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Information Systems and Global Diversity$

Chrisanthi Avgerou

Print publication date: 2003

Print ISBN-13: 9780199263424

Published to Oxford Scholarship Online: September 2007

DOI: 10.1093/acprof:oso/9780199263424.001.0001

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An Experiment of Flexible Specialization in Cyprus

An Experiment of Flexible Specialization in Cyprus

Chapter:
(p.175) 7 An Experiment of Flexible Specialization in Cyprus
Source:
Information Systems and Global Diversity
Author(s):

Chrisanthi Avgerou (Contributor Webpage)

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199263424.003.0008

Abstract and Keywords

This chapter examines a ten-year effort to reform the furniture manufacturing sector of Cyprus, according to the industrial model of flexible specialization. The reform initiative involved the setting up of information services and the development of information systems to strengthen the management of the furniture manufacturing SMEs and their consortia. However, little innovation took place and the whole reform experiment was abandoned in the mid-1990s. The analysis of the case examines how the theory of flexible specialization considered information systems innovation as a prerequisite of good management. It is argued that management and formal information processing and communication were alien and threatening to the owners of the small production firms, whose life values and entrepreneurial competencies could not be stretched to enable the promotion of export-oriented business.

Keywords:   furniture manufacturing, SMEs, flexible specialization, information systems innovation, organizational reform

This chapter traces the story of an effort of industrial restructuring in the economy of the island of Cyprus, and examines the limited role attributed to ICT in that reorganizational process. The ‘Cyprus Industrial Strategy’ (Murray et al. 1987; Murray 1992) is a case of emulation of the industrial model of flexible specialization. Flexible specialization attracted a great deal of attention since the early 1980s as a way of organizing production suitable for the changing market context of advanced industrial societies and promising for the developing economies.

When I started studying this case in the early 1990s, I expected it to demonstrate the interaction between organizational development and information systems innovation. The flexible specialization model contains many of the organizational characteristics which in the information systems literature are associated with the kind of context where ICT acquires a strategic role. It involves extensive and complex inter-organizational relations, it acknowledges technology as a major factor for the sustenance of a competitive regional socio-economic network, it encourages the creation of rich data resources while it recognizes the significance of informal information communication based on a culture of trust. The initial aim in following the implementation of the flexible specialization model in Cyprus was to study the ramifications of ICT innovation in its enabling role in a case of extensive reorganization.

However with the first collected data in 1993 it was apparent that, in this case, there were no significant new information systems either under development or being planned. There were of course computers and computer-controlled machines in operation in most of the enterprises involved in the industrial restructuring initiative. But few of the people interviewed expressed appreciation of the strategic potential of ICT. They were rather surprised at our interest in their use of computers.

That ICT was used modestly in the organizations taking part in the industrial restructuring of the island and was not perceived as important by the owners/managers of the manufacturing firms was at odds with the influential dictum of information systems research and practice in the early 1990s that the enabling role of IT becomes most prevalent and significant in cases of extensive organizational change.1 It was (p.176) particularly paradoxical that the implementation of one of the most promising socio-economic theories of industrial organization of the 1980s, which ‘focused on the way in which the pursuit of economic growth through technological change affected economic organizations generally and the organization of work in particular’ (Piore 1993: 323) involved such limited efforts for information systems innovation. Thus, our research began with the study of flexible specialization as a theoretical model and as a realized practice in the region of Emilia Romagna in Italy. In Cyprus we traced the history of the adoption of the flexible specialization strategy, and started monitoring the government initiatives to develop suitable conditions for its implementation, and the organizational changes taking place in furniture manufacturing, one of the sectors that adopted the restructuring recommendations.

In the second half of the 1990s it was clear that the initiatives taken under the banner of flexible specialization had lost momentum without leading to the intended boosting of the productivity and competitiveness of manufacturing in the island. Few of the reorganization changes were long-lasting and made an impact. Therefore, the lack of information systems innovation had to be examined in relation to the failed reform. The question I examine in this chapter is why throughout the 1990s the majority of manufacturing enterprises of the island resisted and distorted a major industrial rationalization intervention and remained indifferent to information systems innovation.

In the following sections I present the economic background of the island, the initial launching of the flexible specialization emulation initiative, the subsequent faltering organizational development, and the eventual decline of the new structures of the furniture manufacturing sector. Without major ICT innovation in this case the descriptions of information systems are thin. The main focus is on the socio-organizational milieu of the industrial restructuring attempt—or experiment—that was unconducive to ICT innovation, first looking through the lenses of the economic theory that inspired and guided it, and then through the analytical approach pursued in this book.

ECONOMIC BACKGROUND

The economy of the Greek Cypriot state had an impressive growth in the first twelve years after the Turkish invasion and the split of the island in 1974. Between 1975 and 1985 the country's real GDP grew by 121 per cent, with manufacturing contributing 18 per cent of the overall growth (Murray et al. 1987). Through highly protective policies, including import quotas and high tariffs, as well as a series of publicly funded reconstruction programmes—such as emergency housing for refugees, basic infrastructure, and subsidies for the development of tourism—the government was instrumental in developing a labour-intensive manufacturing sector. As a result, the consumer boom of the country's economic reconstruction was met largely by domestic production. In addition, a number of manufacturing industries, e.g. for clothing and shoes, expanded through exports, mainly to countries of the Middle East.

(p.177) In the early 1980s the reconstruction boom subsided and the Cypriot exporters to the Arab countries faced growing competition from South-East Asia. Nevertheless, the development of tourism and the still emerging and growing demand in the Middle East markets continued to sustain the key manufacturing industries that flourished in the 1970s. Government protection continued, but plans to form a customs union with the European Community posed the first substantial pressure for opening the economy. By 1986 it was clear that the growth in manufacturing was falling. With fierce local competition, individual manufacturing firms were undercutting each other's export opportunities. As internal demand was saturated, the government was held by the industrialists responsible for failing to reorient the economy towards export markets and facilitate the promotion of Cypriot products and services abroad.

In 1987 Cyprus joined the European Community customs union. With the prospect of dismantling its protective economic regime, the government sought the services of UNIDO and UNDP to develop an effective industrial strategy. A team of economists and sector specialists centred at the Institute of Development studies at the University of Sussex in the United Kingdom conducted a study and found that the country's labour-intensive industry was geared towards mass production, a strategy, they judged, that would not be competitive in international markets. The secluded economy of the island was small and characterized by a large number of small firms. Of the 6,616 manufacturing firms in the country in 1985, 6,184 had less than 20 employees, and only 56 companies employed more than 100 people (Murray et al. 1987). The majority of business firms were family-owned and built on a craft tradition. It was estimated that about 13 per cent of total wages and salaries were paid to working proprietors, their partners, and family members.

