Industry clusters and firm performance: Evidence from the leather product industry in Addis Ababa

Industrial clustering is the co-location of firms in a geographic area, which can lead to numerous economic benefits such as joint resources and knowledge pooling, R&D collaboration, technology sharing, and joint marketing. This study aims to examine the influence of industrial clustering on the performance of firms in the leather and leather products industry in Addis Ababa. Moreover, this study aims to investigates whether innovation capacity and collaboration networks indirectly contribute to the relationship between clustering factors and firms' performance. In this study, both primary and secondary data were collected for analysis. Partial Least Squares Structural Equation Modeling was employed to explore the impact of clustering on performance in terms of innovation, job creation, attracting investment, export intensity, and productivity growth. This study found that a one-unit increase in cluster factors is associated with a 0.43-unit increase in firm performance. The mediation analysis revealed that collaboration networks mediate the relationship between cluster factors and firm performance by 0.21 and innovation capacity mediates the relationship between cluster factors and firm performance by 0.15 units. The findings indicate that industrial clusters strongly influence firm performance within the leather industry in Addis Ababa. Therefore, the results suggest that innovation capacity and collaboration networks are mechanisms through which industrial clusters affect firm performance. Future researchers should explore the cluster effect in other industrial sectors and regions to validate the research findings.