Industrial Clusters in Asia: Analyses of Their Competition and Cooperation

Industrial Clusters in Asia Analyses of Their Competition and Cooperation

Edited by Akifumi Kuchiki and Masatsugu Tsuji

Industrial Clusters in Asia

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Industrial Clusters in Asia Analyses of Their Competition and Cooperation Edited by Akifumi Kuchiki and Masatsugu Tsuji

© Institute of Developing Economies (IDE),JETRO 2005 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2005 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN-13: 978–1–4039–4350–7 ISBN-10: 1–4039–4350–8 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Industrial clusters in Asia : analyses of their competition and cooperation / edited by Akifumi Kuchiki and Masatsugu Tsuji. p. cm. “Project … coordinated and financially supported by the Institute of Developing Economies (IDE), Japan External Trade Organization (JETRO)”–Pref. Includes bibliographical references and index. ISBN 1–4039–4350–8 (cloth) 1. Industries–Asia. 2. Competition–Asia. I. Kuchiki, Akifumi. II. Tsuji, Masatsugu. III. Ajia Keizai kenkyujo (Japan) HC415.D5I53 2005 338.6⬘042⬘095–dc22 2005040231 10 14

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne

Contents

List of Tables

vi

List of Figures

ix

Preface

xi

List of Contributors 1

Introduction Akifumi Kuchiki and Masatsugu Tsuji

Part I 2

xii

Industrial Clusters in Vietnam

Competition and Cooperation: Vietnam Adam McCarty, Richard Record and James Riedel

Part II

1

27

Industrial Clusters in China

3

Industrial Clusters in the Tianjin Area Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu

111

4

A Flowchart Approach Akifumi Kuchiki

169

5

Chinese Automotive and Parts Industries Masatsugu Tsuji and Wu Quan

200

Part III

Industrial Clusters and IT Industries

6

Can Malaysia’s Growth Be Sustainable? Yumiko Okamoto

225

7

Bangalore’s Software Cluster Aya Okada

244

8

The Local Economy: Lessons from Japan Rika Nakagawa

278

9

Japan: Remedies to Activate Local Cities Takuo Imagawa

299

Index

319

v

List of Tables 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 3.1

3.2 3.3 3.4 3.5 3.6 3.7 4.1 4.2 4.3 4.4 4.5 4.6

Vietnam total and manufacturing GDP by ownership: 1995 and 2001 Enterprises in Vietnam: a snapshot in 2003 Vietnamese export composition: 1995–2002 (percentages) Vietnam’s trade-related infrastructure International relative competitiveness in Asia, 2001 Comparative educational indicators, selected economies, 1990 Vietnamese licensed FDI projects January–July 2003: top five provinces Vietnamese gross exports January–July 2003: top five provinces Examples of some world-class clusters Vietnamese enterprise dataset used for GIS mapping and analysis: labour and turnover Vietnamese enterprise dataset used for GIS mapping and analysis: ownership type List of GIS maps produced of Vietnam Cluster index of Vietnam – all 12 industries Perceived role of clusters, selected Western and East Asian economies Comparison of the development characteristics of the electronic information industry in six Chinese provinces and cities, 2001 Comparison of the degree of agglomeration in the electronic information industry in six provinces and cities in 2001 Electronic industrial clusters in Tianjin Output and output value of main products in the green battery base in Tianjin Distribution of Tianjin’s bicycle enterprises Changes in the percentage of the output of bicycles in Tianjin compared with that in all China Changes of annual export volume of Tianjin’s bicycles Tianjin’s industrial zones Infrastructure of Tianjin Economic Development Area Tax system of Tianjin Economic Development Area Total output of the Chinese automobile industry, 1993 Total output of the Chinese automobile industry, 2001 Keiretsu companies of Toyota in Tianjin vi

32 33 36 37 38 41 43 43 54 61 62 63 91 104 116

117 120 135 155 157 158 181 183 184 190 191 192

List of Tables vii

4.7 4.8 5.1 5.2 5.3 5.4 5.5 5.6 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 7.1 7.2 7.3 7.4 7.5 7.6 7.7 8.1 8.2 8.3 8.4 8.5 8.6 8.7

Japanese companies related to Toyota in Tianjin Summary of industrial cluster policy, Tianjin and northern Vietnam Major Chinese automobile assemblers Number of automobile assemblers and parts suppliers in concentrated regions of China Eight major firms in the Chinese automotive sector, 1995 Concentration ratios in the automotive industry: four-country comparison Localization ratio of Santana Major parts manufacturers in Shanghai Regional shares of foreign and domestic investment in Malaysia between 1993 and 2002 Market shares of Malaysia in major developed countries RCA index of Malaysia Spearman’s rank correlation coefficients of the RCA indexes between Malaysia and some of its major trading partners Spearman’s rank correlation coefficients of the market shares between Malaysia and China in electronics products Intra-industry trade (IIT) indexes between Malaysia and China Economic impacts of the MSC in Malaysia Occupational grouping in Malaysia Average annual software labor cost comparisons in selected countries, 1999 Indian software firms’ global market penetration Locational distribution of headquarters of India’s top 700 IT software and services firms, 2000 Growth of employment and revenue per employee in the Indian software industry IT-related jobs in demand in India Higher education institutions offering courses related to computers, all India and Karnataka Growth in intake in IT-related courses in Karnataka Number of manufacturing factories in Japan, 1985–2000 Number of industrial zones in China Per capita income in each Japanese prefecture Growth rates of per capita income in each Japanese prefecture Details of the Japanese industrial cluster plan 2001 Projects of industrial cluster planning in each Japanese region Details of support for the ICT industrial cluster in Okinawa

193 197 202 203 206 207 211 212 228 231 232 235 235 236 238 240 250 251 253 258 259 263 265 280 282 284 286 288 289 292

viii List of Tables

9.1 9.2 9.3

9.4 9.5

IT industry accumulation in Japan: summary statistics (city data) Estimation results of IT industry accumulation in Japan: basic model (accumulation factor analysis) Estimation results of IT industry accumulation in Japan: influences of education facilities (education and proximity analysis) Industrial classifications of the IT industry in Japan – 1: accumulation factor analysis Industrial classifications of the IT industry in Japan – 2: educational facilities and proximity analysis

308 309 310

311 312

List of Figures 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 2.15 2.16 2.17 2.18 2.19 2.20 2.21 2.22 2.23 2.24 2.25 2.26 2.27 2.28 3.1 3.2 3.3 3.4 4.1 4.2 4.3

Opinions as to whether intellectual property is well protected, selected economies Hotelling model: competition along a line Porter’s ‘diamond of advantage’ Dot density map of Vietnam – all 12 industries Dot density map of Vietnam – automobiles Dot density map of Vietnam – cement Dot density map of Vietnam – electronics Dot density map of Vietnam – garments Dot density map of Vietnam – motorcycles Dot density map of Vietnam – paper Dot density map of Vietnam – rice Dot density map of Vietnam – seafood Dot density map of Vietnam – software Dot density map of Vietnam – steel Dot density map of Vietnam – sugar Dot density map of Vietnam – textiles Vietnam northern region commune-shading map – garments Vietnam northern region commune-shading map – paper Vietnam northern region commune-shading map – seafood Vietnam northern region commune-shading map – steel Vietnam northern region commune-shading map – textiles Vietnam southern region commune-shading map – garments Vietnam southern region commune-shading map – seafood Vietnam southern region commune-shading map – steel Vietnam southern region commune-shading map – textiles Seafood clusters in the Mekong Delta Hourly labour costs, selected developing countries Vietnam provincial codes Hierarchical structure of regional competitive power in China Local production system of bicycle enterprises in Wangqingtuo Town, Tianjin City Tianjin annual bicycle production as a percentage of that of all China Competitive advantage of enterprise clusters Industrial cluster formed by an anchor firm Value chain from design planning to marketing Efficiency in production only ix

40 46 50 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 100 106 114 152 158 159 171 173 173

x List of Figures

4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 5.1 6.1 6.2 6.3 6.4 7.1 7.2 8.1

Optimization for customer’s satisfaction Measures of value chain management: an example Core competence (selection and concentration) Cost structure Average cost Average cost, brand marketing and R&D Toyota’s value chain network in China Toyota’s cluster in Tianjin Consulting services procedures in Tianjin Cross-docking at work Production structure of the Shanghai automobile industry Number of Japanese firms established in ASEAN Countries at the end of 2000 Foreign investment in the electronics industry of Malaysia on the application basis Flow of FDI into China and ASEAN Numbers of world-class companies in the MSC by nationality, 2003 Growth of software exports from Bangalore Structures of the software and services cluster in Bangalore Total number of ICT companies in Okinawa, May 2003

