Business Networks on the Island of Ireland

April 2011

Executive Summary

What do we mean by business networks?

It is recognised that the concept of networks is not straightforward, and there is no consistently applied definition available to conceptualise the term. However, a network can be said to be a group of companies with restricted membership who have agreed to co-operate in some way to achieve specific business objectives that are likely to result in enhanced competitive advantage and/or mutual financial gain.

There are three primary categories of business networks:

• Type 1 - Business networks: These involve firms collaborating for specific purposes where the results of the activity will have some identifiable and measurable impact on their business (for example, Global Wind Alliance).  

• Type 2 - Development networks: These are the most basic form of networks consisting of firms associating with other firms where the activity may often be confined to networking, the exchange of information, or shared services (for example, All-Island Software Network).
• Type 3 - Regional business networks: These are geographically concentrated groups of interconnected companies, educational institutions, local authorities, local economic development agencies, national government agencies and related institutions that arise out of linkages or externalities across sectors. Regional business networks share a common regional location, where ‘region’ is defined as a geographic area, labour market, or other functional economic unit (for example IT@Cork). 

Table 1: Characteristics of network types

Business networks are differentiated from development networks and regional business clusters as members of business networks must have agreed to cooperate in some way to achieve specific business objectives that are likely to result in enhanced competitive advantage and/or mutual financial gain. Development networks on the other hand are usually more informal and unstructured. While they may meet the first three characteristics in Table 1, they will typically not
have a purpose linked directly to financial gain or competitive advantage for the members. Although regional business networks will often result in gain for companies, they are not always solely established with that in mind and are often motivated by broader goals that have to do with regional and national economic development for the greater public good. 

A policy focus towards collaboration

The past twenty years has seen policy makers in economies across the world invest large amounts of public resources on cluster development policies, the foundation of science parks, business networks and other forms of geographically clustered business activities in order to stimulate regional innovation.

Although there has never been an explicit policy on the island of Ireland geared towards networking, collaboration or business clusters, the two economies have recognised the value of a cluster-type approach for some time. In the 1990s strategy and policy documents on both sides of the border recommended that it would be advantageous for industrial policy to include an element of building strong groupings of connected companies or industries. More recently economic development agencies across the island have developed programmes to encourage collaboration between firms on a ‘network’ basis. These are typically focussed on achieving hard research and commercial outcomes. Networks and inter-firm collaboration have become increasingly prominent in economic strategy documents across the island including the Strategy for Science, Technology and Innovation (2006), Innovation in Ireland (2008) and the First report of MATRIX: The NI Science panel (2008). 

The profile of business networks across the island

There has traditionally been very little information on business networks on the island, partly due to the difficulties involved in tracking networking activity. Networks are dynamic organisations that are constantly evolving. They can form, cease or go into suspension. Therefore any profile of networking activity represents a snapshot in time.

The most recent previous research into networking activity on the island was conducted in 2005. The mapping exercise conducted as part of this research has identified that the number of business networks has effectively doubled since 2005 from 110 to 240 (Figure 1 - see page 4 on full report). 

Most networks are located in Ireland, accounting for around four-fifths of networks on the island.
Networks in Northern Ireland accounted for one-tenth of all networks on the island, with a smaller number of all-island networks. The overall profile of networks is broadly similar to that recorded in 2005 (Table 2).

The majority of networks fall within the ‘business networks’ category. This type of network accounts for around two-thirds of all networks on the island. Newly introduced Government initiatives across the island have encouraged the formation of new business networks including Invest NI’s Collaborative Networks Programme and Enterprise Ireland’s Industry Led Research Partnerships Initiative. These types of programmes encourage the formation of more ‘goal-orientated’ networks with hard commercial and research targets. Training networks funded under the Skillnets programme also account for a significant number of business networks.

Development networks account for almost one-fifth of networks on the island. This has increased slightly since 2005 largely accounted for by an increase in activity from the County Enterprise Boards in Ireland. Regional Business Networks account for just over one-tenth of networks, a similar proportion to 2005’s ‘Regional Business Clusters’.

The majority of networks on the island are relatively young, with most having been established in the past five years. While the profile of networks remains relatively young, it has shifted slightly with a greater proportion of older networks within the ‘development network’ and ‘regional business cluster’ categories, while the vast majority of networks established within the past two years fall within the ‘business network’ category. This is reflective of the change in policy focus across the island, where networks that are more commercially focussed with specific research and commercial objectives are being actively supported by both Governments.

The profile of network membership is significantly weighted towards smaller firms, with the vast
majority of network members having less than 50 employees. Networks on the island are largely comprised of membership across sectors as firms seek to collaborate with other companies in different sectors with expertise in other areas to maximise the benefits of interconnections with
other industries. However, there are an increasing number of networks in strategically important
sectors such as ‘health life sciences’ and ‘information and communications technology’ (ICT). 

