Cluster-Based Industrialization in China                    Xiaobo Zhang, IFPRI Food Secure Arab World Conference, Februar...
How Come Has China Become the “World Factories”               in Just a Few Decades?•     State banks rarely provided cred...
Conventional Thinking on Industrial Development•     Assume production technology is not divisible. Thereby,      it is im...
Two Paths of the Industrialization                                   Big VI Firms       Industrial societyFinancial constr...
Clusters of completely un-integrated firms as “world factories”•      Each small firm is narrowly specialized in one proce...
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE                     Long and Zhang, JIE(2011)
The Location of Puyuan                                                   Zhejiang ProvinceINTERNATIONAL FOOD POLICY RESEAR...
History of Puyuan Cashmere Sweater Cluster                                                                      500 millio...
Two business model in Puyuan Cluster                                      Sweater Shops (VPCS)      New Style             ...
Production OrganizersINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE   Page 10
Sweater Merchants as the Leading EntrepreneurCoordinating production processes among the workshops  within each group:    ...
The Putting-out System                             Ironing Workshops                                                      ...
MarketINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE            Page 13
Family workshopsINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE   Page 14
Independent Workers/EntrepreneursINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE   Page 15
Does Dispersed Production Mode                        Incur Higher Transaction Cost?• Not necessarily for three reasons.  ...
The entrepreneurial firms are closely coordinated but no written                         contracts between them           ...
The Average Investment for Different Step of Production                          9.00                                     ...
Role of the Government in the Cluster• Common features of clusters: goods markets, intermediate material  markets, logisti...
Crises and Provision of Public GoodsLocal governments facilitate the growth of cluster by providing  necessary public good...
Crises and Provision of Public Goods      • Reputation crises due to low quality product:            • Enacted decrees on ...
Why Do Local Governments Have the Incentives to               Promote Cluster Development?• Inter-county competition is a ...
Coordinated Entrepreneurial Clusters• The basic operating unit in Puyuan: family owned workshops (3,900) and  trading shop...
Source of Starting Capital                                Average amount Founder         Relatives or   Banks Others      ...
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Session 4 b xiaobo zhang

