Using clusters to improve competitiveness and ability to innovate: The Ukrainian Experience

EUROCHAMBERS Affiliated Members Meeting
“Increase of competitiveness and innovativeness on the basis of clusters. Experience of Ukraine”

Moscow, Russia
22 January 2008

Stanislav Sokolenko
Chamber of Commerce and Industry of Ukraine
Union of Economists of Ukraine
Institute of economy and forecasting, NАS Ukraine

1. Introduction.
Cluster development as the factor of increase national and regional competitiveness is a characteristic attribute of modern innovative economy. Interconditionality and interrelations between processes of clusterization, strengthenings competitiveness and accelerations of innovative activity is a new economic phenomenon which allows to resist to an impact of a global competition and properly to meet the requirements of national and regional development.
Industrial cluster is a group of economically connected firms and others juridical persons and the institutions located close by. Owing to this informational association they receive industrial advantages. Last years „cluster strategy” of economic development have got popularity in the majority of the countries of the world irrespective of their political system. Not exception is Ukraine in which for last decade interest to this model of social and economic development has immeasurably grown. Realizing cluster strategy, national and regional authorities actively organize carrying out of complex researches on formation of clusters
with the account of local conditions. As the global and ukrainian experience testifies, many customers of these researches – politics and their advisers – had a very vague idea of an essence of clusters, about creation of conditions for their successful functioning. Very often cluster researches were considered as a finishing phase of new strategy while actually it was only the initial stage of cluster models formation of regional development.
Starting introduction of cluster models of manufacture, it is very important to realize deep sense and structure of such model, and also conditions of its formation and the further development. It is necessary to master a technique of identification historically generated clusters and definitions of their influence on economic development of region. Very important in due time to support cluster initiatives and to use effectively the cluster analysis in the regional policy and practice.
Clusters in modern conditions of competition strengthening in the global markets represent a fundamental organizational basis for realization of key principles of national and regional economy formation and corresponding elaboration of the strategy of social and economic development of regions.
The understanding of competitive advantages of new industrial systems and active formation of regional innovative clusters opens before regions new prospects of economic development and successful overcoming of “charges” from competitors. In order to reach a such level, leaders of regions should be beyond only carrying out cluster researches. The quantitative and quality indicators analysis of region development should become the initial stage and a basis for dialogue with business structures which are capable on the basis of cooperation to generate regional clusters. This dialogue will assist leaders of region in mastering of art to develop the corresponding strategy of economic development. But, to begin this process, leaders, their advisers, key representatives of business circles should understand in the best way:
- What are the clusters?
And it is more than that
- On what the clusters are capable?
- What they cannot and should not do, and what does not follow from
them to expect?

