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Regional Governance, Institutions and Development
Michael Danson and Geoff Whittam
(University of Paisley-Scotland)


6. NETWORKING AND INDUSTRIAL DISTRICTS: NEW TYPES OF INDUSTRIAL ORGANIZATION

6.1 Introduction

As noted in the sections above, in the recent past the academic literature and the policy strategies of many developed countries have strongly favored the organization of small and medium enterprises (SMEs) through "networking" structures and more spatially specific arrangements, namely industrial districts. This section explores some of the conditions necessary for the establishment of formal organizational structures that will lead to firms cooperating within the process of production. The terminology we employ to describe interfirm relationships is deliberately loose but encompasses all types of relationships that embrace some degree of risk-sharing and information exchange. The section centers on arrangements within the context of the Scottish economy.

The section's focus is based on the fact the principal agency with the task for economic management of the Scottish economy, Scottish Enterprise (SE), has recently identified networking arrangements among SMEs as a way to achieve growth and hence job creation among them. According to SE, "Networks are important: many of the solutions will be found in the actions of individual entrepreneurs, backed by their networks of family and friends. An important focus of action for the strategy is to improve the effectiveness of these networks and to make potential entrepreneurs more aware of what they can do themselves to achieve success. Part of this involves improving the support given by the formal support networks in the private and public sectors" (SE 1993, 4). The Business Birth Rate Strategy acknowledges that there are problems with existing networking agencies within the Scottish economy and seeks ways to encourage the effectiveness of both formal and informal networking arrangements (SE 1993, 8). See Figure 6.1 :Company birth rate

As SE's research efforts and strategies were based on an examination and analysis of the international literature and practices of various levels and forms of governance institutions, the work of SE is used here to show an appropriate example of a standard region. The processes of research and strategy development are applicable well beyond the Scottish experience, so we use this case study as a fully legitimate introduction to the exploration of "networking."

The objectives of the SE inquiry were to provide improved understanding of the role of new firm formation (NFF) in economic development and to explain why Scotland had a lower rate of business creation than other regional and national economies. These objectives made the inquiry international by definition. The SE research program identified two key concepts: the Business Life Cycle and Segmentation. The former concept gave rise to two key questions: Why does Scotland generate so few new ventures, and why does Scotland generate so few new ventures that grow into substantial companies?

In addressing segmentation, the SE program addressed the varying rates of NFF across countries and regions - by structure, product and process. It also analyzed entrepreneurs - by background and circumstances - to investigate the operation of entrepreneurial development in different market milieu. Within this overall framework the program analysed a number of key issues: regional new firm performance, individual and sectoral case studies, business environment, and entrepreneurial potential and cultural issues.

The analysis confirmed the persistent low rates of enterprise creation in Scotland (Figure 6.2), although the growth of surviving enterprises was at least as good in Scotland as elsewhere, if not superior. From this, SE concluded that the problem was the overall birth rate, with the policy implication being that measures to expand the pool were more appropriate than "picking winners."

If the promotion of "networking arrangements" to achieve the desired objective of new firm formation is to be successful, an understanding of the essential components of successful networking is needed. In this section we focus on the issues of trust and cooperation. The remainder of the section is divided into four parts. Part 6.2 provides a brief history of the Scottish economy, focusing on the significance of the past for present-day policy proposals. The consideration of historical, social, political and other environmental contexts in contemporary economic scientific analysis is typical of the Scottish Political Economy tradition. Part 6.3 identifies the significance of trust and cooperation, highlighting how these critical factors can become established. Part 6.4 analyses how successful SE has been in attempting to establish networking arrangements. Part 6.5 concludes the section by suggesting policy implications in an attempt to ensure the future success of networks within the economy. The economies arising out of organizing production within industrial districts have been highlighted elsewhere (Oughton and Whittam 1997) and are not a major concern of this paper.

6.2 Scotland: On the Periphery of Europe.

Since the United Kingdom joined the European Union, the British Isles's trade and industry have seen a change of focus. In many ways this shift of focus has merely exacerbated a much longer decline in Scotland, Wales and the north of England. Indeed, over "most of this century Scotland has been declining relative to the rest of the United Kingdom and, by extension, the rest of Europe" (Danson 1991, 89). As one of the first industrialized regions of Europe and of the world, Scotland has experienced both an early period of growth and a long history of stagnation.