Table 2: Change in the profile of networks on the island (2005-10)

The economic benefits of networks The economic returns from networking are based on better access to skilled labour, opportunities to share inputs and a faster flow of new ideas generating external economies of scale and mutual interdependence. Most obviously, business networks may provide member firms access to resources which would otherwise be beyond the scope of a single firm. Individual firms can face a number of limitations when trying to compete in global markets such as scale, expertise etc. Through collaboration firms can complement each other and specialise in different areas to overcome such barriers to achieve collective efficiency and compete in markets beyond their individual reach. This is the main rationale for government intervention to encourage the development of business networks as a policy tool to facilitate economic development.

On a less tangible level networks and clusters facilitate the transfer of tacit knowledge between
firms. This process of ‘networked learning’ is now seen as one of the most valuable outputs for
firms that participate in networks, allowing them to develop or enhance a range of competencies in a flexible manner. 

The all-island economy is largely comprised of small to medium sized enterprises. Therefore many businesses on the island have the potential to benefit from being part of a business network and adopting a collaborative approach to succeed in new markets and to help overcome problems of scale.

The primary research carried out for this study has provided significant evidence that network membership can influence business behaviour in a positive manner. [1]

Before turning to quantifiable impacts it is important to firstly consider how network membership can change business behaviour. Figure 2 (over) summarises some of the key changes in business behaviour resulting from network membership, which can in turn lead to economic impacts. 

Behavioural Aspects

Members of a network are generally more likely than other firms to engage in activities to share information and learn from other businesses, to work together on cost reduction measures to maximise competitiveness, and to collaborate on commercial ventures such as development of new products or penetration of new markets. 

Figure 2: Behavioural aspects of networks

Table 3: Economic outcomes resulting from network membership

Economic Outcomes

Through their engagement in these activities, members of business networks have benefited from sales increases, greater competitiveness and enhanced innovative activities as a direct result of their membership of a network (Table 3). Increases on sales and employment have a direct impact within the economy. This research has found that many companies experienced an increase in turnover as a direct result of network membership, and on average, increased net sales by approximately 17%. Almost one quarter (23%) of business network members have either created or safeguarded employment as a direct result of network membership. On average, those companies have created / safeguarded six full time equivalent (FTE) jobs.

While these are extremely positive results there remain a number of business network members who have stated that they did not achieve increased turnover or an increase in employment as a direct result of network membership. This is a reminder that network effectiveness is not always assured and that a number of key factors must be in place to drive successful outcomes. 

Determinants of Effectiveness

This research shows that there are a number of key determinants which support effective networks (many of which are well documented in the literature):

• Industry Led - It is important that networks are industry led which works to ensure that the network is focused on enterprise relevant outcomes. On the island, firms themselves are the main drivers in the establishment of networks, but state agencies and, to a lesser extent, educational institutions are playing an important role in the establishment of business networks. It is important that networks continue to be industry led, with Government agencies supporting only where appropriate.
• A common mission - Ensuring a defined strategic direction supported by a set of clear and agreed business objectives is an essential component of a successful network [2]. Network facilitators have identified having a common purpose to meet business needs as the single most important factor for enabling network effectiveness. A scoping study to research market opportunities and establish who the appropriate companies are to form a network is a good model to follow.
• Effective leadership - Network structures differ considerably from traditional organisational structures in that no one single person/organisation is in charge and all members have equal rights. Realising the synergies that can be created within networks requires different forms of leadership that rely on facilitation capabilities. The right type of facilitation skills are required to effectively manage networks, to build trust and encourage network members to work together. 
• Effective membership and governance structures - the consultations and network case studies highlighted that effective governance structures are key to creating the right conditions for network success. They help to promote the development of trust, the transfer of information and knowledge and joint problem solving across the membership. How a network is structured determines its strength and how member firms perceive the value of the network and how they behave within it.
• The ‘right membership’ mix - A network structure is typified by a broad mission and joint, strategically interdependent action. There is a strong commitment to overriding goals, and members agree to commit resources over a longer period of time. The crucial factor in ensuring that a network functions effectively towards a common goal is ‘ensuring the “right membership”. To ensure the optimum consortia of members it is important to have limited membership and formal criteria and processes for network entry and exit. Membership on a cross-border and international basis can be of benefit to boost trade links and help to provide market access in export markets.

A good membership mix can also involve firms of differing sizes. For example, SMEs can benefit from having access to larger companies and can provide opportunities for new markets and customers that smaller companies might not have had access to on their own - particularly in the case of export markets. Equally, SMEs can develop opportunities by collaborating with similar sized firms to jointly bid on large scale tenders that they would not have been able to compete for in isolation.

