Why we should treat SME clusters as special economic zones

A cluster is a geographic concentration of interconnected firms, companies, factories, suppliers, and institutions in a particular field at a specific location. More specifically, a cluster is a concentration of enterprises producing similar products or services and is situated within an adjoining geographical location around a five kilometre radius and having common strengths, weaknesses, opportunities and threats.

To identify a cluster we use three specific indicators, these include interconnected enterprises located in a specific location, producing the same or similar products and/or delivering homogenous services.

The value of these indicators may differ across countries. For example, in Bangladesh, we define an SME cluster as an adjoining geographical location having at least 50 plus homogeneous production units with backward and forward linkages located in a five-kilometre radius.

There are 177 SME clusters in 51 districts of Bangladesh with about 70 thousand enterprises and employing about 20 lac people. The approximate annual turnover of these SME clusters is about Tk295 billion.

Among the 20 lac workers of these SME clusters, 74 percent are male and 26 percent are female. Each of the clusters on average employ about 11,000 people with each enterprise on average employing 28 employees.

The above figures are enough to show that the naturally grown 177 SME clusters of Bangladesh are playing a very significant role in the economic development of Bangladesh. If we wanted to achieve similar results in terms of employment and substantial annual turnover through the establishment of Export Processing Zones (EPZ), BSCIC Industrial Estates and Special Economic Zone (SEZ), etc., consider how much more time, money and effort we would have to invest. Fortunately, SME clusters are delivering these figures to us without any specific development interventions since their inception.

Among the identified SME clusters, there are 38 handicrafts and miscellaneous clusters, 34 agro-processing/agri-business clusters, 31 light engineering and metalworking clusters, 22 knitwear and readymade garments clusters, 16 fashion-rich effects clusters, 13 leather making and leather goods clusters, 10 handloom and specialised textiles clusters, five healthcare and diagnostics clusters, three plastics and other Synthetics clusters, three electronics and electrical clusters, and two educational services clusters.

There are 177 SME clusters in 51 districts of Bangladesh with about 70 thousand enterprises, employing about 20 lac people. The approximate annual turnover of these SME clusters is about Tk 295 billion.

In terms of location (in descending order), there are 68 clusters located in Dhaka division, 32 clusters in Rajshahi division, 25 clusters in Chattogram division, 21 clusters in Khulna division,  12 clusters in Rangpur division, 10 clusters in Barisal division, and 19 clusters located in the Sylhet division.

Around 80%, 15% and 5% of enterprises of the SME clusters are micro, small and medium-sized enterprises respectively.

All the SME clusters are mainly producing primary products and offering very basic services.

From the agro-processing sector, these include manufacturing products such as household items, consumer goods like rice, broken rice (commonly known as khud), husking dust (commonly known as Kura), burning wood (commonly known as 'lakri'), oil, and oil cake (commonly known as 'khail'), etc.

The following are the products and services offered by the other sectors.

Light engineering sector: Doors and window grilles, window frames, collapsible gates, iron and steel furniture, motor parts, engine repair work, pumps, machine tools, agricultural equipment, automobile body building, repairing, and colouring, ship breaking, etc.

RMG Sector: Threads, pants, jackets, three-piece sets for women, towels/gamchas, shirts, measuring tapes, frocks, baby clothes, suits, and clothes, etc.

Fashion designing and fashion-rich sector: Jewellery made from gold/ silver/ other metals, hair spa, hair proteins, party makeup, eye-brow tweezers, herbal face packs, haircut, etc.

Leather goods sector: Men's shoes, ladies' shoes, baby shoes, sandals and slippers etc.

Healthcare sector: X-rays, ultra-sonograms, ECG and different pathological tests, haematological tests, biochemical tests, echocardiogram, CT scans, and surgery, etc.

Plastics sector: Mugs, bowls, buckets, and many other home appliances, etc.

Electrical and electronics sector: Electrical Boards, switches, sockets, holders, coils, batteries, TV, electric cables, etc.

Handloom and specialised Textiles sector: Blouses, saris, ornas, three-pieces, towels, panjabis, cushion covers, bed sheets, and pillow covers, etc.

Handicraft and Miscellaneous Sector: Tables, mats, bamboo nets, large bamboo baskets, dhol (traditional drums), tablas, kulas, candle stands, cup-plates, clay piggy-banks, flower vases, different dices, mud covers, tubs, oil-based perfumes, incense sticks, curry and rice cooking pots, bamboo goods, tray sets, bowl sets, file sets, ruler sets, cylinder sets and wooden furniture such as beds, reading desks, computer desk, sofas, dining table, chairs, etc.

From the list above, it is clear that SME clusters are producing a long list of products to meet local demand that act as a substitute for imports.

With that in mind, let us carry out a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis on the SME clusters of Bangladesh to recommend the necessity of a 'National Cluster Development Authority' in Bangladesh to take specialised care of the SME clusters to make them more productive and help them grow.

The major strengths of SME clusters include its ability to benefit from economies of scale, easy access to local raw materials, access to trade bodies' support, growing demand for products, easy management and administration, lower cost of production, small capital outlets, cultural affinity by opting for traditional production processes and inculcating a sense of bond through a similar type of production process, etc.

On the other hand, the major weaknesses of the SME clusters include the unplanned development of enterprises with limited scope for expansion, the absence of required infrastructural facilities and utility services, an unskilled and uneducated workforce with no formal training, the lack of a common approach to address the problems of environmental pollution, a traditional and less-efficient production process, missing or unattainable economies of scale in some cases, the limited scope for product diversification, limited product range, shortages of finance/ limited access to finance due to lack of collaterals, limited access to the latest technology, family-based business structures resulting in a shortage of expertise, the absence of research and development supports, the absence of skill development initiatives/ institutions, the absence of central warehousing facilities for raw materials and finished goods, etc.

The opportunities for SME clusters include the potential initiation of planned interventions by the government and development agencies, the growing demand for goods and services in the local and national market, the slow but gradual improvement in infrastructural facilities and power supply, the initiatives by the SME Foundation for different planned development interventions, potential global markets for traditional products, an easily trainable workforce, potential public-private partnerships to create supportive infrastructure for SMEs, the establishment of common research and development centres/laboratory facilities set under the PPP, the scope for market linkage among the large and small firms in many sectors, the scope for supply and value chain creation among enterprises, etc.

Finally, the major threats for the SME clusters include the import of cheaper products due to an open market policy, the non-availability of required capital for modernisation, the uncertain availability of utilities connection and supply, the arrival of better quality substitute products, the presence of trade diversion rather than trade creation, the introduction of efficient technology in competing industries, the shrinking of local and national markets due to the flood of imported products, the growing concerns of environmental pollution may limit the growth of enterprises, the economic fallout of the Covid-19 lockdowns, etc.

Based on the above SWOT analysis and presented statistics we can state that the SME clusters have a  huge potential to contribute to the socio-economic development of Bangladesh if the government can undertake certain key development interventions and/or declare the SME clusters as Special Economic Zones.

I conclude with a humble request for the government to establish a national cluster development authority to take proper care of these SME clusters.

Md Joynal Abdin, secretary, Dhaka Chamber of Commerce & Industry (DCCI). Illustration: TBS

Md. Joynal Abdin is the Executive Secretary of the Dhaka Chamber of Commerce and Industry (DCCI).

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.