2. Small Processing and Large Clusters
Processing of small-scale forest products
The existence of large-scale pulp and paper manufacturing companies, and numerous medium size companies in the mechanical wood industries, is both peculiar and advantageous in the related forest sector. There exists considerable scope, tradition and possibilities for smaller-scale activities. In fact, in mere numbers the forest sector continues to be dominated by small and medium sized enterprises (SMEs) and the trade of wood and forest related products is often one of the largest non-farm sectors in rural economies. For example, in the European Union over 90% of firms still have fewer than 20 employees (cited by Mery et al. 2005).
In many developing countries, the informal sector is substantial, sometimes nearly half the GDP. Forest-based enterprises are among the three most important branches of the informal sector and provided employment in Asia and Africa (this example from those surveyed countries). Nearly half of these firms are using non-wood forest products as raw material (Mery et al. 2005). Many of them can be called "micro-enterprises" or "independent activities" because they employ just 1-2 persons. This again, illustrates the large variety of enterprises and jobs that forest-based activities can offer.
Development based on the forest cluster
During the 1990's in different part of Europe, structural problems in the industry and national economies produced an increased interest in the age-old problems of economic development and international competitiveness. The traditional view of competitiveness holds that low prices in key production factors (i.e., wages, raw material, and energy) either in absolute or relative terms, determine the competitive capacity of the enterprise or the country. These are valid arguments for discussion. However, it has been found that higher factory prices can to some extent be compensated by better production technologies and higher productivity.
For example, in some countries the paper industry can raise the public debate on production cost factors - arguing that only companies that manage to cut production costs and increase productivity can prosper in global competition. Consequently, the main issues for the industry will be to cut or at least avoid the increase of labour costs. This should be at a rate greater than the forest industries of competing countries, so as to cut down wood costs at the mill or mitigate rising energy costs. At the same time, the industry tries to keep the productivity growth higher than its competitors.
The Cluster Concept
Other theories have entered into to the debate and including that introduced by Michael Porter (1990) in his book, The Competitive Advantage of Nations. Following his investigation of several countries and industries, Porter concluded that successful firms are seldom alone. Often a company's dominant market share and accelerated growth is supported by a unique combination of firms tied together by knowledge and production flows. He coined the term cluster to pinpoint such a group. The typical features of clusters are numerous interconnections between firms, technical spill-overs, and positive externalities, which create synergies for progress, and simultaneously create competition between some companies (Porter 1990).
The innovative idea of the cluster concept is that companies can come from different yet related fields. The forest cluster is thus a wider concept than the forest sector, which is usually considered to be formed from the direct product chain from forests to market (i.e., forestry, logging and timber transport, wood, pulp and paper industries). Similar to companies in the forest sector, the forest cluster may also consist of sawmilling or pulp and paper machinery and equipment manufacturing, (including other production consumables and maintenance services, consulting companies, research and education institutes) and also have companies producing direct consumer goods such as furniture, wooden houses or printed products.
Geographical proximity is also typical for the cluster, as it increases information and material flows and creates better possibilities for innovation. However, clusters can be different in scale starting from a small local cluster to a regional one (remaining inside a nation state), national clusters and (international) regional. Some examples include local and regional furniture clusters in Italy, tourism clusters at different levels in Mediterranean countries or national forest clusters in Finland (at the Scandinavian or European level). The concept of the European forest cluster has been promoted during the past ten years in order to strengthen the position of this dispersed, multi-sectoral and largely unknown group of related industries within the European Union.
The forest industry operates in a global market, where products are priced according to demand; thus the higher cost levels of the domestic market cannot be shifted into higher product prices. Therefore, industries are enhancing the efficiency of their business operations and improving their cost competitiveness. On a global level, the profitability of forest industry companies has been low when compared to many other sectors. A sharp drop in product prices in recent years has been the major cause of this strain on profitability.