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. 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. 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. Two Paths of the Industrialization
Big VI Firms Industrial society
Financial constraints
Agricultural SMES, Clustering
society
Financial constraints
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 4

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 world's 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 market
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

6. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
Long and Zhang, JIE(2011)

7. The Location of Puyuan
Zhejiang Province
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 7

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 the
A collectively
first marketplace local population had
owned enterprise
began to produce jumped from less
cashmere 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. 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. Production Organizers
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 10

11. Sweater Merchants as the Leading Entrepreneur
Coordinating 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 center
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 11

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 Markets
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

13. Market
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 13

14. Family workshops
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 14

15. Independent Workers/Entrepreneurs
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 15

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. The entrepreneurial firms are closely coordinated but no written
contracts between them
Sample receipt
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 17

18. The Average Investment for Different Step of Production
9.00
Investment required by different types
8.00
7.00
6.00
Ln(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. 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. Crises and Provision of Public Goods
Local 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 cheaters
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 20

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. 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. 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. 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 salary
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 24