Perspectives of SMEs Within and Outside of Clusters: A Comparison between Supply Chain Management Strategies and Performance12 Simone Didonet, Entrepreneurship and SME Center, Faculty of Economics and Business, Universidad Católica del Norte, Chile, [email protected] This study seeks to determine if small-to-medium sized enterprises (SMEs) suppliers participating in clusters led by large firms incorporate supply chain management (SCM) practices and present better performance than SMEs outside of clusters. The specific interest of this study is not to analyze the characteristics of SCM in these contexts, but to investigate if there is a fit between SMEs and SCM considering different environments and pressures from clients. The methodology consisted of a survey with 300 SMEs in the northern region of Chile. The analysis is based on a quantitative approach and the binary logistic regression technique was used to examine the data. The results show some differences that favour SMEs within cluster in terms of the level of SCM integration, especially in relation to clients and internal integration. No significant results were founded in terms of performance. Key Words: small-to medium enterprises, clusters, supply chain management strategies 1. Introduction According to the literature, the clusters may be formed exclusively by small and medium sized enterprises (forthwith SMEs) or by a mix of these and large firms, of which this latter group forms the major part (Markusen, 1996). Independent of the type of cluster, the authors in general agree that there are advantages for firms to belong to these groupings. For example, the coordination mechanisms are facilitated by face-to-face interactions and by the fast flow of information in the local context (Chiaverso and Di Maria, 2009), which are the basis for adequate supply chain management (Mentzer et al., 2001). From this point of view, it can be assumed that the cluster environment favours supply chain management in the SMEs. Nevertheless, various authors emphasize the difficulties of the SMEs in integrating themselves with suppliers and clients. In this context, and although the fundamental premise of the studies conducted on SCM up to now

1

The author wishes to express her thanks for the financial support of the Vicerrectory of Research and Development VRIDT 2010. 2

Simone Didonet is a Professor and Affiliated Researcher at the Entrepreneurship and SME Center in the Faculty of Economics and Administration at the Universidad Católica del Norte, Chile. Her research areas are Marketing Strategies and Supply Chain Management as they apply to small and medium sized enterprises.

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is that this practice is beneficial for the firms involved, there are some controversies about whether SCM can be adjusted to fit the SMEs and generate benefits for these firms. Also, no study has emphasized the relationship between SMEs and large clients in the context of clusters, which complicates the understanding of relationship dynamics between these businesses. This work gathers these aspects together and attempts to compare the behavior of SMEs within clusters with SMEs outside clusters, examining the SCM practices and business performance. The central argument is that the SMEs belonging to clusters led by large businesses should be able to be take advantage of knowledge sharing with their partners to improve their performance through cooperation and mutual collaboration (Markusen, 1996) thus adopting mechanisms of coordination with clients and suppliers. Comparison is made with SMEs external to the cluster from the point that membership in the cluster is a strategic choice of the firm (Chiaversio y Di Maria, 2009), although this does not mean that SMEs which do not belong to the cluster do not act in the market using the same tools and/or strategies. The research question to be considered is whether, in consideration of SCM and performance, the SMEs that belong to clusters show better performance than SMEs outside the clusters, and if they are capable of taking advantage of the benefits of SCM integration. This question considers an important aspect that has not been adequately discussed in other studies: the relationship dynamics between small and large firms that belong to the same cluster in terms of the benefits generated by cooperation and integration. Previous studies have discussed the dynamics of the clusters associated with SMEs, although they have not considered integration between large and small businesses in this environment. This aspect assumes importance when considering the strategies of SCM, its adoption and its advantage to SMEs, and is a debate that remains open in literature as a subject specifically concerned with larger firms. As a result, we can find another perspective little explored in previous investigations: the environment favourable to integration between firms inherent to the cluster, in contrast with the dependence of SMEs on bigger clients and the impact of this dependence on their actions, strategies and results. This is a characteristic of the clusters studied, 2

where the large firms in the mining sector in the northern region of Chile stand out for being the leaders of the cluster and the SMEs' membership in the cluster is dictated somewhat by their capacity to provide the supplies demanded by them. This article seeks to address the research question by exploring the relationship between SMEs, SCM and big firms to determine: (1) if there are any differences between the SMEs that are members of the cluster and those that are not, in terms supply chain integration and the practices of SCM; (2) if the SMEs within clusters show better results than the SMEs outside. The empirical analysis is based on a survey carried out on 300 owners of SMEs, including firms that are members or non-members of the mining clusters in the northern region of Chile. The results show that there are more similarities than differences between the SMEs that are members compared to non-members of the cluster. Notably, the SMEs that belong to the cluster show worse operational performance in comparison with the other group of firms. These results are contradictory considering the characteristics of clusters include integration of the firms involved and better performance. The article concludes by presenting the managerial implications of the results, and considers that the strategic option of the SMEs of belonging to the cluster may not be so important when the primary relationship in this environment is established with large firms generating dependency upon them. This article is structured in the following way: the next section contains the theorectical discussion and hypotheses of the study, followed by the methodology used. Next is the presentation and discussion of the results. In the final section, the implications of this study for firms are discussed, as well as the conclusions and limitations of the study.

