China’ SEZs and Industrial Clusters: Success and Challenges

1. International conference 'Changing paradigm of cluster development: Learning from global experiences‘ 10th - 22th Feb. 2014, New Delhi. China’ SEZs and Industrial Clusters:Success and Challenges Jici WANG College of Urban and Environmental Studies Peking University, 100871, China wjc@pku.edu.cn

2. Importance of cluster understanding • The concept of Cluster are by now well-known but inadequately understood in policy makers as well as entrepreneurs in China. • Yesterday. While our conference was going, over 4000 factories of footwear cluster in Wenling town of Zhejiang province were forced to close down by local government. • Why? • The reason is 16 workers of the Wenling footwear cluster died in a fire accident on 14 Jan. 2014.

3. SEZs Industrial clusters

4. High correlationbetween development of cluster and real-estate in China • “Industrial cluster” and “industrial agglomeration” are usually the excuse and vision of park development. • What is the logic behind the agglomeration and how is China’s need for agglomeration? • The key is neither the existence of industrial agglomeration, nor the number of clusters, and also not new industry within a cluster. • This is important to understand the actors, how they are and which activities in the sector’s value chain, how is industrial linkages inside/outside the cluster. • It is urgent to concern technological innovation and industrial upgrading.

5. FRAMEWORK 1 2

6. Agglomeration phenomenon in China Industrial agglomeration Preferential tariff zone / park Industrial cluster High-tech park Processing park Cultural park Industrial district Supplier park Industrial complex Supply Chain cities One component Whole product 1 Wang J. Mei L. 2009: Global-local Tensions: Trajectories and Prospects of China’s Industrial Districts, in GiacomoBecattini (eds.) Handbook of Industrial Districts, Edward Elgar, pp 598-613, 2009.

7. Two kinds of agglomeration in China: industrial cluster (specialized town) from below and development zones (industrial parks) from above are formed in the background of global offshore outsourcing of MNCs. • Traditional industry, high-tech industry, producer service industry and cultural industry in China are all participating their global production networks. However, many activities are still in the low value-added ones.

8. 1 Development zone / industrial park

9. China’s DZs development process • The idea of development zones began in 1979-1980 . It has created China’s national GDP, more job opportunities, and more foreign direct investment. • China has been among the top targets of global investment • Foreign exchange leakage • Cost ineffectivness, • Failure to achieve state objectives • Economic crimes and related social problems. • Land is being overexploited. • China’s per capital income is still lower compare to other countries. (According to the World Bank, China’s per capital income in 2012 was only US$ 5680, the 94th in the 193 countries)

11. State-level and Province-level development zones

12. 王缉慈 A timeline of science parks at state level S&T Incubator (239) University S&T incubator University science park (109) Software Park (32) Agricultural S&T Park(38) High and new tech development zone (108) 1984 1990 1995 2000 2005 2010

13. Industrial Clusters in China: Territorial Innovation Systems or Supply-chain Cities of the World Economy? 2 Specialized town / industrial district / industrial cluster

14. Remarkable specialization • The places that best accommodate orders for MNCs are China's giant new specialty cities. • to buy 500,000 pairs of socks all at once, or 300,000neckties, 100,000 children‘s jackets, or 50,000 size 36Bbras. …. • The niche cities reflect China's ability to form "lump" economies, where clusters or networks of businesses feed off each other, building technologies and enjoying the benefits of concentrated support centers. New York Times: Textile Enclaves: In Roaring China, Sweaters Are West of Socks City (Dec 24. 2004) • China has created giant industrial clusters in distinctive entrepreneurial enclaves. Each was built to specialize in making just one thing: • cigarette lighters, badges, neckties, fasteners…… Los Angeles Times: China's Strategy Gives It the Edge in the Battle of Two Sock Capitals (April 10, 2005) 14

15. A View from Sectors

16. China’s industrial clusters: distribution in different sectors and different activities From low-tech to high-techFrom weak creative to strong creative Textile and apparelFootwearFurnitureBicycleJewelryEyeglassesCigarette lighter…. E-equipmentAuto partsNotebook computers… SoftwareAnimation… From manufacturing to design and R&D

17. Innovative clusters (industrial districts) in traditional sectors Becattini G. (1990), “The industrial district as a socioeconomic notion”, in Pyke F. and Sengenberger W., Industrial districts and interfirm cooperation, (ILO Geneve). Innovation clusters in high-tech sectors OECD. Innovation Clusters: Drivers of National Innovation systems. Paris: OECD. 2001 Creative clusters in cultural sectors and digital cultural sectors Non-innovative survival clusters Mario DavideParrilli, SME Survival Clusters in Developing Countries (With Case Studies), European School of Management 2007 The category of clusters (“cluster family”)