Furniture Manufacturing

The manufacturing of wooden furniture was highlighted in the UNDP/UNIDO study as one of the five sectors that was under pressure and in need of reform. In the mid-1980s furniture manufacturing firms imported 61 per cent of their raw materials and exported just 2 per cent of their production. Despite high tariffs (70%–80%) on imported furniture, the import of furniture increased throughout the 1980s and a third of furniture consumption was imported in the mid-1980s. There was low production efficiency, lack of product specialization, and lack of management. At the root of the problem was the small size of the production firms. Of the 774 furniture-making firms, 10 had 50–99 employees, 47 had 10–49 employees, and 717 less than 10 employees, which gives an average of 3.9 employees per firm (Murray et al. 1987). In other words most firms were artisan ‘workshops’, each of which produced a large range of products to satisfy a varied customer demand.

The small size of firms has several direct consequences on their operations. First and foremost there was lack of professional management. The consultants noted: ‘There is lack of managerial specialisation, with the manager (usually the proprietor and family) simultaneously trying to cover marketing, production control, accounting, (p.178) design, labour relations, product development and materials purchasing’ (ibid. 123). Second, there was poor utilization of production technology. Many firms had invested in electro-mechanical equipment capable of large batch production which were used at a fraction of their capacity, staying idle much of the time, while no firm could afford to buy electronically controlled machines. Third, there was little investment in design and development of new products; most firms imitated foreign designs. Moreover, the imitation involved only the drawings without much attention to materials used, method of production, or proportion in sizes, with the result of costly, poor quality products that could not stand international competition.

FLEXIBLE SPECIALIZATION

Flexible specialization is one of the best known models for the organization of production proposed in the 1980s as an alternative to the Fordist method of mass production, and considered suitable to provide for the changing pattern of consumer demand observed at that time. Thus, flexible specialization is usually described in juxtaposition to Fordism.

Fordism is characterized by hierarchically managed organizations, using specialized technologies to produce efficiently for mass markets. It assumes a virtuous circle of production and consumption: productivity increases based on economies of scale lead to rising wages which fuel rising mass demand, then increased profits due to increased demand for consumer goods, and consequently increased investment in capital goods increasing further productivity growth. In terms of organization, Fordism makes use of scientific management, which implies functional specialization, work specification, and centralized decision making separated from the performance of the work tasks.

As mentioned in Chapter 3, Fordism has been the dominant model for the organization of production in all advanced Western economies since the turn of the twentieth century. It has been reinforced with government economic policies that aimed to sustain and stabilize mass demand, and institutionalized with such taken-for-granted ideals as life employment. Craft production, using skilled workers to produce a variety of customized products had not disappeared, but was marginalized as an inefficient and risky way of organizing production.

However, fears for the stagnation of the world economy in the 1970s triggered growing uncertainty of mass demand and raised questions about the merits of Fordism. It was in this context that flexible specialization, which reinstates craft production to supply for diverse consumer tastes, was suggested as a viable industrial strategy (Piore and Sabel 1984; Piore 1993).

But the craft-based business units suitable for the contemporary volatile markets are not just independent small producers. Flexible specialization consists of networks of task-specialist organizations, or organization units, equipped with skilled labour and flexible technologies. It is suggested that such a network is capable of producing changing volumes of quality goods for volatile markets without loss of productivity resulting from unutilized workforce or machinery. Thus, in general, (p.179) flexible specialization is associated with the following features: production driven by economies of scope rather than economies of scale; flexible machinery; niche markets; information-intensive production inputs; task integration and flexibility; network and informal, rather than hierarchical, management structures; close customer and supplier linkage; competition by innovation, rather than by capacity.2

The principles of flexible specialization have been demonstrated with several examples in various countries. Invariably such cases exhibit close cooperation among geographically concentrated firms, involving usually small or medium-size enterprises. Significant factors for the success of flexible specialization are considered to be a high degree of trust between employees and skilled workers, the provision of collective services through self-help, and often government-mediated organizations (Piore and Sabel 1984; Pyke, Becattini, and Sengenberger. 1990; Cooke and Morgan 1994).3

Flexible specialization has influenced policy-making initiatives throughout the 1980s. Emphasis on the clustering of organizations and inter-firm relations provided a new perspective for industries dominated by large numbers of small producer firms, which have been generally considered problematic in the context of global competition.4

Flexible Specialization in Emilia Romagna

In the literature, and for most of the policy interventions that follow the flexible specialization ideas, the industrial district of Emilia Romagna in Italy acquired an ‘ideal model’ status.5 The area of Emilia Romagna, extending from the Apennines to the Adriatic has fifty industrial districts, each with a population of less than 100,000, and (p.180) with a predominance of small firms specializing in a particular sector. For example, in the late 1980s in Montegranaro there was a concentration of footwear-producing firms of an average size of 17 employees, and in Poggibonsi there was a concentration of small furniture producers with an average of 5.8 employees.

The firms in each district had formed networks of industry associations, cooperative consortia, and joint facilities. The consortia played a significant management role for their constituent firms, coordinating their production and serving them with access to external information sources, export promotion programmes, market research, and staff training. This allowed the small firms to further specialize, some producing particular parts, others assembling, while they were able to share out production to others if demand exceeded capacity. Moreover, through the consortia the artisans of the small firms had access to complex and expensive technologies such as art design machinery, and CAD.

The small firms participating in the consortia continued to be managed internally in a rather informal manner, but they had to move towards formalization of particular functions, such as sales and marketing, which were mediated by the services of the consortia.

Thus, three different types of organization were involved in the Italian model of flexible specialization:

  1. 1. Small producer firms, typically family-owned and largely informally managed.

  2. 2. Consortia, organized as federations of geographically concentrated producer firms, often belonging in the same industry. Consortia may provide a variety of services to their members, such as promotion of exports, collective acquisition of materials, financial support. They tended to have a simple organizational structure, managed by an executive committee of their shareholder members, and employing a small team of clerical staff. Their activities were often carried out through subcontracting. For example, the consortium Centro Unitario Forme comprised eighty producers of textiles and clothing, tiles and ceramics, and agricultural machinery based in the district of Modena. It employed specialized companies on a contract basis to provide marketing and export, purchase of materials, and finance and investment services.

  3. 3. Support agencies, involving government authorities, entrepreneurial associations, financial organizations, as well as the small businesses themselves. Central role was played by the regional development agency ERVET (Ente Regionale per la Valorizzazione Economica del Territorio), which involved as shareholders a wide spectrum of public and private organizations. It provided its services either directly through its network of support centres, or through independent regional organizations, such as university research centres. Some of these agencies focused on the needs of specific sectors—such as CITER, the information centre for the textile producers of the district of Carpi—others provided cross-sectoral functional services—such as ASTER, the centre for technological development of Emilia Romagna.

