Networking
Technical
Change and Industrialization: The Case of Small andMedium Firms in Nigeria

Banji Oyelaran-Oyeyinka

ATPS SPECIAL PAPER SERIES No. 20

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ABOUT THE AFRICAN TECHNOLOGY POLICY STUDIES NETWORKThe African Technology Policy Studies Network (ATPS) is a multi-disciplinary network of researchers,
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List of Abbreviations and Acronyms
EPZs
MNC
SAP
SME

Export Processing Zones
Multinational Company
Structural Adjustment Programme
Small and Medium Enterprises

Table of Contents
Abbreviations & Acronyms
List of Tables
Summary
1

Introduction

1

2

Inter-Firm Linkages, Cluster Dynamism and Market Demand
2.1 Typology of Enterprise Clusters in Developing Countries3
5

3

Characteristics of the Lagos Clusters
3.1 The Nnewi Cluster
3.2 Comparing Firms and Cluster Characteristics

7
8
9

4

Conclusions

16

5

References

18

1.

Introduction

The relevance of clustering to the industrialisation process of developing countries has been widely
debated in the last decade (Van Dijk et al., 1997) and the role of clustering in attenuating some of the
problems faced by small and medium enterprises (SMEs) is now widely documented, (Nadvi, 1996,1997). The problems of SMEs are well known and relate largely to market failures in input andproduct markets. At the heart of the issue are information deficiencies as a result of weak institutions
and poor finance, and technical and marketing support in developing countries. The difficulties
faced by SMEs are accentuated in poor countries with limited capacity for policy design andimplementation (Romijn, 2000). This situation has been made more difficult as a result of the rapid
pace of liberalisation for which most African countries were ill prepared. “The recent liberalisationand globalisation of financial markets has made it even more common for developing countries withinadequate banking structures, information imperfection and poor institutions and infrastructure, tosuffer from vulnerability through external shocks” (Bhalla, 2001; Lall, 2001). Developing countries
suffer from more than financial market failures; pervasive labour and technological market failures
are also common.
Clustering provides an alternative route for SMEs development, and a potentially less costly avenue
for policy support. As Schmitz and Nadvi (1999) suggest, “clustering facilitates the mobilisation offinancial and human resources”, leading to the gains of collective efficiency. Nadvi and Schmitz(1994) provide a number of reasons for this. First, clustering is a significant form of industrialorganisation for small-scale manufacturing. Second, clustering promotes different types of interfirm linkages; third, clustering is identified with diverse forms of social networks, which are associatedwith personal ties, and the notions of trust and reciprocity in competitive behaviour. Fourth, a cluster
is not a planned intervention yet the state has a role in promoting it. While past efforts have concentrated
on comparing emergent clusters with advanced clusters, particularly the Italian model, it has become
more important to take a more “dynamic approach, which seeks to understand the processes thatlead to success or failure” of cluster growth and development (Schmitz and Nadvi, 1999).
This paper pursues this line of inquiry in seeking to analyse the processes and the dynamics ofcluster growth in Nigeria. Clustering, as Porter (1998) observes are not unique but typical andpossess “the enduring competitive advantages in a global economy”. He suggests that the strengthof clusters can be found “increasingly in local things - knowledge, relationships, motivation - that
distant rivals cannot match”.

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In this study, the author proceeds with the “obvious” proposition that poor production networks havebeen slow in developing because there are no specialised services and firms to take on manufacturinglinkage roles. Manufacturing subcontracting in two clusters with contrasting history, habits, andpractices provides evidence for the proposition. The nature and content of production networking isanalysed, specifically subcontracting and factors that determine the pattern of subcontracting among
SMEs in one rural-based and two metropolitan clusters, Nnewi and Lagos respectively. The influenceof social networks on manufacturing that have persisted and deepened because of weak institutionsof contract enforcement is also examined.
Section two of the paper reviews the dynamics of inter-firm linkages, clustering and industrialisation,
followed by a discussion on the typology of clusters in developing countries. Sections three analyses
the survey result of two manufacturing SME clusters in Lagos which are compared with the Nnewi
cluster in Eastern Nigeria. The comparison is useful, given the contrasting characteristics of the twoclusters. The Nnewi cluster is located in South-eastern Nigeria (Oyelaran-Oyeyinka, 1997), wherebusinesses bear strong family and ethnic accents. This unique ethnic character of Nnewi is due asmuch to geography as it is to historical and cultural forces. Nnewi is an industrial enclave located ina rural setting in the heartland of Igboland, populated by a homogeneous ethnic group with a strong
sense of kinship. On the other hand, Lagos is a highly cosmopolitan industrial centre, served by alarge port, and has employed a pool of both the employed and unemployed educated manpower; it’sa melting point of sorts for all Nigerians. Section four concludes with a summary of the main findings.

2.