173 173 173 175 176 177 179 182 186 189 216 227 230 233 239 255 257 291

Preface This volume is the product of a research project entitled ‘Industrial Clusters in Asia: Analyses of their Competition and Cooperation’ which was coordinated and financially supported by the Institute of Developing Economies (IDE), Japan External Trade Organization (JETRO). Industrial clusters have attracted considerable attention in recent years but little literature exists on comprehensive analyses of Asian clusters. We have paid attention to industrial cluster polices in Asia as growth strategy. Firms in China are supplying many manufactured goods and clusters in China are bases for the manufacturing industries. Firms in East Asia including firms in Japan are competing with firms in China. Therefore we analyzed industrial clusters in Asia and tried to find out a prototype model of industrial cluster policies in Asia. We are grateful to all the members and counterparts who contributed to our project. We would also like to thank all the individuals and organizations that accepted our visits and shared with us their precious time and information. We also wish to express our sincere thanks to Mr Kazuo Katsume, Mr Yuichi Takayama, Professor Susumu Sanbonmatsu, Ms Momoko Kawakami and Mr Ko Yukawa for their lectures for our project. Any opinions expressed in this book are those of the contributors and not their organizations. We hope this publication will contribute to the academic circle and toward further understanding of industrial clusters in Asia. AKIFUMI KUCHIKI Executive Vice-President, JETRO

xi

List of Contributors Zhang Donggang

Nankai Institute of Economics

Takuo Imagawa Institute for Information and Communication Policy, Ministry of Public Management, Home Affairs, Posts and Telecommunications Akifumi Kuchiki

Institute of Developing Economies (IDE-JETRO)

Adam McCarty

Mekong Economics

Rika Nakagawa

Institute of Developing Economies (IDE-JETRO)

Aya Okada University

Graduate School of International Development, Nagoya

Yumiko Okamoto Wu Quan

Doshisha University

Graduate School of Economics, Osaka University

Richard Record James Riedel

Mekong Economics

Johns Hopkins University

Luo Ruoyu

Doctoral student, Nankai Institute of Economics

Xie Siquan

Nankai Institute of Economics

Masatsugu Tsuji University Bai Xuejie

Osaka School of International Public Policy, Osaka

College of Economic and Social Development

xii

1 Introduction Masatsugu Tsuji and Akifumi Kuchiki

Industrial clusters in Asia: analyses of their competition and cooperation Why firms agglomerate has been a question in economics ever since the time of Marshall and Hotelling. In the 1990s, the success of Silicon Valley in California and Route 128 in the Boston area as IT clusters, among others, brought new insights to this field. Since then, owing to the development of new theoretical models such as those of Krugman and of Porter the notion of cluster has become the most important in terms of competitiveness and strategy for economic development. In order to set up policy measures to foster clusters, attempts have been made to identify the strategic factors involved, for example Porter’s (1) demand condition, (2) competitive condition, (3) factor condition and (4) support condition. Cluster projects have been implemented in developing as well as developed countries, and it is said that the total number to date worldwide is more than 500. Traditional or old industrial clusters such as Nishi-Mikawa (Eastern Aichi prefecture) and Yawata City in Japan, Manchester in the UK, or Silicon Valley in California, although the last belongs to the new IT industry, were formed through the competitive process. Anchor firms decided their location through optimizing behaviour by comparing economies of scale and transaction costs, and others agglomerated close to them. On the other hand, recent economic development in East Asia has been initiated and promoted mainly by foreign direct investment (FDI). Here, foreign firms selected their locations by considering the availability of not only cheap unskilled labour but also skilled labour and other economic resources. As a result, East Asia was referred to as the ‘growth center in the world’ in the early 1990s, then the ‘factory of the world’ in late 1990s. Behind this success story, we can find government support to attract firms to the regions. Good examples are industrial parks and export-processing zones in China and Vietnam. In China there are hundreds of these zones in Zhejiang and Jiangsu provinces in the Yangtze River Delta, for example, 1

2 Introduction

established by all levels of government, local as well as central. They offer generous subsidies and tax exemption for profits, and provide infrastructure such as electricity, telecommunications, highways and water supply. In this sense, regions in East Asia have been competing with each other to attract not only foreign but also domestic firms. All understand that without agglomerating there is no hope for industrial development. On the other hand, firms established in one country have been shifting to others, and this implies that the network of outputs, inputs and other business activities such as R&D expands to other areas. Such activities are a natural outgrowth of globalization as the new areas concentrate and specialize while at the same time their interdependence increases more and more. Although, in reality, the competition among East Asian regions is emphasized, tighter interdependence should be noticed. The aim of this book is to analyse competition and collaboration among East Asian industrial clusters, and to envision their future. In Industrial Agglomeration: Facts and Lessons for Developing Countries (2003), we compared agglomerations mainly in Japan, the USA, Italy and some East Asian countries. This book, on the other hand, focuses on East Asia, which has been attracting FDI and developing as a centre of industrial agglomeration, with the result that the production structure in the world has been transforming dynamically. This book aims to analyse this world trend and to provide the strategy framework that is required not only for Japanese local governments but also for firms to survive global competition. Briefly, the conclusions of this volume are as follows. The success of these industrial agglomerations depends on (1) infrastructure (highways, ports, electricity supply, and so on), (2) institutional framework (legal systems, participatory actors, coordination among actors, and so on), and (3) government support in terms of laws, taxation and finance. As shown in this volume, the role of government is essential. In developing countries, the market mechanism to foster clusters does not function well owing to regulations, bureaucracy and the existing legal framework. Moreover, there is no proper market for capital and human resources. In such a case, the government must complement market mechanisms and prepare the above three conditions. The cases of northern Vietnam and China provide good examples of collaboration in these three areas working well. This book is contributed by the following three teams: the US Team which analyses the case of Vietnam by recent theory, the China Team which examines the case of Tianjin, China, and the Japan Team which studies the case of Japan and other Asian economies. The text is divided into parts as follows: Part I provides a case-study of clusters in Vietnam, utilizing geographic information systems approach in particular. Part II presents a case-study of the Tianjin cluster by the Chinese Team, and attempts to make clear how clusters in Tianjin with various industries have been formed. Part II also includes two chapters by the Japan Team: Chapter 3

Masatsugu Tsuji and Akifumi Kuchiki 3

analyses the Tianjin cluster by applying a flowchart analysis to the Toyota production plant located there, and Chapter 4 the Chinese automobile industry, which examines how Chinese automobile assemblers and parts suppliers choose their locations. Part III consists of four chapters by the Japan Team: Chapter 6 focuses on the Malaysian electronics industry and analyses its competitiveness; Chapter 7 looks at Bangalore, India, and examines its local labour market as a basis for competitiveness; Chapter 8 introduces policy measures taken by the Okinawa prefectural government in promoting ICT cluster, and highlights the importance of policy coordination with central government; and finally Chapter 9 examines how ITrelated firms choose their locations and suggests a strategy for a local region to vitalize its IT industry.

PART I: INDUSTRIAL CLUSTERS IN VIETNAM Chapter 2: Competition and Cooperation: Vietnam In both developing and developed countries, certain industries tend to agglomerate in one area in order to take advantage of knowledge creation and spillovers, access to inputs, human and social capital, lower costs and lower barriers to market entry in clusters. For example, in the USA, the information technology industry is concentrated in Silicon Valley in California, while the international financial market is based mainly in London and the semiconductor industry can be found in Hsinchu Park in Taiwan. Vietnam is no exception to clustering. As we note on p. 56, The Old Quarter in Hanoi is famous for its specialist shops and microhousehold enterprises. Many of today’s street specializations date back to the establishment of Hanoi’s merchant guilds in the thirteenth century. Lan Ong Street is famous for herbs and traditional medicine, Lo Ren Street for blacksmiths and metalworking, Hang Gai Street for silk, Hang Bac Street for jewelry, and Hang Dau and Cau Go Streets for leatherwear and shoes. Chapter 2 attempts to answer questions as to why firms choose some locations and not others for their factories and offices. Studies have identified four broad categories for industrial agglomeration, described on p. 102: 1. clusters where locally specialized items are produced or local product districts; 2. clusters where a large core firm has many subcontracting or parts makers surrounding it or the so-called industrial castle town; 3. clusters in large cities where lots of basic production processes are treated or urban processing clusters; and, 4. government-led industrial parks and estates often seen in developing countries.

