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Procedia - Social and Behavioral Sciences 65 (2012) 867 872

International Congress on Interdisciplinary Business and Social Science 2012 (ICIBSoS 2012)

Moderating Effect of Cluster on Firms Innovation Capability and Business Performance: A Conceptual Framework
Wawan Dhewantoa, Eko Agus Prasetioa, Sudrajati Ratnaningtyasa, Sri Herlianaa, Rendra Chaerudina, Qorri Ainaa, R.Bayuningrat H.a, Evy Rachmawatya
a

School of Business and Management, Bandung Institute of Technology, Jl. Ganesha 10, Bandung, 40132, Indonesia

Abstract This paper tries to conceive a conceptual framework for analysing cluster effect on firms innovation capability and firms business performance. This paper is written as part of the research on information and communication technology (ICT) innovation cluster in West Java, Indonesia. Analysis on the firms innovation capability including its factors will be elaborated and followed by the discussion on firms business performance. The relationship of firms innovation capability and business performance will be discussed while considering the effect of clusters in terms of clusters effect as a value chain cluster, as a coopetition cluster and as a resource-shared cluster. Cluster is hypothesized to have moderating effect on the relationship between firms innovation capability and business performance.Conceptual framework from this paper will be used at preliminary stage of the research on ICT innovation cluster that can be expected to contribute into the development of ICT cluster in West Java in particular and Indonesia in general.
2012 The Authors. Published by Elsevier Ltd. 2012 Published by Elsevier Ltd. Selection and/or peer-review under responsibility ofJIBESUniversity, Jakarta Selection and peer-review under responsibility of JIBES University, Jakarta
Keywords: ICT cluster; innovation capability; business performance; moderating effect

1. Introduction 1.1. Research as part of MP3EI research of ICT Innovation Cluster in West Java This paper is written as part of the ICT Innovation Cluster Research in West Java, Indonesia. The research is conducted inside the framework of the program of Government of Indonesia known as Master Plan untuk Percepatan dan Perluasan Ekonomi Indonesia (MP3EI) or Acceleration and Expansion of Indonesia Economic Development Masterplan. MP3EI include three main elements: (1) developing six economics corridors. In the implementation of economic corridors, economic development will focus on the synergy of regional and sectoral development to get national benefit. This research places in the second corridor of Java corridor which has priority of developing information and comunication technology (ICT) sector among other priorities. (2) strengthening national connectivity; and (3) national science and technology acceleration to support the development of main program. (Eurocham)
1877-0428 2012 The Authors. Published by Elsevier Ltd.

Selection and peer-review under responsibility of JIBES University, Jakarta

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1.2. Overview on Cluster and ICT Cluster Porter (1998) defined clusters as ... geographic concentrations of interconnected companies and institutions in a particular field. Clusters encompass an array of linked industries and other entities important to competition. They include, for example, supplier of specialized inputs such as components, machinery and services, and providers of specialized infrastructure. Clusters also often extend downstream to channels and customers and laterally to manufacturers of complementary products and to companies in industries related by skills, technologies, or common inputs. Finally, many clusters include governmental and other institutions such as universities, standard-setting agencies, think tanks, vocational training providers, and trade associations that provide specialized training, education, information, research and technical support. As elaborated by Porter (1998), industrial cluster refers to firms and institutions in close proximity to each other in a particular field and area maintaining an interactive relationship, influencing and supporting each other, where production efficiency is achieved and externalities are created through a fine division of labor. Cluster can be characterized by four constituent elements. Clusters facilitate agglomeration economies arising from spatial proximity (Porter, 2000). They are also characterized by sectorial concentration meaning that most of the firms belong to a particular industry or technology field. Interaction among regional stakeholders distinguishes clusters from pure agglomerations. Finally, clusters are characterized by a high degree of stickiness of specific knowledge (Gertler and Wolfe 2008, LeSage and Fischer 2012) in which such embedded knowledge is based on routines, habits and norms established through collaborative experience (Moodyson and Johnson 2007, Bathelt et al. 2004).

Figure 1. Cluster element (adapted from Terstriep and Lthje, 2009) Grondeau (2004) suggested that innovation and communication technology (ICT) clusters seem to be an evolution or declension of technoples (science parks). The estimation from IASP (the International Association of Science Parks) mentioned that 26% of all of its members were ICT clusters showed the importance of these technologies. He mentioned Silicon Valley as one of the most successful ICT clusters and described elements that contribute to the development and success of it.He also described the emergence of Asian ICT clusters as the serious competitor, especially those in Taiwan and India.

