The impact of industrial clusters on internationalization: the case of SMEs in Malaysia’s...

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15. The impact of industrial clusters on internationalization: the case of SMEs in Malaysia’s Multimedia Super Corridor1

Christopher Richardson and Mo Yamin

INTRODUCTION

Somewhat paradoxically, the era of global competition has made local knowledge and relationships more important than ever (Audretsch 1998; Dunning 1998; Porter 2000). Thus, it is surprising that the impact of industrial clusters (‘geographical concentrations of interconnected com-panies and institutions in a particular field’ (Porter 1998b: 78) on firm internationalization has received little attention in the academic literature (Andersen 2002; Prashantham 2008; Sopas 2001), especially in the emerg-ing and developing countries (EDCs), even though successful clusters are often held to be the vital response to global competition (Schmitz 2000). However, our knowledge of the impact of local clusters on the interna-tionalization of firms from EDCs is very scant. Considering this gap in knowledge, the main research question in this study is: What impacts do EDC industrial clusters have on firm internationalization?

The focus of analysis is on firms in Malaysia’s Multimedia Super Corridor (MSC), an information and communications technologies (ICT) cluster stretching from Kuala Lumpur (KL) to the Kuala Lumpur International Airport (KLIA), which has been described as ‘Malaysia’s answer to Silicon Valley’ (Ernst 2004: 144). There are two important reasons for selecting this particular cluster, from both the industrial cluster and internationalization perspectives. Firstly, in terms of the cluster litera-ture, recent findings suggest that firms in the ICT industry attribute per-formance growth to proximity in clusters (Maine et al. 2010). Geographical concentration can be crucial for high- tech industries, particularly during the early stages of the product or technology life cycle, because the use and transfer of tacit knowledge is fundamental to successful development

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SMEs in Malaysia’s Multimedia Super Corridor 351

(Swann and Prevezer 1998). Secondly, from the perspective of internation-alization, the pressures to expand beyond the domestic market are particu-larly intense in ICT due to the industry’s rapid and continued growth and fierce global competition in recent years (Blomqvist et al. 2008; Saarenketo et al. 2008). Gabrielsson and Gabrielsson (2004: 661) have emphasized this point, stressing that ICT firms must prepare to either ‘globalize or die’.

This chapter’s structure is as follows. The following section briefly introduces the concept of firm internationalization, and the various ways in which locating in an industrial cluster can potentially affect internation-alization, both positively and negatively. Next, the chapter discusses how this study, due to its focus on an EDC cluster, may offer fresh insight into the impact of clusters on internationalization. A discussion of the research method is presented next. The key findings of the study are then presented and discussed. The chapter ends with a concluding section, summarizing the main points and limitations of the research.

LITERATURE REVIEW

The Internationalization of Firms

It has been well established for some time that the ability to engage in international activities has become increasingly important to the growth, and in some cases even to the survival, of firms (Aulakh and Teegen 2000; Levesque and Shepherd 2004; Pla- Barber and Alegre 2007). This is particularly the case for small and medium- sized enterprises (SMEs)2 which operate in small, open economies (Brown and Bell 2001; Fan and Phan 2007), or within high- tech sectors which often have high upfront research and development (R&D) costs but operate in narrow niches spread between different countries (Blomqvist et al. 2008; Gabrielsson and Gabrielsson 2004; Keeble et al. 1998).

Internationalization, defined broadly as the ‘process through which a firm moves from operating solely in its domestic marketplace to inter-national markets’ (Javalgi et al. 2003: 186), has become so important to firms in the twenty- first century that entrepreneurs will have to decide when they will internationalie, not just whether or not they will (Levesque and Shepherd 2004; Majocchi et al. 2005). Internationalization is now less about entering foreign markets than it is about reacting to, and increasing exposure to, the opportunities and threats of international business (Jones 2001).

Traditional models of firm internationalization (the ‘Uppsala’ and ‘Innovation’ models) argue that the process is incremental, owing to firms’


352 Internationalization in emerging SMEs and emerging economies

lack of (experiential) knowledge relating to the operational environment of host countries (Bilkey and Tesar 1977; Cavusgil 1980; Johanson and Vahlne 1977; Johanson and Wiedersheim- Paul 1975). As firms slowly gain more experiential knowledge of operating in international markets, the risk of foreign operation gradually subsides, and therefore more resources can be committed to the firms’ foreign expansion (Johanson and Vahlne 1990). However, studies indicate that knowledge, including knowledge of the operational context of host countries, can be acquired more quickly through a number of alternative means (Forsgren 2002), for example through business networks and relationships (Chetty and Holm 2000; Harris and Wheeler 2005; Zhou et al. 2007), hiring workers with foreign- market experience (Luo et al. 2005) and imitating other firms (Bonaccorsi 1992; Levesque and Shepherd 2004).