4 Introduction

The chapter focuses on the fourth type of cluster – industrial zones (IZs), industrial parks (IPs) and export-processing zones (EPZs). The zones are considered a proxy for public goods in a developed country, that is in a developed country, entrepreneurs would expect to have quality infrastructure and institutions, such as electricity, roads, telecommunications, water supply and sewerage, and so on. Our study revealed that the agglomeration of foreign-invested firms in Vietnam has been in large part owing to the infrastructure and administrative advantages available in the IZs. Besides the development of government-led industrial parks, other forms of clustering are also emerging in Vietnam. Therefore, the chapter builds on the previous study, but pays particular attention to the first three categories of industrial clustering by using a geographic information systems (GIS) approach to locational analysis. Chapter 2 begins with an overview of the industrial competitiveness of Vietnam, before surveying the economic theories that explain industrial clustering and then and reviewing the international empirical evidence of the theories. The chapter then looks at some of the recent work on cluster engagement in Vietnam, after which GIS analysis is applied to analyse 12 key industrial sectors of the Vietnamese economy. The chapter then reviews the roles of both business associations and also IZs, IPs and EPZs as potential ‘cluster facilitator’ mechanisms. It concludes with industrial policy recommendations. Vietnamese competitiveness and the environment for business Without a doubt, Vietnam has been an economic growth success story for a decade now. The transition to a market economy has occurred comparatively smoothly and with relatively strong growth and economic stability throughout most of the 1990s, despite institutional weaknesses and a policy bias against the private sector. However, as we note on p. 31, Vietnam remains a low-income country and the public sector still dominates the industrial economy of Vietnam, contributing some 50 per cent of GDP. The state’s share of output in the manufacturing sector has fallen somewhat over recent years from 59 per cent in 1995 to 51 per cent in 2001. Private domestic firms, by contrast, accounted for only about 9 per cent of manufacturing value added (GDP). Legal reforms in recent years have, however, greatly encouraged private sector development, and in early 2002 the status of the private sector was enhanced when a plenum of the ruling party resolved that the private sector is ‘an integral part of the national economy’. Stronger official endorsement of the private sector embodied in recent policy changes has helped build investor confidence. Biases in favour of the public sector remain, but Vietnam is now beginning a period of rapid growth led by domestic businesses, rather than by FDI and commodity exports as occurred during the 1990s. The private sector’s contribution to national investment has risen from 21 per cent in

Masatsugu Tsuji and Akifumi Kuchiki 5

2000 to 29 per cent in 2002. Through international trade, Vietnam has begun to capitalize on its principal area of industrial comparative advantage – low labour costs. Currently, Vietnam’s garment industry is the second most important market after the EU, and the country is now the secondlargest shrimp exporter to Japan, after Indonesia. However, Vietnam’s competitive potential is weakened by state monopolies (or cartels), which have kept costs high in areas such as air transport, coastal shipping, railways, power and telecommunications. As we note, ‘Vietnam is one of the most expensive countries in the world for both incoming and outgoing international telephone calls’ (p. 36). Such infrastructure problems largely restrict FDI and new business activity to specially built investment zones. In the absence of private provision, government services tend to be driven by what officials think is important to supply, rather than driven by demand. Theoretical literature review Until quite recently, economists have paid only limited attention to the location of economic activity and to the choices firms and households make to decide where to produce or consume. Early works by Alfred Marshall and Harold Hotelling laid some basic premises for looking at the role of geography in economic decision-making. Marshall (1920) did some speculating on the subject with his observation that: ‘Industries tend to cluster in distinct geographic districts, with individual cities specializing in production of narrowly related sets of goods.’ In more modern parlance, as summerized on p. 47, Marshall argued that industrial districts arise because of: • knowledge spillovers (‘the mysteries of the trade become no mysteries; but are as it were in the air’); • the advantages of thick markets for specialized skills; and • the backward and forward linkages associated with large local markets. Hotelling (1929) expanded on this idea by looking at location as a question of finding a stable equilibrium based on the location of the market under highly constrictive assumptions. The work of Paul Krugman, Masahisa Fujita and Anthony Venables began a renaissance in geographically based economic analysis, which they dubbed ‘the new economic geography’. The foundation of this analysis rests largely on monopolistic competition modelling with an emphasis on the interaction of increasing returns, transport costs and the movement of productive factors to understand the latent forces of economic agglomeration. First, economies of scale and transportation costs imply that firms prefer to locate close to a large market. Second, workers are also consumers, and would thus prefer to live close to a large market.

6 Introduction

Michael Porter of the Harvard School of Business developed an alterative approach to economic geography. Porter defines clusters as: geographic concentrations of interconnected companies and institutions in a particular field … They include suppliers of specialized inputs, components, machinery and services. Clusters also often extend downstream to channels and customers and laterally to manufacturers of complementary products … finally many clusters include governmental and other institutions. This school of thought also stresses that nations succeed not in isolated industries, but in clusters of industries connected through vertical and horizontal relationships. This system has an implicit concept based on a ‘critical mass’ of specific influences that will improve knowledge, share resources and stimulate creativity, innovation and entrepreneurship. ‘Porter-style’ clusters in developing countries tend to be shallow and to rely primarily on foreign components, services and technology. Industrial clusters in Vietnam Agglomeration can occur at many different levels, serve large or small areas, and take place in a variety of industries. This study looks at 4400 enterprises engaged in a wide range of sectors – automobiles, cement, electronics, garments, motorcycles, paper, rice, seafood, software, steel, sugar and textiles – and their potential for clustering. Within these 12 sectors, 3 (garments, seafood and textiles) have been chosen for further analysis. Using a basic definition of clustering based on firm density, our sample identifies the garment sector to have the greatest tendency to cluster, followed by textiles, rice, seafood and paper. Our results show that there are some signs of industrial agglomeration in Vietnam; however, these results must be taken into perspective with the transitional nature of the Vietnamese economy. The ability of a particular cluster to form depends primarily on an environment conducive for private enterprises, that is institutional frameworks. Economic reform has been the principal driver of private-sector growth, and future efforts should be focussed on further implementation of the 2000 Enterprise Law. If clusters are dynamic centres of growth, then understanding the development, management and stability of clusters is a matter of great significance for the future of Vietnam’s economy. Especially Japan, Korea and other leading East Asian economies can provide constructive examples for Vietnam. These countries demonstrate that a strategy of preserving core cultural values while being open to new ideas can be extremely successful in a knowledge-driven global economy. State-funded technological catch-up has decreased in importance, while private enterprises have become the international drivers of technological development.

Masatsugu Tsuji and Akifumi Kuchiki 7

The reforms necessary for the long-term and stable growth of the Vietnamese economy were noted at the Vietnam Business Forum (9 December 2002) and are listed on p. 100 as: • introduce greater competition to reduce costs closer to the regional levels in sectors such as telecommunications, power and shipping; • ease restrictions on technology transfers; • make business policies and regulations more transparent in their formulation as well as using consistent enforcement to enhance predictability for investors; • broaden the currently narrow tax base that puts a disproportionate burden on honest taxpayers and slows the growth in employment; • accelerate deregulation and implement the Enterprise Law aggressively outside the main urban areas; • correct misconceptions on the function of the private sector and enhance its role; and stress the importance of encouraging corporate social responsibility. While Vietnam has taken steps in the right direction, there are still substantial institutional changes needed for continued growth. The lesson for Vietnam is that the government is no longer the principal actor in driving economic and technological development. Its role has changed from setting the stage and creating a conducive enabling environment to freely allowing entrepreneurship and innovation.

PART II: INDUSTRIAL CLUSTERS IN CHINA Chapter 3: Industrial Clusters in the Tianjin Area Development and spread of industrial clusters and studying-type regions in Tianjin The strong power of industrial clusters and studying-type regions has been displayed in global competition. It is the best choice for supporting development of enterprises and strengthening competitive power of enterprises. As noted on p. 112, a so-called industrial cluster comprises both the industries that gather within a certain region and their supporting system. Porter generalized this supporting system as having the following four aspects: demand condition, competition condition, factor condition and support condition. Sustained competitive advantage can be produced only by mutual support and coordinated development of these four aspects. Industrial clusters include upstream industrial sectors that provide raw materials and means of production for core industrial sectors and those industrial sectors each of whose production technology affects each others (p. 112). To build mature industrial clusters, good regional economic environment is needed.

8 Introduction

Good regional economic environments should include at least the following six factors. 1. Rich technological resources and its distribution media. Universities and private and government research institutes can provide industrial sectors with the research achievements they need to improve their competitive position, through fast and efficient distribution media. 2. Human resources with high adaptability and organizations for development and training. Economic development requires that regions provide lots of professional personnel and a skilled contingent of workers for enterprises. Also, ‘through basic occupational education, higher education and continuous in-service education, regions should give human resources the knowledge and skill that allow them to adapt to competition and changes’ (p. 113). 3. Abundant fund sources. From fo. 192: The competitive power of regional industries cannot do without the strong support of financial organizations. The functions of these financial organizations include raising enough funds for economic development and establishing investment mechanisms that can fully reflect guidance for market competitive power. 4. Favourable macroeconomic environment with efficient management. As shown on p. 113 this kind of management level is embodied in two aspects: one is that macroeconomic regulations can guide enterprises effectively and at the same time do not destroy the independence and competitive relation of enterprises; the other is that the tax system is beneficial to competition, and at the same time meets the needs of economic development and the public. 5. Well-developed infrastructure for software and hardware. The efficiency of regional economic activities is, to a large extent, affected by the condition of infrastructure. 6. Fair-scale groups of customers with discriminatory ability. ‘Views of these customers and their requirements for products can reflect the basic trend of market changes and should be regarded as the basis for product innovation by enterprises’ (p. 114). There are many mature industrial clusters, such as the German chemical industry, the Italian shoe industry, the Swiss pharmaceutical industry, the semiconductor industry in the USA and Japan, the mobile phone industry in Scandinavia and so on. In Latin America, South Asia and a few African countries, industrial clusters, such as Leon shoe manufacturing in Mexico,