2. Theoretical Framework and Study Hypothesis 2.1 Model and Study Context The model developed in this study is shown in Figure 1, and proposes that SMEs within clusters, in comparison with SMEs outside, gain advantages from supply chain integration and practices as well as better 3

performance. In this model, the dimension of supply chain integration includes use of information and communication technologies (henceforth ICTs) both intra and inter-organizational and in both parts of the chain, i.e., with suppliers and clients (Kauremaa et al., 2009; Bayraktar et al., 2009; Bayraktar et al., 2010; Koh et al., 2007; Quayle, 2003; Bhutta et al., 2007). With regards to SCM practices, these consist of logistics initiatives of the SMEs which show an emphasis in outsourcing, close location to suppliers and clients, foreign suppliers, and export activities (Kim, 2009; Bhutta et al., 2007; Markusen, 1996 and 2003; Chiarvesio and Di Maria, 2009; Belso-Martínez, 2006). Figure 1 – Test Model

The performance dimension considers sales volume as a variable of operational performance (Bhutta, Rana and Asad, 2007) and net profit as a variable of financial performance (Kim, 2009). Upon examination of the relationships established in the model of Figure 1, it is important to consider some aspects associated with the phenomenon under study. For example, Chow et al., (2008) argue that the practice and structure of SCM can depend on the situation where it is being applied, and consider that "each country's situation may be different and would need to be understood to effectively manage the supply chain" (Chow et al., 2008, p.675). From this perspective, the market conditions, logistical infrastructure, and the legal 4

and political context of the emerging countries provide a valid context from which to better understand the effective use of the practices of SCM in SMEs (Bayraktar et al., 2010). With these considerations in mind, the SMEs in the northern region of Chile were chosen as an appropriate context for the study. Chile offers an interesting context for the study due to its macroeconomic profile. The country occupies first place among the countries of Latin America and the Caribbean in the global competitiveness ranking of the World Economic Forum (2009) due to its potential for sustainable economic growth. Its commercial openness, macroeconomic stability, institutional efficiency and transparency, and highly developed infrastructure are some of the aspects that justify Chile's leadership in the region. Chile also has a sophisticated business context, capable of efficiently absorbing technology and knowledge from other countries (World Economic Forum, 2009). Additionally, the country openness index indicates that Chile has an exposure level of 70 percent to international trade (Milesi et al., 2007), which can be translated to greater competitiveness for its domestic industry. As for the SMEs, these contribute a total of 13 percent of the country's gross domestic product (GDP) and provide 38 percent of the total employment according to the 2006 data from the National Institute of Statistics (Instituto Nacional de Estadística, INE, 2008). In the context of the northern region of the country, these contribute 7.4 percent of the GDP of the district of Antofagasta (where the study was conducted), which is historically known as the 'mining capital of Chile', and where many large multinational copper and mineral extractors operate. Copper is the main mineral extracted and is the main export product of the country. In 2006, copper exports represented 56.5 percent of the total of national exports, such that the region of Antofagasta was responsible for just over half of the exports of this mineral (a 54.3 percent of the exports), according to data from the Department of Mining Industry (2006). The production matrix in the district of Antofagasta, resembles the cluster of hub-and-spoke type (Atienza et al., 2006). The district is characterized by the predominance of large mining firms, many of them belonging to foreign multinationals, which are highly integrated vertically and possess large economies of 5

scale. The SMEs are the radials of the cluster and maintain most of their relationships with the large mining firms, establishing in some cases, vertical collaborative agreements (Atienza et al., 2006). However, the SMEs that collaborate essentially do so with their clients, following the proposal of vertical contribution, so that the majority of the collaborative agreements are established for the commercialization of the products and are created for the specific purpose of developing or improving products and processes, including the use of new technologies applied to the production, commercialization, and better internal structuring of the SME suppliers to the mining industry (Atienza, 2009). In spite of the lack of knowledge of the collaborative practices, the results of these are an indicator of the development of the practices of SCM in mining cluster. The following paragraphs provide a detailed description of the relationship established in Figure 1. Based on an extensive review of the literature, the central argument that supports the model is discussed and the hypotheses associated with the variables studied are developed.

2.2 Clusters and Integration of the Supply Chain in SMEs The literature on clusters emphasizes this model of industrial organization as being greatly affected by its embeddedness in the local or regional context (Markusen, 1996). In general, the clusters are identified as a model of organization of economic activity capable of overcoming the limits of large enterprises in the paradigm of Fordism (Chiarvesio and Di Maria, 2009). Regional context forms the basis for understanding these business conglomerations, which provide an answer to the challenge for cities and regions to pledge themselves to income generating activities set against the advances in transportation and information, and the consequent elimination of distances (Markusen, 1996). In this environment, Markusen (1996) emphasizes new types of groups as is the case of the industrial districts called hub-and-spoke, where the small and medium sized firms (considered the nucleus and origin of industrial districts according to Italian concepts) rotate around one or more dominant firms that are externally 6

