- 3 -

It also reduces transaction costs that arise from information asymmetry and imperfect contract enforcement. With low transaction costs, the division and specialization of labor among firms are promoted and the provision of trade credits is facilitated in industrial clusters. Of course, there are localization diseconomies as well. For example, infrastructure may be overused resulting in serious congestion problems. Yet the fact that a large number of firms are located in clusters indicates that localization economies outweigh localization diseconomies. The question is how to nurture entrepreneurship, including managerial capacities, while taking full advantage of localization economies in existing and new industrial clusters without aggravating localization diseconomies.

We use a simple model of micro and small enterprises (MSEs) in an industrial cluster to understand why managerial capacities impact on the cluster’s capacity for job creation. In the model, the major task of management is to maintain control of output, quality, delivery, and costs, as emphasized by Deming (1982) and Toyota’s Production System. Entrepreneurship has an element of initiative, imagination, or innovative capacity (Baumol, Schilling, and Wolff, 2009). Although its manifestation can have a variety of forms, the development of an industrial cluster is boosted by similar or almost the same set of innovations in different industries in different countries, according to case studies compiled by Schmitz and Nadvi (1999) and Sonobe and Otsuka (2006, 2011). Two hypotheses emerge from these discussions. First, in stagnant clusters, firms have almost equally small employment sizes, their labor productivity fluctuates wildly, and, therefore, in a cross section of firms, no clear association is found between labor productivity and employment sizes. Second, in dynamically growing clusters, employment size varies among firms, labor productivity has small variances particularly among large firms, and there is a positive association between labor productivity and employment sizes. The main purpose of this study is to demonstrate that main difference between stagnant and dynamic clusters can be attributed to the difference in management and innovative capacities of entrepreneurs.

The empirical part of this paper uses enterprise data collected in industrial clusters in Ghana, Ethiopia, Tanzania, Bangladesh, Vietnam, and China, with quite different characteristics and growth performances. The data indicate that firms’ employment sizes are small if production fluctuates wildly, a reflection of bad management. The data provide suggestive evidence for the hypothesis that employment size is not closely associated with labor productivity in the absence of innovations. By contrast, in the clusters that have experienced innovations, employment sizes have grown rapidly and are associated positively with labor productivity.

The rest of this paper is organized as follows. The next section briefly reviews the factors associated with productivity, including localization economies and diseconomies. In Section 3, we develop a model highlighting the impact of managerial capacities on labor employment. In Section 4, we discuss entrepreneurship and innovations in industrial clusters. Toward the end of this section, we will develop hypotheses. Section 5 documents the empirical findings based on the selected case studies. Section 6 discusses policy implications and concludes the paper.