Inte-Firm Linkages, Cluster Dynamism andMarket Demand

In broad terms, there are several forms of inter-firm linkages in both developed and developing
countries, among which are: subcontracting, market linkages with customers and suppliers, informal
and formal collaboration (joint ventures, franchise), membership of professional and tradeassociations, and movement of skilled staff from one firm to another. Inter-firm linkages are formed
to serve certain production ends. Among these are exchange of technical and market information;and reduction of uncertainties. The kinds of linkages that develop depend as much on firm-level
capabilities as on the economic environment. Barr (2000) makes a distinction between networks
that reduce uncertainties (common among small firms) and those that are formed to promote
productivity growth. According to Mytelka and Tesfachew (2000), firm interactions with external
agents “were important sources of technological know-how and technological learning in East andSouth East Asian economies”. These diverse forms of interaction constitute important channels offlows in advanced and developing economies (Pavitt, 1984; Von Hippel, 1988; and OECD, 1999). In
the study by Mytelka & Tesfachew (2001), subcontracting, which has yet to be fully institutionalised in
African industry was singled out as having been an important source of technology transfer in garment
manufacturing and textiles.
Subcontracting thrives where there is vertical disintegration and horizontal specialisation. In thecurrent literature, production activities in firms in Africa are less specialised and more verticallyintegrated than their developed country counterparts but this should not be taken as parametricsince production systems are dynamic. In separate visits to Taiwan, Amsden (1977, 1985) reported
dramatic changes in the Taiwanese machine tools industry. Earlier studies revealed high vertical
integration and little horizontal specialisation, but this gave way to greater specialisation and significant
vertical disintegration within eight years. The restructuring of the Taiwanese machine sector was
made possible by a combination of factors. Small producers, producing low quality products for the
low-income domestic market had operated side by side with large firms. Then came the opportunity
and the incentives for expanding into the export market as a result of the boom in the machine tools
market in the 1970s. The small producers had neither the technology nor the financial capability tore-equip in order to compete and as such had two options. They could participate as subcontractors
to larger firms or participate in the export market by buying a substantial proportion of their inputs;
evidently, subcontracting was an attractive alternative (Amsden, 1977, 1985 and Predergast, 1990).
According to Pack (1981), high levels of vertical integration are a result of low capability of
subcontractors in supplying high quality inputs. He suggests that firms systematically underestimate

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the cost of internal co-ordination which includes the cost of learning, and as a result do not seriously
consider the subcontracting option. Secondly, larger firms in Africa lack the experience to organise
subcontracting networks. This might well be a consequence rather than a cause, and it is doubtful
if it explains the whole story. On the contrary, large firms in some African countries tend to develop
historically more intense trade and production networks with parent companies and therefore havelittle use for local SMEs (Oyelaran-Oyeyinka et al., 1996). Personal and social networks historicallydetermine the outward direction of production networks. As Brautigam (2001) observed, garment
production in Kenya is 100% Asian owned while the low-value tailoring activity is 95% African. Asianbusinessmen have preferential access to local and foreign technical assistance and supplier credit.
Networks defined by education and ethnicity do condition in some measure, the intensity of production
networks.
Predergast (1990), advanced another explanation which has both engineering and market
dimensions. According to him, firms have the tendency to capitalise on under-utilised capacity by
expanding their product range, and in so doing, take advantage of economies of scope. Undercapacity results from insufficient demand for any single product to allow full capacity utilisation offacilities. Low market demand therefore induces an engineering response but in the process of
product diversification, firms spread learning efforts in order to master a diverse market and in sodoing, become less specialised.
In the Taiwanese experience, export market opportunities as expected created greater output demandand subsequently, product specialisation and lower levels of vertical integration. The state in Taiwan
as with other East Asian countries such as Korea was quick in providing technical, financial andmarketing support that facilitated the exploitation of export markets (Levy et al., 1993). According to
Stigler (1951), firms in early stages of industrialisation internalise every possible phase of production
because there is a lack of reliable raw materials, machinery and component sources. This is not thecase for mature industries, and by extension advanced economies, where large markets makepossible the externalisation of upstream production. For this reason, specialised suppliers enjoy
scale economies induced by market size for final products.
The vicious circle, whereby firms are unable to specialise in the absence of subcontracting, andsubcontracting is not developed due to lack of specialisation has been further elaborated by
Rosenberg (1976) in his classic study of the American machine tools industry. Beyond market size as
an explanatory variable, he introduces the element of technological convergence to explain why andhow specialisation and vertical disintegration evolve. Technological convergence connotes theconvergence of skills common in the main sector, to the mechanical engineering sector, by whichmachine processes such as milling, drilling, boring, planing, and polishing are common to a wide
range of industries. The machines performing these tasks are subject to a common set of problems.
Technological convergence then becomes a common denominator of industries that “…wereapparently unrelated from the point of view of the nature and uses of the final product”. Productspecialisation then results from a combination of technological convergence and verticaldisintegration:

N ETWORKING T ECHNICAL C HANGE AND I NDUSTRIALIZATION: T HE C ASE OF SMALL AND M EDIUM F IRMS IN N IGERIA

5“Young industries are often strangers to the established economic system. They require new kinds ofqualities of materials and hence make their own; they must overcome technical problems in the use of
their products and cannot wait for potential users to overcome them; these young industries must design
their specialised equipment and often manufacture them, and they must undertake to recruit skilled
labour. When the industry has attained a certain size and prospects, many of these tasks are sufficiently
important to be turned over to the specialists” 1 (Stigler, 1951).

