Overview of the

Industrial Clusters in China

I. Introduction
‘A chopstick can easily be snapped, but a dozen is hard to break’ – Chinese proverb.

Recently national and regional economies tend to develop, not in isolated industries,
but in clusters of industries related by buyer and supplier relationship, common
technologies, common inputs or common customers. China, with is no exception, it is
also dominated by industrial clusters – geographic concentrations of interconnected
enterprises in a particular industry that gain competitive advantages through co-
location. The concentration of enterprises facilitates linkages with suppliers and
buyers, as well as fosters a mixture of cooperation and competition that can give rise
to vibrant local economies.
The presence of the industrial clusters enhances the competitiveness of the region’s
economy in a number of ways. First, the presence of multiple enterprises in an
industry tends to embed the industry in a particular location, making it more difficult
to compete against it or displace it. Meanwhile, such clusters are not reliant on a single
enterprise for success, but rather take advantage of the skills, capabilities, and
resources of many enterprises sharpened by local competition. The result is a far
deeper and more competitive situation than in the case of single enterprise
development.

In China, industrial clusters are located mostly around booming cities and towns in the
eastern coastal region – particularly the Yangtze River Delta (YRD), the Pearl River
Delta (PRD) in Guangdong, as well as in the Bohai-rim region in the north. The three
regions have developed a broad range of clusters in various industries. Products
produced in these clusters account for the vast majority of the country’s total
production, making the regions important sourcing bases for all sorts of inputs,
materials, and capital goods.

Industrial Clusters in China

In China, industrial clusters have a fairly long history. Jingdezhen has a pottery and
porcelain production cluster with a history of more than 1,400 years; while Shenzen
Town in Jiangsu has been one of the well-known silk centres in China for hundreds of
years. Nevertheless, the development of industrial clusters gained momentum after the
country implemented its reform policies in 1979 and different kind of clusters
developed for various reasons. For example, urbanization of Wenzhou in Zhejiang in
the early 1980s gave rise to self-augmented industrial clusters set up by the small
and private enterprises. Under the pressure of excess manpower and limited farmland,
many peasants in the rural areas had turned to run their own household-based
workshops. Thanks to the introduction of market system and technological progress,
they yielded tremendous success. Their success has served as a role model to be
followed by other fellow-villagers. Many similar household-run workshops were
clustered around the area and this formed the basis of Wenzhou industrial clusters.
Industrial clusters of this type are characterized by labour-intensive, low technology
content and low threshold of entry. Enterprises in these clusters are mostly
entrepreneurial and family-owned, often with a craft tradition, where skills are passed
on to the next generation. Many industrial clusters located along the coastal regions in
China were formed in this way. Typical examples include the development of the
lighting cluster in Wenzhou in Zhejiang; the metal processing cluster in Xiaolan in
Zhongshan (Guangdong); the fireworks manufacturing clusters in Wanzai in Jiangxi
and Liuyang of Wunan.

Another kind of industrial clusters developed in China when some cities and counties
such as Shenzhen, Zhuhai, Zhongshan, Shunde, Nanhai and Donguan, formulated
preferential policies to attract overseas investors to set up outward-processing
factories. These are basically export-oriented clusters, by and large, dominated by
foreign direct investments. In order to utilize the advantages of lower land and labour
costs and other tax concessions offered to foreign investors, many Hong Kong and
foreign businesses set up production branches and engaged in export sales. They use
the region as an export-processing base, with products destined for overseas markets.
These clusters specialize in industries such as electronics and electrical goods, textile
and apparel, footwear, plastic products, financial services, logistics, etc. Apart from
producing the finished products, many of these clusters are developing deep supply
networks to provide core inputs to the finished products. Hence, became the leading
sourcing centres in the country.

