Chapter 7

Role of Promotion Policies to Stimulate the

Dynamics and Innovation of Clusters: The
Case of Palestine
Suhail Sultan and Meine Pieter van Dijk

Abstract
This study aims to analyze the challenges facing five Palestinian clusters and
to understand their dynamics and level of development. Using multiple
sources of evidence, the research questions are answered using
semi-structured interviews and focus group discussions. Content analysis was
used to analyze the data obtained. The five clusters in Palestine are located in
a complex environment that imposes a mix of challenges that adversely
affect their performance. The challenges facing Palestinian clusters are
different in terms of their degree of complexity. The common challenges
facing the Palestinian clusters are the fundamental lack of innovative stim-
ulation policies or incentives in the Palestinian ecosystem, lack of trust,
unfair competition, limited access to finance, lack of access to promising
markets, and the limited collaboration between different parties. More
focused policies are suggested to the Palestinian authorities.

Keywords: Clusters; challenges; development; innovation; policies; Palestine

Introduction
Why is it important to look at clusters in Palestine? We will argue that clusters of
economic activities have a development potential. They can contribute to eco-
nomic development, create employment, and become a hub for new ideas.
Kumar, Pullman, Bouzdine-Chameeva, and Sanchez Rodrigues (2022) emphasize
the role played by cluster hub firms. In this chapter, we will study to what extent
and under which conditions this is also the case in Palestine. We first describe the
Palestinian context and give a snapshot of Palestinian clusters. Subsequently, we
give an overview of the research on clusters and present out research on the

Industry Clusters and Innovation in the Arab World, 205–224

Copyright © 2023 Suhail Sultan and Meine Pieter van Dijk
Published under exclusive licence by Emerald Publishing Limited
doi:10.1108/978-1-80262-871-520231009
206 Suhail Sultan and Meine Pieter van Dijk

dynamics of different clusters in Palestine. After a summary of the relevant the-

ories and a presentation of the research methods, the research questions will be
answered. The chapter finishes with a discussion section relating the findings to
the theory, with recommendations and conclusions.

The Palestinian Context

Palestine comprises two main geographical areas. The first is the West Bank,
sharing borders with Israel and Jordan, covering an area of approximately 5,860
km2. The second is the Gaza Strip, covering about 360 km2, sharing borders with
Israel and Egypt. It has access to the sea and has a small port currently blockaded
by the Israelis – no sea traffic is permitted. According to the Palestinian Central
Bureau of Statistics (PCBS, 2022), the population of Palestine is continuing to
rise. It is currently reported to stand at about 5.2 million, with approximately 2.2
million people living in the Gaza Strip.
Palestine does not possess many of the required features for successful cluster
development. Palestine has a poor road infrastructure, inadequate and irregular
power supplies, defective sewage systems, and intermittent water supplies. In
addition, Palestinian movements in and out of the country are severely restricted
due to the Israeli occupation. Access to and from the Gaza Strip is also heavily
restricted. This has a significant impact on business operations and is negatively
affecting the economic development of enterprises in Palestine. Key natural
resources in Palestine include arable land and water, allowing agriculture to
flourish in the Jordan Valley. Yuldashev, Nabokov, Nekrasov, and Djurabaev
(2022) analyze the potential of agro-industrial clusters in Uzbekistan and point to
factors, which are important to the most optimal production in the conditions of
that country and are also relevant for Palestine. Other natural resources than land
in Palestine include stone and marble deposits, predominately found in the areas
surrounding Bethlehem and Hebron. Given the cultural and religious history of
the area, there is substantial growth potential in religious tourism. However,
Palestine is 100% dependent on fuel imported through Israel and only 9% of the
electricity is generated by Palestinian operators.
Liu and Wang (2022) show that agricultural industrial clusters are crucial for
the formation of regional brands of agricultural products. Clustering is also an
effective way to enhance the regional brand value and to increase the competi-
tiveness of agricultural products. Based on the agricultural industry cluster, they
carry out regional brand building of agricultural products. The emphasis is on the
production of agricultural products in a value chain perspective: from raw
materials to product sales in specific areas. Also, the production services of
relevant agricultural technology research and development institutions are con-
nected to establish local networks and regional first-class agricultural product
brands. These brands grow with the development of regional production bases.
 Role of Promotion Policies 207