Analysts of the development of flexible specialization in Third Italy tend to emphasize the significance of the socio-cultural environment that fostered such (p.181) collaborative industrial relationships that amount to collective entrepreneurship. A Catholic tradition combined with the prevalence of collectivist socialist ideology formed a socio-economic fabric that mixes traditional values and modern materialist aspirations. Such a culture facilitated the development of collaboration without the need of direct government intervention.

The organizational complexity of the industrial network of flexible specialization in Emilia Romagna required rich information flows, both formal and informal. While management information requirements of the specialized small and medium enterprise (SME) producer firms were modest, the consortia and the network of support organizations have had more complex information needs as they deliver multiple services to their diverse customers. Moreover, a data infrastructure was developed. The centre of technological development ASTER provided on-line search facilities to about 4,000 firms and consortia through connections with over 1,000 international information services. It disseminated data related to location, financial performance, products and activities of 55,000 manufacturing firms of the region. Another system maintained information on research and technology transfer facilities in the region, and allowed interested firms to identify partners for collaborative projects.

Moreover ASTER developed and conducted test studies for new technologies, such as the development of intranet for exchange of information among SMEs, and the socio-economic issues of EDI use by the networks of the region. It played a facilitator's role as an information systems centre, providing services of requirements analysis for innovative IT uses, such as teleworking, and technical assistance for industrial automation, and new process technologies. In short, ASTER acted as an information broker both to the industrial actors of the region, and to their potential customers.

EMULATION OF FLEXIBLE SPECIALIZATION IN CYPRUS

It is not difficult to see why the UNDP/UNIDO sponsored study that considered the Cypriot manufacturing sector in 1987 concluded that flexible specialization was a suitable model for its survival in the prospect of increasing competition. The small size of the population of the island, the structure of the manufacturing industry, and the social conditions they observed made it a promising case for the principles of flexible specialization. In particular, the consultants emphasized the family culture, the strong tradition of education, the national cohesion in response to the Turkish threat, the collectivist tendencies manifested in the popular support enjoyed by the communist and socialist parties, and the social pact between labour and employers. Also, they highlighted the entrepreneurial attitude of the industrialists, their interest in quality, design-led production, and their resistance to takeover offers by foreign companies (Murray 1992).

The consultants drew up the ‘Cyprus Industrial Strategy’ (Murray et al. 1987), a document containing the rationale for pursuing reforms according to the flexible (p.182) specialization principles, and recommendations to that effect.6 Taking the industrial development experience of the region of Emilia Romagna as a model, they recommended a set of activities at three levels: the small producer firms, industrial sectors, and the national economy as a whole (Murray et al. 1987).

Reforms in the individual manufacturing firms involved the following: multi-skilling of employees to create a flexible workforce, capable of working with a range of machines; small production batches, reducing buffer stocks in the production process; closer integration of design, production, and marketing; strategic planning; development of information systems to support production and management. The most substantial structural recommendation concerned the formation of cooperative entities of small firms in a number of industrial sectors. It was suggested that cooperative networking is a suitable organizational form for functions such as finance, production, marketing, research, and training that individual firms were too small to carry out effectively. Specifically, the UNDP/UNIDO team suggested that the small manufacturing companies would benefit from the formation of associations to carry out collective services for themselves, the development of funds for long-term strategic investment; a centre for the development of industrial design, and the creation of technology support centres.

Further developments regarding finance, design, training, and human resources were suggested at the national level. The strategy required an industrial banking system capable of taking a long-term development view. The Cypriot Development Bank was advised to play a central role in promoting industrial restructuring by acting as a front-line consultancy agency and providing firms with support to reorient their activities along the flexible specialization lines. In order to foster an innovative attitude for the design of new products and develop indigenous creativity for competing in fashion-sensitive sectors, such as clothing, footwear, and furniture, it was recommended that the Ministry of Education should mediate to strengthen education in design in secondary schools, offer scholarships for studying design abroad, and establish a link between a college of art and design and a museum of contemporary art. It was also recommended that the country's existing industrial training authority—sponsored by employers and supported by trade unions—should reorient its training programmes from promoting a division of labour and responsibilities characteristic of mass production to the development of the sophisticated multiple skills required by flexible specialization. Moreover, it was stressed that new labour policies were needed to transform the regime governing conditions of employment. Also, the UNDP/UNIDO study, reflecting the significance attributed to geographic concentration in flexible specialization, advised local and government authorities to plan for district industrial estates, which would provide common facilities and services to specific industries.

The social and cultural characteristics in Cyprus were expected to play a significant role in the success of these structural reforms. The island's craft tradition, high (p.183) percentage of educated population, strong presence of trade unions which had historically trusted the government and supported its policies, and strong family and local ties were considered promising factors for the success of a flexible specialization strategy. However, such a strategy required a substantial change in the relationship between industrialists and government. In the proposed model, the government had a significant facilitating role, particularly for setting up the national level institutions outlined above, but it had to abolish its protectionist policies. Reciprocally, business owners and their workforce were required to take initiatives in following the recommendations. In essence, the strategy sought to reorient the existing partnership between government and industry towards the abolition of protectionist practices, and a new facilitatory role for the government, attuned to a free market economic environment. The regime that nurtured the island's manufacturing with creation of demand in the domestic market, subsidies, and protection from imports was to be discontinued. The government was asked to let companies compete on their own strength. Its ‘care’ should be to assist them to build competitive strength: in the words of a government official, ‘to help them to learn how to swim, rather than to supply them with life jackets’.

THE IMPLEMENTATION OF REFORMS IN THE FURNITURE SECTOR

The Cyprus Industrial Strategy required action for the development of the three types of organization identified in the Italian case of flexible specialization. Individual firms ought to reconsider their competitive position in the local and international market, and adjust their production and business operations to become part of local industrial networks. New cooperative organizational entities, consortia, had to be created for the first time, complementing the functions and rationalizing the performance of their individual firm members. Specialized service providers facilitating and promoting the tasks of both the producer firms and their consortia had to be established from scratch. A number of such initiatives were taken with varying degrees of success.7

In the furniture sector, the most visible area of activity was the formation of consortia. Much less was done for the development of service providers, while rather minor changes took place within the small firms as a result of the strategy. Many firms grew in size since the industrial restructuring experiment began in the early 1990s, but they continued to face increasingly more serious competitiveness problems in the local market. More significantly, they did not reorient their business towards export markets.

(p.184) Acquisition of new technology was a significant factor of motivation for the development of the new organizational scheme. In the sector of furniture, as well as in clothing and aluminium products, there were clear benefits to be gained through common investment in the latest production technologies, such as wood cutting and shaping, fashion design and tailoring, aluminium colouring. Less interest was shown in utilizing IT for management purposes. The following section traces the organizational changes and information systems development efforts that accompanied the formation of industrial networks in furniture manufacturing.

