IMPACT OF CLUSTER BUILDING IN LABOR INTENSIVE INDUSTRIES ON REGIONAL ECONOMY (WESTERN ROMANIA).

• Author: Popescu, Claudia

1. Introduction

   Starting with the 1990s, transition economies have been characterized by emerging clusters in a variety of industries, from traditional to high-tech, as a result of both the delocalization of industrial supply chains across Europe (European Commission, 2001-2004) and increasing domestic entrepreneurship. One of the industrial sectors that have shifted from the Western to Eastern Europe is the footwear industry. Within the process, Italy and Romania have played a central role due to two major triggering events which have contributed to the creation of new productive networks: the relocation of Italian producers and the openness of the Romanian economy to trade and foreign investments. On the one side, the market pressure from low-cost producers in Asia, in particular China, has forced many Italian footwear firms to relocate part of their production in Romania. Consequently, Romania has become the 3rd supplier of footwear to the EU market in early 2000s (European Commission, 2005).

   On the other side, there are several prerequisites which explain the relocation of Italian firms to Romania. First, the country is traditionally specialized in the footwear industry. In 1990 the leather and footwear industry numbered more than 125 thousand jobs employed, mainly, by large state-owned enterprises. Romanian integration with the international economy required a period of catching up which involved a deep restructuring of production and labor markets. In the first half of the 1990s, many leather and footwear firms closed down and 43.5 thousand jobs were lost nation-wide. Therefore, availability of skilled and cheap labor played a crucial role in attracting Italian shoe producers. Proximity, both in geographical and cultural terms, mainly accessibility and short distance from Italy were important incentives for Italian relocation. The advantages relative to labor and transport costs were complemented by institutional factors like European funding for joint ventures in Central and Eastern European Countries (CEECs). One other particular reason for Italian firms to relocate to Romania refers to the easy flow of information on delocalization opportunities provided informally by the large Romanian community settled in northern Italy in the aftermath of the 1990s political changes. There are other reasons as well, such as the more relaxed environment protection laws, flexible regulations concerning work, incentives for foreign investors and exporting companies, and the low rate of unionization (Mariotti and Montagnana, 2008; Constantin et al., 2006). Additionally, external factors have enhanced the attractiveness of the western region for Italian investments. The openness of the economy to trade and foreign investments in early 1990s brought to a sudden end the decades of inward-oriented policies of industrialization. The shift in the location of the manufacturing activities has involved a spatial decentralization of employment, as industry moved from autarky industry location centers, mainly internal regions, to a number of locations with a better access to the European Union markets. These macro-scale shifts have triggered economic growth of the Western Romanian Region as a border region.

   The potential of the footwear industry to grow and cluster in the Western Region has been acknowledged by several national (Russu, 2003; Asodatia pentru Studii si Prognoze Economico-Sociale, 2010; Popescu, 2010) and international studies (Industrial Cluster Development, 2003-2004; European Commission, 2001-2004). According to these studies, the footwear cluster in Arad-Timisoara was made up of more than 300 companies and 32 thousand employees in 2001. In 2007, in Timisoara there were 420 Italian companies registered, with a capital of more than 2 million euro, which placed Italy on the first rank in number of foreign companies and in the second in invested capital (Timisoara City Hall, 2008, p. 54).The agglomeration of footwear producers in Timisoara included more Italian producers than Romanian (Montagnana, 2005) and the region turned to be known as 'the eighth province of Veneto' (Isbasoiu, 2006). The concentration of footwear firms is also significant in Bihor county which totalized 202 companies and 13,794 employees in 2009 (Cojanu et al., 2010). The Italian presence is widely spread throughout Romania, but in late 1990s there has been noticed a trend of concentrating in certain regions; the largest number of Italian investors is found in the West of Romania and especially in Timisoara (Ferrari, 1999).