Snapshot of Palestinian Clusters

The majority of the economic enterprises working in Palestine is micro-, small-, to
medium-sized enterprises (MSMEs). In particular, the small- and medium-sized
enterprises (SMEs) are drivers of economic growth, and despite the many chal-
lenges, they can benefit from linkages in the value chain. However, there are
necessary preconditions, resources, and strategies that need to be put together to
ensure the successful integration and upgrading of these SMEs (Epede & Wang,
2022). As there is a high number of unregistered enterprises and employees, they
might find it difficult to secure development support. Mainly these enterprises are
competing on price and rely on low labor costs rather than quality. Little attempt
is made to compete using other factors, such as innovation, service development,
or design differentiation (Fallah, 2019). The development of Palestinian clusters
has largely been based on exploiting lower labor costs, but this is unlikely to be
sustainable in the long term.
The typical structure of an MSME enterprise in Palestine is one that is owned
by a family and run by a member of that family. Many MSMEs in Palestine do
not possess an institutionalized or formalized structure. Very few MSMEs invest
in R&D and the ability to facilitate a scientific and engineering culture that
encourages innovative thinking is absent, despite Palestine having a high level of
literacy. University–industry research is weak in Palestine (Sultan, Suhail, Van
Dijk, & Ritzen, 2022). The lack of a higher education system that appropriately
serves businesses and enterprises can become a constraint on business develop-
ment, with firms finding it difficult to produce more sophisticated or
value-intensive products, and move up the value chain. Suitable higher education
and training, aimed at serving industry needs, is crucial for economies that want
their firms to move up in the value chains, beyond simple production processes
and products.
An inability by the majority of Palestinian enterprises to access external
markets is one of the key constraints to their development. Movement of products
over borders (controlled by Israel) is not only problematic, but it often implies
extra costs. There is demand for these manufactured products from Israeli com-
panies or agents, where Palestinian enterprises are effectively subcontractors.
However, this limits their access to, and knowledge of, the market and stifles their
development opportunities. While the domestic market cannot be considered
sophisticated and demanding, it is well recognized that international buyers
encourage companies and suppliers to innovate and meet increasingly higher
standards of quality and service. The Palestinian domestic market does not have
this influence on the companies and, despite increasing competition from imports,
the enterprises are not responding.
Related and supporting industries in Palestine are weak. Backward and for-
ward linkages have not developed, while Epede and Wang (2022) show the
importance of such linkages. Networking between enterprises is limited and
collaboration between enterprises and supporting industries is frail. Not having a
free and open border has reduced opportunities for developing a robust, back-
ward supply chain. Palestine’s clusters face many challenges due to access and
208 Suhail Sultan and Meine Pieter van Dijk

movement restrictions imposed by the Israeli occupation, and there is a heavy

dependence on Israeli markets and/or agents, who have access to regional and/or
international markets.
Moving up the value chain requires intellectual and technical development.
Achieving this in a short time period will be a challenge for Palestine. Despite
having a high level of literacy and well-educated population, the practical skills
and experience of the workforce are lacking, particularly in sciences, technology,
and engineering. There is little intellectual development through international
networking, caused in part by restrictions on access and movement. This makes
interaction with international business difficult, reducing confidence in inward
investment and accompanying technical inputs, and contributing to the stagna-
tion of higher education. Palestine’s clusters inputs, processes, and supporting
institutions are not satisfactory and need to be improved. Innovation based on
R&D is currently minimal. Clusters also suffer from low levels of market intel-
ligence regarding technology and business opportunities. Poor enforcement of
intellectual property rights (IPR), certification systems and quality systems are
also major weaknesses affecting clusters.
Operational competitiveness is an issue for Palestine’s clusters. Levels of
innovation and the use of appropriate technology is minimal, contributing to
some operational problems. Clustered MSMEs seem to focus on upgrading
equipment, rather than looking for new business methodologies or processes that
will give them a competitive advantage. Clusters are the promising form of
integration of all types of resources (material, intellectual, and financial), which
provide competitive advantages to the participants. Clustering is one of the most
important prerequisites for enhancing innovation and increasing its competi-
tiveness. The state and local authorities pay special attention to the problems of
financing and the functioning of clusters (Reyzon, Pochekutov, & Aksyonova,
2021). On the demand side, some clustered MSMEs are experiencing pressure
from imported products, notably the shoes and leather cluster from Chinese
products and the furniture cluster faces competition from Turkey. While
geographical proximity to markets (primarily Israel) has historically been a
competitive advantage, it is now the speed of response that is vital in today’s
consumer-aware markets. The importance of the speed of response to market
signals forces many buyers to change some elements of their sourcing strategies,
so that they can react quickly to changing market conditions. These changes are
likely to pose enormous challenges to MSMEs in Palestinian clusters, if they are
developing or maintaining export markets.

