stewart H. Sweeney. 2001. “Incorporating Spatial Analysis in applied Industry Cluster Studies.” Working paper. Feser, Edward J., Stuart H. Sweeney, and Henry Renski. 2005. “A Descriptive Analysis of Discrete U.S. Industrial Complexes,” Journal of Regional Science, 45, 395-419. Getis, Arthur, and J. Keith Ord. 1992. “The Analysis of Spatial Association by Use of Distance Statistics,” Geographical Analysis, 24, 189-206. Getis, Arthur, and J. Keith Ord . 1996. “Local Spatial Statistics: An Overview.” In P. Longley and M. Batty (eds.), Spatial Analysis Modelling in a GIS Environment, 261282. NY: Wiley. Krugman, Paul. 1991. Geography and Trade. Cambridge, MA: MIT Press. Lee, Jay, and David W. S. Wong. 2001. Statistical Analysis with ArcView GIS. New York, NY: John Wiley & Sons. Ord, J. Keith, and Arthur Getis. 1995. “Local Spatial Autocorrelation Statistics: Distributional Issues and an Application,” Geographical Analysis, 27, 286-306. Popkin, Joel and Company. 2003. Securing America’s Future: The Case for a Strong Manufacturing Base.” Washington, D.C.: National Association of Manufacturers (White Paper). Porter, Michael E. 1990. The Competitive Advantage of Nations. New York, N.Y.: Free Press. Porter, Michael E. 1998. On Competition. Boston: Harvard Business Review Books. Ratcliffe, J. H., and M. J. McCullagh. 1999. “Hotbeds of Crime and the Search for Spatial Accuracy,” Journal of Geographical Systems, 1, 385-398. Shelburne, Robert C., and Robert W. Bednarzik. 1993. “Geographic Concentration of Trade-Sensitive Employment.” Monthly Labor Review 16, 3-13. Sohn, Jungyul. 2004. “Do Birds of a Feather Flock Together? Economic Linkage and Geographic Proximity,” Annals of Regional Science, 38, 47-73. Unwin, David J. 1996. “GIS, Spatial Analysis and Spatial Statistics,” Progress in Human Geography, 20, 440-441.

9 Clusters and Local Economic Growth: Unpacking the Cluster Model

Michael Taylor School of Geography, Earth and Environmental Science University of Birmingham, UK

9.1 Introduction In the past decade, an increasing body of research, captured under the rubric of Porter’s (1998) ‘clusters’, has built on Granovetter’s (1985) concept of embeddedness to explain the dynamics of local economies in the face of an intensifying global economy. This social-institutionalist perspective contrasts with more economistic interpretations of agglomeration and local growth (e.g. Glaeser, 2000), and emphasises the role of social relations in economic transactions, holding that anonymous markets are non-existent and that economic life and transactions are built on social connections. It has risen to become a powerful model of local economic growth that draws on a range of complementary literatures on ‘new industrial spaces’, ‘learning regions’, ‘innovative milieu’ and ‘regional innovation systems’ (e.g. MacKinnon et al., 2002; Braczyk et al., 1998; Porter, 1998; Storper, 1997) – also referred to as the ‘new regionalism’ (Rainnie and Grobbelaar, 2004). Building directly on the ideas of Granovetter, new regionalist and cluster-based writing suggests that economic growth is linked not only to market conditions, but also to repeated inter-firm interaction and knowledge exchange, learning, technological change and innovation, collaborative long-term buyersupplier relationships, and the creation of social capital (including trust, reciprocity and loyalty), bolstered by a supportive tissue of local institutional thickness (see Putnam, 1993; Maskell, 2000; Cumbers et al., 2003; Amin et al., 2003). At the very heart of these relationships are place-based business networks, with successful local economies being seen as islands of capital accumulation built on the superior local productivity that these network relationships are said to yield (Porter, 1998; Porter and Ketels, 2003). This emphasis on place-based networks has, in turn, generated renewed interest in the advantages of geographical proximity involving firms in related industries (Keeble and Nachum, 2002). This is a significant shift away from traditional understandings of agglomeration based on inputoutput relations and transaction costs, focussing instead on the social and institutional drivers of growth. Separately, the writings that contribute to and complement the ‘cluster’ perspective tend to emphasise particular drivers of local growth (Taylor and Plummer, 2001a, 2003), built on fragments of evidence and intense theoretical speculation. For example, the new industrial spaces literature tends to emphasise technological change, transaction costs and the local integration of small firms (Scott and Stor99 J. Gatrell and N. Reid (eds.), Enterprising Worlds, 99–117. © 2006 Springer.

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per, 1992). The learning regions literature emphasises firms’ competencies, knowledge transfer and processes of local learning (Maskell and Malmberg, 1999). And, the innovative milieu literature emphasises, above all else, the significance of local social configurations in creating an appropriate environment for local economic growth (Moulaert and Nussbaumer, 2005). Indeed, the literatures of the cluster perspective can be interpreted as layers of theoretical conjecture and layers of contingency built one upon another to create a very plausible fiction about the efficacy of spatially clustered local growth in the face of mounting global economic pressure. Significantly, this model of economic growth has been widely adopted by policymakers and regional development practitioners (OECD, 2001): it is a new paradigm for regional development policy. It is a set of ideas that has been adopted extensively to inform and shape local economic policy at the State level in the US. In the UK, the policies of its regional development authorities (RDAs) are now designed to facilitate clustering and inter-firm linkage through strategies such as the establishment of business parks, urban regeneration schemes, business incubators, low interest loans, and infrastructure support. As in other countries, such as Australia, the application if this new orthodoxy has often been introduced uncritically and in the absence of detailed empirical evaluation. Nevertheless, despite the popularity of this model of local economic growth, it does have significant limitations (Martin and Sunley, 2003; Taylor, 2005; Boschma and Kloosterman, 2005). The purpose of this chapter is to explore these limitations as they apply to both the principal drivers of the cluster model and to the overall configuration of the model as it has been elaborated in theory and practice. The discussion of the chapter is divided into two main sections. Following the introduction, Section 2 examines the limitations associated with the six main drivers of the broadly-based cluster model, including the model’s: • • • • • •

overwhelming preoccupation with social construction of local economic processes, use of the problematic concept of social capital; over-simplification of learning processes; exaggeration of the importance of proximity; de-powering of network relationships; and one-sided interpretation of institutional support and ‘thickness’.

The argument is not that these processes do not occur but that they occur only sometimes, in some places, and not necessarily in the combinations that the most ardent supporters of the model suggest. This aspect of the argument is elaborated in Section 3 which attributes the limitations of the model to four interrelated broader scale problems: •

the casting of the model in an essentially static, a-historic time-frame;

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the normative instrumentalism that runs through the specification of processes in the model which results in the processes being seen only as additive; and the failure of the model to engage with issues of complexity.

The conclusions drawn in Section 4 argue for a more subtle, selective and less dogmatic application of the cluster model as a foundation for the development of local economic development policy. The separate processes are not necessarily additive or synergistic, and they can run as well in reverse as they can forward. It is only when these possibilities are fully recognised that appropriate policies can be designed.

9.2 The Processes and Drivers of the ‘Cluster’ Model The ‘cluster’ model of embedded local growth sees successful local economies as islands of superior productivity within a global mosaic of production and services that fosters sustainable local accumulation. This enhanced productivity is argued to be the outcome of complex processes of ‘embedding’: the incorporation of firms into place-based networks involving trust, reciprocity, loyalty, collaboration, and co-operation (Granovetter, 1985; Storper 1997, Cooke 1998). These are processes that create ‘social capital’. They involve socially constructed relationships that create knowledge, information and ideas, and generate innovative products, processes and services that are, in turn, shared within the system rather than being appropriated by any one individual (Leborgne and Lipietz, 1992). The whole is a system of heightened place-based capacities for learning, information and knowledge exchange, building on local competencies (Maskell and Malmberg, 1999; Bergman et al, 2001). They are local knowledge networks that have the capacity to generate invention, innovation and technological change: where the tacit knowledge of the labour force gained from learning-by-doing is mobilised through paternalism rather than wage discipline, and is blended with codified knowledge (Brusco, 1996). Simultaneously, they are innovative milieus offering socially constructed environments that can nurture ideas, people and enterprise, and they are regional innovation systems driven by intense local processes of Schumpeterian creative destruction that endow locally networked firms with commercial resilience and the ability to cope with constantly shifting factor mixes. At the same time, these locally networked relationships involving firms and labour are said to be reinforced by a “... supportive tissue of local institutions” (Powell and SmithDoerr, 1994, p. 370). These institutions, it is argued, ease and network relationships and foster knowledge exchange and learning; sustaining the Marshallian ‘atmosphere’ and ‘buzz’ of an economically successful place (Amin and Thrift, 1994; Bathelt, et. al, 2004) At the core of the cluster model is, therefore, a set of stylised facts or caricatured processes that focus on the workings and interactions of: (1) trust and reciprocity; (2) social capital; (3) knowledge and learning; (4) proximity; (5) network relation-

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ships; and (6) institutional support. Whether they work in the manner they are thought to in theory is, however, open to question, and each will be explored in turn. 9.2.1 The social construction of local economic processes: trust and reciprocity In the cluster model it is fashionable to see trust, loyalty and reciprocity as basic to business practice and the workings of commercial transactions. Such an emphasis, however, denies an number of fundamental aspects of the workings of capitalism, especially the workings of the price mechanism and the generation of profits. It may well be that the emphasis on either price or trust in inter-firm relationships will vary between periods of economic buoyancy and periods of pessimism, with the focus on price sharpening as margins thin. But, price is fundamental to the earning of profits, and profits are central to capitalism. Profits provide a return on risk and allow capital to be accumulated. They also facilitate innovation, growth and change, they pay dividends to owners and investors, and they send signals to markets. A number of studies suggest, however, that the level and persistence of trust in inter-firm relationships might be rather more illusory than real. Uzzi’s investigations of the garment industry in New York suggest that trust and reciprocity lie at the heart of inter-firm relationships in that local production system, endowing it with flexibility, resilience and a capacity for change, but price is still an important consideration (Uzzi, 1996, 1997). In an investigation of business services in provincial cities in the UK, Search and Taylor (2002) found that price was always a consideration lurking in the background of apparently trust-based relationships that may have lasted for a considerable number of years, and that the balance between trust and price tended to tip towards price in the larger business service firms. In the Turkish garment clustered studied by Erydin (2002), embedded trust-based ties were clear to see in a period of economic buoyancy but, in recession, when profits were squeezed, the primary role of price became clear, and naked price competition reappeared. What these studies suggest is that trust and loyalty are important in business, but only as long as the price is right. Trust, reciprocity and loyalty are not an alternative to the price mechanism and price competition, they are a complement to it. Cluster mechanisms do not operate outside the workings of capitalism, and they are not an alternative to it.

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9.2.2 Social capital: a chaotic concept Going beyond their conflict with the price mechanism and the imperatives of capitalism, trust, reciprocity and loyalty are also the foundation on which the concept of social capital is built within the cluster model. Here, these embedded social ties are used to point to the deeper social relationships that are involved in local economic communities. This orientation shows through clearly in Putnam’s (2000) definition of social capital as the, “connections among individuals – social networks and the norms of reciprocity and trustworthiness that arise from them.” (p.19). It is refined further in the definition by Bowles and Gintis (2002) that sees social capital as referring to, “… trust, concerns for one’s associates, a willingness to live by the norms of one’s community and to punish those who do not” (p.1). Applied in a policy context, social capital has been seen unproblematically to create both human capital (as enhanced skills in a community) and money capital. Taken to the extreme, this implies that social capital has the capacity to create profits, productivity and competitiveness. But, there is an alternative school of thought that condemns the concept of social capital as a chaotic concept. Durlauf’s (2002), for example, has contended that there is a fundamental confusion within the concept of social capital because it mixes both causal and functional elements. The functional element is evident in the set of norms and values social capital is said to provide which facilitate cooperation and efficiency. In this sense, social capital might reduce networked firms’ transaction costs. The causal element of social capital emerges because the co-operative behaviour of others makes the co-operative behaviour of individuals a rational choice. Woolcock (1998) has expressed this same concern in different terms. While on the one hand, social capital can be understood as the ties and norms that bind individuals in and across groups, it can, on the other hand, be understood as a moral resource used to define different status groups in a community. Defined so widely, it is difficult to identify whether social capital is the infrastructure or the content of social relationships – it becomes impossible to separate what it is from what it does. But, even in a causal context social capital is problematic. Rational choice theorists such as Glaeser et al (2002) regard it as an interaction between rational agents for mutual benefit, while network theorists see it arising from non-rational social ties (Woolcock, 1998). It is equally unclear whether the choice to co-operate is made on the basis of altruism, opportunistic ‘free-riding’, fairness, or fear, and there is no reason why social capital should not be negative or perverse, as Portes and Sensenbrenner (1993) have pointed out.

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It is the theoretical vagueness of the social capital concept that makes it unworkable. Depending on how it is defined, it can both enhance and destroy human and physical capital. It is so vague that it is to all intents and purposes of little or no explanatory value. Perhaps Arrow (2000) is right and the term should be abandoned in favour of exploring more closely specified forms of social interaction. 9.2.3 The over-simplification of the processes of learning, entrepreneurship and new firm formation A particularly significant problem associated with the broadly-based cluster model is the simplified and caricatured way in which it deals with processes of learning and the translation of new knowledge into new processes, new products, new services and new ventures. Within the cluster literature, firms are seen as the basic building blocks of regional economies that are unproblematically called into existence as a result of the workings of local knowledge networks. In both management science and economic geography there is a substantial literature that recognises this linked set of processes as far more complex. From this literature, a preliminary general sequence can be sketched out involving learning and entrepreneurship, business expansion and new firm formation; and though generalised, this sequence points to the complexity of the processes alluded to in the cluster model. First, as Cohen and Levintha (1990) have pointed out, firms have to have the capacity to absorb new knowledge, irrespective of whether it has been generated inside or outside the firm. This absorptive capacity is essentially path dependent, and is something which itself has to be learned from experience. Second, new knowledge on its own is of no commercial consequence until it is incorporated into new processes, products and services. Third, those innovations have then to be recognised as business opportunities from which a person or group of people can see the potential to generate personal wealth (Taylor and Murphy, 2004). Fourth, there then follows a translation problem that accompanies the conversion of identified business opportunities and good ideas into commercial realities. Solving the translation problem requires a special sort of knowledge and entrepreneurship skills that allows people to link new ideas and opportunities with the practical knowledge of doing business. Those skills revolve around the ability to think through the very practical problems of financing, equipping, marketing, supplying and staffing so that a venture can generate profits for the venturers that bear its risks. These are the problems that have to be addressed simultaneously in the ‘pre-firm’ or the ‘latent firm’ (Sarasvathy, 2001). Fifth, successful entrepreneurial activity also depends on bringing together the appropriate mixture of people, with the right combination of skills, resources, capabilities and commitment, and for them to be persuaded to cooperate in the realisation of a potential business opportunity (Koppl and Langlois, 2001; also see Taylor, 1999 and 2006). The mixture, however, might not be appropriate. It might be hamstrung by limited capacities, be over-optimistic, or simply be dogged by bad timing. Indeed, at any

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stage in this five stage process of learning, innovation, translation and entrepreneurship, the potential new venture can fail. This nexus of learning and entrepreneurship processes is a complex dimension of the cluster model that needs urgently to be unpacked. It is key to the working of the cluster concept, but it remains very poorly understood.

9.2.4 The fetishing of proximity An assumption implicit in the cluster model is that ‘embedded’ equals ‘local’; that the proximity of local networks affords the opportunity to firms to mobilise knowledge, generate innovation and create growth. This is very much the stance of the ‘learning regions’ view of clusters (Asheim, 2000), though this stance has been modified more recently as globalisation has intensified (Asheim and Herstad, 2005). Oinas (1997, p. 29) has argued strongly to the contrary, questioning the assumption that entrepreneurs and business people need to be strongly embedded in local social relations and not similar relations at different spatial scales. Amin (2000) too, has argued that the significance ascribed to the region as a source of innovation, learning and tacit knowledge may be misguided, and that the relational and organisational proximity – the proximity that can be achieved at a distance within communities of practice – might be more might be more important than geographical proximity. Empirical evidence provides no clear resolution to this issue. Cross-sectional studies point to, the need for proximity to achieve growth (see Maskell et al, 1998; Braczyk et al, 1998), and proximity might be important for small firm providers of business services and small firm subcontract manufacturers (Search and Taylor, 2002; Openshaw and Taylor, 2002). But, proximity can be emotional and not be spatial as Hardill et al (2002) have demonstrated for of Asian businesswomen in the UK. Indeed, there is reason to be circumspect about the benefits of proximity in local knowledge networks. Sharing technical information can damage intellectual property rights, and it can certainly compromise the patenting inventions. What is more, the knowledge-based theory of the firm argues that a key issue in the formation and growth of firms is the close control of knowledge – the principle of inimitability – so that firms have the opportunity to extract better-than-average rents from their knowledge resources (see in particular Kogut & Zander, 1992, 2003). Knowledge will certainly leak out of firms through employee shifts and the trading of goods and services (Power and Lundmark, 2004; Harrison et. al, 2004), but whether it will be actively shared within a cluster is open to question. Proximity and knowledge spill over are also said to encourage entrepreneurship and new firm formation within clusters. But, Harrison, Cooper and Mason (2004) see this as a simplistic interpretation of a more complex process in which the en-

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trepreneurial intellectual capital of latent entrepreneurs is developed in a number of places prior to them working in what have been dubbed ‘incubator organisations’ that appear to spawn multiple start-ups in a particular cluster. These studies suggest is that the role of ‘proximity’ in clusters needs to be interpreted in a more nuanced fashion. When knowledge networks and entrepreneurial processes spread beyond clusters, when firms survive and grow by disengaging from locally embedded transaction networks (Taylor, 1978; Taylor and Thrift, 1982), and when proximity does not always open the commercial doors it is said to, perhaps it is time rethink the role of proximity in clusters. 9.2.5 The de-powering of network relationships While the cluster model promotes co-operation and collaborative equality between firms as the mechanism that generates innovation and growth, there is mounting empirical evidence that power inequalities are more the norm, and that the business environment within which firms operate is far from benign (Bathelt and Taylor, 2002). Indeed, power inequalities impact significantly on the way firms do business, a situation long recognised in economic geography (Taylor and Thrift, 1982, 1983; Dicken and Thrift, 1992; Taylor, 2001; Bathelt and Taylor; 2002). That impact can: • restrict firms’ freedom of action, cementing subordination in buyer-supplier relationships and restricting opportunities for capital accumulation (Taylor, 2001); • create lock-ins and the ossification of transaction relationships (Grabher 1993, Glasmeier 1991); • generate uneven spatial development and place-specific spatial divisions of labour (Hudson 1999, Massey 1984); and • restrict the skill base and information pool that informs strategic decisionmaking in business, in particular through class-based appointments to boards of directors (McNulty and Pettigrew 1999). • There is a growing evidence base that shows asymmetries of power within and between firms are used to exclude, exploit and control network relationships so that the powerful can extraction monopoly rents from the powerless. The use of power to exclude businesses from enterprise networks has been demonstrated in detail in Fiji (Taylor, 2002) and Israel (Sofer and Schnell, 2002; Schnell et al, 1995, 1999). To achieve rates of return set by overseas parent firms, TNCs in Fiji marginalise the 80 percent of their customers who make up only 20 percent of their business by limiting them to cash-only transactions, while developing strongly embedded relationships with the other 20 percent. In Israel, Jewish

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business has been shown to exclude Israeli Arab businesses from their buyersupplier networks (Sofer and Schnell, 2002), leaving Israeli Arab business to become ‘over-embedded’ in the Arab community in order to cope and subsist. The use of power to exploit is evident in studies of the nature of employment in the burgeoning cultural industries, including advertising and marketing, publishing and popular music (Ekinsmyth 2001, 2002, Grabher 2001) that have most fully embraced the emerging ‘project’ approach of production. The cluster model argues that labour markets should tend towards paternalism rather than the imposition of wage discipline to mobilise tacit knowledge (Brusco, 1996). However, pulling together short-lived project teams to advertise, publish and create music, for example, has been interpreted as the self-exploitation of labour – the creation of ‘willing slave’. These labour market arrangements exploit friendship networks, and promote insecurity, impermanence, a reluctance to turn down work any work that is offered. This current variant of self-exploitation mirrors sweatshop production in the garment industry and aspects of agency working and homeworking that are used by firms to achieve flexibility and to avoid sunk costs. The use of power to control business relationships is a well-established and important business tactic. It condemns businesses to performing tightly defined roles in enterprise networks in the manner outlined by Taylor and Thrift (1982a, 1982b, 1983) in the enterprise segmentation model they proposed twenty years ago. And, empirically it has been shown that the subordination of firms within enterprise networks limits who they can deal with, the contractual arrangements under which they can do business, and the sources of capital available to them (Taylor 2000). Nowhere is this control of business relationships clearer than in buyer-driven commodity chains. It has been demonstrated by Wølneberg (2002) in relation to Argentina’s tanning industry and by Taylor (2002) in relation to Fiji’s garment industry, though Gereffi (1994, 1998) and others would argue that network relationships also have the potential to stimulate learning and technological upgrading in commodity chains. 9.2.6 The one-sided interpretation of institutional support Pivotal within the cluster model is the very imprecise concept of ‘institutional support’ or ‘institutional thickness’. Amin and Thrift (1994) have argued that the economic success of a locality is heavily dependent on its “proven institutional capacity” (p.16), which in turn derives from a diverse mix of institutions, frequent interaction, structures to control behaviour, and working to a common agenda. These factors are then reckoned to create institutional persistence and flexibility, heightening trust and reciprocity and local inclusiveness. Unfortunately, as a mechanism driving the cluster model empirical realities do not match theoretical expectations. A growing number of studies suggest that ‘institutional thickness’ does not always bring economic success to an area or endow it with resilience when hit by recession. It can also serve to exclude rather than col-

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laboratively include enterprises in a local economy. In this respect, interesting questions arise as to whether ‘institutional thickness’ pre-dates or post-dates economic growth or whether institutions always remain supportive. MacLeod’s (1997) evidence from the low-wage manufacturing region of Lowland Scotland, suggested that a strong institutional presence and drive to increase the innovative capacity of a region associated with inward investment and quantity rather than quality production resulted in nothing but ‘institutional overkill’. And, the same ineffectiveness of local institutional support, especially in the face of recession has been demonstrated both in Argentina (Wølneberg, 2002) and Turkey (Eraydin, 2002). There is also evidence that in some cases ‘institutional thickness’ can marginalise and exclude some groups within local economies (e.g. Raco, 1998, working in Sheffield). In other situations it can ossify local social, economic and political relations and divisions, stifling mutual co-operation and halting progress (Hudson, 1994). In the context of the Argentinean tanning industry, Wølneberg (2002) has shown that not only can local institutions be ineffective in generating self sustaining local growth, but the actions of international institutions (in this case the World Bank and the EU) can erode what little local benefit that they might have created. Both MacLeod (2001) in Lowland Scotland and Raco (1998) in Cardiff have identified this same scalar conflict in the actions of institutions. Further undermining the usefulness of the concept, Henry and Pinch (2001) have raised the question of whether institutional thickness is a cause or consequence of local growth. They have shown, for example, that the growth of the specialist engineering cluster of Motor Sport Valley was associated with institutional thinness rather than thickness. Institutional thickness only came after success had been achieved. Similar examples of economic success in the absence of thick institutional structures have also been identified in Cambridgeshire’s hi-tech cluster (Keeble et al, 1999), Bristol’s natural history film industry (Bassett et al, 2002) and the British high fidelity industry in South East England (Pinch et al, 2001). As it stands, ‘institutional thickness’ is a concept that obscures more than it illuminates processes of local economic growth. Though theory ascribes it a substantial and significant role in fostering economic activity, empirical verification of that role is hard to find. The concept is swathed in ambiguity and needs urgently to be rethought.

9.3 The deeper underlying problems of the cluster model An important aspect of the discussion of the previous section is that despite the criticisms that can be levelled against each of the drivers and processes of the cluster model, they all appear to contain at least an element of apparent truth. Cer-

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tainly the divers are variously ambiguous, chaotic, poorly defined and unrealistic but still elements of trust and reciprocity can be identified in some local business networks, de-powered network relationships exist under some circumstances, local learning does occur, place does impact on local growth, and institutions may foster growth in local economies. But, those processes do not occur simultaneously, everywhere and at any time. It can be suggested that these shortcomings of the cluster model stem from broader underlying problems against which the discussion of individual drivers and processes needs to be set. Here it is argued that a number of very basic and fundamental problems permeate the whole theoretical edifice of the broadly drawn cluster model, and here three are discussed. First there is the problem of normative instrumentalism and the implication inherent in much cluster model discussion that social/institutionalist processes only create growth. Second, there is the problem that the model deals with time very poorly. To some, it is a static model (Boschma and Kloosterman, 2005) while to others it conflates micro-process of change with historic time (Taylor, 2005). Finally, building on the issue of instrumentalism, the model treats the processes within it as additive and, as a consequence, fails to address and incorporate issues of complexity (Conti, 2005). 9.3.1 Normative instrumentalism Normative instrumentalism, which emphasises the positive rather than the negative effects of drivers of cluster growth, is a pivotal aspect of the cluster model. In effect, by this implicit assumption, all knowledge is beneficial, all learning is positive, all networks are inclusive, and all institutions are supportive. To some extent, this shortcoming of the model stems from the way empirical evidence has been assembled, as has been criticised by Staber (1996). As Stabber pointed out, a significant proportion of the empirical material that supports the cluster model has been drawn from case studies ‘selected on the dependent’. As part of this approach, a cluster is selected for study on the basis that it is apparently successful (e.g. the Third Italy, Silicon Valley or Baden Würtemberg, for example). Then, the processes found operating in that place are argued to be the cause of the success that led to those places being selected in the first place. The shortcoming of instrumentalism is also compounded by the way time is built into the cluster model and its inability to incorporate complexity. 9.3.2 Time and the institutional instantaneous To all intents and purposes, the cluster model is static (Boschma and Kloosterman, 2005). More accurately, perhaps, underpinning the cluster concept is a particular view of the way time operates to shape the dynamics of locally embedded networks of firms. Implicit within this view is the assumption that the microprocesses of business interaction that can be observed in ‘successful’ clusters at

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one particular instance in time can be bulked-up to predict future trajectories of change cast in historic time. And, this assumption is made irrespective of the time within the business cycle that inter-firm relationships are observed. This approach to both time and change brings to the cluster model the shortcomings of what Taylor (2005) has labelled the ‘institutional instantaneous’ – the unproblematic and atemporal translation of socially networked inter-firm relationships into structures of instant knowledge mobilisation and exchange, learning, innovation and social capital formation. In this sense, the ‘institutional instantaneous’ is the equivalent of the assumption of the perfect mobility of capital in economics. Its effect is to reinforce the cluster model’s instrumentalism. This ambiguity surrounding the role of time in the cluster model undermines some of its key elements. Central to the model and the policies it supports is that the local networking of businesses is the key to local economic growth. Under the implicit assumption of the ‘institutional instantaneous’, the plausibility of this assertion is unchallengeable. To find the local networking of businesses in a place that is growing of apparently economically successful is all that is needed to prove the efficacy of local networking. There is no way of knowing whether the local networking that is observed is a portent of emerging relationships, an established form of working, or a vestige of arrangements that are being superseded. There are, as yet, few longitudinal studies to clarify this situation. Perversely, the few longitudinal studies that have been completed (e.g. Taylor, 1978; Taylor and Thrift, 1982; Simmie, 2004) have shown that, over time, the firms that survive and grow tend to be those that have progressively disengaged from their local economies and have reduced their levels of local structural embeddedness.

9.3.3 Complexity A consequence of normative instrumentalism is that the mechanisms and processes of the cluster model are seen as both separate and individual, and at the same time additive in the sense that they can be built into a larger explanatory framework. For Conti (2005), however, this is to miss the very point of the complexity of the relationships that underpin the workings of economic clusters. According to Conti (2005) the development paths of local economic systems are specific, irreversible and irreproducible, and are, as a consequence, unlikely to be subject to universal laws (Boschma and Kloosterman, 2005, p.2). As a result, Conti argues, it is not possible to reduce reality to the methods and simplification that are typical of orthodox economics and social science. Breaking down reality into simple components that are easier to understand and to study simply strips them of the multidimensionality that essential to their reality. As he has put it, “… a place reproduces its own identity … [which has been given] … by the organisation of the social, cultural and economic relations that make that place unique.” (Conti, 2005, p.42)

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A corollary of this argument is that clusters will have a multitude of different and individual development paths as the drivers within them interact in unique and idiosyncratic ways. In effect, what might enhance growth in one place might retard it in another and have no impact whatsoever in a third place. The argument of complexity can, of course, be taken too far. However, it does suggest that local uniqueness needs to be taken into account in trying to explain the mechanisms, processes and trajectories of clusters. It also suggests that the interpretation of the divers and processes operating in clusters needs to be more nuanced in terms of appreciating the synergistic qualities that combinations of drivers might assume in different empirical contexts.

9.4 Conclusion As a model of local economic growth, the cluster model has great appeal but severe limitations. Currently, it comprises six drivers or sets of processes that emphasise the social construction of economies to the exclusion of the imperatives of capitalist accumulation, highlight the hypothesised processes of social capital formation (especially trust and reciprocity), focus on the over-simplified and underspecified processes of learning, exaggerate the importance of proximity, underplay the role of power inequalities in business networks, and stress the importance of institutional support. The model is, in effect, a compound of instrumentalist mechanisms that are fixated with growth, while at the same time being divorced from the processes of time and denied the subtleties that arise from complexity. The model can be likened to a layering of contingent processes that are added to by continuing theoretical speculation but are rarely tested or prioritised through empirical exploration and modelling, as was attempted by Plummer and Taylor (2001a, 2001b) for example, in order to reflect on their efficacy. Indeed, much of the work that supports the model is based on theoretical speculation focused on the notion of embeddedness, rather than on empirical research, thus providing only a limited understanding of processes at work (Maskell and Malmberg, 1999). Empirical research has focused principally on high technology clusters and dynamic growth regions (e.g. Saxenian, 1994; Henry and Pinch, 2001; Keeble and Nachum, 2002), neglecting the experiences of regions suffering economic and population decline, industrial restructuring, or socio-economic marginalisation, for example. As has been argued elsewhere (Taylor, 2005) the processes of the model need unpacking. In particular, cluster dynamics need to be explored as a key to unlock issues of complexity and normative instrumentalism as they impact on the cluster model. Nooteboom and Klein Woolthuis (2005) have begun this task in a speculative way, recognising phases of exploration, consolidation, stagnation or transformation and break-up, linked not in some universal logic but, “… highly dependent on contingencies related to the local institutional environment, infrastructure, his-

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tory, entry and exit conditions and possible roles of multinationals” (p. 65). It is only through detailed longitudinal analyses that the greater clarity can be brought to the cluster model.

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10 Towards Reconceptualising Enterprise, Entrepreneurship and Entrepreneurial Processes for Sustainable Futures: Contributions from Economic Geography R. Le Heron, University of Auckland, Auckland, New Zealand Entrepreneur: one who undertakes an enterprise, especially a commercial one, often at personal financial risk Enterprise: a bold or dangerous undertaking Enterprising: forward in undertaking: adventurous: full of initiative

10.1 Introduction This chapter considers what insights might begin to emerge were ideas and frameworks from economic geography about enterprise and entrepreneurship used by economic geographers to examine sustainability questions. The chapter suggests that at least three distinctive lines of economic geography inquiry, those informed by agent-centred neoclassical economics, political economy and poststructural political economy, offer a basis for embarking on the identification of issues and strategies for undertaking fresh conceptual work. The chapter begins with a discussion of why an engagement if this sort should be given priority. The discussion centres the importance of economic and ecological processes in their institutional settings as a point of entry to consider the differing aspirations and values associated with growth and innovation or sustainability oriented pathways. The chapter then explores how recent strands of research by economic geographers signal directions that could assist understanding of the difficulties likely to be met from a re-conceptualisation that emphasises sustainable futures. 10.1.1 Positioning my viewpoint and argument It is relatively unusual in the history of any sub-disciplinary field to try to ask a new range of questions. Almost by definition this is to invite challenge of what we know. Such efforts in the past have either been relatively unsuccessful or so disruptive of established lines of inquiry that they fractured communities of interest. Often the outcome has been acrimony and wasted effort. Failures in the past to re-approach, re-think and re-conceptualise areas of enquiry may have occurred

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because expectations on the part of those involved were that new directions meant the wholesale rejection and displacement of current wisdom. The Toledo meeting, in contrast, was distinguished by what I call the work of synthesis and translation. There the mix of economic geographers, regional and local economic development specialists and economist meant a mix of backgrounds and experience was available to the group. Because those involved mostly withheld judgement about views expressed and sought instead to explore the bases of differing claims and suggestions, a broader appreciation was gained of how and why various knowledge systems have emerged. The chapter concludes with reflections from the meeting. But first, why would I consider venturing into a discussion about different kinds of knowledge frontiers? I have at least six main reasons, which, when I tease them out become both justifications for undertaking the exercise and at the same time aspects of approach to such an undertaking. First and foremost, I have been actively engaged in recent years as a researcher in some very trans-disciplinary work in a particular context – New Zealand. Nonetheless this has involved economic geography inspired research on questions relating to nature-society, environment-economy, mediated modelling approaches, colearning and so on. The particularities of the New Zealand context impact not only on what I focus on, but also how I explore issues. This is, of course, an acknowledgement of the situated nature of knowledge production and my own academic journey as an economic geographer. I find myself considering how different knowledge claims might be re-worked in order to meet the differing challenges of enquiry outside the normal scope of disciplinary experiences and practices. When I consider the breadth of views that abound about enterprise, entrepreneurship and entrepreneurial processes I realise that I have seen and experienced first hand in my research some of the difficulties of reconciling competing intra- and inter-disciplinary views about particular topics, ranging from methodological issues to political projects. My second reason is that the juxtaposition of potentially incommensurate knowledge systems, as the Commission did by associating ‘sustainable futures’ with ‘enterprise, entrepreneurship and ethics’, carries with it obligations in terms of how we might proceed. The biggest concern is recognising that the immediate adoption of common or accepted definitions – in an attempt to get discussion going – may hold us back more than it propels us forward. This stems from the fact that available definitions define boundaries and bind us to them and as a consequence they are stoutly defended. My experience is that putting aside for the moment the temptation to rush for a-priori definitions will actually help with identifying useful ways to get discussion underway. Third, opening space for discussion around the gaps between knowledge domains, rather than moving directly into the domains, can form the basis for re-situating key ideas and the terms and concepts that usually go with established ideas. An initial step in this is to consider points of departure from and points of entry into existing literatures. These emerge from the time and place of inquiry. Here, the direction dis-

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cussion might take is greatly influenced by the start-up questions and the mix in the groups involved. Where we begin is extraordinarily important in shaping where we go. This may be enough to set in motion dialogue but it is not necessarily enough to maintain lines of engagement. If the experience of economic geography in the past is anything to go by, a priority in any project aimed at re-scoping and re-positioning bodies of knowledge has to be attempting to translate in multidimensional ways, the fresh insights from the wider synthesis to the understandings that are usually derived from taking wider looks at existing approaches and bodies of knowledge. Throughout the challenges are to see such synthesis survive in coherent forms in empirical enquiry and to remain fresh and flexible enough to accommodate re-working in the light of empirical experience. Finally, this truly is a risky undertaking. It is especially risky precisely because there is always the inclination to suggest or infer that early scholarly efforts should be abandoned, dismissed or be considered inferior. My experience reinforces caution. This is not a time to assert right or wrong. Existing facets of knowledge may be re-assessed but the re-assessment itself draws on established understandings to develop any new or different ones. My personal approach and main interests in economic geography is post-structural political economy (PSPE) applied to the investigation of nature-society relations. This comes out of concern about issues of social and environmental justice, whether in global terms or in particular places and a concern about how different political and ethical behaviours might be utilised with respect to sustainability. For me as an economic geographer, PSPE is actually a framework that utilises the heritage of economic geography enquiry (because many of the questions that occupied earlier generations of geographers remain so pressingly urgent) but asks sometimes additional and sometimes new questions. More crucially it is a framework that is concerned with what I think of as developing capacities and capabilities for mobilising approaches to the particular. PSPE is thus inherently geographic, recognising that everything involves place, every place has an economy and that geography matters through the shaping influences of space and place. In the light of this view it will be no surprise when I argue that for us to progress our enquiries on the conference theme we need to incorporate many threads from our substantial international and place-specific literatures. Economic geography has a number of strong traditions that can be re-assembled as we consider how we might move in directions that are viewed, in whatever way, as more sustainable. 10.1.2 Economic and ecological processes in their institutional settings A great deal of economic geography in recent decades has addressed the geographic organisation and patterns of economic activities and the territorial performance of economic entities and governing bodies and frameworks, from the perspective of investment and labour processes.