Potential Advantages of Cluster Location for Internationalization

The above observations link the potential relevance of clusters to interna-tionalization, as studies reveal that greater access to such learning mecha-nisms are among the many benefits that firms in industrial clusters can enjoy (Bell 2005; Fingleton et al. 2005; Iammarino and McCann 2006; Porter 1990; Saxenian 1994). Geographical proximity of firms in clusters generates regular face- to- face interaction (Saxenian 2000), leading to the development of personal contacts (Iammarino and McCann 2006), and therefore trust (Cowan 2007), collaboration (Moodysson and Jonsson 2007), cooperation (Pinch et al. 2003) and information- sharing (Doring and Schnellenbach 2006; Yamawaki 2002). These factors, in turn, produce an atmosphere conducive to innovation (Pouder and St John 1996), creativity (Turok 2003) and specialization (Bathelt et al. 2004). Clusters are also char-acterized by specialized labour pools (Raco 1999; Waters and Smith 2008), interfirm imitation (Enright 1998; Zhang 2003) and the movement of highly skilled workers between firms (Almeida and Kogut 1999; Angel 1989; Cook and Pandit 2005). Thus, firms in clusters often have access to tacit forms of knowledge which by their very nature are ‘sticky’, as they are embedded in a highly localized context (i.e. the cluster) (Maskell and Malmberg 1999).

In addition to spatially confined knowledge, clusters may support firm internationalization through access to industry- specific intermediate inputs and services (Brown and Bell 2001; Krugman 1991; Mittelstaedt et al. 2006), specialized infrastructure (Cook et al. 2001; Swann 1998), local-ized technology spillovers (Baptista 1998; Jaffe et al. 1993), association with the cluster’s international brand (Brown and Bell 2001; Brown and McNaughton 2002), competitive pressures to improve continuously with higher standing than the neighbouring rivals (Porter 2000), the ability to



detect and act on the buyer trends more quickly (Porter 1998a), a greater chance of ‘discovery’ by international contacts (Brown and McNaughton 2002), and exposure to internationalized domestic firms (Zhao and Zou 2002) and foreign firms (Aitken et al. 1997; Alvarez 2007), which often install their facilities in industrial clusters to take advantage of high local-ized demand (Birkinshaw and Hood 2000).

Other important ways in which clusters may enhance internationaliza-tion include permanent co- location with venture capitalists, which may provide much- needed funds to expand operations abroad (Fernhaber et al. 2008), and proximity to specialized universities, often generating oppor-tunities for collaborating on research projects (Wallsten 2001), as well as improved access to fresh graduates, which may provide firms with access to the latest knowledge in academia (Dahl and Pedersen 2004; Varga 2000).

Potential Limitations and Disadvantages of Clusters for Internationalization

Notwithstanding the various ways in which operating in industrial clusters may enhance firm internationalization, the fact that many firms thrive outside clusters should not be overlooked (Maskell and Malmberg 1999). Further, scholars have cast doubt over the importance of geographical proximity in facilitating tacit knowledge flows (Boschma 2005), interac-tive learning (Hausmann 1996), developing social networks (Waters and Smith 2008), collaboration (Gordon and McCann 2000) and innovation (Boschma 2005), particularly as communication becomes increasingly effective at greater distances due to rapid developments in ICT (Rallet and Torre 1998). Thus, the overall importance of locating in clusters for internationalization may, in fact, be minimal.

Moreover, if clusters generate congestion and high land and labour costs (Baptista 1998; Fernhaber et al. 2008), intense localized competi-tion (Baptista and Swann 1998), or if they lead to overdependence on region- specific resources (Enright 1998) and institutional pressures for conformity (Pouder and St John 1996), then internationalization may be adversely affected. Additionally, certain cluster externalities which are often considered to have a positive impact on firm performance, such as imitation, technology spillovers and the interfirm poaching of workers in the cluster, may constitute a disadvantage as they may reduce firms’ (international) competitiveness (Brown and McNaughton 2002; Fallick et al. 2006; Morosini 2004; Newlands 2003).