Research on Clusters in Palestine

In many places, clusters contribute to economic development (Pyke & Sengenberger,
1992), wealth creation (Eisingerich, Bell, & Tracey, 2010), and regional competi-
tiveness (Ferreira, Garrido Azevedo, & Raposo, 2012; Porter, 1990), as clustering
provides advantages for enterprises in the cluster, which are comparable to econo-
mies of scale for bigger companies (Martin & Sunley, 2003) and support innovation
 Role of Promotion Policies 209

(Tan, 2006). Moreover, clusters play an important role in improving the performance
of MSMEs. According to Porter’s diamond theory (1998), clusters are composed of
core industrial activities with a competitive advantage, supporting and comple-
mentary industries (downstream and upstream industries), with certain factor and
demand conditions. Firms located in a concentrated geographical area create an
opportunity for networking, interfirm links, and access to spillover knowledge and
talent pool (Krugman, 1998).
Marshall (1920) and Porter (1990) both stressed that clusters show a combi-
nation of geographic proximity and sectoral specialization. Clusters could be
defined as geographic concentrations of industries related by knowledge, skills,
inputs, demand, and/or other linkages (Pe’er & Keil, 2013). Clusters could include
organizations of different sizes and types (Delgado, Porter, & Stern, 2010). Porter
(2000) emphasized the role of government in cluster development through facil-
itating the elimination of barriers that hinder the development in a given cluster.
Government support can be exemplified in the introduction of policies that aid in
cluster formation, knowledge sharing, and internationalization (Altenburg &
Meyer-Stamer, 1999; Yu & Jackson, 2011).

Dynamism and Innovation of Palestinian Clusters and the Research Questions

This chapter describes the stages of development of five Palestinian clusters and
promotion policies to stimulate the dynamics and innovation of these clusters.
The dynamics of clustering has been studied to identify in which stage of devel-
opment the clusters are and which factors contribute to the success of cluster
promotion policies. Hence, this chapter answers the following research questions:

(1) In what stage of development are most of the clusters in Palestine (Van Dijk
& Sverrisson, 2003)?
(2) What is the current institutional context for clusters and is it encouraging the
further development of this phenomenon (Knorringa & Nadvi, 2014)?
(3) Is innovation, an important source for the dynamic development of the
economy, taking place in these clusters (Van Dijk and Sandee, eds, 2012)? To
what extent are the Palestinian clusters innovative?
(4) What do we know about the factors explaining the success of the cluster and
what can be done to improve the competitiveness of these emerging Pales-
tinian clusters (Altenburg & Meyer-Stamer, 1999; Sultan, 2014)?
(5) How can the dynamics of Palestinian clusters be promoted?

A project of five clusters was launched in 2012 to enhance the competitiveness

of MSMEs, which represents almost 99% of the firms working in Palestine
(Sultan, 2014). These clusters are presented in Table 7.1.
In order to enhance the competitiveness of these MSMEs, it is necessary to
make them dynamic clusters, which promote productivity, innovation, and
competition. Marshall (1920) suggested mechanisms for cluster dynamics, such as
interfirm technological spillovers, the benefits of specialized labor, and the use of
210 Suhail Sultan and Meine Pieter van Dijk

Table 7.1. Five Palestinian Clusters.

Cluster Type Investment ($ No. of No. of % of Location

Million) Firms Employees GDP
Leather Industry 180 85 1,275 0.5 Hebron
and shoe
Stone and Industry 400 50 1,000 2 Bethlehem
marble
Furniture Industry 100 55 1,650 1 Salfit
Tourism Service 380 80 1,200 2 East
Jerusalem
Palm and Agriculture 50 12 400 0.1 Gaza
date

intermediate inputs resulting from specialization within the cluster (Fujita &
Thisse, 1996). Delgado et al. (2010) added the production of entrepreneurial skills
and rapid dissemination of information, while Schmitz (1992) discussed the effects
of active participation and collaboration between entrepreneurs and workers,
which leads to what is called “collective efficiency.” It will be necessary to find
indicators for these factors to test their relevance in the Palestinian situation.

Theoretical Background
The combination of geographic proximity and sectoral specialization is consid-
ered the start of a dynamic cluster development process. Small enterprises
working in clusters and entrepreneurs operating in networks are generally doing
better than those operating individually (Rasmussen, Schmitz, & Vandijk, 1992).
This also applies in the Global South. Physical clustering makes networking
easier. There are important differences in both the definition used by different
researchers and the real-world manifestations of clustering. Hence, the results of
different case studies cannot always easily be compared. This complicates the
formulation of a theory concerning the role of clusters for technological devel-
opment and innovation diffusion and for small enterprise development on the
basis of empirical research. It also makes it more difficult to come up with policies
to promote clustering and to determine the expected positive effects of the process
and forces the researchers to look at the specific local situation.
The external economies generated by clustering and the competitiveness of
small enterprises as a whole are important. Usually, agglomeration economies
explain the choice of a location (Fujita & Thisse, 1996). Piore and Sable (1984)
added to Marshall’s explanation the importance of cooperation to improve the
competitiveness of the cluster. The active participation of skilled workers and the
intensive collaboration between entrepreneurs result in higher efficiency, or what
 Role of Promotion Policies 211