2. Role of clusters in rise of productivity and innovativeness.
Concept „ Industrial cluster ” looks more likely as the wide concept,
than as the exact term which defines the specific participant of market relations.
Cluster is a new еffective way and system cooperation constant business relations territorially and economically allied participants of production process for the sake of reception by each of them total synergy of them total commercial result.
The end of XX-th and beginning ХХІ of centuries were marked by explosion of interest to industrial clusters. Application of cluster concept of manufacture has allowed to enough plenty of the countries to improve efficiency of the economy considerably. In turn, heightened interest to it by economists has led to the beginning of carrying out of a plenty of elaborations which result became not only significant growth of a different sort of political experiments and innovations, but also formation of thousands of clusters worldwide. By the way, activity of scientists in this direction has found the application in appearance of new academic discipline – „ new economic geography “.
One of the key questions of cluster models development is definition from many versions cluster linkages the concrete scheme of production relations of the given network formation, including territorial proximity, social distances, features of technology, directions of industrial streams etc. The degree of closeness of cluster members from the listed components determines a fortress and effectiveness of the concrete industrial cluster system functioning. Clusterization is a real embodiment of a logic conclusion that association of efforts mentioned gives them advantage before those business structures which work separately.
The most precise cluster definition arises on the basis local relations „ the buyer – the supplier “. The majority of firms buys raw material, components, services from other local firms. To have the common network of suppliers and buyers is the big advantage to its firms-parteners in similar districts. An essential part of cluster interconnections is activity generated by cluster „ value – added chains”. Its functioning allows to be convinced that competitive advantages of firms depend on their activity, starting from development of the project design, purchase of materials, manufacturing of production, and finnaly – logistics of their sale and service. As most mentioned operations demand wide interaction with other firms – suppliers, professional service firms, distributers, buyers and other structures – geographical proximity of the companies is really very important for each part of a value – added chain and for their strategy of development. As an example to this is development of the ceramic cluster in Slavyansk (Donetsk area) and the granite cluster in Zhitomir area.
Importance of direct linkages – „ the Buyer – the Supplier ” increases even more, when firms pass from vertical integration (one key company itself carries out all finishing stages of production) to horizontal integration, when each company specializes on separate operations of joint production and coordinates the activity with work of other firms-participants.
Clusters play a role of constructive blocks in productive, innovative economy. In wide understanding, cluster as agglomeration of firms and their suppliers, allows to create locally concentrated labour markets. Clusterization firms in regions allows to strengthen processes of specialization and a division of labour between firms, offering to separate firms wider scale of operations. Involving buyers and sellers to system interaction, it manages to reduce the cost of a unit of production manufactured owing to joint activity. There is also an opportunity to reduce the cost of unit of the technical service, rendered to cluster members.
Working in close proximity one with another, firms can offer and carry out subcontracting (even with attraction of competitors!!) under orders which execution becomes complicated because of absence of capacities. The industrial affinity of firms allows them to have more opportunities due to all potential counteractors. Such opportunities allow firms to keep a circle of constant customers.
Clusterization of firms enables to strengthen intercompany flows of ideas and information. Such streams, as a rule, are carried out formally and informally by an exchange of ideas between cooperating firms at performance of teamwork, within the limits of contacts to the common suppliers, through social intercompany connections. As a rule, such exchange is promoted by the common membership in commercial, handicraft or other business associations, the trade-union organizations, different structures and the institutes established at a municipal level. One of the main intentions of such associations also is the expansion of a flow of the information, creation of a social basis for reduction of the cost of transaction and other indirect expenses of cluster participants. Perhaps in this the greatest success in Ukraine had the Association “Aura” (Sevastopol), which provided interaction of eight local innovative clusters.

3. Effects of regional cooperation on the basis of cluster model.
Depth and breadth of the fields of activity captured cluster by cluster structures, has especially increased last years with increase of globalization processes, with strengthening of competitive struggle and complication of a situation in the world markets. With increase in volumes of the information and knowledge in the field of risks in global economy has considerably changed the role of clusters in competitive struggle. An opportunity by clusterzation to form necessary critical weight in the certain spheres allows clusters to present to the world as uniqueness, and work capacity of any national, regional or territorial economy to maintain an impact from competitors.
Successes of such form of industrial activity as cluster should be considered in close connection with modern laws of competitive struggle and in view of specificity of territorially-regional aspect in global economy.
Clusters can cover both small (10-15 companies), and the significant amount of the enterprises and structures (6-7 thousand companies as, say, in India or in China), and also can be formed both from large, and small firms in various kinds of associations and parities. Cluster can be counted as geographical concentration of the companies which work in the certain kind of business, and a conglomeration of big and small firms which part can be the property of foreigners. Clusters arise both in traditional branches, and in high-tech directions, as well as in industrial-commercial directions, sector of services, and in social spheres.
As quite often center of cluster formation are universities or groups of research structures and scientific institutes. Different clusters have a unequal degree of interaction between firms which enter into them. Forms of such interaction vary from rather simple, network type of associations, to complex, multilevel formations. Formation of clusters is possible as in conditions of multiscale, and in small economy on volumes. Clusters are formed not only in conditions of industrially developed countries, but also in those countries, which else develop. They arise on national and at regional, municipal levels. In some clusters is parallel presence of high technologies alongside with rather low technological level manufactures and services is observed.
Such wide range of forms and kinds of cluster structures certainly creates significant complexities at cluster formation, demands carrying out in this sphere of deep research work. Clusters as a kind of complex organizations, today, during an epoch of globalization, represent typical market structure. Cluster in modern economy is more than a part of a separate industry which releases the certain kind of production. Paying attention to the functioning and “health” of existing in many countries clusters, it is possible to make conclusions about opportunities and prospects of development of these countries. The economy of knowledge which is formed at the present stage, is guided on priority of cluster developments which are recognized by one of the most effective industrial systems of an epoch of globalization.
Global and while modest ukrainian experience show such advantages of industrial systems on the basis of cluster model:
- Clusters are capable to provide connection in manufacture of a competition with cooperation, they personify „ collective efficiency “, they create “flexible specialization “;
- Clusters are under construction on use of a scale effect;
- Clusters are “points of growth”, stimulators of technical progress;
- Clusters represent the mechanism of increase of regional and national competitiveness.
Clusters allow:
- to strengthen processes of specialization and a division of labour between the companies;
- to involve clientele, creating close interaction of buyers and sellers more widely;
- to reduce cost of unit of technical service and production which is made on the basis of joint activity;
- to strengthen interfirm streams of ideas and information;
- to raise innovativeness of manufacture;
- to create new workplaces;
- to use local natural resources more effectively;
- to create the healthy social capital (all is carried out on mutual trust), providing social justice;
- to provide balance of market efficiency and social harmony.
Everyone who are engaged in business in Ukraine, realize, as many barrier arise on a way to success in this complex business. The cluster model of manufacture enables quickly to overcome the majority of such barriers.
Experts consider, that advantages of clusters can be divided on “rigid” and “soft”. More effective business-transactions, more favorable investments, smaller expenses for purchase of materials, services and other parameters which generate profit and create workplaces, – carry to “rigid” advantages of clusters.
“Soft” advantages of clusters follow from their orientation on
the organization of processes of training, benchmarking, an exchange of experience which expands knowledge among participants of cluster and generates innovations, imitation and perfection of manufacture. In many cases “soft” advantages of clustering act as an imperceptible active which is only indirectly transformed to balance of profits and losses. Practice testifies that “soft” advantages potentially have much greater influence on results of activity of cluster, than effect of action of “rigid” advantages.
Paying attention to advantages and specificity of cluster models, it is necessary to note discussion which is conducted today globally including in Ukraine concerning cluster ideas. A number of scientists, and also politicians and experts considers this model partially uncertain or too elastic, therefore cluster is difficult enough for identifying. Really, many-sided nature of clusters and their uncertain character is created problems for their theoretical and practical identification, and also for their methodological research. Actually, it is very difficult to recognize effects of clusterization through the analysis of a usual economic urbanization or infrastructural transformations.
Really, basic difference between agglomeration of structures and cluster is not so obvious. The concept of cluster is based on the specific order of as much as possible intensive industrial solidarity. Naturally, it is possible to approve, that the city too appears as association of a different sort of economic activities, but such activity in the majority at all does not comprise any cluster.
On the other hand, well developed cluster it can be considered, as specialized agglomeration as participants of cluster, which actively cooperate among themselves in spatial affinity, as represents agglomeration.