Also, any localized knowledge that may be beneficial to internation-alization may not reach all firms in the cluster, due to the limited interac-tion between firms (Bathelt et al. 2004), despite the potential benefits of regularly meeting face- to- face with other cluster participants (Storper and



Venables 2004). Moreover, where interaction within clusters does exist, there may be unequal power relations underpinning interfirm relations (Cumbers et al. 2003), meaning that knowledge is often diffused within the region in highly selective and uneven ways (as opposed to just randomly). Thus, not all cluster members necessarily gain equal access to this knowl-edge (Giuliani 2007).

Finally, entrepreneurs and other skilled workers in clusters are often limited in their geographical movements, spending minimal time in other locations, narrowing the range of opportunities to be discovered. In addi-tion, they may frequently develop a systematic bias against responding to opportunities outside the cluster (Zander 2004), for example in foreign markets.

In sum, there are a number of (positive and negative) ways in which industrial clustering may affect internationalization (see Table 15.1). Moreover, the degree to which clustering facilitates the diffusion of tacit knowledge and innovation, both being potentially beneficial to interna-tionalizing firms, is clearly debatable.

Table 15.1 Potential positive and negative impacts of clustering on internationalization

Positive impacts Negative impacts

● Access to ‘sticky’ knowledge through: – cluster networks/relationships – observation/imitation – interfirm labour mobility – access to specialized labour pools● Access to industry- specific inter-

mediate inputs and services● Access to specialized, high- quality

infrastructure● Technology spillovers● Association with cluster’s ‘brand name’● Competitive pressures to stand out● Detect (international) buyer trends● Higher chance of being ‘found’ by

international contacts● Exposure to foreign firms, and inter -

nationalized domestic firms, in cluster● Access to venture capitalists● Access to specialized universities● Intra- cluster collaborations

● Localized congestion● Increased labour costs● Increased land costs● Intense localized competition● Overdependence on region-

specific resources● Pressures to conform● Loss of technological advantage

due to imitation/technology spillovers

● ‘Poaching’ of workers by other cluster firms

● Over- reliance on recruiting workers from local universities/competitors

● Limited geographical movement of individuals

● Systematic bias against responding to opportunities abroad



The Case of Emerging and Developing Countries

Firms based in EDCs often face certain barriers to internationaliz-ation which may not pose problems to firms in more developed coun-tries, such as inferior home- country institutions (Cuervo- Cazurra 2008; Cuervo- Cazurra and Genc 2008) and negative country- of- origin percep-tions amongst foreign consumers (Ahmed and d’Astous 2008; Bilkey and Nes 1982; Tesfom and Lutz 2006), particularly for high- tech products (Ahmed et al. 2002; Leonidou et al. 2007). However, their different own-ership advantages (Erramilli et al. 1997), effective networking capacities (Chen 2003) and the experience of coping with difficult conditions in their home markets (Cuervo- Cazurra and Genc 2008) often gives them an advantage over firms from more developed countries, particularly when entering other EDC markets with similar conditions (Cuervo- Cazurra 2007; Cuervo- Cazurra et al. 2007). Thus, the internationalization path of firms from EDCs and the newly industrialized economies often differs from that of their developed- country counterparts (Bonaglia et al. 2007; Cuervo- Cazurra 2007; Lau 2008).

Furthermore, there are important differences between industrial clus-ters in developed and developing countries, such as their focus on different kinds of market niches (Wang 2007). Whereas innovative and dynamic clusters in developed countries tend to concentrate on higher- value niches, clusters in EDCs are more likely to specialize in lower- value niches where competitiveness is determined by price and often characterized by lower levels of trust and information- sharing (ibid.). Moreover, due to various regulatory and bureaucratic requirements, and inferior human and phys-ical resources, governments in EDCs may be required to complement market mechanisms in order to support industrial clusters (Kuchiki and Tsuji 2005).

Therefore, the impact of clusters on the internationalization of firms in EDCs may not be consistent with the existing studies on the subject that are largely based on clusters located in developed countries in the West. This makes an in- depth research study of this nature imperative. The primary purpose of this study, therefore, is to investigate the way in which industrial clustering affects the internationalization of firms in EDCs.