An entirely different type of industrial cluster – the high-tech industrial clusters,

also emerged in the early 1980s. These clusters were formed by a group of scientists
and scholars from universities and colleges, and located in the surrounding areas of the
universities and research institutes. They play a crucial role in knowledge generation.
In China, Zhon guan cun (ZGC) in Beijing has been seen as a role model for the high-
tech industrial clusters. ZGC benefits greatly from being situated in a research
environment where a number of high-level research institutes are located, which
mainly belong to the Chinese Academy of Sciences. In addition, a number of colleges
and universities including the Beijing University and Tsinghua University are also
located in the vicinity. The opening policy of China provided new possibilities for
researchers to become entrepreneurs. The closeness to the Central government and
support of funding agencies to favour entrepreneurs, researchers and enterprises
helped ZGC become the largest high-tech R&D centre in China and the largest
distribution centre for IT products in northern China.

Some industrial clusters, like furniture cluster and jewelery cluster, relied heavily on
the natural resources of the region such as mines, forests or quarries. The enterprises
in these clusters started off by widely exploiting the ample supply of natural resources.
Overtime, they initiated a process of specialization built around the core product.
Meanwhile, they harnessed their skills and strived hard to upgrade the overall quality
of their products. Typical examples of the resource-driven clusters are the food-
processing cluster in Luohe in Hunan and the timber-processing cluster in Pizhou in
Jiangxu.
Then there are some market-driven clusters such as wood cluster in Linyi in
Shangdong, which has over 44 wholesale markets and over 5,000 manufacturers
selling various types of wood products. The favorable geographical location and
convenient transportation network of Linyi have significantly contributed to the
development of the wholesale.

IV. Characteristics of industrial clusters development in China

Except for very few large enterprises, most of the enterprises in the industrial clusters
are privately owned small and medium sized enterprises (SMEs). For instance, as the
birthplace of industrial clusters in Zhejiang, Wenzhou has very few state-owned
enterprises (SOEs), over 97% of enterprises are privately owned. However, there is an
exception to this. Many enterprises founded in ZGC cluster in the 1980s were
sponsored and funded by the Chinese Academy of Sciences, Beijing University and
Tsinghua University; thus the ZGC cluster has a much higher proportion of SOEs.

Most of them are concentrated in the South-eastern coastal regions, mainly in the PRD
,YRD and the Bohai-rim region. In the YRD, Zhejiang province boasts the largest
number of industrial clusters. According to statistics, 85 out of the 88 county level
cities have developed industrial clusters of some kinds; and over 800 clusters of
various sizes are scattered in the province, with approximately 237,000 enterprises
employing over 600,000 workers.
It is generally believed that industries with a high number of process innovations and
with a high rate of local cooperation with suppliers, customers and other related
industries are more likely to show clustering dynamic. In China, clusters are mostly
found in the light manufacturing industries, including textile and apparel, footwear,
plastics, electronics, automobile parts, etc.

Many industrial clusters in China demonstrate a high degree of division of labour or

specialization in various production stages. Taking the label and badge industrial
cluster in Jinxiang as an example, the production of a small badge involves more than
a dozen of stages including designing, aluminum melting, engraving, drilling, plating,
pin making, assembling and packing, etc. Each process is done by independent and
specialized enterprises, and every semi-finished product is traded through the
commodity exchange market in the cluster. More than 800 enterprises are integrated
together to form a complete production line in the cluster.

In China, large enterprises often exert great impact on the development of industrial
clusters. For example, Nantou in Zhongshan, a renowned home appliances production
base with the title of “Specialized Town for Home Appliances in Guangdong” has
attracted many home appliances manufacturers to locate in the area. The arrival of
Changhong and TCL has further attracted the clustering of related enterprises and
given the town a leading edge in the production of large appliances. As a result,
Nantou has developed into one of China’s largest production bases for high-end home
appliances.
In China, it is common to find one or more commodity exchange markets in or near an
industrial cluster. The markets act as important trading and information platforms,
marketing centres and distribution centres for the products produced in a particular
cluster . For example, the China Light Textile City in Xiaoxing in Zhejiang serves as a
modern multiplex for the distribution of apparel and light textile goods as well as other
functions including trade and commerce, technological services, information
exchange, logistics, exhibitions, entertainment, etc. Commodity exchange markets
may exist in several forms, namely free association of market fairs at the elementary
stage, large wholesale markets built by the government, and specialized mega marts.