4. Clusters and competitiveness.
Formation of “new” economy, namely – “economy of knowledge”, as the basic source of high economic growth in the majority of European countries provides growth of volumes of gross national product, increase in an export potential, reduction of industrial expenses, which cause not only development of different branches of economy, but also qualitative transformation of all society. The important feature of innovatively focused economy is stable growth of a share of the high technology sector of manufacture and employment in it.
Result of expansion of cluster activity of highly technological manufactures (that is characteristic for innovatively active countries, including Japan, USA and the majority of the EU countries) is significant structural change of world export in favour of production of high – and middle-technological branches.
According to a technique of the World Economic Forum (WEF), developed for „The annual Report on global competitiveness ” on the basis of calculations of the Index of growth of competitiveness, ranging the countries on this parameter is defined.
During increase of competitive struggle in the world markets three global innovative incubators – EU, the USA and Canada, the East – Asian region were defined. In number of technological leaders today are the countries which actively increase efforts to create essentially new technological directions, in particular, nanotechnology, genic engineering, biotechnologies, artificial polymers, nonconventional power, transition from strategy of technological imitation to strategy of a technological donor service. The countries-innovators, according to technique WEF, occupy the high ranks in a rating of competitiveness of 117 countries of the world on results for last decade.
Each country had a set of competitive advantages, which allow her to be in the lead in world economy. Any state in the world is not capable to be equally competitive in all industries. The separate countries achieve success only in those branches, for which internal conditions have appeared optimum, dynamical and perspective.
How to excel in increase of national competitiveness in the shortest terms? This question disturbs each country. Especially it concerns to the countries which were generated after disintegration of the USSR. For these young states the concept of “competition” and a problem of increase of competitiveness for the first time have got especial real value. Once they were a part of the uniform Soviet country, in which, despite of imperfect scheduled system, all could achieve the certain successes, but in conditions of increase of processes of globalization these countries quickly started to lose positions in the world markets. After decomposition of the USSR, in each of the new post-soviet countries with transitive economy there were unique conditions of formation of the competitive market environment. Process of transition from planning economy to market economy is connected with difficulties which consist first of all in insufficient experience economic activity in conditions of a competition, backwardness, weakness of institutes of cooperation and a low level of trust to the initiatives of governments. For the countries of this group, and also Ukraine, rather long period of stagnation of economic development became typical.
Transition of this group of the countries to market economy was extremely
complex and chaotic enough, that has led to loss of all cooperation linkages between them. However, gradually these countries could not only survive, but also overcome very much of serious problems, having started to create institutional bases of market economy.
By WEF estimations in 2005г. the best of these countries in a rating of
competitiveness was Kazakhstan, which has provided to itself 61 place, Azerbaijan – 69, Ukraine – 74, Russia – 75 and Киргизстан – 115 place. In 2006г., by estimations of WEF, the rating of competitiveness of Ukraine has fallen to 10 points, having lowered it on a humiliating place among developing countries of Africa.
It is clear, that such low parameters cannot satisfy the country, which transform the economy. By this time still it is difficult to consider their economy as market ecnomy. These economies artificial by were allocated with characteristics which only formally allow to consider them similar to market economy, but at bottom they are still very far from it. For this reason among the population of these countries reigns a dissatisfaction as they remain the poor countries, both on a level of gross national product per capita, and on a level of infrastructural development. The basic problem consists that in these countries the level of a competition in economy remains at a very low level. Therefore in them there was a ultrahigh concentration of business and the property, monopolization of different spheres of trade and manufacture. To this still it is necessary to add the very high degree of corruption and low competitiveness on a number of the important parameters of economy in comparison with middle world analogues.
To finish an estimation of a level of development of economy of Ukraine and former Soviet republics, it is necessary to note, that at an initial level they still have institutes of protection of the property rights, institutes of contract compulsion, i.e. those positions which provide a healthy competition. All it grows out an inefficiency of the legislation, vicious administration and imperfect legal system. Even heavier problems arise in connection with reforming in these countries of institutes of education, science and public health services.
Except for that there are serious problems in regional power, transport, communication spheres, that also brakes further development of the post-soviet countries, especially, in the field of regional integration.
All it demands carrying out institutional reforms of essentially new deeper character, which realization can be very long and painful. They cannot be carried out for a year or for three, therefore it was necessary to begin them already for a long time. It is clear, that only the strong, authoritative authority, based on support of the population, capable to carry out necessary reforms.
Transformations in еconomy are necessary for reception and preservation of positive macroeconomic parameters, that would allow to stabilize and keep on at a low level inflation, considerably to reduce unemployment and to overcome poverty.
Researches of processes of transformation and promotion in this direction of the post-soviet countries testify the gradual acceleration of processes of clustering in each of them. The greatest achievements in formation of new industrial network systems last years have reached Kazakhstan, Armenia and Russia (without consideration Estonia, Latvia and Lithuania, which already became members of EU and accordingly get significant financial support in this direction).