Schmitz (1992) called collective efficiency. Many researchers (e.g., Pyke & Sen-
genberger, 1992) have stressed the importance of a common cultural background
for the development of industrial districts. According to Pyke and Sengenberger
(1992), economies of scale and scope are achieved in the ideal cluster, similar to
those enjoyed by large-scale corporations. It allows firms to specialize in a certain
production phase, local institutions play an important role, and there are rela-
tionships of competition and cooperation. Only in such a case can the necessary
trust develop further as may be expected between collaborating entrepreneurs. In
empirical research, it is unlikely to find all these features at once, in just one case.
Pyke and Sengenberger (1992) also point to the importance of institutional
factors, which will also be analyzed. Institutional economics can help to analyze
the interaction between competition and cooperation in a framework of rules and
regulations created by different levels of government and influencing what hap-
pens in the cluster (Knorringa & Nadvi, 2014). According to institutional eco-
nomics, markets are imperfect. They are defined and shaped by institutions, but
often new institutions need to be created and existing ones need to be modified
when a new situation arises. Hence, the analysis of markets begins and ends with
the design of an institutional framework and an analysis of the actual functioning
of these institutions. They make the market work and let them function in the
desired way. Government policies and agreed regulation play an important role in
designing institutions. Institutions also guide entrepreneurs. They are better able
to enhance their competitiveness.
Clusters contribute to the production of entrepreneurial skills (Delgado et al.,
2010) and facilitate rapid dissemination of information. Van Dijk and Sverrisson
(2003) distinguish different stages in the development process of clusters as shown
in Table 7.2.

Table 7.2. From Clusters to Industrial Districts: An Evolutionary

Perspective.

Stage Main Characteristic Main Advantage

Locational cluster Nearness Information, space, raw material,
etc., sharing
Market cluster More market outlets Benefit from local traders, who
“export” the product
Labor division Development of Specialization
cluster interfirm relations
Innovative cluster Innovation starts Dynamic development
playing a role
Full-fledged Supportive local Own dynamics
industrial district government
Source: Van Dijk and Sverrisson (2003).
212 Suhail Sultan and Meine Pieter van Dijk

In the first stage, the trigger is physical nearness because of available space,
cheap land, the availability of raw materials, the legal framework, or a good
location (Tracey, Heide, & Bell, 2014). These factors lead to a locational cluster.
The main advantage is the sharing of information. The basis may be people
coming from a similar region or village, caste, or clan, getting to know each other,
and the entrepreneurs may set up trade organizations. Such a cluster becomes
then interesting for local traders, who can buy cheaply and sell easily outside the
cluster. Typical examples of such market clusters are described in the study by
Sandee (2002). More market outlets, benefiting from traders who are “exporting”
the product. Besides that, physical nearness facilitates the exchange of ideas, and
it also makes the development of institutions and their interventions more easy
and effective.
Eventually, this development of a market cluster develops, which may stim-
ulate a further division of labor (Table 7.2). The development of interfirm rela-
tions may lead to more specialization, what is called a labor division cluster. By
now governance, structures may develop at very different geographical levels
(Krugman, 1998), ranging from the national to the local and initiated by the
government or by the private sector itself. Clusters are sometimes developing into
a citywide or regional cluster because of the complementarities between the
enterprise and an active role of local governments.
Then an innovative cluster may emerge. Clusters often have become the
seedbed for an exchange of ideas leading to innovations (OECD, 2009). These
clusters of enterprises or small firm communities may eventually become
full-fledged industrial districts, the highest stage of development, like Baden-
Württemberg in Germany or Silicon Valley in the United States. Finally, the
literature points at this stage to the important role of (local) government insti-
tutions and the importance of developing relations with universities for the
development of the clusters (Hui & Zhong, 2006).
This stages approach is very much linked to the type of market served by the
clusters. For that reason, we also use the theory of the market segmentation
matrix (Wind & Bell, 2008). This is a multidimensional approach to characterize
and compare the competitive position of all industrial sectors – considered as
potential clusters – in a region. Segmentation charts are created using the
employment concentration ratios (ECRs, also known as location quotients or the
“specialization metric”) on the vertical axis, and the forecasted growth rate in the
region on the horizontal axis. Along these lines, four categories arise:

• Star industries, which are forecasted to have stronger than average growth and
have ECRs greater than the national average.
• Opportunity industries, in which the industry has an ECR below the average,
but which represents a major opportunity because the industry is forecasted for
strong output growth.
• Cash cow industries, in which the region has an undisputed comparative
advantage although they may be slower growing than others.
 Role of Promotion Policies 213

• Challenge industries, in which the region currently has low specialization, and
they are not projected to grow quickly.