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A major difficulty in any re-conceptualisation is settling on what might be encompassed and the paths of reasoning or argument that might be followed. Such questions reveal that depending on how one begins the exercise, some aspects are framed into view, and others are excluded. This is only too apparent in the conference bundling of the terms ‘enterprise’, ‘entrepreneurship’ and ‘ethics’ – for ‘sustainable futures’. In short, the interpretation and content of what we mean by ‘sustainable’ takes on special significance. In the end this is crucial, as it serves as a goal for knowledge production. This meeting differs then from most (if not all) recent Commission meetings where no such explicit ‘goal’ has been included in the conference theme. Yet we are some distance from coming to grips not only with the idea of sustainable but also the elusive concepts of ‘enterprise’, ‘entrepreneurship’, ‘entrepreneurial processes’ and ‘ethics’. From the international literature on sustainability three powerful conclusions emerge; first we have value systems that privilege particular kinds of consumption, second sustainability as a concept may be hiding more than it reveals, and third, we have a paucity of institutions that might be able to deal with these issues. In an insightful review Whitehead (2003, 1202) argues that urban sustainability, for instance, is ‘less about simply reciting a set of universal social and ecological principles regarding urban development, and more about analysing the ways in which at different times and in different places certain social, economic and environmental strategies of urban development emerge and who benefits most from these strategic formulations’. Approached in this manner sustainability can be ‘understood as part of the wider regularisation (or normalisation) of the socioecological contradictions of capitalist urbanisation’, a set of discursive and material practices ‘forged within the wider socioeconomic context of neo-liberal regulation and interurban competition’. However, this assessment does not go far enough. A fuller argument would be that sustainability is not a model or an ethic for urban development (as Whitehead’s phrasing seems to imply) but rather a criterion for selecting amongst competing models that have embedded in them certain principles. In a similarly challenging manner Chan and Yung (2004, 410) remind us that several decades ago Redclift (1987) argued that the concept of ‘sustainability’ has an ‘ambiguous inheritance because as a desirable objective it has also served to obscure the growth and contradictions that ‘development’ implies for the environment’. Ten years later, Redclift (1997, 334) issued a provocative challenge, asserting that ‘we should begin to consider the institutions that we bequeath future generations rather than merely the environment we hand on to them’. Behind the challenge are a series of assumptions, about institutional failure, about what needed to be done and how to start, beginning with a commitment to explore re-education processes (Redclift, 1995). Redclift identifies three big questions: we need to deal with tradeoffs over production and consumption, we need to handle gains and losses from adopting different values, and we need to develop frameworks for actually changing behaviours based on knowledge of tradeoffs and value shifts. These big questions, bringing to the fore the politics of ‘who’ decides, in relation to ‘whom’, over ‘what’, indicates as Seabrooke et al. (2004, 445)

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observe, ‘the importance of the institutional arrangements for achieving the aim of sustainable development’. At least two very different directions and interests in knowledge production by economic geographers are discernible – ‘let’s understand existing systems without changing them’, and, ‘let’s imagine alternatives to existing systems’. While this framing could imply stark choices, the reality is that it is notoriously difficult to treat enquiry, let alone practice, in such a black and white manner. Since much economic geography output is dedicated to supposedly changing the world, we must go on to ask additional questions - in what ways, for whom, with what effects and implications etc? We also know that the figure is a poor fit with the quantum of effort in economic geography. Probably as much as 95-98 per cent of the literature is dedicated, consciously or unconsciously, to posing and answering questions inside the present system. Even within the discipline, let alone at the level of cross-disciplinary engagement, we have few boundary riders, even fewer boundary crossers, still fewer who return to tell what they found when and after they crossed the borders. The message at this juncture then is not that economic geography should pursue prescribed alternatives. Rather it is that we be open to re-evaluating and re-valuing what we do. It is at the boundaries of the existing and the alternative that we find ourselves examining enterprise, entrepreneurship and ethics – for sustainable futures. This said, we need to ask whether the conference theme is actually seen as a choice and whether at the conference we are actually engaging in a dialogue of the kind I am exploring. It is helpful to shift from the abstract to the personal and address the ideas of the entrepreneur and the other concepts wrapped into the anchor idea of entrepreneurship and enterprise. These words say something about how one participates in the everyday life, in order to be successful. The entrepreneur by being enterprising, undertakes a bold project. But how might success be judged? The answer is by various valuations – reward systems privileging bold or daring efforts, which are incorporated in expanding ways, in the worlds of economic activities. Without the conference theme goal of ‘sustainable futures’ the implicit goals of profits, personal wealth, status and so on would have slipped in to our thinking when we began to consider enterprise, entrepreneurs and ethics. Recognising the presence of an implicit goal means that we can see such terms in a new light – they are behaviour-types that when followed are assumed to produce particular outcomes. What should be obvious from my argument is that the weighting we place on entrepreneurs and entrepreneurship, as change agents and change processes, is a social weighting and that contrary to what is often popularly believed, the very idea of entrepreneurial endeavours is socially constructed, in particular contexts and out of particular politics. The terms do not stand as stereotypes of independent actors whose performance in some way can be separated from the prior or on-going contributions of others. While the standard definitions may seem to be generic, the terms are deployed in countless ways to sustain conventional thinking about how the economy works, or more accurately, how capitalist-type economies ought to work. But these points may be little more than assumptions, there being scant

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evidence. In what ways are the terms being used in the business academy, and is their use different to say, that found in social science disciplines? Can entrepreneurialism be taught, and where attempts are being made to teach the topic, what is the substance of such instruction? A growing body of critical literature is emerging from the business academy on these questions but space prevents these aspects being examined here. 10.1.3 Competing narratives and different knowledge frontiers It is now appropriate to return to my stylised traditions of economic geography. I should be upfront about what I wish to achieve with the discussion that follows. My interest in developing strategies for achieving sustainable futures draws heavily on the insight from both geography at large and economic geography. That insight can be thought of in terms of three especially significant domains of effort. First, what I call the personal (daily practices of existence and what we work on), second, the organisational (which help us with how we work) and, third, systems of private and public governing (where conditions affecting action are set). How have these domains been dealt with by our subject area? Our sub-discipline is a rich resource. Substantial literatures built up over decades exist in areas broadly classifiable as informed by neoclassical economics and informed by political economy. A relatively new literature is growing that is informed by poststructural political economy. These literatures highlight an accumulation of understanding in economic geography. At the risk of gross oversimplification what these three literatures seek to show or purport to show, with varying degrees of success, is: Agent-centred neoclassical economics: strategies for working better in the capitalist system Political economy: how the capitalist system works Post-structural political economy: how we might work on and away from the capitalist system Despite major differences amongst the three domains, there is one striking common thread: research in each domain acknowledges that the world is changed through investment in activities. Thus, to change the world, investment needs to be re-directed. The insight of the more critical sustainability literature is that we need to think of alternative consumption ethics and this links us back into the many mainstream questions of economic geography, though in fresh ways. This can not be divorced from imagining different life trajectories (the personal), different arrangements of organisation for work (the organisational) and new institutions (governing systems) for these initiatives. This said, the interest in each is different. As an economic geographers my knowledge of the economic system (and relationships of this to other spheres) allows me to pose the question ‘Can we identify and

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value tasks that might transform our investment flows such that outcomes will in the future be judged to signify sustainable activities?’ If we were attempting such a task what would we prioritise in respect of these tasks? Is it possible to take generic dimensions from the ideas of enterprise and entrepreneurship and use them to underpin such a conceptualisation? I believe we can and must, though not necessarily using the available concepts in the manner we might have in the past. What are some illustrative examples of available conceptual resources that might be drawn at this stage from economic geography? First, the special issue of Economic Geography in October 2001 (Taylor and Asheim 2001) provides rare insight into the range of conceptions of the firm, regarded by many as a core concept of the sub-disciplinary field. This review begins a re-imagining of the firm as a category by breaking out nine distinctive stylisations of the firm. The goal is to begin asking the question ‘What might a geographically informed theory of the firm look like?’ The review reaches three conclusions of interest to this discussion. A sequential review of firm types beginning with the neoclassical view of the firm culminates in the discursive firm and the temporary coalitions view. In studies of the discursive firm, they state, ‘more directly than in other conceptualizations of the firm, we encounter people being enterprising’ (Taylor and Asheim, 2001, 323) and that the temporary coalition view sees ‘firms as patterned outcomes of processes of enterprise – but not themselves the processes of enterprise i.e. people being enterprising’ (Taylor and Asheim, 201, 324). The special issue (Dicken and Malmberg, 2001; Maskell, 2001; Sternberg and Arndt, 2001) is an example of how economic Geography can be marshalled to transcend neoclassical strictures and thereby (possibly unintentionally) give a toe hold for a very different conception of how enterprises might be viewed. The language of the review is muted, the intention being to maximise leverage from the encounters that spring from a more nuanced study of the firm. Second, the geography of accumulation literature (Fagan and Le Heron, 1994) gives insight into how the circuits of capital might be examined in an era of the globalising world economy. As the influence of political economy waned in the face of cultural economy the potential of this initiative remained latent. The rapid concentration of both production and consumption activities in most nation-states and many regions makes a revisit of this framework a high priority. At least two dimensions to economic concentration support this contention. The continuing penetration by corporate capital of the consumption sphere under neo-liberalising regimes favouring marketisation and privatisation invites scrutiny of the structural conditions in which sustainable futures are imagined. Closely linked to this is the prominence (as argued in Fagan and Le Heron, 1994 (see also Britton and Le Heron (1991) for earlier discussions relating to enterprise and circuits of capital) of the finance circuit. In the decade since the publication of this paper it has become increasingly obvious that urban and rural land development processes, often fuelled by new property arrangements, can not be left out of analyses. Further property developers and land developers are actually reshaping the rules of engagement and the menu of realistic goals through strategies that are couched in the

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language of sustainability. The broad geography of accumulation framework with its accent on the relational arena of the three circuits and the range of actors shows both how goals and rewards are implicated in the circulation of capital and how the nation-state is still strategic in any endeavour to manage capitalism or imagine alternative futures. While the firm (in its many guises) and the expanding circuits of capital (in what ever form these take) constitute the wider context for re-conceptualising how we might begin to imagine sustainable futures, the recurring issues of what we do next and how we might do it have continually frustrated economic geographers. This is where post-structural political economy offers some interesting insights on how to proceed. But before considering this field I turn to the summary by Hanson and Lake (2000) in Economic Geography, outlining a geographic research agenda on urban sustainability. The agenda arose from a workshop where two conflicting definitions of urban sustainability were explored. The definitions were: a global-scale, big players’ version in which sustainability is synonymous with sustainable development and its management, embracing the agenda of the market, top-down planning, and scientific, technological, and/or design-based solutions; and a local-scale version in which sustainability is synonymous with sustainable livelihoods and in which local context can lead to different and locally contingent perspectives on the meaning of and conditions for sustainability and the means to achieve it. The workshop identified eight ‘basic premises’ that underlie the conceptualization of sustainable livelihoods. The final premise reads ‘Sustainability is fundamentally a political rather than a technological or design problem, in the sense that the greatest barrier to sustainability lies in the absence of institutional designs for defining and implementing sustainable practices in local contexts ‘ (Hanson and Lake, 2000, 2). The report from the workshop summarised its approach to sustainability as follows: ‘A comprehensive geographic perspective on urban sustainability reflecting these basic premises entails focusing on process rather than outcomes; on geographic context (i.e. the place-specific aspect of indigenous knowledges) rather than on universal recommendations; on contingency and specificity… rather than on homogeneous solutions; on flows and linkages across space; on flexibility rather than pre-determined outcomes; and on building local capacity for managing unintended consequences, deflecting external shocks, and responding to global pressures. Expanding the capacity of communities (at various scales) to support sustainable livelihoods is thus more important, and more consistent with principles of long-term sustainability, than is the imposition of top-down solutions for meeting

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externally defined needs through market-led consumption processes’ (Hanson and Lake, 2000, 2-3). Perhaps the major insight from the urban sustainability research initiative is that there needs to be a ‘shift from identifying “best practices” of sustainability to understanding the institutional and political structures that foster the adoption of sustainable practices’ (Hanson and Lake, 2000, 3). This provides an important bridge back to the contributions of economic geographers through post-structural political economy. Post-structural political economy, paraphrasing Larner and Le Heron (2002, 417), is especially concerned with understanding how key words such as globalisation and sustainability are both spatial imaginaries and sets of practice through which places and peoples are understood in particular forms. This opens up room to examine the progress/regressive elements in, for instance, neo-liberalising spaces, around competing views of subjectivities and socialities. Stated another way, how identities are constructed is deeply implicated with the choices and constraints tied to choices that are being made as part of what is being imagined and what is considered realistic, feasible or possible in given contexts. Thus, to give some tangible examples, the difference between individuals being constituted through social citizenship entitlements or human rights, community development focusing on needs or on asset-mapping, autonomous self-calculating entrepreneurs or empowered self-responsible communities, become matters of both debate and practical action. To return to earlier discussion, there needs to be simultaneous development within political economy of theorised and grounded alternatives (Gibson-Graham, 2002, 2005), as well as research on understanding existing structure and patterns. The situations actors find themselves in, especially when considering choices around sustainable futures, involve both capitalo-centric and alternative logics. As Larner and Le Heron (2002, 418) argue, ‘It is this simultaneity of capital-centred and capital de-centred subjectivities and identities that especially challenge existing intellectual frameworks’.

10.2 Further Directions Discussion at the conference confirmed the existence of a wide range of academic, community and institutional efforts to make businesses more sustainable (Nattrass and Altomare, 1999; The Natural Step, 2005). At one level this is an encouraging sign; many sincere and well intentioned models for business are under investigation and some of the contradictions that spring from these are the subject of critical reviews (Brown and Frame, 2005). At another level, it reveals a lacuna in economic geography; the absence of wide engagement by economic geographers on topics relating to the conference means few are studying the expanding literature on diverse interpretations of ‘sustainable futures’ by businesses, business com-

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mentators and the business academy (see for instance Kennelly and Bradley, 2005; World Economic Forum, 2002). This chapter suggests that the economic geography literature contains much that could be turned towards critical encounters with other literatures, especially those found in business journals. In this respect, studies that highlight the context, genesis and dynamics of particular interpretations are likely to be most immediately useful contributions in cross-disciplinary dialogue.

Acknowledgments I am grateful to Nick Lewis who read and commented critically on a draft of the chapter. Some ideas developed in the chapter arose from work on the Sustainable Pathways for Auckland project, funded by the New Zealand Foundation for Research Science and Technology. In this regard, discussion with Garry McDonald on related topics is appreciated. I am responsible for the ideas finally expressed in the chapter.

Sources Britton, S and Le Heron, R (1991) "Capital, labour and state relations in the analysis of enterprises and restructuring: an Australasian debate", Australian Geographical Studies, 285-312. Brown, J. and Frame, B. 2005 Democratizing Accounting Technologies: The Potential of the Sustainability Assessment Model (SAM), Working Paper Series, Centre for Accounting, Governance and Taxation research, School of Accounting and Commercial Law, Victoria University of Wellington, Wellington, New Zealand. Chan, E. and Yung, E. 2004 ‘Is the development control legal framework conducive to a sustainable dense urban development in Hong Kong?’, Habitat International, 28, 409426. Dicken, P. and Malmberg, A. 2001 ‘Firms in territories: A relational perspective’, Economic Geography, 77, 4, 345-363. Fagan, R and Le Heron, R 1994 `Reinterpreting the geography of accumulation: the global shift and local restructuring', Environment and Planning D, Society and Space, 16 (3), 265-285. Gibson-Graham, J-K 1996 The End of Capitalism (As We Knew It), Blackwell, Oxford Gibson-Graham, J-K 2003 ‘An ethics of the local. Rethinking Marxism’, 15, 1, 49-74. Gibson-Graham, J-K 2005 ‘Surplus possibilities: Postdevelopment and community economies’, Singapore Journal of Tropical Geography, 26, 1, 4-26. Kennelly, J. and Bradley, F. 2005 ‘Ireland in the new century: an opportunity to foster an ethic of sustainable enterprise’, Sustainable Development, 13, 91-101. Larner, W., Le Heron, R. 2002 ‘From economic globalisation to globalising economic processes: Towards post-structural political economies’, Geoforum, 33, 4, 415-419.

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Le Heron, R. ‘Towards governing spaces sustainably – reflections in the context of Auckland, New Zealand’, Geoforum, forthcoming. Maskell, P 2001 ‘The firm in economic geography’, Economic Geography, 77, 4, 329-344. Nattrass, B. and Altomare, M. 1999 The Natural Step for Business: Wealth, Ecology, and the Evolutionary Corporation. New Society: Gabriola Island, British Columbia. Redclift, M. 1987 Sustainable Development: Exploring the Contradictions, Methuen, London. Redclift, M. 1993 ‘Values, needs, rights: reassessing sustainable development’, Environmental Values, 2, 1, 3-20. Redclift, M. 1997 ‘Sustainability and theory. An agenda for action’, In Goodman, D. and Watts, M. (eds) Globalising Food. Agrarian Questions and Global Restructuring, Routledge, London, 333-343. Sternberg, R and Arndt, O. 2001 ‘The firm or the region: What determines the innovation behavior of European firms?’, Economic Geography, 77, 4, 364-382. Taylor, M. and Asheim, B. 2001 ‘The concept of the firm in economic geography’, Economic Geography, 77, 4, 315-328. The Natural Step 2005 The Natural Step Story: Seeding a quiet revolution. http://www.naturalstep.org.nz/a-u-the-tns-in-nz.asp (accessed 18 January 2006). Whitehead, M. 2003 ‘(Re)analysing the sustainable city: Nature, urbanisation and the regulation of socio-environment relations in the UK’, Urban Studies, 40, 7, 1183-1206. World Economic Forum 2002. 2002 Environmental Sustainability Index: An Initiative of the Global Leaders of Tomorrow Environment Task Force, World Economic Forum. World Economic Forum, Geneva.

11 Attitudes, Behaviours and Outcomes of Different Types of Entrepreneurs: Toward a Better Understanding of the Multiple Entrepreneurship Phenomenon C. Tamásy, University of Auckland, Auckland, New Zealand

11.1 Introduction In recent years an increasing number of theoretical and empirical studies have drawn attention to the special role of entrepreneurship in the economy (e.g., Acs et al., 2005). However, entrepreneurship is not a homogeneous phenomenon and empirical evidence shows that there are different types of entrepreneurs associated with remarkably different outcomes of economic activities. Multiple entrepreneurs are individuals who have established more than one business, often referred to as “habitual entrepreneurs” (Rosa, 1998; Westhead and Birley, 1993).1 Therefore, they are more or less experienced entrepreneurs with prior business ownership experience. To really learn about entrepreneurship MacMillan (1986) already recommended researchers in the mid 1980s to study habitual entrepreneurs. Although the entrepreneurship research field has not ignored the idea that some firm founders engage in multiple entrepreneurial activities, the analysis of multiple entrepreneurs has been a conspicuous, albeit minor feature of the literature (Carter et al., 2004; see also Alsos and Kolvereid, 1998). To date there have been only few dedicated empirical investigations of the phenomenon of multiple entrepreneurship. The multivariate statistical analyses by Tamásy (2006), examining the determinants of start-up activities and business success in selected German regions, have shown recently that multiple entrepreneurial activities influence the appearance, longevity and growth of follow up start-up attempts. This paper aims to enrich the debate by focusing on attitudes, behaviours and outcomes of different types of entrepreneurs (multiple versus single entrepreneurs). Conceptually, entrepreneurship is seen as a process (Gartner et al., 2004) which

1

Westhead and Wright (1999) further distinguish between two types of habitual entrepreneurs. First, serial founders who have sold or closed their original business, but, at a later date, have inherited, established and/or purchased another business. Second, portfolio founders who have retained their original business but, at a later date, have inherited, established and/or purchased another business. 131

J. Gatrell and N. Reid (eds.), Enterprising Worlds, 131–144. © 2006 Springer.

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may lead entrepreneurial attempts of individuals to successful ventures.2 Thus, this paper also aims to give some insights why particular entrepreneurial efforts were successful while other efforts were less successful or failed. Evidence given in this paper enable policy makers and politicians to access contributions of different types of entrepreneurs as well as the embodiment of entrepreneurial processes and their embeddedness in context. The wider literature demonstrates that multiple entrepreneurship approaches take different forms and perform different functions in different circumstances and contexts (Carter and Ram, 2003).

11.2 Survey Design Data for this paper were drawn from a research project called “New Firm Survey” (NFS)3, which has been conducted to examine with a quasi-longitudinal survey design factors influencing new firm survival and growth in selected German regions. In autumn 2001 a written survey under the auspices of the NFS was conducted with a net sample of 462 business founders in the regions of Cologne, Munich and Stuttgart. Eighteen of these 462 firms then participated in face-to-face interviews (6 per region) held in September 2002. All firms considered for the study had an earliest start-up date of 1995, as reported by the Mannheim Foundation Panel which was used as a sampling frame (cohort design). Additional information is available when firms – if so – exited their markets. All business enterprises considered in the NFS operate in manufacturing or the business service sector.4 These newly founded firms are especially important for economic development (e.g., employment, innovation) compared to relatively short-lived foundations that deal with wholesale and retail or belong to the personal service sector. Findings of the survey can be used to distinguish between single entrepreneurs (individuals who have established one business) and multiple entrepreneurs (individuals who have established more than one business). In total, 248 firms (53.7 %) involved multiple entrepreneurs. The remaining 214 firms (46.3 %) involved single entrepreneurs. The level of multiple entrepreneurship is significantly higher than the level detected by Westhead et al. (2003; 43.5 %) and by Westhead and Whright (1999; 37.4 %), both with reference to British samples of firms.

2

3

4

Carter and Ram (2003) highlight the importance to address individual entrepreneurs and newly founded businesses as units of analysis when researching portfolio entrepreneurship, defined as simultaneous ownership of several businesses (“multiple owners and directors” in the understanding of Rosa and Scott, 1999). The survey was financed by the German Research Foundation (DFG) under the grant Ta 277/1-1. For further information about the New Firm Survey see the detailed discussion in Tamásy (2005). Carter (1998) reveals in her research extensive business ownership activities in the farm sector, which is not included in the New Firm Survey.

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However, the generalisability of any findings from the New Firm Survey is still limited by selection of regions. The survey focuses on three urban agglomerations Cologne, Munich and Stuttgart, which can be distinguished by different entrepreneurial environments. Based on the theory of growth regimes (Audretsch and Fritsch, 2002) one would assume that Munich with its entrepreneurial regime offers a much better environment for newly founded businesses than Cologne and Stuttgart.

11.3 Entrepreneurial attitudes and behaviours The first research objective is to estimate the prevalence of multiple entrepreneurial activities among surveyed businesses. The New Firm Survey asked firm founders about their complete self-employment history (see Table 1). 33 % of interviewees stated that they are currently, alone or with others, trying to start other new businesses (nascent entrepreneurs), including any type of self-employment. Moreover, 34 % of respondents are, alone or with others, proprietors of other companies they help to manage; 27 % had, in the past, tried to start other new businesses, which have been closed or given up. Having said this, entrepreneurial activities are often not a single event in firm founders’ employment history. This information can be used to create an index of entrepreneurial activities, by adding up individual engagements in entrepreneurship. Finally, it allows one to distinguish between different types of entrepreneurs. First, multiple entrepreneurs form one group who have tried to start a firm at least twice (successful or not). Second, single entrepreneurs form the other group who have no experiences with further or former entrepreneurial activities (with exception of the surveyed firm). Table 1 shows that this behaviour differs slightly between the three case study areas: some 60 % of firm founders in the Munich region are multiple entrepreneurs compared with 51 % in Cologne and 48 % in Stuttgart. The observed differences reach at least at the 10 % level explanatory power. Firm founder’s experiences with self-employment are to be expected to have a profound influence on entrepreneurial attitudes. Intention-based explanations such as Ajzen’s (1991) “theory of planned behaviour” and Shapero’s (1984) “model of the entrepreneurial event” use attitudes as prerequisites to perform via intentions particular behaviours. Recent empirical analyses by Acs et al. (2005), Bergmann (2004) and Tamásy (2006) have shown that entrepreneurial attitudes have a strong impact on the decision of an individual to start a firm. However, the New Firm Survey focuses on attitudes as “outcomes” of start-up activities. It is logically consistent to argue that entrepreneur’s experiences with self-employment influence attitudes towards start-up activities, which may influence future choices to repeat entrepreneurial activities. At the time of the survey, multiple entrepreneurs stated more often than single entrepreneurs that they have the knowledge required to start a business (99.1 % ver-

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sus 94.6 %) and perceived more good opportunities for starting a business in “their” region (52.5 % versus 39.8 %). In addition, multiple entrepreneurs acknowledged less often than single entrepreneurs that fear of failure would prevent them starting a business (5.5 % versus 10.8 %). These differences were statistically significant (Chi-square test). The findings clearly indicate the existence of circular causalities between start-up behaviours and attitudes within entrepreneurial processes and contexts (Figure 1). For almost half of the firm founders in the survey, however, the venture being described is their only experience with selfemployment (“one-shot”-entrepreneurs; Kirkwood, 2003). Table 1. Entrepreneurial behaviours in selected German regions

Number of surveyed businesses „You are, alone or with others, currently trying to start another new business, including any type of self-employment?“ „ You are, alone or with others, the owner of another company you help to manage?“ (*) „You had in the past, alone or with others, tried to start another new business, including any type of self-employment, which has been closed or given up?“ Index of entrepreneurial activities 1 entrepreneurial activity 2 entrepreneurial activities 3 entrepreneurial activities 4 entrepreneurial activities Type of entrepreneur single entrepreneur multiple entrepreneur

Cologne 138 37.0 %

Stuttgart 155 29.7 %

Munich 169 32.5 %

Total 462 32.9 %

31.9 %

27.1 %

41.1 %

33.6 %

21.0 %

27.7 %

30.8 %

26.8 %

48.6 % 23.9 % 16.7 % 10.9 %

51.6 % 23.9 % 12.9 % 11.6 %

39.9 % 25.0 % 26.2 % 8.9 %

46.4 % 24.3 % 18.9 % 10.4 %

48.6 % 51.4 %

51.6 % 48.4 %

39.6 % 60.4 %

46.3 % 53.7 %

Statistical significance indicated within parenthesis: *= 0.05; **= 0.01

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Fig. 1. Non-recursive model of entrepreneurial behaviours and attitudes

Entrepreneurial Attitudes

+/-

C Coonntteexxtt Entrepreneurial

+/-

Entrepreneurial process Start-up activities (pre-entry phase)

Firm “birth” (market en-

New firm survival/growth (post-entry phase)

11.4 Outcomes of different types of entrepreneurs This section provides a more detailed focus on the process of business formation by comparing the outcomes of different types of entrepreneurs in the post-entry phase (see Figure 1). The analyses keep in focus developments of new businesses after market entry, with the two most important dimensions of firm outcomes being survival and growth, as two objective measures of “success”. Survival after birth. All firms considered for the New Firm Survey had an earliest start-up date of 1995, as reported by the Mannheim Foundation Panel. However, the documented date of formal “birth” does not always fit the year of de facto market entry, which refers in the study to the point in time when firms received their first turnover. Table 2 shows that, in total, almost two-thirds of market entries took place in 1995, the year of formal market entry. No statistical significant age differences were recorded between the two groups of entrepreneurs and by regional comparison (Chi-square test). Nevertheless, businesses located in Munich or Stuttgart are more likely to survive than newly founded businesses located in

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Cologne5 and a larger proportion of businesses owned by multiple entrepreneurs (compared to single entrepreneurs’ businesses) had their earliest start-up date in the years following after 1995. Therefore, surveyed businesses established by multiple entrepreneurs are slightly younger, on average, than their counterparts founded by single entrepreneurs. Table 2. Characteristics of surveyed businesses by type of entrepreneur Multiple entrepreneur Number of surveyed businesses Survival status (*) Discontinuing Survival By region (proportion surviving) Cologne Munich Stuttgart Year of market entry (first turnover) 1994 1995 >1995 Age, sales years (mean) – surviving businesses Age, sales months (mean) – discontinuing businesses

Single entrepreneur

Total

248

214

462

16.5 % 83.5 %

9.8 % 90.2 %

13.4 % 86.6 %

77.5 % 85.3 % 86.7 %

91.0 % 94.0 % 86.3 %

84.1 % 86.5 % 88.8 %

6.9 % 61.4 % 31.7 % 6.0 40.2

8.5 % 67.1 % 24.4 % 6.2 41.3

7.6 % 64.1 % 28.3 % 6.1 40.6

Statistical significance indicated within parenthesis: *= 0.05; **= 0.01 At the time of the survey, Table 2 shows, firms established by multiple founders are less likely to persist than those founded by single entrepreneurs. It can be argued that multiple entrepreneurs have probably more employment opportunities, either in dependent employment or in other self-employed activities - which firm founders run in parallel -, so that business closure is more likely to occur than in single entrepreneurs’ businesses.6 For example, multiple entrepreneurs achieved

5

6

Tamásy (2006) analyses the survival functions in Cologne, Stuttgart and Munich, defined as the cumulative proportion of cases surviving up to the respective interval. Six years after market entry, the probability of surviving is higher in Munich (0.8950) than in Stuttgart (0.8605) and Cologne (0.8273), whereas the three survival functions differ more significantly in later phases of entrepreneurial processes. The survival function for the whole sample shows a decreasing probability from 0.9516 (two years after market entry) to 0.8635 (year six). The findings illustrate that, in an individual perspective, the closure of a newly founded business is not in any case a “failure”. Entrepreneurs may decide to transfer resources (e.g. tangible and intangible assets) to other - more promising – ventures to gain com-

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more often than single entrepreneurs at least a secondary school level certificate (72.6 % versus 57.9 %) or a university degree (50.0 % versus 38.3 %). Higher educated individuals may have better chances on the labour market and face a lower risk of unemployment. Arguments referring to human capital offer an important entry point into entrepreneurship (Schultz, 1975, 1980). The basic proposition is that people invest in themselves through education and training to receive (expected) higher earnings. Higher investment in human capital creates a higher labour productivity and - transferred to the area of entrepreneurship research promotes entrepreneurial success. The importance of human capital aspects is supported by the fact that multiple entrepreneurs less often pursue start-ups because they have - in their opinion - “no better choices for work” (26.2 % versus 36.0 % of single entrepreneurs) and were less often unemployed or non-employed when they started the considered businesses (6.9 % versus 13.6 %). It should be noted that statistically significant differences were identified. Growth after birth. The empirical literature offers a variety of ideas, measures, and facts, how organisations grow (see, for an overview, Delmar et al., 2003). The New Firm Survey focuses on sales, employment and related indicators. Since there appears to be no single best measure of firm growth, it seems to be promising to use different growth measures in an empirical study of post-entry firm growth. Theoretical and empirical literatures offer two basic approaches to measure firm growth: 1) absolute growth; and 2) relative growth (Davidsson and Wiklund, 2000). Absolute growth refers to annual change in monetary units or number of employees, while relative growth refers to annual percentage change. The choice of absolute or relative measures is important, because of an existing relationship between size and growth. Absolute measures tend to ascribe higher growth to larger firms whereas smaller firms more easily reach growth in percentage terms (Delmar, 1997). Table 3 presents size figures of firms in the case study regions, which had not exited the market before the survey was done (“survivors”). At the end of the first business year after market entry, firms had an average of 2.6 employees (full-time equivalents without owners, mean) to produce a turnover of 426,000 Euro (mean).7 Both figures increase until year five, where an average of 4.8 employees

petitive advantage. It may be better, then, to describe firms as discontinued, rather than “failed”. 7 In addition, an average of 1.6 owners per firm (median: 1.0) were actively conducting a business in the year of founding.

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Table 3. Absolute growth characteristics by type of entrepreneur (“survivors”) in a dynamic perspective*

Number of surveyed businesses Turnover 1yme, in thousands Euro (**) Mean Median Turnover 2yme, in thousands Euro (**) Mean Median Turnover 3yme, in thousands Euro (**) Mean Median Turnover 4yme, in thousands Euro (**) Mean Median Turnover 5yme, in thousands Euro (**) Mean Median Turnover 2001, in thousands Euro (**) Mean Median Jobs, full-time equivalent, 1yme (**) Mean Median Jobs, full-time equivalent, 2yme (**) Mean Median Jobs, full-time equivalent, 3yme (**) Mean Median Jobs, full-time equivalent, 4yme (**) Mean Median Jobs, full-time equivalent, 5yme (*) Mean Median Jobs, full-time equivalent, 2001 (working proprietors included) (**) Mean Median

Multiple Single Total entrepreneur entrepreneur 207 193 400 549.9 176.4

294.0 112.5

426.5 143.2

621.8 204.5

356.6 139.3

497.6 178.9

795.7 255.6

399.8 163.3

602.8 204.5

1,105.6 307.3

461.7 196.9

794.0 251.5

888.9 383.5

487.3 204.5

689.3 256.7

1,361.5 357.9

573.8 230.1

982.6 281.2

3.3 1.0

1.9 0.5

2.6 1.0

4.0 1.0

2.3 1.0

3.2 1.0

4.0 2.0

2.4 1.0

3.7 1.0

6.5 2.0

3.1 1.0

4.8 1.5

6.3 2.0

3.4 1.0

4.8 2.0

8.3 3.5

5.0 2.5

6.7 3.0

Statistical significance indicated within parenthesis: *= 0.05; **= 0.01 * 1yme = first fully-completed business year after market entry … 5yme = fifth fully-completed business year after market entry produces a turnover of 689,000 Euro. The results, however, show much skewness. The median of employment is 2.0 in year 5. This confirms the well-known empirical regularity that new firms typically start small. Table 3 shows businesses

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founded by multiple entrepreneurs are considerably larger than those founded by single entrepreneurs. Businesses established by multiple entrepreneurs reported, on average, higher levels of turnover and employment than those founded by single entrepreneurs. It should be noted that all these differences were in a statistically significant direction. The pattern of relative growth summarised in Table 4 detects only few statistically significant differences among the responses made by the two types of entrepreneurs. With regard to their prospective business development (future growth in turnover and employment), multiple entrepreneurs were, on average, more optimistic than single entrepreneurs. A slightly different geographical pattern is reported in Table 4. Businesses located in Munich and Cologne were more likely to be “high-growers” than newly founded businesses located in Stuttgart, whereas entrepreneurial behaviour, itself, differs between the three case study areas (see Section 3). When considering median growth figures only8, multiple owned businesses reported, on average, more often slightly higher levels of growth in sales, employment and productivity than their counterparts owned by single entrepreneurs. Similarly, only slight differences were detected among the responses made by the two types of entrepreneurs with regard to subjective success, defined in terms of how founders value their own objectives relating to their businesses. In the questionnaire this was formally identified by the answers “fully achieved” or “outdone”. Almost one thirds of multiple founders can be classified as “successful”, based on their own expectations and perceptions, compared to 27 % of single entrepreneurs (Table 4). The findings suggest relatively few firms create turnover and employment on a significant scale. However, in terms of contributions to economic well-being, multiple entrepreneurs’ firms appear to provide more benefits (sales, jobs) while, at the same time, business closure is more likely to occur than in single entrepreneurs’ businesses. It has to be noted, that individual measures mirrors only specific aspects and time frames of entrepreneurial processes. The correlations among the different growth indicators are displayed in the Annex. The analysis explores heterogeneity how new businesses achieve growth and correlation coefficients show both positive and negative relationships between various indicators. The highest positive correlations exist between indicators with similar points of reference. However, past growth in sales, employment or productivity does not guarantee future increases in outcomes. Remarkably, there exists a week connection between objective growth measures and subjective success, as stated by firm founders. These findings suggest that satisfaction measures are more a function of entrepreneur’s personal expectations,

8 Given the heterogeneity of the sample, medians should be preferred to interpret the data.

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Table 4. Relative growth characteristics by type of entrepreneur (“survivors”)* Multiple entrepreneur 207

Single Total entrepreneur 193 400

Number of surveyed businesses Annual turnover growth 1yme-2001 in % Mean 16.3 16.4 16.4 Median 14.9 14.2 14.6 Turnover growth 2000-2001 in % Mean 5.3 16.9 10.9 Median 3.1 3.1 3.1 Annual turnover growth 1yme-2000 in % Mean 24.5 21.6 23.1 Median 18.9 15.8 17.3 Prospective turnover growth 2002-2003 in % Mean 12.1 8.8 10.5 Median 6.2 5.5 5.8 Prospective turnover growth 2001-2003 in % (*) Mean 59.7 23.3 41.7 Median 15.5 13.6 14.3 Annual employment growth 1yme-2001 in % Mean 9.3 6.8 8.1 Median 2.4 0.0 0.0 Employment growth 2000-2001 in % Mean 10.2 5.0 7.7 Median 0.0 0.0 0.0 Annual employment growth 1yme-2000 in % Mean 11.7 8.9 10.3 Median 3.3 0.0 0.0 Prospective employment growth (1 = aspired) (*) 70.5 % 53.6 % 53.9 % Annual productivity growth 1yme-2001 in % Mean 7.8 10.2 9.0 Median 8.2 5.9 6.7 Productivity growth 2000-2001 in % Mean 8.0 21.0 14.3 Median 0.0 2.6 1.7 Annual productivity growth 1yme-2000 in % Mean 14.1 13.6 13.9 Median 7.7 6.2 7.1 By region (proportion “high-growers”) Cologne 55.1 % 46.3 % 50.5 % Munich 58.8 % 47.3 % 54.1 % Stuttgart 47.4 % 45.3 % 46.3 % Subjective success (1 = personal goals „fully 31.4 % 26.9 % 29.3 % achieved“ or „outdone“) Statistical significance indicated within parenthesis: *= 0.05; **= 0.01 * 1yme = first fully-completed business year after market entry; growth of employment includes working proprietors; productivity = turnover per employee (working proprietors included); “high-growers” = firms with productivity growth (1yme-2001) higher than 6.7 percent (median)

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knowledge and perception of the situation, and less of the objective performance of newly founded businesses. For example, 29 % of entrepreneurs were highly satisfied even though their businesses do not belong to the group of “high growers” in the sample. On the other hand, 71 % of entrepreneurs belonging to the group of “high growers” were less satisfied or dissatisfied with regards to their personal goal achievement. The possibility to control these factors is therefore important for any analysis of post-entry firm success. Firm founders whose businesses had exited the market before the survey was conducted have been omitted from the correlation analyses.

11.5 Discussion The main purpose of this paper was to analyse attitudes, behaviours and outcomes of different types of entrepreneurs (multiple versus single entrepreneurs). From a conceptual viewpoint, findings suggest a need to take into account the embodiments of entrepreneurship, defined as various types of entrepreneurship. Furthermore, it can be argued that a process perspective offers greater insights into the entrepreneurship phenomenon than have been achieved in studies breaking entrepreneurship dynamics into parts and then treating the individual parts in isolation. Finally, researchers should embed their analyses in contexts, which may influence the decision to engage in multiple approaches. For example, the New Firm Survey has shown that the appearance of multiple entrepreneurial activities varies by region whereas circular causalities between start-up behaviours and attitudes seem to exist. From a policy-oriented viewpoint, the results suggest that experience from multiple start-ups is valuable for growth, even if the study explores enormous heterogeneity in how individual businesses develop in the post-entry phase after market entry. Hence, policy makers promoting start-ups in Germany may not be paying enough attention to entrepreneurs with multiple entrepreneurial activities, who may owe new businesses that record employment and sales growth. Instead, in Germany most government programmes are currently directed at firm founders and businesses rather than experienced entrepreneurs. A few initiatives promote start-ups of previously unemployed people (“Ich-AG”, “Ueberbrueckungsgeld”) who are often disadvantaged with regard to human capital issues and have relatively minor growth potentials. However, business closure is also more likely to occur in firms owned by multiple firm founders, because they have probably more employment opportunities than single entrepreneurs, either in dependent employment or in other self-employed activities. Thus, policy initiatives should be exactly defined and clearly positioned in entrepreneurial processes with reference to different types of entrepreneurs. Westhead et al. (2003) suggest to target limited financial resources to entrepreneurs and businesses with growth potential, rather than to subsidise a large num-

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ber of businesses which will close down after a short period of time, because their products and services are not competitive on the market. The obstacle is, as the findings of the New Firm Survey have suggested, that these entrepreneurs (multiple firm founders) who are more likely to grow are also less likely to survive. Perhaps “no policy” may be appropriate, because one of the unanswered questions is whether the start-up business community is adequately recreating and growing by itself through. This is an area where more research is needed, not addressed by this paper.

Sources Acs, Z.J. et al. (2005) Global Entrepreneurship Monitor, 2004 Executive Report, Babson Park, Babson College. Ajzen, I. (1991) The Theory of Planned Behaviour, Organizational Behaviour and Human Decision Processes, 50, 179-211. Alsos, G.A. and Kolvereid, L (1998) The Business Gestation Process of Novice, Serial, and Parallel Business Founders, Entrepreneurship: Theory & Practice, 22, 101-114. Audretsch, D.B. and Fritsch, M. (2002) Growth Regimes over Time and Space, Regional Studies, 36, 113-124. Bergmann, H. (2004) Gruendungsaktivitaeten im regionalen Kontext - Gruender, Gruendungseinstellungen und Rahmenbedingungen in zehn deutschen Regionen, Koelner Forschungen zur Wirtschafts- und Sozialgeographie, 57, Cologne, Department of Economic and Social Geography, University of Cologne. Carter, S. (1998) Portfolio entrepreneurship in the farm sector: indigenous growth in rural areas?, Entrepreneurship & Regional Development, 10, 17-32. Carter, S. and Ram, M. (2003) Reassessing Portfolio Entrepreneurship, Small Business Economics, 21, 371 – 380. Carter, S., Tagg, S. and Dimitratos, P. (2004) Beyond portfolio entrepreneurship: multiple income sources in small firms, Entrepreneurship & Regional Development, 16, 481499. Davidsson, P. and Wiklund, J. (2000) Conceptual and Empirical Challenges in the Study of Firm Growth, in Sexton, D.L. and Landström, H. (Eds.) The Blackwell Handbook of Entrepreneurship, 26-44. Malden, Blackwell. Delmar, F. (1997) Measuring Growth: Methodological Considerations and Empirical Results, in Donckels, R. and Miettinen, A. (Eds.) Entrepreneurship and SME Research: On Its Way to the Next Millennium, 199-215. Aldershot [et al.], Ashgate. Delmar, F.; Davidsson, P. and Gartner, W.B. (2003) Arriving at the High-growth Firm, Journal of Business Venturing, 18, 189-216. Gartner, W.B. et al. (2004) (Eds.) Handbook of Entrepreneurial Dynamics: The Process of Business Creation, Thousand Oaks, Sage. Kirkwood, J. (2003) The habitual entrepreneur, NZ Business, 17, 27. MacMillan, I.C. (1986) To really learn about entrepreneurship, let's study habitual entrepreneurs, Journal of Business Venturing, 1, 241-243. Rosa, P. (1998) Entrepreneurial processes of business cluster formation and growth by 'habitual' entrepreneurs, Entrepreneurship: Theory & Practice, 22, 43-61. Rosa, P. and Scott, M. (1999) The prevalence of multiple owners and directors in the SME sector: implications for our understanding of start-up and growth, Entrepreneurship & Regional Development, 11, 21-37.

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Schultz, T.W. (1975) The Value of the Ability to Deal with Disequilibria, The Journal of Economic Literature, 13, 827-846. Schultz, T.W. (1980) Investment in Entrepreneurial Ability, The Scandinavian Journal of Economics, 82, 437-448. Shapero, A. (1984) The Entrepreneurial Event, in Kent, C.A. (Ed.) The Environment for Entrepreneurship, 21-40. Massachusetts, Lexington. Tamásy, C. (2005) Determinanten des regionalen Gruendungsgeschehens, Wirtschaftsgeographie, 27, Muenster, Lit. Tamásy, C. (2006) Determinants of regional entrepreneurship dynamics in contemporary Germany: A conceptual and empirical analysis (forthcoming in Regional Studies). Westhead, P. and Birley, S. (1993) A comparison of new business established by 'novice' and 'habitual' founders in Great Britain, International Small Business Journal, 12, 3860. Westhead, P. and Wright, M. (1999) Contributions of Novice, Portfolio and Serial Founders Located in Rural and Urban Areas, Regional Studies, 33, 157-173. Westhead, P., Ucbasaran, D. and Wright, M. (2003) Differences Between Private Firms Owned by Novice, Portfolio and Serial Entrepreneurs: Implications for Policy Makers and Practitioners, Regional Studies, 37, 187-200.