5. Ukraine on a way of economy clusterization.
The argument brought above and undertaken during within more than ten years of attempt of introduction of the first industrial systems on the basis of cluster models in different regions of Ukraine confirm perspectivity and efficiency of movement in this direction. Experience of development cluster initiatives to Podolia, Prikarpatye, Polesye, in Crimea, Sevastopol and in other regions testifies that formation of modern partner relations between local state bodies, business circles, and also the local scientific and educational centers is complex process. The saved up experience testifies also that competitiveness is not static position of region or branch. This is a and dynamic process of realization of efforts for the sake of the maximum efficiency by an effective utilization of intellectual, natural and technological resources of territory, region and their industrial clusters.
It is necessary to count as the indisputable pioneer of clusterung in Ukraine – Khmelnitskiy area. With assistance of Association «Podolia the First», which has united in their lines the scientists, businessmen, financiers and representatives of authority, was possible during 1997 for 2000 to generate there several industrial кластеров, including sewing, construction, food, grossery, historical and green rural tourism clusters. Basically, noted clusters function also today, that is a merit, first of all, of local enthusiasts, and also owing to incidental financial support of the international economic organizations. Specificity of development of clusters of Podolia became that the centers of association of businessmen in clusters were different on size and on geographical arrangement territorial units – the regional center (Khmelnitskiy), the center of area (Kamenetz-Podolsk), the rural center (village Gritsev, area Shepetovka).
Experience of region of Podolia became the major range in development of specificity and prospects of clusterization for the other twenty six regions of Ukraine. Will pass time and for certain process of transfer of unique experience Khmelnitskiy cluster trailblazers in other regions of Ukraine through the big number of seminars, working visits, sociological researches and the subsequent publications will be studied in details. Positive results of an exchange of experience have affected quickly enough. After the many seminars lead by 2003-2004 in various regions of Ukraine which indispensable organizers were regional Chambers of Commense and Industry, International market support foundation, the Union of economists of Ukraine, Association « Podolia the First » and other public organizations, formation of industrial clusters became more active in the majority of regions of the country.
Despite of all problems and difficulties which were experienced by Ukraine last years, process of clusterization in Ukraine was quite dynamic and given hope for success. Thus it is necessary to note such a very important detail. Analyzing the script of process of clusterization in Ukraine for last decade, we should feel constantly its uniqueness – the budget of Ukraine for the present has not touched this important component of social and economic development of the country. At the same time the global practice testifies to the return. Therefore it is trusted, that at support of authority, at due financial maintenance, development of innovative clusters in Ukraine will receive new acceleration.
In number of the regions, managed to achieve successes in formation of clusters associations, except Khmelnitskiy area, it is necessary to mention АРК Crimea and Sevastopol, Ivan-Frankovsk, Rovno, Poltava, Sumy, Kharkov, Kherson, Odessa and Nikolaev areas.
Transition from centralized scheduled to market economy in Ukraine has appeared more complex, than it was expected by experts and politicians. As show researches, in Ukraine consequences of an adverse enterprise climate are meanwhile felt and weakness in formation and carrying out of policy of increase of competitiveness of the country is shown. According to data WEF for last years the rating of Ukraine on an index of global competitiveness constantly decreases. Specific problems for Ukraine there are difficulties in creation institutional conditions of transformation of economy. Together with last years deterioration almost all macroeconomic parameters of economy of Ukraine, the lowest positions at it were defined in institutional components where reduction in a rating position from 92 to 104 place testifies to absence of progress in formation of favorauble institutional environment. Considering the aforesaid, the objective requirement at the present stage for Ukraine is necessity of activization of actions of the national government and regional authorities with the purpose of system increase of competitiveness by stimulation of development of new forms spatial organisation of production and cooperation between the basic parteners in the national economy. It is necessary to recognize, that the considerable changes expressed in a withdrawal from former stereotypic model of thinking and increase of interest to development of the advanced modern technologies in business activity last years continue to happen in consciousness and behaviour of citizens of Ukraine, including representatives of authority, heads of the enterprises and establishments. In this connection introduction of cluster model of association of the enterprises and the organizations in the best way promotes growth of business activity of enterprise structures and overcoming above mentioned negative factors of influence in development of the Ukrainian economy.
Only due to co-ordination of actions and association of efforts of the state bodies, educational and scientific institutes, small, middle and big business it is possible to increase competitiveness of economy and a standard of life of the population of Ukraine in conditions of a rigid competition in the international division of labour.