RESEARCH METHOD

Researchers have argued that exploratory research – that is, the ‘what’ type of questions – are best answered through case study inquiry (Ghauri and Gronhaug 2005; Yin 2009), particularly when little is known about



a particular phenomenon (Eisenhardt 1989). The qualitative case study method is most suitable to capturing the diversity of regionally based innovation dynamics and the roles and relationships of the major actors involved (Bramwell et al. 2008). Previous studies indicate that it is also capable of yielding crucial insights into the nature and dynamics of regional industry clusters and the sources of their success (Wolfe and Gertler 2004).

Thus, in order to address this research question, an in- depth qualit ative case study was carried out. The case in question was the MSC cluster in Malaysia, where semi- structured interviews were conducted with key decision- makers in nine focal firms. Three of these firms were located inside the MSC cluster, three were located outside the cluster, and three operated from offices in multiple locations (both inside and outside the cluster). As the main objective of the study is to examine the impacts of the cluster on internationalization, it is logical to conduct a comparison between firms located inside and outside the cluster, in order to under-stand fully the effects of the cluster.

Case and Firm Selection

The MSC was deemed a suitable case for this study not only because it is a cluster located in an EDC, but also because policymakers consider the cluster to be vital to enhancing the international competitiveness of local firms (MDC 2008). The MSC encompasses 750 square kilometres, a 50 km corridor stretching roughly from the Petronas Twin Towers in the north to the Kuala Lumpur International Airport in the south, anchored by the cities of Putrajaya, the new administrative capital of Malaysia, and Cyberjaya, the core of the MSC (Bunnell 2002; Corey 2000).

The MSC is a multi billion- dollar project conceived by the Malaysian government under former Prime Minister Mahathir Mohamad in 1996 to develop a high- technology cluster, a key driver in the push for ‘Vision 2020’, which aims to transform Malaysia into a knowledge economy, and to achieve developed- nation status for the country by 2020 (Huff 2002; Jarman and Chopra 2008; Lepawsky 2009).

In selecting firms for the study, it was important to minimize the poten-tial effects of other variables on internationalization and to focus on the impact of the firms’ local area. Thus, all firms in the study were fully Malaysian- owned SMEs3 and had been awarded “MSC Malaysia Status”,4 regardless of location. The firms operate either in the city of Cyberjaya (the core of the MSC, located about 50 km south of the capital Kuala Lumpur or in other parts of the general Klang Valley area (which comprises Kuala Lumpur, its suburbs and adjoining cities and towns in the state of Selangor). Table 15.2 summarizes the profile of firms used in the study.


357

Tab

le 1

5.2

MSC

firm

s use

d in

stud

y

Firm

Loc

atio

nSe

ctor

Yea

r es

t.Y

ear a

war

ded

MSC

- Sta

tus

Size

(no.

of

FT

E)

Inte

rnat

iona

l sc

ope1

Inte

rnat

iona

l in

tens

ity2

Non

- clu

ster

firm

sN

C1

Peta

ling

Jaya

Cre

ativ

e m

ultim

edia

1988

1998

60

7

35N

C2

Kua

la L

umpu

rSo

ftw

are

deve

lopm

ent

2000

2004

60

5

10N

C3

Peta

ling

Jaya

Soft

war

e de

velo

pmen

t20

0320

04 3

0

310

Clu

ster

/non

-

clus

ter

firm

s

CN

C1

Peta

ling

Jaya

/C

yber

jaya

Soft

war

e de

velo

pmen

t19

9920

0420

0

790

CN

C2

Kua

la L

umpu

r/Pe

tron

as T

win

T

ower

s

Soft

war

e de

velo

pmen

t19

9920

01 1

2

320

CN

C3

Peta

ling

Jaya

/C

yber

jaya

Soft

war

e de

velo

pmen

t19

8419

9725

012

05-

10

Clu

ster

firm

sC

1C

yber

jaya

Soft

war

e de

velo

pmen

t20

0220

02 3

0

0 0

C2

Cyb

erja

yaC

reat

ive

mul

timed

ia19

9419

9710

2 1

146

C3

Cyb

erja

yaC

reat

ive

mul

timed

ia19

9620

00 4

5

310

Not

es:

1.

Num

ber o

f cou

ntrie

s fro

m w

hich

firm

gen

erat

es re

venu

e.2.