Rosenberg‘s conclusion is that the extraordinary range of specialisation that characterised theAmerican machine tools industry resulted from technological convergence combining with verticaldisintegration. Herein lies the role of technological capability and knowledge acquisition of specifickinds, and learning in networks, in the process of industrialisation. In sum, three elements interact
in shaping the extent of vertical disintegration and product specialisation: technological diseconomies,transactional economies, and the extent of market demand (Perry, 1989 and Stigler, 1951).
2.1

Typology of Enterprise Clusters in Developing Countries

An industrial cluster is a dense sectoral and geographical concentration of enterprises comprising
manufacturers, suppliers, users and traders. A cluster is not simply a geographic phenomenon; interfirm interaction and sectoral specialisation are the defining features of a sustainable cluster (Nadvi
and Schmitz, 1994). Recently, there have been attempts to provide taxonomy of clusters given thediversity of experiences particularly in developing countries. Pedersen (1997) identified two types
that are diversified industrial clusters characterised by “vertical specialisation of individual enterprises
and vertical diversity of the cluster as a whole”. In this cluster, there is a broad sectoral specialisation
but within the sector, individual enterprises and the cluster as a whole are not narrowly and horizontally
specialised. Efficiency gains depend on collaboration within and outside the cluster.
The second type is the subcontractor cluster, characterised by a narrow vertical and horizontal
specialisation by both individual enterprises and the cluster as a whole. Its collective efficiency
derives from reduced transaction costs due to reliance on larger firms as subcontractors. Amin
(1994) identifies three generic kinds which are craft-based, artisinal or traditional sector industrial
clusters (e.g. footwear, garment making, metalworking, etc.); high-tech clusters (e.g. Silicon Valley);and clusters based on interaction of large and small firms. This is similar to Pedersen’s subcontractor
cluster. Mytelka and Farinelli (2000) provide a functional categorisation of clusters that are either“public-induced” or “constructed clusters” such as industrial estates and export processing zones(EPZs) or spontaneous clusters that could be Informal, Organised, or Innovative2. Low levels ofinter-firm linkages characterise informal clusters but organised clusters have advanced somewhat

Quoted from Rosenberg (1976).
Most clusters in developing countries fall into the informal and organised type categories. Informal clusters generally contain microand small firms whose technologies are far from the frontier, and have relatively low technological capabilities. Organised clusters
have considerable technological competence, engage in training and invest in apprenticeship system. Firms undertake technicalupgrading, undertake design adaptations in response to market and can be highly organised and cooperate among themselves.
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in this respect. There is relatively greater networking within and outside their national borders as
exemplified by the firms in Nnewi, and the surgical instruments cluster in Sialkot, Pakistan.
Recent accounts of the limited studies of clustering in Africa are found in McCormick (1999), Adeboye(1996), Oyelaran-Oyeyinka (1997), Van Dijk (1997) and Brautigam (1997). The clusters vary widelyin their levels of development and internal structure and characteristics. In a study of six clusters,
McCormick (1999) identified three levels of cluster development. The first one is groundworkenterprise clusters, that is, those at the incipient stages whose basic role is to improve producers’
access to markets and for joint action. The second category is industrialising enterprise cluster
which “have much clearer signs of emerging collective efficiency”. The third category, complex
industrial clusters are diversified in size, structure and in inter-firm linkages; they exhibit strong
external economies, have reached into wider national and global markets, and demonstrate joint
action in institutionalised professional associations, subcontracting and collaborative arrangements.
In terms of internal structural characteristics, the majority of the enterprise clusters, which tend to fallin the first and second categories, operate with low-skilled manpower. They exhibit weak inter-firm
interactions and lack institutionalised systems of self-help. With the notable exception of the Nnewi
cluster in Eastern Nigeria, the Western Cape clothing cluster in South Africa and the Lake Victoria
fish cluster, empirical studies of the relatively more advanced clusters in Africa are limited.
Nevertheless, evidence from the literature suggests that clustering “can and does promoteindustrialisation” (McCormick, 1999), through improved market access, pooling of labour skills,
opportunities for technological upgrading as proximity promotes exchange of technical information,and promotion of joint action in dealing with external shocks.
The question is where do these clusters go from here? As Mytelka and Farinelli (2000) noted:“vulnerabilities in the production strategy of the cluster have emerged, especially because firms were
not well organised within the cluster to support a continuous process of improvement”. According toNadvi and Schmitz (1994), successful clusters are those that “have an indigenous growth potential,
to be resilient in the face of economic crisis and to be conducive to a process of sustained innovation”.