Masatsugu Tsuji and Akifumi Kuchiki 9

Santa Catarina ceramic tiles in Brazil and the Nnewi automobile components and parts cluster of Nigeria have attracted people’s attention and developed to some extent. In Guangdong, Jiangsu, Zhejiang and other provinces in China, some traditional industries have also shown the characteristics of agglomeration. These industries include the garment industry, shoe manufacturing industry, hosiery industry and toy industry. Tianjin is demonstrating the fruits of its decades-long development by producing large-scale foreign-funded enterprises in the complete processing, manufacturing, and heavy industry areas. In the process of industrial agglomeration, high-tech industrial clusters and traditional industrial clusters have their respective characteristics in shaping process, features and development trends. In Tianjin, industrial clusters of high-tech industries such as electronic information and automobiles and traditional industries such as bicycles and garments have appeared in an embryonic form. The network system of study between industrial clusters has also appeared. Affected and encouraged by developed industrial clusters around the world, in the interaction and competition of domestic industrial clusters, Tianjin hopes to form its own industrial clusters with advantages and studying-type regions of high dynamic ability. Industrial clusters in the Tianjin Area In the process of industrial agglomeration, high-tech industrial clusters and traditional industrial clusters have their respective characteristics of formation processes, features and development trends. The success of the hightech industries depends on: (1) infrastructure (highways, ports, electricity supply and so on); (2) institutional frameworks (legal systems, participatory actors, coordination among actors and so on); and (3) government support (or foreign assistance) in terms of laws, taxation and finance. As shown in Chapter 2, the case of northern Vietnam provides good examples where collaboration in these three areas worked well. There exist the following industrial clusters in Asia: southern China, the Chu-Chiang River Delta in China, Johor, Selangor and Penang in Malaysia, Hanoi and Ho Chi Minh in Vietnam, Bangalore in India, Zhong Guan Cun in China, Hsinchu Science Park in Taiwan, and Leam Chabang in Thailand. As new industries, here we chose the electronic information industry in Tianjin and the battery industry with its special feature of green environmental protection. For traditional industries, Chapter 3 chose the automobile manufacturing industry in Tianjin and the bicycle manufacturing industry. The new motive force for the development of the electronic information industry in Tianjin In recent years, the electronic information industry in Tianjin has developed very quickly and taken on a healthy look. The rapid formation and

10 Introduction

development of the electronic information industry in Tianjin has the following obvious characteristics. 1. Exogenous industrial clusters. Electronic information clusters’ exogeneity is evident from their dependence on foreign funding sources. The increasingly large scale of foreign funds in the electronic information industry, and the ratio of foreign funds in the electronic information industry to gross funds. 2. Industrial clusters have taken on the structural characteristics of a ‘single core’. The average scale intensity of Tianjin’s enterprises is comparatively high; enterprises are of relatively large scale, and ‘single-core enterprises of industrial clusters are large-scale transnational corporations’ (p. 118). 3. Rooting of industrial clusters and the foundation of local production network. Industrial clusters are primarily rooted in local socio-cultural characteristics and institutional advantages. These play an important role in the further development of high-tech industrial clusters. 4. Industrial clusters with product chain. ‘Within electronic information industrial clusters in Tianjin, economic bodies connect with each other to form an inner value chain’ (p. 119). It is a typical mode of product chain cluster. In this chain, three kinds of enterprises share work and cooperate with each other to form a product chain cluster with comparative power. Some problems still exist in Tianjin’s electronic information industry: the industry has comparatively strong dependence; institutional factors restrict the further development of industrial clusters; the local production network has not embedded deeply; the single-core structure of industrial clusters is fragile and unstable; and there is no knowledge connection which is favourable for innovation. Regarding these characteristics and problems, Chapter 3 proposes a solution to the development of the electronic information industry in Tianjin in order to improve its competitive advantage and bring the clustering effect into full play. The solution is as follows. (1) Tianjin’s electronic information industrial clusters should combine industrial advantage, policy advantage, low cost advantage and location advantage. (2) The structure of industrial clusters should develop from ‘single-core’ to ‘multiple-core’ to form a competitive pattern within the region and to transfer and improve electronic information industrial technology. (3) Local industrial clusters with self-strengthening mechanisms should be cultivated. Product chain clusters should be turned into innovation chain clusters so as to change regional comparative advantages into competitive advantages. (4) The process of reform for state-owned enterprises in the electronic information

Masatsugu Tsuji and Akifumi Kuchiki 11

industry and to further complete institutional network within industrial clusters should be speeded up. (5) The electronic information industry should develop toward specialization, interconnection, internationalization and clustering through the combination of technology, institute and market. (6) Investment should be promoted by favourable policy, sound infrastructure, convenient trade environment and improving the ecological environment in regional clusters. The rise of the green battery industry in Tianjin The Tianjin municipal government has listed new energy (taking the green battery as the dominant factor) in three pillar high-tech industries, so called pillar industries. Tainjin New-Tech Industrial Park also looks on new energy as a key field of development. These measures have led to the rise of the green battery industry. Tianjin has distinct advantages in developing this industry as follows: (1) The green battery industry in Tianjin has strong R&D facilities and a high production capacity. (2) Types of products are complete and the production chain has appeared in an embryonic form. (3) The industry has a vast range of prospects and great potential. Tianjin has been successful in opening up the market at home and abroad. After ten years’ development, the green battery industry has achieved a certain scale. However, as a growing industry, it still has some problems that demand prompt solutions. Through analysis of the basic situation and industrial structure of the green battery industry, Chapter 3 makes suggestions for guidance. Development environment, characteristics and direction of the automobile industrial clusters in Tianjin On p. 141 we summarize the situation of Tianjin’s automobile industry: The automobile industry in Tianjin is an important part of the national industry. Especially in the twenty years since reform and opening-up, the automobile industry in Tianjin has both risen and fallen. It is now facing the opportunity of starting a new undertaking. After decades of development, automobile industrial clusters have appeared in an embryonic form with several important development characteristics. These characteristics include: (1) The accumulated development basis of the industry provides an advantage in terms of human resources. (2) The unique product positioning under the national industrial policy has gained some pre-emptive advantages. (3) The industrial agglomeration of which Toyota is seen as the centre exists together with the original industrial agglomeration. (4) Tianjin’s automobile industrial clusters participate in the formation of a domestic oligarchic market structure through its alliance with China’s FAW Group Corporation. (5) Because the industry is in the key stage of change from comparative advantage to competitive advantage, the competitive advantage of the industry is not outstanding. (6) The competitive power of

12 Introduction

enterprises manufacturing automobile components is in decline on the whole, but some enterprises have suddenly come to the fore. (7) The localization system of the R&D of products has yet to be formed. (8) The means by which government affects industrial development lies in facing the requirements of change. Beginning from the background of the automobile industry at home and abroad, Chapter 3 analyses the industry’s development characteristics; next it raises the construction direction of the automobile industry in Tianjin in order to strengthen and/or sustain competitive advantage and improve the clustering effect of this industry. The construction direction includes the following aspects: (1) constructing two interrelated systems of the production chain; (2) medium-scale and small-scale enterprises with quality management and innovative ability being the main factor in maintaining the competitiveness of the value chain; (3) promoting the change of the value chain from comparative advantage to competitive advantage and even to dynamic competitive advantage; (4) government plays a positive role in cultivating industrial dynamic competitive advantage. Analysis of the formation and development of bicycle enterprise clusters in Tianjin Tianjin is the birthplace of China’s bicycle industry. Here the industry has experienced both rise and fall. In this process, unique bicycle enterprise clusters have been formed gradually, the clustering effect playing a significant role in encouraging industrial development. Taking the formation characteristics, factors and development mechanism of bicycle enterprise clusters in Wangqingtuo as the starting-point, Chapter 3 analyses the development, structural features and competitive advantage of bicycle enterprise clusters and the structure of bicycle industrial clusters in Tianjin. The structural characteristics of Tianjin’s bicycle industry are summarized on p. 156: first, the vertically integrated, rigid mode of production in stateowned enterprises has been adaptable neither to market demand nor to technical improvement. These enterprise clusters are, rather, the substitute for such a mode of production. Moreover, they are located in suburbs where it is easy to obtain a flexible labour force. Also, the convenient conditions of transport and communication make it possible for enterprises to communicate with each other in commodities, service, information, labour force and technology. Second, medium-scale and small-scale enterprises with a relatively high degrees of specialization have formed clusters, and the relationship between enterprises in the same industry or between related enterprises is one of dynamic competition and cooperation. This kind of relationship helps clusters to maintain their energy and competitive power. From the above analysis, Chapter 3 concludes that the formation of Tianjin’s bicycle enterprise clusters is the result of many factors, such

