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Antonio Majocchi

Are industrial clusters going


international? The case of Italian
SMEs in Romania

2000/12

UNIVERSITÀ DELL'INSUBRIA
FACOLTÀ DI ECONOMIA

http://eco.uninsubria.it

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© Copyright Antonio Majocchi


Printed in Italy in July 2000
Università degli Studi dell'Insubria
Via Ravasi 2, 21100 Varese, Italy

All rights reserved. No part of this paper may be reproduced in any


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ARE INDUSTRIAL CLUSTERS GOING INTERNATIONAL? THE CASE OF
ITALIAN SMEs IN ROMANIAΚ

Antonio Majocchi*

July 2000

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

Introduction

During the Nineties a growing number of studies have shown how internationalisation strategies
have been significantly pursued not only by large firms but also by an increasing number of
small and medium sized enterprises (SMEs). Consequently, a large number of studies have
been devoted to analyzing this phenomenon (Fujita 1995a; Fujita 1995b, Kohn and Gomes–
Casseres 1997, Khon 1997). Data show that this process of international growth is
significantly taking place in Italy, where local SMEs have expanded their presence not only
through the traditional means of exports but also through the establishment of foreign direct
investments (Mutinelli and Piscitello 1998). The analysis of the strategies of internationalisation
realised by the SMEs is extremely important for an economy such as the Italian one, where the
industrial structure is mainly based on small firms. However, the average small size of firms is
not the only feature of Italian firms, which show a high level of geographical concentration in
areas generally defined as “industrial districts”. Economic literature on the industrial districts
dates back to the work of Marshall, but it is with special regard to the Italian experience that a
large of number of works have been devoted (Porter 1990, 1998, Lorenzoni and Lazerson
1999, Baccarani and Golinelli 1993). This widespread interest on this aspect is mainly due to
the capacity that firms, operating within the industrial districts, have demonstrated in entering
international markets and in the role they have in developing employment. The importance of
districts within the Italian economy can be inferred by an analysis of some synthetic indicators:
the Istat's (Italian Central Statistics Institute) 1991 census singled out some 200 industrial
districts in which over 2 million workers are employed, a figure equivalent to 42.5% of overall
factory employment in Italy. Export data, regarding these local systems, are even more
significant. Recent data on 60 major Italian districts, has emphasised that, in 1996, 30.5% of

Κ
Paper presented at the Asac-Ifsam joint conference, 8-11 July, 2000, Montreal, Canada
*
Università degli Studi dell’Insubria, Facoltà di Economia, via Ravasi, 2 – 21100 Varese; E-mail:
amajocchi@mail.eco.uninsubria.it

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

The majority of Italian industrial districts are to be found in sectors with a standard technology
that produce final consumer goods. These sectors are generally positioned in the maturity
phase of the product's life cycle and are, therefore, growth-restricted and with a high price
elasticity. Consequently, Italian corporations operating in these sectors are heavily exposed to
international competition and, in particular, to competition by companies belonging to
developing areas with low labour costs. Many scholars, looking at the Italian experience, have
forecasted that the coming of globalisation would have forced the myriad of small district-
based firms to merge into a few large enterprises. Against this changing scenario, which
occurred during the second half of the Eighties and the Nineties, the solutions found by Italian
districts once again confirmed their great capacity for adapting to the new environment (Sabel,
1996). This implied in-depth reorganisation and the search for new forms of organisation, both
at the local and international levels. The increasingly stiff price competition in the newly-
industrialised countries compelled district-based companies to change their strategies, by no
longer wagering on cost leadership, but on product differentiation. An additional solution was
the development of technological innovation in terms of marketing and distribution and
production decentralisation on an international level. Concerning the latter development,
aggregate data show that these kinds of strategies are increasingly being pursued by Italian
SMEs (ISTAT 1996, Varaldo and Ferrucci, 1997).

Whereas a large amount of work has been devoted to the strategies of companies acting
within industrial districts - their international marketing strategies in particular - very few works
have considered the internationalisation production strategies realised by SMEs in general, and
those operating in industrial districts in particular. We have tried to analyse the process of
internationalisation that is taking place. With this goal in mind we have analysed the Italian
investments in Romania, this area being a typical target of the investments by Italian SMEs
(Manea and Pearce 1999). More precisely, we have concentrated our attention on the Italian
presence in the northwest area of the country (county of Arad and Timis), where, according to
official data, there is the highest concentration of Italian investments by small and medium-sized
firms mainly coming from the Veneto region, an area within Italy characterised by a high
density of industrial districts.

This paper tries to address the following questions:


Are the firms acting within the Italian framework of industrial districts following some peculiar
path of internationalisation?
Secondly, is the geographical concentration of their ni vestment a sign that the operational
relationships developed within the local network of firms have been expanded even to other
geographical contexts?