Barriers to Effectiveness

The main barriers to network effectiveness relate to a lack of commitment of member firms, a lack of members time and funding.

• Commitment - Both network facilitators and members identified the lack of commitment by member firms as an important barrier to the business network working well. In the case studies which show success stories the benefits to collaboration appear to be very clear to members, leaving little doubt about incentives to collaborate.
• Time - A lack of members’ time was the most regularly cited barrier to effectiveness (by 73% of members and 88% of facilitators). The lack of time is likely to be related to the relative importance placed on the network’s activities by its members.
• Funding - This research has found that networks are highly dependent upon public funding, although there is some evidence of deadweight. Networks identified limited scope for alternative sources of finance.

In the context of constrained resources, networks will have to look for alternative methods of finance to secure their long term sustainability. One potential approach is that the level of funding is digressive. If the network is delivering real benefits for the member companies it should be possible to finance the network through its membership once the public funding period expires. 

Conclusions

This research has identified a number of interesting conclusions with respect to business networks and collaboration on the island. In some cases this provides confirmation of known trends. In other cases it identifies new challenges and issues. The main conclusions arising from the research can be summarised as follows:

• A shift in policy focus - Since 2005 there has been a growing recognition of the importance of collaboration, and policy has developed to be supportive of this. Numerous recent policy documents make reference to encouraging collaboration. The approach taken now encourages collaboration on a ‘network basis’, and represents an important strategic shift from the top-down approach adopted in the 1990s.

• Rapid growth in network activity - The number of networks has grown substantially over the past five years, the growth patterns are broadly reflective of how policy has developed in recent years. Most networks comprise a variety of sectors, although there is evidence of an increasing incidence of networking in growth sectors such as health and life sciences and ICT. Most network members are SMEs, although a small proportion of large firms also participate, a mix of company sizes, which is reflective of the structure of the economies in both jurisdictions.

• Networks can positively impact on company balance sheets - There is evidence of direct economic outcomes for businesses that are members of networks. The evidence indicates some quantifiable impacts such as increases in sales, employment, R&D expenditure, exports etc. There is also evidence of unquantifiable benefits including a large proportion of firms developing new sales through the network, and supply chain benefits. Our survey also indicates that companies are more likely to jointly bid for contracts or collaborate on R&D projects if they are members of a network.

• There is an active role for the public sector to support networks and collaboration - Due to market failures and the dependence of networks on public funding, particularly in the early stages of scoping and network formation there is an active public sector role in encouraging the development of networks, and collaboration can play a key role in economic policy now more than ever. To overcome the challenges presented by the current recession businesses across the island need to be innovative and develop new markets abroad. This report has shown that in some instances networks can contribute positively to both export sales and research and development activity.

Public sector support can take a number of forms, including broader enterprise policy, direct funding supports, and promotional activities. The nature and scope of this support varies depending on wider policy objectives and the specific aims of the individual networks. There are a number of key characteristics/factors which support effective networks (many of which are well documented in the literature), namely:

• Clear and agreed business objectives supported by a defined strategic direction are central to effective networks - The development of new networks should always be linked to market opportunities; this helps to ensure that they are industry led. Having a scoping study to research market opportunities and establish who the appropriate companies are to form a network is a good model to follow. 
• Effective leadership through facilitation can drive network performance - The role and skills of the facilitator is an important factor for network success. The right type of leadership skills are required to effectively manage networks, to build trust and encourage network members to work together.
• Effective network structures are crucial to encourage effective collaboration - The membership structure and governance arrangements are key to creating the right conditions for network success. How a network is structured determines its strength and how member firms perceive the value of the network and how they behave within it.
• To function effectively networks need to ensure the ‘right membership’ mix – To ensure the optimum consortia of members it is important to have limited membership and formal criteria and processes for network entry and exit. Membership on a cross-border and international basis can be of benefit to boost trade links and help to provide market access in export markets. A good membership mix can also involve firms of differing sizes. For example, SMEs can benefit from having access to larger companies and can provide opportunities for new markets and customers that smaller companies might not have had access to on their own – particularly in the case of export markets. Equally, SMEs can develop opportunities by collaborating with similar sized firms to jointly bid on large scale tenders that they would not have been able to compete for in isolation. Therefore, the ‘right membership’ can take many forms and is dependent upon the objectives of each individual network. The main barriers to network effectiveness relate to a lack of commitment of member firms, a lack of members time and financing.

Notes

[1] Metrics indicating network effectiveness included growth in new firms, employment, turnover, costs, competitiveness, innovation and skills.

[2] Such as sales targets, or activity targets such as number of sales leads, number of patents or publications etc.