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152 Clusters and Competitive Advantage beginning of this chapter. One specific factor that favoured the establishment of leather works in Kazliçesme was the ready availability of water there. Moreover, although raw leather was available almost everywhere in Anatolia, high-quality tannin, an essential ingredient of the tanning process, could be obtained only in a limited number of places, one of which was Istanbul. 26 The initial factors that favoured the location, therefore, were factor conditions such as the availability of water, and historical events such as the Turks’ conquering of Istanbul. Tanneries were concentrated in certain locations in the Ottoman era as well, but were encouraged to move outside the city centres because of the unpleasant smell and pollution caused by their activities. Environmental concerns continue to be one of the main reasons why tanneries tend to concentrate in space, in that they are encouraged or required to operate in places permitted by the government. These are usually outside the city centres and the tanneries share the cleanup costs. The Istanbul leather producers were located in Kazliçesme for more than 500 years until their move to Tuzla. 27 Subcontracting was very common (Yelmen, 1992, pp. 153, 161), and recommendation by key actors in the district was of great importance: ‘I used to try hard to convince a well-known master craftsman to use and recommend the machinery that I produced. His opinion was valued very much in Kazliçesme’ said one interviewee. The fact that they were in tough competition with each other did not prevent manu- facturers from spending time together socially. They attended the same local cafes and restaurants, which helped them to keep up to date with what was going on and provided them with motivation. Although leather industrialists in Kazli çesme had a history of solidarity, 28 the competitive pressures that existed paralleled those identified in the clusters examined in the previous chapters. One of our interviewees stated that ‘partnerships were rare in Kazliçesme and even these collapsed sooner or later’ since ‘the atmosphere of the place did not tolerate partnerships’. This is still valid for Istanbul’s leather industrialists, as repeatedly emphasized by the interviewees, who stated that Istanbul differs from Izmir (Istanbul’s major competitor in leather clothing) in this regard. 29 Leather industrialists think that the ‘artistic nature’ of leather processing heightens the intensity of competition and is a major factor in the dominance of family businesses: ‘The craft, that is, the particular way of processing leather, is only taught to close members of the family who will take over the business’. Leather is an organic and diverse material, and the expertise of craftsmen with the necessary skills to ensure its proper treatment is a very valuable asset for leather firms. As a result they compete fiercely for such craftsmen. Another commonality of the Istanbul leather clothing cluster with the clusters previously examined is that specialization is a relatively recent phenomenon, despite the long history of the overall industry. According to our interviewees, the beginnings of this specialization date back to the late 1950s. Prior to that period, leather jackets were not commonly worn and The Leather Clothing Cluster in Istanbul 153 were mainly associated with policemen, railway workers and lorry drivers. It was only after the introduction of a new dyeing method, which involved the use of chromium, that leather garments were seen as desirable by other customers. One of our interviewees, Hasan Yelmen, who is a chemical engineer and regarded as the father of the contemporary Turkish leather industry, was the first to use this technique in Turkey and paved the way for the specialization in leather garments. In the 1970s a growth in demand for these products, especially from Europe, prompted others to enter the sector. This coincided with the ready availability of high-quality but cheap sheepskin, which was the favoured leather for manufacturing garments. Meanwhile the firm Derimod pioneered the incorporation of design features into leather clothing. The cluster’s specialization in leather garments, therefore, was initially triggered by an entrepreneur and subsequently reinforced by changes in international demand. Demand patterns also played a crucial part in the development of the footwear sector. This time, however, the push was in the opposite direction in that the domestic demand for shoes was large and the footwear sector did not come under pressure to internationalize until the 1990s, when it began to face significant foreign competition in the domestic market. As a consequence the export-oriented leather clothing sector now dominates the leather industry, unlike in Italy, where the industry has a rather different structure. Some of the benefits of clustering are independent of the location in question and are related to the phenomenon of clustering itself, as analysed in the previous chapters. First, it is beneficial to customers since it enables them to see a wide range of alternative options in a short time. ‘This is where the heart of the industry beats’, one interviewee said, paralleling the com- ments of his counterparts in the other clusters examined, who emphasized the ‘market-like’ nature of clusters in the eyes of the customers. This factor also ensures a good price–quality ratio since customers can easily compare products in terms of value for money. The second benefit is the proximity of related and supporting industries. One interviewee, for instance, argued that ‘isolated’ firms in provinces such as Konya and Elazig were not so successful because ‘They could not even find a technician to repair broken machinery. Besides, they had to buy chemicals from here, plan everything in advance accordingly and bear the associated costs, whereas we can sometimes buy chemicals daily.’ Another interviewee was of the opinion that it was not only handy to have everything needed nearby, but also knowing that they were within reach gave added confidence. Yet another interviewee made an analogy with the human body: ‘All parts should function properly and only then can you talk about a healthy system.’ Overall, these points reinforce the finding of the previous cases examined, that the presence of related and supporting industries contributes positively to the development and competitiveness of clusters. 154 Clusters and Competitive Advantage The third benefit is the proximity of rival firms. One interviewee considered that this benefit had been much more pronounced in the original location of the industry, Kazliçesme, where the factories had been even closer to each other. According to him, when rival firms are located close it is possible to see what is going on, whether new machinery has been bought and the types of dye competitors are using. The fourth benefit is that if success is achieved during the early stages of cluster formation, this initiates a self-reinforcing dynamic. For instance in Istanbul there were only a few firms specializing in leather-related chemicals in the 1950s, but with the leather cluster’s growing success their number increased considerably in the subsequent decades. The Istanbul leather machinery sector underwent a similar development. In the 1950s the sector consisted of nothing more than a number of craftsmen manufacturing some of the tools used in leather processing. From the 1970s onwards, however, machines imported from abroad were copied by Istanbul engineers, who continued to hone their skills and formed the foundation of today’s leather- related machinery sector. In the meantime the founders of the family businesses that dominated the cluster were taking steps to ‘professionalize the family business via a professionalization of the family’ (Bugra, 1994). This included sending members of the second and third generations abroad (usually to France or Britain) to complete their education in leather-related areas. Another factor in the self-reinforcement of the cluster was new business formation by spin-offs from leading firms, as well as by newcomers to the area who had heard about the opportunities it offered. An interesting finding in this regard, and one that also applies to the previous cases examined, is that a noteworthy number of cluster participants came from the same town, Egin, located near the Anatolian cities of Malatya and Sivas. (Recall that the town in question was Babadag in the case of the towel and bathrobe cluster and Besni in the case of the carpet cluster.) As with the other towns, Egin was a place with few opportunities and many of the younger generation were forced to leave to seek their fortunes. This not only suggests that entrepreneurship is triggered by difficulties and challenges but also illustrates the importance of contacts and fellow townsmanship, as well as the magnetic nature of clusters. The final observation on clustering is unique to Istanbul and is not found in the other clusters examined: there are certain costs that can be linked to ‘diseconomies of urbanization’. Despite its obvious advantages, Istanbul, being the largest city in Turkey, can be a very difficult place in which to conduct business. For instance the cost of living and therefore the cost of labour is higher than in many other locations in Turkey. Moreover leather firms are subject to stringent regulations, for example in terms of environmental pro- tection, which is not necessarily the case for firms elsewhere. Nonetheless the disadvantages tend to be outweighed by the advantages. There is a pool of qualified workers to draw upon and no shortage of supporting industries The Leather Clothing Cluster in Istanbul 155 and services, including transportation and logistics. According to the inter- viewees, what is even more important is that Istanbul has an ‘aura’ (echoing Marshall’s (1949) ‘something in the air’ hypothesis), a refined cultural environment and well-established international links. All this encourages firms to upgrade their activities and motivates people to realize their potential. As one interviewee put it, ‘it is a school’ in that ‘even while walking on the streets of Istanbul you can see a clothing item that inspires you’. The fact that leather firms do not contemplate relocating is related not only to Istanbul’s unbeatable advantages but also to their expectation that today’s few disadvantages will turn into tomorrow’s advantages (see the next section for more on this issue). Lastly, the presence of diseconomies of urbanization in Istanbul prompts the more general question of whether clusters in small cities are different in nature from clusters in metropolises but this matter will be left to Chapter 8. Future prospects for the leather clothing cluster in Istanbul: stuck in the middle? As mentioned at the start of the chapter, Turkish exports of leather garments have levelled off in recent years, and there has been a considerable fall in Turkey’s world export share. Although some of the loss in registered exports can be explained by the activities