Entrepreneurship in Developing Countries

IV.3 Network 

Externalities 

 

Network externalities in developing countries related to both associations of 

entrepreneurs and clusters of firms.  Each had different purposes.  This review explored the 

socio-political importance of groups in developing countries.  Increasingly, these groups 

are powerful lobbyists for economic liberalization.  However, it was acknowledged that 

these groups can be captured and engage in rent seeking behavior, especially when there 

are dominated by one industry.  The formation of multi-industry business associations 

should be encouraged and facilitated.   

Cluster formation, especially where there is international production should be 

encouraged.  Humphrey offers a number of suggestions for policy to foster stronger 

industrial clusters.  First, he points out that policy should be aimed at achieving 

“completeness” ([125], p.14) within the cluster.  On the other hand, however, formally 

integrated clusters are not the only solution.  Taiwan’s semi-conductor industry, for 

example, was dominated by a large number of “small firms that target certain market 

niches and collaborate under different roofs.”  ([137] p.145)  Developing countries, 

 

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therefore, should study their industries to see which clustering strategies are most 

successful.   

LDCs will also need to improve infrastructure, remove barriers to imported inputs 

and immigration regimes will also need to be rationalized to allow access to “specialist 

foreign labor” ([125], pp.15-16).   Education will be important to provide the necessary 

technical and managerial skills ([125], p.16).  Additionally, FDI will need to be strategic to 

ensure that local entrepreneurs enter the global chain at the right place ([125], pp.16-17).  

This requires a better understanding of export markets.  

 

Policy Recommendations: 

1.  Encourage the involvement of multi-industry, multi ethnic business associations in 

public policy making; 

2.  Assess whether existing industry clusters are complete; 

3.  Assess export markets to determine whether clustering strategies are appropriate. 

4.  Facilitate the access to information to entrepreneurs so that they better understand 

their export markets.