Collective E Ciency and Collective Failure: The Response of The Sialkot Surgical Instrument Cluster To Global Quality Pressures

World Development Vol. 27, No. 9, pp.
16051626, 1999
1999 Elsevier Science Ltd. All rights reserved
Printed in Great Britain
www.elsevier.com/locate/worlddev 0305-750X/99/$ - see front matter
PII: S0305-750X(99)00078-9
Collective Eciency and Collective Failure: The

Response of the Sialkot Surgical Instrument Cluster to
Global Quality Pressures
KHALID NADVI *
Institute of Development Studies, Brighton, UK
Summary. One of Pakistan's rare examples of consistent export success has been the
Sialkot stainless steel surgical instrument cluster. This cluster, consisting mainly of small
and medium enterprises (SMEs), has as its main markets the United States and Western
Europe. In recent years, access to these markets has become contingent on meeting
international quality assurance standards. The hypothesis explored in this paper is that
meeting such standards requires greater local cooperation, both among producers as
well as between producers and their suppliers and subcontractors. The study draws on
quantitative and qualitative data to examine how inter-rm ties, both vertical and
horizontal, have changed. The evidence suggests that joint action has increased, but that
there remain signicant areas of collective failure. Thus, the quality assurance pressures
mark a possible turning point for the cluster, raising questions as to whether local
sources of competitiveness, captured in the collective eciency concept, can continue to
provide the basis for export success. It also leads directly to an evaluation of the cluster's
growth trajectory. 1999 Elsevier Science Ltd. All rights reserved.
1. INTRODUCTION tari barriers to trade (Stephenson, 1997; EC,

1997), especially with regards to labor
The one truth about global competition is (Sengenberger and Campbell, 1994; OECD,
that it is constantly changing. As Kaplinsky 1996, 1995; Krueger, 1996; Maskus, 1997;
(1998) has noted, competing in ever-more White, 1996; ILO, 1997; Grootaert and
demanding world markets requires producers Kanbur, 1995) and environmental standards
to run just in order to keep up. The criteria that (Dion, Lanoie and Laplante, 1997; Anderson,
dene best practice in manufacturing are con- 1996).
tinually developing, reecting the constant pace This paper examines how clustered producers
of upgrading in both product and process have responded to the new standards of quality
technologies. In recent years, international assurance, focusing in particular on inter-rm
standards that verify compliance on a range of
issues, including quality assurance, environ-
mental standards, labor norms and even social * Financial support from the Department for Interna-
ethics, have gained importance in global com- tional Development, London is gratefully acknowl-
petition.1 edged. The author thanks the Surgical Instrument
Standards provide consumers with a basis for Manufacturers Association in Sialkot, Pakistan for its
making informed consumption decisions, and support, and the various respondents interviewed in
manufacturers with a benchmark of best prac- Sialkot for their valuable time. The excellent research
tice. For many producers and service providers, assistance provided by Waheed Murad in Sialkot is
from the North and the South, compliance with highly appreciated. The author beneted from discus-
international standards can add a competitive sions and comments on earlier drafts provided by
edge. It may also be necessary to retain access Tilman Altenburg, John Humphrey, Peter Knorringa,
in key niche markets. There is now a growing Roberta Rabellotti and Hubert Schmitz. The author is
literature which examines standards as non- solely responsible for the views expressed in this paper.
1605
1606 WORLD DEVELOPMENT
relations and production organization in the necessitates a capacity to learn both at the level
cluster of surgical instrument producers in of the individual rm and in the relations
Sialkot, Pakistan. This cluster is an established between rms. In the cluster context, know-
player in its global market but struggling to ledge spillovers can facilitate such learning
meet the international quality assurance stan- (Audretsch and Feldman, 1996). Moreover,
dards. cluster-wide bodies and real services centers can
Small and medium enterprises (SMEs) have accelerate the dissemination of know-how
made Sialkot Pakistan's leading center in per among local producers (Brusco, 1992). Finally,
capita terms for manufactured exports. Sial- compliance by local producers can enhance a
kot's SMEs are organized around sector specic cluster's overall quality standards, providing it
clusters producing sports goods, leather gar- with a highly marketable `quality label'.
ments and stainless steel surgical instruments. Conforming to international quality assur-
The latter is the largest in employment terms. ance standards can be a costly process, not only
The 300 or so family-run manufacturing in terms of certication expenses but also in
enterprises that form the core of the Sialkot acquiring the know-how to implement the
surgical instrument cluster together exported required changes. Furthermore, pressures to
over US$100 million worth of instruments in meet standards in one area can also be a pre-
1992-93. The cluster's main market is the cursor to complying with international stan-
United States with 60% of total export sales. dards requirements in other elds. For Sialkot's
During the mid-1990s the Sialkot cluster faced surgical instruments sector, continued access to
a major crisis of quality assurance. This crisis premium markets in Western Europe and
provides a possible `turning point' that could Japan is becoming conditional on achieving the
well determine the cluster's future growth path ISO 9000 series of quality assurance standards.
and its ability to remain globally competitive.2 In addition, there are growing demands on the
In May 1994 the Food and Drug Adminis- cluster to meet global concerns on child labor.
tration (FDA) of the United States, the key Thus, the crisis of 1994 provided an indication
regulatory body in the US health sector, of the new competitive challenges the Sialkot
restricted imports of Pakistani-made surgical cluster would face in global markets.
instruments for failing to meet the interna- The response to these pressures has been
tionally accepted quality assurance standards impressive. By late 1997 sales of surgical
of Good Manufacturing Practices (GMP). This instruments from Sialkot were above the pre-
action had serious consequences for Sialkot's crisis levels. Overall quality had also improved,
producers, especially those exporting predomi- with over 130 of the 300 manufacturers in the
nantly to the United States. Consignments were cluster certied by the FDA as conforming to
stranded midway, orders cancelled, many rms GMP standards and two rms having
and subcontractors ceased operation, and a obtained the coveted ISO 9002 quality assur-
large number of workers were laid o. ance certicate. The evidence from the eld
GMP standards are one measure of quality was equally strong. Of the 60 rms surveyed in
assurance. They are closely related to other November 1997, 68% reported rising sales
internationally recognized quality assurance levels since the crises. Over half the sample
certications, such as the ISO 9000 series, stated that employment levels had also gone
which certify that standardized and account- up. Two-thirds were already GMP certied
able quality control processes are used at each and 37% of the sample had begun the process
stage in a product's design, development, of obtaining ISO 9002 certication. This is, by
manufacture and distribution. In line with the any measure, a remarkable and rapid turn-
emphasis on total quality-management (TQM), around. This paper seeks to explain how the
they provide a system of traceability, involving turnaround was achieved. In particular, it
detailed verication of quality-dependent pro- explores whether collective eciency advan-
cedures through internal and independent tages arising from clustering, especially joint
audits, quality training of personnel and con- action gains, were signicant in the process of
stant monitoring of quality performance mea- upgrading and learning required to meet such
sures. Implementing such standards requires standards.
changes in production organization and man- Elsewhere I have shown how the concept of
agement practices. This has implications for the collective eciency can take us further in
relationship producers have with suppliers and understanding the cluster's relative success as a
with other rms. The upgrading required global player in a niche product line (Nadvi,
COLLECTIVE EFFICIENCY AND COLLECTIVE FAILURE 1607
1999). Local producers have beneted from 2. QUALITY ASSURANCE STANDARDS

