Clusters as an Instrument for Industrial Policy
Xiaobo Zhang (IFPRI)
Conventional Thinking on Industrialization
• Financial development is regarded as a key instrument
for industrial development because pooled resources are
necessary to build factories and purchase machineries
(Goldsmith, 1969; McKinnon 1973; Banerjee and
Newman 1993; King and Levine 1993; Rajan and
Zingales, 1998, Ayyagari et al. 2006).
• Building a sound legal system is also crucial for ensuring
the functioning of market economy (contract
enforcement) (North, 1990; Acemoglu and Robinson,
2012).
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However, not so easy to do
• It may take long time to develop a sound financial and
legal system and the process is wrought with challenges.
• Microfinance institutions (MFIs) are a telling example.
• One useful instrument;
• But they are not miraculous as widely thought (Banerjee et. al.,
2010; Karlan and Zinman, 2010).
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A Counter Example from China
• China’s rapid industrialization in the past three decades
seems to defy the conventional wisdom.
•
•
•
•
MFIs have never been formally promoted.
State banks didn’t extend any credit to SMEs in the early stage
of reform (Lin and Li, 2001).
One possible channel is informal financing (Allen, Qian, and Qian
2006). However, considering that at the onset of China’s reform,
a large proportion of rural people were poor, the amount of local
savings available for informal financing would have been rather
limited.
Private ownership was not formally recognized by constitution
until 2004.
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Role of Clustering
•
Without denying the importance of financial
development, the China growth puzzle suggests there
must be additional factors in play.
•
“Localization is one method of increasing the economic
size of an industry and achieving the gains of
specialization.” (page, 192, Stigler, 1951 JPE article
“The division of labor is limited by the extent of the
market”)
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Huzhou, just down the road from Zhili, is noted for its bamboo products. The city of Wenzhou is famous for manufacturing a large share of the world's supply of cigare
"The cluster-based model is labor-intensive. The real question is whether it can survive in the new environment of
Major Industrial Clusters in China
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Production Organizers
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Market
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Family workshops
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Workers/entrepreneurs
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Initial Capital Investment in Puyuan
Cashmere Sweater Cluster
Average
(10,000 yuan)
Mean/Wage
% of initial capital
investment from banks
12.45
6.25
0.00
7.31
3.65
2.90
Dyeing factories
340.07
170.05
20.63
Finishing factories
177.82
88.90
25.68
Printing workshops
10.60
5.30
0.00
Ironing workshops
3.83
1.90
0.00
12.74
6.35
6.95
0.54
0.25
0.00
4000.00
------
50.00
263.84
131.90
21.13
Yarn dealers
Family weaving workshops
Sweater shops
Three-wheeler drivers
Logistics company
Integrated enterprises
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Working Capital
• While clustering deepens the division of labor
and lowers the entry barriers, firms in the
clusters still encounter credit constraints in the
course of daily operation.
• With a lack of access to formal finance, how do
the numerous SMEs in a cluster overcome the
constraints of working capital? --- informal
borrowing and trade credit.
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The Most Important Financing Source
When Facing Working Capital Problems
Ruan and Zhang (EDCC 2009)
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Almost No Formal Contracts
Sample receipt
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.03
.01
.02
Effective tax rate
.04
.05
Lower Effective Tax Rates in Clusters
0
20
40
60
Cluster measure
80
100
Note: Calculated by the author based on China Economic Census 2004.
The tax rate is the average rate among firms in locations
corresponding to each percentile of the cluster measure.
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9
7
8
Number of firms (log)
10
11
More Firms in Clusters
0
20
40
60
Cluster measure
80
100
Note: Calculated by the author based on China Economic Census 2004.
The number of firms is the total number of firms in locations
corresponding to each percentile of the cluster measure.
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Is China Unique?
• Clusters were widely observed in the early stage of
Industrial Revolution in developed countries, as shown in
the famous gun-making cluster in Birmingham in the 19th
century cited by Stigler (1951):
The manufacture of guns, as of jewelry, was carried on by a large number of makers who
specialized on particular processes, and this method of organization involved the frequent
transport of parts from one workshop to another.
The master gun-maker—the entrepreneur—seldom possessed a factory or
workshop …. Usually he owned merely a warehouse in the gun quarter, and his
function was to acquire semi-finished parts and to give these out to specialized
craftsmen, who undertook the assembly and finishing of the gun. He purchased
materials from the barrel-makers, lock-makers, sigh-stampers, triggers-makers, ramrodforgers, gun-furniture makers, and, if he were engaged in the military branch, from
bayonet-forgers. All of these are independent manufacturers executing the orders of
several master gun makers…. Once the parts had been purchased from the “materialmakers,” as they were called, the next task was to hand them out to a long succession of
“setters-up,” each of whom performed a specific operation in connection with the
assembly and finishing of the gun.
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Cited in Stigler (1951), originally in Allen (1929).
Cluster in History
• Putting-out system was widespread in the UK
according to Adam Smith’ Wealth of Nations.
• Marshall’s emphasized three advantages of
industrial districts in his Principle of Economics:
• Technology spillover;
• Market linkage;
• Labor pooling
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Ethiopian Handloom Cluster
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Why have the Clusters in China Reached such a Scale?
• More compatible incentive of local governments in
developing the local economy.
• Better infrastructure. Without electricity and road, it would
be difficult for a cluster to expand (see our handloom
cluster study in Ethiopia).
• 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.
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Role of Local Governments
• Roadside sweater stands blocked traffic:
• Built cashmere sweater marketplaces (with roof) through privatepublic 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
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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).
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Conclusions
• China's cluster-based rapid industrialization suggests an
important role of localization in industrial policy.
• In addition to the advantages highlighted by Marshall,
clustering helps firms overcome financial and institutional
constraints.
• Cluster-based model fits well to countries with high
population density and weak financial institutions.
• However, most of the small and informal enterprises in
clusters are largely outside the radar of official statistics.
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Electrified versus Nonelectrified Handloom Clusters in Ethiopia
Chencha Revenue/Labor on Capital/Labor
7
6.5
6
7
8
9
Ln(Value-Added/Labor)
7.5
8
10
Chencha Value-Added/Labor on Fixed Assets/Labor
6
7
8
9
Ln(Capital/Labor)
No electricity
10
11
2
3
Electricity
Zhang et al. (2011, JDS)
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4
Ln(Capital/Labor)
No electricity
5
Electricity
6
Opportunities for Clusters in Bangladesh
h
High pop density
Limited capital
Hard working
Entrepreneurship
Flying geese from China
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Dyeing Cluster in Bangladesh
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Dyeing Cluster in Bangladesh
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Dyeing Cluster in Bangladesh
More than 400 in three villages
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Dyeing Cluster in Bangladesh
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Dyeing Cluster in Bangladesh
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Big Textile and Garment Factory (Dyeing)
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