Methodology
We opted for a more qualitative research design. After a literature review, data
were collected on five important clusters through field visits. Semi-structured
interviews were held with key policy decision-makers such as representatives
from the Ministry of National Economy, the Federation of Palestinian Chambers
of Commerce, Industry and Agriculture, and the Palestine Federation of Indus-
tries. In addition, semi-structured interviews were done with cluster managers and
other cluster stakeholders. Focus group discussions were held, discussing with a
group of 10 participants an assessment of the five clusters based on the three
evaluation tools used in the exploratory stage: a typology of clusters (Van Dijk &
Sverrisson, 2003), a market segmentation matrix (Wind & Bell, 2008), and a list of
success factors (File, 2012). The interviews allowed a classification of the different
factors contributing to the success of Palestinian cluster promotion policies. Fifty
cluster firms were surveyed as well to assess their performance.
The prime focus of any cluster development policy should be to address the
inefficiencies a cluster faces. As such, the success of policy interventions has been
measured in terms of the improved performance at the firm level and at the cluster
level, which is reflected in increased turnovers, profits, new markets, increased use
of business development services (BDS), the development of cluster-level coor-
dination systems, and a more important role for local government institutions.
However, the success of these policies depends on the efforts of the local insti-
tutions to address a number of the collective issues of the clusters. The approach
adopted in the cluster development project in Palestine, as shown by the repre-
sentative cases discussed above, tends to crystallize some of the following learning
to be shared for the sake of evolving a robust and effective intervention strategy in
the country for these clusters.

Answering the Research Questions: Cluster Studies in Palestine

The Stage of Development of the Clusters
Sultan and Van Dijk (2017) sought answers as to which level of development the
Palestinian clusters have attained. This resulted in the identification of five stages
whereby clusters are distinguished, ranging from location clusters to fully-fledged
industrial districts (see Table 7.3). The study of Sultan, Van Dijk, and Omran
(2020) analyzed the nature of challenges facing these five Palestinian clusters.

The Institutional Context

Pyke and Sengenberger (1992) have stressed the importance of the cultural
background for the development of clusters. They also point to the importance of
institutional factors. Institutional economics can help to analyze the interaction
214 Suhail Sultan and Meine Pieter van Dijk

Table 7.3. From Clusters to Industrial Districts: An Evolutionary

Perspective Applied to Palestine.

Stage Main Characteristic In Palestine

Locational Nearness, leading to sharing The majority of the firms
cluster information, etc. in the date and palm
cluster
Market More market outlets, benefiting The majority of the
cluster from traders “exporting” the furniture and the leather
product and shoe cluster
Labor Development of interfirm Minority of the five
division relations leading to specialization clusters
cluster
Innovative Innovation starts playing a role Majority of the stone and
cluster resulting in a dynamic marble and the tourism
development and creative arts cluster
Full-fledged Supportive local governments No examples yet in
industrial supporting the own dynamics of Palestine
district the cluster
Source: Van Dijk and Sverrisson (2003) and column 3 from Sultan and Van Dijk (2017).

between competition and cooperation in a framework of rules and regulations

created by different levels of government and influencing what happens in the
cluster (Knorringa & Nadvi, 2014). In addition, it is crucial to revisit some laws
and regulation. As an example, the Intellectual Property Law, Investment Pro-
motion Law, and Public Procurement Law should be modified to add new clauses
to encourage economic entities to work in clusters. This would provide an
enabling business environment for clusters by including the cluster policy in the
existing national policies and strategies and by providing incentives schemes to
cluster members.
For the institutionalization of clusters, activating the Palestinian National
Export Strategy (2014–2018) is a starting point. That would certainly apply to the
five clusters. It would lead to representatives participating in international fairs
and joining the government when there are international delegations interested to
develop trade relations with Palestine. It is well known that the institutional
environments and business situations of developing countries are fundamentally
different from those of the developed countries (Lin & Chang, 2009; Park & Luo,
2001). Chen et al. (2016) explain that, in emerging economies, rules are often
unclear and uncertain because the formal institutions are still evolving.
 Role of Promotion Policies 215

Can Palestinian Clusters Be Considered Innovative?

Although there are significant differences between the five clusters, the basic
argument is that there is no innovative milieu in Palestine. Most of the MSMEs
mainly sell standard products. Interfirm relationships have hardly developed and
the role of local government is limited. Normal buying and selling transactions
between companies in the cluster are not well developed. Other types of coop-
eration such as exchanging ideas and carrying out projects together do exist.
There are limited relations with research centers, universities, and governmental
institutions (Sultan, 2014). The most active of the five clusters are the shoe and
leather, the furniture, and the stone and marble clusters. The main reasons behind
that is the close relationship between cluster members and local universities and
the resulting collective efficiency. The shoe and leather cluster, in cooperation
with Palestine Polytechnic University and the Hebron Chamber of Commerce
and Industry, created testing products. They also launched a joint professional
training in leather and shoe. Leather tanners created a joint company to buy
chemicals together to benefit from the quantity discount to reduce the cost of
production and hence increase their competitiveness.
In Hebron, 18 leather and shoe, medium-sized factories established in 2016 a
joint shoe exhibition in Palestine and moved to Jordan, where these factories sell
their products while sharing all expenses – rent, staff salaries, and other recurrent
expenditures – and they opened another branch in Jordan in 2018. Another
example of collective efficiency concerns the furniture cluster, which organized a
three-day exhibition in Ramallah in 2016, which attracted many visitors. The
stone cluster benefited from the Stone and Marble Center in Hebron that was
established in 2012 as a tri-partnership between the Ministry of National Econ-
omy, the Stone and Marble Industry Union, and Palestine Polytechnic University.
The center offers a two-year diploma course and provides facilities for testing
used material and conducting relevant applied research. The furniture cluster also
agreed with An-Najah National University to establish an innovation center to
develop new designs and provide testing services and other technical assistance.