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Appendix: Correlation between different indicators for success (“survivors”)*

* Correlation coefficients by Pearson; 1yme = first fully-completed business year after market entry; growth of employment includes working proprietors; productivity = turnover per employee (working proprietors included)

12 The Business and Sustainability of Water Supply in Singapore: The Case of Hyflux S. Y. Wong, National Institute of Education, Nanyang Technological University, Singapore

12.1 Introduction Water, once perceived as a free commodity, is now increasingly viewed as a treasure to be protected and guarded. Global consumption of water is doubling every 20 years, more than twice the rate of human population. If current trends persist, by 2025 the demand for fresh water is expected to rise by 56 per cent more than what is currently available (UNESCO. 2003). With less than 1 per cent of the world’s total water supply available for human consumption, water has emerged as a contentious economic resource in many parts of the world. Growing water shortages affecting 40 per cent of the world’s population, and an increasing demand, present a looming crisis and have increased the scope for "water wars." The United Nations estimates that by 2025, about 5 billion people will have difficulties meeting the needs of fresh water. The important role of water in sustaining economic development and our environment has been stressed by many for many years. The Agenda21 has drawn out the framework for sustainable development, but many, especially developing countries are weighing the costs and benefits of doing so. While business and industry are crucial drivers of economic development, they also abuse the use of natural resources like water. The Dublin International Conference on Water and the Environment stated in 1992 that ‘human health and welfare, food security, industrial development and the ecosystems on which they depend are all at risk unless water and land resources are managed effectively.’ Industry can impact on water resources quantitatively and qualitatively through excessively consuming it and discharging the waste-water inconsiderately. Without effective governance and management on both the demand and supply side, the water and industry systems, and eventually the whole economy may not be sustainable. In addressing the issue of sustainability of water resources in connection with the industry and the economy as a whole, social equity, environmental sustainability and economic efficiency also have to be considered. More importantly, the planning and management of resources are workable only in an enabling environment that comprises the right policies, legislation and governance supported by an institutional framework that clearly defines the roles of different actors including the State and any public-private partnership. Given the indispen145 J. Gatrell and N. Reid (eds.), Enterprising Worlds, 145–163. © 2006 Springer.

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sable use of water in our lives and environment, an integrated framework for the provision of water services and management is thus necessary. The water issue of Singapore has attracted considerable attention recently. The complexity of the issue touches on not only the problem of water shortage but also national survival and possibly inter-state conflict. The Republic has long been dependent on Peninsular Malaysia for its water supply. The sustainability of such water supply has become less promising as the political and economic environments have changed over the years. The country constantly alerts itself on selfsufficiency in water supply and emphasizes appropriate water management. The public and private sectors have engaged in finding new means of water supply, creating a new water industry and enterprise which not only helps increase domestic supply, but also diversify and internationalize the domestic economy. The effective water conservation programme and regulatory measures have lowered the level of unaccounted-for-water to only 5 per cent which won Singa-pore the first prize for the International Water Supply Association Asia Pacific Group in 1996. Well known for its high standard of water quality and stringent controls on demand, waste and pollution, for Singapore the question is more of ensuring the continuous supply of water for its industry and people. The sustainability of the national economy is contingent upon the sustainable supply of water. This paper traces the sustainability of water supply and the rising significance of water supply industry in Singapore. A newly emerged local enterprise that engages in the business of water supply, Hyflux, is used as a case study to highlight the enabling factors that lead to its birth and rising importance as an export industry of the city-state. The conventional explanation is that resources such as land, labor, market, technology and raw materials are vital to an industry or a firm’s growth, expansion and stability. However, other factors namely, the role of the State and its agencies, research institutions, resource network and environmental costs which include politico and economic costs and uncertainties are equally important. Using the integrated actor-network framework, it is asserted that individual entrepreneurial foresight, training, working experience and networking largely account for an industry or a firm’s embryonic start but subsequent achievements are an outcome of the collaborative efforts of public and private sectors and the network effects associated with technology innovations, information acquisition, financial support and market access. The pressures of resource constraints, the politics and economics associated with the supply of a scarce resource such as water will reinforce the cooperation and partnership with relevant actors. Environmental and economic sustainability are attained in the long run as the State and the private sector play the mutually reinforcing roles in sustaining the demand and supply of water which is the lifebelt of domestic industries and households. The paper contains five parts. After the introduction, the background of the economy and the significance of water in the new cluster of environmental technology industry are explained. Third, the overall water supply situation and the associated

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economic and political factors that lead to the development of water industry are discussed. Next an account is given on the growth and expansion of Hyflux. Finally concluding remarks are made on the prospects of the country’s water supply and industry.

12.2 Restructuring Singapore Industry – the New industry Clusters After four decades of independence, Singapore has transformed its economy from one that was highly de-pendent on entrepot trade to one that exports high-tech manufactured products such as electronics. The lack of natural resources and past experiences of reliance on British support, separation from Malaysia and confrontation with Indonesia have compelled the small nation-state to adopt an outward-looking, global-based and state-led developmental strategy at its early stage of development. Despite the constant vigilance of re-sources and economic restructuring, the economy remains vulnerable to external uncertainties such as the 1997 regional currency crisis and now the pandemic avian flu and global terrorism. Though a developed economy, the small country remains heavily dependent on external trade and continues to be plagued by chronic problems of rising costs, intensifying competition from neighboring countries, low entrepreneurship and lack of skills in high technologies and specialized services. The relatively low technology base and the lack of any branded goods on a global basis prompt the city-state to stress the importance of R and D and the innovation of branded products. The $2 billion National Technology Plan (1991-1995) and the $4 billion National Science and Technology Plan (1996-2000) are aimed at raising the country’s technology development capability. Specific manufacturing clusters are identified to leverage on synergies at the firm and industry levels, emphasizing core capabilities that are common to industries within a cluster. Among the manufacturing clusters in 2001, electronics remains the key exports, accounting for about 48 per cent of its domestic exports and 56 per cent of private sector gross expenditure on R & D. The strong participation of foreign MNCs in electronics cluster and their global network provide the economies of scale and scope to conduct greater R & D. In comparison, only 14 per cent was spent on R & D in engineering although it could better help develop indigenous technologies in the long run. At present, high value-added activities in photonics, nanotechnology, alternative fuels and performance materials are recommended to spur the development of environmental technology industry and services. The knowledge capabilities of these areas in the value chains are to be broadened, deepened, integrated and ap-plied to create the intellectual assets both in the form of hardware and software for exports. These developments suggest the significant role water can play as these new industries not only require adequate water supply but also good quality water and

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technologies that can help save water resources, produce minimal polluted effluents as well as treat waste water before disposal or recycling. Knowing well the scarcity of natural resources and the fragility of the eco-systems, the State adheres to strict environmental protection and conservation policies which result in the progressive use and export of environmental technologies. Today there are about 250 companies specialized in the manufacturing and supply of environmental technologies and services. These include those in the areas of water technology, waste and wastewater treatment, water supply consulting and engineering.

12.3 The Economics and Politics of Water Supply Catalysts of Water Industry Singapore, a country that enjoys the highest GDP per capita in Southeast Asia, has been ranked by the United Nations as among the top ten countries facing water shortage. It is considered “water-stressed” as less than 1,000 m3 per person of water can be obtained domestically. The ratio of annual per capita of internal renewable water resources in Malaysia is 124 times that of Singapore’s and that of Indonesia is about 71 times that of Singapore. Singapore thus has to import water for its own needs especially the three major consumers - industry, commerce and households. The domestic sector has increased its share of consumption from 41 per cent in 1960 to 53 per cent in 2001. Without a viable agriculture sector to compete for water uses, the industry share doubled readily from about 22 to 40 per cent over the same period. Its domestic consumption level in 2001 is higher than the averages for the world (8%), high-income (11%) and low-income (8%) countries largely because of its highly urbanized city-state environment. Its industry consumption level approximates that of high-income countries (59%) but exceeds that of the world average (22%) and low-income countries (10%), indicating the country’s high level of industrialization. Comparing to cities like Los Angeles, Tokyo, Sydney, Hong Kong, Singapore’s per capita water consumption of 162 litres per day is relatively low (PUB, 2003). Currently, about 50 per cent of Singapore’s water requirements are tapped from domestic sources while the remainder is imported from the Johor state of Malaysia. Around 680,000 m3 of local water consumption is sourced from catchment areas that include 19 raw water reservoirs, 9 treatment works and 14 storage or service reservoirs. The local and Johor storage caters for about two years supply at the current level of us-age. If the Johor supply is not available, the city-state has about 4 months’ time to resolve the water short-age. The recent dispute with Malaysia over the long-term supply of water has raised the question of sustainability of the Republic’s water supply. Modern water politics cannot be divorced from historical international relations. The history of water negotiations and arrangements between Singapore and Malaysia dated back to 1927 when the first agreement was signed and when the two

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countries were under the British rule. The independence of Singapore and its separation from Malaysia took place in 1965 with the signing of a Separation Agreement (SA). The SA also incorporated two water agreements (WA) which were signed in 1961 and 1962. The agreements contain specific provisions on when the price can be revised and how the revisions should be computed. The sanctity of agreements cannot be adhered to if any party change the terms of agreements at will. Any at-tempts to renegotiate the terms of the WA will be interpreted as a direct threat to Singapore’s sovereignty. Based on the agreements, Singapore built and maintains the waterworks in Johor (dams, pipelines, reser-voirs) and has "the sole and absolute right" to a fixed amount of raw water until 2011 and 2061 respec-tively. The price of this water is fixed at 3 Malaysian cents per 1,000 gallons, and Singapore is obligated to sell the treated water back to Johor. With the expiry date for one of the agreements drawing near in 2011, Singapore has initiated talks with Malaysia about extending the treaty. Many negotiations were held with Malaysia over the price of water. Malaysia repeatedly changed its mind on the price whenever an agree-ment was about to be signed. In 1998, Malaysia requested to resolve all the outstanding bilateral issues as a package and Singapore agreed. Malaysia however changed its mind later and was reluctant to sell future water to Singapore. The package was unilaterally cancelled, making no room for negotiation. In August 2000, Malaysia asked to increase the price to US$0.12 per 1,000 gallons, and then to US$0.16 in January 2001. In September 2001, Malaysia first agreed to the price of RM$0.45 for current water supply and RM$0.60 for future water supply. In March 2002, the price was adjusted to RM$0.60 and RM$3 respectively. Later the price was raised to RM$6.25, a 200-fold increase. No agreement could be reached between the two governments. Malaysia refused to discuss future water supply to Singapore until 2059, two years before the 1962 WA expires. The negotiations on supply and price of water have soured the relations between the two neighbours which are closely related historically and economically. The disagreements opened the floodgates of accusations of historical injustices and unfair profiteering. Malaysia blamed the British for having left a legacy that had benefited Singapore and cited Hong Kong case to argue against the unfair price. In 2002, a Malaysian Minister in the Prime Minister’s Department declared that Malaysia could enact domestic legislation to render the WA null and void. Since the agreements were ratified at the United Nations, this action can be interpreted as a debasement of international law. Evidently sovereignty and international treaty obligations have superseded a desire for harmonious bilateral relations. Considerable nationalist fervor including "loose talk of war" was stirred up in January 2003. Such water controversy is not new. In the last 50 years, there have been 37 violent conflicts between states involving water rights and access to water, according to the United Nations. International law has its limits in the prevention or permanent resolution of these conflicts, al-though 200 other water-sharing treaties have been signed globally.

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In the May 2002 address to the Singapore Parliament, former Prime Minister, Goh Chok Tong finally declared that, “Any breach of the Water Agreements would also call into question the Separation Agreement, and undermine our very existence.” In July 2002, Singapore has decided to allow the 1961 agreement to lapse when it expires in 2011. The plan is to replace the imported supply with domestic sources. Studies have shown that domestic demands are not likely to rise further considering the declining population and falling total fertility rates. Total population is estimated not to grow beyond 4.3 million by 2010 assuming that the number of foreigners remains below 1 million. Domestic consumption per head is found to have dropped from 114 m3 in 1998 to 110 m3 in 2001 (PUB, 2002). The water demand is projected to grow at about 2 to 3 per cent a year for the rest of this decade. In 10 years' time, taking a compounded growth rate of 2.5 per cent per annum, Singapore's water consumption will rise by about 450, 000 m per day to about 1.6 million m3 per day. To stress the importance of sovereignty and to challenge the threat of any water shortage, Goh introduced to the public a bottle of water during the 37th National Day celebration in August 2002. It is NEWater, freshly purified water from waste water which will represent Singapore’s current solution to water shortage. To re-affirm Malaysia’s stand, Johor state’s current Chief Minister, Abdul Ghani Othman announced that Johor will stop paying Singapore for treated water once the construction of its $105 million water plant is completed. He added that Johor state government will take over the three water treatment plants presently managed by Singapore once Malaysia's first water supply agreement with Singapore expires in 2011 (Straits Times,7 Jan 2003). Since the renewal of water supply after 2061 cannot be resolved through negotiations, the case will be settled through arbitration according to the laws of Johor, as provided for by the two Water Agreements.

12.4 The Water Solution - The Role of the State and Public-Private Partnership Though water supply has always been the domain of public sector, the problems of pollution, waste disposal, needs of new technologies and cost-cutting measures have made countries favor some form of pub-lic-private partnership arrangements to help improve services. Some countries have delegated responsibility to lower levels of government, or create new institutions or privatize the services. Such options often pro-duce less desirable results unless the water service providers are subject to effective regulation and monitoring as advocated at the ministerial Declaration at Bonn in 2001. Private sector involvement in water supply and services may take many forms. Some countries choose the model of divestiture of assets as in England where the private sector owns the infrastructure, plans and finance its development but the

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government continues to regulate the companies, water quality, discharge and pricing. In other countries such as in France, the management, operation and development of systems are granted to private sector for an average period of 25 years based on concessions system but the government keeps the ownership of the infrastructure. In other cases, some governments use service contracts to buy the goods and services from the private sector. Some follow the schemes of BuildOperate-Transfer (BOT) and Build-Own-Operate-Transfer (BOOT). These involve the private sector in the financing, construction and operation of works. They are usually used for treatment plants and the private investor makes a return on his investment from the revenue for water sold or fees for treated wastewater. The private sector is controlled through the terms of the contract by the government or a statutory board. The partnerships can be informal or legally binding, short-term and project-specific or long-term and broad in scope. Evidence shows that key ingredients in successful partnerships are a shared vision, compatibility, mutual trust, legitimacy, effective communication and transparency. In Singapore, the public-private partnership (PPP) scheme was officially introduced in 2003. Through PPP, the public sector will focus on acquiring services at the most cost-effective basis, rather than directly own-ing and operating assets. It is a means to overcome the constraints of size, resource scarcity, rising costs and the lack of economies of scale in applying new high-tech oriented technologies for service delivery. A typical PPP requires the private sector to design, construct, finance, maintain and operate facilities over a period of 15 to 30 years. Under PPP, companies work as a consortium and undertake the whole project from designing, financing to the long-term maintenance and operations of the facilities while the govern-ment checks the accountability of the services, leverages on private sector expertise and opens up business opportunities for them. The United Kingdom and Australia have already used PPP to build sports facilities, incineration plants, water and sewerage treatment works and public infrastructure. The PPP models that Singapore adopts include joint ventures, BOO, Design-Build-Finance-Operate (DBFO) and Design-Build-Own-Operate (DBOO). The water treatment and seawater desalination plants are some of the PPP projects among others like the Sports Hub, incineration plant and IT infrastructure projects. The concern about the country’s future water security leads to a 2-pronged approach. One is to conserve as much water as possible. The other is to reduce growing demand, reuse and reclaim water within the existing costs and technological means. The approach is based on the concept of addition and multiplication. Addition refers to securing new water sources such as through desalination, expansion of water catchments for collection of more rainwater, local or otherwise. Multiplication is done through water reclamation using new water treatment technologies. Instead of relying on Malaysia for the supply of raw water which ac-counts for about 60 per cent of the total, steps have been taken to diversify the sources of supply through the "Four National Taps", viz. water from Singapore's local catchments, imported water, reclaimed water and desalinated water (PUB, 2002).

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The Public Utilities Board (PUB) is the main body in charge of the country’s water resources and supply. PUB manages the water supply in an integrated manner which involves taking care of the reservoirs, waterworks, rivers, drains, sewerage system and water reclamation plants in addition to constructing reservoirs and storm water collection depots across Singapore. Currently, Singapore has about 2,400 mm of rainfall yearly, of which 680,000 m3 is collected daily by the reservoirs and storm water collection ponds. The PUB plans to construct more of such stormwater collection ponds. Additionally, a barrage will be built cross Marina Bay by 2009 to optimize the yield from the hydrological cy-cle and re-stock the reserves. With current daily water consumption at some 1.2 million m3, local catch-ment can furnish some 57 per cent of domestic needs. By harvesting water from potential catchment areas and aquifers that stretch across the island, the import of water from Johor can be progressively reduced. It has also instituted a comprehensive water conservation programme. These include educating the public to cultivate frugality in water use; incentive-based and pricing mechanisms to encourage water conservation; regulation and legislative measures to check growing demand; and consistent improvements in the infra-structure of the water distribution network to minimize wastage through leaks and faulty meters. A recent pilot project by PUB showed that households which installed water-saving devices such as thimbles and cistern water saving bags were able to reduce their water consumption by about 5 to 8 per cent and lower utility bills significantly. The per capita consumption of water in households has been effectively maintained at 165 litres per day for the last 5 years, a result of PUB's active water conservation efforts and water demand management. The water quality in Singapore is high as the 2001 evaluation showed that about 90 per cent of the water samples taken from the water and non-water catchment area have met the Biochemical Oxygen Demand target (10 mg/liter or less). The maintenance of good water quality is due to the progress made in the construction of public sewer systems. In Singapore, waste water, both domestic and industrial, is treated in public sewer systems. Industrial waste water accounts for a large part of the loads contributing to water pollution, and is under thorough control by the Pollution Control Department of National Environmental Agency (NEA). Industrial plants discharging acidic waste water are obligated to install a pH meter at the exit of waste water and a waste water shutoff device interlocked with the meter. The dependence on foreign supplies of water has made preservation of water quality a high priority in environmental administration. Being 100 per cent sewered, Singapore is able to collect and treat used water to produce high-grade re-claimed water called NEWater that has undergone stringent purification and a treatment process using advanced dual-membrane (microfiltration and reverse osmosis) and ultraviolet technologies. It is primarily supplied to non-domestic sectors such as wafer fabrication parks, industrial estates and commercial buildings for industrial and air-cooling purposes. A small percentage of NEWater is mixed with reservoir water for Indirect Potable Use (IPU) before being treated at the waterworks for drinking water supply. This technique, while

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new to the Southeast Asian region, has been practiced in the United States by Water Factory 21 in Southern California since 1976. Two million gallons per day of NEWater will flow into reservoirs which is slightly less than 1 per cent of the amount of water that Singapore consumes daily. The amount will be increased progressively to 10 million gallons per day by 2011, eventually meeting about 20 per cent of the country’s water requirements. The cheaper low grades of recycled water or industrial water will be used by industries such as textiles and shipyard sectors, thus reducing the pressure on the potable water stocks. There will be a total of four water reclamation plants. PUB currently operates three NEWater factories at Bedok, Kranji and Seletar. Based on PPP, PUB has entered into a 20-year agreement with Keppel Integrated Engineering (KIE), the environmental engineering division of Keppel Corporation which will de-sign, build, own and operate Singapore's fourth but the biggest NEWater factory at Ulu Pandan. The factory will supply more than half of the total NEWater supply for Singapore's use when it is operational from 2006. KIE is the first private company to supply NEWater to PUB under the PPP approach. This Ulu Pan-dan NEWater factory will supply 116,000 m3 (25 mgd) of NEWater and 46,000 m3 (10 mgd) of Industrial Water (IW) per day for a 20 year period from 2006 to 2026. PUB regularly checks on the water quality, the operation and maintenance of the factories. The water quality monitoring system of the factories is linked online to PUB's monitoring room, enabling PUB to have continuous real-time information on the water quality parameters of NEWater and Industrial Water before it is delivered to consumers. The NEWater and Industrial Water are sampled and analysed weekly by an accredited laboratory to ensure that the required quality standards are met (Figure 1). Most of the reclaimed water is being piped directly for non-potable purposes such as in wafer fabrication industries and for air conditioner cooling. Reclaimed water is cheaper than desalinated water at present. To reassure and inform the public the availability and safety of such water, a public awareness campaign was carried out over a period of six months by distributing 1.5 million bottles NEWater free to the public. An independent poll by Forbes Research in 2002 showed an overwhelming level of NEWater acceptance (82%) among Singaporeans, indicating that they were prepared to drink it directly, while 16 per cent were prepared to drink it indirectly through mixing with reservoir water. Since 2002, 2 mgd of NEWater are introduced into the reservoirs, which is just below 1 per cent of the amount of water that Singaporeans consume daily. The amount will be progressively increased to 10 mgd by 2011, about 2.5 per cent of the country’s daily consumption then. Since 2003, PUB has been supplying NEWater to seven wafer fabrication plants. Demand has now reached 4 million gallons per day (mgd), and is still growing. Other industries and the commercial sector are asking for NEWater too. PUB is now supplying NEWater for air-conditioner cooling to a commercial sector at Tampines Regional Centre. By 2011, PUB expects the demand for NEWater to exceed 55 mgd. With a capacity of 35 mgd, the NEWater plant at Ulu Pandan will serve the industrial hub at Jurong, Tuas and Jurong Island, as well as the CBD.

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Many are concerned whether the introduction of new water sources will lead to an increase in the price of water. To recover the full costs of production and distribution, and to encourage water conservation, in 1997, the Government raised water prices to the current level of $1.17 per m3 for water tariffs and 30 per cent water conservation tax, making a total payment of $1.52 per m3 water. The high cost of desalination then led to the estimation that water prices will increase to around $2 eventually. Today, with advances in technology and improved energy efficiency, the cost of desalinating seawater has fallen from US$1.80 per m3 in 1997/1998 to US$0.70 in 2001. Fig. 1. Sources of Water Supply of Singapore, 2004

The cost may drop further, making desalination as attractive as recycling NEWater which is currently 50 to 60 per cent cheaper than purifying seawater. In ten years’ time, the price of desalination should be more affordable than producing NEWater, allowing the cost of PUB water to be kept below $2. Desalination is a viable option for Singapore is surrounded by the Straits of Malacca and South China Sea. In 2005, the first PPP desalination plant was constructed at Tuas. Such partnership will open more busi-ness opportunities for the private sector in the water industry which will mature into an innovative and export-oriented service industry in the

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long run. More desalination plants will be built to generate the capacity of 400,000 m3 of water daily by 2011. In addition to recycling and desalination, alternative water sources are sought in Indonesia. In 1991, an agreement was signed with Indonesia to build a joint water project in the nearby Riau province, allowing Singapore to import up to 4,546,100 m3 of water daily (1,000 mgd) for one century at a cost of S$1.5 billion. There are also plans to tap water resources from West Sumatra (Straits Times, 30 Jan 1993). The 1997 financial crisis and the subsequent political instability in Indonesia have halted the progress of these plans. In 1999, when a gas supply agreement was signed with Pertamina, it was re-ported that water from Indonesia could be made available in future through undersea pipelines from Riau. To further enhance knowledge and research development of water resources, in 2004, the Minister of Environment and Water Resources launched three initiatives together - the HydroHub, the Singapore Water Association (SWA) and the Water Network. The HydroHub is a center for R & D on water re-sources. The PUB’s wholly-owned subsidiary, the Centre for Advanced Water Technology (CAWT) helps develop technologies that will improve Singapore’s global position in water conservation and treatment, water quality monitoring and the treatment of waste water to a high level of potability at cost-effective prices. The centre will also conduct training courses with the HydroHub for pubic and private organizations. The SWA gathers local water companies and related organizations to work closely with government agencies such as PUB, EDB and Institute of Engineers of Singapore on water technology development, skills acquisition and industry missions. The Water Network is a platform for the people, private and public sectors (3P) to meet, network, share information and give views to the PUB on policies and programs concerning water conservation, keeping the catchments and waterways/water bodies clean and using water bodies for recreational and other activities. All these have significant bearing on the water industry of Singapore. With these alternatives, the vulnerability of the city-state’s to Malaysia’s water supply can be reduced dramatically. The termination of water agreement after 2010 will not jeopardize the Republic’s supply as by then the construction of the planned desalination and recycling plants will have been completed. If a water cut-off transpires before 2010, the city-state’s water supply can be met by reserves in Singapore’s impounding reservoirs, the existing water catchment network and waste water recycling plants, purchase of water on the international market and the implementation of water rationing. Nevertheless, the supply controversy and uncertainty have catapulted a small firm like Hyflux into a large enterprise today. It may eventually join the rank of global corporations in the near future as it seeks more opportunities abroad.

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12.5 The Birth of Hyflux – Building the Foundation from Home Hyflux is an offspring of Hydrochem, a trading company set up in 1989 selling water treatment sys-tems in Singapore, Malaysia and Indonesia. The founder of Hydrochem is Ms Olivia Lum Oi Lin who worked as a chemist for three years with Glaxo Pharmaceuticals. As the businesses of the firm expanded, Hyflux was formed and became the first water treatment company listed on SESDAQ in 2001. In 2002, it was listed in Forbes Global magazine as one of the 200 Best Small Companies in the world. In 2003, it was the first water treatment company listed on Singapore Stock Exchange and was ac-corded the prestigious Business Times/DHL Enterprise Award. The transformation of the firm began in the early 1990s when Olivia Lum realized the potential of membrane technology for future water treatment. Hyflux then moved into customized membrane manufacturing of different formulations based on the needs of clients and industries. Such customization provides a robust foundation for the firm’s business growth. After more than a decade of operation, Hyflux is now one of Asia’s leading water and fluid treatment companies, specializing in the manufacture and use of advanced proprietary membranes such as ultrafiltration, submerged and stainless steel membranes and related technologies for liquid/solid separation. It generates products for both industrial and municipal applications as well as for the consumer and industrial market. It is also an integrated solutions provider, offering a suite of turnkey services including process design and optimization, engineering procurement and construction management, pilot testing, fabrication, installation, commissioning, operation and maintenance as well as Design-Build-Own-Operate (DBOO) solutions. Hyflux has four wholly-owned subsidiaries, namely Hyflux International, Hyflux Engineering, Hydrochem and Hydrochem Engineering. Hyflux International is founded in Singapore and is in charge of the operation of water and liquid treatment plants and sale of treated water. Hydrochem was incorporated in Singapore in 1989 and involves in the manufacturing, processing and dealing in water treatment equipment and turnkey engineering installation of industrial equipment and machines and other related activities. Hydrochem Engineering was also incorporated in Singapore in 1994 and engages in consult-ing, installation of equipment for chemical processing, application of chemicals and chemical preparation for commercial or industrial use and wholesale of chemical and fabricated products. Hyflux has majority stakes in SingSpring and Hyflux Aquosus. The latter owns Hyflux Aquosus (Shanghai). Hydrochem Engineering owns Hydrochem Engineering (Shanghai) which was incorporated in China in 1994. Hyflux has 55% stake in Hangzhou Zheda Hualu Membrane Engineering which in turn owns 75% of Ningbo Hualu Membrane Technology. Hydrochem Engineering (Shanghai) was incorporated in China and is responsible for development, manufacture of equipment and parts primarily for membrane filtration technology, sale of manufactured

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equipment and ancillary parts, provision of installation and commissioning of relevant projects and provision of technical services and consultation. Hyflux currently focuses on five core businesses. For water resources, it engages in seawater desalination, raw water purification, wastewater cleaning, water recycling, water reclamation and ultra pure water production for municipal and industrial clients. In the area of industrial processes, it focuses on the design, fabrication and installation of a wide range of liquid treatment systems for industries such as biotechnology, pharmaceutical, agri-food, chemicals and petrochemicals which include separation, concentration and purification of process industry liquids. It participates in privately financed projects which are structured either as BOO or BOT schemes for municipalities, governments and cities as well as private organizations. In 2003 it ventured into the consumer market targeting at residential and corporate end-users by selling its patented air-to-water generation and purification products and home filtration products including faucet and under-sink filters. It also develops cutting edge technology in material sciences to open its areas for membrane applications either through in-house research or collaboration with reputable institutions worldwide. Hyflux plays a pivotal role in treating, recycling and desalinating water of Singapore. In 2000, it was given a project to help ISK Singapore build its titanium dioxide plant at Tuas. The plant will supply high grade industrial water (204 m3 per day) and de-ionised water at 1,800 m3 per day for an initial period of 3 years. The BOT formula is preferred as the process of titanium dioxide production requires large volumes of high-grade water solution to ISK. UMCI, a global MNC in the semiconductor industry engaged in wafer fabrication also chose Hydrochem to build its wastewater treatment facilities so that wastewater from the wafer fabrication can reach the quality acceptable by the local authority be-fore discharging to the city’s process waste line. In 2001, the company moved into the municipal market having been awarded the S$16 million contract for the turnkey supply of a water reclamation plant at Bedok by PUB. Hyflux succeeded in obtaining three of the four major water treatment contracts awarded in Singapore between 2001 and 2003, namely the NEWater plants at Bedok and Seletar, and Chestnut Avenue Waterworks. The Bedok NEWater plant is equipped with an advanced dual membrane (UF and RO) and UV disinfection system. The Seletar project awarded by PUB in 2002 was officially launched in 2003 and will produce 27,000 m3 of NEWater per day. The Chestnut Avenue Waterworks with the capacity of 273 million litres per day is one of the worlds' largest UF membrane projects and the largest in Asia. Operating costs are reduced with the use of permeate pumps and membrane technology instead of conventional stationary membrane systems which are energy intensive and often plagued with severe membrane fouling. In 2003, its subsidiary, Singspring and Ondeo of France were awarded a contract to design, build and operate the first desalination plant at Tuas which will supply

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136,000 m3 (30 mg) of water per day for a 20 year period from 2005 to 2025 at the cost of USD$0.45 per m3 with options to construct more desalination plants. This is the first PPP BOO project awarded by PUB to SingSpring estimated at S$200 million and the water will be pumped into PUB potable water distribution main. SingSpring then awarded the engineering, procurement and construction contract for building the plant to its wholly-owned subsidiary, Hydrochem. When completed in 2005, it will meet some 10 per cent of the nation’s water needs. It will be the largest reverse osmosis (RO) seawater desalination plant in the tropics and the second largest in the world. It is expected to be the most energy efficient desalination plant in the world and will have a guaranteed total energy consumption of 4.346 kwh/m³ of water produced under normal operating conditions. A consortium of four international banks financed the project. It was also accorded the Euromoney Deals of the Year 2003. It is also the first and longest tenor (18 years) project financing in Singapore. The recession in consequence of the 1997 regional crisis, the avian flu and terrorism fear slowed down the growth of the economy. The local market share shrank to only 29 per cent of the firm’s total industrial sales in 2001. Fortunately, opportunities open up in China and Middle East as well as markets in other developing countries such as India, Thailand and South Africa that are increasingly engaged in industries such as textiles and chemicals that require treatment of waste water and pollutants.

12.6 Globalizing and Regionalizing the Technology and Services of Hyflux The surge of Hyflux in the water business is due to its ability to identify and acquire the relevant technologies and applied them where demand arises. It excels in treating water as well as other liquids in the biotechnological, food processing, pharmaceutical, and oil and gas industries. Leveraging upon its proprietary membrane technology and process know-how, it breaks into the local, regional and global markets. Instead of being a systems integrator, it gets involved in turnkey projects, in-house system integration, performs a wide range of industrial applications, develops its own membranes and has elaborate testing facilities. Speciallytrained scientists manipulate micro-environmental conditions to facilitate diverse membrane technology applications. The company was awarded the ISO 9001:2000 certification for the excellence in the manufacturing of membrane products for filtration. Acquisitions of foreign technologies are also made to increase the number of membrane production lines, expand fabrication workshops and upgrade quality R & D facilities. The resource-scarcity, high-cost and strict environmental rules of Singapore have led to the development of energy-saving, low-cost and environmentally-friendly water treatment process and technologies. For example, the Spin2000 system re-

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quires less chemicals for cleaning and hence lower power consumption. Its Kristal300 UF membrane series generates a membrane process with higher permeate quality, eliminates traditional land-intensive conventional treatment processes as it produces a larger membrane area per unit volume at a smaller footprint size, hence lowering capital and installation costs. It has developed stainless steel membranes which process difficult and dirty streams over a broad range of chemical conditions, pressures and temperatures. The company offers a broad selection of membrane modules for removal of contaminants from condensates, processed water, food products and industrial streams. The Reverse Osmosis (RO) systems that are used in the NEWater plants are applied to a range of customers due to easy pumping and electrical connection for immediate applications and automatic operations. These cost-saving water treatment and recycling technologies have resulted in quick returns from water-intensive industries such as wafer-fabrication, paper and pulp, petrochemical, pharmaceuticals, textiles and dyes. Before selling services to industrial users, Hyflux has helped in re-cycling water for one of Singapore's tourist attractions - the Jurong Bird Park where the industrial water is recycled to a high-purity level for 'water-quality sensitive' fauna such as penguins. Besides serving the industry, Hyflux also uses its filtration and purification knowhow to cater for domestic water consumption. In 2003, Hyflux acquired the licence to patent the air-to-water technology to innovate the Aquovate Technology or Aquosus. The technology extracts drinking water from the atmosphere by continual re-circulation through membrane technology and ultraviolet (UV) purification. The launch of Aquosus marks the company’s first foray into the consumer market and will revolutionize the drinking water industry. Dragonfly is Aquosus’s first commercial model. The technology will help meet the growing demand for drinking water especially in countries with poor quality piping. Aquovate has the advantage of free-of-any-piping or storage requirements and is an effective stand alone water generator that can produce treated hot and cold water without the inconvenience of buying water refills, storing used and unused water bottles and troublesome piping. It is a viable solution to more than 1 billion people worldwide who are denied ready access to high quality drinking water. Through acquiring 2 per cent stake in Air2Water, the USA firm which holds the 20-year patent for the air-to-water technology, Hyflux gains the rights to manufacture and sell the machines in most parts of Asia. It has also developed PureFlow which allows homes to enjoy tap or puri-fied water through UF membrane technology. Its compact design allows for easy installation and has been introduced in Malaysia, Thailand and China. In 2000, Asia’s bottled water consumption hit 25.6 million litres which is 23 per cent of global share, and China, Indonesia and Thailand are the world’s top ten markets. The geo-economics of such water markets seem to favor Hyflux. Hyflux now earned about 70 per cent of its sales in China. The firm’s businesses in China cover mainly the industry sectors, particularly in pharmaceuticals, biotechnology, chemicals, electronics, computer-related and petrochemical industries. Its projects concentrate in the major urban centers in the eastern coastal and cen-

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tral parts of China such as Shanghai, Wuxi and Suzhou. Shandong is another important market followed by Shenyang, Tianjin, Beijing, Guangdong, Guangxi, Nanjing and others. Recently more projects are awarded. In 2004, Hyflux won a S$24 million contract to build a treatment plant for Shanxi Heyi Fine Chemical Industry in Shanxi Province which specializes in the manufacture and sale of medicinal products like abamectic. Later, a deal was gained to improve the waste situation of a pulp and paper mill in Shang-hai. At present about 95 per cent of pulp waste generated by the mill is discharged into rivers. Hyflux helped the mill to remove the organic compounds in the waste discharge and purify the water for reuse. The pulp and paper industry is the third biggest polluter in China, generating over one billion tones of pulp waste a year or 11 per cent of the country’s annual waste. Hyflux also helps to treat industrial waste in the remote parts of China. In 2005, together with a state-owned enterprise, Ningxia Electric Power Development & Investment (NEPDIC) and Western PVC (WPVC), Hyflux signed a US$65 mil-lion BOO project in Shizuishan City located in northern Ningxia. WPVC is one of the largest manufacturers of polyvinyl chloride resins and other chemical raw materials in China. Upon completion in 2006, this membrane-based industrial plant will have an average capacity of 10,000 m3 per day and a peak flow of 12,000 m3 per day. Hyflux also sell its desalination expertise in China. In 2004, a DDBO project to supply 100,000 m per day of desalinated water in Tianjin was signed, marking its first entry into China’s municipal market. When completed in 2006, this S$155 million membrane-based treatment plant will be one of the big-gest desalination facilities in China, supplying industrial and city grade water to Dagang district in Tianjin for 30 years, with provision for extension and expansion of the plant’s capacity thereafter. In the same year, the S$86 million BOOT project to build a seawater desalination plant in Huludao of Liaoning province with the capacity of 50,000 m per day began. Its subsidiary - Hyflux Filtech (Shanghai) - in China teamed up with Liaoning Zhengye Group to form Newspring (Huludao) to undertake the project, each owning 49 per cent of the joint venture. Hydrochem will take on the role of turnkey engineering, procurement and construction contractor for the plant. Newspring (Huludao) will do the operational and maintenance work. The Huludao Municipal Government provides some credit and other support for the project. When completed in 2006, this membrane-based plant will supply industrial grade water and potable water to Huludao municipality for 30 years, with plans for future ex-pansion. In 2004, Hyflux entered the Middle East market by having a joint venture with Istithmar, an investment holding company in Dubai. The joint venture will carry out DBOO water utility projects in Dubai, the rest of UAE and the Middle East. Hyflux and its subsidiaries will provide the necessary technology and the process know-how for the water and wastewater treatment facilities worth an estimated S$672 million over the next 3 years. Istithmar/Hyflux will also participate in Nakheel's prestigious projects - The World and The Palm, the world’s two largest

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manmade islands located off the coast of Dubai. The company will construct a seawater desalination plant in Jumeirah island and a sewage treatment plant at the Dubai Metals and Commodities Centre which will be used for the production of irrigation quality water. The estimated costs for the two projects are US$60 million. Hyflux also participated in the pro-ject - The Garden and The World, an exclusive private water retreat comprising 200 islands where luxury hotels, residences, shopping malls and sports facilities will be constructed, further boosting Hy-flux’s role as a global player in the water industry. Having set up an office in Chennai, Hyflux is now expanding into India. Cities like Bangalore and Tirupur are promising markets where pollution from textile and leather factories is rising and the need of clean water and water treatment is strong. Revenue from India is expected to account for 10 to 20 per cent of the total in two years with China making up at least 50 per cent (Business Times, 19, Sept, 2005).

12.7 Hyflux and the Vision of a Global Hydro-hub Since its establishment in 1989, Hyflux has partnered with more than 200 clients from Asia to Africa. It is now competing on equal footing with internationally recognized water treatment firms such as Bio-Treat, Sinomem and Asia Environment. The firm’s revenue rose by fivefold from S$17 million in 2000 to S$88.7 million in 2004. Before 1999, Hyflux treated water for industries in Singapore especially the electronics sector. From 2000, its businesses extended to firms in life sciences and pharmaceuticals, taking about one-third of the industry businesses respectively. From 2001 its services to the municipal sector began. In 2004, its business distribution for industry, municipal and consumer markets was 73%, 19% and 8% respectively. It will further expand its overseas market which has superseded the domestic market since 2004 as it ventures into the markets of China, the Middle East, India, Southeast Asia and Africa. The expansion into overseas markets also allows Hyflux to formulate its regional division of labor. It has relocated peripheral components manufacturing to China while keeping production of the core technology such as the proprietary Hyflux Filtration Cartridge in Singapore. To meet the local needs of differentiated markets, the subsidiaries of Hyflux are tasked to generate customized product and technology designs and manufacturing. For example, Hyflux Filtech (Shanghai) has developed the HVM Tubular membrane technology for brine refining process to tackle the problems of highly corrosive environment in the chloride-alkali and salt production industries in China. Hyflux is Zenon licensee in Singapore for Zeeweed submerged membranes which are used extensively in high-grade water reclamation projects as well as surface water treatment plants around the world. These membranes are used as part of Hyflux's technical offerings to provide solutions in designs for municipal and industrial water treatment in the Asia-Pacific

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region. Its subsidiary in China, Hangzhou Zheda Hualu has refined the technology and used it to treat advanced and difficult wastes. In launching the Global Hydrohub in 2004, the government announced the strategy to capture 3 to 5 per cent of the global water industry market worth some S$430 million and another 5 to 10 per cent of the global membrane market. Hyflux is expected to share this vision and play an active role. To meet the multitasks of a global enterprise and further stretch its R&D capabilities, Hyflux moved its headquarters to Kallang Bahru where it also invested in a multimillion-dollar membrane and materials technol-ogy R&D Centre, the largest in Asia outside Japan and is supported by the Economic Development Board. The centre will focus on research applications aimed at spearheading the development of technologies in water and environmental engineering solutions, development of various types of novel membranes and biodegradable plastics from renewable resources. Another R&D centre will also be established in China to focus on developmental work and a research laboratory will be set up in the Middle East.

