Industrial Clustering, Urban Politics and

Regional Development:
Are We Going to Better Regional Policy
or Muddling Through?

By:
Prihadi Nugroho
 Background
• The inception of industrial clustering policy by Indonesian
Government at both national and local levels has reached
growing recognition in recent developments
• The policy rationale is associated with:
– The internal capacity of (mostly) small and medium industries
clusters to face difficult times with less government support
– The benefits of clustering in generating economic growth
through local resources utilisation, new employment creation,
flexible specialisation, collective efficiency, and so forth
– Its usefulness to the strengthening of industrial linkages and the
creation of transition economy to peasant society
 Background (contd)

• However, the policy practicalities remain problematic

because of its failure to reduce institutional obstacles
resulting from distortive policies
– Recent policies have excessively focused on internal capacity
upgrading with less attention to clusters’ special needs
– Sustaining government privileges on the development of urban
manufacturing industries and large scale industries
• The study purpose is to examine the emergence of urban
politics in the making of industrial clustering policy
 When Clustering Begins?
Import Export Selective
Porter’s
substitution promotion protection with
(Protection) (Liberalisation)
Diamond Model
liberalisation?

The 1997 Asian The rebuilding The search for

BIPIK Program Crisis’ effects to of nation’s strengthening
in mid 1970s economic competitive industrial
development advantage structure

Internal Capacity Building

The support in microcredit, production, promotion, marketing, business management, etc.
 The Principles of Clustering

• Inter-firm linkages of particular products involving core and

supporting activities
• Naturally exists in certain location
• (Generally) consisting of proximate interrelated firms
• Generated by trust relationships and social networks rather
than economic interests
• Combining competitive and collaborative relations
• Flexible specialisation and collective efficiency instead of
individual profit-maximising processes
 Big Question?

Does the government really intend to

promote industrial clustering approach?
 The Facts

• The stronger industrial linkages have not existed yet

– Clustering is unable to link the existing large manufacturing
industries with small-medium industries
– eg. LNG plants vs. fertiliser factories vs. agroindustries
• Coercive government initiatives to link these sectors cannot
last and increase resistance within industries
– Inter-firm parenting approaches from large manufacturing
industries and state-owned enterprises only help temporarily
– eg. Program Bapak Angkat, Kemitraan Inti-Plasma, etc.
 The Facts (contd)

• Resources-based capacity declines, dependency on

imported raw materials increases
– Domestic producers are facing more scarcity of raw materials
– eg. furniture industries “forced” to buy ex-smuggling woods
• Clustering policy too much focuses on internal capacity
building, but fails to recognise the problems of structural
relations between industries
– The prevailing subcontracting patterns and socially economic
ties between larger and smaller firms inside clusters have made
smaller firms had less opportunities to grow independently
 The Facts (contd)

• The promotion of distortive policies that inhibits small and

medium industries to improve their capacity
– eg. non-subsidised petroleum for export industries, conventional
practice banking conditionality to limit female business owners
to access microfinance, etc.
• The greater attention to urban manufacturing industries
than small and medium industries and agriculture sectors
– The recent development policies have consistently supported
pro-growth regime that allows domestic market more opened to
imported products, creating ambivalent protection to domestic
industries
 The Facts (contd)

• Coordination issues between related government agencies

remain unsolved
– Cluster development and small and medium industries have
become policy agenda of various government agencies at both
national and local levels
• The adoption of clustering policy in local developments only
reflects the interests of central government agencies
– eg. the extended use of clustering policy in agropolitan
development policy by Ministry of Agriculture and Ministry of
Public Works
 Examining Policy Support
FOCUS
• The lack of internal capacity of
small and medium industries
• The government maintains the
control over policy process
COHERENCE
• Clustering policy less essential
than other economic policies
• The policy contradictions and
ambivalence over time
RELEVANCE
• The clustering policy only
seeks for total output increase
• Small and medium industries
still subordinated in the policy
RELIABILITY
• Policy ideals and practicalities
do not fit each other
• Policy suitability to overcome
local and global challenges
 The Exercise of Urban Politics

URBAN ELITES CORPORATE INTERESTS

Government officials Urban manufacturing
industries
Political shareholders
Small and medium
industries

Agriculture-based and
traditional sectors
Industrial
Clustering Policy
Tensions between larger and
smaller firms and between
urban and rural sectors
 The Exercise of Urban Politics (contd)

• An unequal treatment in providing required facilities and

infrastructures between urban manufacturing industries and
small and medium industries
– Urban growth vs. endogenous development
• Many policies are more favouring large industries and
disregard the special needs of small and medium industries
– The friendly business environment is questioned
• The limited capacity of local governments to create proper
clustering policy with respect to localities
– Local development policy reflects central government interests
 Conclusion

• The effects of urban politics to some extent have distorted

the achievement of industrial clustering policy goals
– Increasing greater value added with less inter-firm linkages?
• The existing industrial clustering policy has ignored the
importance of the enhancement of reciprocal trusts and
social networks between industries
– Too much focus on short-term economic benefits?
• The government has put forward policy pragmatism instead
of policy comprehensiveness
– Clustering emerges in natural setting and evolves over time
Thank you for your attention