local external economies and have entered into AND COLLECTIVE EFFICIENCY
various forms of joint action. Cheap labor has
undoubtedly been important, but fails to Quality assurance standards move the focus
explain why Sialkot became a leading export away from product to process quality. Tradi-
center. In making the argument on collective tionally, quality standards were based on
eciency, the main focus has been on interrm product characteristics such as durability, reli-
relations and the basis they provide for local ability, conformance to specications and
sources of competitiveness. safety. During the 1980s and 1990s however,
This study takes the collective eciency concern began to shift toward the processes
argument further by exploring how clustered involved in production and a new category of
producers respond to an exogenous crisis. This standards began to emerge. For example, the
particular crisis of quality assurance raises ISO 9000 series of standards (which developed
questions about changes in the relationships from British Standard BS5750) concentrate on
within supply chains. Do they become closer, the documentation of quality procedures, while
more collaborative and obligational, or do the ISO14001 standard deals with the docu-
rms reduce the quality-related costs of mon- mentation of environmental procedures in
itoring by internalizing activities? As the crisis production. The motivation for quality assur-
is cluster-wide, questions also arise on changes ance standards emerged as a result of the desire
in horizontal collaboration and the role played of component and service users for high quality
by local institutions such as the trade associ- input produced at low costs. This was directly
ation. The underlying concern is with the related to the changes in management practices
cluster's growth trajectory. This includes and the adoption of total quality control pro-
understanding how the structure of the clus- cedures. Thus the issue was no longer of simply
ter, and the production relations that charac- ensuring the quality of the end product, but
terize it, have changed as a consequence of the also of being able to verify the quality control
crisis. process that had been used, and the quality
The paper draws on qualitative and quanti- values that had been instilled, at each and every
tative primary data collected in two survey stage of production. Among other things, this
rounds.3 The pre-crisis eldwork, conducted in has implications for the way production is
199394, included a survey of 57 surgical organized, with ``quality at source,'' ``quality
instrument manufacturers and 72 subcontrac- responsibility'' and ``total quality manage-
tors, alongside case studies and key informant ment'' becoming key elements of a ``total
interviews. The post-crisis survey, conducted in quality control'' production organization.
two stages, included qualitative evidence gath- For the surgical instruments sector, quality
ered from case study rms and key respondents assurance is particularly signicant given that
in January 1997, followed by a detailed survey the industry manufactures what the FDA terms
of 60 rms in November-December 1997.4 ``critical devices.'' The consequence of instru-
The discussion is structured as follows. The ment failure can be extremely costlylives can
following section considers the links between be at stake. In the West, malpractice litigation
quality assurance, upgrading and collective places a heavy penalty on failure by health
eciency. Section 3 provides a brief overview providers. The latter require suppliers further
of the Sialkot cluster, describing the quality down the health provision chain to comply with
assurance crisis and chronicling the events that quality assurance norms. The traceability ben-
subsequently took place. Section 4 shows how ets, oered by a quality assurance procedure,
horizontal relationships have changed in ensure that faults can be located and responsi-
response to the crisis. Section 5 turns to vertical bilities for failure clearly dened. It also implies
ties, examining whether the crisis spurred joint that international quality standards have been
action with local suppliers and subcontractors met. For manufacturers meeting global quality
and external buyers. Section 6 tests the propo- assurance standards can potentially raise eco-
sition that increased cooperation has had a nomic eciency, provide a basis for bench-
positive impact on performance. The conclud- marking, and be an important tool in a rm's
ing section summarizes the evidence on collec- competitiveness strategies. Thus, in order to
tive eciency and on collective failure, and raise their share of the global surgical instru-
discusses the implications for the future devel- ment market, Pakistani producers have to
opment of the Sialkot cluster. improve eciency by cutting costs and raising
productivity. They also have to raise quality standards. Upgrading on quality assurance
and provide documented, veriable and inter- requires upgrading of local supply chain link-
nationally accepted quality assurances to ages within the cluster. While quality assurance
existing and potential buyers. standards eectively lower transaction costs
The required upgrading calls for changes in (Foss, 1996), achieving them requires the
production organization and management building of closer ties and greater information
practices within the rm and in their relation- ows within the supply chain. This implies
ships within the supply chain. ``Soft technolo- greater cooperation in vertical relations
gies'' on organizational practices have to be between producers and their various suppliers.
absorbed. These include: detailed record keep- Firms and suppliers both need to monitor
ing of each production batch ow through the production closely, keeping and sharing
various stages of production; adoption of pro- detailed information on production ows,
cess-specic quality accounting systems with source and reject rates at each and every stage
systematic testing of materials and standards at of production. This suggests greater coordina-
key stages, and a restructuring of manufactur- tion within the supply chain, and openness on
ing to emphasize stock and quality control, as the part of suppliers for external monitoring by
well as health and safety standards. This producers. These enhanced interactions, and
demands a change in management outlook and their implicit focus on quality and quality-
in the traditional ``ways of doing.'' Most pro- critical stages of production, facilitate a wider
foundly, it requires the inculcation of quality- set of technical discussions within the supply
driven production values. chain on quality and technical upgrading.
The FDA's actions were not directed at an Moreover, given the costs of such linkages,
individual rm but to the cluster as whole. All rms are potentially encouraged toward more
producers in Sialkot were deemed to have failed obligational, as opposed to arms-length, ties
to comply with international standards. Indi- (Sako, 1992). These changes clearly imply that
vidual responses by rms were unlikely to result clustered rms can no longer rely purely on the
in the compliance required. Assimilation of passive dimension of collective eciency in
quality values and upgrading of practices had order to compete in global markets. They need
to be across the cluster. to focus increasingly on upgrading their supply
The collective eciency argument is of sig- chains, which requires joint action in local
nicance here: it suggests that the upgrading vertical ties.
called for cannot be advanced by SMEs on Similarly, joint action in horizontal ties,
their own. A collective response is needed. This through local multilateral institutions can assist
is likely to generate cluster-wide gains. Collec- this process of upgrading by facilitating the ow
tive eciency is dened as having two aspects of technical information on standards and by
to it: external economies that clustered agents assisting in managerial training. Local institu-
accrue by virtue of their location, and joint tions can also play a potentially key function in
action benets that arise from deliberate dening and regulating local product stan-
cooperation between local agents. I view dards, and thus in creating a reputational basis
external economies as the ``passive'' dimension for the cluster's products. This provides a
of collective eciency (Nadvi, 1996). The term powerful example of what I refer to as `èxter-
passive describes the nature of ties required nalities of joint action'' (Nadvi, 1996, 1999).
between local agents in order to obtain In so much as quality assurance standards
externality gains. In contrast, joint action is the are an emerging feature of demand-driven
`àctive'' dimension of collective eciency pressures within the new competition, they
requiring deliberate and active cooperation. underline the link between market conditions
These two aspects can also be clearly linked; and joint action. Competing in demand-led
joint action by some agents can generate clus- markets requires local clustered producers to
ter-specic externality gains for others (Nadvi, go beyond the passive dimension of collective
1996). It is the combination of these benets, eciency and engage in local cooperation both
external economies and joint action gains, that within vertical supply chain linkages and
provide a basis for enhanced competitiveness through horizontal collaboration within local
for clustered SMEs compared with similarly institutions. Furthermore, where quality assur-
sized, yet dispersed, producers. ance pressures raise demands for new forms of
The collective eciency model relates directly knowledge on managerial organization and
to the pressures raised by quality assurance production best practices, upgrading requires
learning. Learning ties, involving both interac- market. Since the mid-1980s demand for dis-
tion with external agents and through local posable instruments has risen in the US fol-
feedback and demonstration, demand greater lowing concerns on the spread of infectious
and more coordinated collaboration. To the diseases through contaminated instruments and
extent that quality assurance standards pose the rising costs of sterilization. Reusable oper-
new sets of questions and require new mana- ation theatre instruments are made from higher
gerial know-how, external buyers can become quality imported stainless steel, and are pre-
an important conduits for such information. dominantly exported to Western Europe, par-
This clearly raises concerns of whether local ticularly Germany where a number of the
sources of competitiveness within the cluster, leading international surgical instrument man-
captured in the collective eciency notion, are ufacturers subcontract to Sialkot-based pro-
sucient to generate the basis for the cluster's ducers.
continued ability to vie in global markets. The cluster generates various agglomeration
This paper puts forward the hypotheses that benets for local producers. These include the
upgrading to meet global standards by clus- presence of a wide range of specialist input and
tered producers necessitates enhanced joint service providers who ensure competitive prices
action in both vertical and horizontal ties. and facilitate the ability of local producers to
Moreover, it argues that such upgrading will compete in distant markets. Producers are not
have positive consequences on rm and cluster required to hold large stocks of input, and can
growth. Before turning to the empirical evalu- call on the wide range of export-related service
ation of this argument, however, the following providers, from shipping agents to interna-
section presents an overview of the cluster and tional couriers. The large presence of specialist
the crisis. subcontractors generates economies of scale
and scope. The cluster also provides a concen-
tration of skilled labor, the most frequently
3. THE SIALKOT SURGICAL cited locational advantage. The labor market
INSTRUMENT CLUSTER AND THE clears rapidly, facilitated by the easy availabil-
QUALITY ASSURANCE CRISIS ity of information within the cluster. In addi-
tion, the ow of technical and marketing
(a) Brief overview of the cluster information enhances prospects of technical
development.
The Sialkot surgical instrument cluster con- In addition to these ``passive'' gains of clus-
sists of a core of 300 producers, surrounded by tering, which lower costs and raise eciency,