Pe

rcen

tage

of s

ales

der

ived

from

inte

rnat

iona

l mar

kets

(Fer

nhab

er e

t al.

2008

).



For each firm, a key decision- maker within the company – for example chief executive officer (CEO), chief operating officer (COO), managing director – was interviewed. Such a position of power was important for the respondent to be able to outline the key factors behind the firm’s location decisions. As they were involved closely with all the firm’s major activities, they could provide accurate, first- hand accounts of the major influences on the firm’s domestic and international strategies.

The firms were selected from the MSC online directory,5 which lists companies with MSC Malaysia Status nationwide. They were initially contacted by email, in which the author outlined the research objectives and arranged suitable interview dates. All interviews were semi- structured (to ensure that the same themes were consistently covered for each firm), lasting between 60 and 105 minutes, and were conducted in person by the authors in the respondents’ offices in Malaysia in June 2008. The ques-tions centred on the cluster externalities summarized in Table 15.1, where respondents were free to add personal opinions or add topics overlooked by the author. An additional in- depth interview with a senior figure in the Technopreneurs Association of Malaysia (TeAM), a private organization consisting of various ‘technopreneurs’ and designed to further the interests of technopreneurship in Malaysia, provided an alternative outsider’s view of the issues at hand. All interviews were recorded and then transcribed into hard copy to allow for rigorous within- and cross- firm analysis.

FINDINGS

Positive Cluster Externalities

Access to spatially localized knowledgeLocalized networks and relationships As noted earlier, one of the main characteristics of clusters is the frequent face- to- face interaction between individuals, leading to the diffusion of tacit knowledge in the local area. The firms in this study, however, suggested that informal, trust- based rel-ationships and networks leading to enhanced internationalization through sharing of knowledge were deeper and more likely to develop outside the cluster (NC1, NC2, NC3 and CNC3). Only C3 reported that regular infor-mal interaction within the cluster resulted in the acquisition of knowledge, useful in its international activities. Respondents were relatively consistent in their view that the cluster lacked social amenities, such as restaurants, pubs, coffee bars, and so on. In addition, the city of Cyberjaya, the core of the MSC, was described by the respondent from TeAM as a ‘9 to 5 city’, because most of the workers there live elsewhere and commute from



around Kuala Lumpur, further restricting opportunities for socializing. The respondent of C2 sums up the situation: ‘We have a canteen here because there are very few good places outside. In the evening it becomes very quiet very quickly.’ Finally, the respondents from non- cluster firms emphasized that socializing in and around their company’s location was common because many of the workers had grown up in the area and maintained contact with long- term friends who were also based in the area, which often favoured the diffusion of tacit knowledge useful to inter-national business activities within the local area.

Observation and imitation Despite permanent physical proximity to many other firms in the same industry, no respondents felt that the inter-national expansion of their firm was enhanced by the ability to observe and imitate other firms’ international expansion strategy (or processes) within the MSC cluster. However, two respondents (from NC3 and CNC3) argued that, by virtue of their networks in their local area outside the cluster, they were always more informed about what other firms were doing and could adapt certain ideas from nearby firms in their own activities, which supported their international growth. C2 and C3 had no desire to imitate the others around them because they felt they were too advanced compared to their neighbours.

Interfirm labour mobility in the local area Not all firms were aware of any regular interfirm movement of highly skilled workers within their local areas. However, those that did acknowledge the phenomenon largely felt that it had no effect on internationalization, with just two exceptions. NC3 had benefited by acquiring knowledgeable workers with relevant experience because ‘they [new workers] have exposure to trade, and they can share this experience with us, and how to go around [succeeding in foreign markets]’. The experience of C2, on the other hand, contrasts sharply with the positive outlook of NC3. The respondent felt that locat-ing in the cluster and being surrounded by large foreign multinationals was a problem. He stated that: ‘I have lost some very good executives to companies in Cyberjaya, like HP [Hewlett Packard] . . . I haven’t seen many people come the other way. I think HP pays very well – it’s an inter-national brand.’

Access to specialized labour pools In total, the international expansion of four of the firms (NC1, NC3, C2 and C3) has been enhanced to some degree by their proximity to a pool of specialized workers in their local area. For firms NC1, C2 and C3, the presence of a university nearby pro-vided them with invaluable access to specialized IT graduates. Thus, there



is little difference in this regard between cluster and non- cluster locations, in terms of IT graduates enhancing international growth.

