By Dong-Sung Cho, presented at the 18th TCI Global Conference, Daegu, 2015.

1. Clusters as a Basis of
Capitalism 5.0
Dong-Sung Cho
Opening Session: New Direction of Cluster Policy in a Creative Economy

2. Cluster as a basis of Capitalism 5.0:
A Case of Dongdaemun Fashion Cluster
TCI Global Conference
2015. 11. 4
Dong-Sung Cho
Professor of Strategy, Cheung Kong Graduate School of Business
Professor Emeritus, Seoul National University Business School

3. Cluster As a Basis of Capitalism 5.0
Mechanism for Creating Cluster-led Capitalism 5.0
Dongdaemun Fashion Cluster
A Case of Dongdaemun Design Plaza

4. Content: Invisible hands leading free market economy
Period: 1776-1929
Theorist: Adam Smith
Capitalism 1.0
Effect: Base theory of free trade policy by England and France
in their entry to overseas market.
Classic Capitalism
Problems:
In 1917, communist revolution in Russia
In, 1929, market failure in the US leading to the Great depression
In 1931: abolition of the gold standard in the Great Britain
Evolution of Capitalism

5. Content:
Adjustment of market failure through government intervention
Period : 1929-1979
Theorist: John Maynard Keynes
Capitalism 2.0
Effect:
The US overcame the Great depression by creating effective
Demand through state investment in social infrastructure
Revised Capitalism
Problems:
In 1965, The Vietnamese War caused massive fiscal deficits in US
In 1971, the US abolition of the gold standard
In 1973 and 1979, energy crises
Evolution of Capitalism

6. Content: Letting firms take care of welfare with conservative view
Period: 1979-2008
Theorists: Milton Friedman, Anthony Giddens
Capitalism 3.0
Effect:
In 1979, Conservative Thatcher became the UK Prime Minister
In 1981, Republican Ronald Reagan became the US President
In 2008. MB Lee became the Korean President
New Capitalism, Neoliberalism
Problems:
In 1991, disintegrated USSR allowed US global hegemonic power
In 2001, Enron disappeared due to hubris-based illegal practices
In 2008, Financial crisis in US
In 2011, Occupy Wall Street
Evolution of Capitalism

7. Problems:
In 2011, “Occupy Wall Street” movement lasted 73 days
without any alternative ideas
Period: 2008-2011
Theorist: Edward Freeman, Anatole Kaletsky
Capitalism 4.0
Content:
99% People in society should take over the economy that has
been led by 1%, big corporations that are angel-faced villains
People-Centered Capitalism
CSR Capitalism
Evolution of Capitalism

8. -8-
Need for a New Capitalism 5.0

9. Market-centered
Capitalism 1.0
Adam Smith
Classic capitalism
Gov’t-centered
Capitalism 2.0
John M. Keynes
Revised capitalism
Firm-centered
Capitalism 2.0
Milton Friedman
Anthony Giddens
New capitalism
Society-centered
Capitalism 4.0
Edward Freeman
Anatole Kaletski
CSR capitalism
?-centered
Capitalism 5.0
A new form of capitalism
needed
Evolution and Revolution of Economic Thoughts
-9-

10. Peter Drucker proposed “Every single social and global issue
of today is a business opportunity in disguise.”
Michael Porter and Mark Kramer coined the words “Creating
Shared Value.”
People-Centered Capitalism
CSV Capitalism
Period: 2012-
Theorist: Peter F. Drucker, Michael E. Porter
Capitalism 5.0
-10-
Evolution of Capitalism