The growth and development of the economy was built on strong networks. According to Slaven, in the early part of the twentieth century "A community of interests was growing among steelmakers and shipbuilders, and this was a link more strongly developed at a later date. ... The demands of the shipyards boosted the growth of steel dictated the changing production patterns of the pig-iron and malleable-iron producers. Marine engineering and shipbuilding lay at the centre of a complex concentration of heavy engineering and finishing trades" (1975, 182).

Behind the development of the Scottish economy, and of Clydeside in particular, were also factors associated with the British Empire. Britain's role as an imperial power, based on naval supremacy, prompted the establishment of the coal and steel industries of central Scotland. The regional economies, and through linkages and migration the rest of the nation, became inextricably dependent on the trading and military position of the United Kingdom as a whole. Clydeside experienced very significant growth in industry and population in the years up to 1914. Records on shipbuilding tonnage (Slaven 1975) confirm that this area was at the heart of the Empire in terms of industrial output and importance. World War I was perhaps the watershed. Although the seeds of external destruction may have been made inherent before then, the decline of British power and controlled imperial markets exposed a rapid and deep structural imbalance in the Scottish economies. Massive unemployment, poverty, deprivation and emigration marked the period up to the World War II, with Glasgow containing what may have been the worst urban slums in the history of the planet (Damer 1990). Since 1930 this industrial legacy has left Scotland subject to a broad set of economic policies targeted at relieving the worst effects of the rundown and closure of its staple industries - steel, coal, shipbuilding, heavy engineering and textiles.

Having struggled to maintain former glories in output and trade through most of the century, Scotland - and the rest of the periphery of Britain - has been in almost constant benefit of various forms of regional development aid. Regional economic policies have been based on the restructuring of old industrial areas and the decongestion of overcrowded housing and manufacturing areas. Increasingly, such policies have been concerned with promoting foreign direct investment and withdrawing the state from direct involvement in production. This has led to an increase in the degree of external control and ownership of Scottish industries. The change has come at times through merger and takeover, through nationalization and privatization, and through differential rates of decline and growth of native and foreign companies. Research suggests that such changes, in complex ways, put a relative brake on the rates of new firm formation and indigenous development (Ashcroft, Love and Schouller 1987). Concomitantly, output, trade and investment have become more narrowly dependent on a few key sectors.

With the regional policy focus on the attraction of inward investment and with low rates of endogenous growth, a branch plant economy has been created to replace the former heavy industrial clusters. With few local supplier or purchaser linkages, and an absence of such higher business functions as R&D, finance, marketing and corporate strategy, branch plants offer jobs to the local economy, but little else. In particular, there are minimal relations established or developed between inward investors and the local SME sector.

Electronics (and computers especially) and whisky in Scotland have accounted for over half of non-oil manufacturing exports (Scottish Council Development and Industry 1997), and about 50% of all manufacturing investment in recent years. Both these sectors are dominated by overseas companies, with over 90% of output by non-Scottish firms. Over a quarter of manufacturing employment in Scotland is in overseas-owned plants, and much of the rest is controlled by United Kingdom corporations with their headquarters in the southeast of England. This degree of domination is often blamed, in a simple way, for the massive restructuring of the Scottish economy since 1979.

Since 1980, 40% of all Scottish manufacturing jobs have been lost. In key traditional sectors such as coal, steel and engineering the decline in employment has been heavy, with the replacement of some of these jobs in electronic and electrical engineering. In many sectors such as agriculture, fishing, energy and water, manufacturing and construction, employment is at its lowest levels in Scotland, with jobs for both men and women disappearing. Only the service sector is showing any growth over time, and then only in part-time work.

In such past-dominated, narrow economies, NFF and SMEs have been presented as panaceas in the mission statements of many agencies in European regional economic development and regeneration programs. This is noticeable in the European Union in particular. The business birth rate in the European Union has increased since 1980 (SE 1996). However, questions have been raised over the ability of companies dependent on the local market to reverse long-term regional decline on their own. Entering this debate, Malecki and Nijkamp (1988), for example, have suggested that uneven development is endemic and that it is imposible to overcome metropolitan core bias through compensation of the periphery. On the other hand, Vaessen and Keeble (1995) appear to see enough examples of successful SMEs in the periphery to argue that regional divergence need not be inevitable.

