Knowledge and trust: the regulation of cooperation in industrial districts. Birmingham (UK) and Providence (USA)

"By comparing the history of the jewellery making districts of Birmingham and Providence this paper seeks to answer the following questions: How is knowledge shared between agents who are also competing with each other? How do small firms learn to trust each other and why is this trust important in reducing contractual hazards? Can governance structures help set up trust based relations and reduce transaction costs by reducing the impact of opportunistic behaviour? The jewellers of Providence, the capital of the state of Rhode Island, on the East coast of the United States, can be defined as ‘networked specialists’ competing and cooperating in a well-defined area. The prosperous 1880s-90s were followed by decades of decline as the trade collapsed under the pressure of opportunism, design copying, interfirm suspicion and price shaving. The paper details how these evils destroyed the craft nature of the industry and in the long run generated negative externalities, even while the industry was growing in terms of output and of the number of firms. This pattern of spiralling, ruinous competition has been explained as the consequence of ‘the evils of overcompetition, derived from the jewellery sector’s own structure and technical capabilities’ . Structure and technological capabilities, however, might not be the reason for Providence’s decline. By looking at the Birmingham jewellery trade it is possible to see that, though the structure of the industry and its technical capabilities encouraged competition, they did not make ruin inevitable. Despite suffering from the same contractual hazards as Providence in the late nineteenth century, Birmingham’s jewellers were able to create governance structures to regulate competition (without price fixing) and promote cooperation. From the late 19th century through to the troubled inter-war years and the economic recovery of the 1950s and 60s the Birmingham Jewellers’ Association created mechanisms to allow firms to reduce the risks associated with the fragmented structure of the industry. The activities of the Association ranged from credit checks, design theft prosecution, debt collecting, workers’ training, political lobbying at a national level, to schemes for firms to share machinery. Thanks also to the activities of the BJA the district prospered, maintaining its distinctive productive structure. Though after the Second World War the number of firms declined, there was no concentration and the district maintained its distinctive productive structure. Jewellery is the Midland trade which has survived longer than most of the region’s manufacturing industries. In Providence similar attempts at associating failed. Following from this failure to establish internal forms of governance, the district started losing its structure and the craft based character of its production. While after 1945 the Birmingham district responded successfully to changes in the consumer market the Providence district, instead, went into terminal decline. Some established large firms continued to expand but outwork and start-ups continued to proliferate. By the 1960s the number of firms had decreased while the surviving firms had become bigger but trapped in a low-wage, low-quality equilibrium, under the pressure of foreign competition. By the 1970s the trade had become the symbol of the general collapse of light manufacturing in New England. This paper compares the historical development of the two industrial districts to identify what factors allowed cooperation to flourish in Birmingham and not in Providence and what impact this had on the industrial structure of the two districts."