The outputs of many industrial clusters in China make up significant shares of the
national total and even the world’s total. For examples labels and badges produced in
Wenzhou account for 45% of China’s total output; lighters produced in Wenzhou
make up 70% of the world market; neckties in Shengzhou in Zhejiang account for
80% of China’s production and 30% of the world’s total; and PC cases produced in
Qingxi in Dongguan account for 30% of the world’s total.

Many provinces and cities in China, especially those with high concentration of
industrial clusters, have witnessed rapid economic growth and surpassed the national
economic growth rates in the past two decades. According to the National Bureau of
Statistics, in 2004, the GDP growth rates of Dongguan and Zhongshan cities in
Guangdong province were 19.6% and 18.7% respectively; and that of Jiangsu and
Zhejiang province were 15.9% and 15.5% respectively. These cities and provinces
have a fairly strong industrial setting, with the existence of large number of industrial
clusters. These clusters have emerges as a leading center for specific industries and
achieved high level of regional and international competitiveness

VI. Obstacles to the development of industrial clusters

At present, most industrial clusters in China are full of vitality and becoming
distinctive features of the local economy. Nevertheless, there are some barriers to
cluster development in China.

1. Multiple jurisdiction in some industries

In China, different industries may have different administrative requirements and are
under different jurisdictions. In steel, oil, chemical, automobile, computers,
electronics, and printing industries, SOEs are under the control of the central
government, while private enterprises are under the authority of the local
governments. Multiple jurisdiction may lead to multiple decision making and very
often with conflicting interests. This may affect the free movement of factors of
production and thus hamper the development of industrial clusters.

2. Absence of sound legal framework

In China, laws and regulations are promulgated by a host of different ministries and
governments at the central, provincial and city levels, and it is not unusual for the
resulting regulations to be incomplete or even at odds with one another. Furthermore,
China’s policies, laws and regulations tend to be more general and ambiguous than in
other countries. While this allows the Chinese authorities to apply laws and
regulations flexibly, it may also result in inconsistency and confusion. This may deter
foreign investments in a certain extent and pose a negative impact on the development
of industrial clusters. Today, a lot of laws and regulations (especially tax regulations)
mandated by the Central government, are ‘negotiable’ in small cities, particularly in
Guangdong. This creates uncertainties and risks for investors as ‘negotiable’ often
mean ‘changing all the time’.

3. Weak linkages between enterprises

In general, traditional manufacturing industries in China are characterized by low
threshold of entry; and most of the enterprises in the traditional industrial clusters are
SMEs. Linkages between these enterprises tend to remain weak, resulting in
overcapacity in production, duplicative factors of production, etc. Moreover, owing to
their small operation scale, enterprises often emphasize on short-term benefits and
compete severely with, rather than cooperate with one another. Hence, the clustesrs
may remain uncompetitive.

4. Lack of innovation capability

In China, many industrial clusters are sustained by price-competitiveness rather than
product innovation. Enterprises of the traditional industries, in particular, tend to
produce low-value added products rather than innovative ones, resulting in shortage of
internationally recognized brand. The PRD, for instance, is the world’s largest
manufacturing base of certain manufactured goods; but it has few internationally
famous brands of its own.

5. Lack of relevant personnel and management experience

Enterprises of some industrial clusters lack suitable management and technicians to
cope with the ever-changing world. . For example, a major problem encountered by
the Shanghai automobile industrial cluster amid its rapid expansion in conjunction
with the growth of the industry is the shortage of relevant skilled workers.

6. Lack of local industry culture

In China, some industrial clusters, especially those consist predominantly of foreign
enterprises, set up not according to the core principal of specialization and mutual
development among industries, but rather to the cheap land and favorable tax policies.
They often lack the local industry culture (or so-called social embededness) i.e. a
common mission, trust and cooperation required for sustaining the development of the
industrial clusters.