Access to industry- specific intermediate inputs and servicesOverall, access to industry- specific inputs and services in the local region was considered to enhance internationalization in just three instances (two outside the cluster, one inside it), and in each case the effect was perceived to be minimal. The respondent from CNC2 felt that industry- specific inputs available in both of the firm’s locations (inside and outside the cluster) were useful, thus this firm made up two of the three responses. The other firm, NC3, a non- cluster firm, claimed that there was a good supply of such inputs and services in their local area, but this was only slightly useful to their international expansion efforts.

Access to specialized, high- quality infrastructureThe quality of infrastructure is perceived positively by firms inside the cluster as well as those outside the cluster, and the impact of this infra-structure on internationalization does not seem to vary between these two locations, although the particular type of infrastructure to which respond-ents referred would differ. CNC2, C2 and C3 acknowledged the presence of ICT- specialized telecommunications facilities and infrastructure (e.g. power lines) inside the cluster, while outside the cluster the large number of luxury hotels and social amenities attracts clients from abroad: ‘when . . . foreign clients come over, they treat it [their visit] as a working holiday as well’ (quote from respondent of NC1).

Technology spilloversThree firms in total (NC3, CNC1 and CNC3) revealed that their observation and adoption of technology (technology spillover) used by neighbouring firms supported their internationalization, with CNC3 reporting that this was a feature of both of its locations (inside and outside the cluster). CNC1, which also has two locations, regularly participates in events organized by the MSC in Cyberjaya, from which it has adopted technologies from other firms. This respondent suggested that such events were largely absent, or inferior in quality, outside the MSC. However, NC3 reported having benefits from proximity to various accounting software firms in the city of Petaling Jaya (outside the cluster), which helped the firm to improve the product’s international competitiveness when they adopted the firm’s products.

Association with cluster’s ‘brand- name’Five respondents (NC2, NC3, CNC1, CNC2 and C3) perceived their firms’ association with the MSC (through their MSC Malaysia Status)



as beneficial to internationalization. Interestingly, none of the firms con-sidered location per se to have any bearing on this, with MSC Malaysia Status being sufficient on its own to boost company profile abroad. For example, the respondent for CNC2 commented that ‘The [MSC] status is more important than where you are.’

Competitive pressure to stand outGenerally, the firms in the study, regardless of location, felt little pressure to stand out from rivals. However, two firms (NC1 and CNC2) felt that the pressure to stand out from rivals provided additional incentives to internationalize. NC1, a non- cluster firm, revealed that the pressure from its main rivals located nearby forced the firm to boost its profile by pen-etrating the Indonesian market. Although CNC2 has offices both inside and outside the cluster, it was inside the cluster where it felt pressure was more intense to internationalize in order to stand out.

Ability to detect international buyer trendsIn total, five respondents considered their firm’s location was helpful to detect international buyers’ trends. Four of these firms (NC2, NC3, CNC2 and CNC3), however, were referring to non- cluster areas. In general, the firms attributed this to regular informal interaction with business people in the local area, and regular contact with customers. The respondent from C2 stressed the importance of regularly attending international confer-ences, from which they regularly obtained information related to interna-tional market demands. This supports the idea that permanent co- location may not be necessary for acquiring critical knowledge of this nature, with ‘temporary clusters’, such as international trade fairs, being sufficient for achieving this purpose (Bathelt and Schuldt 2008; Maskell et al. 2006).

Greater chances of being ‘discovered’ by international contactsOperating in the MSC cluster clearly improves firms’ chances of being discovered by foreign contacts on a visit to the area. Three respondents (CNC1, C2 and C3) made it clear that their location in the cluster had enabled them to establish contacts with foreign visitors, thus helping them to develop their business abroad, while the respondent for firm CNC2 believes that it is only a matter of time before his firm enjoys such ben-efits resulting from its location. The central role of the government in the cluster was highlighted by the respondents from firms C2 and C3, who were frequently included on ‘tours’ by foreign visitors to the area:

because . . . MDEC6 often showcase companies here, I think there is more like-lihood that we [C2] are going to . . . be part of a tour. For example, the Iranian



Minister of telecommunications came through 6 months ago, and we had a delegation. If we were based in another part of Kuala Lumpur, that would not have happened (quote from C2 respondent)