oriented. According to the author, local firms (in general SMEs) are suppliers to these firms and tend to establish subordinate relationships to them, although in some contexts cooperation between the SMEs and the main firms are established, and these are characterized by their efforts to improve the quality of the suppliers, compliance with time limits, and stock control. Also, the mechanisms of coordination are facilitated by face-to-face interaction and fast information flow in the local context (Chiarvesio and Di Maria, 2009). These aspects emphasize vertical integration between businesses, which would favour the integration and practices of SCM, whose concept is based on firms being part of multiple organisations oriented to the delivery of goods and services to the final consumer (Lambert and Cooper, 2000) and assumes the integration of product, service, finance, and information flows (Mentzer et al., 2001). In terms of SCM, various studies have verified that integration and contribution in the chain can deliver important benefits to the businesses involved. Among these benefits are added value, creation of efficiencies and client satisfaction (Stock et al., 2010; Chow et al., 2008; Min et al., 2007; Cooper et al., 1997) which are demonstrated by the reduction in inventories, improvements in service delivery, quality improvements, and shorter product development cycles (Corbett et al., 1999). Integration of the supply chain assumes activities of interaction with suppliers, undertaking functions both internal to the business and with clients (Kim, 2006). Among these activities, use of communication and information technologies are key, both intra and inter-organizacional, and at both ends of the chain, that is to say, with suppliers and clients (Kauremaa et al., 2009; Bayraktar et al., 2009; Bayraktar et al., 2010; Koh et al., 2007; Quayle, 2003; Bhutta, Rana and Asad, 2007). In general, the literature indicates difficulties in adoption of IT, and consequently of information systems, on the part of SMEs. One of the main inhibitors are the scarce resources available to adopt information system solutions that would enable efficient SCMs. These systems are expensive and demand sophisticated internal systems, and the SMEs do not have the necessary resources for their implementation 7

(Stefansson, 2002; Eagan et al., 2003; Bayraktar et al., 2009). The result can be loss of competitiveness on the part of the SMEs (Kauremaa et al., 2009). As Stefansson highlights (2002), large firms utilize electronic data exchange technologies (intercambio electrónico de datos (EDI)), but experience problems in communications with small businesses when they often do not have sufficient information technology resources, which can exclude them from the logistic operations integrated in the supply chain. In most cases, and as in the case of large clients that yield power over the SME suppliers, it is the clients who lead the adoption of inter-organizational information systems (Kauremaa et al., 2009). Essentially, upon sharing information with its suppliers, large business clients seek efficiency in operating costs and expect to work cooperatively to provide better services, products and technological innovations (Gunasekaran et al., 2004). From this point arise strategic partnerships between suppliers and clients (Kim, 2006), that can be translated into the generation of ideas for product and process innovation (Zeng et al., 2010; Kaminski et al., 2008). Upon comparing the characteristics and benefits generated from the cluster and SCM, the following hypothesis is proposed:

H1: The Cluster favours supply chain integration in SMEs.

2.3 Clusters and Supply Chain Practices of SMEs Among the discussions and studies on clusters, several authors attest to the advantages for the SMEs to integrate into these business conglomerations. Chief among these is the facility for outsourcing and exportation (Chiarvesio and Di Maria, 2009; Belso-Martínez, 2006), supported by higher levels of collaboration and easier access to external markets for SME suppliers (Markusen, 1996). The cluster environment also facilitates interaction between multinational and local businesses through supply management, outsourcing and technical cooperation (Kennel, 2007). On studying the spatial configurations in some industrial districts in the United States and Brazil, Markusen (2003) notes that the relationships between geographically distant businesses can actually turn out to be more important

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than those of local networks, reflecting the tendency of dispersion in the chain of activities associated with product manufacturing. This point demonstrates the importance of the development of SCM practices in SMEs within the cluster context.

On the other hand, while comparing SMEs within and outside clusters in the context of the globalisation of the supply nextwork, Chiarvesio and Di Maria (2009) point out that the global geographical extension of supply networks stresses SME cluster membership to attain efficiency. Likewise, under this new competitive setting, SMEs placed in local supply networks are pressured to take advantage of the opportunities presented by globalisation and of the advanced SCM practices to increase their competitive advantage (Chiarvesio and Di Maria, 2009). Included among the practices of SCM are close location to suppliers and clients (Kim, 2009), exportation activities (Bhutta et al., 2007; Markusen, 1996), outsourcing (Chiarvesio and Di Maria, 2009; Belso-Martínez, 2006), and use of non-local suppliers (Markusen, 2003). Based on these arguments, the following hypothesis is proposed: H2: The cluster positively impacts SCM practices in SMEs.

2.4 Clusters and SME Performance Before examining the performance of the cluster SMEs, it is important to first consider some particularities that distinguish better results between businesses. For example, Grando and Belvedere (2006) compared the performance of production and logistics between SMEs, large firms and clusters, and found that firms that belong to these groups showed better results in different performance categories, depending on their condition. That is to say, better performances are associated with particular characteristics of each typology. Following the same line, Paniccia (1998, p. 693) states that, "the model of the industrial district is not always associated with superior performance and, even more crucially, other local systems of firms […] show superior results." Nevertheless, the logic persists that SMEs belonging to clusters led by large businesses can take advantage of knowledge sharing with their partners to improve their performance by means of mutual 9

cooperation and collaboration (Markusen, 1996), in comparison with SMEs outside clusters. From this perspective, Porter (1998) argues that, once the members of the cluster are mutually dependent, the good performance of one business can improve the performance of the others. Based on these aspects, it is proposed that: H3: The cluster improves the performance of SMEs. For the purposes of this study, the performance dimensions considers sales volume as a variable of operational performance (Bhutta et al., 2007) and net profit as a variable of financial performance (Kim, 2009).