VII. Role of government in cluster development

In China, many clusters were spontaneously formed and out of the plan of the local
governments. Nevertheless, the governments do play an important role in facilitating
cluster development. The Provisional rules issued by the State Council in 1988
concerning new technological industrial development experiment zones of Beijing
Municipality has encouraged massive enterprises to set up business in ZGC. In the
early 1990s, the Chinese government established Science and Technology Industrial
Parks (STIPs) extensively throughout the country, with an aim to speed up the
development of high-tech industries. The industry-park movement specifically aimed
at attracting IT companies and did so with great success. Nowadays, about 50%-80%
of IT products are produced by enterprises in the STIPs.

Meanwhile, other local governments in the PRD have formulated preferential policies
concerning land use, taxation, administration services, charges, etc. so as to create a
sound and flexible external environment to attract foreign investments. Moreover,
these local governments have also introduced initiatives and supportive measures to
boost the competitiveness of the commercial distribution sector. All of these initiatives
have considerable impact on cluster development.

In general, both the central and local governments shall assume an important
supporting and facilitating role. Meanwhile, they shall strive hard to overcome the
hurdles mentioned in the last section. The major roles of the governments are listed
below:
1. Formulating measures and policies to attract investments.
2. Easing regulations and opening up more creative financing and taxing mechanisms.
3. Regulating the market order constantly to form a fair competition environment.
4. Improving local environment and providing sufficient infrastructure to support
technology innovation, including social institution, university lab, research centre,
industry association, chamber of commerce, transport network, public facilities and
communication network.
5. Facilitating the opening of commodity exchange markets and expanding market
scale.
6. Organizing commodity exhibitions and trade fairs to promote local products and
fostering regional brands.
7. Providing necessary guidance to assist industry upgrading and technology
transformation projects.
8. Coordinating integration between production and research to strengthen the
technical innovation capability of industrial clusters.
9. Strengthening personnel training and knowledge building.
10. Cultivating an ideology that nurtures cluster development i.e. a positive attitude
towards entrepreneurship, cooperation, the governance structure in a region; and
11. Cultivating a kind of local industry culture that can help various industry players
including enterprises, universities and local governments to communicate and
cooperation with each other.

VIII.Conclusion
In the globalization era, cost competitiveness alone will not be sufficient to guarantee
further success. In order to remain competitive, there is a need for industries to
upgrade their activities and move up along the value chain. To do so, the industrial
cluster shall constantly pursue enhancement and optimization of the value chain and
develop other capabilities i.e. improving design, R&D and innovation. And very
importantly, enterprises within an industrial cluster shall embrace the pursuit of
competitive advantages and specialization rather than simply imitate successful
enterprises. After all, the role of governments shall not be overlooked. They will and
continue to play an important supporting and facilitating role, though not a leading
role in making entrepreneurship easier. It is the combined force of enterprises and
governments that contribute significantly to the evolution of the industrial clusters in
China.

Yiwu: A Case Study of a Daily Necessity Cluster

Brief Introduction to Yiwu

Yiwu is the world’s largest production and distribution center of daily necessities. This
city was a proper rural area at the end of the 1970s. However, after the local
government established a wholesale market—Yiwu China Commodity City (Yiwu
Market) in 1982, Yiwu started its rapid economic growth. During the period from
1982 to 1990, accompanying the increase in the number of booths in Yiwu Market
from 700 to 8,000, 180 “ONE VILLAGE ONE PRODUCT” appeared consequently.
After the 1990s, the number of booths in the Yiwu Market increased further.
Moreover, this market began to export overseas from the end of the 1990s. As a result,
no less than eight large industrial clusters were formed within Yiwu for, in particular,
socks, shirts, wool, accessories, zippers, toys, key sticks and printing (Ding 2006a,
Chapter 4). The major companies in these clusters are modern mass-production
factories. Currently, the Yiwu Market has over 400,000 commodities in 1,901
categories from 43 industries. Its commodities are distributed in not only China’s
domestic market, but also in 212 countries and regions in the world market (ZCCC
Group 2006).