of the informal economy in Laleli, the sale of leather garments via shuttle trade has also fallen considerably since the peak in the mid-1990s. In the meantime China, India and Pakistan have emerged as the new leaders of the leather industry in the price-sensitive segments, while the world export share of Italy, a noteworthy producer of design- and fashion-oriented leather garments for the upper end of the market, has remained relatively stable. The fall in Turkey’s relative position can be explained by the fact that the industry had to import more than half of its requirement of raw leather, by the rise in labour costs, and by the emergence of new competitors offering more competitive prices. In other words, Turkey’s heavy reliance on cheap raw materials and low-cost labour to provide it with competitive advantage was unsustainable in the long term. As a consequence the Istanbul leather garment producers came under pressure to find a more sustainable source of competitive advantage, otherwise they might well become ‘stuck in the middle’ (Porter, 1985). In order better to understand the gradual change in the strategic orientation of the Istanbul leather clothing firms, it is informative to look at the impact of the Russian market on the cluster. Prior to the emergence of the informal shuttle trade the firms mainly served the European market, where customers were highly demanding. This forced producers to improve the quality of their products, but when these customers were replaced by informal traders who required low-cost goods and were less concerned about quality, the latter 156 Clusters and Competitive Advantage inevitably deteriorated. Although the sacrifice of quality meant easy sales in the beginning and the charm of an easy life was hard to resist, this created a poor image for Turkish products that would prove difficult to counter (SPO, 2000). Moreover in the late 1990s, consumer demands in the Russian market started to change and the informal traders began to pay more attention to quality. In the meantime wholesalers and transportation companies were gaining a hold over the organization of the shuttle trade (Yükseker, 2003). Apart from the difficulty of re-establishing the neglected contacts with European customers, the leather clothing firms now had to improve their image in the Russian market, where in some of the more upmarket shopping centres signs stating ‘Turkish products are not sold here’ were placed in shop windows. The temporary shift to the ‘easy life’, therefore, proved costly for the cluster firms. Indeed some of them switched to Italian-sounding brand names in an effort to reverse the damage. Returning to the subject of new sources of competitive advantage, after the setbacks described above the leather clothing manufacturers drew on their accumulated experience and know-how and engaged in marketing and promotion efforts to improve the image of Turkish leather garments abroad. As a result, in the early 2000s the fortunes of the cluster firms started to pick up again and they managed to erase their low-quality image in the Russian market. Today the larger firms are targeting the upper end of the market and are second only to Italian firms in this sector (SPO, 2000; IGEME, 2002). Thus although it is still possible to cater to the lower end of the market, larger producers are producing and exporting high-quality fashion items as it is impossible for them to compete with Chinese, Indian and Pakistani leather garment producers in terms of price. A related issue is that currently the existence of stringent regulations on environmental pollution and working conditions puts the cluster firms in a disadvantageous position vis-à-vis firms in other regions that do not have to bear the associated costs. The two leather industrial zones in Turkey (Tuzla in Istanbul and Menemen in Izmir) have full cleanup facilit- ies, the cost of which is inevitably reflected in the prices of the products manufactured in these zones. Although this situation is problematic in the short term as it hinders competition with other regions, it will in fact provide the manufacturers with a significant advantage in the long term, given that being ‘green and competitive’ is now viewed as the way forward (Porter and Van der Linde, 1995). In summary the analysis of the leather clothing cluster in Istanbul has highlighted three important points. First, it has given us the opportunity to consider the distinguishing characteristics of an informal, transnational economy (the case of Laleli), which is a rather understudied form of inter- nationalization in the literature on clusters. Second, the analysis has revealed that the benefits of clustering seem to outweigh the diseconomies of urbanization currently faced by the cluster, given that the cluster persists The Leather Clothing Cluster in Istanbul 157 and relocation is not on the agenda of the cluster firms, which moreover expect these disadvantages to turn into advantages in the near future. Accordingly it is preferable to work in a demanding environment provided that this channels the industry in the right direction, as in the case of the stringent environmental standards mentioned above. Finally, the examination of the leather clothing sector has provided us with the opportunity to take a closer look at ‘a cluster in transition’. We have seen that the manufacturers’ low price strategy resulted in their being ‘stuck in the middle’ when new competitors began to threaten them in price-sensitive markets. Moreover the pattern of demand has changed in their largest market, the Russian Federation. These developments, coupled with the 1998 Russian crisis, have forced producers to reconsider their low quality, low price strategy, and taught them the importance not only of product design and quality but also of diversifying their export markets. The changes observed in the competitive dynamics in this leading cluster of the Turkish economy are therefore very informative, but arguably some aspects of this, such as the pressure caused by the emergence of new competitors, are not specific to the Istanbul cluster. 