12.8 Concluding Remarks In seeking the sustainability of its water supply, a new exportable commodity is developed in Singapore. The introduction of NEWater and desalinated water has opened new possibilities of marketable water resources and related technologies. The declining population, the relentless efforts of enhancing water catchment capabilities and enforcement of conservation policies would help reduce the country's vulnerability and any threat of water shortage or an armed conflict. For reasons of availability, cost and the promotion of interdependence, Singapore is likely to continue to purchase water from Malaysia, but in smaller volumes than previously and at mutually agreed price. By reducing the reliance on Malaysia’s supply, the sensitive water issue that is affecting the bilateral relations can be set aside so that the two countries can focus on mutually beneficial cooperation. At the industry and firm level, the prospects of water business are encouraging as evidenced by the needs of water in tsunami hit area like Maldives recently. Local water companies like Keppel Integrated Engineering and GrahamTek donated water desalination plants to the Maldives while Hyflux dispatched its "Dragonfly" water generators (Straits Times, 22 February 2005). Hyflux will further globalize its activities, catering to both industry and consumer sectors. The firm’s success is closely related to the support of and partnership with the State which offers opportunities to consolidate its ability at home before paving the way for ventures abroad. Personal training, corporate governance, knowledge of the technology and networking with expertise in the industry are the bedrock of its foundation and strength.

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Sources FAO. 2000. New Dimensions in Water Security: Water, society and ecosystem services in the 21st century. FAO, Land and Water Development Division, Rome. Hyflux. Annual Report. Various years. Kog Yue Choong, Lim Fang Jau Irvin, Long Shi Ruey Joey. 2002. Beyond Vulnerability? Water in Singapore-Malaysia Relations. Institute of Defence Studies. Singapore, Lee Poh Onn. 2003. The Water Issue between Singapore and Malaysia. ISEAS. Singapore. Ministry of the Environment and Water Resources. 2005. State of the Environment 2005 Report. Singapore. PUB (Public Utilities Board). Annual Report. Various years. UN (United Nations).1992. Agenda21. Programme of Action for Sustainable Development. Official outcome of the United Nations Conference on Environment and Development (UNCED), 3-14 June 1992, Rio de Janeiro. UNESCO. 2003. Water for people, water for life: a joint report by the twenty-three UN agencies concerned with fresh water. New York. UNESCO & Green Cross International. 2003. From Potential Conflict to Cooperation Potential: Water for Peace. Japan. UNESCO & Green Cross International. World Bank. 2004. Water Resources Strategy: Strategic Directions for World Bank Engagement. The World Bank. Washington, DC20433.USA.

13 Entrepreneurship: New Means of Support for Community Colleges M. Rudibaugh, Lake Land College, Matoon, Illinois

13.1 Introduction The modern community college is finding a number of new challenges and opportunities in achieving an ever-broader mission and curriculum. As suggested in much of the literature, the national commitment towards life long learning and the education of at risk students is at the core of the 21st Century community college mission (Vaughan 2000). Technology as well will likely play a major role in modifying the modern community college. Distance education and on-line instruction are likely to expand as a result of the practicality and convenience of this curriculum to community college students. Outside competition into community college districts is likely to occur as for profit and corporate organizations attempt to capture this growing market (Vaughan 2000). These competitions will likely lead public community colleges to be more flexible in their ability to offer curriculum to students and their dynamic schedules. It’s suggested that technology and on-line instruction will likely make college districts and service areas less relevant in the information technology era currently developing within the higher education community. In a striking quote from Kershaw (1999), he suggest that in a “world of anyone with access to a computer, modem, and telephone line can take a course from anywhere else, the geographic basis of our community colleges is history”. Community colleges will likely have to modify their strategies and goals if they want to maintain and expand their student base within and beyond their existing college districts.

13.2 Local Dependence The historic roots of the local dependence literature can be traced to the Marxian theorizing of David Harvey and Neil Smith. In Harvey (1982) and Smith’s (1984) work they detail the core themes that capitalist forces shape and drive the physical and social landscapes. One of the key linkages between the work of Harvey and the evolution of the local dependence literature is based upon uneven development and capital accumulation. The geography of capital tends to promote over accumulation in curtain areas and thus produces unique patterns of uneven development (Harvey 1982). These processes as suggested by Harvey produce class struggle and the inevitable oppression of the working classes to access both physical and social spaces. 165 J. Gatrell and N. Reid (eds.), Enterprising Worlds, 165–176. © 2006 Springer.

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Local dependence, as defined by Cox and Mair (1989), summarize that some elements of economic development is immobile and unable relocate and spread to other locations. This theory in itself often provides direct counter evidence to the process of globalization. This spatially fixed capitol is often linked to social structures that drive the development at “places”, which cannot be produced at other locations. Demonstrating, to a large extent the linkage local dependence and curtain socio-spatial structures, which limit the duplication of economic activities (capital) at different locations and scales. Local dependence often evolves from three attributes of sociospatiality which spatially constrain firms, people, and institutions. These structures are listed below: • A tendency for certain activities to be constrained to local territories, political boundaries, and commuting patterns. • A tendency to immobility Local history, (family ties), fixed capitol • Wider geographical instability, uneven development, politics of scale, and devaluation (Cox and Mair, 1991). A theme within the local dependence literature provides evidence suggesting that “places” and “localities” with their unique cultures and politics, still matter in the era of globalization (Markusen 1996). These observations help redefine a new politics of economic development as a competition between localities rather than conflict within them (Cox and Mair 1988, 1991). Communities try to promote cooperation and develop a sense of identity in attempting to position the community to compete for local investment, which benefits all in the “locality”. New politics are often linked by the following themes associated with the local dependence literature: (1) local cooperation and (2) competition regionally, nationally, and globally (Swyngedouw 1997, Cox 1997, 1995; Cox and Mair 1988). 13.2.1 Locality as Social Structure and Agent Local dependence is often tied to set of actors; like firms, politicians, and people which are tied and dependent to place (Cox and Mair 1988). Cox and Mair (1991) suggest that in examining localities two different meanings need to be addressed relative to the terms of “agent” and “social structures”. Localities as social structures link a set of social relations to a particular scale like a city where concrete interest is defined. At this level a complex set of interactions between the actor(s) (person or institution) develops with the locality in developing the main theme of the study. As suggested in the literature, these processes and social relations can be highly influenced by forces from outside the locality. These scalar issues blur the social relations between local actors and state, federal, and global sources of capital. Consequently, the examination of “locality” as social structure focuses on the dynamic relationship between local and wider scale social processes.

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As suggested in Cox and Mair (1991), the reference to locality as an agent is a natural extension to locality as a social structure. As a locality develops a defined social structure and is linked to clear territorially based issues the locality, can generate organizations to act. Ultimately these organizations are attempting to expand their interest through active cooperation that might not have been possible acting alone. One of the key ingredients in examining locality studies around the idea of “agent” is the connection with how territorial boundaries form and bind through social cohesive forces (Cox and Mair 1991). Gatrell and Reid (2001) illustrated how locality as agency could be developed from the local scale of a city. In their study of Toledo, OH, they detailed how a given community could organize around political leaders and organizations to lobby for global capital investment into the region. Under the threat of plant relocation from a large historically significant car manufacture in the region, the city and its organizers were able to coordinate a plan to keep the company local. Arguing the significance of the company’s role in establishing the city’s identity and history, the organizer’s of the effort were able coordinate a comprehensive political strategy to build local support for keeping the company within the city. 13.2.2 Defining the terms of local dependence: Increased Partnerships Today’s modern community colleges have to deal with intense external market pressures placing the institutions in hyper competition both from within and outside the system (Alfred and Carter 2000). These forces have driven community colleges into the process of developing deep social structures and networks in attempting to deal with changing market forces. Community colleges leverage these structures and networks to continuously tap into external markets and to provide the institution with its own sense of identity. The following literature will attempt to profile the active nature of the community college in developing social structures. Important to the discussion is not only how the social structures form, but the forces driving the creation of them within the strategic planning process at each institution. In recent years the key element impacting strategic planning processes is the consequence of financial crises in funding community colleges (Sheldon 2003; Hall 2002; Fincher, 2002). The work of Alfred and Carter (2000) attempts to summarize the changing market forces that are reshaping economic growth strategies within the community college administrative setting. They suggest that dramatic transformational forces are at work both inside and outside of the institution. These forces are related to changes in the needs of community college students, new competitors, technology, and increased accountability. Two of the forces listed above are of primary importance to the creation of social structures. These forces are new competitors and technology. In the modern community college world new competitors are reshaping the higher educational market. Key entries into the higher education market are the growing number of for profit higher education companies. Organizations like the University of Phoenix, which is the fast-

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est growing education institution in the world, serves 70,000 students in over 100 campuses within 32 states (Alfred & Carter 2000). This organization is not alone, in that it represents literally a new industry of highly competitive for profit organizations such as DeVry, Inc, and ITT Educational Services, who are locating in near proximity to both public universities and community colleges (Alfred, Ewell, Hudgins, and McClenney, 1999). Other new competitors like cable industry giants, corporate universities, and software developers are creating networks of virtual universities and campuses that have no geographic boundaries (Alfred & Carter 2000). These new entrants into the higher educational market are increasing the external pressures into community college districts across the country. The article by Doucette (1998), “What Are Coummunity Colleges to Do When Disney and Microsoft Enter the Higher Education and Training Market”?, poses an interesting question to community colleges. In this competitive environment, community colleges are forced to develop deep social structures in an attempt to provide students with the flexibility and customization new competitors like the University of Phoenix are providing. New technology, as well, supports some of the transformations listed previously. Technological advances are impacting almost all aspects of education in terms of how, when, and where students learn (Alfred & Carter 2000). Two of the biggest impacts shaping the potential delivery of education have been related to personal computer ownership and Internet access rates. In the United States, by the late 1990s, corporate spending on information technology was greater than manufacturing technology. This has resulted in producing dynamic new economic environments which cut across multiple sectors of income, educational, and occupational categories in the American economy (Alfred & Carter 2000). These changes impact the very nature of service areas and networks that community colleges can market through. The modern community college mission can best be described as a challenge to keep pace with technology in attempts to remain economically viable and locally responsive in a community that has become global. The net impact of the forces previously listed has resulted in community colleges developing strong partnerships and alliances in promoting the economic stability of their institutions. These partnerships and strategic alliances have clearly been driven by the pressures posed by financial crises and state revenue shortfalls (Kisker and Carducci 2003, Sheldon 2003, Hall 2002, Brumbach and Villadsen 2002). Collectively these economic forces have been shaped by how local community colleges are funded through state appropriations. As a result of the national economic slowdown, many states have been forced to deal with reduced funding for institutions of higher learning in attempts to bring spending in line with revenues. In response to these patterns, community colleges have been forced to look for new or external sources of funding. Private sector partnerships have emerged as the new social structure in which community colleges promote economic viability at institutional, local, and regional levels (Kisker and Carducci 2003, Sheldon 2003, Hall 2002, Brumbach and Villadsen 2002). These partnerships have focused on building both physical and social structures that assist

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communities in building the environments needed to compete for capital investment Partnerships with the private sector help community colleges structure and build innovative curriculum in key economic development areas like technology, healthcare, and information systems. These alliances allow community colleges to link private capital and resources to building training networks that respond to labor needs within the community. One of the key challenges in developing these partnerships is developing them in a way that participants like local business and industry, government offices, and the community college mutually benefit from the alliance. This ability to develop the structured coherence in linking community partners together, acting as an agent for marketing economic growth, is key to the local dependence process (Harvey 1982). The identification of shared goals between community colleges and private partners has been referenced in the literature as an essential element in developing successful partnerships (Buettner, Morrison, and Wasicek 2002). Potential collaborators or partners must recognize the existence of a community need or opportunity that justifies collective action. Many of the partnerships between community colleges and the private sector are often formed by civic organizations and community boards like Chambers of Commerce and regional economic development groups (Sunberg 2002). These groups often involve community college administrators and local business leaders. They deal with key challenges facing the region like economic growth, labor demands, and social welfare (Sunberg 2002). When acting on these economic concerns, strategic partnerships have proven that community colleges could participate with the private sector by promoting more competitive regional economic growth strategies. The following section will detail some specific examples of how community colleges and private sector partnerships have resulted in new networks and structures in competing for local economic development.

13.3 How Community Colleges Escape Local Dependence Community college partnerships with the private sector have taken many different forms in the past few years. In Kisker and Carducci (2003), they found five specific areas of programming that community colleges have targeted for partnerships with the private sector and other governmental agencies. These areas are as followed customized contract training for private business; technology centers; workforce development, welfare to work; and business based scholarship programs. 13.3.1 Customized Contract Training Southeastern Community College in North Carolina has integrated its capacity of developing customized training into the regions overall competitive position for attracting new industries to locate there. The institution in the 1980s began to deal with enrollment declines through strategies of promoting economic growth in both the college and the community. Southeastern invoked a more proactive economic development approach through investigating the potential needs of industries considering moving into the region. The college would then support the overall

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communities’ recruitment efforts by developing a variety of relocation support services. These services would take the form of skills training, technical relocation support, skills upgrading, and consulting (Kisker & Carducci 2003). Services and partnerships between the community college and other actors in the community help develop a more cohesive competitive proposal in attracting new capital. 13.3.2 Technology Centers Technology centers housed on community college campuses are one of the new agents that can be used for building competitive advantages for communities in linking certain industries with regions. These centers serve as places where industries can turn to for training curricula and broader technical upgrading associated with the high tech labor market of the 21st century (Kisker & Carducci 2003). Technology centers, as a concept, attempt to bridge the college’s vocational training with that of the region’s private sector training needs. 13.3.3 Workforce Development Partnerships Since the creation of the Workforce Investment Act (WIA) in 2000 the opportunities for community colleges to play a role in strategic planning for local workforce development has expanded. The US Departments of Labor, and Commerce have stated that community colleges will play a key role in the adult education market, due to their focus and structures built towards adult education (Kisker and Carducci 2003). These programs attempt to link the needs of local labor with that of the curriculum and training offered by community colleges. Policy and priorities for these partnerships are regulated by local and state workforce development boards. In order to support successful partnerships, community colleges are collaborating with key community players like prominent local businesses and industry (Orr 2001). An example of successful workforce development partnership can be referenced with the Bridge Program at the City Colleges of Chicago. This program links community based organizations for example community colleges, local employers, and local workforce development boards. Local employers serve as advisors to students for training programs that best qualify them for positions within their industry, while the local workforce development boards assist with the funding of the program. The City Colleges of Chicago then serve as the institution where knowledge transactions occur thus creating new value for potential students and the agency required for capitol investment into the region. The Bridge Program at the City Colleges of Chicago has been linked to increased wages for over 125 graduates in the program (Jenkins 1999).

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13.3.4 Welfare-to-Work Federal policy has increased the role community colleges play in educating low income and “public assistance” students. President Clinton signed into law the 1996 the Personal Responsibility and Work Opportunity Act, mandating single parents with dependent children be registered with either federal or some state approved training work activities within two years to continue “public assistance.” Welfare to work programs required community colleges to develop strong ties with local “public assistance” agencies and employers (Brock, Matus-Grosmman and Hamilton 2001). Through establishing these networks and partnerships with other key actors, community colleges get needed information on how to implement federal and state welfare to work policies. Federal and state guidelines are essential to follow in that they are required to facilitate the employment of aid recipients (Kisker and Carducci 2003). An example of a successful welfare-towork program exists at Oakland Community College in Michigan. The program, entitled Advanced Technology Program (ATP), focuses on developing job specific technical training. Both the community college and participating local employer co-design the curriculum to improve the graduate’s chances of employment. The (ATP) has proven to be quite successful because approximately 90% of the participants completing the program have found full-time jobs in areas that they received training. 13.3.5 Business-Based Scholarship Programs Recently, community colleges have been active in pursuing local businesses to sponsor scholarship programs in high demand fields that support local economic development efforts. The Technical Scholars Program (TSP) at Spartenburg Technical Community College in South Carolina is an example of one these partnerships. This partnership involves local businesses sponsoring program participants with full scholarships and providing part-time employment in an area related to the student’s academic program. Employers additionally link each student to a mentor within the company to assist students in learning the company culture. Results of the (TSP) endeavor indicate strong links being established between the community college and the private sector in Spartenburg. Over 80% of the graduates within the program accepted jobs with their industry sponsor (Pelham 2001). Partnerships like the (TSP) demonstrate how institutions like Spartenburg Technical College, students, and local businesses can all benefit from the development of social structures and networking which links communities together. One of the consequences of building partnerships between community colleges and the private sector resulted in high levels of competition between colleges. Colleges are now actively in competition with one another in pursuit of the “right” to form partnerships with industry (Brint and Karabel 1989). These partnerships provide strategic advantages insofar that they allow the community college to structure curricula towards a specific need of a firm and strengthens graduates odds of being placed within local firms. Another impact is that these partnerships

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bring community colleges into contact with higher scale organizations at state and national levels in diversifying how these institutions are funded. The implications of this are that community colleges are showing the capacity to develop social structures and agency in escaping local dependence relative to institutional funding. Additional, partnerships with the private sector benefit community colleges through the acquisition of high tech equipment and software needed to train participants for demanding fields in the new economy. Each community college with its unique situation in terms of history, politics, social networks and economics will apply different strategies to promote growth. One of the keys in understanding community colleges as institutions is locked in the ability to diagram key social structures and how they shape patterns of development across the organization (Brint and Karabel 1989).

13.4 The Rise of the “Entrepreneurial” College All of the examples in the previous section are types of structures or networks of how community colleges can link with private sector and other public agency partners. Additionally, included were the contemporary economic, social, and political forces shaping the creation of the partnerships. To summarize, one of the main challenges in developing private and public sector partnerships with community colleges is finding mission overlap. This overlap is often found concerning issues of local economic development and building competitiveness in attracting new industry into the region. This sense of building internal cohesion on a regional or local scale is at the core of local dependence theory. The impact on these processes has been well documented in the community college literature. This shift to more market and entrepreneurial activity by community colleges has created a “college” within a “college” (Grubb, Badway, Bell, Bragg, & Russman 1997). This shadow college within the regular college has been referred to as the “entrepreneurial” college and consist of programs and practices not typically associated with the regular college. As described in Grubb, Badway, Bell, Bragg, and Russman 1997 they suggest the traditional college consist of three classic programming areas; granting of degrees and certificates, workforce preparation, and community service through noncredit continuing education programs (See Fig. 1).

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Fig. 1. Tripartite Model of the “Traditional” College

In contrast, the new elements and practices of the entrepreneurial college consist of the following programs and descriptions: Workforce Development – Training that is provided or tailored to specific a firm within the district or region. Economic Development – Activities of the college outside of traditional courses that attempt to enhance or increase employment within local or regional communities. Community Development – Actions of the college targeted to enhance the quality of life in local communities through political, social, and cultural networking. These new functions have created an entirely new landscape within the community college setting and reflect the new entrepreneurial spirit, market-orientated drive, and increased responsiveness to external organizations (Grubb, et al., 1997). As a result, structural changes within community college mission the very nature and purpose of the institutions has evolved as well. The entrepreneurial community college mission has created a shift for community colleges from more passive or reactionary organizations within communities to more proactive in promoting economic expansion. Colleges are actively creating a demand for the institution’s services and elevating local economic efforts of communities. These shifts are clearly linked in the literature to many external forces impacting local community colleges. External forces like declining state support and declining local tax bases have driven many community colleges to look for new sources of revenue like government grants, private donations, and dynamic new entrepreneurialism (Evelyn 2004).

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Identified evolutionary processes within the community college setting form the focus of proposed future research. Each community college with its unique setting and institutional cultures reacts to these challenges in both similar and contrasting ways. A conceptual framework will be used in providing guidance with the assessment of the nature of local dependence, politics of scale, and networks of association relative to a given community college’s institutional planning. This framework will serve as the bridge linking the economic geography literature with that of the community college research community. The conceptual framework based upon the tripartite module described in Grubb, Badway, Bell, Bragg, & Russman (1997) assess the degree of entrepreneurialism within a community college and provide the framework for this study. Conceptually the framework is based upon the identified overlapping elements of the entrepreneurial college, which are workforce, economic, and community development (See Fig 2.). Fig. 2. Tripartite Model of the “Entrepreneurial” College

These three new program areas have been evolving at varied rates across the community college system. Research conducted on the topic has shown that these collective functions within the entrepreneurial college can account for up to 30% of some college’s headcount and overall revenue generation; whereas, in other colleges its nonexistent relative to traditional college functions. Some community college presidents have argued that the only way to build economically viable institutions in today’s current funding environment is to decrease dependence on traditional sources of funding through state government and local taxes (Evelyn 2004). Externally, one of the main options to decrease this dependency on declining revenue streams is expanding partnership activities with the private sector. Additionally, some colleges have internally evolved new strategies through increased efforts with grant writing, fund raising, and other entrepreneurial activities (Evelyn 2004).

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13.5 Summary and Implications One of the primary questions this paper poses for future research is to examine how individual community colleges implement or integrate entrepreneurialism as an institutional priority. Contrast among the policy positions of different institutions is at the focus of suggested future research in assessing why and how they evolve. Future research needs to address how local, state, and national economic trends or policies impact the evolution of the entrepreneurial college or in some circumstances slowed its development. These variations produce new dynamic geographies within the community college system on a state by state and institutional basis and have not been previously examined. Impacts on the community college system and mission are as well interesting research grounds for social scientist to examine. Some of the main questions addressing geographic implications of increased community college entrepreneurial activity are as follows: How has increasing entrepreneurial activity of community colleges influenced local and regional economic competitiveness? What types of scalar networks of association are community colleges evolving to produces new spaces of engagement in promoting economic expansion? These research questions imply community colleges are active agents and players in local economic development efforts. Community colleges, as local actors, represent another research area for geographers in assessing how local growth coalitions evolve over time in developing the needed agency to increase economic competitiveness. Through understanding modern community college funding structures, marketing, and current economic challenges geographers have a test environment to see real-time convergence of local and global actors coming together in regional spaces.

Sources Alfred, R. and Carter, P. 2000. Contradictory Colleges: Thriving in an Era of Continuous Change. Community College Press Issue Paper No. 6: pp. 1-15 Alfred, R., Ewell, P., Hudgins, J. and McClenney, K (1999). Core indicators of effectiveness for community colleges. Washinton, DC: Community College Press. Brint, S and Karabel. J. 1989. The Diverted Dream: Community Colleges and the Promise of Educational Opportunity in America, 1900-1985. Oxford University Press, 1989. Pp. 312 Brumbach, M. and Villadsen, A. 2002. At the Edge of Chaos: The Essential of Resource Development for the Community’s College. Community College Journal of Research and Practice 26: 77-86. Buettner, D. L., Morrison, M. C., and Wasicek, M. 2002. Sucessful experiences with making partnering an operational strategy. In M .S. Spangler (Ed.), Developing successful partnerships with business and the community (pp. 5-12). New Directions for Community Colleges, no. 119. San Francisco: Jossey Bass. Cox, K. 1997. Spaces of Globalization: Reasserting the Power of the Local. Guilford Press, 1997. Pp. 280. Cox, K. 1995. Globalization, competition, and the politics of local economicdevelopment. Urban Studies 32: 213-224

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Cox, K. and Mair, A. 1991. From localized social structures to localities as agents. Environment and Planning A 23:197-231. Doucette, D. 1998. What Are Community Colleges to Do When Disney and Microsoft Enter the Higher Education and Training Market. New Directions for Community Colleges 101:79-88 Evelyn, J 2004. The Search for New Means of Support. The Chronicle of Higher Education: Community Colleges. (http://chronicle.com/weekly/v51/il0/10b00501.htm) (active as of July 2005) Fincher, M. 2002. Private and Community College Strategic Alliances: The Case for Cooperation. Community College Journal of Research and Practice 26: 349-361 Gatrell, J and N. Reid. 2002. The Cultural Politics of Local Economic Development: The Case of Toledo Jeep. Journal of Economic and Social Geography 93: 397-411 Gertler, M 1997. Between the global and the local: The spatial limits to productive capital, in Cox, K. (ed) Spaces of Globalization: Reasserting the Power of the Local. New York: Guilford Press, pp. 45-63. Grubb, N., Badway, N., Bell, D., Bragg, D., and Russman. M. (1997). Workforce, Economic, and Community Development: The Changing Landscape of the “Entrepreneurial” Community College. A Report of the National Center for Research in Vocational Educational Education, the University of California at Berkley. Hall, M. 2002. Building on Relationships: A Fundraising Approach for Community Colleges. Community College Journal of Research and Practice 26: 47-60 Harvey, D. 1982. The Limits to Capital, Oxford, Blackwell. Harvey, D. 1982. Consciousness and the Urban Experience: Studies in the History and Theory of Capitalist Urbanisation, Oxford, Blackwell. Jenkins, D. 1999. Beyond welfare-to-work: Bridging the low-wage-livable-wage employment gap. Paper Presented at the Great Cities Institute, University of Illinois, Chicago. http://www.uiuc.edu/cuppa/techbridge/PDF/Bbrief.PDF Kershaw, A. 1999. If geography is history, what happens to community colleges? Community College Journal of Research and Practice. Vol. 23, Iss.8; pg. 747. Kisker, C and Carducci, R. 2003. Community College Partnership with the Private Sector—Organizational Contexts and Models for Successful Collaboration. Community College Review Vol. 31, Issue 3 Markusen, A. 1996. Sticky places in slippery space: A typology of Industrial Districts. Economic Geography 72(3): 293-313 Orr, M. T. 2001. Community colleges and their communities: Collaboration for workforce development. In D. D. Bragg (Ed.), The new vocationalism in community colleges (pp. 39-49). New Directions for Community Colleges no. 115. San Francisco: Jossey-Bass. Sheldon, C. 2003. The Impact of Financial Crisis on Access and Support Services in Community Colleges. Community College Review 31: Issue 2 Smith, N. 1990. Uneven Development: Nature, Capital and the Production of Space. Oxford: Blackwell. Swyngedouw, E. 1997. Neither global nor local: “Glocalization” and politics of scale, in Cox, K (ed) Spaces of Globalization: Reasserting the Power of the Local. New Your: Guilford Press, pp. 137-166 Vaughan, George B. The Community College Story. Washington: Community College Press, 2000

14 Globalization, Social Protest and the Militarized Landscape of Okinawa S. Banasick, Department of Geography, Kent State University, Kent, Ohio

14.1 Introduction The new geographies of production, distribution, and consumption associated with the processes of ‘globalization’ and the rescaling of economic relations have received considerable attention from geographers. Global institutions such as the World Bank, the International Monetary Fund and the World Trade Organization are often the focus of such globalization research. However, in this chapter I address the ways in which the U.S. military has also influenced the processes of globalization and the formation of new economic geographies. Research on the transformation of economic processes in places where the U.S. maintains major military bases has received relatively little attention, perhaps reflecting the rather narrow range within economic geography of research on military actions (Woodward 2004; 2005). This is despite the extensive network of overseas bases maintained by the U.S. military. Conservative estimates suggest that there are approximately 725 large U.S. military bases located in thirty-eight countries (Johnson 2004). Since the end of the Second World War Okinawa has emerged as a crucial staging area for the U.S. military. The result has been a dramatic militarization of the Okinawan landscape. While it is one of Japan’s smallest prefectures, comprising only 0.6 percent of its total land area, Okinawa is host to nearly 50 percent of U.S. military personnel stationed in Japan and 75 percent of the U.S. bases. On the main Okinawan island the result is that close to twenty percent of the total land area is occupied by bases, much of it in the densely populated central and southern areas of the island (Johnson 2000). The development and maintenance of this concentration of U.S. military bases in Okinawa has had a significant impact on economic development in the prefecture. The per capita income of Okinawan residents remains the lowest of all prefectures, and the unemployment rate in 2001 was 10.3 percent, more than twice that of the national average. It also ranked last among Japan’s prefectures in terms of the percentage of high school students who enroll in college (Okinawa Prefecture Military Base Affairs Office 2003; 2004). My goal in this chapter is to contribute to the development of a “critical military economic geography” (Woodward 2005) by examining the ways in which the presence of the U.S. military has influenced, and continues to influence, the processes of economic development in Okinawa. In the next section I describe how 177 J. Gatrell and N. Reid (eds.), Enterprising Worlds, 177–189. © 2006 Springer.

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the U.S. military influenced economic development in Okinawa during the early postwar period. Specifically, I focus on the development of a distinctive base land leasing system that evolved in response to the protests of Okinawans against the expropriation of their land. In the third section I outline how the patterns of economic dependency shifted when sovereignty over Okinawa returned to Japan in 1972. The focus of this section is the system of compensation that the central government development to gain acceptance for the U.S. bases. In the forth section of the paper I illustrate how a recent surge in anti-base protests substantially transformed the base compensation system and therefore the economic geography of the island through a brief examination of recent events in Nago City, which was selected as the location for the construction of a new U.S. military base. In an attempt to quell the anti-base protests, the Japanese government has implemented a variety of measures to rescale economic relations in the region – in effect to ‘globalize’ Nago City’s local economy. In the last section of the paper I provide some concluding statements on U.S. military bases, economic processes and the militarization of the Okinawan landscape.

14.2 The Base Lease System and Economic Dependency The development of military base-related economic dependency in Okinawa was strongly tied to issues of landownership and territorial sovereignty (Arasaki 2001). Initially there was considerable conflict within the U.S. government over the issue of Okinawa’s future. The U.S. military strongly desired to annex the island and maintain a permanent presence there. However, the desire for direct control by the military was countered by the equally strong desire by the State Department avoid direct control over Okinawa because of the political need to demonstrate that the U.S. was not using its victory to acquire territory (Eldridge 2001). The conflict between the State Department and the U.S. military was eventually resolved through a compromise in the 1952 Peace Treaty with Japan in which Okinawa was separated from the mainland. Although Japan retained “residual sovereignty” over Okinawa, it would be directly administered by the U.S. military (unlike on the mainland where the U.S. indirectly administered the occupation). In addition, the wording of the peace treaty suggested that the U.S. would eventually relinquish control over Okinawa and place it under a United Nations trusteeship. However, as the Cold War intensified the strategic importance of the Okinawan bases became clear, and the U.S. never followed through with the pledge. As a result, the U.S. military was able to maintain complete freedom of action on the island and was able to use its bases in Okinawa in ways that were impossible on the mainland (for example, using the bases to house nuclear weapons). The ambiguity surrounding sovereignty over Okinawa after the war had a substantial impact on way in which the U.S. military bases were established since it pre-

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vented identification of a clear legal precedent under international law for land expropriation (Armentrout Ma 1992). From the end of the war in 1945 to the conclusion of the peace treaty in 1952 it was possible for the U.S. to directly acquire land without compensation following the ‘Rules of Land Warfare’. The military was able to acquire by force the land it desired, sometimes taking whole villages in order to meet its needs (Armentrout Ma 1992). At that time there was little protest against the land expropriation, in part due to the wartime destruction which had made Okinawans heavily dependent on the U.S. military for food and shelter. However, after the Peace Treaty with Japan came into effect in 1952 Okinawans began to feel that the continued land expropriation was unfair, and the advent of a civil administration in Okinawa made the use of the ‘Rules of Land Warfare’ to expropriate more land extremely controversial. Initially the U.S. military decided to shift tactics and set out to purchase the needed land. However, many Okinawans refused to sell their land and strongly protested the effort because such purchases suggested that the U.S. military presence in Okinawa would be permanent. The U.S. military then suggested a lease system in which lump sum payments would be made for a sixteen and a half year term (Yamazaki 2003). The lump sum payment system was also unacceptable for many Okinawan landowners and protests against the proposed lease system and land expropriation expanded. The culmination of this anti-land expropriation movement was the 1956 island-wide protest that involved approximately 450,000 people (Yamazaki 2003). The U.S. military used the economic dependency of Okinawa on base-related activity to break the protest movement. When it enacted an off-limits order that kept all military personnel on base, the resultant economic distress in the communities that hosted the bases effectively fragmented the protest movement (Toriyama 2003). However, the strength of the protests did force the U.S. military to accede to annual rather than lump sum lease payments. Thus the partial success of the protests would have a substantial impact on the nature of economic relations on the island. The annual payment lease system meant that large amounts of Okinawa land used for the bases would remain in private ownership, and the annual rental payments for military base land would become an important source of income for some segments of the Okinawan population. In total the U.S. military acquired approximately 42,000 acres of land, of which 16,000 acres were farmland (Watanabe 1970). About 50,000 landowners were affected by the acquisitions, comprising approximately 35 percent of all Okinawan households (Armentrout Ma 1992). Currently about one third of the land used in Okinawa for military bases is owned by the government, while another third belongs to local municipalities. The last third is privately owned, a proportion much higher than that for military bases in mainland Japan or South Korea (Arasaki 2001). Many landowners accepted the lease payments, but a substantial number refused and have continued to protest the expropriation of their land for use by the military

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until the present (Arasaki 2001). Other Okinawans have also protested against the bases because the influence of the bases on Okinawan society extends beyond economic development. Many of the U.S. airfields are located in the densely populated southern portion of the main Okinawan island, so training flights into and out of the bases located there produce considerable noise pollution for local residents. In other areas live fire exercises have contributed destruction of natural habitat and accelerated rates of erosion. Many of the bases also store toxic materials that have leaked into the surrounding environment. Military training accidents are also a great concern for Okinawans. In the mid1990s the U.S. military also mistakenly conducted live fire exercises with more than 1,500 rounds of depleted uranium shells on a small island located off the coast of the main Okinawan island. However, it failed to notify the Okinawan Prefectural government, and Okinawans only became aware of the use of depleted uranium after the Washington Times published an article on the incident more than a year later. More recently a U.S. military helicopter crashed into a building on the Okinawa International University campus. The crash sparked renewed protests against the U.S. bases, and jeopardized the Japanese government’s ongoing efforts to win support in local communities for the U.S. presence (Sanechika 2004).

14.3 Buying Security – the Political Economy of Compensation Many Okinawans expected that the reversion of Okinawa to Japanese control in 1972 would result in the dramatic reduction of the U.S. military presence. However, contrary to their expectations the Japanese government assumed the role of securing and maintaining the bases on the behalf of the United States rather than working for their realignment or closure (Arasaki 2001). Moreover, while making efforts to maintain the Okinawan bases, the central government was able to negotiate reductions in the number of U.S. bases on the mainland. Therefore in proportional terms Okinawa’s share of the burden of Japan’s military obligations with the U.S. increased after reversion. The Japanese government soon developed a system of compensation politics designed to maintain the U.S. bases at their pre-reversion levels (Mulgan 2000). The first component of the system was an eightfold increase in the rents paid to Okinawan landowners within three years (Yonetani 2001). The rapid increase in the rents soon brought them to levels higher than average market values, and dramatically reduced the number of landowners participating in the anti-base movement (in the late 1990s the base-related rental payments were still about four times average market rental prices).

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The second component of the system was the central government’s provision of generous subsidies to local communities that hosted the military bases. The main form of the compensation is subsidies for large-scale physical infrastructure projects. The projects are often targeted at the local communities that have recently experienced some negative effect of the presence of the U.S. bases, and are similar to the pork-barrel projects common on mainland Japan. As of 1998 nearly ninety percent of the central government funds designated for development in Okinawa took the form of public works projects, and the per capita level of public works investment in Okinawa is more than double that of the mainland (Johnson 2000; Kawase 2000; Yonetani 2001). In the late 1970s economic decline in the U.S. contributed to the addition of another component to the compensation system. The U.S.-Japan Security Agreement states that the U.S. shall bear the costs of stationing troops in Japan, but in 1978 the Japanese central government agreed to pay for some of the costs of the Japanese civilians working on U.S. military bases. The funds became an annual expenditure and came to be referred to as a “sympathy payment” to the U.S. in light of the economic difficulties that it was experiencing at the time. In the 1980s the U.S. requested larger payments, and the Japanese government’s so-called “sympathy budget” rapidly expanded to include support for a wide variety of facility and infrastructure construction. The levels of support rose rapidly during the late 1980s and early 1990s, and eventually stabilized in the late 1990s (Figure 1). By 2000 the Japanese government was providing 78.9 percent of the cost of stationing troops in Japan, a much higher percentage than any of the other countries where significant numbers of U.S. troops are stationed (Figure 2). The Japanese support now goes beyond the provision of mission-related facilities and includes funds for the construction of apartments, golf courses, and churches (Johnson 2000). In Okinawa the sympathy payments have contributed to the construction of exceedingly plush accommodations for some of the U.S. military personnel. For example, Kadena Air Force Base, one of the largest bases on the island, includes a twenty-six lane bowling alley, two gymnasiums, two parks, two theaters, two libraries, three swimming pools, four tennis courts, seventeen baseball diamonds, four officers’ and enlisted men’s clubs, a riding academy, a ballet studio, and a dog obedience school (Johnson 2000).

14.4 The ‘globalization’ of Nago City The central government’s compensation system experienced a major crisis in the mid 1990s. In late 1995 three U.S. servicemen kidnapped and raped a 12-year-old Okinawan girl. The incident triggered a series of protests on the island, and made

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Fig. 1. Host Nation Support – 2000 (Millions of U.S. dollars)

Country

Support Level

U.S. Stationing Cost Offset Percentage

Number of U.S. Military Personnel

Japan

5,003

78.9

40,025

South Korea

796

41.9

36,171

Germany

1,211

20.6

70,126

Italy

364

37.2

11,348

England

133

16.6

11,170

Spain

115

50.3

1,945

Belgium

49

34.6

1,574

Greece

19

28.6

696

Luxembourg

16

50.6

6

Norway

6

66.7

77

Turkey

5

3.4

2,059

Hungary

4

9.5

373

Portugal

1

0.9

994

Denmark

0.1

0.1

25

Kuwait

245

47.0

4,527

Saudi Arabia

63

79.9

5,176

Bahrain

21

18.4

1,433

Oman

19

39.8

199

United Arab Emirates

13

---

425

Qatar

11

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Source: Report on Allied Contributions to the Common Defense, 2003. http://www.defenselink.mil/pubs/alllied_contrib2002/02-Chptr1/02Chptr_1tx.html

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Fig. 2. Trends in the Sympathy Budget and SACO-related Expenses (Hundreds of Million Yen) 3500

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it extremely difficult for the U.S. and Japanese governments to maintain the base land leasing system. In an attempt to reduce the intensity of the protests, the U.S. and Japanese governments presented a plan to close Futenma Air Station, one of the major bases in the southern part of the main Okinawan island. However, after the protests receded the two governments revealed that the base would only be closed if a new base was constructed at another location in Okinawa. This disclosure sparked a new round of protests, with many local governments passing resolutions rejecting the idea of new base construction in their communities. Ignoring these protests, the Japanese government selected Nago City as the site of the new base that would replace Futenma Air Station (Figure 3). The decision to construct the new base in Nago City created deep divisions within the local community. In 1997 local groups opposed to the base organized a nonbinding referendum on the proposed construction (Johnson 1999; Eldridge 2000). After a heated campaign, the results of the referendum showed that a slight majority of the residents did not want the base located in Nago City. Despite the results of the referendum the mayor of Nago City announced that the city would accept

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the construction of the new base, and the central government has continued with its plans to locate the base there despite ongoing protests. Shortly after the mayor agreed to the proposed base, a ten-year, ¥100 billion (about US $900 million) development package for northern Okinawa (including Nago City) was passed by the Japanese central government.

Fig. 3.