In practice, there has been but limited success in replacing traditional major manufacturing employers. Seeing that more prosperous areas of the United Kingdom tend to maintain higher rates of business start-up (Ashcroft and Love 1996) and that real unemployment rates are persistently significantly higher than the United Kingdom average in the problem regions (Beatty and Fothergill 1997), one might conclude that greater levels of incomes and wealth are compatible with the creation of conditions for enterprise development. But analysis of the nature and form of networking and of the wider business environment is also of critical relevance in determining such comparative performances in regeneration.

A key question for the success of the new firm and of inward investment strategies, separately and collectively, is whether they are conducive to the creation of networking and industrial districts. Superficially based on the best practice models identified in regional economic regeneration strategies elsewhere in Europe and in North America, these strategies rely on trust and cooperation. It is to a consideration of these themes that we now turn.

6.3 Trust and Cooperation in Industrial Districts

From the outset it is worth remembering that wherever exchange takes place, either on the market or through firms, a degree of cooperation takes place. The division of labor, so crucial toThe Wealth of Nations, is dependent on cooperation between the parties involved. Similarly, business deals involving millions of pounds are concluded on the strength of a handshake, and currency deals struck over computer terminals are all based on a degree of trust. Looking at events in the natural world, perhaps we should not be so surprised at the potential for cooperative behavior. We can cite examples from nature (see for example Bateson (1988)) to illustrate there is nothing in the "state of nature" to say that the "survival of the fittest" is the one culture evident in nature, and we can even appeal to the works of anthropologists and psychologists for examples of how human behavior has led and does lead "naturally" to cooperation, as opposed to unrestrained competition. Burchell and Wilkinson, building on these aspects of conducting business, highlight what they see as two dimensions of a business relationship, cooperation and competition: "Trading partners," they argue, "derive mutual benefits from cooperation in production from which their incomes are ultimately derived, but they compete over the proceeds of production because what one gets the others cannot have. Every business relationship is therefore by its nature both rivalrous and cooperative" (1997, 219). What we observe in systems of production such as industrial districts is a greater emphasis being placed on the cooperative aspects of the exchange relationship. Accepting that there are two sides to a business relationship, we are confronted with the problem of making sure that economic actors who may prefer a cooperative option are not the victims of opportunistic behavior.

One method of attempting to restrict opportunistic behavior is by organizing production within an institution such as a firm, as opposed to the institution of the market. Coase (1937) observed that there are instances in which it is economically more efficient to do this. The costs of using the market mechanism can be reduced by organizing production within the structure of the firm. Similarly, contracting arrangements can act as a means of reducing the costs of coordination, but there are costs involved in establishing and monitoring contracts (Williamson 1993). Furthermore, it has been observed (Macaulay 1963) that while detailed clauses are often written into contracts they are seldom used: "contract and contract law are often thought unnecessary because there are many effective non-legal sanctions. Two norms are widely accepted. (1) Commitments are to be honoured in almost all situations; one does not welsh on a deal. (2) One ought to produce a good product and stand behind it" (Macaulay 1963, 63). So even when measures are taken to monitor actors’ behavior, it is often the case that an environment develops among those actors in which implicit contracting makes enforcement unnecessary, and the cooperative aspect of trading surfaces once again. These arguments tell us that although there are legal sanctions available for organizations to enforce compliance, these are rarely used. These comments are worth bearing in mind in our examination of the characteristics of trust and cooperation.

Gambetta (1988) in discussing the relationship between trust and cooperation argues that it is through cooperation that trust will evolve. Gambetta defines trust as "a particular level of the subjective probability with which an agent assesses that another agent or group of agents will perform a particular action, both before he can monitor such action (or independently of his capacity ever to be able to monitor it) and in a context in which it affects his own action" (217). This definition raises two important points. First is its implication that individual actors will calculate the probability of an actor behaving in a particular way, suggesting that some of the actor's behavior can be monitored. Second, Gambetta raises the possibility that not all activities of an individual actor can be monitored. If actions cannot be monitored, what guarantee is there that an actor will behave in the manner expected? How can cooperation be guaranteed? In situations in which behavior cannot be monitored, is it worthwhile calculating the probability that the individual will act in the expected manner? It will be argued below that where exchange takes place within productive systems, institutions will develop which will ensure certain types of behavior. Using monitoring arrangements suggests that there is some way of guaranteeing compliance, or at least some way to prevent opportunistic behavior. In other words, Gambetta is moving beyond a simple transaction cost approach. And, Gambetta’s definition implies that monitoring is not always necessary.