11. GOVERNMENT
FIRM CONSUMERS
SOCIETY LABOR
STOCK
HOLDERS
MARKET
Market-Based Capitalism 1.0

12. MARKET
FIRM CONSUMERS
SOCIETY LABOR
STOCK
HOLDERS
GOVERNMENT
Government-Based Capitalism 2.0

13. GOVERNMENT
MARKET CONSUMERS
SOCIETY LABOR
STOCK
HOLDERS
FIRM
Firm-Based Capitalism 3.0

14. GOVERNMENT
FIRM CONSUMERS
MARKET LABOR
STOCK
HOLDERS
SOCIETY
Society-Based Capitalism 4.0

15. GOVERNMENT
FIRM CONSUMERS
MARKET LABOR
STOCK
HOLDERS
CLUSTER
Cluster-Based Capitalism 5.0

18. New Paradigm in Capitalism
Laissez-faire

Capitalism 1.0
Mercantilism

Capitalism 3.0
Paternalism

Capitalism 2.0
Constitutionalism

Capitalism 4.0
Cluster-based
Capitalism 5.0

19. Market-based
Capitalism 1.0
Adam Smith
Classic Capitalism
Government-based
Capitalism 2.0
John M. Keynes
Revised Capitalism
Firm-based
Capitalism 3.0
Anthony Giddens
New Capitalism
Society-based
Capitalism 4.0
Anatole Kaletsky
People Capitalism
Cluster-based
Capitalism 5.0
Peter Drucker
Michael Porter
CSV Capitalism
Evolution of Capitalism

20. Clustered
business district
Non-clustered
business district
Geographic dispersion Densely populated Sparsely populated
Infrastructure sharing Necessary Not necessary
Transaction cost Low High
Information sharing Easy Difficult
Competitive spirit and rivalry High Low
Innovative spirit High Low
Physical contacts Many Few
Anonymity Low High
Trust High Low
Community spirit High Low
Regulation Self regulation Rule of law
Government subsidy Collective Individual
CSR Collective Individual
Nature of Industrial Clusters

21. Causes for Industrial Clustering
• Vision of entrepreneurs and government
• People
• Market
• Infrastructure (hospitals, cultural centers, schools)
• Raw materials
• Transportation
• R&D capabilities
• Intended government policy

22. Classification of Industrial Clusters by Region
1. Inter-city Cluster:
2. Intra-city Cluster:
3. Street Cluster:
4. Industrial Zone:
 London Savile Row Men’s Clothing
 Seoul Dongdaemun Fashion Cluster
 Silicon Valley IT Cluster
 Los Angeles Fashion District
 New York Wall Street Financial Center
 Tokyo Ginza Department Cluster
 Seoul Shindangdong Dduck Bok-ki Street
 Sophia-Antipolis Research Park
 SNU Science Park
 New York Garment District
 New York 5th Avenue Shopping Street
 Beijing Zhongguancun IT cluster

23. Single Vertical Cluster Single Horizontal Cluster Single Complex Cluster
R&D
Design
Material
Production
Warehousing
Logistics
Sales
After service
(asanexample)
Babyclothes
Ladies’clothes
Men’sclothes
Specialclothes
Etc.
Classification of Industrial Clusters by Business Scope
Multiple Vertical Cluster Multiple Horizontal Cluster Multiple Complex Cluster
……
……
……
Multiple: combination of multiple industries Complex: combination of related and supporting industries
Upstream: clusters in the upper part of the value chain Downstream: clusters in the lower part of the value chain

24. Nature
Single
Multiple
Vertical
Horizontal
Complex
Upstream
Downstream
Vertical
Horizontal
Complex
Full
Upstream
Downstream
Partial
Full
Classification of Industrial Clusters by Business Scope
 Savile Row men’s clothing
 Dongdaemun Fashion Cluster
 Zhongguancun IT Cluster
 LA Fashion District
 Wall Street Financial Center
 Ginza department cluster
 Shindangdong Dduck Bok-ki Street
 Sophia-Antipolis Research Park
 SNU Science Park
 NY Garment District
Full
Upstream
Downstream
 Silicon Valley IT Cluster
 5th Avenue shopping street

25. Region
Nature
Cluster
Classification of Industrial Clusters
Single
Multiple
Vertical
Horizontal
Complex
Upstream
Downstream
Vertical
Horizontal
Complex
Partial
Full
Upstream
Downstream
Partial
Full
Inter-city Cluster
Intra-city Cluster
Street Cluster
Industrial Zone

26. Traditional classification New classification
• Industry-specific classification
• Region-specific classification
• Inter-City
• Intra-City
• Street
• Industrial Zone
• Nature of Business Scope
• Single (Vertical-Horizontal-Complex)
• Multiple (Vertical-Horizontal-Complex)
 Cluster productivity ↑
• Beyond geographically assembled
cluster
• Value chains are embedded in virtual
cluster
 Creating Shared Value ↑
Regional
Cluster
Virtual
Cluster
Generic Cluster
New Classification of Industrial Clusters

27. New Classification of Industrial Clusters
Cases of virtual clusters
• Mileage alliance by Airline carriers
• Affiliated companies of major manufacturers
• Franchises
• Others
The new definition of clusters will include the great
majority of economies.

