SME clusters for spurring growth

SME clusters for spurring growth

 Md. Joynal Abdin

The Financial Express on August 7, 2014


Michael Porter, father of the concept of ‘industrial cluster’, defined cluster as a ‘geographic concentration of interconnected businesses and associated institutions in a particular field’. In this definition, we are getting three criteria of an industrial cluster. These are (a) a geographic concentration, (b) a group of interconnected business, (c) in a particular field. Besides this fundamental definition, industrial cluster could also be defined on the basis of common activities, single origin, size of business, used technology, and focused market or target market etc. Many countries define clusters based on different criteria. For example, ‘One village, one product’ or ‘One town, one industry’ concept is very popular in the East like Japan or China. India has defined cluster based on a particular number of similar production units in a specific geographical location. The United Nations Industrial Development Organisation (UNIDO) has described industrial cluster as a ‘geographic and economic concentration of manufacturing activities which produce and sell a domain of interrelated and complementary products and having common problems and opportunities.’


l For the first time in 2011-12 fiscal year, the Small and Medium Enterprise Foundation (SME Foundation) took an initiative to define SME Cluster in Bangladesh. After a thorough discussion with relevant stakeholders like the Bangladesh Bank, the Ministry of Industries, the Bangladesh Small and Cottage Industries Corporation, the Export Promotion Bureau, and the Federation of Bangladesh Chambers of Commerce and Industries (FBCCI), etc. the SME Foundation defined cluster as ‘a concentration of enterprises producing similar products or services and is situated within an adjoining geographical location and having a common strengths, weaknesses, opportunities and threats.’

 The key criteria selected to define a SME cluster are the following:

 (i)    Products or services should be similar or homogenous and related,

 (ii)    The enterprises must be production or service units which number at least 50 and above,

 (iii)    There must be adjoining geographical location and

 (iv)    The location may comprise several villages, wards, unions and industrial estates which might be scattered within an area of 3-5 kilometre radius.


SME CLUSTERS IN BANGLADESH: Based on the above definition, the SME Foundation identified 177 SME Clusters in 51 districts of Bangladesh. There are about 38 handicrafts and miscellaneous clusters followed by 34 agro-processing/agri-business/plantation clusters, 31 light engineering and metal working clusters, 22 knitwear and readymade garments clusters, 16 fashion-rich effects, wear and consumer goods clusters, 13 leather making and leather goods clusters, 10 handloom and specialised textiles clusters, five healthcare and diagnostics clusters, three plastics and other synthetics clusters, three electronics and electrical clusters, and two educational services clusters in the country. These clusters are located in 51 different districts. No clusters are found in 13 districts namely Netrakona, Rajbari, Narail, Meherpur, Lalmonirhat, Sunamganj, Barguna, Bhola, Patuakhali, Noakhali, Bandarban, Rangamati and Khagrachari.

There are about 69,902 SME enterprises employing approximately 1,937,809 workforce in the SME clusters of Bangladesh. Their annual turnover is about Tk 573,510 million per year. A major portion of government revenue in different forms (income tax, VAT, customs duty etc.) comes from these SME clusters. But no significant government support is visible to support, develop or promote SME clusters/ entrepreneurs.


PRODUCTS IN SME CLUSTERS: Major products being produced in the SME clusters of Bangladesh are as follows:

1. Agro-processing/agri-business/ plantation clusters: Major products are rice, broken rice (commonly known as khud), husking dust (commonly known as kura), burning wood (commonly known as lakri), oil, and oil cake (commonly known as khail) etc.

2. Light engineering and metal working clusters: Major products are door and window grill, door and window frame, collapsible gate, iron and steel furniture, motor parts, engine repair, pump, machine tools, agricultural equipment, automobile body building, repairing, and colouring, ship breaking etc.

3. Knitwear and RMG clusters: Major products are thread, pants, jackets, ladies’ three-piece sets, towels/gamchas, shirts, tape/ nima, frocks, baby set, suit, and cloths etc. 

4. Fashion-rich wears, effects and consumption goods clusters: Major products and services are jewellery made by gold/silver/other metals, hair spa, hair protein, party makeup, facial, eye-brow pluck, herbal facial, haircut, and orange facial etc.

5. Leather and leather goods clusters: Major products are gents’ shoes, ladies shoes, baby shoes, sandal shoes, and slippers etc. 

 6. Healthcare and diagnostics clusters: Major services are X-ray, ultra-sonogram, ECG, different pathological tests, hematological tests, biochemical tests, echo-cardiogram, CT scan, and surgery etc. 

 7. Plastics and other synthetics clusters: Major products are mugs, bowls, buckets, bodna, and many other home appliances. 

 8. Electronics and electrical clusters: Major products are electrical board, switch, socket, holder, cut-out, anti cut-out, coil, battery, TV, and electric cables, etc. 

