Academic circles and policy debates are always coming up with the next big development idea. But in Latin America and the Caribbean, the reality on the ground is that we have failed to implement even some of the more basic policies to promote development and job creation at the scale that is needed. One of the powerful ideas that has fallen out of vogue is the importance of clustering industrial activities, and linking local clusters with global value chains to promote higher investment, innovation, and ultimately upgrade economic growth models. Policymakers should not miss the untapped potential of upgrading existing linkages and promoting the development of knowledge-intensive sectors of industry.
The region has had some success on this front, such as with Chile’s wine industry. A combination of foreign direct investment, imports of specialized capital equipment, and highly skilled human resources were key to the technological upgrading of the industry. Italian economist Elisa Giuliani studied companies in the valley of Colchagua, a region known for premium-quality wine production, and noted that a large majority of firms adopted new technology, including improving cellar technologies, bottling plants, and production processes such as viticulture and vinification.
Equally important, notes Giuliani, was the formation of a cluster of companies in the Chilean wine industry offering highly specialized complementary services, including professional advice in vineyards and terroir, implementation of quality certifications, design and packaging, and assistance with international trade fairs and competitions. And while this allowed each firm to exchange information and jointly solve problems, the entire cluster also connected to national research institutions and business associations to tap into other sources of knowledge. This was all essential to bolster Chile’s export capacity and establish it as the world’s fourth largest wine exporter.
As the Chilean example points out, clusters can be effective tools for raising competitiveness and developing local communities. They can be essential in bringing together firms in geographical proximity to take on the full range of activities that is required to bring a product or service from its idea phase to the market. And they can provide a much-needed mechanism to move from countries’ over-reliance on commodity production to more resilient areas of industry.
The market often naturally forms clusters, as firms specialize and try to derive gains from economies of scale. But it takes a concerted effort, through policy, to promote value chain formation and cultivate the strategic partnerships between academia, public and private sectors that allow for the transfer of technology and the inclusion of small and medium enterprises.
Mexico, for example, built its mid-size software industry as clusters developed in a few of its cities. In Monterrey, it was spurred by the availability of highly skilled talent, while in Mexico City and Guadalajara it has grown as a byproduct of the activities of transnational companies in the electronics sector. This allowed for product and process upgrading, but the extent to which productivity gains will spread to the rest of the country remains to be seen. Small and medium enterprises often have a harder time taking part in segments of industry controlled by the larger players, and policies could play a role in redirecting their efforts to other more strategic sectors.
Costa Rica, for example, developed an electronic parts production cluster around the presence of Intel, the chip making company, in the country. But the decision of Intel to close its production plant in 2014, seriously threatened the existence of the cluster, highlighting the importance of building more resilient ecosystems of innovation that can continue to grow even after some of these anchor industries move away. This can be done through policies that effectively sustain the upgrading efforts of suppliers and avoid the temptation to anchor clusters to the presence of a handful of large multinationals.
Global competitiveness ultimately implies continuous learning and innovation. And as Latin America and the Caribbean move forward, policy can exert considerable positive influence through its role as a catalyst, source of demand, and supporter of research, basic education, and training. These aren’t big ideas; they’re just simple, straightforward policy innovation and consistency.