This kind of cluster achieves sustained dynamism and competes in the regional or global export
market not only on price basis but also by becoming an innovative cluster. It almost certainly is likely
to be characterised by substantial inter-firm linkages and networking. Greater subcontracting is one
such measure of manufacturing dynamism but of which little is known in African manufacturing.
This study is an attempt to contribute to our understanding of network subcontracting in Africa.

3.

Characteristics of the Lagos Clusters

The interviews for this study took place in the year 2000 for the Lagos clusters where 50 firms out ofa sample of 75 selected were interviewed using various instruments. The firms are based in two
locations, Ikeja and Isolo, both containing a large number of firms in a city with close to 60% of all the
manufacturing firms in Nigeria. The dominant product groups in the two Lagos clusters are chemicals/
pharmaceuticals, domestic and industrial plastics, rubber and rubber products (ISIC 351-356), andfabricated metals (light engineering, ISIC 381). Other product groups in the clusters are paper andpaper products (not significant), and food, beverages and tobacco. Except for beverages and tobacco,
all the other sub-sectors belong to the chemicals sector and light engineering. Historically, significant
inter-firm interactions exist between chemicals and engineering, for instance, among industrial
plastics and rubber product manufacturers and machinery makers. The 50 firms analysed comprised
21 small and 29 medium enterprises. Sixty four percent are in the Ikeja industrial cluster, and 36%
are from the Isolo cluster. Overall, 32% are in the chemicals and pharmaceuticals sector, 12% in
domestic and industrial plastics and rubber, 34% in fabricated metals and 12% in food, beverages
and tobacco sectors (table 1). Small firms have a labour force of 1-49 and medium firms employ 5099 persons; 42% of the firms are small while 58% are medium sized. The firms are established,registered business entities with affiliations to local and foreign Chambers of Commerce.
Table 1: Major Products of the SMEs within the Two Cluster Locations
Clusters

Product Group

Lagos

Chemicals and Pharmaceuticals
Fabricated Metals (34%); Chemicals and pharmaceuticals(32%); Domestic and Industrial Plastic and Rubber (12%)

Nnewi

Automotive Parts and Components (85%); Fabricated metals

Source: Survey (2000)

About 70% of the firms were established in the last 20 years, the period of economic structuraladjustment. The higher concentration of firms established in the 1990s in Ikeja is due to several
reasons. Ikeja is an older, more “desirable” location due to superior infrastructure (although all urban

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ATPS SPECIAL PAPER SERIES N O. 20

8areas suffer from epileptic power and water supplies). It is a “denser” cluster and therefore better
able to offer collective efficiency advantage conferred by geographic proximity to other firms, small
and large.
All firms are private and Nigerian owned; 61% have sole proprietorship, while private investors jointly
own 38%. This ownership structure of SMEs contrasts with what obtains in East Africa where
substantial ownership is in the hands of Asians and Europeans (World Bank, 1995).
Similarly, close to 80% of the firms at Nnewi are 10 - 20 years old meaning that despite Nigeria’s
economic difficulties, a reasonable level of investment was made by Nnewi businessmen during theStructural Adjustment Programme (SAP) years. Due to lack of public utilities, a strong feature of thecluster is the widespread provision of private facilities such as water boreholes, electricity generating
plants and communication.
A total of 97.8% maintain standby generating sets while only 2.2% do not. Small firms in particular,
tend to spend disproportionately large amounts on utilities.
3.1

The Nnewi Cluster

The study focused on automotive spare parts manufacturing, an area in which Nnewi firms havedeveloped considerable skills. Products manufactured include motorcycle parts and components,
cables and hoses, motorcycle engines and roller chains, automotive filters and exhaust systems.
Eighty per cent are SMEs and all are fully Nigerian-owned. The rate of capacity utilisation, a measureof performance, was 20% above the 1996 national average of 32%. Local resource-based manufacturers
such as rubber products firms averaged in some instances over 70% in the 1990-1995 period.
3.1.1 Origin and Investment Strategy of Nnewi Cluster Firms
The firms employ relatively sophisticated technology and manufacture products that require somemeasure of technical skills. The size of investment is substantial, measured against the typicalsmall firm in Africa, and for this reason, firms need to master significant elements of investment andproduction capabilities. The capabilities were acquired through long years of trade, networking withlocal and foreign agents, and visits to factories of suppliers. Investment in these segments of industry
requires knowledge of machine tools, product design at the early stages, and process and complex
product design at later stages.
In all the cases but one, the road to manufacturing was through trading apprenticeship to importingand finally, manufacturing. Entrepreneurs raised capital from trading, and subsequently entered into
manufacturing partnership with technology and machinery suppliers. None of the founders had
previous production experience except one entrepreneur who had previous experience with amultinational company (MNC) producing electrical cables. This entrepreneur then went on toestablish business along the same line.