158 8 Conclusions This chapter will first discuss the theoretical implications of the key findings of the cluster analyses with respect to the ongoing debate in the literature on the competitiveness of clusters (see Chapters 1 and 2), and then consider the implications of the study in terms of policy. Theoretical implications The emergence of clusters At the beginning of this book we discussed some alternative theoretical approaches to how and why a cluster emerges in a particular location. The main triggers might be historical accidents, demand patterns and the prior existence of related and supporting industries and special inputs, including labour (Marshall, 1949; Krugman, 1991a; Porter, 1998). In general the emer- gence of the clusters examined in this book can be related to one or more of these, but additional factors also play a part. In the case of Ankara it was the declaration of the city as the capital of the Turkish Republic, its central location and climate, and the presence of a related industry (construction) that triggered the emergence of the furniture cluster. For the Denizli towel and bathrobe cluster it was the city’s good location, historical circumstances, the availability of inputs, the prevailing demand patterns and the presence of an entre- preneurial spirit. A similar set of forces triggered the development of the leather clothing cluster in Istanbul, for which a specific chance event, Sultan Mehmet II’s particular interest in the sector, was also very important. Finally, the emergence of the carpet cluster in Gaziantep was linked to its key location, the availability of inputs, the presence of related industries (yarn and textile machinery) and an entrepreneurial spirit, as well as a ‘historical accident’: the long-established border trade with Syria. 1 Although these findings are generally in line with those in the literature, additional factors have been revealed. For example an examination of other centres of production shows that similar conditions, such as a long history Conclusions 159 in textiles or leather and the presence of inputs and several related industries, pertain in other locales in Turkey, prompting the question of whether chance events were the determining factors in the emergence of the com- petitive clusters. This contention is argued against in Chapter 6, which discusses how Gaziantep emerged as the leading location for machine-woven carpets when there was no tradition of carpet weaving, apart from kilims. In this particular case the importance of historical accidents is clear, since the event that triggered the emergence of the cluster was the growing demand for silk carpets imported via Syria. It is notable that this chance event was capitalized on in Gaziantep and not in another Eastern Anatolian city that also engaged in cross-border trade. This can be attributed to the entrepreneurial spirit of Gaziantepians, which was in turn reflected in the city’s favourable business environment. As discussed in Chapter 6, it may well be that such historical accidents happen all the time, but they trigger the emergence of a cluster only if the local business environment is conducive to growth. Another interesting issue revealed by the case studies is that although the production of textiles and leather had a long history in the clusters examined, specialization had only taken place recently. The real impetus began in the 1970s in all three cases, triggered by different combinations of circumstances (on top of those which favoured the general area of activity), namely entre- preneurship and demand patterns (mainly international) in the towel and bathrobe cluster; chance events, entrepreneurship and demand patterns (both national and international) in the carpet cluster; and chance events, entrepreneurship and demand patterns (mainly international) in the leather clothing cluster. This observation adds a new insight to the contributions in the literature, although the general theme is in line with the notion of ‘the process of becoming specific’ (Storper, 1999). Another issue that has been highlighted is the possibility that once a cluster begins to form a self-reinforcing dynamic comes into play and locks the activity into the location even if the initial conditions change (Arthur, 1985). This is exemplified by the cases of the towel and bathrobe and leather clothing clusters in that the basic conditions that triggered their emergence no longer provided them with a clear advantage. Apparently the benefits of clustering (see below) are strong enough to ensure the continuity of the cluster even if the initial advantages diminish in importance or disappear. The final point on the emergence of clusters is that it is often a meth- odological challenge to identify the historical triggers. The present study benefited from the fact that specialization in the products in question was a relatively recent phenomenon, so the scarcity of written documen- tation was countered by the availability of people who had witnessed the early stages of the clusters’ development. This underlines the importance of oral history and the necessity of documenting this history while it is still possible. 