Masatsugu Tsuji and Akifumi Kuchiki 13

as geography, economy, society, humanism, institutions, technology, the market and history. It has not resulted simply from the action of enterprises, nor was it able to appear in a short time. Enterprises within the clusters have an obvious coordination effect. Once this kind of organizational structure is formed in a region, other regions have difficulty in copying it quickly. It should be considered a significant factor in the continuous improvement of the competitive power of Tianjin’s bicycle enterprise clusters. Conclusion: to cultivate Tianjin’s new industrial clusters In the process of industrial agglomeration, both high-tech industrial clusters and traditional industrial clusters have their respective characteristics in shaping processes, features and development trends. Regarding these four industrial clusters as our research object, through contrast and analysis on shaping process, features and development trends, Chapter 3 raises future characteristics and development trends for industrial clusters in Tianjin. The development trends are as follows: (1) A developed interrelated industrial cooperation system in which foreign-funded enterprises are the centre. Tianjin’s industrial clusters regard large foreign-funded enterprises as the centre. This type of cluster, however, does not yet enjoy the benefits of an ‘interrelated connection of innovation networks.’ Rather, with local enterprises still dependent on core enterprises for funding and technology, these clusters still experience a hierarchical division of labour within the value chain. This is one reason why these clusters are inherently fragile, and why they are still largely at the bottom of or outside the global production system. (2) Being good at study, imitation and innovation, and to bring dynamic ability into full play. Through the alliance, medium and small-scale enterprises may form a certain kind of scale economy and maintain and strengthen their own competitive advantage of technology and also improve their core and dynamic ability. (3) With the tie of the market, industries in urban areas and industries in rural areas should be combined to form a rational structure of priorities. As described on p. 165, so far, Tianjin has formed a pattern of industrial clusters with the characteristic of distribution according to priorities in urban and rural areas. The enterprise clusters in capital-intensive or technology-intensive industries gather in economic–technological development areas, free-trade zones, new technical industrial parks and some development areas in counties. Traditional industrial clusters have appeared in some industrial parks in villages and towns. Relying on new technology and new concepts of management, these traditional industrial clusters are being reformed into new industrial clusters. (4) Support by a developed international supply chain and market network. On p. 167 we argue that cooperation in the international supply chain is the best choice for entry into the international market. However, the final goal is not the internationalization of enterprises. The final goal of

14 Introduction

an enterprise is to occupy market share and gain profits. The market network can collect rich market information for enterprises and provide unblocked channels for selling. (5) Positive enterprising concept and clustering culture. It is our brief that ‘Tianjin’s future industrial clusters of the new type should maintain and develop a coordinated and open clustering culture. In addition, future industrial clusters in Tianjin should incorporate a foreign advanced culture and cultivate compound competitive advantage’ (p. 167).

Chapter 4: A Flowchart Approach The economic development of East Asia can be explained by an industrial cluster, or industrial cluster policy, and industrial agglomerations such as the export-processing zone in Kaousing, Taiwan, established in 1965, the free-trade zone in Penang, Malaysia, in 1971 and the export-processing zone at Tan Tuan near Ho Chi Minh, Vietnam, in 1993 are typical examples. Industrial Parks near Shanghai developed by central government as well as all levels of local government are other examples. Chapter 4 makes clear the conditions required for forming a cluster in developing countries, and attempts to present a new method referred to as a flowchart approach. The author applies this method to analyse the Toyota Motor Corporation cluster in Tianjin, China, as a case-study. The flowchart approach proposed in Chapter 4 is used to extract the factors contributing to a cluster and to explain how these affect each other so as to form a cluster. The four factors proposed in this chapter are: (1) industrial zones, (2) capacity-building, (3) anchor firms, and (4) related firms. These are the key to industrial clustering in implementing industrial cluster policy. Capacity building means facilitation of physical infrastructure, institutional reform, human resource development, and preparation of living conditions. Institutional reforms include streamlining investment procedures and establishing one-stop services. The cross-dock logistics introduced in Shanghai of a just-in-time system contribute to value chain management but weaken an incentive to form an industrial cluster in Tianjin. The following three factors have positive effects on expanding an industrial cluster: a keiretsu relationship between an anchor firm and its related firms, scale economies, and modularity. Chapter 4 presents two interesting theoretical models for analyzing the decision of an anchor firm to construct a new production plan in a cluster, and on the scope of the value chain, namely, a ‘regional value chain network’. The author shows that, in the former, the crucial elements for the decision are scale economies and external economies of the anchor firm and that these are related to the size of the market (the amount of production), while those in the latter are the international vertical or horizontal division of labour and of parts, and outsourcing strategy.

Masatsugu Tsuji and Akifumi Kuchiki 15

After the theoretical formulation, the chapter applies the flowchart analysis to Toyota in Tianjin. The first step in forming an industrial cluster is to find the market for products. Here scale economies in China are crucial to forming an industrial cluster in Tianjin. The market in the case of Tianjin is domestic. The next step is to determine whether there are saucers for firms to build plants. Tianjin has (1) the Tianjin economic development area of 130 km2 and other industrial zones established in 1992. Tianjin can also offer to firms as an incentive a good port, a physical infrastructure to be part of (2) capacity-building. Tianjin Port is effective in forming an industrial cluster. Tianjin’s government has been criticized for slowness in reforming laws and regulations but it is now improving. Living conditions in Tianjin are favourable to foreign investors such as the Japanese since there is a Japanese department store and many Japanese restaurants. Tianjin offers to firms as a further incentive many university students as human resources. Toyota started to operate in October 2002 as (3) an anchor firm for a cluster in Tianjin. Toyota merged with Daihatsu and decided to establish a subsidiary, partly owing to Daihatsu’s subsidiary located in Tianjin, though it had several candidate cities to invest in. Japan’s keiretsu system was effective in inviting (4) related companies of Toyota. Inviting an auto assembly company as an anchor firm is effective in implementing industrial cluster policy, since a car is composed of some ten thousand components. Component firms move into a cluster where an anchor firm exists if they can have surplus by building a plant. Cross-dock logistics are characteristic of Toyota’s Tianjin cluster. The just-in-time system there collects components in Shanghai and transports them to Tianjin. The logistics reduces transportation costs from Shanghai to Tianjin and weakens firms’ incentive to move into Tianjin. After discussing these factors, Chapter 4 concludes that the crucial factor in the decision to build a factory in Toyota’s case was economies of scale.

Chapter 5: Chinese Automotive and Parts Industries This chapter analyses how Chinese automotive assemblers and their parts manufacturers choose their locations. There are approximately 120 automobile assemblers and 2201 registered parts suppliers, and the characteristic of locations is that concentrated areas of the industry show a wide dispersion all over the country. The economic grounds of this are the rational behaviour of each firm to maximize profits subject to various constraints such as costs of transportation, transactions and information, but also the size of the market. The more firms concentrate in a particular region, the larger the information flow such as managerial know-how and technological innovation, and all participants there receive benefits from this. This cumulative process attracts more economic resources to the region.

16 Introduction

In addition to the economic factors, Chapter 5 emphasizes political factors in the Chinese automotive industry. The location of assembly plants was chosen mainly from the viewpoint of national security in such a way as to scatter factories around the country. Those locations of the assemblers became a core to attract other parts manufacturers, and this process created the agglomerate regions of the automotive industry such as Jiansu, Sichuan, Zhejian, Jilin and Shangdon provinces, and Shanghai and Beijing cities. In 1987, the Chinese central government designated six large motor assembly plants as ‘key firms’ targeted for expansion with administration support. The six automotive corporations were given different market goals. Three were allocated to the large passenger car sector and three to the small passenger car sector according to the displacement, and the plan was referred to as ‘three big, three small’. According to this plan, China’s main vehicle manufacturers would be the First Auto Works (FAW) in Changchun, the Second AutoWorks (SAW) in Hubei and the Shanghai Vehicle Factory, which formed a joint venture with Volkswagen. The three small players would be joint ventures of Beijing Jeep, Guangzhou Peugeot and Tianjin Daihatsu. However, the plan was expanded to ‘three big, three small, two mini’ under pressure from the Central Military Commission. As a result, the scales of production of the ‘eight major large automotive firms’ were very small, while other governments in the world imposed a strict concentration policy on the automotive industry. These eight key companies controlled only 28.7 per cent of total volume of terminal assembly plants and 7.5 per cent of components plants. Although they accounted for 66 per cent of vehicles production, their individual scale was very small by international comparison, with an average output volume of only 27,466, far below the efficient level of production, which is estimated to be between 250,000 and 300,000 vehicles. The eight majors accounted for less than half of total assets and investment made in the automotive sector in 1995, which indicates that the Chinese central government was unable to invest strategically. The political issue can be found in the solution of the above problems. In order to obtain a sufficient level of production, the Planning Committee and the Ministry of Machinery Industry (MMI) determined to restrict severely the number of automobile plants. MMI had worked hard on sorting out the chaos in new entry acquisition to make some sense of its role in the broad development of the Chinese automobile industry. MMI, however, ran into much difficulty in performing its functions in control and coordination. Not only did its policy preference differ from the rational interests of most of the local governments and the defence industry, which have a bureaucratic stature equal or higher than MMI, but also its financial weakness rendered it unable to enforce its authority effectively. Moreover, this was due also to the governance of local governments in seeking their own strategy to develop their economy, and they made use of its political