28. Comparison of Apparel Clusters
Location Seoul Los Angeles New York
Name
Dongdaemun Fashion
Cluster
LA Fashion District NY Garment District
Size
Densely populated
30 blocks
90 blocks
23th-42nd streets &
5th-9th Avenues
(1 square mile)

41. Comparison of Apparel Clusters
Location Seoul Los Angeles New York
Name
Dongdaemun Fashion
Cluster
LA Fashion District NY Garment District
Size
Densely populated
30 blocks
90 blocks
23th-42nd streets &
5th-9th Avenues
(1 square mile)
Year started 1953 1960s Early 20th century

42. Comparison of Apparel Clusters
Location Seoul Los Angeles New York
Name
Dongdaemun Fashion
Cluster
LA Fashion District NY Garment District
Size
Densely populated
30 blocks
90 blocks
23th-42nd streets &
5th-9th Avenues
(1 square mile)
Year started 1953 1960s Early 20th century
Characteristics
Multiple-Vertical-
Downstream
Multiple-Vertical-
Full
Multiple-Complex

43. Comparison of Apparel Clusters
Location Seoul Los Angeles New York
Name
Dongdaemun Fashion
Cluster
LA Fashion District NY Garment District
Size
Densely populated
30 blocks
90 blocks
23th-42nd streets &
5th-9th Avenues
(1 square mile)
Year started 1953 1960s Early 20th century
Characteristics
Multiple-Vertical-
Downstream
Multiple-Vertical-
Full
Multiple-Complex
Strengths through
Synergy
Speed to the market,
Direct distribution via
the Internet
Supply of labor from
Mexico, proximity
to Korea Town
Chelsea with fine arts,
Museums such as
MOMA, 5th Avenue,
global fashion media

44. Comparison of Apparel Clusters
Location Seoul Los Angeles New York
Name
Dongdaemun Fashion
Cluster
LA Fashion District NY Garment District
Size
Densely populated
30 blocks
90 blocks
23th-42nd streets &
5th-9th Avenues
(1 square mile)
Year started 1953 1960s Early 20th century
Characteristics
Multiple-Vertical-
Downstream
Multiple-Vertical-
Full
Multiple-Complex
Strengths through
Synergy
Speed to the market,
Direct distribution via
the Internet
Supply of labor from
Mexico, proximity
to Korea Town
Chelsea with fine arts,
Museum such as MOMA,
5th Avenue, global
fashion media
Strategic Issues Being sandwiched Rule of law
Global economy coupled
with real estate price

45. Comparison of Apparel Clusters
Location Seoul Los Angeles New York
Name
Dongdaemun Fashion
Cluster
LA Fashion District NY Garment District
Size
Densely populated
30 blocks
90 blocks
23th-42nd streets &
5th-9th Avenues
(1 square mile)
Year started 1953 1960s Early 20th century
Characteristics
Multiple-Vertical-
Downstream
Multiple-Vertical-
Full
Multiple-Complex
Strengths through
Synergy
Speed to the market,
Direct distribution via
the Internet
Supply of labor from
Mexico, proximity
to Korea Town
Chelsea with fine arts,
Museum such as MOMA,
5th Avenue, global
fashion media
Strategic Issues Being sandwiched Rule of law
Global economy coupled
with real estate price
Problems Lack of R&D Counterfeiters
Lack of growth versus
real estate price hike

46. Comparison of Apparel Clusters
Location Seoul Los Angeles New York
Name
Dongdaemun Fashion
Cluster
LA Fashion District NY Garment District
Size
Densely populated
30 blocks
90 blocks
23th-42nd streets &
5th-9th Avenues
(1 square mile)
Year started 1953 1960s Early 20th century
Characteristics
Multiple-Vertical-
Downstream
Multiple-Vertical-
Full
Multiple-Complex
Strengths
through
Synergy
Speed to the market,
Direct distribution
via the Internet
Supply of Mexican
labor, proximity to
Korea Town
Chelsea with fine arts,
Museum such as MOMA, 5th
Avenue, global fashion media
Strategic Issues Being sandwiched Rule of law
Continued differentiation,
Real estate price
Problems Lack of R&D Counterfeiters
“Save the Garment Center”
Real estate price hike
Solution
Concurrent Development of
Government Policy and Corporate Strategy