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

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

Methodology

The research followed a case studies approach (Eisenhardt 1989; Yin 1994). In February,
1998, data on Italian firms in the northwestern part of Romania were collected by the local
Chambers of Commerce. From the lists of the 482 firms operating in the area, a group of 22
companies that are part of a local network and with links to Italian industrial districts have
been selected. The dimension of the sample have been chosen in order to allow an in-depth
analysis of cases.The link has been defined in quite a broad way, ranging from cases where the
Romanian company is a subsidiary of an Italian corporation located in an industrial district to
those of firms with relevant participations of Italian capital and with some kind of agreement
with Italian partners located in an Italian industrial district. In order to catch one of the main
industrial cluster characteristics the definition of agreement has been taken according to the
definition offered by Blankenburg Holm, Eriksonn and Johanson (1999), who define business
relations within networks as those:

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

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

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Results

The process of delocalisation of activities directed toward countries such as Romania


has been generally interpreted as the result of strategies aimed just at looking for low cost
labour. Our research tends to confirm this result, but in addition it casts some light on the
importance of the relationship developed within the starting district in order to fully understand
the strategies followed by the firms acting within the framework of the district. The Italian
presence in Romania is mainly distinguished by small and medium-sized corporations. Big
Italian corporations are only marginally present. This tendency for small and medium-sized
corporations to be in Romania implies relatively scanty resort to market penetration methods
performed through the take-over of local corporations. Our analysis has identified three
different organisational strategies followed by the SMEs.

One strategy can be defined as a sort of “transnational district”. According to this model,
which from some points of view resembles the one defined by Lorenzoni and Baden Fuller
(1995), firms develop an international presence through their ability to co-ordinate an
international network of partners. The difference between the Lorenzoni and Baden Fuller
model and ours is that in our case the network is co-ordinated in the centre by an SME which
is mainly domestic and not by a large multinational company, as in the cases they analyse.
Moreover in our model the network is mainly located within industrial districts both at the local
and at the international level. The main characteristic of this kind of firm in our sample is that
these companies replicated on an international scale the kind of intense relationships developed
within the district. These corporations, that we can call the leader-corporations, have direct
access to the target market and have significantly developed marketing and merchandising
functions. They are distinguished by a high number of relations with other corporations and
have often autonomously started up production internationalisation processes either by
transferring plants or, more significantly, encouraging main partners-suppliers to follow a
similar route. The firms located at the centre of the network have intense sub-supply
relationships with partners located both in the Italian and the Romanian districts. From a purely
formal point of view, the central firms have just a market relationship with these partners. The
research highlights how these relations are much deeper than appear at first glance. In the
companies in question the greater part of production, excepting the higher range, is supplied by
outside contracting companies, located in both the local district and other countries, but mainly
concentrated in the northeast part of Romania. In this case the companies basically carry out
the role of co-ordinator for other corporations, both in and outside the Italian district.
Therefore, from a formal viewpoint the relations between the Italian companies, which we can
describe as the leader-companies, and the Romanian companies possess all the elements of
standard supply relations. In some cases we have observed that these relations are extremely
flexible, without resort to the drawing up of contracts. From a material viewpoint, a true
partnership with these corporations is feasible. The leader-companies supply technical
consulting, by sending their staff on the spot for certain periods of time, including long periods.

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They offer a marketing outlet to the partner corporations and can also supply equity and
required technology, by way of leasing machinery, using the loan-lease formula. Therefore,
relations between the leader-company and the partner corporations reproduce the relations to
be found inside the district, on an international level. The leader-company puts suppliers in
reciprocal competition both as regards prices and product quality, but this competition takes
place within a context of strong collaboration. The leader-companies, in the specific cases
examined, enjoy the cost advantages ensuing from the localization of the supplying
corporations in Romania, without having to directly commit themselves as regards production
internationalisation processes. Moreover, thanks to collaboration relations, the leader-
company is able to guarantee suitable quality standards, as compared to outlet market
demand. For their part the partner corporations can, in this way, guarantee a marketing outlet,
thanks to the stability of their relations with the leader-company, while securing for themselves
the technical consulting offered by the leader-company and making use of the opportunity to
obtain human resources.

Figure n.1

The international network model: from district to district

The leader company

ITALIAN INDUSTRIAL INDUSTRIAL DISTRICT


DISTRICT IN ROMANIA

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

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On the one hand, there are 14 corporations which have attempted to tackle decreases
in prices enforced by customer corporations by decentralising production in Romania with the
main target of curbing costs. This kind of strategy is standardly pursued by corporations
operating in the textile-clothing and footwear sectors. In some cases, the privileged relations
which are to be found inside a district have been preserved through a company still operating
in Italy. The company in Italy has, in general, been assigned the task of undertaking those
activities held to be of a strategic nature, such as marketing, business relations management
and design and marketing, whereas production is entirely or partially decentralised to
Romania. This model of expansion is quite a standard one and has been followed quite
extensively by large corporations. But, compared to the strategies usually observed where
relocalisation processes are being implemented (Dunning, 1993), this strategy stands out
insofar as the firms involved are SMEs which seem to move towards areas where the
existence of others companies allow for some of the typical processes implemented within the
industrial districts to be replicated.