Masatsugu Tsuji and Akifumi Kuchiki 17

power to nurture the automotive industry according to their local industrial policy. This resulted in a larger number of automotive assemblers and an inefficient level of production. Next, Chapter 5 focuses on the city of Shanghai as a case-study, which shows the remarkable development of the automotive and its parts industry. Almost half of parts manufacturers in China are located in Shanghai and its nearby provinces such as Jiangsu and Zhejiang. The success lies in not only the historical background of the manufacturing industry and the largest amount of foreign direct investment (FDI), but also the organization of municipal governments such as the Shanghai Localization Office (SLO), the Shanghai Municipality Trans-bureau Localization Cooperation Office (SMTLCO), and the Municipal Automotive Small Group (MASG). The bureaucracy of the Chinese government is so strong that the different bureaux have their own authority and jurisdiction. They cannot surpass the authority of other bureaux. The organizations of Shanghai municipal government used strong leadership to nurture and promote its automotive industry. Major Japanese automotive assemblers such as Toyota and Honda have already established plants in China, and Nissan will be producing soon. Chapter 5 briefly examines their relationship with their parts suppliers and make a comparison with that in Japan, and from field research on Toyota in Tianjin concludes that current Japanese automobile assemblers cannot exploit merits of agglomeration through the hierarchical production structure, since the amount they produce is far less than that required for economies of scale.

PART III: INDUSTRIAL CLUSTERS OF IT INDUSTRIES Chapter 6: Can Malaysia’s Growth Be Sustainable? This chapter focuses on the Malaysian electronics industry, which has been successfully forming an industrial agglomeration since the mid 1980s, as a result of which Malaysia has been a leading producer of electronics products in the international market. However, owing to the recent rapid emergence of China as an industrial power, it may not be possible for the Malaysian electronics industry to sustain its current industrial growth. In order to analyse these issues, the chapter examines empirically the international competitiveness of the Malaysian electronics industry, using various analytical measures. With these methods, it analyses rigorously the Malaysian and Chinese electronics industries in the global market, examining whether the two industries are competitive or complementary. Finally, the chapter investigates whether the new rise of the ICT industry in Cyberjaya in Malaysia may constitute another industrial cluster to sustain the country’s growth.

18 Introduction

The Malaysian electronics industry is dispersed rather than concentrated all over the country, so that, the regional distribution of foreign and domestic investment tends to be dispersed among such states as Selangor, Penang, Perak, Johor, Negeri Sembilan, Melaka, Kedah, Pahang and Sarawak. This is shown by examining the Gini coefficients of foreign and domestic regional investment patterns in 1993 and 2002, which are 0.67 and 0.50, respectively, values significantly lower than those of China and Thailand, for example. The recent flow of FDI into the Malaysian electronics industry went up enormously in 2000, after a short drop during the 1997 Asian crisis. The characteristics of the recent flow of FDI are aiming for the expansion and/ or diversification of existing investment and projects, and concentrating on the production of high value added products such as plasma TVs. These seem to reflect the high level of confidence prevalent among foreign investors in Malaysia. Chapter 6 analyses the competitiveness of the Malaysian electronics industry by calculating the RCA index, which indicates the comparative advantage of each commodity within a country compared with the world trade structure. The author shows that there is no change in that Malaysia continues to specialize in the production of electronics products in general, but some products such as office machines and computers raise the index, while others like radios and sound recorders tend to decline. This means that the industrial competitiveness of Malaysia shifts away from the production of low value added products to that of high value added ones. Despite the closure of some establishments and the shifting of their operations to lower-cost production countries such as China and Vietnam, many existing firms continue to engage in expansion or diversification of their investment projects in the production of relatively high value added products. Chapter 6 also focuses on whether China is a threat to Malaysia, that is, whether the emergence of China as an industrial power may have a significant impact on the Malaysian electronics industry. The background of this argument comes from the flow of FDI into both China and ASEAN. It is very clear that ASEAN cannot compete with China in terms of the absolute value of FDI inflow. Moreover, the gap seems to have become even wider in recent years, as the entry of China into the WTO turned around the declining trend of FDI flow into that country, while the flow of FDI into ASEAN remains stagnant. In order to answer the above issue, the chapter again utilizes the RCA index. The procedure is as follows. The RCA indexes are calculated for Malaysia and China for electronics products. These indexes are ranked for each country respectively and the Spearman’s rank correlation coefficient between the rankings of the two countries is calculated. If they show a high positive correlation, their trade structure is very competitive. That means that the emergence of China as an indus-

Masatsugu Tsuji and Akifumi Kuchiki 19

trial power may have a significant impact on Malaysia. On the other hand, if the coefficient is near zero or negative, their trade structures are rather dissimilar and could be complementary to some extent. The results of the analysis for the Japanese market show that in 1996 the coefficient was a little bit high (0.453), but statistically insignificant, while in 2000 the coefficient became even lower and close to zero (0.134). Considering the high degree of involvement of MNCs in the electronics industry in Malaysia and China, the Chapter 6 concludes that MNCs tend to produce different types of electronic products in China and Malaysia, that is, China and Malaysia can be complementary in the electronics industry.

Chapter 7: Bangalore’s Software Cluster It is widely recognized that capital, technology, information and human resources embedded in a region are essential factors for firms to agglomerate there. This chapter examines as a case-study Bangalore in India, one of the leading centres of software clusters in the world, by analyzing (p. 244): the conditions under ‘which knowledge-intensive industrial clusters in developing countries build competitiveness, with particular focus on the dynamics of the local labour market. In other words, this chapter examines the characteristics of the local labour market, such as an institutional mechanism for promoting innovation and strengthening the competitiveness of its software industry’. In the 1990s, Bangalore emerged as the largest software cluster in India, achieving tremendous growth particularly since 1997, mainly through exports of lower-end software and IT-enabled services to the US market. In more recent years, leading IT global players such as Motorola, HP, TI and IBM have started outsourcing their R&D to Bangalore, allowing the cluster to gradually move up the value chain by engaging in higher-end services such as embedded systems. Lower-end IT-enabled services have also grown rapidly. A question posed by this chapter is: Why did this phenomenal export growth occur, particularly in Bangalore? The answer is an affluent, skilled, IT-related labour force with proficiency in English in that region. As of 2001, approximately 80,000 IT professionals were working in Bangalore, accounting for about 20 per cent of the IT professionals in the whole country. Chapter 7 analyses the factors to explain this in the demand and supply sides of the labour market, the latter including educational institutions in the region. In 1998, Bangalore established the Indian Institute of Information Technology (IIIT) as a joint initiative between government and industry. The IIIT-Bangalore was located right in the centre of the International Technology Park (ITP), in order to improve the quality of training in IT-related courses and train IT professionals to meet industry needs. In addition, there were (as of 2001) 106 engineering colleges in Karnataka: two government-run and the rest privately funded. Private engi-

20 Introduction

neering colleges in Karnataka accounted for 19 per cent of the 553 all private technical colleges nationwide. These institutions contributed greatly to the IT-skilled workforce for the software industry in the region. Moreover, in-firm training is a principal means to develop IT professionals’ skills in Bangalore. Because technology changes so quickly, firms need to keep upgrading their skill sets, by retraining their employees in ‘hot skills’. The average life of technical skills is only three years. Major firms frequently update the skills profile of their employees through in-firm training, in technical skills, domain knowledge and communication skills. It is said that firms spend about 5 per cent of total labour costs on in-firm training, and on average employees spend 10 to 12 per cent of their work time on such training. Another characteristic of the local labour market for IT is found in its high mobility. Chapter 7 discusses the fact that the average IT professional works only 2 to 5 years at one firm. During the boom years between 1997 and 2001, the average labour turnover rate rose to 22 to 25 per cent, sometimes even up to 30 per cent, as engineers moved frequently to other firms offering higher salaries. After the IT industry slowed down in 2001, the industry average for labour turnover declined to 8 per cent. The high turnover rate in search of higher remuneration brought about positive effects for the skills development of workers. Workers in the software and services industry are in a fast career trajectory. The author of Chapter 7 found an interesting fact through field research that in only 4 to 5 years software engineers reach the top level, becoming project leaders. Software design engineers must have at least 5 years of experience, while software programmers must have at least 3 years or more of experience, while junior engineers doing coding need only 1 year. Because of this fasttrack career development, most leading firms have performance-driven and merit-based compensation schemes. This again causes high mobility in the local labour market. The dynamism of the local labour market comes also from spin-offs, a phenomenon similar to that in Silicon Valley. Many workers in large MNCs such as HP and Motorola and in leading Indian firms leave to set up their own firms. Former Wipro employees, for example, have set up more than 100 companies with no assistance from the firm. These IT professionals use the knowledge and skills they acquired in large firms in their new startup firms. The relatively low capital requirements for such new startups, along with the growth of venture capital across the country, have facilitated this trend. Chapter 7 also analyses successfully a so-called virtuous cycle that generated knowledge management in the region. The process was formed through the following mechanisms: (1) the state government quickly responded to the enormous growth in demand for skilled IT manpower through its manpower planning polices; (2) high intra-firm transnational

Masatsugu Tsuji and Akifumi Kuchiki 21

mobility as well as inter-firm mobility has helped firms to quickly deploy and mobilize the skill sets they require; (3) the emergence of local labour market intermediaries in terms of staffing agencies as well as the industrywide collaboration in carrying out a periodic compensation survey helped facilitate the working of the local labour market; and (4) both MNCs and leading Indian firms actively promoted in-firm training to upgrade the skills of the workforce in their internal labour markets. These altogether have led the cluster to better mobilize the skills to meet the global demand and move up the value chain, and thus build competitiveness.