3. Methodology 3.1 Sampling and Data Collection The data utilized in this study are taken from the database of the project 'Demography of the Regional Small and Medium size Enterprises', undertaken by researchers at the Entrepreneurship and SME Center at Universidad Católica del Norte, Chile. The current database utilises a sample of 597 SMEs in the district of Antofagasta, northern Chile, that takes in four cities: Antofagasta, Calama, Tocopilla and Taltal. The base includes both suppliers and non-suppliers to the mining industry. It is important to note that, for the purposes of the present study, firms which are suppliers to the mining industry are considered to be within the cluster. Also, only firms based within the city of Antofagasta were considered. The data for the project was collected between September 2009 and August 2010 via a cross-sectional survey. The questionnaires were administered by a team of interviewers via personal interviews with directors or owners of SMEs. Once they completed the questionnaire component, the project coordinator followed up the work of the interviewers by randomly selecting and then telephoning some of the businesses to confirm the data obtained. This procedure ensured control over the work carried out and guaranteed the reliability of the information. 10

The criterion adopted for the definition of SME was the sales volume of each company, according to the government criterion in Chile. In accordance with this criterion, a SME has an annual sales volume of no less than US$ 111,474, and no more than US$ 1,997,241 (reference values in Chilean pesos, the national currency, converted to US dollars according to the exchange rate of 21st April, 2011). The sample used in the present study consisted of 300 companies drawn from a pool of 3111 SMEs operating in Antofagasta in 2009, according to data from the Service of Inland Revenue, an entity connected to the Treasury Department of the Chilean Government. For the study sample calculation the confidence level was taken at 93 percent with a sampling error of 5 percent. It is important to note that the strategy used to gather the data allowed data collection from the entire sample within the previously defined time frame for this phase of the investigation. Therefore, there were no problems with non response bias. Common method bias was controlled using the procedure recommended by Podsakoff et al. (2003). According to this author, it is possible to reduce method bias via improvements in the item scalings. This was achieved by the researchers' revision of the questionnaires, who were required to verify ambiguities such as vague concepts, complex syntax, complex questions, among others aspects. Of the 300 SMEs researched, 218 were small enterprises, with 82 corresponding to the category of medium sized businesses, as we can see in Chart 1 below. Chart 1 - Distribution of the SME sample according to size

250

218

200 150

82

100 50 0 Small

Medium

Of the SMEs shown in chart 1, 181 belong to the mining cluster. Table 1 below shows the distribution 11

of companies according to size, and whether they are members of the cluster or not.

Table 1. Distribution of the SME sample according to size and cluster membership Condition/Size Outside Cluster

Small 102

Medium 17

Total 119

Within Cluster

116

65

181

Total

218

82

300

It is also important to highlight that, of the SMEs that belong to the mining cluster, 50 percent are suppliers of large mining firms integrated into the cluster. Another important aspect to emphasize is the concentration of the SMEs‟ sales, an aspect that reveals their dependence upon their clients. Of the total of cluster member businesses investigated, 40 percent of them concentrate between 60 percent and 100 percent of their sales in a single client. This situation reflects the importance for the SMEs to adjust to the requests of their clients, and to implement practices that improve their operating performance (Bayraktar et al., 2010), as they can be subject to frequent changes in demand and have difficulties in balancing the supply chain (Towers and Burnes, 2008).

3.2 Research Variables and Measurement Based on the literature review, an assembly of variables used in this study were defined which represent the dimensions of SCM, and performance applicable to the SMEs. These dimensions are shown in the table below (see next page). Table 2 shows the variables employed in the model and indicates the sources utilized. As for the Supply Chain Integration dimension, the variables represent those defined by Kim (2009) as: integration of the business with suppliers, integration of the business with clients, and cross functional integration within the business. These three sub dimensions are complemented and adjusted to the context of SMEs using the references of Bayraktar et al. (2009), Bayraktar et al. (2010), Bhutta et al. (2007), Kauremaa et al. (2009), 12

Koh et al. (2007) and Pagell (2004) as the starting point. With regards to the Supply Chain Practices dimension, the variables considered were: the logistic initiatives of businesses in close physical proximity to the suppliers and clients (Kim, 2009), outsourcing of activities (outsourcing) (Chiarvesio and Di Maria, 2009; Belso-Martínez, 2006), exportation (Bhutta et al., 2007; Markusen, 1996), and use of foreign suppliers (Markusen, 2003). Performance considered increase in sales volume (operational performance) and increase in net profit (financial performance) (Kim, 2009; Bhutta et al. 2007).

Table 2 – Research Variables and Measurement Dimension

Supply Chain Integration

Supply Chain Practices Performance

Item meaured Use of ICT to sell goods and services to clients Use of ICT for post sales service Use of ICT to communicate with clients and suppliers Client as source of ideas for innovation (close partnership with clients) Supplier as source of ideas for innovation (close partnership with suppliers) Use of IT in production Use of IT to share information internally Use of IT for inventory/stock administration Use of IT to buy goods and services from suppliers (e-procurement practices) Closer location to suppliers at a national level Foreign suppliers Outsourcing Export activities Close location to clients at a national level Sales volumen Net Profit

Source

Bayraktar et al. (2009), Bayraktar et al. (2010), Kim (2009), Bhutta et al. (2007), Kauremaa et al. (2009); Koh et al. (2007), Pagell (2004)

Kim (2009), Chiarvesio and Di Maria (2009), Belso-Martínez (2006), Bhutta et al. (2007), Markusen (1996), Markusen (2003) Kim (2009), Bhutta et al. (2007)