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Once persuaded, an entrepreneur imports machinery and equipment, and contracts engineers to
set up the plant. Procurement of machinery is sometimes done piecemeal as capital becomes
available, until a whole plant assembly is ready. The pattern of investment is unbelievably uniform for
all the firms.
Firms acquired production capability through technological training of start-up/pioneering staff in
Taiwan or on-the-job. In each instance, the foreign technical partner provides training manuals aswell as technical assistance in installation and plant commissioning. Most owners are semi-literate,
coming from trading backgrounds and without formal engineering schooling. Training is for thatreason very important and central to the firms’ subsequent technological capability acquisition
strategy. On-the-job training during production takes the form of “close marking” of foreign technicalpartners. Overall, firms succeeded in acquiring investment, production and minor innovation
capabilities to a great extent. Major innovations involving advanced design skills and processcapabilities are yet to be seen since firms are still basically copying and modifying foreign designs.
Table 2 shows that much of the innovation undertaken is minor, yet important improvement to oldprocesses and products. Medium and large firms are more active in carrying out innovations totechnological processes, as well as to products.
Table 2: Reasons for Innovation by Firms in Nnewi
Firm size

Old process
improvement

Old productimprovement
20.4

Different
variety ofexisting
products
-

Small

52.3

Medium
Large

59.0
50.0

Capacity
Othersexpansion
22.5

20.0

16.3
50.0

16.7
75.0

18.17
-

50.0
-

Source: (Oyelaran-Oyeyinka, 1997)

3.2

Comparing Firms and Cluster Characteristics

To understand the content and nature of emerging manufacturing networking, we examine in somedetail, the subcontracting activities in the Lagos cluster. Subcontracting refers to user-producer
relation, usually a form of non-equity arrangement between firms, in which goods and services areprovided according to the specification of the user. This mode of inter-firm linkage often demands
communication and consultation, and in most cases leads to obligational relationship (Perry, 1999).
How much firms externalise their activities is subject to a number of factors ranging from the level ofproduction know-how outside the firm, through the need for specialised intermediate inputs, to costreduction.
The need for secure supply sources, in timeliness and quality, and the decision on the choice of
local as opposed to distant suppliers, particularly for low-volume supplies play a part in the firms’ATPS SPECIAL PAPER SERIES N O. 20

10

decisions in underdeveloped economies. A good number of the 32.6% firms in these two clusters
subcontract some aspects of their productions. However, they are mainly non-core operations suchas packaging, labelling, printing, production of bulk materials, and animal feed production, among
others. Sixty eight percent of those that subcontract do so because of the greater efficiency of thesubcontractors - a recognition of the role of specialists, while 10% do so because of irregulardemand (Table 3). Cost savings through lower inventory costs and the lower wages paid to
subcontractors (16%) are additional reasons for subcontracting. Thirty nine percent of thesubcontractors seek advice from firms on process-related problems while over 80% do so in respectof product improvements.
Table 3: Reasons for Subcontracting
Reasons for subcontracting
Irregular or low demand
Savings on inventory
Greater efficiency of subcontractor
Lower costs of subcontractors
Total

Total %
9.7
6.5
67.9
16.1
100

Source: Survey (2000)

Three sets of reasons were adduced for poor subcontracting of core production. First, firms express fears
about the high risks involved in contracting firms with no track records. In particular, firms that manufacture
custom made machinery were concerned about financial penalty arising from delays and defects. Second,
and related to the first, is scepticism about the ability of potential subcontractors to meet delivery dates
since one of the motivations for this activity is to speed up delivery to customers or the retail market. For
instance, 45% of the firms “frequently” returned orders, while 29% occasionally did so. Twenty percent had“frequently” changed subcontractors as a result of consistently poor performance, or disagreement on
specifications, while 35% did so occasionally. Forty two percent offered personnel to supervise
subcontractors “often” to avoid poor quality, while 26% did s o occasionally. The third set of reasons iswhat one may term: “we can do it, why take it out”. Due to slack machinery capacity from low market
demand, firms tend to underutilize engineering capabilities and machine capacity. For this group of firms,
it makes little sense to subcontract, particularly when they have to pay wages even when firms with superior
capabilities are available.
Subcontracting collaboration is in three main areas. First is joint process and product development workthat involves elements of upgrading in size, and changes in engineering materials specifications. This
technical engineering change is carried out for cost saving and also in substitution whereby a particularmaterial is unavailable or too costly for the local market. This type is common with the mature firms,
particularly in food processing machinery. The second broad area is in product standardisation, an
exercise that is becoming increasingly important as firms compete with higher quality imports in all
sectors. The third area and related to the first is in reverse engineering. Firms will often subcontract difficult
designs and more commonly, electrical/electronic parts and components to specialised firms. Of theN ETWORKING T ECHNICAL C HANGE AND I NDUSTRIALIZATION: T HE C ASE OF SMALL AND M EDIUM F IRMS IN N IGERIA

