The Indian economy is no stranger to business clusters.
Intertwined deeply within the Indian economy, business clusters can be credited with creating a significant impact, employing millions of people through interconnected businesses, suppliers, and buyers.
Take for example the Firozabad glassworks and bangle cluster.
As one of the oldest and more well-known clusters in India, Firozabad has been around for a few decades, with the city itself having gained fame for its glass production as far back as the 17th century. And now, in the present day, Firozabad accounts for approximately 70% of the glass production driven by MSMEs.
With approximately 400 glass industries registered in the cluster and 500,000 people employed, Firozabad also contributes over INR 2000 Crore to the Indian economy.
Identifying Characteristics of Business Clusters
In a business cluster, geographic proximity of the businesses gives way to a unique relationship phenomenon where a number of businesses and business entities are able to rely on each other for shared resources and information.
Typically, companies or enterprises within a business cluster that produce the same or similar products or services, are clubbed together based on a few overarching and identifiable characteristics like:
- Similarity of challenges and opportunities in the economic landscape.
- Similar channels of communication.
- Similar methods of production, testing and quality control, environmental impact, etc.
- Approximately similar levels of technology being used.
- Relatively similar marketing strategies or practices.
Operating within clusters allows these organizations – which otherwise would not have the capital strength or the network for growth – to build their competitive strength while simultaneously collaborating for mutual benefit – a phenomenon known as co-opetition.
Cluster Benefits: The Importance of Coopetition for MSMEs
MSMEs stand to derive multiple benefits from operating within clusters.
For one, existing within a business cluster leads to a trade and skill specialisation, that brings about attendant benefits like a higher quality of goods and services and cost-efficiency resulting from the inherent competitiveness.
Because clusters become famous for their expertise in the core product being offered, they are able to get attention from the bigger giants who reach in to the businesses for their products and services.
As a result, businesses operating within a cluster also get access to wider markets.
Moreover, clustering leads to the development of several enterprises that create self-reliant ecosystems drawing from common inputs and skills.
The economic contributions from these clusters are so significant that they encourage private corporations and government bodies to invest in peripheral activities that support the cluster’s core functioning.
And all of this is done without the pressure of intense or stifling competition.
The Aye Approach to Business Cluster Lending
At Aye, our lending approach starts with identifying such clusters through primary and secondary analysis. Each cluster is studied on various parameters like:
- Cash Flows
- Business Linkages
- Business Challenges, and
- Funding Sources
This approach helps us closely understand the surrounding ecosystems for these clusters and we’re able to develop deep insights because of the similarities we see amongst players.
Our Managing Director, Sanjay Sharma explains why this process is necessary:
“[Classifying manufacturing units into clusters] allows NBFCs to make better credit evaluations of enterprises” he says. “This approach not only helps in providing credit to MSMEs at large, but also contributes towards strengthening the ecosystem under which MSMEs operate, including their ancillaries which support the big manufacturing giants.”
What’s Next
Clearly, encouraging cluster growth is essential for the Indian economy.
For clusters to develop into independent, complex, and most importantly, synergetic ecosystems, it’s important to encourage competition as well as co-opetition.
Currently, we’re able to observe and tap into the massive growth potential that clustering encourages for small and medium enterprises.
Moving forward, as many financial institutions like Aye Finance streamline credit delivery to micro and small enterprises, we’re looking forward to seeing widespread economic transformation take place at the grassroots level.