The variables of the Supply Chain Integration dimension were originally measures in a continuous scale of seven points, ranging between the extremes of 'never' and 'ever'. The respondents could mark any point in the scale. The variables of the Supply Chain Management Practices dimension were originally measures with questions of multiple choice and/or categories. The same method of measurement was utilized for the measures of performance where the options were 'sales volume and net profit in the last three years: has increased, has been maintained, or, has diminished'. 13

3.3 Data Analysis a) Preliminary Analysis and Reliability: Prior to statistical analysis of the data, a check was made for outliers and transformation of independent variables to dummy variables. No outliers were found, reflecting the homogeneity of the sample in term of its characteristics and strategies. In relation to the transformation of variables, this is a recommendation in the case of binary logistic regression (the technique used for the analysis) in the case of multiple types of variables (Pérez, 2001). The type of scale used to measure variables of the dimension 'Integration into the Supply Chain', where one of the extremes corresponded to the option 'never', the value attributed to this option was '0' and to all others a value of '1'. This decision was taken since, for the interests of this investigation, there was no interest in revealing the intensity of the scale, but rather a simple yes or no, 'does not use' (corresponding to the option 1, 'never' in the original scale), and 'uses' (corresponding to all the other options above 1 through to 7). As for the dependent variable, this was transformed into categorical, with the value '0' corresponding to SMEs outside the cluster and the value '1' corresponding to SMEs within the cluster. Then, the SMEs outside the cluster were considered as the contrast group in the model. The reliability of the constructs was also examined to ensure the items collectively measured their intended construct consistently (Churchill, 1979). Internal consistency reliability was examined by way of Cronbach‟s alpha (Nunnally, 1978) and an alpha of 0,692 was obtained. b) Data Analysis: A binary logistic regression was carried out to compare SMEs within and outside clusters in terms of supply chain integration, supply chain practices and performance. Prior to this, a correlation analysis of the independent variables was conducted to verify their independence in the model. The test revealed only two correlations with values between 0.6 and 0.7 and none over 0.7. This does not represent a problem for subsequent analysis which implies dependent relationships (Lin and Chen, 2005). 14

4. Results and Discussion Table 3 below presents a summary of the results from the binary logistic regression used in testing the hypotheses. In accordance with the results, the model presents a log likelihood of -339,232 (Nagelkerke R2 = 0,259; Omnibus tests of model coefficients p-value = 0,000; Hosmer and Lemeshow Test p-value = 0,614) indicating that the model adjusted to the statistical parameters. The model classified 71,3 percent of the cases.

Table 3. Results of the Comparison between SMEs Within and Outside Clusters Dimensions

Supply Chain Integration

Supply Chain Management Practices Operational and Financial Performance

Variables in the Equation

Results

Uso TIC vender bienes y servicios a clientes

B S.E. Wald -,028 ,364 ,006

df 1

Sig. Exp(B) ,938 ,972

Uso TIC servicio post venta

1,074 ,345 9,695

1

,002

2,928

Uso TIC comunicarse con clientes y proveedores Cliente como fuente de ideas para innovar

-,483 ,658

,539

1

,463

,617

,195

,471

,172

1

,678

1,216

Proveedor como fuente de ideas para innovar

-,201 ,410

,240

1

,624

,818

Uso TI para producción Uso TI para intercambiode info internamente

,985 ,762

,327 9,062 ,459 2,748

1 1

,003 ,097

2,677 2,142

Uso TI para administración de inventarios

,130

,454

,082

1

,775

1,138

E-procurement practices

,351

,352

,995

1

,319

1,421

Closer location to suppliers at a national level Proveedores extranjeros

-,416 ,279 2,220 ,318 ,599 ,282

1 1

,136 ,595

,659 1,375

Outsourcing

-,305 ,280 1,187

1

,276

,737

Export activities

,530

,616

,739

1

,390

1,699

Close location to clients at a national level

,553

,290 3,637

1

,056

1,738

Volumen de ventas

-,480 ,367 1,712

1

,191

,619

Net profit

,222

1

,541

1,249

,364

,373

4.1 Clusters and Supply Chain Integration in SMEs In accordance with the results shown in Table 3 above, there is a partial support for H1. Initially, the significance of 0.002 and positive coefficient of 1.074 for „the use of ICT in post sales service‟ indicates that the SMEs within clusters are highly receptive to integration into the supply chain, in comparison with the SMEs outside the clusters, specifically in terms of the attention delivered to the client 15