Even with the exceptionally large compensation package protests against the base remained strong, and in an effort to undercut the anti-base protests and win local community support the Japanese government substantially altered the compensation system that had been in place since the reversion of Okinawa to Japanese control in 1972. Rather than simply funneling cash into public works

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projects, the central government’s main goal now shifted to restructuring Nago City’s economic networks. Thus the usual physical infrastructure-type development projects that characterized previous efforts in Okinawa were dramatically amplified by a series of projects aimed at strengthening economic ties between Nago City and mainland Japan, as well as encouraging foreign investment in the region. One component of the central government’s new compensation system focused on expanding Nago City’s tourism industry, mainly by designating it as a host venue for a series of international conferences and meetings. For example, the Japanese government selected Nago City to host the 2000 Summit of G-8 nations soon after the local referendum. All of the previous Japanesehosted G summits had been held in Tokyo, but for the 2000 meeting then Prime Minister Obuchi selected Nago City even though it was ranked last on the list of eight candidate sites (Johnson 2002). The ¥81 billion that the central government eventually spent on the Summit was more than 100 times the amount the German government spent on the 1999 Summit in Cologne (Johnson 2002). In addition to having Nago City host international meetings, the central government has also funded projects designed to attract tourists from mainland Japan to the Nago City area. Examples include the “Global Oceanographic Data Center” developed in November 2001 with several billion yen in subsidies. While its main function is officially described as the development and maintenance of digital imagery of marine and earth environments, a significant portion of the facility is dedicated to educational purposes for the tourists who will visit the site. A second component of the new compensation system was a more direct effort to rescale Okinawa’s economic networks and foster the social and economic development of the region. In the summer of 2002 the central government designated Nago City as an official “Information Technology and Financial Center”. The special financial zone designation, the only one of its kind in Japan, includes provisions for the construction of low-rent office space, a thirtyfive percent reduction of corporate taxes, an eighty percent subsidy for communication expenses, and a thirty percent subsidy for hiring young workers (Nago City 2003). Given that wages in Okinawa generally tend to be about forty percent lower than on mainland Japan, the thirty percent subsidy means that firms relocating to the zone can achieve close to a seventy percent reduction in labor costs. The offices of the financial zone are housed in a new multimedia building complex constructed at a cost of ¥2.1 billion yen (about $21 million). By November, 2002 the Financial Center had attracted 12 firms with 3,261 employees (Nago City 2003). In the 2004 national budget several additional large development projects were also proposed, including a ¥332 million IT Business

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Integration Project that would create a database center for new businesses in Nago City, and a ¥147 million yen Wide Area Network Project that would develop an optic fiber network to connect Nago City with the surrounding communities of Onna, Ginoza, and Kin (Okinawa Times December 12, 2003). The central government’s efforts also extended to the small settlements surrounding Nago City. In neighboring Onna village the government funded the construction of the “Okinawa Institute of Science and Technology”. With an initial investment of ¥3.3 billion (approximately US$30 million), the institute is projected to grow into a full-scale research university with a total investment of ¥20 billion to ¥80 billion (US$150 million to $600 million) and annual operating costs of ¥20 billion (Cyranoski 2002; 2004). The stated aim of the facility is to develop an international faculty performing cutting-edge research. In keeping with that philosophy British molecular biologist and Nobel laureate Sydney Brenner was selected to head the institute in 2004 (Kyodo News Service, Feb. 5, 2004).

14.5 Conclusion The presence of the U.S. military has deeply affected the processes of economic development on Okinawa. The transformation of land from agricultural purposes to use for U.S. military bases had both direct and indirect effects on the local economy. Besides removing the land from productive use, construction of the bases necessitated the creation of the land leasing system that would strongly tie some Okinawans to the presence of the bases. However, it is important to note that the Okinawans were active agents in shaping the nature of the militarization of the landscape. It was the protests of Okinawan residents that pushed the U.S. military to make alterations to the lease system. Even from the anti-base perspective the changes to the lease system were important because the required renewal of the leases required a public process which could be used as a venue to express ongoing resistance. This public renewal process would not have been available for protests if the land had been purchased outright or leased using a lump sum payment method. After reversion Okinawan protests also shaped the compensation system implemented by the Japanese government. The rapid increase in rental payments and investments in public works projects did bring the level of development in Okinawa closer to that of the mainland. However, the price for that development was the continued presence of the U.S. bases at essentially pre-reversion levels while bases on the mainland were being closed. Thus, for Okinawan communities issues of local autonomy and economic development have become subsumed within a broader security framework in which the maintenance and expansion of U.S. military bases are often given priority. For local communities the processes of eco-

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nomic development are unavoidably caught up in webs of interlocking networks and dependencies that have evolved in conjunction with the U.S. military presence. When widespread protests emerged in the mid 1990s the Japanese government sought to overcome the resistance by radically transforming its compensation system. The attempt to ‘globalize’ Nago City suggests that such public infrastructure investments and related economic networks should also be considered a manifestation of the militarization of the landscape since it seems unlikely that the central government would have invested so heavily in a peripheral region of a peripheral prefecture without the U.S. military presence or the protests against that presence. The experience of Nago City also shows that economic development in the prefecture will now more than ever be tied to national policy and outside private investment (Yonetani 2004). In addition, the realization that the central government’s largesse is dependent on their continued acceptance of the military bases creates a considerable barrier for efforts by local groups to develop their own strategies for economic development. Given the strong desire by the U.S. military to maintain its Okinawan presence it seems likely that the tensions between resistance to the U.S. military bases and the acceptance of compensation for their negative externalities will continue to shape the economic fortunes of Okinawan communities in the near future.

Sources Arasaki, M. 2001. The struggle against military bases in Okinawa – its history and current situation. Inter-Asia Cultural Studies 2 (1): 25-36. Armentrout Ma, L. E. 1992. The explosive nature of Okinawa’s ‘land issue’ or ‘base issue’, 1945-1977: A dilemma of United States Military Policy. The Journal of American-East Asian Relations 1 (4): 435-463. Cyranoski, D. 2002. Japan plots course for university on naval-base island. Nature 416 (25 April 2002): 774. Cyranoski, D. 2004. Will creativity thrive in an island paradise? Okinawa is the unlikely setting for an ambitious institute. Nature 429 (13 May 2004): 220221. Eldridge, R. 2000. Okinawa and the Nago heliport problem in the US-Japan relationship. Asia-Pacific Review 7 (1): 137-156. Eldridge, R. 2001. The origins of the bilateral Okinawa problem: Okinawa in postwar U.S.-Japan relations, 1945-1952. New York: Garland Publishing.

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Johnson, C. 1999. The heliport, Nago, and the end of the Ota era. In Okinawa: Cold War Island, ed. Chalmers Johnson, 215-234. Cardiff, CA: Japan Policy Research Institute. Johnson, C. 2000. Blowback: The costs and consequences of American empire. New York, NY: Henry Holt and Company. Johnson, C. 2002. Okinawa between the United States and Japan. Occasional Paper No. 24. Cardiff, CA: Japan Policy Research Institute. Johnson, C. 2004. Sorrows of empire: Militarism, secrecy, and the end of the republic. New York: Henry Holt and Co. Kawase, M. 2000. Fukki seisaku to chihoujichi., In Okinawa – 21 seiki no chousen (Okinawa: Challenges for the Twenty-first Century), eds. Miyamoto Kenichi and Sasaki Masayuki Tokyo: Iwanami Shoten. Kyodo News Service. February 5, 2004. Nobel laureate Brenner named to head Okinawa grad school. Mulgan, A. G. 2000. Managing the US base issue in Okinawa: A test for Japanese democracy. Japanese Studies, 20 (2): 159-177. Nago City. 2003. International Information Technology and Financial Center. Nago City, Okinawa: Nago City Government. Okinawa Prefecture Military Base Affairs Office. 2003. US Military bases in Okinawa. [Okinawa no Beigun Kichi] Naha: Okinawa Prefecture Military Base Affairs Office. [in Japanese] Okinawa Prefecture Military Base Affairs Office. 2004. Impact on the Prefectural Economy. (last accessed January 15, 2006). Okinawa Times, December 12, 2003. Four new projects for the northern region. Sanechika, Y. (2004). Anger explodes as a U.S. Army helicopter crashes at Okinawa International Univeristy. http://japanfocus.org/article.asp?id=155. Last accessed July 15, 2005. Taoka, S. 2000. “Is this base really necessary?” JPRI Critique 7-2. http://www.jpri.org/publications/critiques/critique_VII_2.html. Last accessed July 15, 2005. Toriyama, A. 2003. Okinawa’s ‘postwar’: Some observations on the formation of American military bases in the aftermath of terrestrial warfare. Inter-Asia Cultural Studies 4 (3): 400-418. Watanabe, A. 1970. The Okinawa problem: A chapter in Japan-U.S. relations. Melbourne, Victoria: Melbourne University Press. Woodward, R. 2004. Military Geographies. Oxford: Blackwell. Woodward, R. 2005. From military geography to militarism’s geographies: Disciplinary engagements with the geographies of militarism and military activities. Progress in Human Geography 29 (6): 718-740. Yamazaki, 2003. Politicizing territory: The transformation of land struggle in Okinawa, 1956. Jinbun Kenkyu 54 (3): 31-65.

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Yonetani, J. 2001. Playing base politics in a global strategic theater: Futenma relocation, the G-8 summit, and Okinawa. Critical Asian Studies. 33 (1): 70-95. Yonetani, J. 2004. Appropriation and resistance in a ‘globalized’ village: Reconfiguring the local/global dynamic from Okinawa. Asian Studies Review 28: 391-406.

15 Paternalism and Struggle at Weirton Steel Corporation Aron Massey, Kent State University, Kent, Ohio

15.1 Introduction At first glance Weirton, West Virginia looks like any number of small industrial cities with busy streets, billowing smokestacks, trucks, and rail cars. Weirton is representative of what most would call a “Steel town.” Weirton’s population of 22,000 is only a fraction of that of historic steel production centers such as Pittsburgh, Cleveland or Youngstown, but the residents of this city have a connection to the mill that has remained solid since operations began in 1909. It is rare to find anyone in Weirton that has not, at one time, had a family member, friend, or neighbor work for the mill. The relationship between Weirton Steel and the community surrounding it began with the construction of the mill. An examination of the subsequent formation of the town shows how interconnected the two are. This paper illustrates how the historical geography of Weirton was influenced by Ernest T. Weir, the businessman responsible for bringing steel production to the area now known as Weirton. The policies that he implemented to control labor will be thoroughly examined. It is my intent to show that the paternalism of Weir is directly responsible for the ways in which the workforce at the Weirton Steel Corporation (WSX) has struggled over time, and how it continues to reinvent itself today, in order to maintain steel production in Weirton, WV. Weirton’s distinction from other “steeltowns” is due to its relatively small size, especially in comparison to the place that Weirton Steel occupies in the world of steel making. The city of Weirton is known for little other than Weirton Steel outside of the Ohio Valley region, yet those in the steel industry the world over recognize the Weirton Steel Corporation as an industry leader in hot and cold rolled steel. The Weirton Steel Web site (2003) reported that Weirton Steel is the seventh largest integrated steel producer in the nation. The mill was recently purchased by a multinational corporation, ending decades of independence. This is not the first major transition that the workers of WSX have faced. E.T. Weir’s vision, and his approach with labor-management relations, shaped the Weirton Steel workforce into a cohesive group, evidence of this can still be seen today.

191 J. Gatrell and N. Reid (eds.), Enterprising Worlds, 191–199. © 2006 Springer.

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15.2 Ernest Tener Weir: The Man Behind the Mill E. T. Weir is the reason for the existence of both the Weirton Steel Corporation and city of Weirton. He chose a location in the northern panhandle of West Virginia (30 miles north of Wheeling, WV and 30 miles west of Pittsburgh, PA) to build his city. The story of Weir’s life has been documented by a number of local and regional historians (Ubinger; 1975, Ferguson; 1976, Welch; 1963, Javersak; 1999). Ubinger (1975) tells of Weir’s early years in Pittsburgh’s Southside. After his father’s death, Weir started working as office boy in the steel mills to support his family. He worked his way up to salesman and later manager, before partnering with James R. Phillips, a salesman for U.S. steel. Both of them believed that the U.S. Steel trend of buying up independent mills would create an overpopulation of managers in the corporation. To avoid the affects of this trend they decided to go into business for themselves (Ubinger;1975). They found a brand new facility in Clarksburg, West Virginia and purchased it. Soon after they acquired the mill, James Phillips was killed in a train accident near Harrisburg, Pa. (Welch;1963). Weir was devastated but soon returned to business and attempted to make a profit in West Virginia. Although the mill expanded and profits were made, Clarksburg turned out to be a poor location for a steel mill. The plant was isolated from most markets in the East and Midwest, and due to poor transportation routes near the town, raw materials took a long time to reach Clarksburg. The finished product took just as long to reach its buyers. The site also lacked an adequate water supply. Water plays a critical role in many parts of steel production. The mill was perched on a small stream and in periods of drought, such as 1908, the stream was reduced to a trickle. The plant began to recycle the water, but it became highly acidic when reused (Ubinger; 1975). After only four years Weir began looking for a new location for his operations. He knew he would have to do so in order to rank among the best steel producers in the nation. E.T. Weir’s search ended in 1909 when he visited Holliday’s Cove, a small hamlet in West Virginia’s northern panhandle. A businessman named Cyrus Ferguson had purchased the farms in the valley in 1902 to develop the oil fields that lay in reserve under Holliday’s Cove. Weir bought 105 acres from Ferguson and another 1,200 hundred acres that surrounded the area from other landowners. Here E.T. Weir found the physical characteristics that he desired. The land was located near the Ohio River, which would supply more than enough water for even the biggest steel mills, and thanks to the newly constructed railroad from Ohio to Pittsburgh, transportation to the East was operational and accessible (Javersak; 1999, Weirton Steel Website; 2003).

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In addition to the geographic elements of site and situation, there was one more thing Weir was hoping to capitalize on when he chose Holliday’s Cove. In his early years at Oliver Wire Company he witnessed a long, violent strike that tore apart the community and caused much suffering by the families of the workers. In the end Weir came to the conclusion that no one ever benefited from a strike. He knew that an isolated location like the one that would become present day Weirton would allow him to control labor-management relations. “We had something else important in mind besides building an integrated plant,” Weir said. “We were convinced that the principles and process on which we operated our business would make a basis of peace and harmony possible if we could establish our own environment” (Javersak; 1999). Weir believed that larger cities with established industry were catalysts for strikes and worker discontent. He believed that labor disputes in one plant would spill over into other plants and this would make the problems more difficult to resolve. Weir felt that a small town would be better suited to deal with labor problems because the management and workers lived in close proximity to one another. In a small town, the workers and managers would go to the same churches, belong to the same organizations, have children going to the same schools and playing on the same sports teams. He thought that most of the mill’s employees would become friends in a small town; they would be neighbors or even family. His philosophy was that the workers would be more thoughtful and patient in their efforts to make changes at the mill. He believed that they would be more open to think before they act, and less likely to strike or refuse bargaining, in an effort to maintain their way of life (Javersak; 1999; Ubinger; 1975). 15.3 E.T. Weir’s Mill Fosters Development in the Area The mill that Weir built was operational in less than a year. The establishment of the steel mill, then known as Phillips Sheet & Tin Plate after Weir’s late partner James Phillips, resulted in rapid expansion. As the steel mill grew, so did the community around it. Holliday’s Cove and the area surrounding the mill were once home to apple orchards and small farms, but soon the land began to house an influx of workers and their families. A tent city was erected around the plant which led to plans for permanent housing. Leadership at the mill laid out plans for the first streets in the north end of the town, which, by this time, had come to be referred to as Weirton. Workers lived in the tents and shanty towns on the surrounding land until 1913, and barracks owned by the company were used to house surplus workers inside the mill property until the mid-1920s. Though not yet a city, growth in millcontrolled Weirton soon overshadowed Holliday’s Cove. The Cove, incorporated in 1912, did not include the steel mill. By not being included in the incorporation of Holliday’s Cove, Weirton was placed firmly in Weir’s hands.

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By 1920 Weirton had 9,500 residents, compared to the approximately 1,200 residing in Holliday’s Cove. By the end of the 1920s, Weirton had become the largest unincorporated town in the United States with nearly 20,000 residents. The demand for housing was so great that Weir decided to start a real estate business. All 663 home plots that his firm laid out were quickly sold to his steelworkers (Javersak; 1999). Weir’s service ensured that some of the wages he paid out would return to his pocket. As the mill’s production increased so did the control that it had over the area. The plant, renamed Weirton Steel in 1922, founded the water works, built a power plant to provide electricity for the city, funded the fire and police departments, and paid for Weirton’s roads to be built and paved. The company made many of the decisions that affected the workers’ daily lives, both at work and at home. While many of the public works initiated by the steel company were beneficial in nature, most were devised to maintain the hold that Weirton Steel had over its employees. In addition, Weirton Steel influenced other aspects of daily life. E.T. Weir, along with his brother David and colleague J.C. Williams (both vice presidents at Weirton Steel) founded the People’s Bank and the Bank of Weirton. David Weir was also highly involved in founding the local newspaper, The Weirton Daily Times, which contained only positive information about the steel mill. The Daily Times was the only paper that most workers would read, and the Weir family’s involvement ensured that unionization would be painted as socialistic and un-American (Javersak; 1999, Ferguson; 1972). In addition to social control, Weir occasionally used violence to squelch notions of strike or worker upheaval. One such occasion came in 1919, during a series of nationwide strikes. More than 365,000 steel workers walked off the job in 50 cities around the country. Weir ordered his private police force to round up suspected radicals. Most of these “radicals” were Finnish immigrants the Weirton management suspected of belonging to the Industrial Workers of the World, also known as the Wobblies. Suspected Wobblies were then taken to the town’s main street where they were forced to kiss the American flag, then exiled from the town (Javersak; 1999). But even in the face of such hard-line anti-labor events, Weirton Steel avoided serious labor conflicts during Weir’s tenure. The Weirton Steel employees represented themselves through an informal group of workers when it came to matters of wages or benefits. In 1929, Weirton Steel merged with Michigan Steel of Detroit and M.A. Hanna Steel of Cleveland to form the National Steel Corporation. E.T. Weir took charge of the new corporation and Weirton Steel became the flagship mill. Weir put the headquarters for National Steel in his home town of Pittsburgh, although Cleveland would have been more centrally located. After the merger, the threat of unionization presented itself more often. Nationwide labor unions attempted to garner support for organization through the 1930’s

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and 40’s, just as the Wobblies had before. In 1933, the Weirton employees rejected an opportunity to join the Amalgamated Association of Iron, Steel and Tin Plate Workers. In the early 1950’s Weirton employees chose the Independent Union of Weirton Workers for their representation over the United Steelworkers of America. Workers in Weirton and the other National Steel plants had better than average relations with their respective management. Weir became known as a tough but fair employer, and the pay in his mills were some of the highest in the business (Ubinger; 1975). Weir believed that having a contented workforce that less likely to strike was well-worth higher wages. E.T. Weir’s vision of labor-management solidarity and harmony, where labor disputes took a backseat to the personal and social relationships existing among employees at all levels, was largely fulfilled during the first few decades at Weirton Steel. However, as more of the Weirton Steel management could afford automobiles, they began to move away from the smoke and noise generated by the mill – thereby moving away from the workers. High class residential neighborhoods developed in the hillsides surrounding downtown Weirton. The Williams Country Club was opened in 1931, and the area around it became coveted by Weirton’s growing upper class. William’s served as a playground for the wealthy-elite of the National Steel Corporation and other community leaders (Rine; 1995). The workers lived downtown, usually grouped by ethnicity, while the wealthy lived on the outskirts. E.T. Weir’s initial plan was for workers and executives to live in close proximity and to become a part of each others lives, both at work and at home, but the city became more economically segregated each year. Weir himself did not help matters by never actually living in Weirton; he commuted daily from Pittsburgh, his lifelong home. Apparently, his vision did not apply to him. Weir would only occasionally stay at the Lodge at the William’s Country Club, which was used for visiting lobbyists, dignitaries, and executives (Ubinger; 1975). Weirton, West Virginia became incorporated on July 1, 1947. The first mayor was head of the Weirton division of National Steel, Thomas E. Milsop; another example of the symbiotic relationship shared by the mill and town. Holliday’s Cove was included in the incorporation to become part of the city. Weir remained at the helm of National Steel until his death in June 1957. At the time the Weirton Steel Corporation was among the leaders in the American steel business (City of Weirton website; 2003). Not much changed at WSX in the 20 years after E.T. Weir’s death. Occasionally improvements would be made (such as the Basic Oxygen Plant (BOP) that went online in the late 1960s) but for most workers in Weirton life carried on as usual. However, it is important to note that aspects company control continued after Weir’s death. Primarily that the town of Weirton and the mill continued to develop together. Many residents chose to work at the mill instead of attending college. Some sought employment in Weirton’s banks, newspapers, or the public

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works departments that were founded by the company. Deindustrialization also occurred. Industry in the northern manufacturing core began to fall on hard times in the second half of the 20th century. The threat of layoffs and shutdown at WSX was particularly worrisome to Weirton residents because such a high number of the local population worked at the mill or in an industry directly related to it. There were not many options for employment outside of steel in the northern panhandle of West Virginia because Weirton and Wheeling had become so dependant on its production.

15.4 Struggle at Weirton Steel Throughout the 1970s National Steel’s profits slumped, the corporation looked toward diversification and plant cut-backs as ways to counteract the losses. National became National Intergroup after getting into other fields so they would not be so dependant on domestic steel. This diversification did not please those at the helm of National Steel which, for the first time in its history, was not comprised of former Weirton Steel leaders or executives with family connections to E.T. Weir or Thomas Milsop. In 1982, National decided to invest no further capital into the Weirton Steel division. John Love, National Steel President, broke the news to then West Virginia Governor John D. Rockefeller, and then to the workers of Weirton Steel the next day (Zukin;1991). National presented Weirton Steel with two options: close the mill and eliminate jobs with the exception of a few hundred employees remaining to serve as a finishing operation, or allow employees to purchase the mill through an Employee Stock Ownership Plan. Weirton Steel management and workers knew that a loss of that magnitude would cause a severe economic depression in the area. They began a campaign to raise funds to purchase the mill and make WSX independent once again. For months, the Weirton community rallied around the ESOP cause. West Virginia state officials speculated that if the ESOP did not succeed, all steel making in Weirton would cease by 1985, leaving thousands unemployed and the state without the revenue from its largest taxpayer. Rallies and meetings throughout 1983 added momentum for the campaign and led the push to find lenders and investors for the takeover. Weirton laborers argued that the economic fate of the Upper Ohio Valley rested upon the continued production of steel in Weirton. Weirton representatives petitioned banks in Cleveland, Pittsburgh, and Detroit for loans. While Weirton Steel had a book value of $386.2 million, Weirton Steel workers paid National only $193.9 million for the company, the entire sum was raised through bank loans, there was no government participation. In addition to the purchase price the workers also assumed responsibility for $192.3 million of National’s debt (Zukin, 1991).

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With the financial aspect of the deal finalized, Weirton Steel employees had to vote on whether or not to accept the terms of the ESOP takeover. On September 23, 1983, over 7,000 workers voted on the ESOP plan and passed it with nearly 90 percent of the vote. National Steel turned the Weirton Steel Corporation over to the employees on January 11, 1984 making WSX the largest wholly employeeowned company in the country. Employees took a 32 percent pay cut in order to pay for the purchase of the steel mill (Javersak; 1999). The transition to ESOP would not be the only occasion that the Weirton Steel Workforce would struggle against forces that could harm steel production in West Virginia’s northern panhandle. Throughout the 1990s steel industry insiders kept a watchful eye on the increasing imports of foreign steel. American manufacturers were able to buy steel from Europe, Asia, and South America at cheaper prices than domestic firms could produce them. Steel imports grew from 29.2 million tons in 1996 to 41.2 million tons in 1998. Between 1997 and 1999 more foreign steel imports were brought to American than in any time in history. From late 1998 to 1999 over 10,000 steelworkers were laid-off in the United States. During this time period 35 steel-producing or steel-related companies closed due to slumping profits (Weirton Steel Press Release; 1998, www.weirton.com ). The threat of job loss inspired the USWA to call for a national Stand Up for Steel Campaign beginning in 1998. Steelworkers across the country began to learn about the threat of foreign steel producers, quotas, and tariffs, many for the first time. Weirton Steel became highly involved in the Stand Up for Steel Campaign, on both local and national scales. Locally, ISU members and Weirton executives led informational meetings for workers and townspeople to learn about low labor costs and threatening importers from places such as China, South Korea, Russia and Brazil. A large rally was held in Weirton in November 1998. Congressmen from Ohio and West Virginia attended and spoke to 3,500 steel supporters about what should or could be done to alleviate the problem of excess foreign steel importing, which they labeled “steel dumping.” It was during the rally in Weirton that the voices of Weirton Steel began to be heard nationally. The employee-owners mobilized a group estimated at 6,300 to rally in Washington, D.C. The date was set for January 20, 1999; the day after President Clinton’s State of the Union Address. Members of the ISU and officers of WSX organized seventy-seven buses to leave from multiple points across the Ohio Valley. The steelworkers took nearly 100,000 signed petitions with them to D.C. to give to President Clinton to show that their support ran deeper than the 6,300 in attendance that day. When they returned to Weirton, the employee-owners and their supporters were optimistic that they had shown policy makers in Washington that they had the numbers and the power to warrant the placement of steel tariffs. “The Valley’s Rally,” as it came to be known, brought attention to Weirton unlike anything it

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had seen since the ESOP buyout. From this point many considered the Weirton worker a “poster boy” for the campaign against foreign steel. Foreign media were frequently in contact with ISU and Weirton Steel officials. Employee-owners were interviewed and participated in debates for audiences in Europe and Asia. They used this exposure to strengthen the base of supporters in the Weirton area. President Clinton made no immediate action to rectify the imported steel problem, but tariffs against foreign steel did come two years later under President Bush.

15.5 E.T. Weir and Weirton Steel’s Struggles Although it is not known how much, if any, influence the Stand Up for Steel Campaign had on President Bush’s decision to institute the tariffs, the participation of Weirton Steel workers is important to this analysis. Much criticism has been given to the way in which workers at WSX operated. At the headquarters of the USWA, only 30 miles away in Pittsburgh, WSX employees were often referred to as “those Weirton scabs” (Zukin; 1991). There was much resentment to the higher wages and job security that WSX workers had in exchange for union independence. The argument could be made that the paternalistic actions of E.T. Weir and his colleagues infringed on the rights of the workers in his growing mill town. However, it appears that the paternalism bred by Weir in the town’s early years prepared the steelworkers, and the community, to successfully struggle through the ESOP transition to employee-ownership. This was again evidenced in the high participation of WSX workers in the Stand Up for Steel Campaign. As stated, Weir wanted his workers and mangers to have daily interactions with each other, both in the mill and at home. Weirton’s small size and sense of community ensured that this would remain true, even after Weir’s death. Although there were some divisions among class, these were put aside in times of struggle in favor of preserving steel production in Weirton. Zukin (1991) explains that a docile workforce was necessary for the ESOP to be successful. She classifies Weirton steelworkers and “doubly captive.” E.T. Weir’s actions fifty and sixty-years prior to ESOP provide an explanation for the docility. By providing higher than average wages, an Independent Union through which they could voice concerns, social services, and job security generation after generation, Weir created a cohesion between workers, managers and owners which would culminate in the ultimate expression of labor-boss solidarity – the employee-owner. Weirton worker’s roles in the Stand Up for Steel Campaign can be directly attributed to their history. The workers were much more in-tune with foreign competitors and profits once they were employee-owners. WSX was perched at a place to

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regain greatness in the domestic steel industry and the employees would fight to make sure that imports would not stop them after the recent success of ESOP. Employee-owners were accustomed to the national spotlight because the buy-out had been highly publicized on TV and in print (cover of Parade magazine). Not only did the WSX workers band together as they had during the ESOP days, but on an elevated level as well as a result of the sacrifices made by Weirton Steel employees to become employee-owners. The recent struggles at the Weirton Steel Corporation have been greatly influenced by of the early actions of the founder of the mill and the town of Weirton, Ernest T. Weir. His ideas of a utopian town with high amounts of workermanagement interaction, while not spatially perfect, are still found in the streets and communities of Weirton, WV. Even after bankruptcy in 2003 and purchase by larger steel producing firms in 2004 and again in 2005, Weirton workers are still manufacturing steel on the site of E.T. Weir’s original mill. The workers have transformed themselves on multiple occasions in order to preserve not only the operations that Weir founded and presided over decades before, but also the community that has grown from Weir’s vision.

Sources Ferguson, M. 1976. History of Holliday’s Cove. Mary H. Weir Library Collection: Weirton, WV. Javersak, D. 1999. History of Weirton, West Virginia. Virginia Beach, Va: Donning Co. Rine, R. 1995. Links to the Past: History of the William’s Country Club. Mary H. Weir Library Collection: Weirton, WV. Ubinger, J. 1975. Ernest Tener Weir: Last of the Great Steel Makers. Western Pennsylvania Historical Magazine. 58(3,4). Weirton, City of. 2003. www.cityofweirton.com Last accessed, June 7, 2003. Weirton Steel Corp. 2003. www.weirton.com. Last accessed, June 19, 2005. Welch, J. 1963. History of Hancock County: Virginia and West Virginia. Wheeling, West Virgina: Wheeling News Printing. Zukin, S. 1991. Landscapes of Power: From Detroit to Disney World. Berkeley: University of California Press and Development, Washington.

16 Ethics in Economic Geography Christine Tamásy, University of Auckland, Auckland, New Zealand Ethics is often described as the science of morality, which is commonly understood as a systematic intellectual reflection on which behaviour is right/wrong or better/worse. Such an analysis concerns the normative sphere of human and economic activities. Although the author’s work has been based on Karl Popper’s philosophy of science (critical rationalism) with its claim for value-free research, she even so has the opinion that values and ethics should, and must be, more explicitly discussed by economic geographers. Smith (1997) identified in the late 90s indications for such a “moral turn” in geography. In more recent reviews, however, Smith (1999a, 2001) also concluded that geographers have been less successful than other disciplines in engaging with ethics.1 The author would like to argue that economic geography can be made more productive by paying greater attention to ethical considerations that shape human behaviour and related economic activities which occur in the context of particular times and places (contextsensitive ethics in the understanding of Smith, 1999b). Due to an increasing attention to ethical issues, a discussion how (economic) geographers address moral concerns is essential (Kobayashi and Proctor, 2004). Ethics, also known as moral philosophy, is typically divided into three fields (http://www.galilean-library.org): 1) Meta-ethics, 2) normative ethics, and 3) applied ethics. The aim of meta-ethics is to study where ethical notions came from and what they mean. One important question is whether a system of ethics exists that could be applied to any situation at any time and any place. Normative ethics is devoted to searching for principles that guide or regulate human conduct. Applied ethics, in distinction, is the study of specific problems or issues which involve a moral dimension. Proctor (1999a) illustrates the importance of ethics as Geography’s ontological project and its epistemological process as one (!) possible analytical framework for a geographical perspective on ethical issues. This dualism refers to geographers’ view on the nature of reality and to the basis on which their knowledge claims are made. In a “world of difference” (Smith, 2000) economic geographers are, as well as researchers from other disciplines2, especially concerned about the causes and consequences of uneven development. Ethical discussions integrate aspects of globalisation with questions of fairness in an international arena. Major inequalities exist both within and between countries. These differences matter because they imply that some individuals, groups or territories have inferior opportunities than others. Sources of evidence for the actual importance of questions related to uneven well1

According to Cutchin (2002, p. 656) geographers’ engagement with ethics is at a “nascent” stage. 2 See, for example, Sen’s (1987) well written discussion on ethics and economics. 201 J. Gatrell and N. Reid (eds.), Enterprising Worlds, 201–204. © 2006 Springer.

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being are the latest Human Development Report (UNDP, 2005) and the Word Development Report 2006 labelled “Equity and Development” (World Bank, 2005). But general concerns leave important conceptual aspects to be clarified. How is development or well-being to be measured, by whom and whose set of values? Can well-being, however defined, be compared between nations and regions, or is development a concept specific to time and place which is comparable only within the same culture or society? The promotion of well-being or development is thus a normative project, connected with issues of human rights and aspects of social justice. Sen (2004), as a proponent of economic and political freedom, poses elements of a “theory” of human rights and its relation to public discussions. Nussbaum (2003, p. 33), following Sen’s (e.g., 1999) revolutionary work on development ethics, argue that a set of defined capabilities (“what people are actually able to do and to be”) help to conceptualise social justice in a normative way to direct policy. The interest in development ethics has been growing in recent years. The International Ethics Development Association (IDEA), a cross-cultural group of philosophers, social scientists, and practitioners, defines development ethics as “ethical reflection on the ends and means of local, national and global development” (http://www.development-ethics.org). Another professional organisation has been formed in recent years which indicates that development ethics has become a more recognised field: The Human Development and Capability Association that promotes research on questions related to impoverishment, justice, and well-being (http://fas.harvard.edu). In their review of research and related activities Crocker and Schwenke (2005) identify a broad range of beliefs and commitments shared by development ethicists that inform their practice. However, due to the multidisciplinary composition of the research community development ethicists employ a variety of different perspectives and approaches. Some of the unsolved controversies focus on the expanding scope of development ethics, the status of moral norms and on the question which agents and structures to blame for the present situation of global uneven development and opportunities (ebd.). However, geographers are not well recognised by these academic circles and should become more “visible” in debates about issues of morality. Context matters on a local, national and global scale even though such categories as location and place are seldom given prominence by philosophers in their analyses of ethics and morality (Smith, 2000).3 For example, which behaviour is seen as right/wrong or better/worse varies between particular societies, times and places. Different values that guide actions are given more or less weight in different societies in different points in time and different geographical contexts. A fundamental question in development ethics involves the environment, implicit in such notions as sustainable development. These discussions have important im3

Location refers to a position of somebody or something in space, while place denotes a portion of space in which actors and objects are embedded, as a setting for economic and social interactions. Location, place and space are important metaphors in “geographical imaginations” (Gregory, 1994).

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plications for global justice with respect to the well-being of future generations. However, the meaning of sustainability as an economic, social, and environmental concept is open to different interpretations. This perspective includes questions related to business ethics, which refer to the various moral or ethical problems that can arise in a sustainable business setting; and any special duties or obligations that apply to persons who are engaged in such businesses (e.g., Collier and Fuller, 2005). At a global scale the notion of sustainable development links discourses of environmental crisis, demography - as the Malthusian spectre of population growth - and uneven economic development (Smith, 2000). Geographers, who have been trained in social science and environmental science, make their contributions to discussions on ethical issues in globalising worlds and try to help navigating toward sustainable development, however defined (e.g., Morse and Fraser, 2005; Pettit, 2005). Proctor (1999b, p. 158) stresses the importance to conceptualise a so-called “moral earth” being inhabited by business leaders, policy makers, scientists and other population groups who act in certain morally-relevant way and justify their behaviour with reference to existing moral notions. Indeed, development ethicists find a great deal of possibilities for a systematic intellectual reflection on different aspects of morality on the global, national and local scale. However, geographers, and economic geographers in particular, have to take up the challenge more often.

Sources Collier, J. and Fuller, T. (2005) Corporations, ethics and global futures, Futures, 37, 111116. Cutchin, M.P. (2002) Ethics and geography: continuity and emerging syntheses, Progress in Human Geography, 26, 656-664. Crocker, D.A. and Schwenke, S (2005) The Relevance of Development Ethics for USAID, Washington, Management Systems International. Gregory, D. (1994) Geographical Imaginations, Cambridge, Blackwell. Kobayashi, A. and Proctor, J.D. (2004) How far have we cared? Recent developments in the geography of values, justice and ethics, in Gaile, G. and Willmott, C. (Eds.) Geography in America, 723-731. Oxford, Oxford University Press. Morse, S. and Fraser, E.D.G. (2005) Making ‘dirty’ nations look clean? The nation state and the problem of selecting and weighting indices as tools for measuring progress towards sustainability, Geoforum, 36, 625-640 Nussbaum, M (2003) Capabilities as fundamental entitlements: Sen and social justice, Feminist Economics, 9, 33-59. Pettit, C.I. (2005) Use of a collaborative GIS-based planning-support system to assist in formulating a sustainable-development scenario for Hervey Bay, Australia, Environment and Planning B: Planning and Design, 32, 523-545. Proctor, J.D. (1999a) Introduction: Overlapping Terrains, in Proctor, J.D. and Smith, D.M. (Eds.) Geography and Ethics: Journeys in a Moral Terrain, 1-16. London, Routledge.

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Proctor, J.D. (1999b) A moral earth: Facts and values in global environmental change, in Proctor, J.D. and Smith, D.M. (Eds.) Geography and Ethics: Journeys in a Moral Terrain, 149-162. London, Routledge. Sen, A. (1987) On Ethics and Economics, Oxford [et al.], Basil Blackwell. Sen, A. (1999) Development as Freedom, New York, Knopf. Sen, A. (2004) Elements of a theory of human rights, Philosophy and Public Affairs, 32, 315-356. Smith, D.M. (1997) Geography and ethics: a moral turn?, Progress in Human Geography, 21, 583-590. Smith, D.M. (1999a) Geography and ethics: how far should we go?, Progress in Human Geography, 23, 119-125. Smith, D.M. (1999b) Conclusion: towards a context-sensitive ethics, in Proctor, J.D. and Smith, D.M. (Eds.) Geography and Ethics: Journeys in a Moral Terrain, 291-290. London, Routledge. Smith, D.M. (2000) Moral Geographies. Ethics in a World of Difference, Edinburgh, Edinburgh University Press. Smith, D.M. (2001) Progress reports, Geography and ethics: progress, or more of the same?, Progress in Human Geography, 25, 261-268. United Nations Development Programme (UNDP) (2005) Human Development Report 2005, New York, UNDP. World Bank (2005) World Development Report 2006: Equity and Development, Washington, World Bank [et al].

17 Whose Development? The Tribal Involuntary Dislocation in the Sardar Sarovar Sutapa Chattopadhyay, Department of Geography, Kent State University, Ohio

17.1 Abstract Postcolonial India’s prime development agenda was to bring in rapid economic development through the construction of infrastructural development projects thereby creating employment, optimally utilizing and distributing resources, and reducing poverty. Besides fulfilling the economic goals, development also affected the poorer masses’ socio-cultural and economic conditions creating discontent, crisis and marginalization. I conceptualize this argument by encapsulating my research findings over: the production of uneven development, unsustainability of large dams, and how loss of rights and resources led to power struggles due to the construction of the Sardar Sarovar damming project (SSP) in western India. I highlight the larger trajectories of dominance and resistance following the protest narratives and discourses on the SSP. The different sections of this chapter is crafted on the aforementioned concerns which I addressed through the narratives collected in my qualitative survey and various discourses drafted in different timeperiods from the construction of the damming project, different stages of dislocation, and implementation to destabilization.

17.2 Introduction The Sardar Sarovar (SSP) is the largest out of 30 large dams constructed on the fifth largest perennial river, the Narmada, in India (Figure-1). Additionally the river is dammed at 3135 places for minor and medium projects. The Narmada originates from the Amarkantak Plateau in Madhya Pradesh making a journey of 800 miles through Madhya Pradesh, Gujarat and Maharashtra draining in the Arabian Sea. The construction of the SSP began in 1962, with Gujarat as the prime beneficiary leaving the adverse impacts for the upstream Madhya Pradesh and Maharashtra. Disputes over water sharing and resettlement and rehabilitation (R&R) led to the origin of the NWDTA1 in 1969. This project is justified for improving the economic conditions of the people by bringing in electricity, irrigation 1

The Narmada Water Disputes Tribunal Award (NWDTA) formulated in 1969 and the tribunal came up with guidelines on R&R for the three riparian states in 1979. 205

J. Gatrell and N. Reid (eds.), Enterprising Worlds, 205–219. © 2006 Springer.

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Fig. 1. Sarovar Project Area

Source: Report 2006: Equity and Development, Washington, World Bank [et al]. and drinking water. But large dams like the SSP are also known for aggravating drought and poverty, widespread negative environmental impacts, forced dislocation and faulty implementation procedures. The Narmada Valley is the home of numerous indigenous groups (Bhils, Vasavas; Ratwas, Bhilalas, Pavras; and Tadvis) with a complex and diverse social character differing from one another through their primary subsistence activities, sociocultural and religious niches and intense community networks. Without a clear knowledge of the magnitude of displacement and adequate rehabilitation provisions the dam has being constructed to 90 feet and projected an increased height of 130 feet (Table – 1). The three riparian states had different resettlement and rehabilitation measures involving the land compensation of one or two hectares per family in the catchment’s areas, but ignoring thousands of families affected by the construction of the township and canals. In 1985, Medha Patkar who is currently heading an activist group Narmada Bachao Andolan- NBA (Save the Narmada Movement) visited the Valley. Entering into discourses with the villagers, she finds unanswered questions, doubts and fear among the tribal villagers regarding the construction of the project, dislocation and socio-economic losses. This mounting exasperation of the people and the activists gradually shaped into the non-violent struggles for claiming better rehabilitation and sustainable development in the valley.