18. A View from difference scales

19. China’s industrial clusters: Distribution pattern at different scales Country Province City Town(Local network)

20. Industrial clusters in China’s inselected provinces

21. Clusters in Guangdong Province

22. Clusters in Provinces of Zhejiang and Jiangsu

23. Furniture industrial clusters

24. Foshan city, Guangdong Province

25. Experience

26. Critical mass, proximity, linkage Factor condition: R&D institutions, university education from outside the cluster Global market, Technology Knowledge Training schools and innovation centers Opportunities MNCs and joint ventures Local MSMEs Local government, banks and other public supporting institutions Services Support from related ministry of central government Formal and informal activities for interaction Industrial associations

27. Experience of Chinese industrial clusters Entrepreneurship (start-ups and spin-offs) local entrepreneurs’ enthusiasm under the reform and open policy, the development of local division of labor and the follow-up impetus of the large domestic markets. Township enterprises set up by rural entrepreneurs S&T spin-offs from universities and research institutes Spin-offs from State-owned enterprises Strong involvement of local government Industrial Associations are becoming stronger The role of Specialized Market New development of e-commerce related agglomerations 27

28. Strong involvement of local government • Setting up colleges and schools • Making connections between universities and industries • Setting up specialized industrial parks, exhibition centers and trade buildings • Building and financing technology innovation centers • Boosting international co-operation through twinning clusters (WANG Jun, 2006)

29. New development of e-commerce related agglomerations • Three crucial aspects • virtual agglomeration - the so called “Industrial belt” (Chanyedai) which acts as the B2B platform in the industrial districts, is rapidly created by the firm Alibaba. • the agglomeration of e-commerce C2C stores is emerging in more than 20 rural location – the so called “Taobao village”. Covering 15000 e-shops. • as part of real estate development, the e-commerce parks are built in many cities. • However, the flourish of e-commerce and its agglomeration are rarely straightforward processes in which actors are confronted with uncertainties.

30. Taobao village • Taobao villages gradually became a new force of rural economy, in 2013, the number of Taobao villages increased to 20 which brought about 60,000 job vacancies directly and many job opportunities in logistics and packaging industries indirectly. • Taobao village is a unique economic phenomenon in the world. • The definition of Taobao village includes that online stores have to account for above 10% of local families and online transaction surpassed 10 million yuan (USD 1.64 million). These retailers in rural areas based on Taobao C2C platform, achieved economies of scale and synergy effects.

31. challenges

32. Challenges and Upgrading Global Competition Technology regime Restrictive protectionist policies Innovation and Upgrading Raise of production costs Relocation Local Stress Social and environment Issues Race to the bottom

33. Relocation to Inner Provinces for Lower Labour Costs • Reasons causing this relocation: • The rising labour cost, land cost and environmental cost. • The resource is exhausted in some resource-based clusters. • The relocation of many SMEs from coastal industrial clusters to the regions in the central, western and northern China for lower labour costs will lead to a new regional division of labourwithin China. • The coastal clusters will become the outsourcers to lower-cost inner provinces and the higher technology or design centers. • Large amount of employments • high levels of informal low-wage workers • export-led growth has created jobs, but not so many decent jobs • Buyer-driven or contractor-driven • Engage in global production

34. From Guangdong to Guizhou Province

35. Cultivating innovation cluster:Linking skills and pooling resources • To meet intense global competitive pressures while avoiding the “low road” based on cost reduction and reaping the benefits, developing core competencies through innovation and embedded localization, cultivating innovation cluster is necessary. • Linking skills and pooling resources both inside and outside clusters/cities are the right way to meet the challenges posed by globalization and the increasing dynamism of structural change. TV : Family on the Go / Legend of Entrepreneurship

36. 2 Theoretical thinking

37. New wine in the old bottle • China’s industrial cluster development and land exploitation always stick together. • Success made by new urban zones and industrial parks has encouraged central ministries and local governments to property-driven development. • “Industrial cluster” are the latest fashions. • We could not say that only firms gather in somewhere and it will develop. • We could not say only these firms develop in a certain period can they have permanent competiveness advantage. • We could not say that a locality only needs to create an “supply chain”, its economy will be well developed. • “new wine in the old bottle”. Like the form of “making nest to lure birds” in the past.