after the sale. This result reveals closeness to the client which is possibly affected by the SMEs' dependence on the large clients within the cluster. From the perspective of SCM, these results indicate the need for adjustment to the clients' requests as a way of maintaining their relationship with them (Bayraktar et al., 2010). According to Boeck et al. (2009) these requirements are associated with the level of relationship that the SMEs suppliers maintain with their clients and the development of this relationship depends on the SMEs adopting these technologies. Similarly, supply chain integration is favoured in the SMEs within the cluster, through „the use of IT in the production process‟ and „the use of IT for internal information sharing‟. In the first case, the significance of 0.003 and the positive coefficient of 0.985 indicate that the more SMEs are integrated into the cluster, the greater their use of IT in the production process, thus favouring integration into the supply chain, and therefore allowing the partial acceptance of H1. In the second case, a positive coefficient (coefficient = 0.762) and significant at a level of 90 percent (p-value = 0.097) for the SMEs within the cluster shows that these firms are used to exchanging information throughout their internal functions via IT, in comparison with the SMEs outside the cluster. Conversely, and contrary to expectation, „the use of ICT to sell goods and services to clients‟, „the use of ICT to communicate with clients and suppliers‟, as well as „e-procurement practices‟ were not shown to be significant in the model, indicating that these practices are not relevant in the comparison between SMEs. These results reveal important integration failures of SMEs into the supply chain which persist in spite of the supposedly favourable environment of the cluster to this type of activity. Also, not all of the internal functions associated with the production processes in SMEs favour the use of IT. This is the case in „the use of IT for stock management‟, which was not shown to be significant in the model, which would indicate that this variable is not important for the SMEs, independent of the context in which they are found (within or outside the cluster). In addition, the close partnership with clients and suppliers, represented in this study by the variables: 16

„client as source of ideas for innovation‟ and „supplier as source of ideas for innovation‟, respectively, did not show significant results in the model, indicating that this are not practices associated with SMEs both within and outside the cluster. From the cluster perspective, these results run counter to the theory, which describes how the cluster environment favours cooperation between firms (Markusen, 2003), thereby facilitating innovation in these environments (Zeng et al., 2010; Kaminski et al., 2008). This is much more evident in the SMEs within cluster, due to the negative coefficient associated with the variable „supplier as source of ideas for innovation‟, although the result is not significant. In other words, the result suggests that the cluster environment would not be beneficial to the strategic cooperation between SMEs and their suppliers, implying a deficiency in integration into the supply chain. In general terms, the results allow partial acceptance of the H1 assuming that the integration into the supply chain is weak in the SMEs, and that the cluster environment, in spite of being favourable to some actions of integration, fails to stimulate this type of initiative in the SMEs that would be beneficial for all enterprises involved. The characteristics of the cluster studied, where the large firms are the leaders and the SMEs their suppliers, show the dependency upon clients for those SMEs not favourable to integration and cooperation. On the other hand, the non significance of key variables in the integration of SCM emphasizes the difficulties of SMEs in adopting this proposal.

4.2 Clusters ans SCM Practices in SMEs The results presented in table 3 show very tenuous support of H2, with „close location to clients‟ being the only significant variable in the model, with a p-value = 0.056 and a positive coefficient of 0.553. This shows that the cluster environment is favourable to SMEs in terms of sales to domestic clients. According to Markusen (2003), relationships between geographically distant businesses can turn out to be more important than those of local networks, reflecting a tendency for dispersion of activities associated with product manufacture. This perspective demonstrates the importance of the development of SCM practices for the 17

SMEs in the cluster context.

Also, complementing Kennel (2007), interaction between large mining

businesses (the majority of which are multinational) and local businesses seems to favour SME contact with clients that extrapolate the borders of the cluster. Contrary to the expected outcome, the results lead to the rejection of other variables. In all of these cases, the variables are not significant in the model, indicating that these logistic practices are not associated with the SMEs independent of their condition (within or outside cluster). With regards to „close location to suppliers at a national level‟, the results indicate that is not a prominent practice for the SMEs. Likewise, the negative coefficient of -0,416, although not significant, leads to the conclusion that this practice is not favoured by the cluster. The same is shown for „foreign suppliers‟, where the results are not significant. Nevertheless, the coefficient is positive (0.318), leading to the supposition that the cluster could favour SMEs in their contact with suppliers from other countries. In such a case, the result would approach the view of Markusen (2003) regarding relationships with geographically distant businesses being more important than local networks for SMEs belonging to clusters. In regard to the variables „outsourcing‟, it was not shown to be a practice associated with the context of the SMEs. The non significant result of the variable indicates that SMEs from both within and outside of the cluster do not utilize this strategy in supply chain management. However, attention is drawn to the fact that the coefficient is negative (-0,305), which suggests that the cluster does not favour this type of activity and that it could indeed be more prevalent in the SMEs outside the cluster, contradicting results from previous studies such as those conducted by Chiarvesio and Di Maria (2009), and Belso-Martínez (2006). In the case of „export activities‟, the result indicates that exportation is not a common practice in either category of SMEs. Observation of the data collected from the firms shows that the percentage of exporting firms is very low, where barely 8 percent of the SMEs affirmed exportation of their products and/or services. In spite of this, export activity is more frequent in the SMEs within the cluster, which shows an indication (albeit tenuous) that cluster membership may favour this activity. The results from the logistic regression 18

report a positive coefficient of 0.530 ratifying this association, although not by a significant margin. Results showing export activities as favourable to cluster SMEs were found by Chiarvesio and Di Maria (2009), Belso-Martínez (2006) and Markusen (1996). From these results H2 is partially and tenuously accepted, indicating that SCM practices are not intensively integrated into the strategies of the SMEs, and are little evident in these firms, although their development could be more favourable from within the cluster environment. In consideration of the prior discussions on the relationship between SCM and SMEs, the results found for H1 and H2 indicate that the SMEs do not use SCM as a replacement or complement to compensate for their weaknesses in strategic areas such as new product development, quality and service to the client (Arend and Wisner, 2005), and see SCM as a use of power by the large clients, in the arm's length perspective (Quayle, 2003). Considering that the SMEs are viewed as a dispensable part of the chain (Quayle, 2003), where their function is to provide manufacturing services and support to large clients (Huin et al., 2002), there is little evidence that these firms invest in SCM to receive similar benefits to those obtained by the large firms from the use of these practices (Levy et al., 2002).