In line with Gambetta’s definition, the literature on industrial districts identifies trust and cooperation in a way that transcends the notion of simply reducing transaction costs. The accepted values of trust and cooperation transcend the productive units of the district and embrace the whole community. On this note, Best (1990) states that "A carefully nurtured collective identity can potentially provide the social fabric which sustains cooperation in an industrial district as in a corporation" (237). The identification of the industrial district encompassing firms and a wider community as a whole, "as in a corporation," is a point identified by Becattini in his definition of an industrial district: "I define the industrial district as a socio-territorial entity which is characterised by the active presence of both a community of people and a population of firms in one historically bounded area....The most important trait of the local community is its relatively homogeneous system of values and views..." (Becattini 1990, 38-39). This collective identity has resulted in a large degree of trust and cooperation between the SMEs operating in the industrial districts of the Third Italy'. It is worth reminding ourselves, however, that this collective identity, now acknowledged to be so important to the success of these districts, has not always been present. Indeed the history of the Third Italy, the most famous of the industrial districts, is littered with strife and conflict. While Capecchi (1990) provides a picture of historical uniqueness based on the development of Emilia Romagna it is difficult to imagine that the modern development of the region, which suffered large-scale factory closures immediately after World War II, and witnessed a huge sectoral shift in employment from agriculture to industry over a twenty year period, 1950-1970, could have occurred without social unrest. Sabel (1992), in discussing the building of trust, suggests that the actors within the industrial districts of the Third Italy have developed a selective history of the past: "it is not us outsiders but themselves that the tellers of these stories aim to fool; and it is no fault but our own if their efforts to induce a kind of genesis amnesia in themselves lead us to believe that their history was without conflict" (226). Sabel continues to document various conflicts within northern and central Italy; a more detailed analysis can be found in Sabel (1982). Likewise Brusco (1982) cites the impact of effective unions in the large factories of the industrial districts of the Third Italy as a reason for the development of SMEs, the large firms deliberately outsourcing as a means of breaking union organization.

The trust and cooperation occurring in the industrial districts of the Third Italy is of a differing order than that occurring in a simple exchange relationship. We would argue that due to the establishment of a culture of trust and cooperation between firms there we are witnessing economic interaction with limited calculation and monitoring. In the literature at least three different types of trust are acknowledged: contractual trust, competence trust and goodwill trust (Sako 1992). Contractual trust is the trust that exists between trading partners and that results in the belief that goods will be delivered on time, be of the required specification and be of the agreed quantity and quality. Competence trust refers to the belief that a trading partner will fulfill a particular task. Goodwill trust occurs when initiatives are undertaken beyond the specific remit of a contract: "the role of goodwill trust extends beyond existing relations and includes the transfer of new ideas and new technology. Thus, while contractual and competence trust mainly benefit operational efficiency, goodwill trust also contributes to the dynamic efficiency of productive systems" (Burchell and Wilkinson 1997, 218). Quite clearly, it is this latter type of trust that is to be found within the established industrial districts. The question then arises, how can contractual trust be developed into goodwill trust? Put another way, how can the cooperative aspect of an exchange relationship be developed so that cooperation and trust become the norm for business undertakings?

This objective can be achieved by two related means: policy delivery and collective action. Policy delivery can be utilized to promote a cultural change. Collective action needs to be developed to guarantee cooperation and trust within the productive system. A pertinent example of policy delivery resulting in a cultural change is provided by Hodgson (1988), who uses the example of the introduction of seat belt enforcement. Hodgson points out that this policy initiative resulted in changed behavior. The policy was accompanied, of course, by a degree of coercion. The chances of detecting that someone was not wearing a seat belt, however, were slim, and the educational campaign highlighting the benefits of wearing seat belts was established long before 1983, when the law enforcing their use was introduced. Hodgson’s argument is that "The authority of the law had the effect not simply of changing behaviour by the introduction of penalties or the perception of costs and benefits. In addition, it changed these individuals themselves and their goals" (Hodgson 1988, 137). In other words, through policy delivery individual behavior can be changed. Change affecting many individuals will result in a different culture being established. Using coercion implies that action can be taken to ensure compliance. Over-reliance on coercion, however, may well lead to distrust. Actors may well question the amount they are actually trusted if they have to be continually monitored. More significantly, if one actor is able to exercise coercion over another this suggests an unequal distribution of power in the relationship. "It introduces an asymmetry which disposes of mutual trust and promotes instead power and resentment" (Gambetta 1988, 220).