 9. Educational services clusters: Major services are education services/counseling.

 10. Handloom and specialised textiles clusters: Major products are blouse, saree, orna, three piece, farnet, towel, panjabi, cushion cover, bed sheet, and pillow covers etc. 

 11. Handicraft and miscellaneous clusters: Major products are dining table, mat, bamboo net, large bamboo basket (commonly known as dhol), tabla, Nest, kula, candle stand, cup-plate, clay piggy-bank, flower vase, different dices, mud cover, tub, oil-based perfume, incense sticks, curry and rice cooking pot, bamboo goods, tray, bowl, file, ruler, cylinder,  and partition, wooden furniture boxed bed, normal bed, dressing table, reading desk, computer desk, sofa set, dining table, and chairs, etc.    


RAW-MATERIALS USED IN SME CLUSTERS: Major raw materials used in the SME clusters are rice, wheat, yeast, sugar, salt, husk, sesame, mustered, SS pipe, steel, iron, scrap, GI pipe, aluminum, flat and angle bar, copper, led, colour,  elastic/rubber, thread, gum, foam, sticker, lace/ribbon, bale, chemical, cloth, cotton, soda, jori/puti colour, zipper, paper, button, , necklace, metal, buckram, fabrics, navy blue RX copper, zinc, acid, sohaga, massage cream, face pack, orange pack, foundation, hair polish, nail polish, spa pack, half silk, herbal pack, beauty pack, rexine, solution, sole, rubber/elastic, thread, gum, foam, sticker, pasting, gum, synthetic, chemical, plastic, cellulite, animal skin, X-ray film, ECG roll, ultra sonogram paper, different chemicals, surgical equipment, plastic, uranium powder, steel, plastic, colouring mud, copper, zinc, uranium powder, screw, copper rod, picture tube, remote, steel, carbon, iron, brass, PVC, thread, ribbon/lace, cellulite, wool, half silk, , jori/puti, polyester, colour, paper, bamboo, cane, wire, plastic, wood, mud, colour mud, soda, date leaf,  agar tree, hay and different type of timbers etc.


CHALLENGES OF SME CLUSTERS: SME clusters usually grow due to the availability of raw materials, skilled labour in competitive prices as per  daily needs of local people. There are a few clusters growing faster to meet local or international demands. A few of them may become extinct due to wrong government policy, or absence of necessary support from the government. Clusters are playing a vital role in employment generation and balanced development of the country but till now they have been neglected by the government or donors in terms of policy support, technology development, infrastructure development, electricity and other utilities supply, market linkage with local or foreign buyers. Development barriers of SME clusters are very much location-specific and sector-dependent. Therefore, it is quite difficult to describe challenges of SME clusters in a particular document or article.


MAJOR CHALLENGES: With this limitation in mind, we could describe major challenges of Bangladeshi SME clusters as follows:

 01. Absence of appropriate technology: Most of the clusters are using old technology adopted in 1950- 60s. Therefore, productivity of the clusters is lower than that of their competitors. Its tells on the quality of the products. Entrepreneurs are losing market share to imported products or failing to get access to target market at home and abroad. For example, entrepreneurs of the coconut oil cluster located at Bagherhat Sadar are using a semi-auto technology imported from Japan in 1952. Local workshops copied it and are producing the same machines during the last 60 years. Major limitation of this machine is that it is unable to extract 100 per cent oil from the coconut and quality of the oil produced is of crude grade. Till now, there is no refinery machine in the Bagherhat coconut oil cluster. As a result, their oil is losing market share to imported coconut oil marketed by various multinationals in Bangladesh.

Similarly, time-worn technology is being used at the Sataranji cluster at Nishbetganj, Rangpur and different handloom clusters all over the country.

02. INADEQUATE RAW MATERIAL SUPPLY: Most of the clusters are dependent on imported raw materials or purchased raw materials from a third party. There are middlemen/intermediary traders/ importers in each of the sectors supplying raw materials to the clusters. Sometimes, these intermediaries used to charge illogical prices for raw materials without any valid reason. For example, there are more than five thousands of electrical and plastic goods manufacturing enterprises in Bangladesh. Raw materials of these sectors are mainly import dependent or recycle based. Small entrepreneurs of the sector could not import raw materials directly due to their limited financial and technical ability. They used to purchase raw materials from local trader/ importers. In few cases, importers charge so higher prices for raw materials which are not even in tune with the international market. Syndication is responsible for this unusual price hike in these sectors.    

The same scenario is there in handloom or power loom entrepreneurs in home textile cluster at Kumarkhali, Kushtia and hosiery cluster at Gobindaganj, Gaibandha while they purchase threads or dye. These irrational price hike of raw materials make the whole sector uncompetitive in the market. A large number of entrepreneurs and workers have to suffer and pay undue prices of raw materials to a number of middlemen.