160 Clusters and Competitive Advantage The costs and benefits of clustering The findings from the case studies in respect of the costs and benefits of clustering are generally in line with those in the literature in that the proximity of related and supporting industries has been found to be very beneficial and the benefits of clustering for customers are large, while the proximity of rival firms generates both costs and benefits. When it comes down to the details, however, some interesting issues emerge. For instance clusters are convenient not only for customers since they reduce the likelihood of arbitrage as well as search costs, but also for the firms themselves since clusters are treated as markets to be visited, rather than the firms having to visit the customers. Similarly, the beneficial effects of the proximity of related and supporting industries include not only static aspects such as reduced transportation and transaction costs but also more dynamic ones, such as the contribution it makes to innovation and growth. The perceived costs and benefits of in-cluster rivalry, on the other hand, are far from uniform. Before analysing the details of this issue, the perceptions of cluster firms with regard to competition from other regions of Turkey should be mentioned. The managers interviewed in the furniture cluster, for instance, stated that they competed with Istanbul producers in the market for quality furniture and with the other locales such as Inegöl in the price-sensitive segments. The Istanbul leather industrialists saw Izmir as their main competitor in leather clothing, but other regions could cause trouble in price-sensitive markets by means of unfair competition. Finally, managers in the towel and bathrobe and carpet clusters perceived competitors in other regions as ‘different’ in the sense that they were isolated and very large, and therefore were not direct competitors. In-cluster rivalry is very intense in all four cases examined in this study. In fact, competitive forces are much more pronounced than cooperative ones, supporting the finding by Saxenian (1994) and Porter (1998). As noted in the literature, in-cluster rivalry can be personal and emotional, and is some- times triggered by envy (Schoeck, 1966; Klein, 1975) and a desire to look good in the local community (Porter, 1998). A repeated theme raised by the interviewees is that the success of rival firms acts as a motivator and thus stimulates growth. Since the rival firms are working under the same condi- tions, firms have little excuse ‘if the neighbouring company is exporting, say, to France, but you cannot’. This not only stimulates motivation but can also increase confidence since, as one manager stated, ‘you learn not only about the opportunities themselves but also about the fact that they can generate fruitful results’. These observations provide support for the emphasis in the literature on the motivating nature of competition (Porter, 1990, 1998) as well as the importance of learning, tacit knowledge and information spillovers (Camagni, 1991; Brusco, 1996). Conclusions 161 The fact that information spreads rapidly in a cluster, on the other hand, raises the issue of what information should be shared with competitors and what should not. In the case of the Turkish clusters examined, we have seen that information on products and markets is crucial for success, and hence it is considered inappropriate to share such information with competitors. The greatest disadvantage of the proximity of rivals, according to the managers interviewed, is the rapid pace of imitation. Imitating best practices is easier in a cluster, being facilitated by the rapid flow of information through social networks. In-cluster competition, therefore, has advantages (it brings dyna- mism and stimulates innovation) and disadvantages (for example imitation by competitors is easier). However, even the problems associated with the ease of imitation might provide benefits in the long term since firms are inevitably pushed to develop sustainable competitive advantages. It is also possible that the cluster environment prevents destructive price competition, given that the likely costs of this are obvious to all and social sanctions may be imposed on those who start a price war (Dei Ottati, 1994). This points to the self-disciplining aspect of clustering, as observed in the case of the towel and bathrobe cluster in Denizli, where there is an unspoken consensus on the approximate price that should be charged for a typical bathrobe. In other words competition is good, provided that it is ‘sweet’. As the case of the furniture cluster in Ankara illustrates, however, there is also a possibility that it can turn into destructive competition. The challenge is to identify the circumstances that cause in-cluster competition to evolve towards either of these variants, which will be discussed in the next subsection. The analysis in this study has provided some insights into the nature of localized competition as well. According to Baum and Haveman (1997), local competition can lead to the differentiation of some product dimensions. This finding derives from a study of the hotel industry in Manhattan, where hotels are different in size but similar in terms of their price range. The leather clothing cluster in Istanbul confirms this finding since the firms there are concentrated in terms of their strategic orientation. The analysis of the Gaziantep