   Recent research was focused on the impact of delocalization on the origin Italian districts in terms of labor and economic performance. While extensively focused on the Italian districts, these studies marginally discuss the impact of the relocation process on the host economy. In that context the aim of this paper is to shift the focus of the analysis on the economic impact of the emerging concentration of footwear producers in Western Romania. The paper adopts a developmental perspective examining the economic development implications of delocalization and cluster building at regional level. To accomplish this aim, the paper is structured in several sections.

   Firstly, the role of Italian relocation on cluster building is discussed based on the findings of the extant literature. Secondly, the spatial concentration of footwear firms based on quantitative methods (Location Quotient analysis) is aiming to reveal the specialization of the regional economy. Thirdly, the composition of the cluster suggests the evolutionary patterns of selection and change which triggered the diversification of productive capabilities, higher integration into the global supply chain and spatial pattern. Finally, policy recommendations are outlined.

2. Literature review

   After 1990, under strong internationalization pressure, Italian footwear firms searched to benefit from labor cost differentials by relocating in Central and Eastern Europe. The relocation of their productive activities was mainly driven by 'efficiency-seeking' reasons (Farshchi, 2008), meaning lower costs of production and cheaper labor. Pursuing international outsourcing and aiming to reduce production costs, Italian firms have gradually transferred to Romania the bottom phases of the production process, developing a 'buyer-driven value chain' (Isbasoiu, 2006). All along the 1990s, Romania became the preferred location for final processing in footwear industry (Cutrini, 2003; Amighini and Rabellotti, 2006; Sammarra and Belussi, 2006). Firms from Italian footwear districts relocated to Western Romania in successive waves. The Montebelluna district moved massively low value added production stages to

   Romania hosting 46% of FDI and 62% of international subcontracting in Eastern European countries (Sammara and Belussi, 2006). Firm relocation from Marche district contributed mainly to the creation of a twin local productive system in Arad-Timis (Cutrini, 2011). Also Verona firms relocated final producers in the Western part of Romania, except in 1997 and 2000, which suggests that it might have started to diversify its partner countries (Amighini and Rabellotti, 2006). Brenta switched to Romania in 1999, importing more than 75% of footwear as outward production trade in 2000.

   Much of the extant literature focuses on the driving forces of relocation. The Italian industrial districts (IDs) are dominated by small and medium-sized enterprises (SMEs) with organizational structure based on subcontracting relations inside the vertically disintegrated productive chain. These firms form closed SMEs systems which traditionally interact with the exterior through the two ends of the value chain. Facing the crisis of Fordism and the challenges of globalization, these firms broke the 'tacit agreement' that had bound them together in their origin districts and started to delocalize. The delocalization process was based on initiatives taken at firm level as Italian firms took advantage of the openness of the Central and Eastern European countries in their pursuit for profit. The mix of strategies employed by the Italian firms shows their attempt to overcome uncertainties. Italian companies have relocated production activities in Romania through foreign trade, cooperation agreements and direct foreign investments. The cooperation agreements were dominant in the 1990s; on their basis, Italian companies were exporting raw materials and intermediate products to Romanian subcontractors who processed them in finished items and exported them back to Italy. These cooperation agreements decreased drastically after 2000 and were replaced with foreign direct investments (Mariotti et al., 2008).

   Another significant part of the literature is devoted to the study of the self-augmenting processes of the cluster building in the region of destination. The delocalization process was mainly based on 'vertical investments' (Majocchi, 2000) through which district firms have migrated along with their suppliers and trustful collaborators searching to reduce the risk of losing crucial sources of 'tacit knowledge' and accumulated competences embodied in skilled workers and managers (Sammarra and Belussi, 2006). The Italian entrepreneurs employed two major forms of delocalization mechanisms: the 'imitation effect' and the 'district effect' (Isbasoiu, 2006). According to the first mechanism, the pioneer firms which first moved to Romania were 'success stories' and triggered a migration process of other district firms. According to the second mechanism, small companies followed the leader-companies in order to keep up the collaboration relations and to reduce the uncertainties by maintaining their membership in the production network. The small companies, once settled in Romania...