The Formation of SME Consortia

AtoZ

The first consortium created in the furniture manufacturing sector with the support of the Cyprus Development Bank was ‘AtoZ’. It was founded as early as 1987 by twelve furniture-making firms based in Limassol. These firms varied in size from fifteen to forty employees. The purpose of the consortium was to promote common marketing for the twelve shareholder manufacturers. It built its management office in the industrial district of its SME members, and began operations by creating showrooms in all major cities in the island. The AtoZ consortium had an executive committee of five shareholders elected by the twelve shareholder members and an appointed executive director. It employed also a design manager, a marketing and sales manager, and a small number of clerical and support staff.

Murray (1992), one of the consultants involved in drafting the ‘Cyprus Industrial Strategy’ reported enthusiastically on activities of AtoZ in the early 1990s and the benefits it brought to its members. The firms that formed the consortium agreed to specialize their products—e.g. in kitchen furniture or children's furniture—thus having efficiency of production benefits. Murray reports that the unit costs in the specialized furniture production fell by 20–25 per cent. As joint retailing required careful costing, the consortium formed a costing subcommittee to check costing, materials, and production methods of member companies and advise on ways for cost cutting. Moreover, Murray presented indicative evidence of successful sales promotion and successful exporting in 1989 to the Soviet Union and Saudi Arabia.

At the beginning of its operations AtoZ had no formal information system for communication with its member firms. When an order was placed by a customer, a standard form was filled in and the details were communicated to the specialized producer, mainly by telephone. A number of problems were experienced, such as incomplete information and misunderstandings in communicating order details, which in turn caused delays in meeting delivery dates.

To overcome such problems the executive committee of the consortium decided to use computers for the processing of orders. Technically and operationally the computer-based information system developed for this task was relatively simple. A database was installed at the main office of the consortium, order details were transferred from the showrooms to the main office, entered in the database and consequently distributed to the producers. The system produced information lists on (p.185) orders, delivery dates, customers, and selling prices; later it started to be used to implement a penalty system for late deliveries. It was generally thought that this system improved efficiency and reduced the number of errors.

Encouraged by this positive experience, the executive director of the consortium developed plans for two further technology projects: a network to connect the showrooms with the consortium headquarters, and a design system through which the furniture producers would be able to propose models and then display them at the showrooms of the consortium to solicit customer responses. But the shareholder manufacturing firms were not keen to support these ideas and they were not implemented.

Line-11

Another consortium, Line-11, comprising eleven small furniture manufacturers in the industrial district of Larnaca was established in 1991. It had the same purpose as AtoZ, to market the products of its shareholder members under a common trademark, and its operations and management were very similar to those of AtoZ. Indeed its first executive director was a former director of AtoZ. Line-11 did not develop any computer-based information systems, and relied largely on informal communications for the dispatching of customer order details. Telephone and fax were seen as perfectly adequate by its shareholders.

MFC

Substantially different from AtoZ and Line-11, MFC was established in 1994 with the aim of efficiently pursuing one particular specialized process of furniture making, panelling cutting, through utilization of computer-controlled production machinery. MFC involved four furniture manufacturers of approximately the same size, forty to fifty employees. The initial idea was to equip the consortium by pooling together existing machines and technical staff of its members. However, a number of problems emerged when the implementation of such a strategy was thought out. Existing machines were found to be obsolete, with limited capacity and capability, and incompatible with each other. Moreover, it was not easy to release employees from other duties in their firms and transfer them to the new organization. It was decided to set up MFC by purchasing new computer-controlled production machines, and by transferring only a few employees from the shareholder firms.

By 1996, the work of panelling cutting at MFC was carried out by nine workers trained to operate the computer-controlled machines, and supervised by a manager with the support of a secretary. Strategic management was the responsibility of a board committee comprising the owners/managers of the member firms and the MFC manager. Initially, the goal set was to achieve 60 per cent utilization of the capacity of the computer-controlled machines' optimal capacity within three years of operation. That target was met within the first six months, covering all the production needs of the four members of the consortium and allowing surplus capacity that could be used by taking orders from non-member firms.

Despite the success in achieving the initial goal of the consortium, there were significant inefficiencies in the use of the computer-controlled production technology. (p.186) Details on panelling cutting were received on manual forms, which included designs of the ordered products. Such order details were first entered into a system that ran an optimization algorithm and calculated the size of the panels to be used, thus minimizing waste of raw materials. Subsequently, and according to the production schedule, the output of the optimization application was retyped as entry into the production machines. As the production process involved several steps and different machines, data and software commands were reloaded at each step. Overall, the repetition of the same data entry was prone to errors, caused frequent delays, and reduced the ‘optimization’ benefits.

Yet, the managers of the SME members of this consortium interviewed in 1996 were not keen to upgrade its technology and integrate the operations of the computer running the optimization algorithm and the production machines. They were pleased with the savings they achieved through MFC, and were not interested in increasing its efficiency. They recognized the potential of MFC to become a profitable specialized company for panelling cutting, but this was seen as too marginal for their business interests to contribute funds for the required investment.

Support Service Providers

Several sector-wide and national service organizations were gradually developed in the 1990s, such as a design centre for the clothing industry, and training organizations for the dissemination of appropriate skills and finance opportunities for all industrial sectors. One such intermediary service provider of particular relevance to this case study is the Institute of Technology (IOT). It was established in 1992 as an agency of the Department of Commerce and Industry with the mandate to support the technological upgrading of the manufacturing industry, and to create new technology industrial units. Among the aims of the IOT was the creation of an information technology centre, and the provision of consultancy services on technology and organizational development. In 1996 IOT assumed responsibility for a government plan of subsidizing consultancy services on IT that was partly funded by the World Bank. There was limited demand for such services, though, and a large proportion of the funds remained unused and returned to the Bank.

The information centre of the IOT was intended to provide information on a wide range of areas, such as market research, trading, abstracts of research relevant to various industries, industrial policy and regulations of the European Union, trade statistics, academic and professional journals, programmes on human resources development. The producer firms and their consortia in the furniture industry did not make any substantial use of these resources. Demand was poor in the other industries too and the role of IOT as an information centre diminished.

By the end of the 1990s, IOT was concerned almost exclusively with assisting the organizational development of the local business firms. This involved both subsidies to business firms to use consultancy services and efforts to develop the professional standards of the market of such services. For example the Institute offered subsidies to business firms in all industries to appoint management consultants and had a system of evaluation and professional certification for organization consultants.