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Session 4 b xiaobo zhang

  1. 1. Cluster-Based Industrialization in China Xiaobo Zhang, IFPRI Food Secure Arab World Conference, February 6-7, Beirut, Lebanon 2012年2月6日
  2. 2. How Come Has China Become the “World Factories” in Just a Few Decades?• State banks rarely provided credit to private entrepreneurs at the onset of reform.• The contribution of the domestic private sector to the overall growth is 72% according to the Industrial Census in 1995 and Economic Census in 2004.• A little over 70% of the private sector growth is attributable to the birth and the growth of new private firms.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 2
  3. 3. Conventional Thinking on Industrial Development• Assume production technology is not divisible. Thereby, it is important to pool disparate savings to finance large lump-sum investment for factory building and machinery.• Many argue that a well-developed financial system is a key prerequisite for industrial development.• However, financial development itself is a great challenge.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 3
  4. 4. Two Paths of the Industrialization Big VI Firms Industrial societyFinancial constraints Agricultural SMES, Clustering society Financial constraints INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 4
  5. 5. Clusters of completely un-integrated firms as “world factories”• Each small firm is narrowly specialized in one process of production• A group of coordinated firms complete a product• Thousands of small firms are concentrated in a ‘specialized’ town• These towns become ‘world factories’ of socks, neckties, buttons, umbrellas, sweaters, etc. – most challenging • Datang Town produced 6 billion pairs of socks per year • Shengzhou Town made 40% of the worlds neckties • Qiaotou town made more than 70% of the buttons for clothes made in China • Songxia town produced 350 million umbrellas every year • Puyuan Town made over 500 million cashmere sweaters; 60% of China’s marketINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  6. 6. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Long and Zhang, JIE(2011)
  7. 7. The Location of Puyuan Zhejiang ProvinceINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 7
  8. 8. History of Puyuan Cashmere Sweater Cluster 500 million pieces. 4,000 firms & workshops 6,000 merchants 60,000 workers More than ten billion yuan sales The largest distributing centre of cashmere sweaters in China. Ten million pieces Local government constructed theA collectively first marketplace local population hadowned enterprisebegan to produce jumped from lesscashmere sweaters than 30 thousand in 1992 to more than 130 thousand in 2005 1976 1988 1994 2007 year INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 8
  9. 9. Two business model in Puyuan Cluster Sweater Shops (VPCS) New Style Packing Selling Designing Computer Aided Designing Assembling Dyeing & Weaving Buttoning Ironing Printing Finishing Yarn Purchasing The Putting-out System New Style Integrated Producing Factories Designing Packing Selling Computer Aided Designing Weaving Assembling Buttoning Ironing Printing Yarn Dyeing & Purchasing Finishing The Vertically-integrated System Ruan and Zhang, EDCC(2009)INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 9
  10. 10. Production OrganizersINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 10
  11. 11. Sweater Merchants as the Leading EntrepreneurCoordinating production processes among the workshops within each group: • Has shops in the town’s designated sweater marketplaces • Provide designs and receive orders • Purchase raw materials and deliver them to the subcontracting weaving workshops; then semi-finished products are sent to the subcontracting dyeing factories; then to printing and ironing workshops; then … • Finally package in the sweater merchant’s shop, which also serves as quality inspection • The final products are transported to the Puyuan logistics centerINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 11
  12. 12. The Putting-out System Ironing Workshops Weaving Printing Workshops Workshops Raw material CAD Less than 2 miles Workshops market Yarn dealer National Road Buttoning Sweater market Workshop Sweater shops Dyeing & Finishing Factory Assembling Workshops Other Logistics Overse company Cities as Markets MarketsINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  13. 13. MarketINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 13
  14. 14. Family workshopsINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 14
  15. 15. Independent Workers/EntrepreneursINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 15
  16. 16. Does Dispersed Production Mode Incur Higher Transaction Cost?• Not necessarily for three reasons. • When producers stay in a geographically proximate region, information flow is much easier. Words about bad behavior spreads fast. • The opportunity cost of committing dishonest behavior is high because of the nature of asset specificity in a cluster (the asset, skills and network are not portable to other places). • Since they locate nearby to each other, they know each other well. Repeated transactions help form trust.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 16
  17. 17. The entrepreneurial firms are closely coordinated but no written contracts between them Sample receiptINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 17
  18. 18. The Average Investment for Different Step of Production 9.00 Investment required by different types 8.00 7.00 6.00Ln(initial investment) 5.00 Integrated Factory in Inner Mongolia 4.00 3.00 2.00 1.00 0.00 Logistics Dyeing Integrated Finishing Sweater Yarn Printing Family Ironing Three- -1.00 company factories firms factories shops dealers workshops weaving workshops wheeler workshops drivers -2.00 Types of division INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 18
  19. 19. Role of the Government in the Cluster• Common features of clusters: goods markets, intermediate material markets, logistic center, quality control and inspection center and other infrastructure (roads, electricity, security, and so on).• The presence of these markets and other essential public goods in a cluster enables individual producers to keep the scale of production small and specialize in fewer tasks.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 19
  20. 20. Crises and Provision of Public GoodsLocal governments facilitate the growth of cluster by providing necessary public goods in response to various crises: • Roadside sweater stands blocked traffic: • Built cashmere sweater marketplaces (with roof) through private-public partnership to formalize the informal business • Fights among different private logistic centers and transport companies: • Set up a unified logistic center by re-organizing dozens of private logistics and transport companies and auctioning out the rights of transport routes • Increasing crimes as a result of more merchants and migrant workers: • Increased street security patrol to ensure a safe environment • A large fraud by a woman trader using fake name: • Established information system to link hotels with police stations to check fake Ids to chase out cheatersINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 20
  21. 21. Crises and Provision of Public Goods • Reputation crises due to low quality product: • Enacted decrees on the quality requirement of cashmere products; • Set up quality inspection centers and quality control offices; • Established an industrial park to attract cashmere firms with brand names to Puyuan from all over the nation by preferable land, tax, and credit policies • Short of skilled labors and inadequate trainings: • Built technical training centers/schools to train employees at the township level • Land shortage: • Replaced the scattered farmers’ residential houses with town houses. Using the saved land to build factories and industrial park (in which famers hold shares).INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 21
  22. 22. Why Do Local Governments Have the Incentives to Promote Cluster Development?• Inter-county competition is a key feature of Chinese economy (Steven Cheung’s lecture in the last meeting). Local government officials’ performance is based on GDP growth, fiscal revenue growth and other economic indicators.• In contrast, in many other developing countries, local governments play little role in fostering local economic development.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 22
  23. 23. Coordinated Entrepreneurial Clusters• The basic operating unit in Puyuan: family owned workshops (3,900) and trading shops (6,000)• Every workshop is specialized in one task: • Designing, weaving, finishing, dyeing, printing, ironing, packaging, etc.• A virtual firm: a group of specialized workshops closely worked together coordinated by a lead entrepreneur • Sweater merchants as virtue production coordinators • Design and produce cashmere sweaters from yarns• A virtual conglomerate: thousands of workshops clustered together sharing infrastructures • The town government provides many important public goods and services, fostering the clustering development INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
  24. 24. Source of Starting Capital Average amount Founder Relatives or Banks Others (10,000 yuan) (%) friends (%) (%) (%) Yarn dealers 12.45 83.21 16.79 0.00 0.00 Family weaving 7.31 81.46 15.64 2.90 0.00 workshops Dyeing factories 340.07 47.50 31.87 20.63 0.00 Finishing factories 177.82 29.91 34.14 25.68 10.27 Printing workshops 10.60 77.36 22.64 0.00 0.00 Ironing workshops 3.83 88.26 11.74 0.00 0.00 Sweater shops (VPCs) 12.74 80.58 12.47 6.95 0.00 Three-wheeler drivers 0.54 63.28 36.72 0.00 0.00 Logistics company 4000.00 50.00 0.00 50.00 0.00 Integrated enterprises 263.84 59.59 19.28 21.13 0.00 2-month salaryINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 24

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