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Table 1. Villages and Families facing submergence in the three States of India

Population affected

Avg area submerged per village (hectares)

Avg area submerged per family (hectares)

4600

18000

374

1.55

33

3133

19650

291

3.06

192

193

33014

89796

108

0.63

241

245

40747

127446

153

0.92

Villages fully submerged

Villages partially submerged

Total villages submerged

Families affected

Gujarat

3

16

19

Maharashtra

-

33

Madhya Pradesh (MP)

1

Total

4

State

Source: Sardar Sarovar Nigam Limited, Government of Gujarat: Gandhinagar, Gujarat (2000). To understand these mechanisms of involuntary migration,2 in summer 2004, I started my re-search pilgrimage to some rehabilitated3 villages of Gujarat and submerging villages4 in Madhya Pradesh. Everyday my journey to the rehabilitated villages began with an early bus trip from the Vadodara bus depot to Chota Udaipur. For me, as an outsider, it was always quite exacting traveling in shanty buses that hurtled over the wretched roads. For the local people, however, it was a great conveyance; the remote link connecting the submerged villages with the city. My knowledge of Gujarati5 was inadequate for a semblance of communication with fellow passengers, which alienated me from the rest for most of my journeys. Though I dressed traditionally in the salwar kameez and wore a humble composure to suggest that I am one among them, but still I could not escape the gaze of fellow passengers. It was difficult to blend with the crowd for some unknown reasons and I remained an outsider among them.

2

3

4

5

Here migration is induced by the State Governments of Madhya Pradesh, Gujarat and Maharashtra for the construction of the river valley project (SSP). Since dislocation of the people from the submerging to the rehabilitated villages was involuntary initiated by the state, the type of migration is stated as involuntary migration or development induced migration. The word ‘rehabilitate’ as per the Oxford Dictionary means to help to have a normal life again after they have been in prison or hospital; to restore to their former higher status or position.... The word rehabilitation is used in the context of development projects addressing the restoration of former status or provision of better living conditions in the relocated sites which the affected populations might loss through dislocation and submergence of previous lands and assets. Submerging villagers denotes to those villages which are submerged. Some villages are not yet submerged but will be submerged as water is discharged from the dam. Gujarati is the language commonly spoken in Gujarat.

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After a few hours I reached Thuruthy6 nodal point, which served as an intersection of roads running in four directions to major markets, towns and cities. This is the first village I surveyed. Thuruthy was a dam-site village7 and one of the first villages submerged and dislocated. Tea and pan shops were mushrooming on all sides along the intersection. The teashops sold tea served with some freshly fried snacks. Every morning, after reaching the village I chose to drink a small glass of tea, overlooking it’s making, with the hope of carefully observing the villagers’ spatial movements, images and attributes. Different types of transportation catered to the needs of villagers of different age groups: children going to school, men to the place of work, farmers to the market and so forth. Frequently buses stopped besides these shops blowing a heave of dust on its wake. The ticket collector swaggered along the road, arrogantly calling out destinations and shoving the passengers in the bus till it was filled to the brim. The villages looked planned. The brick settlement structures were aligned in rows with unpaved roads neatly dividing them into clusters. I could not relate them to the sparsely scattered mud houses in the villages of Bengal, which I had often visited in my school days8. The submerged village settings were different from one another. The rehabilitated villages failed to preserve the traditional socio-cultural originality of the submerged villages. They looked like generic landscapes with various amenities such as schools, community centers and drinking water taps and tanks. It may be noted, however, that these amenities were not included in the initial R&R policies, and the state’s original plan on displacement and rehabilitation could have entailed social, economic and physical instability to thousands of affected people. The original R&R policies were reshaped thanks to the prolonged agitation against the state by the local people and various NGOs of the Narmada Valley. Even now unevenness prevails in the distribution of compensation as a result the valley continues to be a site of contestation and conflicts. Multipurpose development projects (like the SSP) entail large-scale negative impacts on the less powerful sections of the society. In the submerged villages, the tribes in particular engaged in conventional agriculture and closely depended on the nature, which sustained their socio-cultural lifestyles, and economic activities, which are limited in, rehabilitated villages. In this chapter, while recognizing that large damming projects are, perhaps essential for the progress of a country like India, I argue that medium and minor projects are sustainable compared to the large projects.

6 7 8

The pseudonym is given to the village to maintain privacy to the information collected from the villagers. The submerging villages were classified into rock-fill dyke village, dam-site village and interior village depending on their geographic characteristics of these villages. This was reminiscent of Henri Lefebvre’s abstract space or built spaces. Abstract space is the produced space. The creation of abstract space is linked with the modern western capitalist structures (Lefebvre 1991).

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This chapter has seven sections, starting with an introduction and theoretical framework. In the third and fourth sections, I question the unevenness of development and sustainability of large dam projects. Here I introduce the discourses and narratives to highlight that the development interventions are not uniformly distributed rather ‘refracted, reworked and sometimes subverted in particular localities…’ (Moore 2000, 655). The fifth and sixth sections detail the trickle-down effect of development that germinated into struggles, created power gradients and the complex spatial links at the interface of the local and the state. Finally I suggest some development alternatives that can bring in an ethical development for the rehabilitated villagers.

17.3 Theoretical Framework The term “development” is defined in the Oxford Dictionary as a process to grow gradually, to become or make a nation grow larger or more advanced. The Western development discourse, however, colonizes reality in its quest to produce modern capitalistic regimes. Though development projects are needed for a country to economically advance, they impact negatively on the local culture, social foundations and economic systems. It is therefore pertinent to ask the questions on, what is development? how is it distributed within various classes and castes of the society?, and how does it function in the society?. But the development discourses are convoluted in the critiques of development, jumbled with contradictions and identified by socially constructed definition in specific contexts. In the post independence era of India, we find development used to structure political relations, produce knowledge and transform local spaces into material landscapes (Brass 1994; Gupta 1998; Ludden 1992; Parajuli 1991; Gandhi 2003). Ostentatious spending on grand development projects were often justified as the inevitable costs for the ‘greater’ common good. Such developmental mechanisms created avenues to alleviate the conditions of the rich and in the making of the poor. In the Sardar Sarovar the original plan of the state was involuntary dislocation of the tribes, overlooking their livelihood mechanisms, regulating their secured landscapes, ignoring the need for a coherent R&R policy (Morse Commission Report 1992). Various NGOs working in the Narmada Valley also voiced concern regarding the unsustainability of the project. These circumstances inevitably peppered the valley with conflicts between the state apparatuses and the displaced people over the unequal distribution of benefits and resources. Further I comprehend that the construction of multipurpose development projects such as the SSP are manifesting and manipulating free will through economic and political institutions of the modern society (Foucault, 1980; Gibson-Graham, 2000; Tyner, 1994). The Foucaultian post-developmentalist Escobar conceptualizes how institutions form and spread development theories, models and strategies. Escobar (1995) argues that the acts and motive of the state is to constantly produce

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and condition the migrants to docile bodies9 through the exercise of power. Foucault conceptualizes the use of power in various scales within similar or different institutions, the enactment of power differently in different circumstances and the effects of power and the everyday (Foucault 1979; 1980). In the lines of Foucault (1979; 1980) and Escobar (1995) I argue that if the migrants’ original spatial structures and livelihood mechanisms are altered, they will resist the state’s relocation efforts and norms10. In the fourth section of this paper, I discuss some resistance movements related to R&R to prove that the weak can organize and strategize to obtain their lost rights and control over resources. There are examples of development projects all over the world that shows that the economic and social lives of the people are altered and conditioned over time and space. In the following section, I discuss the strategies adopted by India in the post-colonial era to develop and to make up for the losses incurred during the colonial period.

17.4 Uneven Development Mahatma Gandhi appealed for the revitalization of rural communities through simple techniques of craft production that provide a descent standard of living and assurance for a better quality of life to the Indian peasantry. In contrast, the Nehruvian government strongly emphasized and implemented the replica of development followed in the West. Gandhi asserted that, if the Indian nation with millions of people followed similar development and economic exploitation like Great Britain, ‘it will strip the world bare like locusts’ (Gandhi 1951, 31). Thus India should never take to industrialization in the manner of the West. He emphasized that the rural spaces were ecologically sustainable and offered a higher quality of life, with proper infrastructural facilities. Gandhi hoped the nation to preserve its socio-cultural originality that might be lost in its quest to achieve rapid growth. However, the Gandhian ideology was variously interpreted, unanticipated and unapproved by the Congress, the then ruling party. Most of the India’s ruling nationalists reconstructed the nationstate by replicating the West through a fast injection of commodification, capitalism, industrialization and urbanization to quickly compensate for the losses incurred in the 200 years of colonial oppression (Kholi 1987, 73; Gadgil and Guha (1992, 184) From the second five year plan onwards the Indian government spent 22 percent of the total budget in agriculture while 75 percent of the populations depended on 9

Here the migrants are conceptualized as docile bodies whose lives are shaped and modified by the practices and discourses of development (Escobar 1995). 10 This argument follows the analogy on Tactics and Strategies provided in de Certeau’s ‘The Practice of Everyday Life’ (1988, 91-110).

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agriculture. Thus the strategies adopted by the Indian state to develop affected the social and ecological equilibrium and destabilized the local, rural and primitive cultures (Baviskar 1995). Centralized planning has lead to a rapid increase in social and income inequality. In the irrigation sector, about 64 percent of major and medium river valley projects irrigate only 30.5 million hectares of land while minor projects irrigate 37.4 million hectares (Sachidanandan 1988, 80; Dharmadhikary 1995, 135-153). This suggests that India could as well implement minor and medium irrigation projects, instead of large development projects which entail huge amount of expenditure, large magnitude of displacement and submergence of land, forests and other natural resources. The SSP, one among the many river valley projects of the Narmada, alone cost more than the entire amount spent on irrigation projects by the government since independence! (Baviskar 1995). The construction of the gigantic project benefits big farmers on the plains but destabilizes the lives of the people living on the banks of the river at the subsistence level whose livelihoods are directly or indirectly linked to the river. Yet the state invested on centralized projects instead of smaller decentralized ones. In the irrigation schemes, prior to the SSP there was no definite rehabilitation policy other than some programmes implemented on an ad hoc basis (Joshi 1991). The compensation was provided in accordance with the guidelines of the Land Acquisition Act (LAA) of 1894 which is couched in the colonial vintage stipulates that individual oustee will be compensated based on the amount of land previously owned. Share croppers, land laborers, users of common land, and encroachers11 were not entitled to receive any land compensation in the rehabilitated villages if they were unable to provide proofs of cultivating the land for some time period which varied for Madhya Pradesh and Maharashtra (Table – 2). Out of the total affected people about 60 percent of the oustees who did not have proofs of land ownership received no land compensation. So the people for whom cultivation was the only source of income were affected by landlessness and loss of income stability. While this should have raised concerns over the need to setting clear guidelines for compensation and rehabilitation, the reaction of the then chairman of the Narmada Valley was ironic: No trauma could be more painful for a family than to get uprooted from a place where it has lived for generations… yet the uprooting has to be done. Because the land occupied by the family is required for a development project which holds promise of progress and prosperity for the country and people in general. The family getting displaced makes a sacrifice … so that others may live in happiness and be economically better-off (S. C. Varma quoted in Alvares and Billorey 1987, 64). 11

Encroachers are villagers who cultivated forest land or common lands for generations with or without legal ownership to the cultivated land. They were considered as illegal cultivators if the following conditions were not satisfied. Different States involved in the SSP had different ways of considering the encroachers suitable for land compensation. They had to show proofs of cultivating the land prior to 1978 for Maharashtra and by 1987 in case of Madhya Pradesh

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Table 2. Land Holding Status Prior to Displacement Land Owners

Co-sharer

Encroachers

Major Sons

Landless Agri Laborers

Landless Laborers

Total

Gujarat

647

850

487

2204

392

20

4600

Maharashtra

1472

-

-

893

748

-

3113

Madhya Pradesh (MP)

9985

-

-

-

15018

5776

2235

Total

12104

850

487

18115

6916

2255

40727

State

Source: Sardar Sarovar Nigam Limited, Government of Gujarat: Gandhinagar, Gujarat (2000).

So the officials involved in displacement and rehabilitation assumed that the villagers should willingly sacrifice themselves for the cause of the nation's well being. Even the educated elites/ academicians had similar views as the bureaucrats. For example, a Professor at the Center for Social Studies of the South Gujarat University had the following to say: A culture based on lower level of technology and quality of life is bound to give way to a culture with superior technology and highest quality of life. This is what we call development. What has happened to us is bound to happen to them because we are both parts of the same society (Joshi 1991, 68). He reiterated, in a discussion we had on the lives of the people in the Narmada Valley and argued that rehabilitation is replacing the backward living standards with modern amenities. The fact remains, however, that development projects produce unevenness and the process of development is unsustainable.

17.5 Unsustainable Development India, a developing country, has made considerable progress on the social development front: reduction in death rates, increase in life expectancy and increase in adult literacy, etc. This has been due to awareness programs on hygiene and health, educational programs, and provision of medicines, sanitation, and health care. In the energy sector, however, the country has been utilizing her natural resources in an unsustainable manner. The energy needs are mostly provided by biomass (50 percent). Even then the seventh plan (1985-1990) allocated less than Rs. 20 million for the development of biomass resources whereas other electricity sectors

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received Rs.320 million (Darmadhikary 1991, 15). In 1990, out of 329 million hectares of land, only 56 percent was considered arable out of which 25 percent was irrigated. According to the National Remote Sensing from 1970 to 1990 forest cover dropped from 56 million hectares to 33 million hectares. Over the last 15 years from 1951 to 1976, 4 million hectares of forest area was lost. About 22.7 million hectares of forest was cleared (Gadgil and Guha 1992, 196; UNDP 1992, 173). About 20 million hectares or 11 percent of agricultural land was severely affected by salinization (Vohra 1980:4). Due to salt accumulation, 7 million hectares of land was abandoned (Gore 1992, 111). Deforestation and construction of embankments led to a steady increase in the incidence of floods in the fertile plains of north India. From the 1950s to the 1980s, the annual flood damages increased nearly 40 times (CSE 1991, viii). The Gandhian workers, environmentalists and human rights activists raised some issues regarding the SSP, such as, the invaluable forests will be destroyed by submergence, wild life and birds will face extinction, stagnant waters of the reservoirs will cause water-borne diseases and affected people will suffer from socioeconomic losses. The ways in which resources were used and accessed for economic advancement through the construction and implementation of large damming projects establish the fact that the environmental stability can be fundamentally altered beyond repair. The villagers living in the submergence zone were unaware of the construction of the project and its impact on their lands and property until the field officers started to take measurements in the villages to estimate the amount of land submerged by the rise in water level after water was discharged. Through decades of protests the NBA and other local NGOs voiced along with the fully or partially affected villagers through the construction of the project and canals, to acquire a better rehabilitation package. 17.5.1 The people’s and NGOs resistance movements The Narmada Bachao Andolan or NBA (Movement to Save Nimar which was renamed as Movement to Save Narmada) started in 1978 in Nimar, soon after the Water Disputes Tribunal gave its award. Arjun Singh the leader of Congress (I) mobilized the people of the Nimar to claim their lost assets due to displacement for the SSP and formed the Narmada Bachao Andolan to win the elections. In that year, Janata Party came to power at the center and in Madhya Pradesh. He was supported by the wealthy merchants and the people of Nimar, won the elections in 1979, and promptly duped the movement (Baviskar 1995).

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In 198512, Medha Patkar, a social scientist at the Tata Institute for Social Sciences, Mumbai, made a second attempt to organize and mobilize the people against the large scale displacement. Initially, however, the Andolan did not challenge the overall validity of the SSP, but organized the people to demand adequate rehabilitation. The government conceived the principles of the rehabilitation policy as most liberal with the assistance of a few involuntary and educational organizations (ARCH-Vahini, Rajpipla Social Service Society and Center for Social Studies in Gujarat) (CSE 1985, 106-9). The policy, however, suffered from some discrepancies and was not implemented uniformly among all the people in the submergence zone. Recalling my field experiences in a rehabilitated village of Maharashtra, (Daboi Taluka) justifies the argument of the NGOs on inadequacy in distribution of rehabilitation benefits. This village is situated far from the main road, quite inaccessible and faces problems of adequate drinking water and leveled fertile cultivatable lands. The hand pumps and the main tank do not work and drinking water is saline and non-edible. The villagers, therefore, walk a few kilometers to the nearby town or village to fetch water for drinking and household purposes. Also the village gets water logged in the monsoons. When I questioned the government officer-incharge of rehabilitation in this area, he mentioned that, ‘rehabilitation was 100 percent complete and the villagers falsified their problems’. Since I scrutinized all the civic amenities during the span of my surveys, I was certain that the officer was not truthful. Coming back to the resistance movements led by NBA, who gradually changed their position from better rehabilitation to a total rejection for the construction of the dam and voiced ‘Koi nahin hatenga! Baandh nahin banenga!’ (No one will move! the dam will not be built!). The Andolan consisted of representatives from all over the country and was supported by international NGOs (Environmental Defense Fund, Environmental Policy Institute and National Wildlife Federation). The latter urged the United States Congress to compel the World Bank to stop funding the SSP. Besides this, the Independent Review of the World Bank submitted by Morse and Berger in 1992 was highly critical, and all these factors forced the Bank to withdraw from the project. Similar persistent efforts of the ‘Friends of the

12

During this time the environmentalists outside the valley expressed disquiet about the Narmada Valley Projects (see press reports Kalpravish and Hindu College Nature Club 1985). As a result of which: first, the commitment of the World Bank and bilateral aid agencies to fund the project was withdrawn (Goldsmith and Hilyard 1984); and secondly anti dam was endorsed and clearance to the construction of the projects were not sanctioned by the Indian Ministry (Department of Environment and Forest) for insufficiently knowing the impacts of two large dams (Sardar Sarovar and Narmada Sagar). The ministry was overruled by the Prime Minister of India (Rajiv Gandhi) who sanctioned the construction of the dam though the expenditure and impact over people, environment and resources were scarcely known (Baviskar 1995).

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Earth’ in Japan convinced the Japanese government to suspend funding the SSP on environmental grounds (Udall 1995, 201-230). The Andolan exhibited its strength in the Narmada Valley through demonstrations, chanting slogans and non-violent ‘Satyagraha’ (fasting). In February 1989, about 8000 people gathered at the dam-site to protest against the construction of the SSP. Many among them were beaten and arrested by the police. The NBA nonviolently demanded for an end to all projects which devastated the environment and destroyed people’s livelihoods. Its defiant message to politicians and planners was that, “people are no longer prepared to watch in mute desperation, as project after destructive project is heaped on them in the name of development and progress” (NBA, Delhi 1990:4). The Andolan claimed for a comprehensive review of the project and the impact of the embankments on the river bed. They also opposed the clear-felling of trees which disturbs the environmental equilibrium and leads to biodiversity change. For a week the local people of the Narmada Valley marched in a procession singing and chanting slogans. The parade was stopped at the interstate border in Gujarat and Madhya Pradesh by a massive police blockade. Unable to proceed towards the dam-site 2,000 people camped in the border at Gujarat for a month in cold winters. After three weeks they terminated the struggle to a non-cooperation movement against the state stating ‘Hamaara gaon mein hamaara raj’ (Self rule in our villages) (Baviskar 1995). The NBA followed tactics, similar to the Gandhian nonviolent resistance against the colonial rule. The NBA shifted its focus of struggle to Manibeli, where the rising dam wall started impounding water which could submerge houses and lands if water level rose in monsoons. They asserted that people prefer to die than leave their villages and created a ‘sampriti dal’ or a band of people who would drown themselves – the drown squad. The police attempted to evict the people forcefully, but the threat to ‘jal samarpan’ (drowning) created serious press coverage and forced the Government to undertake a comprehensive review (Patkar 1995, 157-178). 17.5.2 The interface between Resistance movements and Power Resistance movements could be conceived as liquids that flow through the cracks and crevices of power. Power maneuvers them through ‘guileful ruses of interests and desires’ (de Certeau 1988). Involuntary dislocation, environmental disturbance, disturbing the tribal people’s tryst with nature, all contributed to invisible oppression to the people, placing them in the trap of uneven development. According to de Certeau (1988) these resistance movements are ‘tactics’ that are played by villagers with the help of the NGOs as ‘art of the weak’ which attempts to destabilize the acts of oppression.

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A reading through the series of movements in the Narmada Valley reveals the various tactics adopted by the Andolan to gain national and global significance. Their publicity efforts through processions, fasting or ‘satyagraha’, chanting of songs and slogans, and creation of drowning squads, and so forth attracted wide coverage in the press and forced the government to negotiate with the demands of the villagers. The Andolan tactically placed the women at the forefront of the demonstrations opposing the dam. However, the government officials in charge of the SSP had little concern towards the women activists and subjected them to brutal assault, ripping off their clothes in public and dragging them along by their hair. In one incident, one pregnant lady was repeatedly struck on her stomach with a rifle butt (PUCL 1990). Thus to counter tactics of the locals and activists, strategies were used by the powerful (the state in this case) to control and manipulate the lives of the weak. It is a specific type of knowledge that impacts the lives of people that are subjected to its power (de Certeau 1988). Besides suppressing the peaceful demonstrations and non-violent acts of the NBA, the government officials tried to breakdown the movement by threatening the villagers and bribing the local tribal leaders. The collector of Jhabua who was the head of the district administrative services held a ‘problem resolution camp’ where he informed the assembled villagers that the combined might of the state (‘lathi (stick), bullet and pen’) will be used to evict the people from their lands. The people who were active against the project were harassed and their works were hampered. Once the people were forced to take off their clothes and spend the nights in cold cell without food. They were constantly tracked by the police, tortured and humiliated (Bhaviskar 1995; Patkar 1995, 157178). Nation’s development or progress was never a goal of the people of Narmada Valley. The various tactics played by the villagers against the strategies of the state and the oppression of some R&R officers was against the violation of their right to live and livelihood.

17.6 Conclusion Sardar Sarovar has a positive side, but the project’s benefits failed to improve the conditions of the tribal villagers who depended on various resources of the Narmada Valley to support their traditional livelihood systems. The people who were living on the edge of survival could not welcome the nation’s approach to gain economic sufficiency and promote greater common good. The state lacked foresight on the huge magnitude of displacement and the availability of land to resettle the displaced villagers. As a result there was secondary displacement as the state bought land from private landowners and relocated them from their lands.

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However the government can promote sustainable agrarian strategies in the rehabilitated sites utilizing the skills of the academicians and non-governmental organizations to educate the villagers. Since the tribals are focusing on sedentary agriculture, agricultural improvement programs such as providing information on various food and commercial crops, usage of proper and appropriate fertilizers, pesticides, mechanized farm techniques, and marketing of commercial farm produce can be helpful. Educational programs can be implemented to enhance the level of awareness and empowerment and decision making power of local men and women. Various financial programs can educate the people to use the gramin (village)/cooperative banks, benefit from small agricultural loans, and government subsides. The tribal women leaders can create self-help groups for the management of household expenditure, maintain hygiene at home and educate the children. Such simple and sustainable techniques can infuse self-reliance, bring back stable income and promote better living in the rehabilitated villages. Drawing on my field surveys I surmise that if the Government is willing, it can infuse better socio-economic and cultural conditions through bottom-up strategies; by heeding alternative paths to development to address the needs and demands of the lower echelons.

Sources Alvares, Claude., and Ramesh. Billorey. 1988. Damming the Narmada, Malaysia: Third World Networks/ AAPEN. Baviskar, Amita. 1995. In the Belly of the River: Tribal Conflicts over Development in the Narmada Valley, New Delhi: Oxford University Press. Brass, T. 1994. The politics of gender, nature and nation in the discourse of the New Farmers’ Movements, The Journal of Peasants Studies, 21, 3-4: 27-71. CSE (Center for Science and Environment). 1985. The State of India’s Environment 1984-85: The Second Citizen’s Report. New Delhi. de Certeau, M. 1988. The Practice of Everyday Life. Steven Randall (trans.). California: California University Press. Dharmadhikary, Sripad. 1991. The Narmada Dams controversy: Issues for Energy Policy, Urja, 29, 5. Dharmadhikary, Sripad. 1995. Hydropower at Sardar Sarovar. Is it Necessary, Justified and Affordable? In W. F. Fisher (ed.), Towards Sustainable Development India’s Narmada River, Armonk, London: M. E. Sharpe. 135-153. Escobar, Arturo. 1995. Encountering Development. Princeton, New Jersey: Princeton University Press. Fernandes, W., and Thukral, E. G. eds. 1989. Development, Displacement and Rehabilitation. New Delhi: Indian Social Institute. Foucault, Michael. 1979. Discipline and Punish. New York: Vintage Books. Foucault, Michael. 1980. Power/ Knowledge. New York: Pantheon Press. Gadgil, Madhav., and Ramachandra. Guha. 1992. The Fissured Land: An Ecological History of India. New Delhi: Oxford University Press.

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Gandhi, M. K. 1951. Towards Non-Violent Socialism. B. Kumarappa (ed.). Ahmedabad: Navajivan Publishing House. Gandhi, Ajay. 2003. Development compliance and resistance: the state, transnational social movements and tribal people contesting India’s Narmada project, Global Networks, 3, 4: 481-495. Goldsmith, Edward., and Nicholas. Hildyard. 1984. The Social and Environmental Effects of large Dams: A Report to the European Ecological Action Group. Cambridge: Wadebridge Ecological Center. Gore, Al. 1992. Earth in the balance: Forging a New Common Purpose. New Delhi: Viva Books. Gibson-Graham, J. K. 2000. Post structural Interventions, in E. Shepard & T. Barnes (eds.). A Companion to Economic Geography, Oxford: Blackwell Publishers. Gupta, A. 1998. Postcolonial developments: agriculture in the making of the modern India. Durham: Duke University Press. Joshi, Vidhyut. 1991. Rehabilitation – A Promise to Keep: A case of SSP. Ahmedabad: The Tax Publications. Kalpraviksh., and Hindu College Nature Club. 1985. The Narmada Valley Project: Development and Destruction? The Ecologist. 15, 5/6. Kohli, Atul. 1987. The State of Poverty in India: Politics of Reform. Cambridge: Cambridge University Press. Lefebvre, Henri. 1991. The Production of Space. Donald Nicholson-Smith (trans). Oxford: Blackwell publisher. Ludden, D. 1992. India’s development regime’. In N. B. Dirks (ed.), Colonialism and Culture, Ann Arbour: University of Michigan Press. 249-87. Moore, D. 2000, The crumble of cultural politics: Reworking ‘development’ in Zimbabwe’s Eastern Highlands, American Ethnologist, 26: 654-89 Morse Commission Report. 1992. Sardar Sarovar: Report of the Independent Review. Canada: The typeworks. NBA. 1991. Towards Sustainable and Just Development: The People’s Struggle in the Narmada Valley. Mimeo Parajuli, P. 1991. Power and Knowledge in development discourse: New social movements and the state in India’, International Social Science Journal, 127: 173-90. Patkar, M. 1995. The struggle for participation and justice: A historical narrative (in conversation with Smitu Kothari. In W. F. Fisher (ed.), Towards Sustainable Development India’s Narmada River, Armonk, London: M. E. Sharpe. 157-178. PUCL (People’s Union for Civil Liberties, Madhya Pradesh). 1990. Vikas ka Aatank (The Terror of Development). Sachindananda, P. 1988. National Perspective for Irrigation Development in India in J.S. Kanwar (ed.). Water Management – The Key to Developing Agriculture. Indian New Delhi: National Science Academy. Tyner, James. A. 1994. The Social Construction of Gendered Migration from the Philippines, Asian and Pacific Migration Journal, 3, 4: 589-617.

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Udall, Lori. 1995. The International Narmada Campaign: A Case of Sustained Advocacy. In W. F. Fisher (ed.), Towards Sustainable Development India’s Narmada River, Armonk, London: M. E. Sharpe. 201-230. UNDP. 1992. Human Development Report 1992. New York: Oxford University Press. UNDP. 2005. Human Development Report 2004. (last accessed 07/06/2005). http://www.undp.org.in/hdr2004. Vohra, B. B. 1980. A Policy for Land and Water. Sardar Patel Memorial Lectures: Government of India: Department of Environment.

18 Geographies of Informalization: Conceptual Dilemmas over Social Standards and Informalization of Labor Hege Merete Knutsen, Department of Sociology & Human Geography, University of Oslo, Oslo, Norway

18.1 Abstract Informalization is a fuzzy concept, but in broad terms it refers to a process of economic activities increasingly moving into unregulated spheres. The ILO concludes that the part of the global workforce which is “..outside the world of full-time, stable and protected employment - continues to be important and probably has been increasing over time”, and that informal work arrangements have expanded (ILO 2002, 11). An increase in informal work is further supported by qualitative data and reasoning (Benerìa 2001; Munck 2002). As informalization is increasing, there is increasingly more information about adverse working conditions, especially in the South, and there is increasingly more concern with social standards as a means to solve such problems. However, there are contrasting views among scholars whether social standards actually impede or enhance informalization. This chapter seeks to explain the main differences in this debate in light of the theoretical and conceptual point of departure of scholars who represent structural, neoliberal, neostructural and Marxist approaches to informalization. Regarding social standards, the main focus is on internationally recognized labor standards promoted by international organizations, i.e. in essence the ILO declaration of 1998 on fundamental principles and rights at work. The declaration makes it binding to member countries to promote and realize freedom of association and the right to collective bargaining; the elimination of compulsory labor; abolition of child labour; and elimination of discrimination in employment and occupation (ILO 1998). Freedom of association and collective bargaining and freedom to express grievances are civic rights. Rights against involuntary servitude, child labor and physical coercion are referred to as basic rights. In addition to the civic and basic rights of the ILO declaration, there is concern among scholars with survival and security rights. Survival rights address wages, working hours and occupational health and safety, while security rights address issues such as arbitrary dismissal and rights to obtain retirement compensation (Portes 1994).

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18.2 Concepts of Informality Labor surplus and poverty in cities in the South due to rural-urban migration was a concern already in the 1950s and 1960s. At a conference in 1971 Hart defined formal employment as salaried work in units such as factories, public services and large-scale commerce, whereas informal employment referred to self-employment in activities such as petty commerce, personal services and small-scale production (Hart 1973). Inspired by this, the ILO mission on employment, income and equity in Kenya defined the informal sector as characterized by ease of entry; reliance on indigenous resources; family ownership of enterprises; small scale of operation; labor-intensive and adapted technology; skills acquired outside the formal school system; and unregulated and competitive markets (ILO 1972 excerpts in Bangasser 2000). Both Hart and the ILO made a point that the informal sector comprised both of marginally productive activities and activities that were economically efficient and profit-making. However, the informal sector has first and foremost been considered as a means of survival through invented marginal jobs. This is particularly evident in the Regional Employment Programme of the ILO in Latin-America (PREALC) in the 1980s. Theoretically the understanding of the informal sector was inspired by Prebisch and structuralist development thinking. Prebisch explained how structural conditions limited reinvestments and employment generation in the formal sector. Hence, the policy implication was to support the informal sector to absorb more labor at higher levels of productivity. However, state investments and private investments in the formal sector were also encouraged in order to reduce the need for survival strategies as such (Tokman 1978; Prebisch in Tokman 1993; Portes and Schauffler 1993). Neoliberal economic policies emerged in the 1980s. It was as a response to what was conceived as the short-comings of Keynesianism and focused on the failure of the welfare state in the North, and the failure of import substitution and “state dirigisme” in the South. The main components of the neoliberal economic policy amounted to a roll-back of the state, reliance in free market forces and export orientation on the basis of comparative advantage. In the late 1980s, De Soto (1989) argued that the informal sector in Peru developed in opposition to excess regulation rather than as a response to excess labor. Informalization was seen as a process of deregulation from below. Hence, one should rather make use of the energy of this sector and open for private initiative on a large scale. The policies of the World Bank reflect this. Deregulation of the formal sector, private property rights and access to credit will enable people to leave the informal sector (World Bank 2005). Neostructuralist thinking represents a reaction against neoliberal advocacy of free market forces, but also incorporates some of the neoliberal criticism of the way

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structuralist thinking has been practiced. As a representative of neostructuralism, Tokman (1993) argues that one should apply a concept of informalization that refers to the organization of production at the microeconomic level as well as the structural and institutional context that informalization occurs in. There is little surplus labor in the North and the institutional system is highly protective. Hence, it is possible to trade work protection and job security for higher wages or vice versa. This contrasts countries at a lower level of development where informal activities are largely due to the need for survival and they generate low income. The strategy implication for countries in the South is selective changes in labor regulation. It is necessary both to protect labor and for firms to be able to earn profits. Measures include productive assistance to informal entrepreneurs; a welfare package by the state to informal workers and simplification of procedures for legal recognition of enterprises in the informal sector. Because of low surpluses in the informal sector, informal entrepreneurs should not be obliged to pay social security for their workers (Tokman 1989). The realist Marxist approach rests on a critical realist ontology and epistemology and the Marxist notions of crisis and class struggle. Castells and Portes (1989) introduce the concept of informal economy as a universal process of informalization. The process of informalization develops in response to economic crisis and restructuring. The main force behind the present process of informalization is the crisis of mass production and mass consumption in the late 1960s/early 1970s, which has led to a fall or erosion of the Fordist development model. In line with critical realist ontology and epistemology it is important to differentiate between essence, i.e. real structures and mechanisms that are independent of human consciousness, and appearance. The ontology of the critical realist approach in social sciences is that there exists a reality independent of human consciousness. Social structures are pre-existent but transformed and reproduced by social actors, and there are no regular conjunctions of social events and outcomes. The epistemological point of departure is that there are necessary and contingent relations between objects and events (Yeung 1997). In order to explain a phenomenon or an event, one has to isolate its causal powers and generative mechanism. A distinction is drawn between three analytical levels: the real, the actual and the empirical. Put simply, the real denotes the events and their structures, causal powers and generative mechanism that exist whether one has knowledge of them or not. The actual is where mechanisms and counter mechanisms meet and events are modified, i.e. in this case where informalization and the introduction of social standards meet. The events may not be realised at the empirical level. The empirical refers to the outcome of the mechanisms in a time-specific and a placespecific context, i.e. what one actually observes. Whether a mechanism is realised at the empirical level at all, and how it appears if it is realized, is a matter of contingent relations created by time-specific and place-specific factors. Marginalisation and poverty are only one outcome of the process of informalization. Hence, informalization cannot be defined as survival strategies by the desti-

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tute, but should be understood as a specific form of a relationship of production (Castells and Portes 1989). Formal and informal enterprises are closely connected, but the nature of formal-informal relationships is due to time-specific and placespecific conditions. Moreover, when actors in the formal economy defend themselves against crises, this has implications for actors in the informal economy and may challenge existing class structure (Portes and Schauffler 1993). In their policy recommendation, Portes and Schauffler (1993) argue that it is necessary to draw on both PREALC and De Soto. State intervention, for example in the form of development programs for entrepreneurs, is required in order to assist subsistence activities to become dynamic small firms. Regarding deregulation, flexibility is required for firms to be able to adjust the size and composition of labor according to changing economic conditions. Protective regulations regarding wages and working conditions should remain. In sum their strategy implication resembles the neostructural. It was not until 2002 that the ILO adopted a concept of informal economy referring to “..informal employment (without secure contracts, worker benefits, or social protection) both inside and outside informal enterprises.” (ILO 2002, 12) All of the above theoretical approaches to informalization disclose at least some reluctance towards regulation of the informal sector. In contrast, there has been a growing concern with international labor standards and corporate codes of conduct since the 1990s. This concern is basically directed at informalization of formerly formal work. The wider concepts of informalization by Castells and Portes (1989) and the ILO (2002) capture this. 18.2.1 International labor standards curb informalization Monitoring of the ILO declaration consists of annual national reports and global reports every three years. There are no sanctions as such in cases of no compliance. Moreover, it is explicitly stated that the principles should not be used for protectionist measures and that “the comparative advantage of any country should in no way be called in question” (ILO 1998, 2). However, for moral reasons and in order to avoid a race to the bottom, trade unions and various groups of labor activists promote a social clause that links international labor standards to trade sanctions. The WTO, the ILO or the two in partnership should act as enforcing organizations. It is argued that higher labor standards may have a positive macroeconomic impact. The thinking is that freedom of association and collective bargaining may increase wages. Higher labor standards that lead to higher wages may raise global demand and result in faster growth and thereby benefit economic development in the South (Hepple 1989, Heintz 2003). This gives connotations to neostructural development theory. The point is for countries in the South to construct competitive advantages in high-quality economic activities that can attain higher prices in the market and lead to demand-induced growth. International labor standards that lead to higher wages may contribute to such a process provided

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that it compels foreign buyers and consumers to pay for the cost of compliance. Although neostructualists favour international labor standards, they do not argue for a social clause. Advocates of the realist Marxist approach, however, support the introduction of a social clause, but only under certain conditions (below). 18.2.2 International labor standards lead to more informalization Neoliberals and representatives of the South Centre in Geneva share the view that international labor standards that are subject to a social clause will be misused for protectionist purposes and that it will lead to more informalization (Bhagwati 1995, Singh and Zammit 2003). This is also an orthodox Marxist stand (Silver and Arrighi 2001). Unlike proponents of a social clause, opponents argue that the level of labor standards should be decided on the basis of the structure of the economies in question, and that strict standards in the South may impede economic development in the long run. More concretely, higher labor standards that strengthen trade unions will result in higher wages and thereby restrict total employment. Moreover, a decrease in trade due to protectionism will result in a flow of workers from a relatively well regulated export-oriented industry to an unregulated informal economy directed at the domestic market. According to the orthodox Marxist stand, capitalism as such serves a positive function by enhancing industrialization and exports because this makes the working class strong. However, unlike the neoliberal stand, the problem of informalization is attributed to finance capitalism which represents a set-back to this process. This is in line with Lenin’s criticism of finance capitalism and imperialism. There are also other writers with a Marxist approach who link informalization and adverse working conditions to “neoliberal globalization” (Munck 2002). A reason to reject a social clause in this respect is that the WTO is considered an agent of “neoliberal globalization” and part of the cause of the problem rather than a solution. Regarding a race to the bottom, Bhagwati (1995) claims that it is not documented that firms shift production due to stricter regulations, and that it is unlikely that countries change regulations due to competitive pressure from countries with laxer regulations. However, case studies reveal that one cannot dismiss that stricter environmental regulations and enforcement have contributed to relocation and outsourcing (Knutsen 2000). In the case of working conditions it is even more difficult to reject that laxer labor standards matter to locational changes because this is intrinsically linked to the cost of production. It is first and foremost in laborintensive industries that are difficult to mechanize and automate that this is an issue, but cost-cutting is also becoming a concern in more technologically advanced

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industries directed at higher quality market niches (Kaplinsky 2000). It is also a case in point that mere pressure to shift production to countries with a laxer labor regime is sufficient to undermine the rights and power of workers (De Martino 2003). In the North fierce international competition is used as an argument to propose laxer and more flexible labor legislation pertaining to working hours, pensions, sick leave etc. The notion of a race to the bottom does not only address competition between countries in the North and the South. Pressure on workers in the South for flexibilization and cost reduction in order to attain market shares in the North increases. Findings from a study of the textile and garment industry in Mexico and China reveal that a comparative advantage based on cheap labor creates employment but ot higher wages and that working conditions deteriorate (Chan and Ross 2003). 18.2.3 Civic rights curb informalization On the one hand, if working conditions in formal firms approach working conditions in the informal economy, the whole economy would be informalized. On the other hand, introduction of imported labor standards and extensive labor regulation in labor-intensive economies will lead to a rise in the informal economy because firms make use of informal work to bypass state laws. Portes (1994) thinks that the solution to this dilemma is to protect workers’ rights and the flexibility of firms at the same time. Civic and basic rights such as those that are included in the ILO declaration should be subject to a social clause to be enforced by the WTO. However, it should be the direct violator and not the state that should be sanctioned in cases of no compliance. This also means that it would be possible to penalize companies from the North that are involved in adverse working conditions in the South. In contrast, survival rights and security rights should be tailored to local conditions and open to bargaining between workers, employers and the state, facilitated by adherence to the international civic rights. A study of 14 countries in Latin-America concludes that an increase in civic rights does not necessarily result in higher shares of informal employment (Galli and Kucera 2004). This supports Portes (1994), but contradicts De Soto (1989). However, the case of Sri Lanka illustrates the difficulties involved in making civic rights a means to protect the survival rights. In Sri Lanka there have been instances of union busting and dismissal of workers who have attempted to organize in free trade zones. This is despite the fact that Sri Lanka is a member of the ILO and has signed the conventions that the ILO declaration is based upon. When the Factories Bill was amended in 2002 the limit on overtime in the textile and garment industry increased from 100 hours a year to 60 hours a month. This can partly be attributed to pressure from the IMF in order to enhance the mobility and flexibility of work (Clean Clothes Campaign 2002; Dent 2002). The case illustrates the problem of incompatible requirements by international institutions, i.e.