a range of over 1,500 process specialized sub- there is evidence of local joint action. Firms
contractors, a further 1,000 ancillary, supply collaborate with their local suppliers and sub-
and support units as well as a number of sup- contractors, particularly on issues of quality.
port institutions. Among the latter are the Horizontal cooperation is less marked. Yet
Metal Industries Development Centre (MIDC) there are a number of local institutions,
that provides technical services to local rms; including the trade association, the chamber of
the Surgical Instrument Manufacturer's Asso- commerce and the dry port, which reect hor-
ciation (SIMA) which represents local produc- izontal inter-rm cooperation. At the same
ers; and, the Sialkot Dry Port Trust (SDPT) time local rivalry is intense. Producers compete
which has ``brought the port to the cluster,'' with each other in an environment where price,
providing customs handling, storage and quality and reliability are essential factors for
transportation facilities.5 export success.
Over 2000 dierent types of surgical instru- The Sialkot cluster is also highly dierenti-
ments are produced in Sialkot. These are ated. A small number of the cluster's original
themselves dierentiated by market segment: SMEs have grown into large rms and have
high quality, reusable, operation theatre developed close collaborative linkages and joint
instruments and lower quality, disposable, oor venture units with key external players, partic-
instruments. The two segments are distin- ularly leading international producers. There
guished by the type of raw material, quality of also many small enterprises that struggle to
workmanship, and end markets. Disposable survive. This process of increasing internal
instruments are produced from locally sourced, dierentiation, and the related intensity of the
recycled, or scrap-based, stainless steel and local competition, raises questions of the clus-
exported primarily to the high volume US ter's growth trajectory. Will price competition
and cost cutting force the cluster down a ``low dismantled new machinery to learn how it
road'' (Sengenberger and Pyke, 1991)? Or is functioned and then rebuilt it. As a result, a
there the possibility of a ``high road'' where number of formerly imported technologies were
quality led developments encourage innova- made locally. Absorbing the ``soft technolo-
tion, growth and rising real incomes? gies'' associated with quality-driven production
organization was potentially more dicult. An
(b) The quality assurance crisis attitudinal shift was required, wherein local
producers recognized that traditional practices
In the context of these questions, the quality could be improved upon and were aware of the
assurance crisis of 1994 provides a potential urgency to do so. For the Sialkot cluster, where
turning point for the Sialkot surgical instru- many of these changes were perceived as going
ment cluster. Before turning to the discussion against the grain of locally embedded practices,
on how the cluster responded it is useful to map such reorganization was unlikely to be smooth.
the events associated with the crisis. In the months following the FDA ``ban''
Concerns regarding the quality of Sialkot's sales to the United States were suspended, most
surgical instruments had begun to emerge rms reduced production levels, some smaller
during the latter half of the 1980s (Wiegersma, units closed down while others entered new
1989; GEMCO, 1990). In 1989 the FDA tem- product lines (such as, for example, barber's
porarily restricted imports of Sialkot-made scissors or beautician's equipment) or sought
instruments on the grounds of unacceptable new markets in Europe, Asia and Southern
metal composition standards. Random tests Africa. A number of manufacturers tried to
revealed that the chromium content and hard- nd alternative channels into the US market in
ness of recycled Pakistani stainless steel was order to circumvent the FDA's barriers.
below par, leading to a higher risk of rust and Among the hardest hit segments of the cluster
breakage. The concerns expressed by the FDA were process-specialized subcontractors and
in 1989 were largely allayed by the early 1990s. suppliers of locally manufactured scrap steel
A technical dialogue ensued between Sialkot's (the main raw material used for disposable
surgical instrument producers and the local instruments produced for the US market).
steel re-rolling sector, resulting in gradual The awareness of the necessity to upgrade
improvements in the quality of the locally was rapid even if the process of upgrading itself
produced scrap-based stainless steel. was gradual. Discussions on the means to
The FDA's action of May 1994 was more acquire the requisite know-how for upgrading
serious in character to that of 1989. It went local practices began almost immediately,
beyond simply quality control and metal test- especially within the forum of the trade asso-
ing. The critical nature of quality assurance was ciation (investigated in depth below). By
brought into sharp focus. Prior to this, know- December 1994, one large rm in Sialkot had
ledge of international quality assurance require- managed to become GMP certied by the
ments was limited to large rms in Sialkot. FDA. It did so by hiring the services of a for-
While three-quarters of the large rms surveyed eign consultant. In April 1995, 11 months after
in 199394 were aware of the ISO 9000 stan- the FDA's action, SIMA, with nancial aid
dards, only 31% of SMEs sampled had heard of from the government, negotiated a contract
it. At the time, neither the local technology with a US quality assurance consultancy to
center, the MIDC, nor the cluster's trade body, provide technical training for local producers
SIMA, had disseminated information or pro- to upgrade to GMP standards.
vided technical training on the subject. By January 1997, as a result of the training
The continued competitiveness of the cluster provided by the consultant, 75 producers had
depended on its ability to respond rapidly to been certied by the FDA as conforming to
the demands posed by the quality assurance current GMP standards, and were thus able to
pressures. Incorporating the changes necessary export to the United States.6 Ten months later
to conform to the new requirements, however, this gure had risen to 133 rms, with a further
was not easy. In an industry reliant on tradi- 153 producers either undergoing training on
tional knowledge and metalworking expertise, quality assurance techniques or awaiting certi-
the adoption of new ``hard'' technologies was cation by the FDA. Moreover, two local rms
relatively simple in that the logic of new had become ISO 9002 certied while at least 10
equipment could be easily understood, often other producers were condently expecting to
aided by reverse engineering. Local producers be certied in the course of the next year.
Export sales from the cluster stood at approx- agreed to nance, at a cost of US 1.6 million,
imately US$125 million in 1995-96, compared the development of a new, internationally rec-
with US$109 million in 199394.7 The numbers ognized, metal testing laboratory and a tech-
of exporting rms in the cluster had increased nical training facility in Sialkot, both to be
(to close to 400), as had physical production managed in partnership with SIMA.8 Finally,
levels, while quality levels were generally SIMA acquired approval from the government
acknowledged as having improved. Although for a revolving credit line, of approximately
the cluster has not yet fully extricated itself US$2.5 million, to provide soft term loans to
from the crisis there is evidence to suggest that local manufacturers.
it has managed to upgrade. In this sense, the The growing importance of SIMA can be
FDA crisis may well have been a dening gauged from the survey data that show that of
moment and a turning point for the cluster. the 60 rms sampled 61.6% reported using the
The question remains how has it done so? services of the association more now than they
Moreover, what implications arise for individ- did before the crisis. This pattern was similar
ual rms, and for the ways in which they are across dierent size categories of rms.
organized? How have ties with local suppliers Although the overall package took time to take
and subcontractors, and forward ties with shape, SIMA's response was seen by many
external buyers, changed? Has horizontal local enterprises as the best way to address the
cooperation that local rms have with each crisis. SMEs considered the predominance of
other, and through their trade association, representatives of large enterprises in SIMA's
become more pronounced? These questions are delegation an advantage to the cluster. As one
addressed below in Section 4 and Section 5. entrepreneur who ran a medium-sized rm
explained:
4. CHANGING HORIZONTAL TIES Owners of large rms have better contacts, they have
clout. Ministers in Islamabad will listen to them; they
wouldn't give small rm owners like me even an
A key aspect of the response by the Sialkot appointment. Also, large rms have good contacts
surgical instrument cluster to the FDA has abroad, they can speak better English, they can nego-
been the role played by the trade association, tiate far better on our behalf than we could (P.
SIMA. In particular, the trade body mobilized Ahmed, July 14, 1994).
the state to adopt a more supportive and
interventionist program for the cluster. This The relatively proactive stance adopted by
section reviews how horizontal joint action the association contrasts sharply with how it
generated cluster-wide gains. was perceived prior to the crisis. While SIMA
Evidence of greater horizontal cooperation in has a long history, having been set up almost
the cluster began to emerge soon after the ve decades ago, and all manufacturing and
FDA's action in May 1994. As mentioned exporting rms in the cluster are members, it
earlier, local producers quickly began to discuss has traditionally been seen as relatively inef-
how to face the challenge posed by quality fectual. It is meant to provide information on
assurance standards. Exchange of information markets, trade policy, technology and other
was the one arena where the majority of rms relevant issues to its members. It is supposed to
sampled reported an increase in cooperation assist them in resolving technical diculties and
with other producers. Much of this discussion in dealing with the state and other regulatory
took place within the trade association. As a bodies. It is also mandated to regulate business
result, SIMA began formulating a collective practices within the cluster. The 199394 survey
response within a month of the import ``ban'' found, however, a widespread consensus in the
being imposed. It put together a delegation, cluster that the Association was ill-informed
composed predominantly of owners of large with regards to technical and marketing infor-
rms, to visit the United States and negotiate mation, was unable to provide technical guid-
directly with the FDA. On failing to convince ance to its members and was not always
the United States regulators to accede to a eective as a `leader' or `voice' of the cluster's
phased process of GMP certication, SIMA collective interests. Its most common activity
turned to the Pakistani government for nan- was its occasional eorts at lobbying govern-
cial support to hire foreign consultants to help ment and representing the interests of member
local producers upgrade quality management rms with local state agencies, especially the
procedures. The federal government also customs and tax departments.
What made SIMA a more vocal and eective SIMA since 1994. At the time of the crisis, the
champion of cluster-wide interests following association was led by a chairman whose
the quality assurance crisis? In part, the expla- interests were said to be closely tied to those of
nation lies in changes that have taken place the leading large rms in the cluster. In 1995,
within SIMA since 1994. In 1994 there was a only ve rms (all large units) had managed to
widespread view, especially among SMEs, that get through the GMP hurdles set by the FDA.
large rms dominated SIMA's management Moreover, it had taken the association a full
and that their interests determined the associ- year to get an agreement with a foreign con-
ation's activities. While this perceived bias is sultant to obtain quality management training