Success Factors for Palestinian Clusters

Many studies of clusters in developing countries have focused on the supportive
role of government and public agencies on clusters’ performance (Kamran, Fan,
Matiullah, Ali, & Hali, 2017; Richardson, 2013), indicating, for example, that
when the social bonding in a given cluster is weak, government interventions are
of greater significance. Kamran et al. (2017) analyze the role of classical factors of
production (including land, labor, and capital) and found that a better infra-
structure, availability of utility services, and the accessibility to inexpensive bank
loans and commercial finance helped businesses in the developing countries to
flourish in geographic proximities. Richardson (2013) mentions that it would be
great if the policymakers foresee the problems prior to developing the cluster and
can take the necessary steps to overcome them.
216 Suhail Sultan and Meine Pieter van Dijk

Cluster Promotion Policies in Palestine

Categories of policies for clusters development are listed in Table 7.4 (Van Dijk,
2003) and consists of five distinct categories: (1) policy-related incentives, (2)
controlling prices and providing subsidies, (3) innovation promotion, (4) physical
support, and finally (5) stimulating cooperation among enterprises within the
cluster itself. These polices have been recommended by Van Dijk for China and
India (Van Dijk, 2003). Table 7.4 presents the diagnosis of the current promotion
policies in the Palestinian context.
The Palestinian government developed a national policy to promote clusters
and inserted related initiatives to cluster development in their National Devel-
opment Plan (2017–2022) to provide support to the clustering process. To create
new clusters and foster the ongoing promotion, policies are listed in Table 7.5 and
discussed in general terms below:

• Revisiting related laws and regulation

This can be achieved by including a well-defined cluster policy in the existing
national policies and strategies and by providing incentive schemes to cluster
members. As an example, the Intellectual Property Law, the Investment Pro-
motion Law, and the Public Procurement Law.
• Internationalization of clusters
Activating the Palestinian National Export Strategy (2014–2018) is a starting
point to institutionalize the five clusters discussed in this chapter. It would lead
to representatives participating in international fairs and joining the govern-
ment when there are international delegations. However, internationalization
may not be possible or appropriate for all clusters.

Table 7.4. Cluster Promotion Policies: Different Categories of Instruments.

Category Example
Policy-related Fiscal policies; targeted education and training;
incentives marketing support; linking with private or public capital
or suppliers; and cluster marketing through advertising
Prices and Influencing land prices; the price of electricity and water
subsidies or other services
Innovation Involving research centers; stimulating incubator
promotion centers; and promoting linkages with training and R&D
institutions
Physical support Providing space and infrastructure
Stimulating Forming groups or associations and consulting these
cooperation groups and promoting interfirm relations
Source: Van Dijk (2003).
 Role of Promotion Policies 217

Table 7.5. Palestinian Cluster Promotion Policies.

Category Example
Policy-related There are no tax benefits in Palestine for companies
incentives working in clusters. This law addresses large-scale
companies rather than MSMES. However, there is no
support observed for marketing clusters or clusters’
products. The same challenges exist when it comes to
access to finance.
Prices and The Government does not give any direct preferential
subsidies treatments to any cluster. However, they mention the
clusters on the national agendas and development plans,
which may encourage donor organizations to support
existing or new clusters.
Innovation The gap between education and training institutions in
promotion Palestine and MSMEs is decreasing, but the involvement
of the research centers and business is still limited.
Physical support Local governments do not provide any space,
infrastructure, electricity, or any other support to help
clusters to improve their competitiveness. Recently, the
Government started to build industrial zones, which
might help the development of existing clusters.
Stimulating Interfirm cooperation is not very well developed. We
cooperation noticed a few cases in the leather and the shoe cluster,
the stone and marble cluster, and the palm cluster. All
these cases were initiated by the private sector and not
by the government.