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the ILO and the IMF, and that the working class is weakened with the acquiescence of the state. Downgrading of labor becomes a way of constructing a national competitive advantage. There are also other authors who criticize the strong focus on the ILO civic rights and argue that they mainly reflect needs and interests of the labor movement in the North. In the South promotion of civic rights is not sufficient. Survival rights such as a living wage, restrictions on overtime and safe working conditions must be given more emphasis and dealt with directly. It is not a social clause that is called for, but a South-South agreement on a living wage (Chan 2001; Chan and Ross 2003).

18.3 The case for a realist Marxist approach By imposing social standards that are too strict, enterprises may externalize production and informalization may increase. However, it is important to prevent existing formal activities from going informal, and counteract a race to the bottom among countries in the South. The realist Marxist approach is fruitful as it captures the complexity of informalization processes and their outcome, which in turn is necessary in order to devise selective strategies that can prevent ill effects. There is, however, little difference in policy recommendations by proponents of the neostructuralist approach and the realist Marxist approach regarding informalization in the South. In his neostructuralist contribution, Tokman (1993) rejects informalization as a universal process because of structural differences in the North and the South. The problem is that the description of informalization in the North and the South becomes somewhat stylistic and misses out the complexity of the processes. Segments of the labor market in the North have properties more similar to the description of the labor market in the South (Peck 1996), and countries such as South Korea and Taiwan have suffered from labor shortages since early in their development process. More importantly, the conceptual distinction between informalization in the North and South tends to overshadow the fact that formerly formal enterprises go informal in the South. This in turn may require other solutions than when the objective is to provide employment to the already unemployed and the new entrants to the labor market. In contrast, Portes, Castells and Benton (1989) argue that informality is a universal concept, but that the outcome is subject to contingency and differs with timespecific and place-specific conditions. They also imply that crisis is the generative mechanism of informalization. This differs from the analysis of Tokman (1993) that is based on the empirically observable. His notion of structure is of something concrete. It is the place-specific context in which informality takes place that

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represents the structures that explain informality. Hence, because the context differs in the North and the South, explanations also differ. One analytical criteria as to whether a proposition can be considered a generative mechanism in critical realism is that the proposition is exclusive (Yeung 1997). Whereas Portes, Castells and Benton (1989) focus on the “present” crisis since the 1970s, informality in the South has been an issue before this. However, both “present” informalization in the North and the South and “previous” informalization in the South can be explained by tendencies to crises in capitalism. The concepts of primitive accumulation and accumulation by dispossession as applied by Harvey (2003) shed light on this. There are inherent tendencies to crises in capitalism, and “capitalism always requires a fund of assets outside of itself if it is to conform or circumvent pressures of overaccumulation” (Harvey 2003, 143). This can be attained by opening up new territories to capitalism or it can actively create an outside by “[throwing] workers out of the system at one point in time in order to have them to hand for purposes of accumulation at a later point in time” (Harvey 2003, 141). Primitive accumulation refers to how capital accumulates as a condition for the emergence of capitalism in the first place. It is also applied in explaining the transition to capitalism in late-comer countries. Transition to capitalism implies that land is privatized, resident populations are expelled and assets such as land, new sources of raw material and labor are released at a very low price. Idle capital can turn this into profitable use and thereby counteract a crisis of overaccumulation. This shows how the argument that informality in the South originates in a mismatch between demand and supply of labor created in the transition to capitalism can be led back to crises in capitalism. Accumulation of dispossession also denotes accumulation based on assets at a very low price. The difference, however, is that accumulation of dispossession takes place after primitive accumulation has led to expanded reproduction. Workers are dispossessed, for example by a roll-back of existing protective regulations and cuts in social welfare arrangements in order for capital to increase profits. An “outside” for capital to take advantage of is created inside the capitalist system. Accumulation of dispossession is something that has increasingly taken place both in the North and the South since the early 1970s. In the South it exacerbates existing problems of informality and represents a set-back to expanded reproduction. Understood this way a universal concept of informalization as applied in the realist Marxist approach makes sense.

Sources Bangasser, P. E. 2000. The ILO and the informal sector: an institutional history. Employment Paper 2000/9. Geneva: ILO. Benería, L. 2001. Shifting risks: new employment patterns, informalization, and women’s work. International Journal of Politics, Culture and Society, 15 (1): 27-53.

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Bhagwati, J. 1995. Trade liberalisation and fair trade demands: addressing the environmental and labor standards issues. World Economy, 18 (6): 745-759. Castells, M. and A. Portes. 1989. World underneath: the origins, dynamics, and effects of the informal economy. In The informal economy. Studies in advanced and less developed countries, eds A. Portes, M. Castells and L. A. Benton, 11-37. Baltimore: Johns Hopkins University Press. Chan, A. 2001. Chinese workers under assault. Armonk: M.E. Sharpe. Chan, A. and R. J. S. Ross. 2003. Racing to the bottom: international trade without a social clause. Third World Quarterly, 24 (6): 1011-1028. Clean Clothes Campaign 2002. Update on Sri Lanka workers struggle. September. http://www.cleanclothes.org./urgent/02-09-18.htm Dent, K. 2002. The contradictions in codes: the Sri Lankan experiences. In Corporate responsibility and labor rights, eds R. Jenkins, R. Pearson and G. Seyfang, 135-145. London: Earthscan. De Martino, G. 2003. Free trade or social tariffs? In The Handbook of Globalization, ed. J. Michie, 402-412. Cheltenham: Edward Elgar. De Soto, H. 1989. The other path. The invisible revolution in the third world. London: I. B. Tauris. Galli, R. and D. Kucera. 2004. Labor standards and informal employment in Latin America. World Development, 32 (5): 809-828. Hart, K. 1973. Informal economy opportunities and urban employment in Ghana. The Journal of Modern African Studies, 11 (1): 61-89. Harvey, D. 2003. The New Imperialism. Oxford: Oxford University Press. Heintz, J. 2004. Global labor standards: their impact and implementation? In The Handbook of Globalization, ed. J. Michie, 216-233. Cheltenham: Edward Elgar. Hepple, B. 1999. Labor regulation in internationalised markets. In Regulating international business. Beyond liberalization, eds. S. Picciotto and R. Mayne 183-202. Houndsmills: Macmillan. ILO 1998. The ILO declaration on fundamental principles and rights at work. http://www.ilo.org/public/english/standards/relm/ilc/ilc86/com-dtxt.htm ____ . 2002. Women and men in the informal economy. Employment sector. Geneva: ILO. Kaplinsky, R. 2000. Spreading the gains from globalization: what can be learned from value chain analysis. IDS Working Paper 110. Sussex: Institute of Development Studies. Knutsen, H.M. 2000. Environmental practice in the commodity chain: the dyestuff and tanning industry compared. Review of International Political Economy, 7 (2): 254-288. Munck, R. 2002. Globalization and labor. The new “great transformation”. London: Zed Books. Peck, J. 1996. Work-Place. The social regulation of labor markets. New York: The Guilford Press. Portes, A. 1994. By-passing the rules: the dialectics of labor standards and informalization in less developed countries. In International labor standards and economic interdependence, eds. E. Sengenberger, and D. Campbell, 159-176. Geneva: ILO. Portes, A. and R. Schauffler. 1993. Competing perspectives on the Latin American informal sector. Population and Development Review 19 (1): 33-60. Portes, A., M. Castells and L. A. Benton. 1989. Conclusion: The policy implications of informality. In The informal economy. Studies in advanced and less developed countries, eds. A. Portes, M. Castells and L. A. Benton, 298-311. Baltimore: Johns Hopkins.

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Singh, A. and A. Zammit. 2003. Globalization, labor standards and economic development. In The Handbook of Globalization, ed. J. Michie, 191-215. Cheltenham: Edward Elgar. Silver, B. J. & G. Arrighi. 2001. Workers North and South. Social Register: 53-76. Tokman, V. E. 1978. An exploration into the nature of informal-formal sector relationships. World Development, 6 (9/10): 1065-1075. Tokman, V. E. 1989. Policies for a heterogeneous informal sector in Latin-America. World Development, 17 (7): 1067-1076. ____ . 1993. Labor markets and employment in Latin American Economic Thinking. In Development from within. Toward a neostructuralist approach for Latin America, ed. O. Sunkel, 127-149. Boulder: Lynne, Rienner. World Bank 2005. World Development Report 2005. Oxford: Oxford University Press. Yeung, W. 1997. Critical realism and realist research in human geography: a method or a philosophy in search of a method? Progress in Human Geography, 21(1): 51-74.

19 Building or Repairing Institutions: Microcredits in Argentina Martina Fuchs, Department of Economic & Social Geography, University of Cologne, Cologne, Germany.

19.1 Introduction Firms have to keep investing if they want to keep up with the competition. But they are not always able to raise the money themselves. Arranging for credit can be particularly difficult for small companies, especially those that are not part of transnational corporations. And small companies do need money – not just at the outset, to start up, but later on as well, for innovation or simply to maintain machinery and equipment. Often, their limited access to credit is an outcome of institutional arrangements that were designed to serve larger firms. Moreover, some entrepreneurs have to invest in a volatile financial environment. This problem is especially common in regions on the periphery of the world system. There, currencies are rarely stable in the long term. Thus, arranging a business loan is often a risky venture for entrepreneurs. And much is at stake: the region’s development is often dependent on their success. International development policies have been in place since the 1990s to support micro-finance for small companies. Development agencies now recognize the immensity of the problem arising from unstable currency and inflation. This new awareness is reflected in some shifts in development policy. Previously, the policy discourse was dominated by the Washington Consensus. In that vein, the International Monetary Fund (IMF) and the World Bank followed an unswerving path of deregulation. But after the deep financial crises that hit Mexico (1994/1995), South East Asia (1997), Russia (1998), and Argentina (2001), the major players in international development began to change their tune. Stabilization of financial systems became a policy priority. Concurrently, the promotion of microfinance came into the picture – a means to facilitate borrowing by small companies. As the financial system stabilized and the conditions for small enterprise improved, entrepreneurs would supposedly gain easier access to credit. The campaign did not envision creating equality through an equal distribution of capital or goods to meet basic needs. Rather, the idea was to provide equal chance for success. In practice, that would entail creating opportunities to enter new markets. Concretely, this means offering access to financial markets on the micro level. Doing so amounts to a new approach to development based on a specific understanding of the role of place and space. This conception has given impetus to improvements in the institutional framework for the functioning of market economies all over the world. Inherent in the notion of ‘institution building’ is the possibility of building up new institutions purposefully. 231 J. Gatrell and N. Reid (eds.), Enterprising Worlds, 231–241. © 2006 Springer.

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As our case study of Argentina will show, efforts to build institutions in the area of microfinance will succeed or fail depending on the overall institutional arrangement that influences the possibility to borrow money. Over the past few years, the institutional arrangement in Argentina has had to cope with sudden and severe swings in the value of the currency, inflation, and floating exchange rates. In that highly volatile economic environment, the instability of the prevailing institutional arrangement set the stage for microcredits. This innovative scheme was promoted by the Argentinean government and international organizations. Thus, microfinance was initiated by actors who were already playing a powerful role in the institutional arrangements. But it was not only their control that made the innovation spread. It took root because there was a need for it at the local level. Indirectly, its proliferation was a result of the crisis in the institutional arrangement. In this paper, we examine this institutional arrangement. Its direct influence on the spread of microcredits is distinguished from its indirect influence by drawing out the inadequate institutional response to the financing needs of small companies. First, however, we specify the conceptual framework that allows us to integrate the direct and indirect outcomes in an institution-oriented analysis.

19.2 The conceptual framework of the institutional arrangement and regionally bounded institutions Before discussing institutions, we have to consider how they are defined. Underlying many definitions is the assumption that an institution consists of rules that regulate economic transactions and social interactions. In this general sense, institutions constitute the conditions for and the consequences of individual action. Thus stated, institutions fall squarely in the realm of the economic and social sciences. Within that general debate, economic geography is particularly interested in the institutional framing of markets. This topic covers financial markets but also spans the processes of production and reproduction. Thereby, it includes socioeconomic regions and spatial relations. In that light, the creation of new financial markets for small businesses via microcredits warrants attention for its regional and spatial implications. Several analyses in economic geography have demonstrated that microfinance is not a ubiquity but rather a commodity. Furthermore, its social and spatial distribution has been described as unequal and often unfair (Taylor & Thrift 1983; Schamp & Thierstein 2003; Tickell 2000, 242). This leads us to query whether microcredits actually do constitute a step towards social and regional balance, as generally assumed, or whether they are mainly a symptom of crisis. The World Bank and the IMF speak of ‘institution building’. This brings another connotation of the term institution into the discussion. It implies that institutions

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can be made intentionally. To do so would call for new rules and innovative organizations, the latter serving to frame the new rules of conduct. From the perspective of intentionally made institutions, we can see how the notion of ‘institution building’ fits into the general conceptual framework. It represents the purposeful effort of specific actors to create new institutions. This perspective also opens our eyes to the role that the actors play in globalization, particularly as global financial markets turn increasingly volatile. The scope of this paper does not permit us to discuss the topic of global financial markets in any depth. Therefore, we merely allude to some pertinent aspects of it: the growth of the offshore financial markets since the 1970s/1980s; the allurement of ‘free money’; the seductive prospect for governments of easy money on international financial markets; and the accumulation of debt, opening wide the door to the influence of international actors such as the World Bank and the IMF. The institutional approach allows us to adopt a perspective that includes different actors following diverse interests. We have already mentioned the significance of two players, the World Bank and the IMF. Historically, their significance lies in their specific approach to introducing the market economy in different parts of the world. Nowadays, it also includes their role in the stabilization of financial systems. At the national level, the main actors in Argentina are the government and members of the country’s traditional elite. All actors champion their own concept of economic growth. At the same time, they support institutions that uphold the old structures and maintain the traditional hierarchies in society (see Lash & Urry 1994, 285). Over the past twenty years, the actors have weathered the winds of change in Argentina’s institutional arrangement. One of the changes involved the introduction of a stabilization policy, which induced the abrupt deregulation of the financial system. The impetus for another change came from some NonGovernmental Organizations (NGOs) that operate at the national and the international level. Generally speaking, their objective was to make access to microcredit easier for the underprivileged members of society. All these actors play a role in shaping the institutional framework for the access to finance in Argentina. But these are not the only institutions that promote access to microfinance (fig. 1). The institutional arrangements that we have been discussing so far differ from the institutions that exist only within local boundaries. In Argentina, some of these regionally bounded institutions are a direct outcome of programs resorting under the broader institutional arrangement. Public support for microcredit schemes is a case in point. In various cases encountered in our study, the institutions were locally grown. We refer to them as ‘institutions from below’, in contrast to the top-down programs initiated by the Argentinean government. These institutions from below are not a direct result of political intervention. Indirectly, though, they are usually an outcome of the overall institutional arrangement in Argentina in the sense that they are intended to compensate for its deficiencies.

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Fig 1. Conceptual Framework

Created by Author.

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Taking an institution-oriented perspective, we are able to overcome the limitations posed by the universalistic assumptions of neoclassical approaches (Linge & Schamp 1993, 2f). We do so by analyzing the specific institutional arrangements and regionally bounded institutions that affect access to credit at the local level. In the ideal world of neoclassical economics, money performs three tasks: it is a means to calculate; to exchange or pay; and to sustain the value of a currency. In many real economies, however – and exceedingly so in Argentina – the institutional arrangement is fraught with friction, problems, and deficiencies, as we shall see in the next section.

19.3 Institutions relevant to microcredit in Argentina 19.3.1 The institutional arrangement and regionally bounded institutions Argentina’s currency has been unstable for decades. Under the military dictatorship, the country accumulated a high level of foreign debt. This built up to a crisis in 1989, when interest rates and inflation rose rapidly. In 1991, the government of President Menem introduced a period of stability by passing the Convertibility Law. It pegged the Argentinean currency – at that time, the Austral – to the US Dollar. It also stipulated that the Central Bank could only issue money if sufficient reserves of gold and foreign currency were on deposit. This prevented inflationary growth of the amount of money in circulation. At the same time, the Central Bank could not conduct an autonomous monetary policy. As a consequence, inflation declined and interest rates remained stable. Because the value of the Peso was high compared to the US Dollar, some companies were able to purchase foreign machinery and other technologies. But it was very difficult for others – especially export-oriented companies – to sell their products in other countries; they were simply too expensive. The Central Bank did not have any instruments to improve the country’s export position and thereby expand its economic activity. Production for export, being very expensive anyway, slid into a worse situation when Brazil devalued its currency in 1999. This made it even harder for Argentinean companies to compete. At the same time, the government was under duress. It had to pay off the debts; it had to pay the salaries for a broadly ineffective administrative apparatus; and it did not dare cut off its ‘clientele’, who provided a form of support that led to high expenditure. Rates of unemployment rose, along with the share of work in the informal sector. December 2001 was marked by uprisings. Then, when President De La Rúa resigned, an interim government took over under R. Saa. Speculation arose that the Peso would be devalued, setting off a run on the banks. The government froze the bank deposits, fearing a flight of capital. The money was locked up like livestock in a corral, spawning the term ‘corralito’. The new government formed by Duhalde lifted the restrictions on the value of the currency. Furthermore, large shares of the loans and savings deposits held in US Dollars were converted to Pesos.

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A liquidity problem already existed during the period of stability and the restricted issue of currency, but also during the crisis. At first the provincial governments, and later the central government, were unable to pay public employees. To meet the payrolls, the central and provincial governments issued surrogate money (a measure drawing reprimands from the IMF). The Argentinean government referred to the surrogate money as ‘government loans’. In the future, it claimed, people would be able to convert them back into Pesos – and at a profit, as the loans were interest bearing. But not everything could be purchased with surrogate currency; expensive goods, for instance, were excluded. People could not apply government loans to the balance on their credit cards, either. Nor could they exchange the surrogate currency with its surplus of interest; they could only roll it over, for a fee. Against this background, most people considered the surrogate currency worthless. The surrogate money issued by the central and provincial governments was a regionally bounded ‘top-down institution’. It should not be confused with the surrogate money of the barter networks, which emerged as an ‘institution from below’. The latter came into being in the mid-1990s. At that time, the stability policy made it difficult to borrow money for investment. Thus, as grassroots initiatives, people set up barter clubs to meet their needs. During the crisis of 2001/2002, about 5,000 barter clubs were spread across the country. In the beginning, they did not use money; their capital took the form of lists on the internet. As they grew, this method became cumbersome, and a form of ‘social money’, the ‘crédito’, was introduced. Participants in the barter clubs were supposed to act as ‘prosumers’: both producers and consumers. Some supporters of the scheme hoped to create islands free of capitalistic surplus accumulation and atolls of equal opportunity and reciprocal economic relations. Meanwhile, however, most of these networks have failed. As the barter networks grew very rapidly, the degree of personal relationships declined. The arm’s-length relations probably allowed the erosion of the ethical ideals through a lack of individual control. For example, some ‘créditos’ were counterfeit and had been forged. Moreover, although members of the barter networks were not supposed to use the social money for speculation, some did. In conclusion, the ‘créditos’ were intended to circumvent the problems of capitalistic money (such as accumulation of surplus), but by functioning as money, the currency became money, with all its negative implications (see North 2005, 230). Last but not least, the ‘créditos’ failed because there is enough regular money in circulation today. Many small businesses in Argentina fell into a state of crisis. This was partly due to the instability of the institutional arrangement. But it was also due to frictions in the regionally bounded institutions (such as government loans and social money). Both instability and frictions were symptoms of crisis rather than a general reaction to the problem of a volatile currency. The problem runs deeper than the ups and downs of the institutional arrangement, though. Access to credit is not well adapted to the needs of small businesses. In fact, even in the industrialized core

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regions of the world system, formal institutions do not usually respond very well to their needs. Indeed, when Argentinean entrepreneurs approach the formal institutions for resources to make investments, they encounter an institutional arrangement that can by no means be considered helpful. A clear indicator of its weakness is the fact that only between a fifth and a third of the population has a bank account of their own (Schreiner & Colombet 2001). In principle, Argentina has numerous financial intermediaries. There are commercial banks, along with savings and credit banks, operating as all-purpose banks. And there are specialized banks, such as investment banks, mortgage banks, development banks, and banks for factoring and leasing. Furthermore, the banking industry has undergone several reforms since the early 1990s. For a long time, however, the banks remained old-fashioned with regard to organization and technology. Additionally, in Latin America, local stock markets are inefficient and are really only open to the stronger and larger companies. This formal institution is therefore irrelevant to smaller companies. By and large, the same applies to venture capital. In general, a conclusion that Biles (2004, 170) drew for Mexico also applies to Argentina. That is, while the transformation of the financial system may have promoted greater efficiency, it has failed to promote equity and accessibility. Small businesses are also hampered in their quest for credit by the informal rules of conduct that pertain in this formal arrangement. For example, the larger and stronger companies in Argentina have more possibilities to obtain long-term credit on favorable terms. Usually, smaller companies can only get short-term loans, which are expensive. This is not only a result of the better solvability of the larger firms. They also wield more bargaining power, which is often linked to their longstanding relations with a bank. The informal institutions are important because the Argentinean banking system has so few formal rules on creditworthiness. This means that banks do not formally have access to information about borrowers. Besides, the collateral of the smaller companies may seem of dubious value to the banks. This is especially true for mortgages. In Argentina, the title to property and real estate is not always recorded in a public land registry; the only record of ownership may be a private contract. If the land or the building is to be used to guarantee a loan, a private contract does not provide sufficient security for the bank. Because this system for getting access to credit is inadequate for small businesses, it is common for entrepreneurs to borrow money from family members, relatives, or friends. These informal institutions of borrowing and lending have their own peculiarities. Usually credit is given only if one of the parties has surplus funds; often, no interest is charged. If the entrepreneur cannot find a credit grantor, he will simply not invest. And this ‘solution’ is presumably widespread in Argentina. The above discussion has made it clear that extending credit is not only an economic transaction but also a social process involving the transfer of financial resources. It may be seen as a business deal with the expectation of a return. Alternatively, it may be seen as a private matter with the expectation of economic or

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social compensation (see Lee 1999, 210; Leyshon & Thrift 1997, 8-11). This social dimension is also important with respect to microcredits. 19.3.2 Microcredits By now, the surrogate money of the government and the ‘créditos’ of the barter networks have lost their importance. Their role is being taken over by microcredits. This institution offers a means to solve the problems caused by a lack of finance for small companies. Microcredit is central to a number of innovations in microfinance – including mortgages, savings deposits, transfer payments, and insurance – for people in countries of the periphery, who usually do not have access to such services. A driving force in its spread was the establishment of the Grameen Bank in Bangladesh, founded in 1983 by Muhammed Yunus. As a success story, it served as a model for the spread of microcredits to countries where so many people live in poverty. During Argentina’s crisis, microcredit agencies responded better to deficiencies in the institutional arrangement than the formal financial intermediaries could. The window of opportunity for microcredits opened wider during the financial crisis of 2001/2002. The few existing agencies for microfinance were quickly able to resume their tasks. Larger banks simply did not offer loans; some still did not provide credit until 2003. Since the crisis, the importance of microcredits has grown immensely in Argentina, though by far not as much as in other Latin American or Asian states (Schreiner & Colombet 2001). The size of a microcredit in Argentina ranges from 100 to 10,000 US Dollars, depending on the debtor and the aims of the lending agency. But in general, most loans are for less than 1,000 US Dollars. Typically, loans must be serviced once a week, every other week, or once a month. The security of the debtor is sometimes guaranteed by deposit of some collateral (such as objects of value). More often, though, the debt is secured by means of social control. In that case, individuals come forward to vouch for the debtor. Such vouchsafed guarantees are often bundled. The credit is then given to members of a group (typically three to eight persons). They promise to provide each other’s security in a reciprocal manner (hence the name ‘solidarity groups’). In some cases, credit is granted to chains of debtors, whereby the loan is secured by a chain of social control (Matta & Zarazaga 2005, 12-14). A problem may arise from the importance of social relations, however. The debtors may become dependent on their creditors, who are often family members, relatives, or friends. It is easy to imagine what would happen if the company did not thrive. Apart from economic problems, the entrepreneur would be faced with social problems. Most instances of microcredit in Argentina are derived from public-private partnerships (‘fideicomisos’) or banks. The spectrum of microcredit agencies extends from the large Banco Ciudad in Buenos Aires to small agencies that offer specific

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credits for poor immigrants from Bolivia. In some countries, the provision of microcredits has already become a profitable business. In Argentina, however, many credit grantors argue that charging market rates for interest payments would put the loans out of their clients’ reach. The reason lies in the high operating costs – the extensive administration and the high overhead – of microcredit agencies. Thus, the banks usually receive government grants that lower the interest rates on microcredit. Similarly, ‘fideicomisos’ receive grants from the government, both national and state level. Often, they also get support from local chambers of commerce or industry and other local actors. Furthermore, there are independent microcredit agencies that receive money from NGOs. Today, global organizations such as the UN and the World Bank give strong support to microfinance. All of these sources help keep interest rates low. But some agencies want to become independent of aid in the future, hoping eventually to operate on a market basis. They see the donations and other forms of support as capital with which they can start up in business as autonomous microcredit agencies (Matta & Zarazaga 2005, 15-20). Unlike other kinds of finance, microcredits are combined with a transfer of knowhow. The debtors are offered a consulting service. The microcredit agency has an outreach program, with assistants who visit the debtors regularly to discuss their success and problems. The agency usually runs general training programs related to credit and sometimes programs for alphabetization or psychological support. Additionally, there are specific training programs for the debtors. For example, there are courses in how to start a business, how to innovate successfully, how to solve technical problems, and so on. Many of the microcredits are only available to women. In fact, new opportunities are opening up for more companies than ever before. However, the chances of success are limited. Consider companies in the informal sector. The only ones that will be able to break out of the informal sector are the strong and healthy ones. They want to gain access to the formal sector so they can take advantage of public health insurance, unemployment insurance, pension insurance funds, etc. (see Biles 2004, 170). The same applies to equal chances with regard to spatial disparities. Because the population in rural Argentina is so widely dispersed, it is difficult to provide counseling and training programs in rural areas. Not surprisingly, about three-quarters of all microcredits are assigned to entrepreneurs in the large urbanized areas (Matta & Zarazaga 2005, 16, 18). Thus, microcredits are regionally bounded institutions in Argentina; they virtually exclude businesses in rural areas and smaller cities. That said, some recent microcredit promotion efforts have been directed toward the indigenous population in the Northern Andean region.

19.4 Conclusions In this paper, we have shown that the limited opportunity to enter financial markets in Argentina is mainly a result of the institutional arrangement. The problem lies in its drastically alternating policies – from seeking stability to accepting inflation and floating the exchange rates. The predicament of enterprise is only getting

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worse, especially for smaller companies. They are the most vulnerable to the formal and informal institutions of the financial intermediaries. Furthermore, we have given some examples as evidence of a trend. It appears that if the institutional arrangement exhibits more deficiencies over a longer period, the result may be the creation of new regionally bounded institutions. These new institutions would be more able to respond to the need for investment capital. By considering the example of Argentina, we have shown that government loans and social money schemes operate as such institutions. They serve a need, even though they are not long lasting and do not really offer sustainable solutions to the problems connected with the Argentinean currency. Microcredits also constitute such an institution. As we have demonstrated, the microcredits are a direct outcome of the institutional arrangement that was introduced from the top down. The Argentinean government, along with other actors at the national and international scale, launched the scheme as a form of ‘institution building’. Yet we have also demonstrated that microcredits grew from the bottom up as well in reaction to the deficits of the institutional arrangement. In many cases, microcredits were the only way out of hard and difficult situations. They may therefore be considered a ‘repairing institution’. Interpreting the innovation thus, we are by no means ignoring the fact that a great deal of the work that microcredit agencies do amounts to lending small companies a helping hand in tricky situations. However, only some companies in selected areas can use the lines of credit. The vast majority of Argentinean companies are still in a precarious situation. The microcredit agencies are dependent on donations. That poses an ethical – and political – problem. In short, the volatility of the currency and the insufficiency of the institutions providing credit for small enterprise are issues that have to be tackled at a more general level – the level of the institutional arrangement. Last but not least, we should note that any improvement in the chances of success would imply taking an ethical stance. It would entail a specific understanding of ‘development’, one supporting the spread of money as the major means in social life and social exchange.

Sources Biles, J. 2004. Globalization of Banking and Local Access to Financial Resources: A Case Study from Southeastern Mexico. Industrial Geographer 2 (2): 159173. Lash, S., Urry, J. 1994. Economies of Signs and Space. London, Thousand Oaks, New Delhi: Sage. Lee, R. 1999. Local Money: Geographies of Autonomy and Resistance? In Money and the Space Economy, ed. R. Martin, 207-224. Chichester etc.: John Wiley. Leyshon, A., Thrift, N. 1997. Money/Space. Geographies of Monetary Transformation. London, New York: Routledge.

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Linge, G.J.R., Schamp, E.W. 1993. Finance, institution, and industrial change. Spatial perspectives. In Finance, institution, and industrial change, eds. G.J.R. Linge, C. Rogerson, E.W. Schamp, 1-38. Berlin, New York: Walter de Gruyter. Matta, A., Zarazaga, R. 2005. Los servicios de microcrédito en la Argentina. Situación y posibilidades de la oferta de la sociedad civil y el sector público (forthcoming). North, P. 2005. Scaling alternative economic practices? Some lessons from alternative currencies. Transactions of the Institute of British Geographers 30 (2): 221-223. Schamp, E.W., Thierstein, A. 2003. Innovation, Finance, and Space. In Innovation, Finance, and Space, eds. E.W. Schamp, A. Thierstein, A., 1-6. Frankfurt/Main: Frankfurt University Press. Schreiner, M., Colombet, H.H. 2001. From Urban to Rural: Lessons for Microfinance in Argentina. Development Policy Review 19 (3): 339-354. Taylor, M., Thrift, N. 1983. The Role of Finance in the Evolution and Functioning of Industrial Systems. In Spatial Analysis, Industry and the Industrial Environment, eds. F.E.I. Hamilton, G.J.R. Linge, 359-385. Chichester: Wiley. Tickell, A. 2000. Finance and Localities. In The Oxford Handbook of Economic Geography, eds. G.L. Clark, M.P. Feldman, M.S. Gertler, 230-247. Oxford: Oxford University Press.

20 Bread or Circus? The Economics of Mega-Sporting Events Jeffrey G. Owen, Department of Economics and Management, Gustavus Adolphus College, Saint Peter, Minnesota

20.1 Introduction “Mega-events” such as the Olympic Games require large sums of public money to be spent on venues and infrastructure improvements. The general perception of the public and civic leaders is these events are an economic boon for the host cities and countries. An import element in fostering this perception is the use of economic impact studies (EIS), which invariably predict billions of dollars will flow into the local economy by such means as job creation and visitor spending. Expost studies, however, have not found evidence of positive economic impacts from mega-sporting events even remotely approaching the estimates in economic impact studies. In a review of studies on the economic impact of mega-events, Coates and Humphreys (2003) found “evidence of positive economic benefits from mega sporting events should be considered weak at best.”1 In recent years, cities in less developed countries have made a stronger push to host these events. It seems logical that a less developed country will have more to gain from long term growth opportunities. Matheson and Baade (2003) argue, however, that the prospects of mega-sporting events are even worse for developing countries. The opportunity costs of providing state of the art facilities are much higher and lack of modern infrastructure requires significant additional investment. Contrary to the claims of boosters, the expense of hosting mega-events will not be recovered either directly from event income or from increased economic activity. Instead, civic leaders face a tradeoff between the spectacle of mega-events or more mundane uses of resources such as education and public health. For a developing country with limited capital, pinning hopes of economic growth on mega-events could be a costly mistake. In what follows the mistakes of EIS pertaining to the Olympic Games will be examined. To gain perspective on how the expectations and experiences of developing countries may differ, we will look at China’s plans for the Beijing Games.

1

Coates and Humphreys [2003], p. 13. 243

J. Gatrell and N. Reid (eds.), Enterprising Worlds, 243–256. © 2006 Springer.

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20.1.1 The Fallacy of Economic Impact Studies Supporters of mega-events have made EIS a standard part of their public relations campaign. The benefits projected in EIS are commonly accepted by the public, media, and even academic circles with little or no critical evaluation. Short et al (2000) provides an example of a typical statement: “The promise of worldwide exposure and economic gain has made hosting these major and regularly scheduled sporting affairs a lucrative goal for aspiring cities around the world.”2 A closer look at the methodology of such studies reveals an appealing but fundamentally flawed line of economic reasoning that virtually guarantees a forecast of large economic benefits. The objective of economic impact studies is to measure new spending that occurs because of a project or event. This new money circulates in an economy, creating a multiplier effect that magnifies the initial impact and magnifies any mistakes in estimating the initial impact. The most common criticisms of EIS can be summarized as follows: treating costs as benefits, ignoring opportunity costs, using gross spending instead of net changes, and using multipliers that are too large. In many cases the cost of constructing facilities for an event is treated as a direct benefit to the local economy, based on the reasoning that this spending will go primarily to local labor and suppliers. With this single assumption, EIS turns the cost of the project into a benefit, onto which a multiplier will be applied. A benefit estimate that exceeds the expenditures has already been guaranteed. The following quote exemplifies the bizarre logic of this type of accounting: The initial construction of a $10 million sports facility provides an initial impact of $10 million on the local economy. This is the direct impact. Clearly, the construction of the facility will require concrete, steel, construction workers, and so forth. The money spent on these materials and services comprises the indirect expenditures, or the indirect impacts.3 Clearly, the initial cost of the project has now been counted as a benefit not once, but twice; directly and indirectly. If the economy is at full employment, the workers needed for the facility would have been doing something else: public investment crowds out private investment. During a period of high unemployment it could be argued that the project gives jobs to people who would otherwise be idle, in which case the expense of the facility is at best a transfer from one group to another; still not a benefit. The EIS for the Sydney Olympic Games purports to have been prepared “using the most up-to-date modeling techniques . . . and detailed financial information

2 3

Short et al (2000), p. 320. Hefner [1990], pp. 4-5.

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available.”4 These modeling techniques include treating revenues from ticket sales and tourist spending exactly the same as expenses from venue construction and operation of the Games. By putting revenues and expenses on the same side of the ledger, the study is able to project an increase of $5.1 billion to the Gross State Product of New South Wales. Opportunity costs—the value of alternative investments—are not considered in EIS. Alternative uses of local dollars could be a hospital, education funding, or even letting taxpayers keep their money for their own purposes. No consideration is given to how the funds for the project are acquired. If the money for the project comes from local residents, they would have spent that money if they had been allowed to keep it. The difference is the spending would have been spread over a much wider range of sectors in the economy instead of being focused on a particular area. By focusing spending on a particular area, large-scale projects make it appear as if they have created money. Spending on a project funded by local tax dollars does not create money any more than raking a yard creates leaves. Attempts to assess the impact of a project based on the spending an event creates can suffer from a similar error. EIS count all spending attributed to the event as increased spending in the local economy, when in fact a significant portion of it is business that is taken away from other local businesses that offer substitute leisure activities. These losses are ignored by EIS. This estimation problem may not be as severe for events with the stature of the Olympics. Most visitors attending the Games are likely there expressly for that reason. A greater concern is regular visitors avoiding the city during the Games, a literal “crowding out” effect. In one of the most carefully conducted EIS, the SLOC estimated a decline of 700,000 skier visits during the 2000 Games based on the experience of Calgary in 1988.5 Once an initial estimate of economic impact is obtained, a multiplier is applied. The size of the multiplier is determined by accounting for any “leakages” that might occur as local consumers spend their money outside the economy. Critics contend EIS often chose a multiplier that is too large—another source of overestimating benefits. The more critical problem with multipliers is that they magnify the errors made in calculating initial impact, especially by once again failing to recognize opportunity costs. The multiplier is applied to any new spending in the economy regardless of the source. If the multiplier does not depend on the spending source, then it is useless in the comparison of alternative projects—the multiplier cancels out. Much of the critique of EIS has focused on making a proper accounting of the money that actually flows into an economy because of an event. If this is done accurately, it is asserted, then a true measure of the economic value of the event will 4 5

Economic Impact Study of the Sydney Olympic Games, p. 1. 2002 Olympic Winter Games, State of Utah, p. 12.

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have been measured. This reasoning, however, is not consistent with the standard economic theory of gains from trade. At its core, EIS is a modern application of mercantilist economic principles. According to mercantilism, wealth is created through a positive trade balance—exports are good, imports are bad. Adam Smith was among the first to discredit the mercantilist line of reasoning. His critique of mercantilism in The Wealth of Nations describes well the fundamental error of EIS: The inland or home trade, the most important of all, the trade in which an equal capital affords the greatest revenue, and creates the greatest employment to the people of the country, was considered as subsidiary only to foreign trade. It neither brought money onto the country, it was said, or carried any out of it. The country therefore could never become either richer or poorer by means of it, except so far as its prosperity or decay might indirectly influence the state of foreign trade (435). Classical economic theory proposes mutually beneficial trade. Therefore internal trade within an economy keeps all the benefits of the exchange within the local economy, whereas in any trade with an external partner, only a portion of the benefit from the exchange benefits the local economy. Whether the local economy is the exporter or importer is irrelevant. Mercantilism treats trade as a zero-sum game; the winner is determined by following the money. Even the most thorough and careful critics of EIS have accepted its mercantilist premise. Baade and Sanderson (1997) claim “sports will induce economic growth only if they attract money from outside the city (exportation of services) or keep money inside the city previously spent outside the city’s walls (import substitution).” (103). If mega-events affect economies to the scale EIS suggest, it should be detectable by looking back at the performance of an economy after the event. As noted earlier, ex-post studies have consistently found little or no economic impact from such events. In a study of the impact of Super Bowls on local economies, Philip Porter (1999) found “no measurable impact on spending associated with the event. The projected spending and spillover benefits of regional impact models never materialize.”6 Of course the Olympics are an event of a larger scale than a Super Bowl, but a look at the 1996 Atlanta Games reveals a similar story. Table 1 summarizes the economic impact projections of the Atlanta Olympics EIS. The impact of the Games was projected to be $5.1 billion, divided nearly equally between direct spending by the Atlanta Committee for the Olympic Games (ACOG) for staging the games and spending by out-of-state visitors. Contrary to these projections, data and anecdotal evidence strongly suggest the Olympics had little effect on the local

6

Porter [1999], p. 61.