38. From development zone to industrial new town —“industrial real estate” • Larger and lager Areas • More and more functions • More and more ministries involved • More and more places are planned • More and more problems • More and more empties? ?

39. Over-investment on development zone • Local government take real estate as a cornucopia of collecting public investment. • So called “City management” - through urban planning and land exploiting, local government may get development fund within or outside budget to support projects of infrastructure and city beautification. • Due to the land easy policy and low land price, in many cities of China the areas expand blindly. Local governments stimulate land exploitation of development zones excessively.

40. Mushroom or poisonous mushroom? High-tech zone achievement In 105 high and new tech development zones, There are about ten million employments, 13 trillions business income. The industrial output value account for 13% and the export account for 16.7% of the nation’s total. • Example: Ministry of Culture has been out of Control for the presence of over 2500 cultural parks in China. • The policy should be inclined to real economy but not industrial real estate and other speculative market. Good cluster or bad cluster?

41. Free-tax zones New Technology Cities(industrial park)？ Low Carbon Ecological High Tech Innovative …… Headquarter Base？ Industrial Relocation Parks? South Korea Entrepreneurs Zhejiang Entrepreneurs Guangdong Entrepreneurs …… Theme Park？ Innovative（cartoon, film……） Manufacturing（clothing, cement, sugar……） Outsourcing(software, bio-tech……） …… Investors Central government Local government Agents attracted The World 500 biggest ? Overseas Returnees State-owned Enterprises Residence, Tourism？ Where are the first seed from？ Development opportunity, Condition, Mechanism？ Warning: real estate bubbles Industrial Real E state？ “Get land , make money？

42. 生态城 “Eco towns/cities”

43. What kind of agglomeration we eed？ Location is now "proximity" to know-what, know-how, and know-whom - its local clusters of knowledge not companies and assets. ？ • A new industrial space to foster a new industry? • Does it have new start-ups? • Local entrepreneurship? • Institution for collaboration？ • Potential to create industrial community?

44. Local cluster and innovation Porter(1990) defines cluster as “geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions.” • Industrial clusters are a group of firms and institutions (agents) with spatial proximity, industrial linkages and mutual influences. • Through agents’ linkage and action, external economy are realized to lower cost. • Through mutual trust and cooperation, innovation are promoted in learning milieu. • Learning and innovation in clusters may, or may notoccur. (Wang Jici, 2005; Wang Jici, Beyond Cluster, 2010) 44

45. A danger of using cluster approach • The ambiguities of cluster concept • Localization and urbanization • The site of operation and the site of interaction • The global-local discourse of industrial linkage • The confusion of the concentration based on knowledge-intensity and the concentrated dispersion based on labor costs • For the reason of the ambiguities of cluster concept, • There is a danger of using cluster approach as the fashionable next ‘new thing’ in economic development.

46. Making connections is important • Usually, the main purpose of firms moving to industrial parks to get preferential infrastructure and policies. • Despite of near distance, there is little relation among them because of differences in type of business, ownership, nation and language. • Even there are firms which have production linkage in theory but they could not connect each other because of differences in technical standards. • Making real connections (~ “proximity”) in industrial cluster need a couple of years even tens of years. • Therefore, it’s a risk to develop industrial properties in some underdeveloped localities with few firms.

47. Cluster formation in developing countries: concentrated dispersion Global dispersion Local concentration Actors: MNC flagships …… Clustering effect (Positive-negative) Power Imbalance? Local Manufacturing and service Global outsourcing Actors: Local SMEs, MNCs Government, education/research institution, Industrial association

48. Background of high-tech development in China University and research institutes Reforms of S&T system/education system/ human resource management system Marketing of research result urbanization New town construction Non-state-owned firms Hot of real estate development Central government Development zone / industrial park High- and new tech zones 863 project Torch plan Innovation-driven strategy Local government Global shift Off-shore outsourcing Fight for resources between local governments and between different department of central government, GDPsm High-tech hot Silicon valley effect Branch plant of MNCs returning of overseas Chinese

49. There is a risk to construct industrial parks！ Industrial parks have “potential energy” 1 Attract investment from outside 2 create jobs Clustershave “kinetic energy” 1 reduce cost （the labour cost and environment cost reduced are limited） 2 promote innovation （in a condition of abundant social capital） Cluster may falling into a wrong path, separate or relocate！

50. Factors of a park： 1land and infrastructure 2Preferential policies In China, lots of spontaneous clusters are not innovative Factors form a cluster： 1critical mass 2 geographical proximity 3industrial linkage In China, successful and fake industrial parks are mixed up.