dicult to substantiate, the majority of the for the cluster. In the annual elections held in
annually elected chairmen of SIMA over the 1995, the frustration felt by the SMEs in the
previous decade and a half had been owners of cluster at the slow pace of progress came to a
large rms. The Chairman has an important head. The sense of being marginalized within
function within SIMA, providing executive SIMA led to a process of mobilization by
day-to-day management and closely inuencing SMEs. Some of the more dynamic SMEs built a
the level of activity displayed by the association loose coalition with a few of the leading large
at any given time. rms in the cluster and a new panel of oce
The continuing dominance of larger pro- bearers was voted in the 1995 elections for
ducers in the working of the trade body was SIMA's executive committee. This panel, which
brought into question by the FDA action. was re-elected in 1996, has as its Chairman an
Representatives of large rms organized owner of a large enterprise. He is respected
SIMA's initial reaction, the formation of the widely within the cluster and much credited for
delegation. It was in their immediate interest to his eorts in accelerating the introduction of
negotiate with the FDA and thus ease the consultancy services on a cluster-wide basis.
shipment of ongoing consignments. SMEs also Thus, as one SME owner reports
stood to benet from this initiative; neverthe-
less large rms had the most at stake in terms of SIMA is now more active as a consequence of the
proportion of exports from Sialkot. SIMA's GMP and FDA issue. Before the big rms would hin-
der the activity of SIMA and of smaller rms. Now,
subsequent eort in getting state support for a through SIMA, all rms in the cluster, big and small,
consultant to provide GMP training to 200 can get the help they need to get through this [quality
rms within the cluster, however, provided a assurance] problem (Rashid, January 21, 1997).
benet that was particularly critical to SMEs.
Large rms could have obtained GMP certi- While individual agency mattered, the broad
cation by acquiring know-how and training coalition of interests and the mobilization of
from consultants directly although at a price (as collective concerns of SMEs made such pro-
some did). Alternatively, they could turn to gress feasible.
their foreign buyers for assistance on upgrading Of the steps initiated by SIMA, the most
(one leading US buyer had begun to provide important was clearly seeking external technical
such aid to the large manufacturers it dealt with knowledge on quality management. Acquiring
in Sialkot in 1994). In contrast, small rms were the know-how, via international consultants, to
in a weaker position. They were less likely to adopt the record keeping and documentation
have either the connections, or the large sales procedures necessary for quality assurance
volume, with more quality-conscious foreign certication became the critical element in
buyers to obtain the latter's support. Moreover, becoming GMP certied.
they lacked the resources to seek individual As mentioned earlier, implementing quality
solutions of hiring foreign consultants to management procedures, including reorganiz-
acquire the required know-how to upgrade. ing production to conform to quality assurance
The cluster-wide consultancy service, nanced requirements at each stage of production is in
by the state and organized through SIMA, many ways more dicult than the acquisition
made such know-how more widely accessible, of hard technologies. It requires quality train-
thus making it possible for many of the smaller ing, new management practices and the incul-
producers to obtain GMP certication and cation of quality-driven values. A number of
continue competing with their larger local external service providers, both Pakistani and
rivals. foreign, began oering training and consult-
How did this happen? In eect, there appears ancy services to local producers soon after the
to have been a discernible shift in power within May 1994 FDA action. The rst rm to be
GMP certied obtained its certicate by hiring, implying a need for greater, quality-intensive,
at a substantial cost, such a consultant. The information ows within the supply chain,
response of this large rm was a clear sign of potentially closer monitoring and eectively a
individual action in response to the FDA crisis. greater degree of reliance that suppliers meet
It bought the technical services and know-how new standards. In the new competitive scenar-
it needed to get it through the FDA barrier. Its io, failure by suppliers to conform to quality
costs were recuperated through its ability to sell assurance standards is potentially more harm-
again in the US market. ful to local producers. By the same token, once
While this rm pointed the way out of the suppliers are themselves certied as meeting
crisis, SIMA's action, in bringing in a quality quality assurance standards, the transaction
consultant for the cluster as a whole, trans- costs in vertical ties would decline, providing
formed the situation making such soft tech- an incentive to move to `àrms-length'' con-
nologies available to most rms in the cluster. tracts (Foss, 1996). This section draws on
The mandate for the consultant was to provide sample and case study evidence to examine if
training to 200 local producers on the man- producers in the Sialkot cluster increased ver-
agement, documentation, and record keeping tical cooperation with their local suppliers and
practices required for GMP certication. By subcontractors and their external buyers. In
late 1997, the US consultant rm had been doing so, it also explores how vertical ties are
operating in Sialkot for over a year, using the changing as a consequence of the quality
premises of the trade association as its base. assurance crisis.
Among the 133 rms that it helped through the One of the main ndings of the earlier study
FDA's certication process were small, medi- on Sialkot (Nadvi, 1996) was the importance
um and large enterprises. Most, although not of vertical linkages. Almost all of the 57 rms
all, large rms became GMP certied. Among surveyed in 199394 used subcontractors for
smaller enterprises, the fact that the consult- particular process activities, and relied on local
ancy services were heavily subsidized meant suppliers for stainless steel and other inputs,
that they were able to acquire the technical raw material and machinery. Similarly, most
expertise that would otherwise have been rms dealt directly with foreign buyers. Ties
beyond their reach. As the consultant's repre- with local subcontractors and foreign buyers
sentative observed `òur project in Sialkot is were often close. The majority of producers
operating on a level playing eldwe provide reported assisting subcontractors in production
services to everyone irrespective of their size'' organization (cited by 56% of rms surveyed in
(D. Narejo, January 28, 1994). 199394), and engaging in technical discus-
Horizontal joint action, especially through sions on issues relating to product quality.
the cluster's trade body, has played an impor- Similarly, manufacturers often sought and
tant part in making it possible for many local obtained help from their buyers. Buyers were
rms to cross the GMP certication barrier. one of the more frequently cited sources (re-
What does this certication process, and the ported by 85% of sampled respondents) for
quality assurance problem in general, imply for technical and marketing information, and
vertical ties that Sialkot's manufacturers have according to 46% of the sample had assisted
with their suppliers, subcontractors and buy- them in raising quality standards. Such ties
ers? Is there greater cooperation in these rela- were especially close for rms engaged in
tionships as a consequence of the quality subcontracting, or in joint venture partner-
assurance crisis? ships, with foreign producers.
The FDA crisis of 1994 could result in two
distinct ways of reorganizing ties with subcon-
5. CHANGING VERTICAL TIES tractors. The rst response was of producers
internalizing quality-critical stages in produc-
The hypothesis put forward in this paper is tion, where transaction costs of monitoring and
that the upgrading required to conform to ensuring that quality assurance requirements
quality assurance standards necessitates greater had been met outweighed the benets of sub-
inter-rm cooperation, both in horizontal and contracting. The second response was of rms
vertical linkages. The latter is particularly continuing, possibly even extending, the prac-
important. Quality assurance, to be eective, tice of subcontracting and engaging in greater
has to be ensured at all levels of the supply cooperation in vertical linkages as the preferred
chain. This requires upgrading of suppliers, path for upgrading.
There was some evidence for both types of decline in the degree of cooperation in ties with
responses. Most large rms had already inter- suppliers following the FDA crisis. While many
nalized a number of the more quality-critical aspects of these relationships, such as negotia-
stages in production. There were also signs tions over payment and delivery, remain as
that, in response to the FDA crisis, large rms before, in other areas there has been some
planned to further internalize production. This increase in cooperation. As Table 1 indicates,
was most clearly seen in the case of rms over half the sample had increased the exchange
entering into joint venture partnerships. For of information and experience with their sup-
example, one large rm, that had signed a joint pliers. This was especially so on issues of qual-
venture agreement with a German partner, ity. Thirty percent of rms sampled stated that
stated that the planned joint venture unit would cooperation with suppliers over quality
be a fully integrated plant with no subcon- improvement had risen since the 1994 crisis.
tracting-out. Another large rm proposed to There was no signicant pattern across rm size.
bring key subcontractors into its newly con- A key aspect of the quality assurance crisis
structed facility to ensure that they worked relates to the quality of stainless steel. It is
exclusively for the rm and were regularly widely reported in the cluster that pressure
supervised and monitored. from local producers and from the trade asso-
The second response, of closer collaboration ciation has resulted in improvements in the
in ties with subcontractors, however was more standards and manufacturing processes
common. This is not entirely surprising because employed by the scrap-based steel re-rolling
quality concerns were already a key element of sector in nearby Gujranwala. Local respon-
vertical ties prior to the FDA's action. Main- dents now consider local scrap-based stainless
taining quality standards and ensuring that steel to be on par, in quality terms, with some
product specications were met was the central imported stainless steel. Due to the FDA's
aspect of interaction between manufacturers pressure, and in line with the GMP require-
and subcontractors. Assistance and even ments, all steel bought locally is metal tested
supervision was regularly provided to subcon- before it is forged, and has the required trace-
tractors to ensure quality levels especially ability records. This ensures for manufacturers
where problems occurred (reported by 58% of (and their buyers) that, unlike before, the metal
rms sampled in 199394). The new quality composition of the steel conforms to require-
assurance standards, however, require more ments, that these quality standards are uniform
systematic and formalized inspection and doc- across the whole sheet of metal, and that the
umentation. The remainder of this section steel producer can be held accountable. The
analyzes how vertical ties changed in response improvement in local stainless steel has brought
to the new quality assurance principles imposed with it an increase in steel prices (by up to
by the FDA. 50%), much of which has been absorbed by
producers thanks to the devaluation of the
(a) Backward ties Rupee over this period. The key point to note is
that, in some respects cooperation with sup-
Take rst the ties with local input and raw pliers has increased and generated cluster-wide
material suppliers. No respondent reported a benets.
a
Table 1. Improvements in cooperation with suppliers
All rms Small rms Medium rms Large rms Kendall s

