The Evolution of an Industrial Cluster in China

CHLRWORKINGPAPERSERIES中国人力资本与劳动经济研究中心工作论文系列TheEvolutionofanIndustrialClusterinChinaBeltonFleisherDinghuanHuWilliamMcGuireXiaoboZhangWorkingPaper12December2009CHINACENTERFORHUMANCAPITALANDLABORMARKETRESEARCHCENTRALUNIVERSITYOFFINANCEANDECONOMICS中央财经大学中国人力资本与劳动经济研究中心39XueyuanSouthRoad,HaidianDistrict,Beijing,China100081Web::86-010-62288298©2009byBeltonFleisher,DinghuanHu,WilliamMcGuireandXiaoboZhang.Allrightsreserved.1  TheEvolutionofanIndustrialClusterinChina1November24,2008BeltonFleisherDepartmentofEconomicsOhioStateUniversityColumbus,OH43210&ChinaCenterforHumanCapitalandLaborMarketResearchCentralUniversityofFinanceandEconomicsBeijing,China&IZAEmail:[e-mail]yofAgriculturalSciencesChinaEmail:[e-mail]entofAgricultural,Environmental,andDevelopmentEconomicsOhioStateUniversityColumbus,OH43210Email:[e-mail]nalFoodPolicyResearchInstitute(IFPRI)Washington,DC&ZhejiangUniversityEmail:[e-mail]  Prelminary.  Please do not cite without author permission.                                                            1Theauthorsaregratefulfortheopportunitytopresentearlierdraftsofthispaperattheconference,MicroeconomicsofGrowth,StEdmund’sHall,UniversityofOxford;theStudent/FacultySeminaroftheCenterforHumanCapitalandLaborMarketResearch,CentralUniversityofFinanceandEconomics,andtheCenterforChineseAgriculturalPolicy,ChineseAcademyofSciences,InstituteofGeographicalSciencesandNaturalResourcesResearch.WeparticularlyacknowledgethevaluablesuggestionsofJohnKnightandJikunHuang.AlsowewouldliketothankKeijiroOtsukaandTetsushiSonobeforsharingthefirst-roundsurveyquestionnaireanddatawithus.FinancialsupportforthesurveyswasprovidedbytheInternationalFoodPolicyResearchInstitute,OhioStateUniversityDepartmentofEconomicsandbytheOhioStateUniversityofAgricultural,Environmental,andDevelopmentEconomics. 2  TheEvolutionofanIndustrialClusterinChinaAbstractWeusetworoundsofsurveys,in2000and2008,intheZhiliTownshipchildren’sgarmentclusterinZhejiangProvincetoexamineindepthitsevolution.Firmsizehasgrownonaverageintermsofoutputandemployment,andincreasingdivergenceinfirmsizeshasbeenassociatedwithasignificantincreaseinspecializationandoutsourcingamongfirmsinthecluster.Althoughinitialinvestmentshavemorethantripled,theyremainlowenoughsothatformalbankloansremainaninsignificantsourceoffinance.Accompanyinglowerentrybarriers,therehavebeenanincreasingnumberoffirmsinthecluster,whichhavedrivendownprofitandbidupwages,particularlysincetheyear2000.Facingseverecompetition,morefirmshavebeguntoupgradetheirproductquality.Bytheyear2007,nearlyhalfofthesampledhadestablishedregisteredtrademarksandnearly20percenthadbecomeISOcertified.DecliningprofitratiostoinitialinvestmentandstagnantTFPimplythatthefutureofthisindustryislikelytorestonusingmoreadvancedtechnologyandhigherratiosofcapitaltolabor,whichimplyincreasesinfirmsizeandinitialinvestment.Thustraditionalsourcesoffinancethatdonotrequirehonest,efficient,andtransparentcourtsarelikelytofadeastheneedforimprovedlegalandfinancialinstitutionsbecomecriticalfactorinfluencingChina’sgrowthprospects.JELCodes:L22,O14,P233  1.IntroductionChina’srapidruralindustrializationseemstodefytheconventionalwisdomthathightransactionscostsimplyverticalintegration.Itsrapidindustrializationhasbeenaccompaniedbytheemergenceofnumerous“specialtycities”ofaparticularkind.Thousandsoffirms,largeandsmall,manyspecializedinafinelydefinedproductionstep,areagglomeratedinadenselypopulatedregion,wheresomeparticularmanufacturedconsumergoodischurnedoutinmillions(ifnotbillions)annually.Manyformerlyruraltownsinthecoastalareashavebecomesospecialized,boastingthemselvesastheworld’sSocksCity,SweaterCity,Kid’sClothingCity,FootwearCapital,andsoon.WhiletheserapidlygrowingruralindustrieshavebeenamajorengineofChina’sunprecedentedeconomicgrowthinthelasttwodecades,theirroleinthedevelopmentandgrowthprocesscanbeeasilyoversimplified.Moreovertherearewarningsignsthattheseindustries’roleasasourceofgrowthisreachingitslimits.Competitivepressuresatthegloballevel,productmarketlevel,andonthelabormarketsidearelimitingoutputprices.Atthesametime,asChina’sgrowingprosperityisreflectedinrealwageincreases,manufacturingcostsarerisingbecauseproductivityrisesdonotkeeppacewithrisinglaborcosts.Despitenumerouspopularmediareportsonthesephenomena(forexampleDeering,2008;Lee,2008),fewstudieshaverigorouslyinvestigatedthemechanismsbehindtheemergenceandevolutionoftheseclusters.Thecluster-basedruralindustrializationdescribedabovenotonlyplaysasignificantroleinChina’sindustrialgrowthbuthasalsobeenimportantintheearlystagesofindustrializationinotherEastAsiancountriesandmanyEuropeancountries(Hayami,1998;WorldBank,2008).Manyclustersareinitiallyformedasagglomerationsofsmallandmediums-sizedenterprises(SMEs)(Schmitz1995;SchmitzandNadvi,1999).BecausemostSMEsaregenerallylaborintensive,thecluster-basedruralindustrializationmodelisconducivetogeneratingnonfarmemploymentandfi