To overcome the potential for mistrust that the use of monitoring and punishment strategies to guarantee compliance can breed, the promotion of collective action needs to be encouraged. Potential members need to be aware of the benefits to be achieved from belonging to the productive system: "large organisations that are not able to make membership compulsory must also provide some noncollective goods in order to give potential members an incentive to join" (Olson 1971, 17). This promotion of collective action within established productive systems, such as industrial districts, has led to the actors taking on a group identity, as previous citations have indicated. The development of a group identity results in the individual actor placing the group’s interests above his self-interest. However, even in productive systems in which members appreciate that pursuing group interests leads to individual benefits, there is still the necessity for some compulsion. Where elements of public goods are being delivered, there is always the temptation to "free-ride." Goods and services, such as facilities for engaging in R&D, are typically provided within industrial districts, and contain elements of public goods. Cooperative advertising strategies promoting a region or country as a whole indirectly advertise all businesses within the geographic area and hence suffer from the "free-rider" problem. Within industrial districts the compulsion element resides in the fact that companies have to be a member of the "club" (such as the Real Service Centre or a network) and if they break the rules, they can be excluded. Once established inter-firm relationships develop norms of behavior, custom and practice facilitate trust and cooperation, which can result in "embeddedness" (Granovetter 1985). Being a member of the club leads to established relationships becoming long-term because of the investment a firm undertook to become a member in the first place, and because if a firm did leave, "competitors and customers would ask why" (Arrighetti et al. 1997, 190).

In part 6.3 we have identified the dual nature of business relationships. There are economic gains to be achieved, particularly for SMEs, by the promotion of the cooperative side of the business relationship. In order to promote the cooperative side of a business relationship it is necessary to reduce the risk of opportunistic behavior. This can be done by the promotion of trust and the establishment of inter-firm relationships. We noted three different types of trust and argued that it is goodwill trust that should be sought in establishing networking relationships between firms. We have further argued, by drawing on the experience of the Third Italy, that policy delivery can assist in the development of trust and cooperation. While it would be desirable for productive systems to avoid punishment strategies or enforcement mechanisms because of the danger of promoting distrust, such strategies are always necessary, even in best practice examples of inter-firm relationships. Enforcement mechanisms exist in the form of institutional norms and practices and in the development of more concrete organizational structures. Member firms who "cheat" on other member firms can be excluded from the institution or organization of which they are members. This idea of examining firms within a framework of institutions and organizations suggests that SE, with its objective of establishing networks, needs to develop a collective approach to the establishments of inter-firm relationships. We now turn to examine the recent experiences of SE in its efforts to establish networking between firms within the Scottish economy.

6.4 Scotland's Business Birth Rate Strategy

As suggested above, Scotland could be described as an export-oriented economy, now relatively protected from the United Kingdom's business cycles, but open to new sensitivities. Scotland is especially locked into the supply needs of multinational oligopolies in the electronics and oil sectors. It is clear that Scotland's future will depend upon European markets, and also, consequently, in attracting foreign direct investment from North America and the Pacific Rim to enter the European Union. Exports surveys for Scotland show the degree to which the historical patterns of trade have been transformed. According to a well established survey (Scottish Council Development and Industry, 1997), two-thirds of Scottish exports go to western Europe. Electronics products account for 49% of all sales overseas, most going to Europe and to a lesser extent the Middle East and Africa (See SCDI and SE). Globalization of production in essence means multinational enterprises arranging a configuration of plants across the world that meets their needs to supply exports to a number of trading blocs. The deepening reliance of Scotland on the attraction of such titans means competing for highly mobile investment, with this very competition between regions and states threatening to heighten the propensity of such capital to be mobile. Without a counteracting, long-term sustainable development of indigenous companies, it is recognized that peripheral economies progressively will lose further control over their own destinies: the development of underdevelopment.

In implementing the twin supply-side strategies of inward investment and new firm formation to address regional development and regeneration, RDAs and local authorities collectively arrange for property investments, improving the image of the area in the process. Training, technology transfer, information technology, and telecommunications are also favored areas for investment through local, United Kingdom and European Union interventions. Confirming such joint working, recent research (Danson et al. 1997) has demonstrated the strength of the corporate consensus approach to regional policy in Scotland, with many adopting the Scottish partnership model as the way to organize local and regional development strategies. At the political and bureaucratic levels, then, networking and partnership are accepted as valuable features of economic development strategies.