Chapter 8: The Local Economy: Lessons from Japan Since the Plaza Accords in 1985, many Japanese manufacturing companies have moved production bases from Japan to overseas locations such as Southeast Asia and East Asia because of the sharp appreciation of the yen. In the 1990s, Japanese manufacturing companies shifted investment to factories to China owing to the low costs for production and a global management strategy. These drastic changes in firms’ investment strategies, coupled with the economic deterioration following the bursting of Japan’s ‘bubble economy’, have had a serious negative impact on the Japanese local economy. As a consequence, not only per capita incomes but also the number of factories in regions have decreased. For the latter, from 1985 to 1990, the number of factories decreased at the annual rate of –0.1 per cent; from 1990 to 1995 it was –2.2 per cent, and from 1995 to 2000 it was worse still, at –2.4 per cent. Chapter 8 makes an attempt to analyse policy measures taken by local governments as well as central government, to cope with industrial transformation and globalization as stated above, by focusing particularly on IT and information, communications and technology (ICT) policies. The chapter analyses the case of Okinawa Prefecture, which aims to promote the IT industry through collaboration with the central government, and attempts to draw lessons from the case of Japan in order to contribute to stable IT development in the local economy. The chapter introduces the Industrial Cluster Plan of 2001, and learns how the local government has attracted firms to its prefecture in order to form industrial clusters. The Industrial Cluster Plan of 2001 consists of the following three core programs: (1) to support firms to collaborate with universities; (2) to assist technical innovations in the industrial sector; and (3) to establish institutions for promotion of startups and entrepreneurs. The government prepared about ¥476bn in funds for the plan. Following the lead of the central government, the Okinawa government has implemented policies to promote and invite the ICT industry to the prefecture. Chapter 8 summarizes these into the following five policies: (1) Financial support for ICT companies established in Okinawa to reduce

22 Introduction

telecommunication costs, (2) Development of the ICT industrial cluster. Since the Japanese government laid a special telecommunication cable between Tokyo and Okinawa in order to reduce costs for telecommunications, costs for telecommunications between Okinawa and Tokyo have become inexpensive as compared with to or from elsewhere. The government of Okinawa has taken full advantage and provided support for data centres with funds up to 50 per cent of the total cost incurred in transferring an existing facility to Okinawa. (3) Enhancement of job opportunities for the young. (4) Human resource development. This includes training courses for engineers to learn advanced IT knowledge and for people who are willing to work for call centres. (5) Tax deduction and tax exemption for ICT firms. As for policy achievements, the chapter shows that as of May 2003 there are 34 call centres, 17 software companies, 10 information service companies, 13 contents companies and 6 companies in other categories. As lessons learned from the experiences of Okinawa, Chapter 8 points out that local governments should make a plan for forming industrial clusters in an effective way by cooperating with the central government; in other words, local governments should not duplicate policies implemented by the central government, but should supplement the disadvantages of their programs with the policies of the central government. The following two points are, however, suggested by the author for further development of the ICT cluster. First, local government should stimulate competition and promote cooperation among companies in the cluster. In the case of Okinawa, the prefectural government played an important role in inviting ICT companies to the area; however, it did not act as a promoter for competition and cooperation in the cluster. Second, the local government should keep a balance between support for vocational training and for new business. The government committed itself to support human resource development; however, it has not paid much attention to support for new businesses or venture businesses. To stimulate the local economy, it is also important to help entrepreneurs start new businesses. Thus, local governments need to maintain these balances.

Chapter 9: Japan: Remedies to Activate Local Cities Silicon Valley and Multimedia Gulch in the USA, Bit Valley in Tokyo and Sapporo Valley in Hokkaido are typical examples of IT clusters. As of March 2002, approximately 30 per cent of establishments engaged in IT business were located in Tokyo. It is common all over the world that the IT industry tends to agglomerate in the larger cities. This chapter makes an attempt to explain empirically the factors that determine IT-related firms to agglomerate to a certain region. This issue attracts interest not only from academia but also from policy-makers, since while they have been

Masatsugu Tsuji and Akifumi Kuchiki 23

implementing so many projects to revitalize regions by promoting or attracting IT-related firms to them, in reality most of them seem to have failed. In this sense, the analysis of this chapter thus bears an important message. The chapter identifies common characteristics that attract IT-related firms to a region by comparing the agglomerated regions listed above. In so doing, the author examines the supply and demand of information services. From the supply side, IT requires skilled engineers. Potentially skilled workers are most likely to exist near high-level educational facilities, and existing research also shows that industrial accumulation occurs near universities. This can be explained by the nature of information, that is, IT is related to embodied information such as experience accumulated in individuals which is difficult to transfer. Face-to-face meetings play an important role to sharing such information. An industrial innovation depends on the resources of fundamental scientific knowledge of universities, research institutes and so on. Firms, therefore, concentrate their resources of related research into areas where universities and research institutes are easy to access. Regarding the demand side, it seems to be common all over the world that the IT industry tends to agglomerate in larger cities. Population density is a factor related to the size of consumer demand. In addition, another source of demand is other firms. Thus, existing industries are considered to increase demand for corporate services from the IT industry, and also to be a measure of economies of scale or industrial diversity as an element of accumulation. This is referred to as the accumulation effect. In addition to supply and demand factors, Chapter 9 emphasizes social amenities as an important factor for the location of IT firms. Since talented high-skilled workers are key in this high-tech industry, they demand dense information exchange between them, which brings about positive information and knowledge spillovers. A good quality of social amenities around the workplace may also be related to location, as a stimulator of face-to-face communication. Lastly, government policy both central and local an important element in attracting IT industry enterprises. After identifying the expansionary variables, the chapter constructs an econometric model to examine the effects of the above variables on the growth of the IT-related industries in the region, which are classified into the following three categories: (1) software business, (2) informationprocessing and (3) the internet. The result of the empirical analysis is summarized as follows. Empirical estimation proposes that the IT industry tends to accumulate in an area where there are many people, many establishments and many educational facilities. In particular, it can be shown that availability or easy access to educational facilities is the most influential factor. This is consistent with the idea that the IT industry is likely to rely heavily on knowledge workers to promote innovation.

24 Introduction

The policy recommendations derived from Chapter 9 are therefore such that if local governments wish to attract IT industry they should have highquality educational facilities such as universities and graduate schools as a minimum requirement. This requirement may become increasingly important in the information or knowledge economy of this century.

References Hotelling, H. 1929. ‘Stability in Competition’, Economic Journal, Vol. 39, pp. 41–57. Kagami, M. and M. Tsuji (eds) 2003. Industrial Agglomeration: Facts and Lessons for Developing Countries. Institute of Developing Economies–JETRO, Chiba-shi, Japan. Marshall, A. 1920. Principles of Economics. London: Macmillan (8th edn).