4.3 Cluster and SME Performance In accordance with the results shown in Table 2, H3 is rejected indicating that the cluster does not provide better performance in the SMEs. With regard to operational performance (sales volume), the non significant result shows that this variable is not important for comparison of the SMEs within and outside the cluster. However, it is important to observe that the coefficient is negative (-0,480), suggesting that increase in sales volume could be negatively related for the SMEs within the cluster. In other words, membership in the cluster does not generate better operational performances for those SMEs, contrary to what would be shown for the SMEs outside the cluster. This could be a consequence of the dependence upon clients within the cluster which can 19

be verified by the SMEs having, for the most part, a high number of their sales concentrated in a single client. The data obtained for the group of firms studied reveal that 40 percent of the SMEs within cluster concentrate between 60 and 100 percent of their sales in a single client, a figure that is halved in the case of the SMEs outside cluster with 24 percent of the firms found within this ranking. In the case of the SMEs within cluster, this situation reflects the importance for these enterprises to adjust to the requests of their clients, and to implement practices that improve their operating performance (Bayraktar et al., 2010), since they may be subject to frequent changes in demand and encounter difficulties in balancing the supply chain (Towers and Burnes, 2008). In the case of financial performance, the variable „net profit‟ is not shown to be an important variable in the comparison of SMEs within and outside the cluster. This variable was not shown to be significant in the model. Nevertheless, the positive coefficient (0.222) suggests that this measure of financial performance could be favourable in the cluster environment. The results obtained reflect the contradictions identified in previous studies. According to Paniccia (1998), the cluster model may not always would be associated with better performance and other systems adopted by local firms could generate better results. For Grando and Belvedere (2006), large firms and independent SMEs, as well as clusters can both obtain better performances, depending on the measure of performance used and characteristics of each business type. Taking another view, Markusen (1996) states that SMEs belonging to clusters led by large firms can take advantage of knowledge sharing between partners to improve their performance through mutual cooperation and collaboration. Thus, considering the cluster members as mutually dependent, good performance in one business can improve the performance of the others (Porter, 1998). In regard to the group of firms studied, and considering the findings of previous studies, it seems that where the little evidence of mutual cooperation can be found, this is not oriented to improving the performance of the SMEs. Also, knowledge sharing between partners seems to be insufficient to generate 20

better operational and financial results for the SMEs. In this sense, the relative high return to capital noted by Markusen (1996) would be present in the large firms within cluster as a consequence of the market power often present in hub-and-spoke clusters as is the case studied.

Similarly, this performance would not be

shared with the SMEs.

5. Conclusions and Limitations of the Study This research discusses the context of integration and practices of SCM, and the performance of SMEs which either belong or do not belong to the regional mining cluster in the north of Chile. The original contribution of this research is in studying the theme of SCM from the perspective of clusters, comparing SMEs within and outside of clusters, an aspect that has not been sufficiently explored in previous studies. This work thus increases the studies on SCM in SMEs conducted by other investigators as Kauremaa et al. (2009), Quayle (2006), Bhutta et al. (2007), Bayraktar et al. (2009), Welker et al. (2008), Arend and Wisner (2005), Koh et al. (2007), Cambra-Fierro and Polo-Redondo (2008), Levy et al. (2002), Kaminski et al. (2008). This work also complements the investigations on clusters and/or industrial districts carried out by authors as Markusen (1996 and 2003), Paniccia (1998), Grando and Belvedere (2006), Chiarvesio and Di Maria (2009), Doloreux (2004), Dimitriadis and Koh (2005), Zeng et al. (2010). Specifically, this work contributes in four ways. First, it provides some positive evidence that clusters favour supply chain integration and practices in SMEs. Although the great majority of studies consider the role of regional clusters in promoting cooperation among the agents (Markusen, 2003 and 1996), few studies have considered the SCM perspective in this context. Within the clusters, it is not uncommon to find foreign firms that interact with small local supply firms, where technical cooperation provides the backdrop for innovative activities (Kennel, 2007). Within this setting, SCM emerges as the most efficient form of interaction. Using the regional mining cluster in the north of Chile as a base, where the central axis belongs to the large mining firms, many of them multinational, the 21

formation of their relationships with small suppliers demonstrate, in this study, that interaction with SMEs favours integration into SCM, albeit in a fairly tenuous manner. Second, this work contributes to the previous studies by revealing the failures in terms of integrating operations into the chain and information flow between the agents. For Kauremaa et al., (2009), Bayraktar et al. (2009) and Hafeez et al. (2010), SMEs present internal and external barriers which impede use of information systems (IS) as a support to SCM, chief among these are scarce resources and lack of skills. The findings of this study seem to show these barriers in the adoption of IT as a condition for integration into the supply chain. For example, the results did not show any association of important aspects of integration into the chain towards the suppliers of SMEs and this was transferred into the cluster environment. In other words, independent from how the cluster can facilitate the integration, the SMEs in general do not develop strategies of this nature. Assuming that the management base is in the flow of information established between clients and suppliers this should favour adaptations and/or creations of new products and services in line with the needs of clients. From the cluster perspective, it should be expected that the information flow between clients and suppliers will promoted interaction between agents (Kaminski et al., 2008; Markusen, 1996; Grando and Belvedere, 2006; Paniccia, 1998). On one hand, the results found in this investigation do not follow this logic and reveal some failures in these connections. On the other hand, they may also indicate that communications are much less formal and are not absorbed in a strategic way so as to contribute to better performances. Performance, in turn, suggests negative results in the cluster environment and does not contribute to an explanation of the differences between SMEs within and outside the cluster, contrary to what was anticipated. Third, this study corroborates and complements previous results in terms of the weakness of SMEs in adopting SCM. Although it was expected that the cluster environment would favour this type of strategy, the results provide further evidence of the difficulties of the SMEs in this sense, reaffirming the idea that SMEs are not using SCM as a strategy to compensate for their weaknesses in strategic areas like the development of new products, quality and customer service (Arend and Wisner, 2005). On the contrary, the cluster 22