11

three, 30% collaborate in product quality standardisation, 15% in reverse engineering collaboration and
13% in joint product/process development.
From table 4, there seems to be an average incidence of output rejects (index of 2.18) which is above
average, and an equally pragmatic response in which most firms second their own staff and participate
actively in “supervising” the work of subcontractors. The incidence of surcharge is equally prevalentconfirming the scepticism of firms, but most admit to continual improvement on the part of subcontractors.
There is a low to average index of switch of subcontractors but from firm-level interview, this happens
largely as a result of disagreement in terms of contractual costs and conditions rather than as a result of
performance.
Professional ties, informal social interactions, and proximity tend to be the most important forms of social
networking. Less than 9% of the workers employed in firms in the Lagos clusters are related to the owners,
whereas at Nnewi, the entire workforce is of Nnewi origin. Most have trading outposts in Lagos that aresubstantially staffed by families and co-ethnics. In the metropolitan cluster, 32% of firms claim that nonprofessional ties other than family determine business relations, while spatial proximity and family ties areclaimed by 19% and 20% respectively.
Table 4: Response (%) to Subcontracting Outputs by Firms
ResponseHigh orto subcontractors “Frequently”“errors”

Average“Occasionally”

Low or “Never”

Response
Index

RejectSurcharge
Changesubcontractor
Joint exercise

45.2
19.4

29.0
48.4
35.5

25.8
51.6
45.2

2.18
1.94
1.74

41.9

25.8

32.3

2.1

Source: survey. Note: Index was calculated by weighting averages and normalising scores. 3=High, 2=average, and
1=Low.

In the following section, Nnewi firms’ and cluster characteristics are compared with that of themetropolitan clusters and in so doing the following are examined: subcontracting, networking,geographical proximity, co-operation and competition, trust and cultural affinity.
Networking: Three types of networking are dominant in the two clusters: trade, production andsocial. The social network includes professional and family ties, kinship and ethnic bonds. The
most prominent at Nnewi is the trade network and social networking. Trade networking has been themainstay of Nnewi entrepreneurs for decades and the area has for long controlled a huge portion of
trade in transportation and automotive spare parts in Nigeria. For the last 80 years, starting with
importation from Europe and later from East Asia, Igbo traders of Nnewi origin had accumulated
considerable experience and succeeded in forging linkages with partners in Asia. Family ties had

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been an important source of credit, and a novice starts out as an apprentice trader, learns the ropes,
and is started out with some capital. Outsiders are kept out completely and the new apprentice issoon exposed to international partners. In the manufacturing stage, there is evidence of sharedfacilities, and informal provision of capital through family ties continues, but manufacturingsubcontracting is yet to emerge. This is not surprising for two reasons adduced by firms. First,
independent scientific and technological infrastructure such as foundry, forge shops and testing
facilities that promote subcontracting, are largely absent. Second and as a result of the first reason,
most factories were established to be self-sufficient in terms of core production, the provision ofancillary facilities, and basic utilities, since investment and plant design assumed “Greenfield1 ”
conditions. Greater subcontracting may evolve over time when production processes begin to demand
greater specialisation, and as the market demands higher quality products.
Geographical Proximity: Firms are concentrated within the locale of Nnewi although there isconsiderable trading and other supply relationships with companies outside Nnewi. The mostremarkable aspects of the linkage relationship is the firms’ source of technology which is Taiwan.
To this extent, Nnewi cluster differs significantly from the European and Japanese clusters that havetheir origin in traditional crafts and a longer history of technical apprenticeship. Nnewi is also uniquein the sense that while firms derive strength from each other’s presence they have few subcontracting
relationships. The cluster has no sea or air port, the roads are not good and in most cases areconstructed by the entrepreneurs themselves. However, the resource-based firms such as
manufacturers of automotive rubber products have strong links with domestic suppliers. The Lagosclusters have developed relatively more intense relationships but subcontracting is more in noncore activities.
Co-operation and Competition: There is an intense desire by the entrepreneurs for social relevanceand high visibility. The subtle competition, which started with trading, seems to manifest in a“manufacturing contest”. There was co-operation in trading where a group of traders would entrust
huge sums of money to a member for making purchases on behalf of the group. This practice which
reduces transactional costs (airfare for instance) is common among family members. This elementof co-operation still exists where wealthier kinsmen advance credit to new entrants to start a business;there are shared facilities, equipment and in rare cases, assistance with manpower. Competition
and rivalry, however, remain intense and firms protect production “secrets” constantly.
Entrepreneurial Dynamism: A most important source of the relative success of Nnewi is the perceived
dynamism of its entrepreneurs. The typical small hi-tech firms in Europe and Japan are run byskilled labour and highly educated manpower. The Japanese entrepreneur is likely to be a productof an apprenticeship system (deshi) with its strong emphasis on technical skills, while the Nnewi
businessman comes from a trading and apprenticeship background. The majority of Nnewi
manufacturers are semi-literates who have learnt to operate relatively modern systems but have lowlevel educational backgrounds, yet evidently good technical factory level skills. The Lagos clusters
have a higher level of educated manpower as earlier discussed.