To what extent has this experience been applied to the implementation of the business birth rate strategy? Addressing this question requires a consideration of the original and subsequent related research into the low rates of new business start-ups in Scotland. As part of the overall study on this subject, SE sponsored research on specific sectors that were considered to contain significant lessons or to have a key role in the economy. Analysis of the clothing and textile industry showed that the popular view of company failures and declining employment was disguising the actual and potential contributions of new firms to the industry in Scotland. However, the role of new firms in the industry was restricted by a lack of innovation and dynamism. Evidence from Italy and Germany, with their strong networking traditions, suggested that the clothing and textile industry had the potential to make a more significant contribution to the economy. This evidence suggests that development through growth in the number of new, small firms rather than expanding the size of existing companies is the best way forward. In this context, Johnstone and McLachlan (1996) examined the internationalization of SMEs in a region of Scotland - Ayrshire. The two examined in particular the development of networking through the establishment of export consortia. They found that recent attempts to improve competitiveness through pooling of capabilities, with the local enterprise agency acting as facilitator, produced mixed results. The reluctance of firms to participate fully in the network was a clear obstacle to realizing economies of scale and scope, with "a low level of trust and the strongly adversarial nature of the [local] sector" (755) a significant factor. Unwillingness to pool resources, concern over allocation of orders within the network, apprehension over cooperation, and a failure to communicate were all cited as reasons for the lack of a full commitment to the project by the member firms. The need for training in networking protocol and processes, the key role of the facilitator, and the benefits of contractual agreements among members were identified as necessary for the local industry to create a successful cluster. Further details of this study are given in section 5.

Looking at high tech and academic spin-offs, the economic consultants PACEC reported minor differences in the factors explaining low levels of NFF in these specific sectors and in the overall economy. PACEC perceived the research base within industry to be inadequate, with few organizations acting efficiently as incubators for spin-outs and new high tech companies. The infra- and super-structure were deemed deficient, with poorly developed and weak specialist resources, social networks and information flows within the high tech community. PACEC highlighted the lack of demand for high tech companies. This lack of demand, PACEC concluded, constrained development of a home base and put firms at a cost disadvantage in export markets. In comparison with other areas, notably Massachusetts, policy support was seen as less extensive. Problems in establishing a high tech firm were compounded by the actual process of formation and growth, with the lack of support and ambition at home stunting development opportunities. All of these problems seemed minor compared with problems facing academic spin-offs, the authors argued. Major restrictions in promoting new firm formation were identified in Scottish higher and further education institutions and in their business, funding and cultural environments. Entrepreneurship was perceived as alien to academic traditions, risky and stigmatizing, so that significant barriers to entry into the marketplace had been erected.

Westhead and Cowling (1995) also looked at high tech business start-ups and questioned the certainty of such conclusions. They believe that the debates on the major factors affecting high-tech firms are still unresolved. In a study from the United States, Muniak (1994) has argued that there are essential conflicts over the promotion of regeneration policies at the urban and at the national level. In the same vein, and as seen here, much of the policy and analysis in the United Kingdom seems to suggest that the needs of local and of national economies may not be coincidental with regard to the encouragement of high tech and academic entrepreneurs. Policies to improve NFF in the country as a whole may lead to different effects across regions, perhaps providing strong virtual and vicious cycles of uneven development.

These various studies on high tech and academic spin-outs and starts suggest that networking, partnership, trust and cooperation were poorly developed or actively discouraged in Scotland. The role of branch plants in diminishing the ability of entrepreneurs to set up their own businesses was noted frequently, as more unexpectedly was the skepticism and obstruction of the business development and academic establishments.

In section 5 we highlighted the problems of developing an embedded cluster in the electronics industry in Scotland. Research by Lipka and Howie (1993) on the North Sea oil industry has demonstrated that Scottish companies tend to be restricted to the peripheral, low value added areas of the sector, such as catering, supplies, labor-only contracts, and maintenance. Unable to integrate forward because of a lack of market strength and too low on the value chain to establish an export oriented sector of any note, such companies realize few opportunities by cooperating in an industrial cluster.