• Promoting innovation
Promotion of innovation could be achieved by encouraging cluster members to
closely cooperate with universities, research institutions, and technical and
vocational centers, which may promote innovation.
• Promoting public–private dialogue
It is essential that private sector partners will take the lead in dealing with the
different challenges clusters are facing through an effective and serious dialogue
between cluster members and relevant government departments such as the
Ministry of Finance and the Palestine Standard Institute.
• Access to finance
Working in clusters could help these MSMEs to get loans from banks through
collective projects or collateral. A more effective financial system is needed
such as changing collateral laws; invest in financial literacy; increase the
218 Suhail Sultan and Meine Pieter van Dijk

number of suppliers of finance; and improve credit assessment systems used for
MSMEs.
• Good governance
This could be achieved by creating a national committee consisting of repre-
sentatives from the government, the private sector, and academia, which could
suggest new cluster policies and monitor the developments in the ongoing
clusters.

Discussion
There are significant differences between the five clusters studied. Constraining
factors, such as a lack of closer collaboration between firms themselves and
between firms and universities, were also found in the literature. As the size of
most of the Palestinian economic entities are MSMEs, clustering can help these
entities to increase their productivity and hence help to reduce the high unem-
ployment rate among Palestinian youth, but more focused policies of the Pales-
tinian Authority are necessary. The transition from the stage of disorganization
and stagnation to one of organization and dynamics is difficult. The building of
trust, constructive dialogue among actors, exchange of information, identification
of common strategic objectives, agreement on a joint development strategy, and
its systematic and coherent implementation require substantial efforts and
commitment to common goals.
Evidence from Palestine shows that cooperative relations and joint action are
more likely when enterprises operate in each other’s proximity and share business
interests as also stated by Marshall (1920) and Porter (1990). Such markets for
products and the infrastructure need the challenge of external competition. In the
case of groups or clusters, joint initiatives of enterprises are more effective because
of the critical mass of interested parties. They are also more cost effective due to
shared fixed costs and easier to coordinate, with proximity fostering mutual
knowledge and trust.

Recommendations
The framework used helped to identify the initiatives of the Palestinian govern-
ment to develop clusters and will eventually help to evaluate their effectiveness,
efficiency, and impact. Based on the analytical framework, it is noticed that the
current government support to clusters is not enough. Needed are cluster policies.

(1) Identifying critical constraints: The cluster project offered the same inter-
ventions (i.e., same training, same trade missions, etc.), without taking into
considerations the different stages of life cycle and different stages of
development. However, each cluster needs to identify its critical constraints
and the needed interventions to take away these constraints by addressing the
issues, not just on the basis of their pressing nature but on the basis of their
 Role of Promotion Policies 219

criticality in the overall scheme of things for the cluster, and in this case, the
logical precedence of the constraints needs to be done in order to set the
process rolling. Sometimes the constraints that were addressed could not
become fully resolved in any of the clusters. This was quite possible given the
complex problems of Palestine and the cluster: the large number of stake-
holders and not all benefiting from the interventions in any program and also
the long-term nature of most issues that a cluster faces.
(2) Segregating stakeholders into very clearly distinct silos for the sake of
refining the intervention strategy: Since averaging out the issues of the
distinct sets of stakeholders lends to the development of a very generalist
action plan, it is important that the aspirations of the different important
stakeholders are incorporated and action plans for each set of stakeholders
are developed separately such as access to financial institutions, contacts with
local universities, etc.
(3) Creating governance platforms of each cluster needs to be institutionalized to
assure sustainability. As the AFD project was finished by the end of 2017, the
institutionalization of the cluster was very important to assure sustainability.
(4) Developing a clear business environment for clusters. The legal status of the
clusters is not well defined and that may lead to confusion concerning the
existing rules and regulations.

The research shows important differences between the different clusters and
points to constraining factors, such as a lack of closer collaboration between
firms, not enough innovation, and problems to gain access to bank finance. This
leads to the conclusion that the institutional context in Palestine is extremely
important and can contribute to more economic growth in the existing clusters,
but more specific policies are necessary (EC, 2008).
Promoting innovation is important. Encouraging cluster members to closely
cooperate with universities, research institutions, and technical and vocational
centers may promote innovation.
Growth and decline of these activities is highly dependent on external cir-
cumstances. Import liberalization and competition from producers from other
countries can lead to lower growth and even to contraction of production. In the
Palestinian context, this means changing from local production to importing the
product through Israel. In order to create new clusters and foster the ongoing
ones, a number of promotion policies is suggested.
Promoting public-private dialogue. It is essential that private sector partners
will take the lead in dealing with different challenges clusters are facing through
an effective and serious dialogue between cluster members and relevant govern-
ment departments such as Ministry of Finance and Palestine Standard Institute.
Access to finance. Since most of the members of the clusters are SMEs, they
lack enough collateral to get loans from banks. Working in clusters could help
these businesses to get loans from banks through collective collateral.
Good governance. It is important to improve cluster governance at the
national and local level to assure sustainable development of the clusters. This
220 Suhail Sultan and Meine Pieter van Dijk