Exposure to foreign firms or internationalized domestic firms within the cluster or local areaPermanent proximity to foreign firms appears to be helpful to inter-nationalizing firms, although locating in a cluster does not seem a neces-sary ingredient as four firms (NC1, NC2, NC3 and CNC3) revealed that their exposure to foreign firms in their local area outside the MSC often provided for acquisition of the tacit knowledge which could be used in international business operations through regular interaction with the employees of foreign firms. Inside the cluster, only CNC3 argued that knowledge was often acquired through interacting with foreign firms within the cluster. For one firm (C3), proximity to large foreign multi-national enterprises (MNEs) was actually detrimental to international growth as its local workers were often poached by these foreign firms offering higher salaries and the chance to work for a global brand name. No firms reported any explicit effect on internationalization by co- locating near internationalized domestic firms.

Proximity to venture capitalists based in clusterJust one firm in the study, CNC2, reported that its international growth was supported by financial support from venture capitalists operating in its vicinity. Interestingly, the respondent stressed that the firm received this support from venture capitalists located near both of its offices (inside the MSC cluster, and outside of it).

Proximity to specialized universitiesThe reported impact of the MSC’s Multimedia University (MMU) on the internationalization of firms has been somewhat positive. The main benefit, as has already been discussed, is the presence of a pool of IT- specialized graduates who are already familiar with Cyberjaya and its companies. They are keen to pursue their careers in the area. The respondents of CNC3, C2 and C3 were clear about the positive impact of the MMU graduates on their firms’ international growth following their employment. Proximity to MMU was considered a vital factor behind the students’ ambitions to work in Cyberjaya: ‘I think because MMU is closer [to companies in Cyberjaya than universities elsewhere], students think of us more, they know more about us, and hence it’s easier to attract them’ (quote from respondent of C2). Nevertheless, the international growth of non- cluster firms may also be supported by access to universities. The



respondent of CNC2 reported that his firm regularly collaborates with the International Islamic University (IIU) and stressed that ‘distance is an important aspect, because when you do collaborate, you want to be as [physically] close as possible.’

Collaboration in local areaOnly two firms in the study, NC2 and NC3 (both non- cluster firms), had benefited from collaborating with other firms in their local area in their internationalization. Firm NC2 regularly collaborated with hospitals and foreign companies located nearby, although the respond-ent was quick to downplay the importance of geographical proxim-ity in such collaborations. The firm NC3 also regularly collaborated with other firms in their region, helping them to deliver their solutions abroad. In this case, the respondent championed the role of geograph-ical proximity.

Negative Cluster Externalities

By and large, firms in this study did not consider the negative cluster exter-nalities discussed earlier (see Table 15.1) to have had much substantial impact on internationalization, although there were two exceptions.

Overdependence on region- specific resourcesTwo non- cluster firms (NC2 and NC3) felt that their overdependence on local resources restricted their international growth, although only minimally. Although the respondent from NC2 did not wish to go into detail on this issue, merely stating his firm’s position, the respondent from NC3 explained that his firm depended very much on employing workers who live within the city of Petaling Jaya (because he felt they were more likely to stay with the firm longer due to its favourable location near their place of residence), which implied that the mindset of workers was largely uniform in nature and lacked diversity (Pouder and St John 1996). This, the NC3 respondent argued, may have had a slightly negative impact on the firm’s international expansion.

Poaching of workers by other cluster firmsJust one firm, C2, a cluster- based firm, felt that its proximity to other firms resulted in the loss of highly skilled workers. In particular, and as mentioned earlier, foreign MNEs located nearby had attracted local workers with higher wages and the opportunity to add a big name to their curriculum vitae (CV).



CONCLUSION AND LIMITATIONS

This research raises new issues regarding the impact of industrial clusters on the internationalization of SMEs, particularly those in EDCs. The findings suggest that clusters in EDCs may not have a substantial impact on internationalization, either positive or negative. In terms of the posi-tive impacts on internationalization of the cluster, clearly the only factor in which the cluster significantly improves on firm internationalization is through greater visibility amongst foreign contacts, particularly as the government regularly showcases cluster firms for foreign visitors, enabling firms to develop contacts with important international buyers, suppliers and partners. Although the presence of MMU within the cluster also helps firms’ international growth (predominantly through the regular supply of IT- specialized graduates), it is clear that the presence of universities elsewhere means that the firms outside the cluster can also enjoy similar benefits.