(p.187) The Producer Firms

Initially the producer firms appeared to respond to the recommendations for change and take advantage of the new opportunities offered by the intermediary organizations set up by the government. For example several firms made use of the new financial schemes of the Development Bank to expand their business, and sought to upgrade the skills of their workforce through government sponsored training programs. They were particularly appreciative of the opportunities to enhance their production technology. Thus, the MFC consortium was created by the initiative of the owner of one firm and enjoyed a great deal of commitment from its member firms. Also, they showed interest in collaboration for schemes for marketing and sales, thus setting up AtoZ and Line 11.

But, the restructuring strategy required also the manufacturing firms to adjust their operations and develop their organizational capacity taking part in the wider network of agencies that would complement or support their business. The small producer firms of the furniture sector were reluctant to change their traditional ways of doing business, they did not trust the consortia or the service agencies.

The behaviour of the firms involved in the three consortia outlined above demonstrates the prevailing attitude. The firms taking part in the AtoZ and Line-11 consortia were intended to remain independent organizations, but to adapt their production and specialize by product. Some producers started doing so, but in just two years after the creation of the AtoZ and Line-11 consortia their members started acting antagonistically both to each other and to the consortia that were supposed to be their marketing and sales agencies. Although initially these consortia boosted sales of the products of their members, they could not absorb all their production capacity. The owners/managers of the small firms reverted to their pre-consortium state, each producing and selling on their own a broad range of products, rather than specializing by product. They became competitors as well as suppliers of their consortium. On many occasions they supplied their products to the consortia at selling prices higher than those they offered directly to their customers. By the mid-1990s AtoZ and Line-11 did not have a privileged status as selling outlets of the producer firms that formed them; these producer firms kept only an agreement to supply them with a particular line of products with a pre-specified price and delivery timing.

The attempted restructuring had negligible effect on the management of the small firms. The most significant changes concerned the rationalization of production that resulted from the use of computer-controlled machines. Producer firms had to standardize their product parts in order to be able to use the new machines. In turn, such standardization benefited the MFC consortium as an independent business organization, increasing the efficiency of its operations, reducing errors in orders, and releasing spare machine capacity for further business.

Overall, the producer firms did not develop an export orientation. The structure, management, and business culture in furniture manufacturing remained unchanged, mitigating rather than contributing to the industrial change initiative. The owners/managers of the firms retained total control of the business through direct communication with their staff and day-to-day decisions on task allocation. Unlike (p.188) the trend exhibited in the case of Emilia Romagna, the small firm owners in the Cypriot furniture sector did not form partnership networks and did not develop significant demand for the services of support agencies. They were reluctant to trust professional management and third parties—such as the managers of their consortia—for the survival of their business. All the owners/managers we interviewed saw their firms as a family business. The founder of the business either had already passed control to a son or daughter, or was hoping to do so. They saw the changing government regime from providing protection and subsidies to offering facilitatory services pessimistically, as the end of the era they built their business. They were concerned that unaided, under market conditions, they could fail to survive. They had little appreciation for the supporting services and were not keen to use them.8 Most firms' owners continued to run their business in the way they had established them: by direct involvement in all matters of the firm and by trying to undercut their competitors in the shrinking local market.

The information systems requirements of the producer firms remained very limited. Computers were used for internal administrative tasks, but there was no interest to exploit the potential of IT to support management decisions, formal communication, and information sharing with partners. As the inter-organizational links that the flexible specialization experiment initiated waned, there was no need for inter-organizational network communications. Moreover, without an export orientation international data communications remained largely irrelevant to the concerns of the local firm owners/managers.9

THE ECONOMICS OF INNOVATION OF THE CYPRIOT INDUSTRIAL EXPERIMENT

In 1996 government officials told us that the experiment of flexible specialization had failed, and government economic policy was shifting attention from manufacturing to services. By the time of my latest round of interviews with managers and government officials, in 2000, most of the restructuring initiatives of the early 1990s had long been abandoned.10 Questions about the reasons the restructuring experiment failed and the wisdom of changing government policy are beyond the scope of this case study. Rather, of interest here is more specifically the relationship of the failed restructuring intervention to the poor utilization of ICT.

(p.189) This is not a simple causal relationship, of the form ‘ICT was not used because the restructuring intervention did not get off the ground’. It can be assumed that, had the organizational restructuring been successful in creating industrial networks of closely collaborating producers and service agencies, there would have been pressing requirements for rich information flows and formal information communication channels. In other words, it could be argued that the need for information systems innovation did not arise because the institutional change was not successful. However, it may also be assumed that, had the enterprises involved been self-motivated and proactive in utilizing IT strategically to improve their competitiveness in a free domestic market and expand their exports, the industrial organization initiative would have been able to build the necessary links for the intended industrial network structure. In other words, it could be argued that the industrial restructuring was not successful because the participating firms made inadequate efforts to innovate products and processes, including their information systems.

Before I examine the socio-technical relationship between the organizational restructuring effort and the lack of information systems innovation, the following two questions lead to the literature on innovation in economics. What did the theory that guided the restructuring intervention say about information systems innovation and how may it help us to explain information systems development inaction in this case? And, how realistic was it to expect the small producer firms to pursue the required innovation of organizational processes or technology?

From its inception, the restructuring intervention was vague on information systems innovation. The analysis of the UNDP/UNIDO team drew attention to the significance of investing in technology and the owners in the furniture sector had no difficulty in appreciating the significance of investment in advanced production technology. Indeed, they grasped the opportunities for securing funds to invest in new machines, and were willing to collaborate with competitors to that end. They had clear efficiency expectations from these machines—faster production, savings in raw materials, less labour—and they could see them realized.11

Information systems innovation was another matter. In the UNDP/UNIDO report information systems innovation was specifically related to the need to improve management. But what would an ‘improved management’ be like, and how could it be achieved? It seems that the team of industrial development specialists has been at a loss on these questions. They wrote:

If for the moment we leave aside the general orientation of the firms, and concentrate on two of the traditional centrepieces of management, accounting and finance, and production, there (p.190) is something of a policy enigma … The Government has pursued remedial policies … [has] run management courses, which have been well attended, and provided consultancy services which have been well used…. Yet on the basis of our visits, and the reports of other surveys, this approach has not been sufficient. (Murray et al. 1987: 247)

The action they recommended as one of the ‘immediate priorities’ of the government, reinforces the impression that they had low confidence in their understanding of how management in the small producer firms could be improved. They proposed the appointment of a senior consultant to draw up the details of an emergency programme for management; the establishment of an ‘Emergency Management Unit’, staffed by consultants and civil servants to supervise the emergency programme; a ‘Management Consultuncy Fund’ to provide ‘the requisite consultancy services to firms’; and a Management Equipment Fund to subsidize the ‘purchase of equipment necessary to improve management information systems and stock control’.