6. Recommendations.
In Ukraine objective conditions for positive changes in development of economy were generated. Development of cluster initiatives in Ukraine has revealed necessity of prime realization of the following steps.:
- Urgently to develop, approve and provide realization of strategy and programs of increase of competitiveness of Ukraine and its{her} regions
on the basis of innovative cluster structures;
- to provide legislative work in Ukraine on formation of favorable for development of business environment with special accent on cooperation of authority, business, science, education and public organizations in innovative network structures;
- to provide introduction in Ukraine innovative educational programs for universities, institutes, schools,as well as for incubators, oriented for preparation and retrainings of experts which take part in development and functioning of innovative network structures;
- to lead basic researches in a direction of definition of priorities of formation in Ukraine national and regional innovative industrial clusters;
- to create National and regional Councils of Competitiveness, which should coordinate development and performance of projects of innovative cluster associations, realization of the major for the country cluster initiatives;
- comprehensively to promote development of the international cooperation of clusters, megaclusters of Ukraine with cluster associations of EU, BSEC, COMECON and at a global level.

1. Janek Uiboupin, Industrial clusters and regional development in Ukraine, Pan-European Institute, 9/2006.
2. Конкурентоспроможність економіки України: Стан і перспективи підвищення, ред. І .В. Крючкової, К.:Основа, 2007.
3. Соколенко C.I., Кластери в глобальній економіці. – К.: Логос, 2004.