It is clear that the development of the Yiwu Market directly stimulated the industrial
cluster formation in Yiwu. This market played a crucial role in 1992 in particular. As
Figure 1 indicates, despite the appearance of “one village one products,” the tertiary
sector of Yiwu continued to expand until this year. After that, however, the secondary
sector suddenly started its remarkable growth.

Ding (2006a, Chapter 4) has pointed out this transformation was caused by the
structural changes that had taken place in the Yiwu Market during the period from
1992 to 1997. In concrete terms, 1) a large number of merchants from other regions
began operating in the Yiwu Market; 2) the number of comparatively educated and
young merchants increased in the Yiwu Market; and 3) the booth keepers in the Yiwu
Market gradually built long-term business relationships with the makers. To fully
explain, the situation in the Yiwu Market that caused these changes in 1992 must be
clarified.

3.2 Classification of Commodities

Mr. He Zhangxing is one of the key persons for understanding the situation in 1992.
10
At that time, he was in charge of the AIC (Administration for Industry and Commerce)
office, which is a major member of the managing committee for the Yiwu Market14.
According to Mr. He, the classification of commodities in the Yiwu Market was very
rough in 1991. In 1990, the 8,000 booths in the market were only divided into four
industries: daily necessities, garments, knitwear, and shoes15. Although all of the
commodities were assigned to be placed in specific spaces by the industries, one could
easily find the same type of commodity in any other commodity’s space. For some
booths, once the booth keeper was changed, the commodities of the booth would also
change. Some small merchants who did not have stable relationships with the makers
also changed their businesses often. As a result, the same type of commodities had at
times quite different prices in different places of the Market. It is easy to imagine that
in this chaotic situation the formation of industrial clusters with the establishment of
mass-production factories was very difficult.
Consequently, in 1991 when the Yiwu Market planned to build a new generation
market16, Mr. He was confronted with a great hurdle in his efforts to design an
efficient way to classify by industry and location the large quantities and types of
commodities of the Yiwu Market ( Hua Hang Gui Shi). For this purpose, Mr. He and
his colleagues visited numerous department and hardware stores to learn methods of
classifying commodities by use, raw material, and configuration, etc. In 1992, they
were able to work out a plan to classify the Yiwu Market into eight zones, where the
commodities of 16 industries could be bought and sold. These industries were 1.)
garments, 2.) knitwear, 3.) shoes, 4.) socks, 5.) ribbons, 6.) wool yarn, 7.) small
hardware, 8.) decorations, 9.) daily necessities, 10.) rainwear, bags and suitcases, 11.)
stationery and sports goods, 12.) cosmetics and other pharmaceutical goods, 13.)
buttons, zippers, and other accessories, 14.) toys, 15.) lighters, watches and
electronics,
14 The record of the interview with Mr. He Zhangxin is based mainly on Xinhuanet
(2006). In the following paragraphs on the Yiwu Market, sources were only written
when being cited from other sources.
15 YYLGE Office (1992)
16 The regular Yiwu Market was originally built in 1982. After that, as business
expanded and infrastructure and other constraints were felt, a new generation
market was built in place of the original. New generations replaced the earlier ones
periodically. The fourth generation market was built in 1991.
11
and 16.) artificial flowers17.
Before moving into the new market, the AIC asked every booth keeper to register
their business and obtain a license18, as the first step to carrying out the above plan.
However, there was no reaction from the booth keepers in the first three days. Many
booth keepers worried their profits would decrease due to the scope of their businesses
being limited by the registration. In order to solve this problem, Mr. He and his
colleagues approached some of the leaders of the merchants of the Yiwu Market,
particularly those in the Communist party. In the end, most of the booth keepers were
registered.
After the fourth-generation market was opened, the AIC continued to take flexible
measures in promoting the classification of commodities19. During the first month,
they permitted all merchants, registered or not, to enter the new market. From the
second month, they began permitting the resale or exchange of booth licenses. The
AIC
required all the booth keepers to show their license in the Market from the third
month.
Then, the effect of the classification was gradually felt by most of the merchants. For
example, in the third-generation market, the transaction scale for artificial flowers and
shoes was very small. In the fourth-generation market, however, because the same
types of booths were collected in the same areas, their existence became increasingly
noticeable. The number of shoes booths increased from 220 to 1,700 during the period
from 1990 to 199220. The booth keepers of artificial flowers developed more than one
type of new product almost every day.
In 2006, Mr. He looked back on the commodity classification and declared it to have
the following three merits.
Firstly, by collecting booths that dealt with the same commodities into the same
areas, competition increased. As a result, the merchants in the Yiwu Market were
17 The data of the classification plan in 1992 is cited from Zhang and others (1993).
18 Mr. He did not explain clearly about registration. It is estimated that the business
scope of booths was not strictly fixed until this time.
19 They allocated the newly built booths to more than 13,000 merchants by lottery.
20 The number of shoe booths in 1990 is cited from the YYLGE Office (1992).
12
strongly stimulated to develop newer and better commodities. Although Mr. He did
not
point this out, the increase of better-educated and younger merchants in the Yiwu
Market during the period from 1992 to 1997 can be inferred as a result of this
situation.
Secondly, the classification of commodities stimulated the merchants to specialize in
specific fields (so that their businesses become more stable). It is easy to infer that
small merchants in the Yiwu Market were able to build long-term business
relationships with makers due just to this reason.
Thirdly, classification enabled the extension of the Market. In 1994, the Yiwu
Market was enlarged again. The new market was classified into 13 zones, where the
commodities of 21 industries were bought and sold21. Currently, as mentioned above,
there are over 400,000 commodities in 1,901 categories from 43 industries. The
number of booths increased to 580,000. It is clear that a large number of merchants
from other regions relocated to the Yiwu Market just due to this situation.
Needless to say, the above three points on the classification of commodities are the
most powerful explanation of the development of the Yiwu Market and Yiwu’s
industrial clusters. This classification of commodities within the Yiwu Market seems
to
have had a broad influence. In 1998, among Zhejiang’s above-mentioned 68
specialized
markets, there are at least 18 markets where the commodities were classified by
industry and location. Of these, the transaction volumes of five markets amounted to
100-1,000 million Yuan. The transaction volumes of 13 markets were no less than 1
trillion Yuan. We can observe a clear correlation between the transaction scale and the
classification of commodities.