carpet cluster, on the other hand, has revealed that carpet firms of similar size tend to concentrate in space and that smaller ones dream about upgrading their location to the industrial zones that house the larger carpet firms. Another related issue is the assertion that clustering is linked to pro- duction divisions (Steinle and Schiele, 2001). Both the Istanbul leather clothing cluster and the Gaziantep carpet cluster provide evidence against this conten- tion in that most of the firms are vertically integrated but remain clustered. The furniture cluster in Ankara, though in line with this contention given that the firms specialize in different areas of the furniture business (each of which is concentrated on a street-by-street basis), is not competitive in international markets. Apparently clustering offers benefits in addition to reducing transaction costs. [...]... articles of concrete, cement and plaster Manufacture of soft drinks; production of mineral waters Other supporting transport activities Quarrying of stone, sand and clay Wholesale of food, beverages and tobacco Wholesale of solid, liquid and gaseous fuels etc Processing and preserving of fish and fish products Manufacture of vegetable and animal oils and fats Quarrying of stone, sand and clay Hardware consultancy... local demand conditions, related and supporting industries, and the context for firm strategy In the case of the Turkish clusters, one more can be added: international demand International demand has been found to play an important role in the highly competitive towel/bathrobe and leather clothing clusters, providing support for those who argue that international forces (including international demand)... clusters, on the other hand, our analysis shows that not all geographic clusters are internationally competitive In fact, understanding the link between clustering and competitiveness – in the sense of whether or not there are commonalities among clusters in respect of their ability to develop sustainable competitive advantages that also differentiate them from less competitive clusters – has been a... impact on competitive advantage Sustainability of competitive advantage and strategic transformation One issue that should be clarified for a better understanding of the strategic orientation of firms and the sustainability of competitive advantage is the process of imitation We have seen that the towel/bathrobe and leather clothing clusters have found it difficult to compete with China, India and Pakistan... metal waste and scrap Manufacture of vegetable and animal oils and fats Processing and preserving of fish and fish products Building and repair of ships Other non-scheduled passenger land transport Manufacture of soft drinks; production of mineral waters Quarrying of stone, sand and clay Manufacture of other products of wood, etc Extraction of crude petroleum and natural gas Real estate activities with... environment, which will be discussed in the next subsection Clusters and competitive advantage The clusters examined in this book are largely dominated by small and medium-size enterprises, although a few larger firms also exist, especially in the furniture and carpet clusters There is a large degree of specialization in the furniture and towel/bathrobe clusters, whereas the key processes in the value chain... This does not mean that macroeconomic policies are 170 Clusters and Competitive Advantage unimportant, but it seems that they are not sufficient to ensure the sustained competitiveness of clusters There is also a need to avoid overreliance on macroeconomic variables such as devaluation and wage rates and to focus instead on the true sources of competitive advantage Unfortunately governmental institutions... pressure and the desire to look good in the community One challenge faced by clusters in smaller cities is attracting talent to the area, so local institutions and firms should join forces to bring this about To conclude, the growing literature on clusters can contribute to a better understanding of competitive advantage, and insights from the management literature can contribute to a better understanding... Saw milling and planing of wood Production, collection and distribution of electricity Veterinary activities Manufacture of vegetable and animal oils and fats Other credit granting Radio and television activities Other non-scheduled passenger land transport Renting of construction or demolition equipment with operator Mining of chemical and fertilizer minerals Recycling of metal waste and scrap Manufacture... of clusters can depend on interfirm cooperation, competitive forces rather than cooperative ones are pronounced in the less competitive furniture cluster, but to differing degrees this also applies to the competitive clusters in this study (carpets and leather clothing in particular) It follows that the existence of strong cooperative mechanisms (examples of which are seen in one of the competitive clusters: . develop more sustainable competitive advantages? In the Gaziantep carpet cluster, competition from Belgium and the patent law were the main 168 Clusters and Competitive Advantage triggers. The. entre- preneurship and demand patterns (mainly international) in the towel and bathrobe cluster; chance events, entrepreneurship and demand patterns (both national and international) in the carpet cluster; and. stages of the clusters development. This underlines the importance of oral history and the necessity of documenting this history while it is still possible. 160 Clusters and Competitive Advantage The