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1.3. Previous Research and Gap Some empirical studies had been conducted in examining the effect of clustering on innovation. For example, Khan and Gani (2004) in their research on Faisalabad textile cluster in Pakistan argued about the importance and role of cluster in facilitating technological innovation as well as entrepreneurship. Cluster has a role in decreasing the risks of failure as well as promoting the diffusion of new technology. Stone (2005) described how close collaboration and knowledge spillover caused the revival of apparel cluster in South Carolina, USA.Eventhough in the short run clustering is beneficial, Beal and Gimeno (2001),on the other hand, argue that the benefits of agglomeration or clustering are decreasing over time and even reduce firm-level incentive for engaging into innovative activities,. Existing literatures on cluster effect on the relationship between firms innovation capability and business performance are focused on industrial clusters. Hence, this paper would like to conceive the conceptual framework of moderating effect of cluster in the relationship between firms innovation capability and business performance in ICT clusters. 2. Literature Review 2.1. Cluster and Firms Innovation Capability Innovation capability is defined by Adler and Shenbar (1990) as identified in its four dimensions, as follows: (1) ability to develop new products that meet market needs; (2) ability to apply appropriate process technologies to producing these new products; (3) ability to develop and adopt these new products and process technologies to satisfy future needs; and (4) ability to respond to related technology activities and unexpected activities created by competitors. Shapira (2008) pointed out that firms can benefit from spillover effect stimulated through collaborative relationship with nearby institutions, labor training, and access to market information within regional cluster. The study of Anderson (1994) disclosed three types of industrial clusters. The first category is buyer-supplier relationship,or value chain cluster, which is characterized by collaborative vertical relationships of suppliers and buyers(Anderson, 1994; Porter, 1998; Brenner, 2005). The second category is competitor and collaborator or coopetition (cooperation and competition) relationships in which the clusters are formed from firms withsimilar products and services. Sharing information among competitors about products and production processes to seize opportunities in the market makes the relationship exist (Anderson, 1994; Porter, 1998; Kim, 2003). The third type of industrial cluster is shared-resource relationships which refers to an entity consists of firms in a region where resources are shared. Resources here include infrastructure, places, knowledge, technology, and stock of products (Anderson, 1994; Porter, 1998; Rosenfeld, 2002). 2.2. Firms Business Performance Balance scorecardis used in this study as business performance assessment, since the concept does not only stress on the outcome but also the process. The balance scorecard supplemented and not replacedtraditional financial measures, with criteria that measured performance from three other perspectives, i.e., customers, internal business processes, and learning and growth (Kaplan and Norton, 1996).The balance scorecard includes: (1) financial perspective, e.g., net income, ROE, ROA, revenue, cash flow; (2) customer perspective whose indicators include retention and acquirement of customers, customer satisfaction, and market share ratio; (3) internal business process perspective. Indicators for this business process perspective include innovation, operation process and customer service process; and (4) learning and growth perspective. The balance scorecard proposes that besides investing in new product and facilities, a company has to also invest in people, system and process to create long-term growth. The indicators include ability of employees, incentive, ability of information system, authority and fitness. 2.3. The Relationship between Clusters, Innovation Capability and Business Performance Innovative capability is seen as critical to a firm in achieving competitiveness from resource-based view of the firm (Conner, 1991). Innovations might offer more valuable, rare, differentiated and inimitable products and lead firms to better financial performance (Zahra et al., 2000).The relationship will be more elaborated in the subsequent conceptual framework and hypoteses section.