N 60 (%) N 21 (%) N 22 (%) N 17 (%) value
Increase in exchange of information 55.0 61.9 50.0 53.0 0.028

and experiences
Increase in cooperation to improve 30.0 23.8 31.8 35.3 0.089
quality
Change suppliers less often than 16.7 23.8 0 23.5 0.064
before FDA crisis
a
Source: Author Survey (1997).
Turning to ties with subcontractors, the pic- in Table 2 below. As this shows, while the
ture is more complex. A core requirement of internalization of most key processes has
international quality assurance systems is the increased, this has not, with the exception of
documentation of each lot and batch of pro- the ling stage, taken place on a large scale.
duction at each and every stage in production. The variation in this pattern by rm size is also
This implies that all batches have to carry not signicant. At the same time, it has to be
record cards for each process, listing who noted that subcontracting did not appear to
undertook the task, the defects that occurred at increase in the cluster. Only three out of the 60
that stage, the amount that was rejected as a rms surveyed reported increasing subcon-
consequence, and the results of each stage-wise tracting in any given process.
quality inspection. Where processes are put-out The aggregated data would imply that the
by manufacturers to subcontractors, the latter increased transactions costs associated with
are required to complete these documents, quality assurance monitoring and documenta-
referred to locally as ``travel cards,'' for each tion in any given process, with the possible
batch and each stage of the process that they exception of the ling process, do not sub-
undertake. The rm is responsible for the sub- stantively outweigh the gains that rms accrue
contractor fullling these requirements. In this from subcontracting. This, however, veils
situation the cost to the rm of the subcon- important dierences within the cluster. Case
tractor failing to keep to the quality assurance study evidence suggests that the process of
stipulations are high. internalization was signicant for some large
With one exception, manufacturers reported rms.
that subcontractors had diculty in furnishing Take the example of Amir Surgicals, a large
the correct documentation. Unlike most man- rm which in 1994 had 125 employees and sales
ufacturers subcontractors are often illiterate, in excess of US$1 million, the bulk of which
rarely maintain appropriate records, and usu- (90%) was to the US market. Prior to the FDA
ally lack the management training to meet action, the rm subcontracted all of its ling
quality assurance assessment and documenta- tasks to some 30 subcontractors as well as half
tion needs. Consequently, some rms ``ll-in'' of its polishing work to another 25 subcon-
their subcontractor's record cards themselves, a tractors. It has now internalized some of these
practice which raises doubts on the legitimacy activities and foresees reducing its reliance on
of overall standards certication within the external subcontractors even further. Since
cluster. Others carry out regular inspections 1994 sales have increased and the rm is
and monitoring of subcontractors for each expanding. As part of its expansion plan, a new
batch lot. A few rms, recognizing the higher unit is being built on Sialkot's outskirts. In this
transactions costs of monitoring, have begun to facility the rm plans to internalize all pro-
lower their extent of subcontracting. Others cesses. It will continue to use some of its current
have brought some of their key subcontractors subcontractors, especially for labor-intensive
into their premises in order to ensure moni- ling tasks. They will, however, have to work
toring and appropriate stage-wise documenta- from within the new premises.
tion.
The extent to which subcontracting declined It costs us a lot of time and eort to monitor that the
as a consequence of the FDA crisis is reected subcontractors follow the correct quality assurance
a
Table 2. Decline in extent of subcontracting in key process activities
Reduction in extent of subcontracting All rms Small rms Medium rms Large rms Kendall s
since FDA crisis N 60 (%) N 21 (%) N 22 (%) N 17 (%) value
Key processes
Forging 8.3 4.8 9.1 11.8 0.082
Milling & Grinding 11.7 4.8 13.6 17.7 0.055
Filing 23.3 14.3 27.3 29.4 0.139
Polishing 10.0 14.3 4.5 5.9 0.040
Heat Treatment 3.4 4.8 0 5.9 0.081
a
procedures. By having these subcontractors located precarious position, with poorer access to
within our larger compound we will be able to ensure external knowledge and to a guaranteed ow
that they prioritize our work and that they are fol- of work.
lowing the correct quality procedures. Also it be-
comes easier for us to do the documentation which
This trend also has consequences for small
will come with the ISO 9000 (S. Amir, January 21, and medium-sized rms. Take the case of
1997). Unimed, a medium-sized rm with a workforce
of 31 persons (six of whom were family mem-
Amir Surgicals gains in that its quality-re- bers) in 1994, and sales of US$350,000 pri-
lated monitoring costs are lowered while the marily to the German market. What
labor exibility that comes with subcontracting distinguished Unimed from other SMEs was its
is retained. adherence to high quality standards and the
In 1994 the extent of subcontracting was fact that it had acquired the technology to
already inversely related to rm size. As manufacture higher value-added instruments.
Figure 1 makes clear, most medium and all It relied extensively on process specialized
large rms internalize some intermediate pro- subcontractors with whom it had particularly
cesses (such as polishing) and all nishing close ties. A number of its subcontractors
tasks. The pattern of production emerging in reported in 1994 that they had gained more in
some large rms, as illustrated in the case of technical feedback through their relationship
Amir Surgicals above, indicates a desire to with Unimed than with many large rms. With
retain aspects of subcontracting while mini- rising quality standards in the cluster, and
mizing monitoring costs by ``bringing subcon- increasing numbers of GMP certied SMEs,
tractors into the rm.'' Supervision and Unimed lost its quality-based competitive edge.
monitoring costs associated with quality Unable to retain key buyers, it has seen a drop
assurance are kept low and core subcontrac- in sales. As a result, the volume of work sub-
tors are available on an assured basis. For contracted out has also declined. Many of
subcontractors, this practice is considered Unimed's more dynamic subcontracting units
advantageous in that they obtain rent-free are now seeking closer ties with large rms
space, their search costs for new work are which are more likely to provide them with a
much reduced as they can expect a regular continued ow, and potentially larger volume,
stream of work, and they get access to new of work. Consequently, the intensity and depth
forms of knowledge (and potentially training) of the technical dialogue that the Unimed for-
from outside the cluster. Subcontractors merly enjoyed with its subcontractors has
remain responsible for their own labor, its diminished.
training and for some machinery, and they Despite the somewhat uneven patterns of
continue to be paid on a piece-rated job basis. change in subcontracting, it appears that
Firms that have adopted this practice have cooperation with subcontractors has increased
identied a core group of rst-tier subcon- following the quality assurance pressures. As
tractors with whom ties are closer. Subcon- Table 3 shows, three-quarters of sampled rms
tractors left outside this rst-tier are in a more reported an increase in cooperation with sub-
Figure 1. Subcontracting in key process activities by rm size. (Kendall s signicant at 95% for grinding and ling
processes and at 90% for forging.)
a
Table 3. Improvements in cooperation with subcontractors
All rms Small rms Medium rms Large rms Kendall s

