Virtual Incubation in Industrial Clusters: A Case Study in Pakistan

In industrial clusters, transaction costs are kept low and free riding is discouraged by a community mechanism developed through dense and repeated interactions among entrepreneurs. In such environments, new entrants without established reputations and connections are put at a distinct disadvantage. This negative effect on new entry must be neutralized for an industrial cluster to expand. Using enterprise level data from Pakistan, this study finds that personal networks are indeed important for successful enterprise operation, which works to the advantage of incumbents, but that subcontracting plays the role of virtual incubation in nurturing new enterprises, reinforcing the cluster’s dynamism.