With respect to the negative effects on internationalization attributable to operating in industrial clusters, the only serious claim was made by the respondent of C2, who felt that co- locating with big- name foreign MNEs meant the loss of its capable workers who would often be attracted to work for them. This suggests that the presence of foreign MNEs in clus-ters in EDCs may have some adverse effects on the internationalization of local firms, particularly SMEs, as skilled workers may be attracted to MNEs’ higher wages and better career prospects, therefore exhausting the supply of skilled workers available for smaller local firms inside the cluster. The decision to include C1, a cluster- firm with zero international activities, in the study, was primarily to investigate whether the negative cluster externalities would be cited as a significant impediment to its inter-nationalization. However, on interviewing the respondent from C1, it was conclusively established that the firm’s lack of international operations was due to its shortage of resources and lack of readiness, and had little to do with any negative cluster effects: ‘we don’t go overseas because we’re not ready yet, we’re too small. We don’t have the resources’ (quote from respondent of C1).

The findings have significant implications for both theory and practice. First, in terms of theory, research on how operating in clusters affects internationalization of firms in EDCs is somewhat limited; and therefore, it is important that more scholarly efforts will be dedicated to exploring this theme. The exploratory study presented in this chapter suggests that the impact of clusters in EDCs on firm internationalization may not be highly significant, which somewhat varies from the lessons of the extant literature. As this is largely a preliminary study, the future research needs



to test and verify the findings here, ideally in different industrial and loca-tional settings.

Secondly, in terms of implications of this study for public policy and management practice, cluster policymakers in EDCs should recognize the difficulties involved in implementing any single ‘ideal’ type of indus-trial cluster. While there are a number of examples of successful clusters which appear to have enhanced firm internationalization, efforts to clone these models are likely to be limited by the fact that regional struc-tures and cultures are unique (Breschi and Malerba 2001; Dohse 2007). Firm managers, meanwhile, should be cautious about committing their firms to clusters in EDCs. While many previous studies have argued that operating in a cluster is likely to enhance firm performance signifi-cantly, this may not necessarily be the case for clusters in EDCs, where, for example, higher levels of government involvement may have some adverse effects, or where the presence of large foreign MNEs may drain the supply of skilled local workers available to SMEs seeking and eager to internationalize.

These implications and the overall findings from this study should be considered in light of the following limitations. Firstly, the study focused solely on the experience of firms in one cluster, the MSC, and thus it may not be appropriate to generalize the findings to other clus-ters. Secondly, the cluster in question is a policy- driven cluster, estab-lished with the principal objective of developing the regional economy. Government- sponsored clusters may differ in some ways from ‘organic’ clusters; for example, in terms of the level and impact of public support and investment for the cluster and its firms. Thus, when investigating the impact of these types of clusters on firm performance, including internationalization, one should be aware of any additional influences beyond the typical cluster externalities discussed in the literature and highlighted in Table 15.1. While organic clusters are more common in the developed countries in the West, in EDCs, and particularly in Asia, government- sponsored clusters appear to be more prevalent (Su and Hung 2009), a phenomenon reflected in the choice of the MSC as the case context for the present study. Thirdly, the method used in the study, that is, a qualitative case study approach, has its inherent strengths and weaknesses. Although this exploratory study has uncovered many insights, their generalization across the population and possible bias in interpreting interview transcripts remain as challenges for future research. Naturally, researchers wishing to generalize this study’s find-ings may have to adopt alternative quantitative methods, for example questionnaire surveys, to enable a broader research base supporting the analysis and results.



NOTES

1. The authors would like to acknowledge the financial support of the Economic and Social Research Council, Uk.

2. Defined in Malaysia as firms with up to 200 employees or up to RM25million annual sales turnover (Abdullah 2002; Salleh 1991)

3. As foreign ownership may have had a decisive effect on the firm’s international activities, these firms were avoided.

4. MSC Malaysia Status refers to incentives and benefits enjoyed by ICT firms (both local and foreign) including financial and non- financial incentives, in recognition of the development or use of multimedia technologies to produce or enhance their prod-ucts and services, and for process development (source: http://www.mscmalaysia.my/topic/12071141958827).

5. http://www.mscmalaysia.my/topic/Company1Directory.6. Multimedia Development Corporation (MDEC), the quasi- state institution set up to

oversee the implementation of the MSC Malaysia.

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