03. ABSENCE OF MODERN DESIGNING KNOWLEDGE AND TECHNOLOGY: Most of the SME clusters in Bangladesh are using old technologies and producing almost similar products. On the other hand, customer’s choices are changing every day and they are not willing to purchase the same design, same quality or same shaped products with higher prices. As a result, they are attracted to the imported good- looking products even of lower quality with higher prices. Limited designing knowledge and technology are a common problem in almost all the SME clusters in Bangladesh.

04. ABSENCE OF TESTING FACILITY: Testing products is a prerequisite to classification or grading of the products. But we have absence of testing facility in almost every cluster in Bangladesh. For example, there are no testing machines in Bangladesh to test quality of Agar/Ator production at Agar/Ator cluster located at Barolekha, Moulvibazar. Gold testing facilities are very rare in any jewellery cluster in Bangladesh. Wood seasoning and testing facility of the wood products like cricket bats is absent in Baldia cricket bat cluster at Nesarabad, Pirojpur.

05. ACCESS TO FINANCE: Limited access to finance is one of the oldest problems. So many initiatives were taken by the central bank to facilitate access to finance at the door-step of the entrepreneurs, but till now, it is a major challenge for any new entrepreneur. But today we will see sector or location-specific format of the same problem in different forms. For example, entrepreneurs of Bhairab shoe clusters face a dry season for three months in every year. At that point of time, their products see lowest sales and lowest revenue generation. As a result, they are unable to pay bank installments during that period. But they are willing to pay the whole year’s installments in rest eight months. But no bank is offering that tailor-made loan products to them to address the ground reality. Entrepreneurs of Agar/Ator cluster located at Barolekha, Moulvibazar are getting bank loan for Tk 5,00,000-Tk 5.0 million easily. But they need up to Tk 100 million -Tk 200 million while government Agar garden/forest calls for tender. If a third party (without having Ator producing plant) win the tender, then either original entrepreneurs having Ator producing factories have to purchase the trees with much higher prices or the trees will be exported to neighbouring country. Thus Bangladesh loses its own wealth to add value and export at much higher prices.

There are no banks which can give Tk 100 million-Tk 200 million loan for a short period of time to the Agar-Ator entrepreneurs at Barolekha cluster at Moulvibazar. Another unique form of financial problem could be seen at Nawgah jewellery cluster. Banks usually do not provide loan to jewellery business. Our neighbour India is exporting jewelry products worth millions of dollars to Dubai and other Middle East countries. Till now the Bangladesh government is not providing any support to jewellery sector. Even official import of gold is banned or strictly controlled by our government. On the other hand, Bangladesh is importing a significant volume of artificial jewellery/stone jewellery from India and China to meet its internal demand.

06. LACK OF KNOWLEDGE ABOUT QUALITY AND CERTIFICATION: Our entrepreneurs have very limited knowledge about product quality and international quality certification system. As a result, they are lagging behind even with qualitative products in a few sectors.

07. LIMITED SKILLED LABOUR: Most of the clusters have potentials to grow further but availability of skilled manpower is very limited. As a result, labour availability is higher and entrepreneurs are not willing to develop skills at their own cost. Entrepreneurs are not adopting new technologies due to non-availability of technicians of modern machineries in local market. As a result, productivity and quality of products are not increasing to a satisfactory level.

08. NON-COOPERATION FROM GOVERNMENT AGENCIES: In most of the cases, tax, VAT, police, environment and consumer rights officials do not cooperate with the entrepreneurs. There is an orientation gap between officials and entrepreneurs. The government can make these officials believe that all entrepreneurs are not dishonest. So everybody and anybody should not be treated as a thief. They must recognise an entrepreneur’s role in the economy. He pays taxes/VAT, generate employment and increases GDP growth of the country.


WAY FORWARD:  Many development projects are being implemented by the government, donor agencies and NGOs (non-governmental organisations) in different sectors of Bangladesh. There could be a development project to update existing technologies of different SME clusters for increasing productivity and product quality.

The government could allow sectoral associations to import raw materials relevant to that sector with bonded warehouse facility to facilitate export of SME products produced in different SME clusters throughout the country. The government may also consider allowing minimum import duty on raw materials being used in SME clusters and give protection to SME products against import.

The central bank has to inspire the scheduled commercial banks to offer loans on the basis of local needs in different SME clusters. The government has to take the lead in establishing sector-specific testing laboratories and training institutes to promote world class products and efficient labour/ technicians in Bangladesh’s business arena.

Today or tomorrow we have to face the reality that without producing qualitative products having international standard certification no one will buy our products at home or abroad. Therefore, the government could inspire entrepreneurs to achieve global standard quality certification for respective products. Moreover, cluster development activities should get priority in government development agenda for balanced development of Bangladesh.


At this stage, SME clusters are in need of government’s intervention for faster growth and sustainable development. It will facilitate industrialisation, employment generation, poverty reduction, increase in export earnings, and balanced development of each district of the country.


Published by

Md. Joynal Abdin

Development Researcher, Columnist and Author

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