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3. Conceptual Framework and Hypotheses 3.1. Conceptual Framework Romijn and Albaladejo (2002) explored the determinants of innovation capability and divide them into (1) internal sources, i.e., professional background of founder/manager, skill of workforce and internal efforts to improve technology; and (2) external sources including intensity of networking, proximity advantages related tonetworking,and receipt on institutional support. We would like to suggest that external sources here refer to clusters. Tsuji and Minetaki (2011) in their study postulated three factors which contributed to innovation: (i) technological factor; (ii) managerial organization; and (iii) human resources. Using AHP (Analytical Hierarchical Process) they construct the index as a proxy to of internal innovation capability of firms. Every factor is considered as first layer factors and each has its own sub-factors. Technological factor consists of (a) ratio of R&D expenditure to sales; (b) Possession of intellectual property rights; and (c) technical and management system. Managerial organizations consists of three sub-factors: (d) practicing QC circle; (e) cross-functional team; and (f) sharing information. Whereas human resources consists of (g) degrees of top management; (h) attitudes toward communication of top management; and (i) degree of employees.Therefore we would like to make hypotheses as follows: H1: Technological factors have positive effect on firms innovation capability H2: Managerial organization has positive effect on firms innovation capability H3: Human resources have positive effect on firms innovation capability. Regarding innovation capability and business performance, resource-based view suggests that company with strong innovative capability can lead to superior competence due to the tendency that innovative capability can not be perfectly imitable (Chen, 2009).Garcia-Morales et al. (2007) suggested that an organization with greater innovation capability achieves abetter response from the environment. Previous researches indicated positive relationship between innovation and business performance (Garcia-Morales, 2007; Koellinger, 2008). Therefore, we would like to make a hypothesis as follows: H4: Innovation capability has positive effect on firms business performance Previous researches examined the effect of clustering on innovation and argued that cluster plays a key role in facilitating technological innovation as well as entrepreneurship (Khan and Ghani, 2004). They assert that close proximity, competition, trust and extensive ousourcing arrangement encourage the technological innovation. Market opportunities and competitive pressure that are experienced by the firms inside the cluster are more visible, and flow of information as well as skilled people or human resource is beneficial to industrial innovation (Furman et al., 2002). Therefore, we would like to make a hypothesis as follows: H5: Clusters have the positive impact on firms innovation capability. Firms located in an advance location that can effectively promote cooperation have a significant effect in enhancing their performance (Morosini, 2004). Sher and Yang (2003) argued that the benefits that lead to clustering to business performance can be analyzed according to demand and supply analysis. On demand side, they argue, clusters might provide strong local demand, particularly from related industries in terms of easy access to customers. On the supply side, Krugman (1991) argued that concentration of firms in the related industries create pool workers with specific skills. Nevertheless, there are limits to the positive effect due to congestion and competition, therefore Sher and Yang (2003) expect that as a cluster grows, congestion costs might eventually offset the benefit to firms. From those findings, the following hypotheses areproposed: H6: Clusterhas moderating effect to innovation capability and firms business performance H6-1, H6-2 and H6-3 respectively: Value chain, coopetition and shared-resource cluster have moderating effect to innovation capability and firms business performance The conceptual framework is described in the Figure 2 as follows:

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Clusters: 1. Value chain clusters 2. Coopetition clusters 3. Shared-resource clusters Technological factors H1 Managerial organizations H2 Innovation capability Business Performance

H5

H6

H4

H3 Human resources

Figure 2. Conceptual framework

Further Research The conceptual framework in this paper needs to be followed by empirical research to test the hypotheses. From our perspective, this paper is a preliminary work before the survey to the ICT companies within the ICT clusters in West Java Province, Indonesia. Acknowledgements This paper has been produced within the ICT Innovation Cluster Research Project in West Java, Indonesia inside the framework of the program of Government of Indonesia known as Master Plan untuk Percepatan dan Perluasan Ekonomi Indonesia (MP3EI) or Acceleration and Expansion of Indonesian Economic Development Masterplan. References Adler, P. S. and Shenbar, A. (1990) Adapting your technological base: The organizational challenge. Sloan Management Review, 25, pp. 25-37. Aldas-Manzano, J., Kuster, I. and Vila, N. (2005). Market orientation and innovation: an inter-relationship analysis. European Journal of Innovation Management, Vol. 8 No. 4, pp. 437-52. Anderson, G. (1994). Industry clustering for economic development. Economic Development Review, 12(2), pp. 26-32. Beal, B.D. and Gimeno, J. (2001). Geographic agglomeration, knowledge spillovers, and competitive evolution. Academy of Management 2001 Conference. Brenner, T. (2005). Innovation and Cooperation during the Emergence of Local Industrial Clusters: An Empirical Study in Germany, European Planning Studies, 13(6), pp. 921- 938. Chen, C.-J, (2009). Technology Commercialization, Incubator and Venture Capital, and a New Venture Performance. Journal of Business Research. Vol. 62, pp. 93-103.

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