The same report highlighted also the importance of access to information resources on market and suppliers. But the underlying logic that linked investment in data resources and ICT with business success was to be found in management. Without a successful reorientation in the management of the firms, the introduction of new elements such as a database service, or the rationalization of order taking using computers, remained isolated incidents, which did not add up to contribute to an information systems infrastructure.

These shortcomings were not mistakes in the particular diagnostic exercise, but, on closer examination, they reflect gaps in the underpinning theory. The obvious difficulty the economic development experts faced in their attempt to prescribe how a management tradition could be developed, and to provide a convincing rationale for the significance of information systems to that end12 is indicative of a more general vagueness in economic studies of innovation regarding organizational change. The flexible specialization theory offers a target organizational structure—district conglomerations of semi-autonomous producers, service providing producer partnerships, and government agencies—but it is unclear about the way such structure can be managed effectively. The main characteristics of successful industrial districts include the maintenance of a craft tradition, their institutional capacity for informal communication and sharing of tacit knowledge, and reliance on trust rather than formal contracts or hierarchical control mechanisms. The right mix of formal and informal information flows, explicit and tacit knowledge in running a business, reliance on trust or regulation is recognized as one of the most crucial factors in fostering technical innovation and economic growth, but is unspecifiable in general (p.191) terms.13 This is recognized as a particularly acute problem in cases which emulate organizational arrangements and supporting institutional elements, what Dalum et al. call ‘institutional borrowing’ (Dalum, Johnson, and Lundvall 1992). In short, the guiding theory did not have the capacity to make effective recommendations on initiatives for information systems innovation. Linking information systems with management, a problematic aspect in the context of the manufacturing firms in Cyprus, could not provide an inspiring vision for ICT innovation.

Furthermore, the limited guidance on information systems and management interventions that the experiment of industrial change began with was compounded by the limited extent to which the owners of the firms of this case were willing to innovate. Throughout the period of this study, the striving-for-survival small firms did not take an interest in investing in technology-based information systems. Could it be otherwise?

In economics, we find contradictory views about small firms as innovators and economic players. On one hand, small firms are highlighted as the creation of ‘Schumpeterian entrepreneurs’, who are ready to take risks and exploit opportunities that more established firms with rigid management procedures would not venture to pursue.14 On the other hand, most small firms do not survive very long, and part of the problem is understood to be their inadequate innovation capacity (Audretsch 1999). But if propensity for innovation is not a general intrinsic characteristic of small firms, what are its determining conditions?

Most economic accounts of innovation in small enterprises consider innovation as the result of adjusting business performance under conditions of competition. Technology, with its impact on efficiency, is seen as a factor that changes a firm's competitive position. Economic research, therefore, has tried to determine what factors spur innovative behaviour, considering, among others, availability of funding, size, intensity of competition (Cosh, Hughes, and Wood 1999). In an effort to broaden the perspective and take into account the behaviour of the entrepreneur, Casson, still looking at the success of a firm as a matter of rational choice, argues that the significant factor is the cognitive ability of the entrepreneur: his ability to synthesize information on markets, technology, and people.

(p.192) Such analyses exemplify what Granovetter (1985) calls the under-socialized theoretical perspectives of economics. The decision maker is considered to be preoccupied with an atomistic rational behaviour, unaffected by social influences of the context within which he is embedded. To have a better understanding of economic action, Granovetter suggests, one should try to trace its broader underlying rationality, and explain it as embedded in a social context. Studies of innovation economics which have taken a broader perspective and considered the institutional context within which small firms are embedded—mainly the economic policies and industrial structures of the national context—added important new dimensions to the competition-by-efficiency perspective, such as the interaction between producers and their customers, and government incentives or disincentives (see e.g. Unger 1988; Lundvall 1992; Hobday 1995). Still, such analyses of the institutional and structural social features of the national context of small firms tend to ignore what Granovetter (1985: 507) calls the ‘proximate causes’ of their action, meaning the network of social relations overlaid on their business relations. They also tend to miss what could be called the ‘distant causes’, that is, the beyond-the-national-borders social and institutional influences that theories of globalization brought to our attention.

SOCIO-TECHNICAL VIEW OF THE CYPRIOT INDUSTRIAL EXPERIMENT

The restructuring experiment sought to reorganize a set of organizations as a cluster, an ‘industrial network’ whereby the enactments of its participants ought to be closely interrelated in order to achieve internationally competitive manufacturing of furniture. The small producer firms responded with remarkable similarity of behaviour to the restructuring experiment, although not to realize the intended clustering and exports, but to preserve their autonomy and to maintain their salient institutional features, such as total control by the owner, direct contact of the producer with the customer, the intermingling of business and family affairs. It is therefore valid to look at these small firms as a category of organizational actors sharing common institutional characteristics and engaged in common enactments.15

In the late 1980s, most small furniture manufacturing firms were the life work of artisans, people who knew, primarily, how to make furniture. Their firms had been formed in the previous decade under the favourable circumstances of plentiful demand in the domestic market and government protection from foreign competitors. The making and selling of furniture created wealth for the owner, provided work to a number of other people, and served the needs of the reconstruction of the country's economy. The protagonist in this enactment, artisan/manager, negotiated his actions with a variety of other actors and intermediaries: wood and other raw materials, machines, designs, money, workers and administrators, customers, competitors, laws.

(p.193) There were a set of interconnected organizational fields that sheltered the small firms, and set the norms and conditions of their business. The most important organizational fields were local: the island's furniture industry with its ‘standards’ such as wages, range and quality of products, fashion, selling prices; the local supplier industries for raw materials and machines, with their norms for quality, speed, and prices; the local customers—families and businesses—with their taste and buying habits; the island's family culture and solidarity for the reconstruction of the nation after the invasion, setting, for example, values for saving, investing, and achieving; the government striving to rebuild the nation's economy, maintaining the vision of the nation developing against the odds, setting rules, protecting, subsidizing, and sanctioning.

Much weaker and more nebulous were the international institutional influences. These included: the international furniture industry circulating its own quality standards, designs and prices; the customers in the Middle East with their own tastes, spending capacity, and alternative sources of buying from South-East Asia; foreign suppliers of wood and machines; international agencies exerting pressure on the government to lift its protective regime, and creating uncertainty about the future of local firms.

In the mid-1980s, uneasiness about the small furniture firms' strategy grew out of various changes taking place in several of the local and the international organizational fields. To begin with, with the boom of the post-invasion reconstruction subsiding, the Cypriot furniture industry was getting too congested. Moreover, local customers, having overcome the difficult economic times that followed the war and the split of the nation, had reached a certain degree of prosperity and were prepared to pay more for imported furniture. The government was readjusting its policy from rehabilitation after the wounds of the war towards economic growth earned in the international arena of trade, and towards a political identity of a nation that is part of Europe. In the world beyond the island the discourse of economic globalization was shaping visions and consolidated in rules. Academia and economic institutions were circulating new ideas about how economies develop, and international centres of power worked out and exercised rules and conditions for participating in the global economy.