47. Cluster As a Basis of Capitalism 5.0
Mechanism for Creating Cluster-led Capitalism 5.0
Dongdaemun Fashion Cluster
A Case of Dongdaemun Design Plaza

48. Role of the Government in Business
1. Rule-Setter - legislation of laws and regulations
- intermediary, coordinator
- management of market order
2. Supporter - guarantor and loans
- subsidizer through financing and tax shelters
- planner
- information provider
- insurance provider
3. Regulator - protector of consumerism
- protection of labor
- enforcer of anti-trust, fair trade laws
- discretionary intervention
4. Active Participant - producer
- buyer
- co-decision maker
5. Others

49. Paradigm of Business-Government Relations
Hi
Supporter
Lo
RegulatorLo Hi
Laissez-faire
Mercantilism Paternalism
Constitutionalism

50. Evolution of Korea’s Business-Government Relations
Hi
Supporter
Lo
RegulatorLo Hi
Laissez-faire
Mercantilism Paternalism
Constitutionalism
President Syng-man Rhee
(1948-60)
President Park Chung-Hee
& Chun Doo-Hwan
(1961-88)
President Rho Tae-Woo
& Kim Young-Sam
(1988-1998)
President Kim Dae-Jung
& Rho Moo-Hyun
(1998-2008)
?

51. Hi
Supporter
Lo
RegulatorLo Hi
China
Korea
Finland
UK USA
Business-Government Relations by Nations
Japan
?

52. New Paradigm in Capitalism
Laissez-faire

Capitalism 1.0
Mercantilism

Capitalism 3.0
Paternalism

Capitalism 2.0
Constitutionalism

Capitalism 4.0
Cluster-based
Capitalism 5.0

53. Mechanism for Creating Cluster-led Capitalism 5.0
Combination
1. Subject: vision of the leader (entrepreneurs and government) and people
2. Environment: market and infrastructure
3. Resource: raw materials
4. Mechanism: transportation, R&D capability, and intended government policy as
the mechanism
Permutation
1. Market-led Cluster Development
2. Government-led Cluster Development
3. Firm-led Cluster Development
4. Society-led Cluster Development
5. Jointly- and Concurrently-led Cluster Development
Time
1. Old versus New
2. Fast versus Slow
3. Long-term versus Short-term

54. Causes for Industrial Clustering
• Vision of entrepreneurs and government
• People
• Market
• Infrastructure (hospitals, cultural centers, schools)
• Raw materials
• Transportation
• R&D capabilities
• Intended government policy
Subject
Subject
Environment
Environment
Resources
Mechanism
Mechanism
Mechanism

55. GP
CS
R&D Policy Industrial
Policy
Tax
Policy
Labor
Policy
Environment
Policy
M&A
Strategy
Lowering exit
barriers through
flexible
application of
anti-trust act
Limitation
imposed on
labor union
movement
Generic
strategy
Environment
protection as a
source of
differentiation
Product
(R&D)
strategy
R&D support for
new product
development
Tax incentive
for new product
development
Market
strategy
Government
insurance for
FDI
Tax incentive for
Globalization
Survival
strategy
Financial
restructuring
Tax exemption
for factory
closure
Concerted effort
for labor
flexibility
Jointly- and Concurrently-led Cluster Development:
Synchronized Development of Market’s Invisible hands, Government Policy,
Corporate Strategy, and Societal Pressure

56. Goal Policy 1 2 3 4 5
Gov
ern
ment
Poli
cy
Econ
omy
Dom
ain
Macro
Growth
Inflation
International balance
Micro
Industrial policy
Tax
Labor
Means
Information
Insurance
Ad
mi
nis
tra
tiv
e
Support
Reg
ulati
on
Licensing
Support-backing
regulation
Health/Safety/Savi
ng/Environment
Finance
Fiscal
Welfare
Inclusive welfare
Selective welfare

57. Goal Strategy 1 2 3 4 5
Corpo
rate
Strate
gy
Corporate
value
(Profitabil
ity)
Enterprise
Starting new venture/new
business development
M&A
Corporate
Generic
strategy
Low-cost
Differentiation
Globalization
Diversification
Other strategies
(Example: ____________)
Social value(Public int
erest)
Creating employment opportunity
New technology development
Environment protection
Balance in income distribution
Others(Example:____________)

58. Cluster As a Basis of Capitalism 5.0
Mechanism for Creating Cluster-led Capitalism 5.0
Dongdaemun Fashion Cluster
A Case of Dongdaemun Design Plaza