One model to address such problems is corporate venturing. Corporate venturing covers assistance to entrepreneurs or SMEs to exploit new ideas, corporate restructuring through staff creation of new independent businesses, and the development of new profit centers and subsidiaries to exploit new products, processes and markets. It has been suggested (SE 1993) that Scotland is poorly provided with such approaches to regeneration and restructuring, which is unfortunate because, by reducing risk and establishing new ventures with better prospects, these approaches offer an effective, additional element in promoting NFF, especially in the high tech industry.

A perennial problem facing new entrepreneurs in Scotland, and in the United Kingdom more generally, concerns financial support. Considering the extensive research on financial aspects of supporting new firms and networks, the SE (1993) findings proposed an attempt to close the widening equity and financial gap with a move to the provision of risk finance by the public sector and by the private investor, the so-called "business angel." Some of the sections on finance in Scotland's Business Birth Rate ("Finance - The Big Issue?," "Informal Investment - A Neglected Source?," and "Finance - The Ongoing Debate") suggest that little of this problem has been resolved. The equity gap is contrasted with the availability of money; the question of access is a major and persistent feature in the Scottish business environment, and to a greater extent than elsewhere. Given the significant power and size of the Scottish financial sector, its invention and introduction to the world of investment and unit trusts, and its strong history of (savings) banking, there is an argument that "improvements in the behaviour and performance of both lenders/investors and actual/potential business founders" can and must be encouraged (SE 1993).

Many of the factors influencing enterprise creation and regional economic development raised in the SE inquiry are common to most communities, and arguments surrounding these factors are well rehearsed elsewhere. However, the inquiry's identification of entrepreneurial potential and cultural issues as significant adds an extra dimension to our understanding of the processes involved in NFF. The SE research directly challenges the business development community in Scotland to address its own behavior and attitudes toward potential entrepreneurs. The SE inquiry used extensive interviews across several countries, and literature reviews, to establish the comparative levels of interest in entrepreneurship, perceptions and experience of entrepreneurship, and social attitudes towards enterprise. According to the research results, the perception of entrepreneurs by the community in Scotland was less positive than it was elsewhere. Recognition of entrepreneurs' contributions to the economy was not sufficient to undermine the key role the community reserved for government intervention (Figure 6.3). The Scottish perception may be a reaction to Thatcherism, but it is undoubtedly related to Scotland's economic and social history. It has been argued that persistent unemployment, poverty and deprivation, against a relative economic decline of eighty years duration (Danson 1991), have thralled Scots to the philosophy of collective intervention to generate jobs. Entrepreneurs were seen in these surveys as being less caring and community oriented than the respondents. As argued here, the strategies of SE, with their denial of the relevance of trust and cooperation, have exaggerated rather than addressed this view (SeeFigure 6.3: What people think about entrepreneurs).

Although further analysis by SE (1993) showed a lower pool of self-confessed, potential entrepreneurs, there was still a substantial proportion of adults who believed they had the ability and desire to run their own businesses. Statistics suggest that there was no anti-enterprise or dependency culture; rather, with much unexploited potential, there seemed to be a barrier to converting desire into reality.

A closer look at the SE analysis suggested that the very agencies established to promote business start-ups lacked trust and cooperation in the indigenous entrepreneurs under their charge. Interviews with the business development industry and among opinion-formers demonstrated complacency, a less than positive attitude to policies promoting new SMEs. They also revealed that among members of these groups, there was a dependency culture in which it was believed that native Scots entrepreneurs could not be a dynamic part of the regeneration process. A misperception of the characteristics of indigenous people, and therefore of potential entrepreneurs, was not uncommon, with some agencies suggesting higher barriers were required to limit entry by local businesses into the market.

Many of the concepts at the heart of regional economic development strategies, such as the encouragement of inward investment, the avoidance and fear of displacement, and the provision of business advice, suggest that they may in their implementation corrupt the promotion of NFF in ways not identified before. So, while dominant and branch plants have been considered as potential destroyers of entrepreneurship (Fothergill and Gudgin 1982; Storey 1982), the reality may be more complex. There is evidence that RDAs and government departments have been opposing management spin-outs, effectively scuppering the opportunity for technology based developments by sanctioning the closure of R&D laboratories in nationalized industries, and dampening enthusiasm and support for management/worker rescues of branch plant closures (Strathclyde Regional Council 1988; Danson 1991). The rationale for the agencies' actions is that, with the views of overseas owners and future investors paramount, the position of inward investment agencies cannot be compromised in the international market for mobile capital.