On the other hand, there are corporations which have entirely transferred all the value
chain to Romania. These companies have been typically located in a marginal situation within
the framework of districts of origin. Once again, the SME corporations have shown a
tendency to replicate in Romania the district logic and behaviour as achieved in Italy. These
corporations, whose reference market was mainly the Italian district, are distinguished by a
restricted number of relations with other corporations, and they mainly depend on the leader-
corporations we have described above. These corporations, so as to avoid being cut off from
the market by other corporations outside the district, have relocated in Romania. However,
among these corporations some have seized this opportunity for internationalisation to achieve
a strategic expansion, by acquiring a more autonomous role as regards the corporations in
their district of origin. These firms maintained their strategic links with the “central” partners in
the Italian districts, but they were also able to become a reference point for a series of other
corporations in Romania. In so doing they perform the role of leader-company in their new
target district, a role they were unable to perform in their district of origin, by diversifying
production, increasing the number of clients and reference markets, or directly penetrating
target markets with autonomous trademarks, thus expanding merchandising and marketing
strategies.

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

Discussion

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

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

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

In the cases we analyse no firms were really market leaders. The companies in the
sample seem to follow the classical model of international expansion as defined by the
international product cycle (Vernon 1966 and 1979). According to this model firms operating
in mature sectors expand their production abroad in order to keep up with the low-cost
competition from foreign producers. The choice of the entry mode in our sample seems to
depend mainly on the position of the firms within the constellation developed in the original
industrial districts. In the cases of firms in the centre of the network, internationalisation is
mainly realised through the investments undertaken by suppliers; in all other cases, through
direct investments. The more relevant aspect of this strategy is that even in the case of
internationalisation through suppliers the process of expansion remains largely within the
original network. Firms in the districts do not outsource transactions outside what we can call
the “soft-hierarchy” of the network, realising a sort of internalisation within the constellation
and not within the firms.

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

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The relationships developed in the source districts help us to understand why the
internationalisation strategies are focused on a restricted area. Management literature has
clearly shown how the main limit to the international expansion of small firms is the shortage of
managerial skills. (Buckley and al.1997). Within small firms decision-making is often
personalised and relies on personal perception, therefore it is likely that (Aharoni, 1966) the
decision to go international and the management of international operations rely on decisions
taken without a proper evaluation of the alternatives. In this context the personal relations
developed within the Italian districts with managers of suppliers, clients and competitors
strongly influence these kinds of decisions. When the first-mover firms within the districts
moved towards Romania, other companies followed within the network and in the other
competitor networks (Knickerbocker, 1973). Moreover, if we take into account information
costs, SMEs are at a disadvantage compared to large firms also regarding their capabilities in
collecting information on the new business environment (Cafferata and Mensi 1995). This
situation increases the uncertainty surrounding the investments. Since for small firms the
proportion of resources committed to a foreign direct investment is quite large, the risk also
seems larger for SMEs then for big firms (Caves 1982). The concentration of firms in a
restricted area helps firms to save on search costs and decrease the uncertainty surrounding
the investments. Finally, to go abroad requires adaptation and modification in terms of
management, organisational routines and even of marketing and production technologies. All
these modifications involve costs to the firms which would be hard to absorb given their limited
resources.

The path of expansion shown in our sample seems to indicate that the Italian firms
minimise these problems of risk and uncertainty through a model involving the common sharing
of information through the network that made up the districts and through a step-by-step
process of internationalisation. From this point of view, the results of the empirical research
seem to confirm some of the main findings of the network theory concerning
internationalisation (Håkansson, 1982, Johanson e Vahlne 1977, 1990, Bjorkmann e Forsgren
1997).

The process of international expansion in the cases we have analysed seems to be a


cumulative process. An international presence – according to the model (Johanson and
Mattsson 1988) is the result of increasing market knowledge and consequent market
commitment. According to this theory, the first approach to the international market is through
exports, therefore investments follow (Peterse and Pedersen, 1997). In our case investments
and commitment to the foreign market are resource seeking, therefore exports are not the first
means of acquiring knowledge of the new environment. This knowledge is gained through the
diffusion of the information not only within the firms but within the network of companies that
have initially been formed within the original districts. In our case international expansion has
been realised not only through the classical instrument of foreign direct investment but also
through partnership co-operation and sub-supply agreements. In this respect, the network
approach seems best suited to evaluate this process. Internationalisation must be interpreted as

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a process that regards not only one firm but the entire web of firms. The international
experience and the advantages of part of the network is then passed to the entire constellation
and from constellation to constellation. The stability that characterised the relationship within
networks help the diffusion of information within the constellation. Geographical proximity at
source became, in this respect, an important point. Proximity not only reinforces the
relationship among firms, thus facilitating the exchange of information, but also contributes to
the spread of imitation processes among the firms, and consequently to replicating a
concentration of firms in the Romanian area. In analyzing the internal process of decision
making that convinces the firms to go international, all the firms affirmed that an important
factor was the existence of other partners or competitors from the same district following the
same route.

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