59. Night Life in Dongdaemun Fashion Cluster
< http://cafe.naver.com/hanseom204/1>

60. Night Active Consumers as a New Tribe

61. Common Corporate Behaviors in Dongdaemun Fashion Cluster
Case 1
• If a customer cannot find a suitable piece from a store, the store person
helps her/him find the right one in nearby stores. He/she even escorts the
customer to the store that has the item he/she is looking for. (developed by
Ellen Song)

62. Issues on Dongdaemun Fashion Cluster
Multiple-Vertical-Downstream Cluster
• Sandwiched between Paris/Milano and Shenzhen
• Lacking R&D capability in vertical integration
City Cluster
• City Government policy on DFC without enough communication and
coordination with the business community in DFC
• City’s growth with high value-added industries resulting in an increase in
real estate prices, which drive out marginal members of DFC (fatal issue to
New York Garment District as well)

63. Key Success Factors in Dongdaemun Fashion Cluster
1. Trust and other social capitals supporting the transactions
within the cluster
2. vision and objective of the central/local government
3. R&D capability of firms and universities
4. Understanding of, and confidence in, the role of clusters by
the society
Jointly- and Concurrently-led Cluster Development:
Synchronized development of market’s invisible hands,
government policy, corporate strategy, and societal pressure

64. Cluster As a Basis of Capitalism 5.0
Mechanism for Creating Cluster-led Capitalism 5.0
Dongdaemun Fashion Cluster
A Case of Dongdaemun Design Plaza

68. Agony of Mayor Oh Se-Hoon
1. Which is a better strategy between “Low-cost leadership” and
“Differentation” for Dongdaemun Fashion Cluster?
2. Should Mayor Oh sign the contract for constructing DDP that will cost $1
billion?
① + DDP may become Seoul’s landmark building.
② + DDP may support Dongdaemun Fashion Cluster.
③ - The oldest baseball and football stadiums must be destroyed.
④ - Construction cost is huge, and construction period is too long.
3. In case DDP is built, should it be used for “fashion design” or “industrial
design”?
4. Will DDP construction help Mayor Oh winning his second Mayoral
election in 2011?
Concurrent Development of GP and CS

69. GP
CS
R&D Policy Industrial
Policy
Tax
Policy
Labor
Policy
Environment
Policy
M&A
Strategy
Attracting
universities and
design schools as
R&D center
Policy guideline for
M&A between F&D
companies
Tax incentive for
M&A between F&D
companies
Restrictions imposed
on labor union in
F&D companies’
M&A
Generic
strategy
DDP as a venue for
F&D shows
Policy guideline for
F&D convergence
through DDP
Tax incentive for
creative projects
involving DDP
Incentive for job
creation in F&D
convergence
Environment
protection as a
source of F&D
differentiation
Product
strategy
R&D support for
convergence of F&D,
Protection of design
patent and design-
related IP
Global designer
education and
promotion
Tax incentive
for new product
development in F&D
Market
strategy
E-commerce support,
Government
insurance for F&D
going global
Tax incentive for
Globalization of
F&D
Provision of 24 hour
service.
Restrictions imposed
on labor movement
against F&D going
global
Survival
strategy
Financial
restructuring
Tax exemption in
factory closure
Concerted effort for
labor flexibility
Concurrent Development of GP & CS
for Transforming DFC to Globally Competitive DDC

70. Time
$100
$10,,000
$25,000
GNP
Stage Undeveloped
Country
Developing
Country
Semi-developed
Country
Developed
Country
Physical Factor Factor
conditions
Context for firm
strategy an rivalry
Related and
supporting
industries
Demand
conditions
Human Factor Worker Politician &
Government official
Enterpriser Professional
Art Plaza
(The first modern
shopping mall)
Dongdaemun
Design Plaza
(DDP)
(Total design plaza)
Traditional
shopping district
Korea’s largest
wholesale and retail
clothing cluster
One of the
competitive
fashion clusters
in Asia
The most competitive
design cluster
in the world
New Shopping
Mall
(One-stop-
shopping,
Multiplex mall)
20131953 1970s 1990s
$1,000

71. Thank you for listening to my lecture.
Please correct if you find any mistakes, and advise if
you do not agree with any parts, in my lecture note.
Thank you.
Dong-Sung Cho
010-8133-8888
dscho@snu.ac.kr
71

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