It was in this situation that the UNDP/UNIDO team of experts was called in to contribute. They brought along the flexible specialization model as a powerful intermediary, which could illuminate the problem and lead to its solution. Indeed, it produced a translation blueprint for this: a set of recommendations for the mobilization of diverse actors—government agencies, banks, training institutions, entrepreneurs—and the circulation of a whole set of intermediaries—design, technologies, management techniques, databases, information systems.

There were good signs that the translation of the model of flexible specialization in the Cypriot manufacturing industry—and furniture manufacturing in particular—could produce results. There was no explicit resistance and the main actors appeared accommodating. The government was interested in the new role it was given to play for the development of the country's manufacturing. It was ‘politically correct’ because it abandoned protectionism, and it enjoyed intellectual kudos in the international economic institutions. The government ought, however, to do a (p.194) lot for such a change. It should not come to the rescue of stressed industrialists, even if it risked losing their votes, it should allow the private sector to do jobs they were doing. But many of the private actors of the flexible specialization blueprint—the specialized service providers, the venture capitalists—were not there yet, and the government had to be instrumental for their creation.

The small producer firms found the diagnosis convincing and the solutions promising, though perplexing. The flexible specialization translation gave them an obligatory point of passage position, therefore seemed to guarantee their survival. But it required them to change in order to gain such a privileged position. They ought, for example, to install new technology, to introduce new activities—such as design, marketing, and management—to collaborate with their competitors, not to hassle the government for subsidies and protection, to find new customers from abroad. For such changes they were promised assistance: the government would create special agencies for the required retraining, and create new funding institutions. But it was a matter of serious concern for them that the government would not secure the territory of their market any more, and would not provide them with subsidies when faced with hardship.

The furniture manufacturing business firms in Emilia Romagna offered credibility to the new organizing vision. Italy—a European country that maintained its family-centred culture, as Cypriots would like to do—demonstrated that small business firms could prosper by following the proposed model. Cypriot industrialists travelled to Italy to see the prosperity of flexible specialization live: the thriving businesses, their consortia, and the agencies that assisted them in producing for export.

But the translation process never built an adequate momentum. Although ICT was prescribed as an intermediary in the reorganization blueprint, it was not brought into action by any of the interested actors. This inaction can be explained as follows. ICT was a stranger in the organizational field of the attempted translation, an actor that the participants in the Cypriot furniture manufacturing sector would not ‘naturally’ turn to for support. That this stranger was connected with the managerial rationality which was alien to the traditional way of running the small manufacturing firms did not help either. So long as the enactment of the small producers did not change to export-oriented business, the global institutional fields of management and information systems exerted weak influences on the actors of the attempted translation, and could be ignored. The remainder of this section elaborates on each of these observations.

ICT was an insignificant institutional force in the Cypriot organizational fields that influenced furniture manufacturing in the 1980s and early 1990s. The producer firms had remained largely unaffected by the rational myth that ICT innovation is a strategic weapon for doing business. There was no taken-for-granted necessity for a race of information systems innovations as in the advanced economies. There was no substantial IT industry championing it, no strong government and media propaganda for an imminent information society, and no government experience as an ICT innovator. This does not mean that computers were not ubiquitous. But their perceived value was limited to providing support tools for formal administration, (p.195) and, therefore, the significance attributed to computer-based information systems in the flexible specialization translation was not obvious or unquestionably accepted.

The argument for the need of information systems that associated them with management added reluctance rather than convincing the small firms' entrepreneurs of the necessity of ICT innovation. The small firm owners and their trusted staff were not competent in computers or in the management inscriptions they were valued for and expected to transfer. They had to surrender control to professional managers, competitors/partners, and service-providing intermediaries. If computer information systems were added in such networks, the owners of the small firms would lose some of their ability to exercise control and make decisions crucial for their business. For example, if the small firm owners allowed the computer-based system in the hands of the AtoZ manager to determine what they could produce best for a customer, at what price, and by when, they would lose their direct bargaining power with customers, which they trusted as the most reliable way to sell profitably.

Even if the alliance of professional managers and information systems was promising to save the producer firms from bankruptcy, their owners saw the risk of their family business being diminished, and their duty and joy to secure the well-being of the inheritors, sons or daughters, in jeopardy. Thus, their inaction was not a matter of the extent to which they were ‘rationally’ convinced about the economic merits of management and information systems. It was a result of battling with the question ‘How should we live?’,16 as they confronted an unfamiliar regime of truth. The answer to this question was restricted by the embodied enactment of their business: their vision of the future, their confidence in negotiating with their customers—including language—their ability to use the tools of their trade, their imagination of what new to produce and how, their sense of the value of their business in their life. Management, exports, and the information systems they required were outside their embodied experience.

There were resistances to the flexible specialization translation and inactions by various other actors. Most importantly, perhaps, the government delayed for years the creation of the agencies that were so important for the flexible specialization translation, and they were reluctant to abandon those enterprises which, at the mercy of market forces, were begging for subsidies. Moreover, the government officials did not feel comfortable themselves in enacting their new roles as mediators for the cooperation of entrepreneurs and management professionals. The few and isolated actions that took place under the banner of the intended translation started reversing after a few years.

The reversal of the flexible specialization translation left the ‘traditional’ enactment of the small manufacturing firms virtually intact, without visions for information systems innovation. As exports continued to remain a remote possibility there was neither a felt need nor additional institutional pressure from international organizational fields for management practice and information systems innovation. (p.196) As far as information systems innovation is concerned, the failed flexible specialization translation completed a vicious circle.

CONCLUDING REMARKS

A question that emerges from this analysis is whether and how this vicious circle—irrespective of a value judgement of its consequences—may be broken. A look at the unfolding interaction of local, international, and global institutional fields provides some indications for what may happen in the future.

During the 1990s the forces of globalization became more prevalent in Cyprus, as the government protective measures were gradually being lifted, and the post-invasion generation—much more at ease to use computers, to speak the language of modern business, and visualize the world beyond the island's shores as their market—started assuming power. The infiltration of norms from international organizational fields into the local ones was too slow to make a difference for the translation of flexible specialization undertaken in the late 1980s, but any translation that may be attempted more than ten years later will be situated in a very different institutional context.

Several changes are taking place that may make a difference to any new attempt for organizational change and information systems innovation. There is a cadre of professional managers and an emerging services industry, including ICT consultancy. ICT itself has changed and, in its latest and more flexible form, the Internet, it is less closely linked with formal information processing practices and data infrastructures. The spreading information society discourse cultivates widely the image of ICT as the sine qua non for modern life. The growth of the Cypriot stock exchange affects the perception of success in business, encouraging entrepreneurs to surrender their absolute control and autonomy of their enterprises, to venture in mergers with competitors, and to employ formal management techniques.