environment highlights the perspective of SCM in SMEs, in which it is seen as the use of the power by large clients, via the arm's length perspective (Quayle, 2003). Assuming that the SMEs are considered as a dispensable part of the chain (Quayle, 2003), where their function is to provide manufacturing services and support to large clients (Huin et al., 2002), there is little evidence to show that these firms invest in SCM to capture similar benefits to those obtained by large firms from the use of these practices (Levy et al., 2002). Finally, this study reveals a specific context to analysis of the phenomenon, whose market conditions, legal and political context contribute to a better understanding on the effective use of SCM practice in SMEs (Bayraktar et al., 2010; Chow et al., 2008). From this point of view, the SMEs in the northern region of Chile assume the favourable characteristics of the country's openness to international trade markets (Milesi et al., 2007) and sophisticated business context, capable of efficiently absorbing technology and knowledge from other countries (World Economic Forum, 2009). Nevertheless, the debate remains open as to whether SMEs in regional mining cluster are taking advantage of the benefits of this opening, and of the technologies and know-how generated by the large multinational firms, with whom they interact in the cluster. The partial acceptation of the hypotheses reveal that the deficiencies in integration into supply chain on the part of SMEs could be hindering technology transfer and generating lower performances to those potentially expected. As a limitation of the research, supply chain management could only be compared between SMEs within and outside the cluster. Variables such as innovation and enterprise orientation in the environment studied were not considered. In general, studies on clusters show the importance of these groups in promoting innovation in firms and it would be interesting to study the behavior of these variables using clusters of huband-spoke type like the one that was studied. In this way, studying enterprise orientation of SMEs in these environments would contribute to an understanding of the strategic option of these firms to belong to clusters.

6. Managerial Implications The results of this study reveal implications for SMEs in terms of their relationships with large clients 23

and integration into regional clusters. Some implications for regional governments can also be highlighted. In the case of SMEs, belonging to the cluster or not is a strategic option of the firms (Chiarvesio and Di Maria, 2009). This does not mean that SMEs which are not part of these groupings cannot utilize the same tools and/or strategies. Thus, if on the one hand, cluster membership favours some actions of integration into the supply chain, on the other hand, dependence upon the large clients which lead the cluster seems to monopolize the attention of the SMEs. This can generate difficulties for these firms in integrating with suppliers and in advancing the practices of SCM. Assuming that integration into the chain represents cost efficiency and important competitive advantages, failure to include suppliers in the cluster would imply worse performances for SMEs, which to a certain extent was found in the results of this study. The role of IT here is also evident, whose adoption seems to be an indispensable condition for the SMEs to advance towards more collaborative phases with its partners (Johnsen and Ford, 2006). On one side, collaboration of SMEs with their main clients involves using inter-organisational systems for communication (Levy et al., 2002). These requirements are associated with the level of relationship that SMEs maintain with their clients and the development of this relationship depends upon the adoption of these technologies by the SMEs (Boeck et al., 2009). On the other side, the SMEs' suppliers depend on the flow of information coming from the demand side (large clients), and also of these clients' demands to know their needs in terms of products and services. Thus, by adopting IT into their internal and external processes, the SMEs should be able to be benefit, on the one hand, from the reduction of operating costs and agility of the information transmitted to its suppliers and, on the other, by the delivery of products and services unique to their clients, generating sustainable competitive advantages over time. This applies to both groups of firms, that is, to SMEs within and outside the cluster. In the public sphere, this study contributes to the development of public policies oriented to strengthening the position of SMEs in their relationships with large clients, with regard to investments in IT and the definition of strategies which translate into mutual benefits along the chain. Essentially, the 24

contribution is in the generation of information regarding relationships established between SMEs and large firms in the regional cluster and failure shown in these interactions. This runs along the same lines of the regional politics of the Chilean government, through the Corporation for the Promotion of Production (CORFO), which defines and implements policies that seek to improve the competitiveness of small and medium sized firms with respect to knowledge development and management, integration with the environment, and internationalisation of firms (CORFO, 2007). Also, this investigation did not delve into identification of the nature of integration of the supply chain with regards the adoption of inter-organizational IT between SMEs and their clients and suppliers. It did not consider, for example, the level of sophistication of IT in the SMEs, which upon relation to the variables proposed in this work, would contribute to a better comprehension of the results. As noted by Kauremaa et al. (2009), many SMEs do not utilize system-to-system integration to share data with their. On the contrary, to some extent they involve people in this exchange, which can generate worse performances for the SMEs.

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