The SE analysis concludes that concerns over displacement dominate much thinking, while there is scant recognition given to the longer term processes of innovation, dynamism and efficiency. Protecting the status quo is preferred to encouraging indigenous start-ups (SE 1993, 23). Research such as that done by SE is indicative of a wider, growing interest in the concept and importance of social networks in the entrepreneurial creation process. Recognizing this interest, SE addressed the role of networking directly. Its analysis revealed Scotland as having a more extreme set of rules and social mores in determining support and advice. Those who would have most difficulty establishing a business elsewhere - the young, women and the working class, appear to face higher hurdles in Scotland than in the southeast of England and beyond. Lack of security and of alternative employment in the event of failure, and the effects on family life of creating a new firm are the major concerns of potential entrepreneurs according to the SE report (1993, 24). The report expressed the view that these problems could be overcome in some instances by wider discussions with informed contacts and with existing entrepreneurs. This seems all the more important given the less than positive attitude of business development organizations toward entrepreneurs. Unfortunately, the low level of entrepreneurship identified above becomes self perpetuating in these circumstances, compounding the earlier barriers to enterprise.

Knowing an entrepreneur is an important rocket for changing someone from a potential to an actual business creator. Those who are most dissuaded from making the transition are least likely to have a set of relevant contacts. In addition to financial support problems, the greater severity of funding problems in Scotland is associated with the lower degree of penetration of the ideology of the property-owning democracy there. With the United Kingdom's funding bodies showing a preference for mortgages on borrowers' homes to be used as collateral, there is an additional barrier to establishing companies in areas where owner occupation of housing has tended to be low traditionally.

McNicoll (1996) and Whittam and Kirk (1996) have discussed this set of elements in more detail. McNicoll, on behalf of SE, concluded that encouragement of the idea of entrepreneurship would often be sufficient to prevent most potential ventures from failing to reach the starting line, despite the environment of hurdles and obstacles. Struthers et al. (1996) add an interesting discussion of recent developments in Russia, where the restructuring of the last few years has highlighted a number of key issues. Not least among these are the importance of market defining characteristics (indeed prerequisites) of property rights, contract laws, information, and degrees of risk and uncertainty. The influence of organizations and individuals within current and former networks is shown to be significant in the processes of new firm formation and business development. This discussion of the role of information and networks is extended by Devins (1996), when he considers measures taken to overcome market failure to provide business advice and knowledge. The dual need to monitor and evaluate advice programs and services, and to know the companies supported, are seen as essential to the long-term health of the new firm sector.

Curran and Leitch have presented (Figure 6.4) a stylized account of the development of linkages and networks as they affect different-sized companies and organizations in response to external environmental changes. Examples of such changes include the establishment of the single European market and new forms of enterprise regulation. Such changes always affect and are qualified by the system and strength of the local and regional networks within a locality.

Harrison and Leitch (1996), in considering Northern Ireland's experience, argue for the establishment of entrepreneurial teams to progress business ideas and opportunities, positively assembling a collection of talent and expertise, rather than an approach that passively supports the market. The consensus, here as earlier, is for intervention to overcome market failure in labor, capital, land, and knowledge sectors, but to address the establishment of trust and cooperation directly.

In summary, the business birth rate strategy in Scotland has tended to be passive with regard to the promotion of trust and cooperation. Networking is identified as important but is to be encouraged at the level of the individual entrepreneur on an atomistic basis. This approach to networking contrasts sharply with the extensive and successful model of regeneration established between the regional economic development agencies and organizations themselves, and with the industrial clusters of traditional sectors that created the nineteenth century Scottish economy.

6.5 Conclusion

In this paper we have argued that the economic development of the Scottish economy suggests that there is scope for the establishment of networking arrangements once again. To ensure the success of potential networks, SE needs to move from contractual trust to goodwill trust within the networking arrangements. To achieve this it is necessary to develop a group approach to firm organization. This requires the involvement of all potential firms in the decision-making process to make sure that the needs of the firms are being catered to within the networks. This collective approach is required because the services being delivered within the network of firms will consist of elements of public goods such as information. We have noted that within networking arrangements punishment strategies exist, but rather than prohibiting trust, these strategies can enhance it, acting as a safeguard mechanism. With an economy dominated by branch plants, however, it is unclear how multinational enterprises can be encouraged to adopt more cooperative strategies, and so to become more embedded into the Scottish economy.


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