N 57 (%) N 21 (%) N 21 (%) N 15 (%) value

& experiences
quality

Increase in cooperation in technical 12.3 4.8 9.5 26.7 0.238
upgrading
Increase in cooperation in production 35.1 23.8 42.9 40.0 0.180
organization
Increase in cooperation in labor 22.8 14.3 23.8 33.3 0.186
training
Change subcontractors less often 36.9 23.8 47.6 40.0 0.164
than before FDA crisis

Kendall s signicant at 90%.
a
contractors on quality improvement. Almost (b) Forward ties

two-thirds of the sample stated that there was a
greater exchange of information and experience Forward linkages with external buyers were
in these ties. Moreover, a third of the total seen in 1994 as a key source for the soft tech-
sample noted that subcontractors were changed nology necessary to pass the new quality
less frequently than before, indicating more assurance standards, and thus a critical link for
consistent arrangements. In none of these areas local producers to upgrade. As the manager of
of increased cooperation was rm size signi- one rm suggested: ``With these new require-
cant. ments on quality control, we need to have ties
No rm reported a decline in cooperation with foreign buyers to get us through the new
with subcontractors as a consequence of the standards'' (S. Tariq, July 16, 1994). In 1994,
quality assurance pressures. Yet, there are clear some buyers had begun to take the initiative,
gaps where increased cooperation did not assisting local rms by providing quality
occur. Thus, 88% of respondents report no assurance training manuals and developing
increase in cooperation with subcontractors on management processes and software packages
the issue of technical upgrading of equipment. for quality assurance documentation.
Some 77% report no change in cooperation on Since then, ties with buyers have altered in
labor training (where the onus continues to rest several ways. Although the overall quality
with the subcontractor), while 65% state no standards of Sialkot's instruments has
change in cooperation with subcontractors on improved, and a number of local producers are
improving production organization. Coopera- now GMP certied, unit prices of instruments
tion with suppliers, and more so with subcon- manufactured in Sialkot have fallen in the
tractors, has focused on information exchange world market. According to local respondents,
and on discussions aimed at raising quality this decline in price is a direct outcome of the
standards. While not denying the importance of competition prevalent in the US market, par-
such exchanges, further collaboration in supply ticularly among US-based Pakistani market
chains on issues of labor training, production agents. More established and larger US buyers
organization and technical upgrading, have yet have gained. The fact that a signicant number
to take place. of Sialkot's producers, both large and small
These ndings suggest that the demands of rms, are now GMP certied has also had an
quality assurance are changing the pattern of impact. Thus, while there is evidence that the
subcontracting in the cluster, with greater dif- crisis led to the forging of closer relationships
ferentiation between producers and among between some buyers and producers, many
subcontractors. At the same time, cooperation buyers moved to more transient, market-ori-
with subcontractors has tended to increase. ented ties in order to benet from the overall
drop in price and the rising quality standards become more consistent and long standing.
prevalent in the cluster. Unlike backward linkages, rm size appeared
This, for example, was the most important to be more signicant a factor in upgrading of
factor behind the decline in the fortune of forward ties. Large rms tended to have
Unimed, the medium-sized rm discussed increased cooperation with buyers more so
above. Despite the fact that it did not sell to the than small and medium enterprises.
US market, Unimed was one of the earliest Case study evidence again helps bring out
SMEs to seek GMP certication. According to more sharply how the nature of forward ties are
the owner, ``the GMP certication was free, so changing. Take again the example of Amir
we thought it was worthwhile going through it, Surgicals. Unlike Unimed, which saw its close
and we hoped it might impress some of our links with its European buyers weaken, Amir
European parties [buyers] as well'' (Rashid, Surgicals has become more closely tied to its
January 22, 1997). Yet, it has had to compete leading buyer. In 1994, the rm owner had
with a larger number of local producers trying stated his preference for a diversied set of
to sell in the relatively more quality-driven buyers within and across his leading export
European market, following the initial FDA markets. At that time he pointed out that
ban. Unimed lost orders with some of its long-
standing buyers who could now source more
we have one very big buyer in the US who takes about
cheaply from other quality assured suppliers in 60% of our total output. He would like to purchase
the cluster. more from us. In fact to satisfy his demand we would
While the decline in prices was a general have to more than double our capacity. But we don't
experience, the relationships with buyers did want to get too tied and dependent on him, although
not always deteriorate. In fact, Table 4 shows this American client has been very good for our busi-
increases in cooperation with buyers following ness. Instead we try to ensure that at least 40% of our
the quality assurance crisis: 62% of rms sam- production is sold to other buyers, not only in the US,
but also in Europe and the Far East. It is good to be
pled reported an increase in exchange of diversied this way (S. Amir, Febuary 22, 1994).
information, while 65% reported greater coop-
eration with buyers over quality control and
quality improvement issues. In contrast, only a This diversication proved dicult to main-
minority of rms experienced increased coop- tain. Following the FDA's action, Amir Sur-
eration with buyers in developing quality gical was faced with the prospect of having to
assurance systems and reorganizing produc- shut down its operation given that the bulk of
tion. Finally, a quarter of the sample (and its production was destined for the US market.
almost half the large rms interviewed) stated The rm sought alternative end markets, in
that buyers were changed less often than before Europe and especially in Japan. To some extent
the FDA crisis, indicating that these ties had this was achieved, nevertheless the dependence
a
Table 4. Improvements in cooperation with buyers
Ties with buyers All rms Small rms Medium rms Large rms Kendall s
N 60 (%) N 21 (%) N 22 (%) N 17 (%) value

& experiences
quality

Increase in cooperation in technical 16.6 4.8 18.2 29.4 0.251
upgrading
Increase in cooperation in produc- 3.4 0 9.1 0 0.021
tion organization
Increase in cooperation in develop- 29.3 (n 57) 30.0 (n 20) 27.2 31.3 (n 15) 0.021
ing quality assurance system

Change buyers less often than 26.7 9.5 27.3 47.0 0.370
before FDA crisis


a
on the US market remained. Its leading US assistance was provided directly at the shop
buyer oered to assist, by selling Amir's output oor to resolve quality related problems. In
under its own brand name and providing its this process, Ameritrade's Sialkot representa-
own quality guarantees. tive became a technical knowledge bank for its
local suppliers. Many local producers consid-
They [the US buyer] were willing to put their quality ered this a key relationship and Ameritrade
reputation on the line for us. This enables us to get itself also beneted: reject rates declined sub-
around the FDA barriers and to continue production stantially.
at a time when most of the industry in Sialkot were
barred from the US market (S. Amir, January 21,
In keeping with the importance that
1997). Ameritrade attached to its technical assistance
role within the cluster, Ameritrade's Sialkot
There was however a cost to this arrange- oce began to assist its local suppliers soon
ment. The buyer placed a condition that Amir after the FDA crisis. It helped them develop
Surgical would not market its product in the statistical process control packages and design
United States through any other agent. This documentation for quality assurance systems.
buyer now takes three-quarters of the rm's At the same time, Ameritrade's representative
output. In addition to this dependence, further was clear that Sialkot's producers had to
disadvantages are emerging from this agree- adopt rapidly the quality assurance require-
ment. ments or lose key buyers. Since 1994 the
nature of Ameritrade's relationship with the
cluster has radically changed. It continues to
My US buyer sells a smaller and more standardized
range of instruments than I used to manufacture be- purchase large quantities of Sialkot-made sur-
fore. So there are a number of items that were very gical instruments, almost at the same level as
protable which I am no longer producing. In terms in 1994, but it no longer maintains close
of prices I am also tied (S. Amir, January 21, 1997). technical ties with its local suppliers and has
downsized its Sialkot operation. The local
The rm's predicament is not unique. A representative in Sialkot provides Ameritrade
number of local producers report a growing with intelligence on the cluster as a whole, on
reliance on key foreign buyers since the FDA local rms from whom purchases are being
crisis. Buyers have also begun to adjust their made and on the progress these rms have
relationships with Sialkot's manufacturers and made on quality assurance. Given that all
in doing so have tried to improve their position instruments now being sold in the US are

vis-a-vis the cluster. There are two ways in GMP certied, however, the quality-related
which this has happened. The rst is, the transaction costs that Ameritrade previously
experience observed in Amir Surgicals, where had to bear are now much reduced. Moreover,
the weak position of the producer has allowed this reduction in quality-related transaction
the buyer to negotiate better terms. The rela- costs has been achieved without Ameritrade's
tionship between specic buyers and producers intervention.
is sustained, but the terms of trade are shifting
in the former's favor. Second, buyers have Ameritrade, and other buyers like it, realized that
begun to shop around much more than before. once the Pakistani government got interested into
Thus, as with Unimed, long-standing buyers the quality assurance issue and were keen to provide
assistance to the cluster, the FDA problem could be
have sought out cheaper alternative sources in solved without them [the buyer] having to invest fur-
Sialkot. ther in raising quality standards. That is why we have
In fact, as a consequence of the fact that a almost stopped our earlier quality control programme
signicant number of local producers have here (N. Rahim, January 21, 1997).
become GMP certied and that prices have
fallen, technical ties that buyers had with In summary, both the quantitative and the
Sialkoti producers have in some cases weak- qualitative data help bring out the ways in
ened. Take, for example, the case of a leading which vertical ties are changing in the Sialkot
US buyer of disposable instrumentsAmeri- cluster. Although at times apparently contra-
trade. Prior to the FDA crisis of 1994 dictory, case study and survey ndings together
Ameritrade directly monitored the production provide a more nuanced understanding of how
quality of its dozen large suppliers in Sialkot. vertical ties have evolved as a consequence of
Frequent and regular on-site inspections were pressures to meet international quality assur-
carried out and, where needed, technical ance standards. Ties with local steel suppliers
have improved, resulting in a higher quality challenges posed by the new quality assurance
raw material base. As far as ties with subcon- standards. Section 4 and Section 5 indicate
tractors are concerned, the higher costs of that, while uneven, increasing collaboration has
monitoring quality have led to some large rms been observed in both horizontal and vertical
internalizing more activities and ``bringing linkages. This section examines whether rms
subcontractors into the premises.'' The survey that have increased cooperation have per-
evidence suggests however that internalization formed better. Evaluating the relationship
is not a universal trend, not even among large between changes in levels of cooperation and
rms. SMEs, in particular, continue to rely on rm growth allows for an assessment of the
subcontractors for a wide range of tasks. cluster's growth trajectory. In addition, disag-
Nevertheless, subcontractors are also becoming gregating this relationship facilitates an
more dierentiated as large rms seek to appraisal of the types of interrm relationships,
develop rst-tier suppliers. This has conse- both local and external, that are becoming
quences for SMEs who formerly had close, and more critical for growth. The discussion below
often technically rich, ties with their subcon- is structured as follows. First, using the survey
tractors. Forward ties to foreign buyers have data, indices of performance and cooperation
also become weaker in some cases, and in are generated, and the correlation between
others closer and often more dependent. Buy- these various indices analyzed. Second, regres-
ers have been able to bring about a shift in sion analysis is carried out to assess if there is a
their favor in the terms of trade as price com- signicant association between cooperation
petition has forced down unit prices for Sialk- and performance.
ot's instruments. Is this a long-term response Cooperation indices were developed for ties
on the part of buyers, or are they likely to with suppliers (COPSUPL2), with subcontrac-
(re)build technical ties with Sialkot's producers tors (COPSUBC2), with buyers (COPBUYR2),
as prices stabilize? Again the evidence from the with other rms (COPFIRM2) and with the
quantitative survey suggests that greater trade association (COPSIMA2).9 Table 5 pro-
cooperation in vertical ties is most pronounced vides the frequency distribution for these indi-
in links with buyers, especially for larger rms. ces of cooperation.
But such increases in cooperation were limited The majority of rms sampled stated there
to exchange of information and quality had been a small increase in cooperation in all
improvement and did not extend to broader the cooperation indices. The index for cooper-
concerns of technological and organizational ation with other rms was dropped from sub-
change. sequent analysis as none of the sampled rms
reported an index value of greater than 0.5.
The extent of such horizontal collaboration
6. COOPERATION AND PERFORMANCE: was limited and had not changed since the
IS THERE A RELATIONSHIP? FDA crisis. The only area where there was a
signicant increase in such horizontal cooper-
This section statistically evaluates the rela- ation was in exchange of information and
tionship between rm performance and coop- experience with other rms (55% of the sample
eration, both vertical and horizontal. To recap, reporting an increase), much of which took
our contention has been that Sialkot's rms place at the time of the crisis and had since
must engage in greater joint action to face the diminished.
Table 5. Changes in cooperation indices since the FDA crisis
Big increase Small increase No change Small decrease Big decrease