It is a safe bet to predict that such changing institutional conditions will open the way to many new experiments of ICT translations in all the economic sectors of the island. But, as the other cases demonstrate, the effects of such translations can hardly be predicted by general trends. Rather, they will continue to be decided by actors struggling with the question ‘How should we live?’.

References

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Notes:

(1) See e.g. Earl 1987. In the early 1990s seminal publications, such as Hammer (1990) and Scott Morton (1991), associated IT innovation with organizational change and had an immediate impact on business and information systems management alike. They reinforced the message that IT enables the achievement of ‘strategic’ gains that was spread during the 1980s and gave it a new twist: the potential benefits of IT are released by reorganizing business organizations.

(2) It is interesting to note that flexible specialization is not an economistic perception of industrial activity. By considering contextual features such as the cultural aspects in the behaviour of the economic actors and the role of government institutions, it recognizes the social embeddedness of economic activities.

(3) It is debatable to what extent the mode of production of flexible specialization presents a serious challenge to the dominance of the Fordist system. A brief review of the debate regarding network organizational structures and multinational corporation within the current trends of economic globalization is included in Chap. 5. More specifically, critics of flexible specialization have pointed out that it is unlikely that the crant-based industrial paradigm will acquire substantial significance within the world economy, and that powerful economic actors, such as multinationals, will continue to dominate markets through their grip over finance, market outlets, advertising, and so on (Amin 1994; Cooke and Morgan 1994).

(4) Although the model of industrial clustering of flexible specialization was developed on the basis of the study of European industrial districts, it has been particularly relevant for developing countries, which tend to have large numbers of small firms. Small firm industries are onten seen as comprising an ‘informal economy’, unsuitable to serve developmental goals through formal economic policy. Nadvi and Schmitz (1994) reviewed several cases of industrial districts in developing countries in terms of their organizational form, the social context, links with the state, and their developmental effects. Although optimistic that the principles of organizational clustering of flexible specialization as identified through the European experience provide a promising model for developing countries, they avoided drawing conclusions about its developmental potential. Instead they argued for the need for further research to understand the validity of the model in different contexts and its possible variations.

(5) Numerous descriptions and discussions of this case have been published. From those in English, see, e.g. Brusco 1982, 1990; Pyke, Becattini, and Sengenberger 1990; Becattini 1991; Cooke and Morgan 1994. This section is based partly on published descriptions and partly on research reported in Chrysohos (1999).

(6) The government endorsed the report and the manufacturing industrialists accepted it as a promising new strategy.

(7) The UNDP/UNIDO report triggered sporadic action in various sectors, but the government delayed the implementation of its recommendations for many years. A study conducted by the Department of Commerce and Industry on the problems of the manufacturing sector in 1993 showed that little had been done and the problems in the five key industries had worsened. The study echoed the same concerns identified six years ago and suggested the same approach to reform the industries and make them viable. Several of the initially recommended measures were subsequently taken, but some people I interviewed in the industry as well as in government believed that the slow government response was one of the factors that contributed to the poor results of the attempted reform.

(8) An example of the lack of appreciation of the value of the supporting services is the poor attendance at the training seminars for new skills organized and funded by the industrial training agency. Many firm owners were unwilling to allow their staff to leave earlier and attend the seminars.

(9) However, towards the end of the 1990s the use of communication technology took a new impetus with the spread of the Internet. The new industrial policy of the Department of Commerce, Industry, and Tourism in 1999 included subsidies for Internet connections and development of webpages.

(10) Still, the prevailing view in June 2000 was that the principal diagnosis of the structural problems of the Cypriot manufacturing by UNDP/UNIDO in 1987 was correct. Too small producers without management skills would not be able to face international competition. However the remedies considered were different this time. A ‘New Industrial Policy’ announced by the Department of Commerce, Industry, and Tourism in 1999 provided incentives for the merger of small manufacturing firms and the development of professional management services.

(11) Nevertheless, technology innovation in production was not a long-lasting attitude. According to the flexible specialization model, the regional network should have spurred processes of localized learning and tacit knowledge sharing that would have promoted technology innovation. Economic theory is less clear on how that would happen, and does not offer convincing explanations of why it fails to do so when it does (Nadvi and Schmitz 1994; Howells 1999). Indeed, the idea that flexible specialization is conducive to technology innovation, and in particular ICT innovation has been disputed, and empirical studies suggest that even successful districts of flexible specialization make limited application of advanced technology (Lazerson 1990).

(12) The lack of vision for information systems development in the report of the development experts is in stark contrast to the business and management literature of that period, which offered long lists of arguments about the strategic potential of technology innovation in information systems and prescribed methods on how such potential could be diagnosed and achieved (see e.g. Porter and Millar 1984; Earl 1987; Earl 1989). One could think that if the study of the boosting of competitiveness of the manufacturing firms in the island had been done by business consultants instead the recommendations might have put more emphasis and guidance on ‘strategic’ information systems. Whether such recommendations would have had better chances of being successfully implemented is another question, though.

(13) On the same grounds it is difficult to predict which industrial districts can develop successful organizational processes to sustain networks of flexible production. This point is reinforced by Sabel who observes that on the basis of empirical evidence ‘there is no plausible list of the necessary and sufficient conditions—rare or otherwise—for the emergence of flexible economies’ (Sabel 1989: 133). It is interesting to note that in the Cyprus case the problem diagnosed was lack of formal and accountable decision-making processes, and eventually it was conflict rather than trust that prevailed.

(14) Joseph Schumpeter's work on technical innovation and the dynamics of economic growth (Schumpeter 1939) has been one of the most influential theories that paid attention to organizational, institutional, and social psychology issues of economic activity. In his early work Schumpeter emphasized the role of the entrepreneurs and the small innovative enterprise (Schumpeter 1934). In the 1980s Schumpeter's ideas became the core of the ‘Neo-Schumpeterian’ school of thought, pioneered by Christopher Freeman and Carlota Perez at the Science Policy Research Unit, Sussex, which has been one of the main contributors to contemporary theory and policy on technology innovation (see e.g. Freeman and Perez 1988).

(15) A shortcoming of this abstraction is that Granovetter's ‘proximate’ social relations of individual firm owners, managers, and workers, cannot be accounted for in detail, but only as generally observed patterns exemplified by indicative evidence from individual organizations.

(16) Quoted by Helen Verran (1999), who referred to Pyne Addelson's work (Pyne-Addelson 1994: 154), showing how collective action addresses the question ‘How should we live?’