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Table 1. Projected Outputs of 1996 Olympics on Georgia’s Economy ($1994) Expenditure Category Direct Spending by ACOG Other Spending Spending by Out-of-State Visitors Grand Total

Direct and Indirect Total Spending Expenditures

Induced Output Total Output

1,529,758,000

1,141,903,000

1,444,322,740

2,586,225,740

20,000,000

20,000,000

23,944,000

43,944,000

1,265,363,037 2,815,121,037

1,145,994,764 2,307,897,764

1,364,364,452 2,832,631,192

2,511,359,220 5,141,528,960

Source: Atlanta Committee for the Olympic Games and The Selig Center for Economic Growth, (1995). economy. Macroeconomic indicators in Georgia and Fulton County show no discernible break in the pattern of per capita income growth or unemployment rates.7 In an ex post study, Baade and Matheson (2002) found a modest boost in employment that was short-lived. Even according to their most positive estimates, “the City of Atlanta and the State of Georgia spent $1.58 billion to create 24,742 full- or part-time jobs which averages out to $63,860 per job created.”8 There appears to have been a significant crowding out effect on the rest of the tourism industry. Table 2 shows convention attendance in Atlanta, which had been increasing steadily over the previous ten years, fell ten percent from 1995 to 1996. Hotel occupancy rates fell from 72.9% in 1995 to 68% in 1996 despite the Olympics. Due to the disruption caused by the Olympics, hotels and restaurants that would be expected to benefit from increased tourist traffic were actually hurt. “In other parts of town, many hotels and restaurants reported significantly lower than normal sales volume during the Games. Even shops and resorts in areas up to 150 miles away reported slower than normal business during the summer of 1996.”9 The reality was so much below expectations that some vendors who leased vending space for the Olympics from the city sued Atlanta, claiming they were misled about business prospects.10

7

2002 Olympic Winter Games, State of Utah. Baade and Matheson [2002] p. 28-29. 9 French and Disher [1997], p. 390. 10 “Olympic Vendors” [1997]. 8

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Table 2. Atlanta Tourism Indicators Year

Number of Conventions

Convention Attendance

Visitors

Hotel Occupancy

1988 1,623 1,737,800 N/A N/A 1989 1,662 1,800,792 N/A 61.80% 1990 1,721 1,883,546 N/A 62.20% 1991 1,854 2,152,386 N/A 60.40% 1992 2,105 2,503,522 N/A 63.10% 1993 2,321 2,753,412 6,058,000 67.40% 1994 2,410 2,985,641 7,009,900 71.90% 1995 2,560 3,102,455 7,342,000 72.90% 1996 2,280 2,780,000 6,695,000 68.00% Source: State of Utah, Governor's Office of Planning and Budget

Long-Term Impacts Beyond the standard projections of EIS, Olympic studies also include “legacy effects” related to the long-term impact of the Games. Legacy effects can be broken into two categories: (1) publicity effects of the Olympics as a promotional tool, leading to increased tourism and exposure to the worldwide business community; (2) developmental effects of the Olympics as the impetus for public investments in infrastructure. For example, legacy effects listed in the EIS for the Atlanta Games study emphasized three categories: facilities, media exposure for Atlanta and the state of Georgia, and community benefits, such as civic pride and a more cooperative urban culture. “The long-term beneficial effects on decisions regarding investment, trade, corporate relocation, government spending, convention sites, the location of major sporting events, and vacation plans will likely be among the most enduring, yet statistically untraceable, legacies of the Games.”11 The publicity effects of the Olympic legacy are related to the concept of a “world cities” hierarchy. According to Short et al (2000), “some of the most important global spectacles are sports mega-events such as the Olympics which reach a worldwide television audience and offer perhaps the best stage upon which a city can make the claim to global status.”12 Tourism is seen as a modern arena of economic competition among cities. “During this latest phase of globalization, when tourist attractions are highly prized, many cities are repackaging the old with new accommodations or accessibilities to re-present themselves as living history and to take advantage of the global tourism economy.”13

11

Humphreys and Plummer [1995], p.6. Short et al (2000), p. 320. 13 Short et al (2000), p. 319. 12

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In this context the Olympics are seen as an opportunity for a city to move up the ladder of world cities. Beijing has been classified in the second tier as a “major regional world city” along with cities such as Washington, Hamburg, and Cairo. China may see the 2008 Games as an opportunity for Beijing to join or even surpass the three Asian first tier cities: Tokyo, Singapore, and Hong Kong.14 There is no doubt that the Olympic Games trigger massive investments in urban infrastructure; it is an IOC requirement for any host city. But how well suited are these Olympic investments to the future growth and development of the local economy? The EIS for the 1996 Atlanta Games claims, “world-class facilities will be among the most enduring legacies of hosting the 1996 Olympics.”15 The facilities noted by the study include the Horse Park, Shooting Range Complex, and Rowing Center; none of which are likely to be heavily used after the Games. The primary facility, Olympic Stadium, became the new home stadium for Atlanta Braves baseball. Instead of providing a venue of high quality and instant historical significance for future track athletes, the stadium now serves as yet another chapter in the story of public subsidies for professional sports teams. Overall, Baade and Matheson (2002) found “only 31 percent of the ACOG expenditures were in areas that could reasonably be expected to provide a measurable economic legacy.”16 The legacy from building world-class facilities for athletes and spectators of obscure Olympic sports may simply be a legacy of expense. Sydney had plans for the long-term use of many of its venues, but four years later the arena that housed gymnastics and basketball is in receivership and “the State Government has been propping up other uneconomic venues since the Olympics to the amount of about $46 million a year.”17 EIS refer to legacy impacts as an additional benefit above and beyond the estimated economic impact since “legacy impacts are impossible to quantify, but can be identified and described.”18 The implication is the benefits are unquantifiable but quite large. It may well be that legacy effects are difficult to measure because the effect is too small to have a meaningful impact on economic development. Expost studies have found no evidence of improvements in economic growth or living standards due to mega-events, casting some doubt on the legacy effects of the Olympics, or at least whether such effects are transformed into real economic benefits to the local economy. Instead of a lasting legacy “the evidence suggests

14

See Derudder et al [2003]. Humphreys and Plummer [1995], p.4. 16 Baade and Matheson [2002], p. 30. 17 “The Pain of the Games” [2004]. 18 2002 Olympic Winter Games, State of Utah, p. 33. 15

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that the economic impact of the Olympics is transitory, one-time changes rather than a ‘steady-state’ change.”19 Developing countries with limited infrastructure potentially have the most to gain by investing in public works projects, but if those resources are invested in areas that will create little or no long-term benefit, they also have the most to lose. Countries with limited capital simply cannot afford billion dollar mistakes. Beijing There is no doubt that China expects substantial economic benefits when Beijing hosts the Olympics in 2008. Essex and Chalkey (1998) examined each of the modern Olympic Games (begun in 1896) in terms of their impact on urban change. They divided the Games into three categories: low impact (minimal infrastructure investment, such as Mexico in 1968 and Los Angeles in 1984), Games focusing mainly on additional sports facilities (such as Atlanta in 1996), and Games stimulating transformations of the built environment (such as Tokyo in 1964 and Montreal in 1976). As the Games have grown in stature so have the ambitions of host cities, so more recent games are more likely to be in the third category. This certainly appears to be the case for Beijing. The Beijing Organizing Committee of the Olympic Games (BOCOG) is charged with the planning and administration of the 2008 Games. According to December 2001 budget forecasts (see Table 3), capital investments on venues and non-sports infrastructure will be US$14.257 billion. Of this only about 13% (US$1.872 billion) will be spent on sports venues and the Olympic Village, which is three times larger than spending on venues for Atlanta. Table 4 shows the planned investment on Olympic venues. Of the 37 facilities listed, 16 are new and almost all but three require some type of upgrade. The biggest projects are Wukesong Indoor Stadium (US$282.65 billion) for basketball and National Stadium (US$246.71 billion) for athletics and ceremonies. Surprisingly, 60% of the Non BOCOG budget is for environmental protection. It appears that Beijing intends to use the Olympics as a catalyst for environmental improvements in the areas of air quality, water conservation, waste disposal, clean energy development, and “greening up” of the landscape.20 Transportation improvements are part of the environmental improvements. Plans include expansion of public transportation systems and conversion of city buses to clean energy. The transportation plan addresses a wide range of topics, everything from highway construction and pollution control to teaching English to cab drivers and improve the driving habits of the general population.

19 20

Baade and Matheson [2002], p. 28. Beijing Olympic Action Plan: Environmental Protection

20 Bread or Circus? The Economics of Mega-Sporting Events

Table 3. Beijing Planned Expenditures Revenues Television Rights TOP sponsorship Local sponsorship

US$ m

Licensing Official Suppliers Olympic Coins Program

50

Expenditure Capital 43.63% Investment Sports Facilities 8.00% Olympic Village 8.00% MPC and IBC 3.08%

20

1.23%

8

0.49%

Philately

12

0.74%

Lotteries

180

11.08%

Ticket Sales Donations

140 20

8.62% 1.23%

Disposal of Assets

80

4.92%

Subsidies Others

100 46

6.15% 2.83%

709 130 130

%

MV

Sports Events Olympic Village MPC and IBC MV Ceremonies and Programs Medical Services Catering Transport Security Paralympic Games

Administration Pre-Olympic events and coordination Other Surplus 1625

% 11.69%

102

6.28%

40

2.46%

45

2.77%

3

0.18%

Operations

Advertising and Promotion

Total

US$ m

87.32% 275

16.92%

65

4.00%

360 10

22.15% 0.62%

100

6.15%

30 51 70 50

1.85% 3.14% 4.31% 3.08%

82

5.05%

60

3.69%

125

7.69%

40 101 16 1625

2.46% 6.22% 0.98%

Source: BOCOG, www.beijing-2008.org

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Table 4. Non-BOCOG Capital Investments Spending in Beijing

Environment Protection Roads & railways Airport

Construction Cost (US$ m) 2004 2005 2006

2001

2002

2003

1000

1000

1500

1500

1500

547

592

636

636

12

30

31

12

212.57

2379.57

Sports Venues

2007

2008

Total

1300

827

0

8627

636

313

313

0

3673

0

0

0

0

85

425.13

495.99

283.42

12.01

0

1429.12

110.62

158.87

134.74

38.25

442.48

2573.13

2742.61

2055.29

1286.75

38.25

14256.6

Olympic Village Total

1559

1622

Source: BOCOG, www.beijing-2008.org The BOCOG budget (Table 3) actually projects a small surplus, but this does not mean the Olympics will pay for themselves. Included with revenue are subsidies from the national and municipal government (US$50 million from each) and a lottery expected to generate US$180 million. In addition BOCOG receives an indirect subsidy by being granted tax-exempt status. The exemption includes revenues from foreign sources such as broadcast rights and sponsorships. The IOC has also been granted tax-exempt status, which among other things will exempt athletes who win prize money from income tax. Of course the capital investments outlined in the Non BOCOG budget dwarf the revenues and expenditures of BOCOG. The question is: how much of the capital investment should be considered a cost of the Olympic Games? Ideally, many of these investments will have long term value, but assessing that value, and more importantly how that value compares to the opportunity cost of foregoing alternative capital investment opportunities, is no easy task. Often events such as the Olympics are given credit for governments making investments in infrastructure that would have been done much later or not at all. However, the economic conditions that led to these projects not being pursued prior to the Olympics are not likely to have changed greatly. It may well be the case that Olympics cause investments to be made too soon, instead of preventing them from being made too late. According to BOCOG there are currently 458 hotels with 84,812 rooms in Beijing, which is “so many hotel rooms that tourists visiting the city will have no trouble finding a place that suits their specific needs.”21 BOCOG also projects that by 2008 there will be 800 hotels with 130,000 rooms. Will there be too many hotels or will tourism growth make up the difference? Capital infrastructure expenditures are nearly nine times larger than the revenue and operating expenses of the Games; they will not pay for themselves during 21

www.Beijing-2008.org

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those two weeks. After the Games the sports venues (see Table 5) will for the most part be turned over to organizations that can utilize the facility for their sports. Was Beijing so lacking in sports and recreational facilities that nearly $2 billion can be productively invested, or could those resources be put to a more effective use? For these organizations having state-of-the-art facilities is surely a wonderful thing, but probably not a wise investment from a social welfare standpoint, as shown by the Sydney experience.

20.2 Conclusion The most critical difference between developed and less developed countries is the opportunity cost of capital. Building public infrastructure and political and social institutions is essential to economic growth. The degree to which capital infrastructure investments for mega-events are worthwhile depends on how useful they can be after the event is over. Many projects, such as transportation, communication, and environmental improvements certainly provide social benefits. But if the benefits of such projects outweigh the costs, why would an Olympic Games be needed to spur the project forward, especially in developing countries where public affirmation in a political marketplace is rarely necessary? Instead of being a catalyst for beneficial long-term investment projects, the Olympic Games are more likely to divert attention and resources away from such projects. The extent to which infrastructure investments can be utilized after the Games will be the primary determinant of their economic success. One mitigating factor the opportunity cost of labor. If surplus or misallocated labor resources exist job creation from venue construction and operation of the event could be considered a transfer with zero net social cost instead of an opportunity cost. Of course this would be true of any project, so the question of whether alternative infrastructure investments would be more valuable remains. Hosting the Olympics requires billions of dollars in investments on venues and related infrastructure, of which only a fraction will have practical long-term application. The belief that the Olympics will pay for themselves is fanciful. The reality is cities face a tradeoff between investing public resources in hosting the Olympics or investing those resources in public goods such as infrastructure improvements, education, and health care. In a country like the United States the cost of the Olympics can be absorbed with fairly little effect on the overall economy. But in a developing country with limited capital, the opportunity cost of billions of dollars invested in the mistaken belief that the Olympics will be a catalyst for economic growth is a very steep price. Pursuit of mega-events could become yet another obstacle to prosperity in developing countries.

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Table 5. Total Investment in Facilities (US$m) Sports Facilities

New

BOCOG Budget Upgrade Subtotal

New

Non-BOCOG Budget Upgrade Subtotal

Total

National Stadium

246.71

246.71

National Indoor Stadium

45.67

45.67

246.71 45.67

National Swimming Center

107.51

107.51

107.51

CIEC Hall A

6

6

6

CIEC Hall B

4

4

4

CIEC Hall C

3

3

3

CIEC Hall D Olympic Green Archery Ground

7

7

7 0

National Tennis Center

43.92

43.92

43.92

National Hockey Stadium Olympic Sports Centre Stadium Olympic Sports Centre Gymnasium Olympic Sports Centre Softball Field

68.02

68.02

68.02

12.99

12.99

24.99

12

12

7

7

27.69

27.69

34.69

20.16

20.16

28.16

8

8

Ying Tung Natatorium

8

8

8

Beijing Shooting Range

3.5

3.5

3.5

Beijing Shooting Hall

37.51

Laoshan Velodrome Laoshan Mountain Bike Course

42.68 4

3.31

37.51

37.51

45.99

45.99

4

4

Road Cycling Course

0

Wukesong Indoor Stadium

282.65

282.65

282.65

Wukesong Baseball Field

31.77

31.77

31.77

Fengtai Baseball Field Forbidden City Triathlon Venue

28.48

28.48

28.48

3.5

Shunyi Olympic Aquatic Park Beijing Country Equestrian Park

3.5

15

15

Shoutiyuan Sports Hall Beihang Gymnasium

1.75

74.85

74.85

74.85

101.01

101.01

116.01

34.22

34.22

34.22

13.03

13.03

13.03

1.75

Beitida Sports Hall Capital Indoor Stadium

3.5

1.75

7

7

7

Workers' Stadium

3.5

3.5

3.5

Workers' Indoor Arena Tiananmen Beach Volleyball Ground

3.5

3.5

3.5 0

Qingdao International Marina

87.59

87.59

87.59

Tianjin Stadium

83.21

83.21

83.21

36.14

36.14

36.14

Qinhuangdao Stadium Shenyang Wulihe Stadium

1.75

1.75

Shenyang Stadium

3.5

3.5

Olympic Village

40

40

1.75 3.5 442.48

442.48

482.48

MPC

30

30

30

IBC

15

15

15

Media Village Total

40

3

3

150

190

Source: BOCOG, www.beijing-2008.org

3 1820.44

51.16

1871.6

2061.6

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Sources Baade, Robert A. and Allen R. Sanderson. (1997). The Employment Effect of Teams and Sports Facilities. In R. Noll and A. Zimbalist (Eds.), Sports, Jobs, and Taxes. The Brookings Institute. Baade, Robert A. and Victor Matheson. (2002). Bidding for the Olympics: Fool’s Gold? In Transatlantic Sport, edited by Barros, Ibrahim, and Szymanski. Edward Elgar Publishing. Beijing 2008 Olympic Games Official Website. http://en.beijing2008.com/. Beijing Organizing Committee of the Olympic Games. (2001). Beijing Olympic Action Plan. Coates, Dennis and Brad R. Humphreys. (2003). Professional Sports Facilities, Franchises and Urban Economic Development. University of Maryland Baltimore County, Working Paper No. 03-103. Derudder, B., P.J. Taylor, F. Witlox, and G. Catalano. (2003). Hierarchical Tendencies and Regional Patterns in the World Cities Network: A Global Urban Analysis of 234 Cities. Regional Studies. Vol. 37.9, pp. 875-886. Essex, Stephen and Brian Chalkley. (1998). Olympic Games: Catalyst of Urban Change. Leisure Studies. Vol. 17, pp. 187-206. Fizel, John, Elizabeth Gustafson, and Lawrence Hadley, eds. (1999). Sports Economics: Current Research. Praeger Publishers. French, Steven P. and Mike E. Disher. (1997). Atlanta and the Olympics: A OneYear Retrospective. Journal of the American Planning Association. Vol. 63, No. 3, pp. 379-392. Hefner, Frank L. (1990). Using Economic Models to Measure the Impact of Sports on Local Economies. Journal of Sport and Social Issues. Vol. 14, pp. 1-13. Humphreys, Jeffrey M. and Michael K. Plummer. (1995). The Economic Impact of Hosting the 1996 Summer Olympics. Atlanta Committee for the Olympic Games, Inc. Olympic Vendors Could Cost Atlanta. (1997, May 24). Lubbock AvalancheJournal. http://lubbockonline.com/news/052597/olympic.htm. Matheson, Victor and Robert A. Baade. (2003). Mega-Sporting Events in Developing Nations: Playing the Way to Prosperity? Presented at the New England Universities Development Consortium Conference, Williamstown, MA, October 2002. Noll, Roger and Andrew Zimbalist (Eds.). (1997). Sports, Jobs, and Taxes. The Brookings Institute. The Pain of the Games. (2004, July 26). Sydney Morning Herald. http://www.smh.com.au/articles/2004/07/25/1090693836746.html.

Porter, Philip K. (1999). Mega-Sports Events as Municipal Investments: A Critique of Impact Analysis. In Sports Economics: Current Research, edited by John Fizel, Elizabeth Gustafson, and Lawrence Hadley. Praeger Press. Short, J.R., C. Breitbach, S. Buckman, and J. Essex. (2000). From World Cities to Gateway Cities: Extending the Boundaries of Globalization Theory. City. Vol. 4, no. 3. pp. 317-337.

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Smith, Adam. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. Reprint: The Liberty Fund (1981). State of Utah, Governor’s Office of Planning and Budget. (2000). 2002 Olympic Winter Games: Economic, Demographic and Fiscal Impacts. The University of Tasmania Centre for Regional Economic Analysis and Arthur Andersen (1999). Economic Impact Study of the Sydney 2000 Olympic Games.

21 Social Entrepreneurship and Regional Economic Development: A Conceptual Framework

Henry G. Rennie Department of Business and Economics, Heidelberg College Tiffin, Ohio

21.1 Abstract Social entrepreneurship seeks improvement in social conditions by creating value; however, much of that value is in the form of externalities to the social entrepreneurship project. Thus, while social benefit may exceed social cost, market value is less than market cost. Un-subsidized, privately funded, social projects will not be undertaken. This study develops a conceptual framework linking economic development of a region and social entrepreneurship. We separate the social value into two parts: That which can be internalized by the social organization, and that which is external to the social organization. The externalized portion is dependent on the value to a “community.” Under certain circumstances, part of the external value generated by the social entrepreneurship project may be recoupable. The conceptual framework is applied to a proposed national historic automotive museum as an example of how social entrepreneurship and economic development can be linked. The conceptual framework justifies, under certain conditions, a public-private partnership for social entrepreneurial projects. In addition, the conceptual framework will work best where a community has a clear and generally accepted set of values and mission. Thus, two strategies are proposed: (1) A social entrepreneurship strategy to improve economic development of a region and, (2) An economic development strategy that incorporates social entrepreneurship.

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21.2 Social Entrepreneurship and Business Entrepreneurship Definition of Entrepreneurship Many definitions of entrepreneurship exist; however, we need to set aside the popular idea that entrepreneurship only means, “… the creation and management of new businesses, small businesses and family businesses” (Academy of Management 2004). Certainly that is one common concept of entrepreneurship. According to Drucker, “The entrepreneur always searches for change, responds to it, and exploits it as an opportunity.” [Drucker as in (Dees 1998)]; On the other hand, others, in true Mises-Hayek tradition, would argue that the entrepreneur, rather than responding to change, creates change (Kirzner 1973); Schumpeter attributed to the entrepreneur the “big” changes such as railroads. He saw the entrepreneurship role in five areas of change: New products; new combinations; new methods of production; new markets; or new organizations (Schumpeter 1934). To others, capitalist control of resources is irrelevant, “Entrepreneurship is the pursuit of opportunity without regard to resources currently controlled.” (Stevenson 1988); “Entrepreneurship is the process of creating something new with value by devoting the necessary time and effort, assuming the accompanying financial, psychic, and social risks, and receiving the resulting rewards of monetary and personal satisfaction and independence” (Hisrich and Peters 1998). Entrepreneurship as used in this paper is defined as: Entrepreneurship generates value by creating an opportunity and implementing change (Rennie 2004). 21.2.1 Vision and Mission of Social Entrepreneurship Social entrepreneurship differs from business entrepreneurship in that its primary mission is a social mission. The social entrepreneurs’ objective is to create social value. As such, social entrepreneurs set out to create change with that objective in mind. We can categorize the distinction between a social enterprise and a business enterprise on two dimensions: Social objective and social method. Whereas a business enterprise is primarily motivated by financial benefit, a social enterprise looks more to improvement in social conditions (Dees 1994). They do this by modifying concepts of business entrepreneurship, for example: (a) Adopting a mission to create and sustain social value; (b) Recognizing and relentlessly pursuing new opportunities to serve that mission; (c) Engaging in a process of continuous innovation, adaptation, and learning; (d) Acting boldly without being limited

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to resources currently in hand; (e) Exhibiting a heightened sense of accountability to the constituencies served and for the outcomes created (Dees, Emerson et al. 2002). 21.2.2 Strategy: Competitive versus Cooperative Social entrepreneurship tends to pursue a cooperative strategy rather than the more common competitive strategy found in the profit sector [(Brinckerhoff 2000; Dees, Emerson et al. 2002), p. 24]. Partly this is due to reduced command over economic resources either from lack of working capital or lack of market demand. It is also due to the social mission of the social entrepreneur. 21.2.3 Governance The corporate business sector is governed by a Board of Directors whose obligation is to the owners, the stockholders. Social entrepreneurship, if of the not-forprofit variety, has the possibility of alternative governance structures. For example, it is not uncommon for a not-for-profit organization to have an Advisory Board that offer advice in various areas of their expertise to the managing director. Also, Operating Boards, typically made up of community volunteers, may be called upon to do as much or as little of the actual work of the organization. Finally, there is the Business Enterprise Board. If a not-for-profit wishes to run a portion of its enterprise as a profit maker, it can form a subsidiary corporation with a business enterprise board responsible for the governance functions. In this case, the mission is profit making and must be consistent with the primary mission of the not-for-profit organization (Dees, Emerson et al. 2002), pp. 104-105. 21.2.4 Funding The private sector raises funds for their corporation by issuing ownership shares in the form of stock, or incurring long-term debt in the form of bonds, or short-term debt in the form of loans. The for-profit social organization can raise funds through these sources and the not-for-profit social organization can borrow funds as well as through donations and, to a lesser extent, by charging fees in the form of admissions, sales, or rentals. Thus, a primary funding distinction between forprofit and not-for-profit social organizations is the distinction between investors and donors (Dees, Emerson et al. 2002), p. 119. 21.2.5 Market A corporation operates in a market setting in which supply and demand determines price of the product or service and the quantity sold. A social entrepreneur

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also operates in a market; however, frequently demand revenue does not cover costs. The private sector typically engages in business-to-business marketing or business to final consumer marketing or both. The social sector typically engages in business to third-party consumer or to final consumer marketing or to both (Dees, Emerson et al. 2002). 21.2.6 Public-Private Partnerships, Externalities, & Economic Development Cooperation within the private business sector has increased in the last ten years through various collaborative methods, joint ventures, and partnerships. Social entrepreneurship, in which the organization provides external benefits, could combine with the private sector in the delivery of services that would benefit both. An example is the proposed national historic automotive museum discussed later in this paper. What would not have been a viable economic entity could become so with joint public-private sponsorship. This would enhance regional economic development. The concept of public-private partnerships in the presence of externalities forms the basis for the conceptual framework we develop in Section II. 21.2.7 Typology: Social Entrepreneurship and Business Entrepreneurship We summarize the similarities and differences between social entrepreneurship and business entrepreneurship in Figure 1. It should be recognized that in many cases the distinction between the two types of entrepreneurship organization is not that of “either/or” but is more of a spectrum representing sets of characteristics differing by degree.

21.3 Social Entrepreneurship and Economic Development

21.3.1 Economic Growth versus Economic Development The purpose of this research is to establish an analytical linkage between social entrepreneurship and regional economic development. Regional economic development, as used in this research, refers to those measures taken to enhance the standard of living and the quality of life of the population of a region. Measurement of these concepts is not our concern in this research, and a vast literature has developed about them. Frequently, as a matter of expediency, job creation or income growth are used as convenient proxy measures of the effect of economic de-

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velopment. The reader should be aware that these are poor proxies for the standard of living and the quality of life concepts to which we refer; however, we will use them in our application (Section III) as a convenient means to demonstrate our conceptual framework developed below. Fig. 1. Comparison of Business and Social Entrepreneurship Criteria

Business Entrepreneurship

Social Entrepreneurship

Vision

Private

Social

Mission

Business with social

Social with business

Strategy

Competitive

Cooperative

Funding/Capital

Investor

Investor or Donor

Public or Private Goods

Private

Both

Partnerships

Private

Public-Private

Rewards

Profits

Not-for Profit

Community

Target market

Target community

Target Market

Business-to-Business

Business-to-third-party Consumer

Business-to-final Consumer

Business-to-final Consumer

Governance

Board of Directors

Board of Trustees, Advisory Board, Operating Board, Business Enterprise Board

Economics

Private cost less than Revenue

Social Cost more than Revenue

Internality

Externality

Private Good/Service

Social/Public Good/Service

The qualitative concepts to which our conceptual framework applies for economic development can be contrasted with economic growth, usually expressed as a quantitative term, in which the many qualitative implications are not the primary consideration. The causes of changes in the magnitude of such measures as Gross Domestic Product (GDP) or of Gross State Product (GSP) are the focus of attention in economic growth research (Scitovsky 1971; Urban Center 1999). 21.3.2 Social Welfare and Economic Development Regional economic development ultimately seeks to improve the standard of living and the quality of life of a community. Conceptually we can view this as a form of welfare maximization and translate the goals of economic development into the optimization of a social welfare function (SWF) (Samuelson 1954). We

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leave aside the important consensus of whose utility functions are used. A SWF is a function of individual ordinal utility levels. Pareto optimality, the condition in which at least one person is made better off while no-one is made worse off, is sought. Compensation criteria such as those developed by Kaldor, Hicks, or Scitovsky are used to predict “whether a given change in the economy is socially preferable to the existing state” (Henderson and Quandt 1958). The debate frequently centers around the tradeoff between economic efficiency and economic equity (Musgrave 1973; Blaug 1997). Many social organizations exist because the for-profit competitive market is unable to provide the same services for a profit. 21.3.3 Economic Efficiency Perfect competition in the production sectors implies the rate of commodity substitution (RCS) equals the price ratios and perfect competition in the commodity and factor markets implies that prices equal the ratio of factor price to marginal factor product. Thus, the rate of commodity substitution equals the rate of product transformation which implies Pareto-optimal allocation [(Henderson and Quandt 1958), also see (Mueller 2003), p. 506]. 21.3.4 Internalities versus Externalities and Economic Development Social value differs from market value whenever external effects are present in consumption, production, or both. It is the working hypothesis of this paper that the utility level of the consumer, when social values are taken into account, is interdependent. In addition, I argue that the output levels of social entrepreneurs affect the total costs of other entrepreneurs, especially in the private sector. In that case, the consumers’ RCS will not equal the individual firms’ RPTs. Price will equal social marginal cost and thus RCS will equal social RPT (Henderson and Quandt 1958). 21.3.5 A Conceptual Framework Linking Society, Social Entrepreneurship, and Economic Development With the above information, we are in a position to develop a conceptual framework that links social entrepreneurship and economic development. We do this by means of four modules: Module: Society, Community, Region – represents three types of entrepreneurship: Private entrepreneurship; social entrepreneurship; and political entrepreneurship. They represent a complex interaction. Motivations differ. This module is purposely represented as an “amorphous cloud” to symbolize flexibility of specific details.

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Module: Optimization Concept assumed to be maximization of profit/stockholders wealth, etc. for business entrepreneurship and optimization of a social welfare function in the case of social entrepreneurship projects. These are totally unspecified to allow for different concepts of social welfare and different market structures. Module: Macro/Regional Effect embodied in the derivation of regional multipliers: Direct, Indirect, and Induced effects. The social entrepreneurship project(s) resulting from the amorphous cloud module representing society, community, and region will have various multiplier effects that affect the final module of development indicators. Module: Development Indicators Vector, quite unspecified for the time being but would be chosen to measure qualitative changes in such concepts as the standard of living and in the quality of life. The four modules can be combined to create a conceptual framework that shows the relationship between social entrepreneurship and regional economic development. The social entrepreneurship and economic development model developed in this research is quite general. For example, if private entrepreneurship is undertaken, the optimization concept would generally be profit maximization, although other optimization concepts could be applied. If social entrepreneurship is undertaken, it could be classified either as purely private or as a combination of a public-private partnership.

21.4 Empirical Application of the Conceptual Framework: An Example Overview of the Social Entrepreneurship Project Example The purpose of this section is to give empirical content to the conceptual framework developed above. The “vehicle” chosen to do this is a feasibility study to create a national historic museum devoted to the Jeep automobile, an historic icon in America (Rennie 1986; Rennie 2002). Many other social entrepreneurship projects on a national, regional, or local level could have been selected to illustrate the conceptual framework developed in this article. For example, the conceptual framework could be applied to a symphony orchestra, women’s shelters, community theaters, the homeless, and many other non-profit organizations. It must be emphasized that this empirical example is chosen only to show, in a rudimentary way, how the conceptual framework could be applied. Economic Development Strategy for a Region The sponsors of the national historic automotive museum saw the social entrepreneurship project as part of a larger economic development strategy to attract and retain businesses to a region (Northwest Ohio, USA) and to create well-paying

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and meaningful employment (Smith 2002). The museum target audience was envisioned to be composed of automotive fans, families, and school children coming from a national and international target geographic area, but with the majority of visitors expected from Illinois, Indiana, Ohio, Michigan, Pennsylvania, and Ontario, Canada.

21.4.1 Income and Costs of an Automotive Museum Income by Museum Size Income to a museum comes from two basic sources: Revenue, which is income earned in the course of business, and Support, which is income received from donations and grants. As an example of the relative magnitude of the values, revenue of a small science museum was 43.22% of total income. Of that amount, 37% was derived from admissions, 15% from store sales, 13% from investments, 10% from membership, and 9% from special events. The remainder came from food service, programs, and other (American Association of Museums 1989). Revenue of an Automotive Museum Four categories of revenue were identified: Ticket Sales; Donations/Investments; Facility Rental; and Concession Sales. Marketability of an automotive museum was estimated to create paid attendance from 24,242 school children per year at an average admission price of $4.00 and 6,000 adult visitors at an average ticket price of $8.00. Combined with the Revenue generated from additional areas such as the Store and Cafeteria and Facility Rental, total earned revenue of the Museum was estimated to be approximately $207,567 per year. Costs of an Automotive Museum Three categories of cost were identified in the feasibility study for the national automotive museum: Personnel Costs; Operating Costs excluding personnel, and Capital Costs. For purposes of using this example to showcase the conceptual framework, we have excluded the annualized, present discounted value of capital expenditures such as building construction. Further explanation is given below. Personnel Costs were estimated to be $265,200. Social entrepreneurship projects such as a museum frequently attract volunteers as well as donation of artifacts. We allowed for the possibility of volunteers reducing cost and the feasibility study estimated several scenarios, the most likely of which was a reduction by 65%. Operations costs excluding personnel included items such as advertising, utilities, insurance, and routine maintenance and was estimated at $200,000 per year. Private Shortfall of an Automotive Museum It is clear that if the museum were operated as a profit-making venture it would lose money because revenue would be $207,567 and costs would be $465,200. Even if volunteers were factored in to save money, the shortfall as a private, forprofit venture, would be -$85,253 per year as can be seen in Table 1.

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Table 1. Private Revenue and Costs for the Automotive Museum Source

Annual Amount

Generated Revenue

$207,567

Attendance

$144,967

Cafeteria (net)

$6,000

Rental of Facilities

$26,600

Gift Shop (net)

$30,000

Costs

$465,200

Personnel

$265,200

Operations (excluding personnel)

$200,000

Private Shortfall (loss) Private Shortfall with Volunteers (loss)

($257,633) ($85,253)

21.4.2 Economic Impact Objectives The automotive museum cannot justify its existence as a profit maker. Can a museum, or other non-profit organization, be an overall net positive benefit to a community? This section estimates the economic impact of an automotive museum on a region. Museums and other cultural events and social welfare organizations provide externalities to a community. To explain an externality, we turn to the concept of a free competitive market environment in which there are two parties to a transaction, the buyer and the seller. Both gain from trade and both reap the benefit, individually, from that trade. Where there are externalities involved in a transaction, a third party benefits. In the case of an automotive museum, that would be the communities that the museum serves. The benefits provided by the museum cannot be reaped by the “owners” as they would, for example, if General Motors, sold a car. In that case, the buyer gains and the seller, GM and its stockholders, also gain. With a museum, the community gains an enormous amount by the increase in the quality of life it brings to the community. It also brings jobs, income, increased spending locally, and increased tax revenues from the increased economic activities, even though the museum itself would be a non-profit and non-tax paying entity. This section estimates these community benefits derived from a museum.

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Expenditure Model The feasibility study used an expenditure model to measure the direct, indirect, and induced flow of revenues and expenditures of the proposed national historic automotive museum. A model for evaluating the economic impact on local economies was developed by the use of IMPLAN Pro software (MIG 2000). The circular flow of income, where households earn income and spend, businesses receive revenues from household spending and pay their operating costs, and the local government receives taxes and fees which they transform into municipal services, is increased. The income – spending – income - re-spending cycle constitutes the multiplier process to which we now turn. Multipliers We estimate three components for the economic impact of a social entrepreneurship project: Direct Effects, Indirect Effects, and Induced Effects. Direct Effects are the changes to the regional economy directly attributable to the presence of the social entrepreneurship project, e.g., wages and salaries, museum spending with local vendors, and visitor spending. Indirect Effects are the changes in interindustry purchases caused by the presence of the Direct Effects. Induced Effects are changes in household spending due to the income or population changes caused by the changes in production. To predict the economic impact of a national historic automotive museum on a regional economy, three multipliers were estimated: Type I, Type II, and Type SAM. Type I multipliers measure the Direct and Indirect effects of a change in economic activity. Type II multipliers are Type I multipliers with the addition of the induced household effects. Type SAM multipliers are Type II multipliers with the addition of all inter-institutional transfers. Thus, the Type SAM multipliers use all the information contained in the social accounting matrix. We have used the plural “multipliers” for each of the three types described above because each multiplier can be applied to more than one class of economic magnitude. In this study, we apply the multipliers to three economic magnitudes of particular interest to local economic development: Output, Employment, and ValueAdded. For purposes of this example, we have used the Type SAM multipliers of 1.8842, for output, employment, and value-added, respectively (Rennie 1986; MIG 2000). Regional Economic Impact The regional economic impact of the social entrepreneurship project can now be estimated. For purposes of this research, we use only the “steady state” case of ongoing expenditures after the first year of operation. In particular, we have excluded the annualized, present discounted value of capital expenditures such as building construction. In the case discussed later of a private, for-profit, social entrepreneurship project, the negative “profit” would become more negative but the conclusion would be unchanged. It could also turn the case where social benefit

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exceeds social cost to a situation where, in this particular case study example, social benefit is less than social cost; however, it would not negate the usefulness of the conceptual framework developed in this research. The direct economic effect of personnel costs, operations costs (excluding personnel) and visitor spending totals. Indirect and induced economic effects add an additional for a total economic impact in the steady state of job creation generated by the museum started with 9 full-time employees, 6 other, and 12 indirect for a total of 27 full-time equivalent jobs. The regional economic impact of the social entrepreneurship project is summarized in Table 2. Table 2: Regional Economic Impact of Social Entrepreneurship Project Direct Economic Effect (Steady State Case)

$465,200

Personnel Costs

$265,200

Operations (excluding personnel)

$200,000

Indirect Economic Effects

$778,292

Additional Regional Spending

$600,000

Additional Tax Revenue

$178,292

Total Economic Impact (annual, steady state)

$1,243,492

Annual Payroll New Jobs Created (FTE) Increase Employment Effects (steady state)

27

$742,884

Full-time Museum Employees

9

$265,200

Other Full-time Employment

6

$177,684

Indirect New Jobs Created

12

$300,000

21.5 Conclusions

21.5.1 Conceptual Framework Applied We can combine the theoretical model of Section II with the empirical application in Section III. We devised three cases to separate some of the issues: Case A: Social Entrepreneurship Project as Private Enterprise recognizes only private costs and private revenue with the result being that the social entrepreneurship project would only be undertaken if private benefit exceeds private costs. This was not the case in our automotive museum example. Case B: Social Entrepreneurship Project as Private Enterprise with Volunteers recognizes that volunteer workers can re-

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duce costs. Again, however, private benefit was less than private cost. Case C: Social Entrepreneurship Project with Private-Public Partnership recognizes that a purely private project would not be undertaken. It also recognizes that a social entrepreneurship project can generate external benefits. These external benefits can not be internalized by the social entrepreneurship organization; however, some of these benefits can be recouped by government entities. Case C shows that, under certain circumstances, a purely private entrepreneurship project that would not be undertaken could be economically feasible with a public-private partnership. These results are summarized in Table 3. Table 3. Conceptual Framework Applied

CASE A: Social Entrepreneurship Project as Private Enterprise Revenue (private)

$207,567

Costs - Operations (private, including personnel costs)

$465,200

Result: Private Benefit < Private Cost CASE B: Social Entrepreneurship Project as Private Enterprise with Volunteers

($257,633)

Revenue (private)

$207,567

Costs: Operations (private, including personnel costs) less Volunteers

$292,820

Result: Private Benefit < Private Cost less Volunteer Cost

($85,253)

CASE C: Social Entrepreneurship Project with Private-Public Partnership

Revenue-Public&Private

$385,859

Revenue: Generated

$207,567

Revenue: State & Local Taxes

$178,292

Costs - Operations (social)

$292,820

Operating Costs - Personnel

$265,200

% Volunteer Personnel

65.00%

Volunteer Personnel Cost Saving

$172,380

Operating Costs-Net Personnel

$92,820

Operating Costs - Other

$200,000

Result: Social Benefit > Social Cost

$93,039

21.5.2 Social Entrepreneurship and Externalities

The proposed national historic automotive museum would be classified as a social entrepreneurship venture by virtue of its vision, mission, and objectives. Further-

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more, we have concluded that the museum could not be run as a profit making enterprise because private costs will exceed private revenues. From our simulation analysis, we have seen that costs can be reduced by the use of volunteers; however, private costs will still exceed private revenues. Revenues are such that the project will be economically viable only if considered as a donor-investor collaboration. Two basic sources of income exist for the Automotive Museum: Revenue and Support.

21.5.3 Social Entrepreneurship Strategy and Economic Development Strategy Economic development is enhanced as a concept of combining social entrepreneurship. A Board of Trustees must recognize the significance of the economic externality argument for justifying a not-for-profit social entrepreneurship project. Multiplier analysis revealed direct, indirect, and induced effects of between 1.5 and 1.8. Steady state, i.e., second year and subsequent years’ economic impact on the area economy will be approximately three-quarters of a million dollars in new payroll and the creation of 27 full-time equivalent jobs. Income and sales tax receipts will increase by Error! Not a valid link. per year. We conclude that a strategy could be adopted by economic development planners to include a critical mass of such socially desirable projects such that they would complement, and be the catalyst needed, for true, sustainable economic development. This implies that the strategic tools used by both social entrepreneurs in planning the creation of social value and the traditional approach taken by economic development planners should be modified to recognize a portion of the external social value that is “internal” to the community. Thus, two strategies are proposed: (1) A social entrepreneurship strategy be used to improve economic development of a region and, (2) Economic development strategy incorporate social entrepreneurship. Communities with a clear and generally accepted set of values and mission would appear to come closest to attaining a solution to the efficiency versus equity debate and to a generally accepted social welfare function.

Acknowledgments I wish to thank the participants of the International Geographical Union Conference: Commission on the Dynamics of Economic Spaces for helpful comments on an earlier draft of this paper. I also wish to thank Heidelberg College for the award of an Aigler Grant to defray the costs of this research.

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