>1.0 01.0 0 1.0 to 0 >1.0
(%) (%) (%) (%) (%)
COPSIMA2 11.7 61.7 25.0 1.7 0 N 60

COPFIRM2 0 53.3 46.7 0 0 N 60
COPSUPL2 0.7 54.9 41.7 1.7 0 N 60
COPSUBC2 11.7 70.0 18.3 0 0 N 60
COPBUYR2 5.1 72.4 17.2 5.1 0 N 58
The aggregated performance variable It is also apparent that (at the 1% level of
(PERF2) was developed through principal signicance) there is a positive correlation
component analysis, using the SPSS package. between cooperation with suppliers and coop-
PERF2 consisted of the three performance eration with subcontractors. This suggests that
variables that had the highest factor loadings rms which cooperate more closely with sub-
for the main factor (which was seen to account contractors do the same with input suppliers.
for 39.6% of the total variation). These are: There is no signicant relationship however
growth over the past ve years in sales between cooperation in backward ties and
(Q2ASALES), improvements in product qual- cooperation with buyers. This is an important
ity (Q2FQUAL), and in employment result, suggesting that while performance is
(Q2GWRKRS). most closely related to improved ties with
As a rst step in assessing the relationship buyers, greater cooperation with buyers is not
between the aggregate measure of performance correlated with improved ties with suppliers
(PERF2) and the cooperation indices, Kendall and subcontractors. Clearly, this indicates a
Correlation Coecients were generated. As weakness in the vertical chain relationship.
Table 6 shows, the performance measure is Firms appear to address concerns of improving
signicantly and positively correlated (at the their ties with external buyers independently of
1% level) with the cooperation with buyers their relationships with local suppliers and
index (COPBUYR2), and with the cooperation subcontractors.
with subcontractors index (COPSUBC2). The It is important to consider whether there is a
coecient is particularly high with cooperation causal relationship between increasing cooper-
with buyers suggesting that overall perfor- ation and improved performance. To explore
mance and rm growth is most closely associ- this, simultaneous and step-wise regression
ated with collaborative ties with buyers (0.436), methods were used to estimate the following
followed by ties with subcontractors (0.286). equation:
Ties with suppliers also has a positive associa-
tion on performance, however, this is only PERF2 b1 b2 COPSIMA2
signicant at the 10% level. Interestingly, col-
laboration through the trade association SIMA b3 COPSUPL2 b4 COPSUBC2
appears not to be associated with performance. b5 COPBUYR2:
This result, while appearing to diverge from
what the qualitative ndings suggests, supports The simultaneous multiple regression led to
the notion that sequencing and timing of sup- the coecients for the independent variables
port is important. SIMA played a critical role shown in Table 7.
at the time of the crisis through a number of While the R2 value is relatively low, there is a
strategic interventions. Once the required path clear positive and signicant coecient for the
to address the FDA's concerns had been cooperation with buyers and cooperation with
adopted, its inuence diminished. subcontractors indices. As can be expected this
Table 6. Correlation of performance and cooperation (Kendall coecients)
COPSUPL2 0.1768
N(60)
Sig 0.090
COPSUBC2 0.2235 0.3739
N(57) N(57)
Sig 0.029 Sig 0.000
COPBUYR2 0.0846 0.0878 0.1225
N(58) N(58) N(55)
Sig 0.403 Sig 0.406 Sig 0.238
PERF2 0.0759 0.2011 0.2861 0.4358
N(60) N(60) N(60) N(58)
Sig 0.440 Sig 0.051 Sig 0.005 Sig 0.000
COPSIMA2 COPSUPL2 COPSUBC2 COPBUYR2
a
(Coecient/(Cases)/2-tailed Signicance).
Table 7. Simultaneous multiple regression Table 9. Simultaneous equation regression with rm size
CONSTANT 0.033 CONSTANT 0.506

COPSIMA2 0.053 COPSIMA2 0.076
COPSUPL2 0.291 COPSUPL2 0.390
COPSUBC2 0.513 COPSUBC2 0.264
COPBUYR2 1.043 COPBUYR2 0.926
Multiple R: 0.611 R2 : 0.374, Adjusted R2 : 0.323 SIZE 0.285
Multiple R: 0.654 R2 : 0.428, Adjusted R2 : 0.370

T-value signicant at 10%.

T-value signicant at 1%. T-value signicant at 10%.


Table 8. Step-wise regression
CONSTANT 0.039 closely associated with growth. None of the

COPSUBC2 0.581 other variables are signicant. Carrying out
COPBUYR2 1.085 this exercise using a step-wise regression
Multiple R: 0.603 R2 : 0.364, Adjusted R2 : 0.340 method reveals similar results. What this

implies is that if rm size is taken into con-
sideration, greater cooperation in forward ties
still has a positive and signicant inuence on
performance.
is further borne out by the step-wise regression