could be achieved by creating a national committee consisting of representatives

from the government, the private sector, and academia, which could accredit new
clusters and monitor the developments in the ongoing clusters.
Nwokoye, Igbanugo, Ekesiobi, and Dimnwobi (2022) studied the impact of
fiscal incentives on the tax compliance behavior of firms in industrial clusters in
Nigeria. The major findings of the study show that regular tax audit, firm size,
simplifying the communication on tax requirement, communicating deterrent
messages, educational attainment of the firm owner, and political legitimacy of
the current government as well as fiscal incentives (tax credit, tax reduction,
capital allowance, investment incentives) significantly influence the tax compli-
ance behavior of firms. This may also apply in Palestine. The study finds that
fiscal incentives significantly enhance firm performance in industrial clusters.

Conclusions
Even though the issue of clusters in SMEs has been well researched in developed
countries, empirical studies are still lacking in this developing region. In the
overwhelming majority of Palestinian entities categorized as SMEs, clustering
adds value to the firms from the point of view of productivity and by battling
unemployment, which is rampant among Palestinian youth. This study aims to
analyze the nature of challenges facing five Palestinian clusters and to understand
their dynamics of development. The study proposes a number of key policies
necessary to the growth and innovation of the current clusters.
There are limited backward linkages to suppliers of raw materials, and few
organizations offer services that match cluster needs. Private sector institutions,
Chambers of Commerce and Industry, Palestine Trade Center (PALTRADE),
and the Palestinian Federation of Industries rely overtly on donor-funded pro-
jects. Such projects do not always meet the needs of cluster members, since they
are often based on donors’ strategies and methods of providing aid. Firm struc-
ture, strategy, and rivalry have not developed enough to allow MSMEs in clusters
to improve their competitive drivers, much beyond price-based advantages.
Currently, cluster development in Palestine requires the elementary features of
competitiveness to include strong institutions, an adequate infrastructure, a stable
macroeconomy, and sufficient primary education. However, many of these
requirements are currently lacking for Palestinian MSMEs, which need to develop
more efficient production processes, increase product quality, and understand that
innovation is about changing business processes as well as changing product
types. The development of clusters is often impeded by a lack of coordination,
consistency, and relevance. Usually, there is support, but this support lacks for-
mality and organization. Efficiency in internal operations is a necessity, but not
sufficient in itself to compete globally. Intrinsic within Palestine is the over-
arching, national culture, affecting all areas of cluster development, particularly
when implementing cluster-based, collaborative initiatives. It is important to take
into account the types of planned cluster initiatives and to ensure that cultural
traits of hierarchy and collectivism are factored into such planning. In particular,
 Role of Promotion Policies 221

governance and cluster management should be performed by well-respected

individuals, who can commit their time to ensuring that clusters are effectively
managed.
It is critical that the economy has the autonomy and ability to tap into and
develop strategic, economic resources: land, roads, and water. Control of borders,
the development of domestic electricity supplies, access to air and sea space, trade
agreements, and human resource development are vital to Palestinian social and
economic development. While strategic resources are under the control of Israel,
the future for developing a robust economy and building social capabilities in
Palestine is extremely challenging. The dynamics of the clusters were assessed
based on five criteria as stated by Van Dijk and Sverrisson (2003) and Sultan and
Van Dijk (2017). The results show that clusters in Palestine are at different stages
of development, differ culturally, and in terms of maturity.
Dynamic clustering creates additional value to the customers and improves
productivity and innovation, which may lead to a sustainable level of prosperity
in a region. Therefore, decision-makers need to consider this fact when designing
policies to promote clusters in Palestine. The situation in Palestine is specific since
it is a landlocked country that is occupied. It is also a small country, which
because of its location is not benefiting from trade as much as some of the Middle
Eastern countries with a sea port. Finally, the level of economic development is
low, which implies local demand for industrial products is limited.
The prime focus of any cluster development policy should address the ineffi-
ciencies a cluster faces (Altenburg & Meyer-Stamer, 1999). The success of policy
interventions could be measured in terms of the improved performance at the firm
level and at the cluster level, reflected in increased turnovers and profits, the
development of new markets, the increased use of BDS, the development of
cluster level coordination systems, and a more important role for local govern-
ment institutions.
The researchers were facing many challenges. Among these challenges are the
availability of data about the clusters and their members, the movement between
the geographical locations especially between West Bank and Gaza Strip, and the
lack of knowledge and experience of the government and private sector institu-
tions about their roles and responsibilities in supporting the clusters. The
researchers recommend investigating the clusters’ development periodically and
to assess the expected impact of the proposed policies on the growth of these
clusters. That will help the government to prioritize their policy interventions. In
addition, the researchers recommend to include other new start-up clusters that
recently emerged in Palestine.

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