N ETWORKING T ECHNICAL C HANGE AND I NDUSTRIALIZATION: T HE C ASE OF SMALL AND M EDIUM F IRMS IN N IGERIA

13

Trust and Cultural Affinity: Nnewi is a culturally homogeneous society and manufacturing, like trading
which gave impetus to it’s growth, tends to be organised along a strong ethnic accent. Family ties
are critical while kinship networks formed the basis for informal finance and the apprenticeshipsystem that provided a foundation for Nnewi’s success. The way in which the system works needs
to be properly understood through systematic research.
In the Lagos clusters, 74% of the owners are from states within the southwestern part of the country
while other Nigerians from other parts of the country own 26% of the enterprises. In contrast, allowners of businesses in the Nnewi cluster are natives, not just of South-eastern Nigeria but specificallyfrom Nnewi town (Oyelaran-Oyeyinka, 1997). Most workers are from the town and are related toeach other and to owners of firms. The liberal land policy and the relatively more accommodating
attitude of Lagosians, contrasts sharply with what obtains in South-eastern Nigeria where a nonnative person is most unlikely to have access to land for business. The contrasting pattern of ownershipof businesses in the clusters reflects the cosmopolitan nature of Lagos and the different values of thecultures. It is part of what is commonly known as “the son of the soil syndrome” in Nigeria and an
important determinant of the nature of ownership and direction of development. Less than 10% of
workers in the Lagos clusters are family members of the owners of the SMEs.
3.2.2 Educational Levels of the Entrepreneurs and Workers
All the Lagos firm owners have formal education; the majority have gone beyond high school to haveadvanced degrees. About 4% have high school certificates while 12.6% have Trade Technical
Certificates and/or school certificates (equivalent of high school but with emphasis on technicalcourses). A total of 63.2% have bachelors degrees, and 20% obtained Higher National Diplomas (adegree course taken in polytechnics, with emphasis on skills rather than theory). The other 8% havepostgraduate degrees.
In the skilled workers’ category, only 1.3% do not have formal education. Fifteen per cent passed
high school, while some 32% have Trade Technical Certificates, and 28% obtained the Higher
National Diploma. About 23.7% have bachelors degrees and higher certificates. In the unskilledworkers category, 19% have no formal education, while 56% passed high school. About 25% havethe Trade Technical Certificate and/or high school certificates (table 5).
Table 5: Educational Levels of Owners
Type of Degree
University Degree
High School or equivalentLagos Cluster (%)
63.2
36.8

Nnewi Cluster (%)
5.8
Less than 30

Source: survey

At Nnewi, the path and sequence of transformation from trading to manufacturing is, with few
exceptions, extremely similar. Most of the entrepreneurs have only elementary education before

ATPS SPECIAL PAPER SERIES N O. 20

14starting an apprenticeship period - usually funded by a relation. There is a strong accent on kinshipthat defines the structure of trading and subsequently, that of manufacturing. This practice is notuncommon with small and medium entrepreneurs. The strategy is to keep the skills and experiences
gained within the family while reducing the risk of losing a valuable worker. Again, consistent with theliterature findings on SME clusters, trust between employers and employees is critical for success.
Employing relatives into the trading and manufacturing network reduces the risk of sabotage andensures some measure of loyalty. These distinguishing characteristics of this emergent cluster havedramatically shaped the process of industrialisation in this semi-urban town.
3.2.3 Limiting role of support systems
Common to both clusters is the poor state of science and technology support systems. Response
from the Lagos clusters, with relatively better support systems is reflected in table 6. Firms internalizefunctions that could otherwise be contracted out relatively cheaply, because the specialists are notavailable outside the firm. In cases where they are available they are within rival firms.
Table 6: Ranking of Support Systems by Lagos Firms
PublicMaterials Testing1
Training
2
Technical Assistance1
R&D Support
1
Industrial Extension
1
Electricity
2
1 = weak or none
Source: Survey

5 = strong

The similarities and differences are summarized in table 7.