method (where the variables COPSIMA2 and 7. CONCLUSION
COPSUPL2 were dropped). This results in a
slightly better t, and a higher level of signi- The evidence above shows that, in response
cance for the variable COPSUBC2 (see to the pressures posed by the quality assurance
Table 8). crisis, there has been upgrading in manufac-
These ndings substantiate the earlier results turing practices in the Sialkot surgical instru-
that performance (and thus growth) over the ment cluster. Furthermore, such upgrading has
previous ve years has been associated with involved greater joint action, both in vertical
increasing cooperation in ties that local rms and horizontal ties. Joint action has also been
had with their buyers and their subcontractors. positively associated with improved rm per-
Cooperation in forward and backward ties formance. This suggests not only that the col-
inuence performance. There is no evidence to lective eciency model continues to be valuable
suggest, however, that this is the case for hor- in explaining the competitive advantages that
izontal cooperation, nor is it clear that coop- local producers gain by virtue of being located
eration in forward ties is necessarily associated in a sector specialized cluster, but also that
with cooperation further down the supply sustained competitiveness demands local joint
chain. action.
To further strengthen this nding, it would In terms of backward ties it appears that
be important to see how the performance is links with suppliers have led to signicant
inuenced by other factors not directly related improvements in the quality of stainless steel
to cooperation. This requires conducting a used. With regard to the widespread practice of
regression analysis for the same equation above subcontracting within the cluster, the trend on
but with a further independent variable for rm joint action is less clear. There is evidence to
size (SIZE). This is reported below using a suggest that some large rms are moving
simultaneous equation method (see Table 9). toward greater internalization of production as
Introducing rm size into the picture clearly a way to reduce quality-related transaction
has some inuence on the specications of the costs. This practice has involved `ìn-house''
equation and on the relationship with perfor- subcontracting and has resulted in the emer-
mance. Firm size is positively and signicantly gence of rst-tier suppliers with whom large
correlated with performance. It is also appar- rms have closer ties, not only for purposes of
ent however, that cooperation with buyers monitoring but also for quality upgrading. It
(COPBUYR2) remains the variable most remains to be seen how widespread this practice
will become and the consequences it will have were present before the FDA crisis and which
on subcontracting more widely within the remain an issue: poor infrastructure, and san-
cluster. For most medium and small rms, itation, low safety and health standards and
subcontracting remains a signicant element of the continued use of child labor. Sialkot's
production organization. There are signs of other leading export cluster, the sports good
greater cooperation in ties that SMEs have with industry, has seen the damaging eect the use
their subcontractors. It is also apparent, how- of child labor can have on its global reputa-
ever, that with the exception of the use of tion and on its exports (Marcus and Harper,
`travel cards', there is little to suggest that such 1996; Save the Children Fund, 1997). Child
ties have technically improved. Quality con- labor is less of a problem in the surgical
cerns were an important feature of these rela- instrument sector but it does exist. SIMA has
tionships before the FDA's actions, yet there begun to work with its members to ensure that
are no apparent signs to show a qualitative they do not use child labor. It has not, how-
upgrading within such production linkages as a ever, been able to change practices among
consequence of the new competition. subcontractors where some child labor can be
Greater cooperation with buyers emerges as found.
statistically the most signicant factor associ- Another area where there remains a collec-
ated with rm growth, even when accounting tive failure within the cluster is environmental
for rm size. In some cases it is apparent that costs of surgical instrument manufacturing.
forward ties have weakened, due to price The GMP and ISO 9000 quality assurance
competition and reduction in unit prices that requirements are only the rst stage in an
have been seen in the leading export markets, increasingly more stringent and quality-driven
and as a consequence of certication itself. On market environment. ISO 14000 requirements
the whole though, ties with external buyers are likely to follow hard on the heels of the
have grown in importance in the cluster, par- current quality-assurance demands. This will
ticularly as conduits of information and new become another important area for the Sialkot
know-how. It is also apparent that they have cluster where joint action could lead to signi-
led to a shift in the terms of trade in favor of cant improvements in working conditions,
buyers. Meanwhile horizontal joint action, health and safety standards, pollution control
particularly through the trade association, has and overall improvement of the physical
been a key arena for strategic local cooperation environment in which manufacturing takes
and has generated cluster-wide advantages. The place.
association helped connect local producers to Similarly, the poor condition of local infra-
external technical know-how at a critical junc- structureespecially power supply, roads, and
ture in the crisis, allowing SMEs to access sewerageact as an inhibiting factor on the
knowledge that was prohibitively costly. The cluster's potential growth. Again, local pro-
association also mobilized the state to intervene ducers have not yet explored the possibility of
at this point. joint action. All of these are issues that the
Has the joint action that has occurred been cluster will have to address if it is to raise its
wholly benecial for the cluster or not? Sialk- productive eciency and continue to meet the
ot's response to the FDA crisis provides clear increasingly stringent standards that Western
signs of greater collective action as well as ele- markets demand.
ments of what I term collective failurethat is A particularly important aspect of collective
to say, where collective action failed to take failure, highlighted by the survey data on
place, or where the actions of local agents led to changes in horizontal and vertical ties, is the
a deterioration of their collective position. limited increase in inter-rm cooperation aimed
The previous sections provide an account of at bringing about improvements in labor
how vertical and horizontal production and training. The cluster's skill base is traditional,
trade ties have changed since 1994. In some and to some extent artisanal. It has been a key
cases these developments have also led to the factor in generating the cluster's competitive-
emergence of further problems for the cluster, ness. As the quality assurance crisis has indi-
and there are other areas where the lack of cated, however, the nature of markets are
joint action has meant that existing problems rapidly changing, calling for new skills and
remain unresolved. These areas of collective undermining the basis of traditional practices.
failure include the inability of the cluster to In this rapidly changing environment, a failure
address a number of collective problems that to improve labor skills and to build the cluster's
technical capacity does not bode well for its cluster to the crisis in quality assurance. There
ability to upgrade in a sustained fashion. has been extensive local cooperation especially
On the specic and immediate issue of through a more invigorated trade body. Joint
quality assurance, however, there was a signi- action in vertical ties is apparent, but uneven.
cant increase in interrm cooperation. This Alongside examples of collective action there
conclusion needs to be qualied. Once agents remains collective failure. The evidence sug-
(and more broadly the cluster as a whole) are gests that a process of dierentiation has
certied as meeting regulatory standards, resulted, with SMEs being squeezed while
transaction costs for external buyers engaging larger producers are better positioned to switch
with local producers are eectively lowered. gears and become internationally certied in
Standard certication assures that rms con- quality assurance. At the same time the more
form to international quality assurance proactive stance of the trade body and its role
requirements. Standards, therefore, provide a in facilitating the provisioning of quality-relat-
basis for what Zucker (1986) refers to as insti- ed services to the cluster as whole has allowed
tutional trust. This can potentially allow for the many SMEs to upgrade and comply with GMP
existence of arms-length contracts between standards. What is of importance and at issue,
agents within the supply chain. The institu- however, is not so much the demise of smaller
tional trust encapsulated in GMP certication rms but the survival and continuing growth of
has for some buyers meant a return to arms- the cluster as whole. Here there may be evi-
length contracts with local producers. Such dence that Sialkot's surgical instrument cluster
buyers could loosen their longstanding ties with may manage to rise to the challenge. Clearly the
local producers and search out cheaper alter- ability of the cluster to do so will rest in large
native suppliers. measure on the issue of local governance. The
Nevertheless, ensuring that the cluster as a type of governance determines the nature of
whole complies, and that local rms therefore inter-rm relations within vertical supply
obtain the benets of this reputation eect, chains that link local suppliers and manufac-
requires eective local governance and regula- turers to external markets, as well as the
tion. Cooperation of private actors is not suf- strength of horizontal relations that provide the
cient and the state has a role to play here. In basis for collective joint action within the
subsidizing the costs for local rms to obtain cluster. The challenge for the Sialkot cluster is
the know-how to get through the GMP hur- to address the collective failures pointed out
dles, the state in coordination with the trade above. The increasing dierentiation makes it
association provided the cluster's producers, dicult to rely entirely on the cooperation of
particularly SMEs, with a way through the private actors to solve these problems. Public
crisis. intervention in partnership with private initia-
Thus this study indicates a mixed story on tive is required to sustain the cluster's compet-
the response of the Sialkot surgical instrument itiveness.
NOTES
1. On labor standards see, for example, Sengenberger 3. For reasons of condentiality all rm and respon-
and Campbell (1994), ILO (1997) and Lee (1997). On dent names, where reported, have been altered.
standards and global ``value chains,'' see Brown et al.
(1993). On ethical standards, see Zadek and Tien 4. The survey instrument was based on one developed
(1996) on fair trade initiatives, Hilowitz (1997) on social jointly with Peter Knorringa, Roberta Rabellotti and
labeling and van Liemt (1998) and Murray (1997) on Hubert Schmitz.
corporate codes of conduct.
5. On the cluster's history see Nadvi (1996).
2. The paper is based on research undertaken prior to
the nancial crisis that Pakistan faced in 1998 following 6. The consultant does not do the actual GMP
the explosion of nuclear devices and, therefore, does not certication. That is left to the FDA. Its task is simply
take into account the impact of these events on the to train management on GMP and TQM issues. This is
cluster. done through day-long seminars, the dissemination of
quality related literature, on-site training and pre-certi- of backward, forward and horizontal relationships. The
cation inspections. ve possible responses for each variable, from ``big
increase'' to ``big decrease'' were coded on a range of +2
7. Source: SIMA and Federal Bureau of Statistics. to 2, with no change being coded as 0. Variables that
were seen to have been insignicant for this particular
8. It should be noted, however, that by December 1997 case study (such as speeding up delivery) were dropped
neither facility had been set up. from the analysis, while others that were unique to the
Sialkot cluster (such as help in developing quality
9. The index was generated by attaching equal weights assurance systems) were included in the respective
to each of the specic relevant variables in each category indices.
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World Development Vol. 27, No. 9, pp.

Collective Eciency and Collective Failure: The

1. INTRODUCTION tari barriers to trade (Stephenson, 1997; EC,

1999). Local producers have beneted from 2. QUALITY ASSURANCE STANDARDS

All rms Small rms Medium rms Large rms Kendall s

Increase in exchange of information 55.0 61.9 50.0 53.0 0.028

All rms Small rms Medium rms Large rms Kendall s

Increase in exchange of information 64.9 57.1 66.7 73.3 0.140

contractors on quality improvement. Almost (b) Forward ties

Table 5. Changes in cooperation indices since the FDA crisis

Big increase Small increase No change Small decrease Big decrease

COPSIMA2 11.7 61.7 25.0 1.7 0 N 60

Table 6. Correlation of performance and cooperation (Kendall coecients)

CONSTANT 0.033 CONSTANT 0.506

Table 8. Step-wise regression

CONSTANT 0.039 closely associated with growth. None of the

is further borne out by the step-wise regression

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