Interesting Stories
Zhongguo Zhiliang Wanlixing (ZZW) is a social movement that started in 1992. It
was facilitated by China’s central government, major mass media, famous companies,
scholars, and technologists. This movement put emphasis on the exposure of imitation
goods and goods with
poor quality. In order to get the true information, the members of ZZW would usually
visit a factory, a market, or a department store suddenly, thoroughly inspecting the
quality of commodities in these places. The results were be reported to China’s major
mass media outlets.
In 1995, a few members of
ZZW visited Danyang Market and inspected its eyewear. Their report indicated that
the examination pass rate of glasses in this market was surprisingly zero29. CCTV and
other major mass media outlets in China reported on this, and as a result, the
Danyang Cluster’s image was greatly damaged.
they established a quality control (QC) department in
Danyang Market. The QC department determined two reasons for the poor quality.
The first reason
was the poor quality control technology.
In 1996, the
price of each instrument was 30,000 Yuan. In cases where the booth keeper was not
able to afford the instrument, the QC department in the Danyang Market or the
Danyang QC department, acting as a guarantor, would ask the measuring instrument
agent in Danyang Market to accept postponement of payment. Sometimes, they even
helped booth keepers in collecting debts from their customers
The second reason for the poor quality was a lack of QC awareness.

12 As for the details of the development of the Yiwu Market, see Lu, Bai, Wang
(2003),
Ding (2006b).
13 Yiwu Market is one of Zhejiang’s above-mentioned 68 markets