Private
1
3
2
1
1
4

N ETWORKING T ECHNICAL C HANGE AND I NDUSTRIALIZATION: T HE C ASE OF SMALL AND M EDIUM F IRMS IN N IGERIA
Table 7: Lagos and Nnewi: Comparison of Firm and Cluster Characteristics
Characteristics
Lagos (metropolitan)
Nnewi (rural cluster)
Educational level

Most owners are first degree holders
and workers are largely educatedMost owners of businesses
are semi-illiterates

Age in production

80% of businesses were establishedin the last 15-25 years

Similar age structure with
Nnewi firms

Ownership

Nigerians own all firms; 61% soleownership while balance has joint
private ownership.

Mostly sole proprietorship bynatives of Nnewi.

Relation with support
institutions

Average

Very weak

Export orientation

West African markets

Exports to West Africancountries

Manufacturing origin ofentrepreneur

Diverse backgrounds including
previous experiences with MNCs

Geography, spatial
proximity

Metropolitans cluster with far greater
availability of utilities but poorly
maintained. Liberal land policies
enable a diverse set of businessownership. Factories are located inindustrial areas and spatial proximity
is a greater determinant of inter-firm
co-operation.

Most come from trading,with close ties to Taiwan
and from there, moved into
manufacturing of same
products
A rural enclave with poorroads and power supply.
Factories are built on family
land. Spatial proximity does
not seem to engenderhorizontal inter-firm
co-operation.

Ethnicity, family andkinship ties

Accent on ethnicity is notpronounced; social and professionalties tend to be more a determinant
than kinship and family.

This is a strong basis for
employment and trust isequally based on filial andfamily ties. Nnewi cluster
originates from “this is ourland”.

Relation with foreign
suppliers of machinery

Diffused and non-uniform. Not asstrong and enduring.

Very strong ties with
Taiwanese partners.

Relation with local inputs
suppliers andsubcontractors

Stronger than what obtains at
Nnewi. Sources of supply are wider
and there is greater scope for cooperation within the metropolis.
not subcontracted

Local resource-based
activities have strong tradingties with domestic input
suppliers. Core activities are

Source: Linkages in African Manufacturing Cluster: a Nigerian Case Study(Footnotes)
1

Greenfield” investment assumes zero-level utilities since plant is on “virgin” land.

15

4.

Conclusions

Table 6 summarises the main characteristics of the clusters in the urban and metropolitan locations.
The author discusses how different attributes have shaped the evolution and performance of theclusters. Examining the nature of subcontracting networks in both locations in some detail, theauthor found that while networks are growing in the metropolitan cluster, they are much fewer in therural cluster. The availability of specialised agents seems to provide the impetus for firms to engage
in subcontracting. Even then, much of the core production activities of firms are still carried out inhouse. However, the most striking attribute of the two locations is the differential influence of sociocultural factors on the evolution of clustering in the two locations.
Economic relations among a group of firms have elements of social embeddedness and can beviewed in three different ways (Granovetter, 1973; McCormick, 1997). The first is the notion thatspecific and interrelated social and cultural factors give rise to different processes of development.
Second is the notion that those socio-cultural identities provide a foundation for trust and reciprocity
in firms dealing with one another; and third, that the social milieu exerts strong influence on, and is
influenced by, the processes of innovation and technical change. There is evidence from the study
that investment decision by firms and the subsequent cluster formation in the rural cluster studied
was strongly predicated on ethnic, family and geographic factors. In the metropolitan clusters, family
and kinship factors were less influential but social and professional networks were very important.
The role of education of entrepreneurs seems to be neutral in the choice of location for the ruralcluster, as other factors tend to be more powerful. We did not investigate the consequences of low
educational attainments for firm performance but this will become crucial in an increasinglycompetitive, skill-based economic milieu. The compelling need for investment security, and theunavailability of land in Eastern Nigeria meant that entrepreneurs locate factories within their own“fathers compound” even in the face of high transaction costs (poor road networks and poor
power supply). However, in the metropolitan clusters, social and professional networks are basedon educational attainment of owners and for that reason tend to be a strong determinant ofbusiness formation and growth.
Spatial proximity plays different roles. Nnewi firms are part of business associations, as are theLagos firms but the two clusters tend to leverage professional networks in different ways and todifferent degrees of intensity. The linkage with foreign firms is more crucial to the Nnewi
entrepreneur while firms in Lagos have developed greater inter-firm links among themselves.

16

N ETWORKING T ECHNICAL C HANGE AND I NDUSTRIALIZATION: T HE C ASE OF SMALL AND M EDIUM F IRMS IN N IGERIA

17

Whereas in the former, cluster collaboration has grown with input suppliers and traders within andoutside the country, the latter engage local firms in maintenance, purchase of spares and insharing of information on technical and market matters. Nnewi firms trade and conduct much of
their financial transactions in Lagos where they maintain trading outposts.

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in African Manufacturing Cluster: A Nigerian Case Study. He can be reached at
Oyeyinka@intech.unu.edu.