How do regions attract manufacturing firms and industrialise? How do manufacturing clusters develop? What are the requirements to achieve industrialisation?
Even with examples of success, explaining the HOW of industrialisation has remained a mystery. I blogged here in the context of the success of Silicon Fen in Cambridge. All that can be said is that industrialisation just happens.
Much of the mainstream debates and literature is focused on the role of infrastructure provision, industrial policy and industrial promotion activities. But, for areas and regions seeking to find a foothold in the industrial landscape, is this sufficient?
I want to point to two aspects of this issue which are less discussed - the importance of personalised engagement with investors, and the multi-layered nature of industrialisation.
While the mainstream issues like enabling policies and infrastructure are important, a less discussed but equally important area is the need for personalised and continuous engagement. In fact, this may perhaps be the difference between success and failure in industrial transformations.
Conditional on an enabling policy environment, what's required is continuous and high-level engagement all through down to commissioning of the project and its initial years. This is a deeply personalized play involving the political leadership and the top bureaucrats. In simple terms, it's about intense schmoozing to court the investor and then continuous handholding support to help them establish and operate the enterprise. It's about the unsexy and diffused art of long-drawn and persistent backroom implementation.
Given its personalised nature, this approach is clearly something only a few politicians and bureaucrats can pull off. And given the political economy of India, where such schmoozing is scorned upon, it's also an immensely challenging task. For example, a bureaucrat found to be dining and wining investors and businesses, even with the best of intentions, is most likely to attract the negative attention of media and commentariat and become the target of allegations and insinuations. I blogged here highlighting the contrast between India and China.
This requirement for personalised engagement should be seen as a means to overcome the unpredictability and difficulties of doing business in India, especially for foreigners. The personal connections give confidence to the investors that they'll have a helpful ear when they face problems in the ground.
However, these are only necessary conditions. Even with these, success is by no means certain. It's a long haul, require persistent effort, and lucky breaks. Once some big investors come in, the repeat game dynamics help reinforce investor confidence and bring more. At some point, it tips over.
It's not for nothing that there are just a handful of examples of regions/countries having made this manufacturing breakout. Successful structural transformation is very rare.
Now let's come to the second issue of multi-layered nature of industrialisation.
There are perhaps three levels of industrialisation. The first, and most salient one, involves investments by large global companies - contractor manufacturers like Foxconn with their large plants or factories by large companies themselves. Their arrival most often is accompanied by the emergence of an eco-system of suppliers and ancillaries. The second level involves the medium scale enterprises, mostly domestic ones, which employ a few tens or hundreds of workers and have a smaller footprint than the large global companies. The final level constitutes the numerous small enterprises who provide the major share of job creation in a country as a whole.
These three levels form an eco-system and are connected by a complex web of endogeniety in their respective growths. The first level provides the trigger for productivity growth through technology transfers and learning by doing spillovers, which cascade across levels. The third level provides the soil for growth of a business culture within the area and the basis for further expansion and growth of attendant infrastructure and support mechanisms. It can be argued that the strength of the middle level is one of the most important contributors to the aggregate productivity and competitiveness of the region or country.
Successful industrialisations are likely to combine a mix of all three levels. How it emerges can, in theory, be top-down or bottom-up in terms of the levels. But both will take time.
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