Part I Industrial Clusters in Vietnam

2 Competition and Cooperation: Vietnam Adam McCarty, Richard Record and James Riedel

Background to the study The previous JETRO–IDE study carried out in 2002, titled ‘Industrial Agglomeration: Facts and Lessons for Developing Countries’, analysed industrial agglomeration across Japan, Korea, China, Vietnam, Italy, the USA and Mexico. The study attempted broadly to answer questions as to why firms choose some locations and not others for their factories and offices. A key question was: Why in particular do we see so much high-technology agglomeration, when in theory new developments like the internet should supersede constraints such as distance? The 2002 study covered a broad spectrum of cluster types, from heavy industry clusters in Japan, through small and medium-sized enterprise clusters in Italy, to high-tech software clusters in the USA. From these existing clusters, lessons were learned for application to the developing countries covered in the study (namely Korea, China, Vietnam and Mexico). According to the 2002 project, industrial agglomerations can be grouped together into four broad categories: 1. clusters where locally specialized items are produced or local product districts; 2. clusters where a large core firm has many subcontracting or parts makers surrounding it, or the so-called industrial castle town; 3. clusters in large cities where lots of basic production processes are treated or urban processing clusters; and 4. government-led industrial parks and estates, often seen in developing countries. The 2002 study concluded that the success of these industrial agglomerations depends on: 1. infrastructure (highways, ports, electricity supply and so on); 27

28 Competition and Cooperation: Vietnam

2. institutional frameworks (legal systems, participatory actors, coordination among actors and so on); and, 3. government support (or foreign assistance) in terms of laws, taxation and finance. The Vietnam chapter in the 2002 study, titled ‘Agglomeration of Exporting Firms in Industrial Zones in Northern Vietnam: Players and Institutions’, focused on the fourth type of cluster – industrial zones (IZs), industrial parks (IPs) and export processing zones (EPZs). Development of such zones began in earnest in Vietnam in 1994, and at present much of Vietnam’s foreign direct investment is channelled into such zones. The study looked at zones as being a proxy for the kind of public goods normally provided in a developed country, that is in a developed country entrepreneurs would expect to have infrastructure and institutions such as electricity, roads, telecommunications, water supply and sewerage and so on. In countries such as Vietnam, such facilities are provided to a much higher standard in zones than elsewhere, and by a number of different actors including the public sector, but also the quasi-public sector and the private sector. For example, Japanese Official Development Assistance (ODA) has financed the construction of such zones in Vietnam. The 2002 study compared practices in Vietnam with other regional countries (Thailand, Malaysia and the Philippines), and applied the theory of endogenous growth with quasi-public goods to show the positive impact of IZs on economic growth. The 2002 Vietnam study also looked closely at the role of Japanese firms in developing IZs across the region, and then at their impact on particular IZs in northern Vietnam. The paper summarized the advantages of two successful IZs in Northern Vietnam as having: 1. 2. 3. 4. 5. 6.

a favourable location; a good standard of education in the labour supply; abundant cheap labour; good infrastructure; existing support industries; and straightforward administrative procedures.

The paper also examined the transport infrastructure and some of the vocational and technical educational institutions in the locality. The study concluded that the infrastructure and administrative advantages for firms choosing to locate in the IZs were significant and that these factors were contributing towards the agglomeration of foreign-invested firms and the promotion of economic growth in northern Vietnam. International experience suggests that much of the innovation that enhances growth and expands trade is likely to occur in industrial clusters

Adam McCarty, Richard Record and James Riedel 29

in a few major cities that have a strong research capacity and a full suite of other amenities. Agglomeration economies in these major cities can feed the growth impulse generated by industrial clusters. Clusters form as a result of multiple factors. Among these are policy measures that influence the entry of entrepreneurial firms: the availability of skills, infrastructure and amenities and also the presence of institutions that have a significant role in innovation. The direction of causality between clustering and industrial growth is debated. Questions remain as to whether clusters can really be ‘created’ and therefore drive industrial growth and development, or whether clusters develop merely as a naturally occurring side-effect of successful economic development. Clustering is associated with specific localization economies resulting from the presence of many firms drawn from a single industry or industry value chain. Clustering spurs innovation and allows firms to benefit from the availability of diverse and specific skills, shared infrastructure, cross-fertilization of ideas and learning, knowledge spillovers and faceto-face contacts. Many clusters already flourish in East Asia, and produce everything from buttons to electronics and cane furniture and are a source of continuous, incremental innovation; however, few high-tech clusters exist outside Japan. Industrial clusters in developing countries have recently become a focus of attention because clustering seems to help firms to overcome growth constraints, upgrade productive techniques and compete more effectively in distant markets. Experience suggests however that it is not desirable for governments to form industrial polices deliberately to build high-tech clusters. A common approach across East Asia involves investing heavily in transport and communications infrastructure, serviced land and research facilities, and providing incentives for high-tech industries to locate in the designated area. Cities can strongly influence production and productivity by serving as centres for the clustering of industries and services serving domestic and global markets. They are also crucibles for stimulating consumption, developing tastes, spreading new consumer habits and trends, and engendering different lifestyles. As the original ‘tiger economies’ of East Asia have begun to discover, high savings and investment, and greater participation in the workforce can launch a country’s industrialization, and for a time exports can be an important source of growth and indeed the driver of economic development. Ultimately, however, domestic consumer spending, especially by urban consumers, is vital to sustain stable growth. Moreover, sophisticated and cosmopolitan urban consumers can push local producers into refining their offerings and provide the market for the testing and launching of new products and technologies. Experience suggests that openness and the freedom of movement of skilled labour is vital for creativity. Linkages offering opportunities for collaboration with firms in other clusters can support innovation, and the

30 Competition and Cooperation: Vietnam

circulation of human capital from overseas supports creative innovation. Many of the East Asian economies have benefited from the great diaspora of skilled workers employed in the large North American and European clusters where they have acquired valuable intangible assets, skills and human capital, and contacts, as well as more tangible financial wealth. In Hong Kong, Singapore and Taiwan, overseas Chinese have in many cases been the nuclei for cluster development. Provided the institutional environment is hospitable, Vietnam could similarly benefit and learn from the experience and expertise of overseas Vietnamese (Viet Kieu) participating in clusters abroad. Industrial clusters, ‘competitiveness’ and ‘the new economic geography’ are all rather new topics with respect to Vietnam’s industrial development. This study of industrial clusters in Vietnam will begin in the next section with an overview of Vietnamese competitiveness, the environment for business and the recent reforms directed towards the private sector. The section after that will revisit the theories that lie behind industrial agglomeration and dispersion, then the next sections discuss some of the international evidence of successful clustering, and look at some of the recent work on cluster engagement in Vietnam. Next, a detailed analysis of potential clusters will be conducted using the techniques of geographic information systems (GIS) for 12 key sectors of the national economy. A look at business associations and their role as possible ‘cluster facilitators’ through enterprise cooperation in Vietnam will follow, then the discussion will revisit the role of IZs,/IPs and/EPZs as ‘cluster facilitators’, as covered in the JETRO–IDE study in 2002. The scope of analysis will be widened to include zones in the south of Vietnam – the nation’s industrial heartland, and to include FDI from all countries. The final section will make conclusions and industrial policy recommendations based on the findings of the preceding sections.

Vietnamese competitiveness and the environment for business The macro economy There is no doubt that Vietnam’s economic growth story in the last decade can be called a success. GDP growth rates have been among the highest in the world: 6.1 per cent in 2000, 5.8 per cent in 2001 and 6.4 per cent in 2002 (ADB 2003). The transition to a market economy has occurred comparatively smoothly and with relatively strong growth and economic stability throughout most of the 1990s. From a closed economy, the ratios of FDI and exports to GDP have increased rapidly to levels that are high by international standards. Vietnam has signed bilateral trade agreements with many OECD member countries (most recently with the USA in 2002), is a member of AFTA and is seeking WTO membership. Poverty incidence has fallen from more than 70 per cent in the mid 1980s to about 37 per cent in

Adam McCarty, Richard Record and James Riedel 31

1998, and about 29 per cent in 2002 (according to the government’s official poverty line). Most employment growth has been generated in the informal and private sectors. This success was achieved despite institutional weaknesses and a policy bias against the private sector. Nevertheless, Vietnam remains a low-income country (annual GNI per capita US$ 410). Human development indicators are relatively high, given per capita income, but market institutions in Vietnam remain underdeveloped. Until the mid 1980s, the state actively discouraged private business activity. Most private enterprises and cooperatives in Vietnam are small or medium-sized enterprises (SMEs), as are about 70 per cent of all state enterprises. The public sector still dominates the industrial economy, contributing some 50 per cent of GDP (Table 2.1). The state’s share of output in the manufacturing sector has fallen somewhat over recent years from 59 per cent in 1995 to 51 per cent in 2001. This change is a result of the increasing presence of foreign-invested enterprises in the manufacturing sector, rather than in any increase in manufacturing by the domestic private sector. The share of capital absorbed by the state sector is presumably large, but precise estimates are difficult to obtain owing to the difficulty of valuing state assets in a transitional economy. An indirect measurement is the share of domestic credit consumed by the state sector. The outstanding back debt of SOEs amounts to 90tn dong, or about US$6bn – some 40 per cent of total domestic credit (World Bank 2002). How much of this is nonperforming is unknown. The share of new credit extended to SOEs, while declining, still represents some 25 per cent of new loans. The almost total dominance in the banking sector of the big four state-owned commercial banks also makes it difficult to assess whether new loans to SOEs are extended on market terms. The World Bank described recently how ‘Vietnam’s accounting standards afford some scope for discretion in what to count as profits, making them a poor indicator of performance, and making performance of SOEs generally difficult to assess’ (World Bank 2002). Coming ASEAN trade liberalization will strip away the protective tariffs under which many inefficient SOEs in ‘heavy’ industries such as cement and steel have previously enjoyed protection, exposing them to more cost-competitive rivals in the region. International evidence suggests that barriers sustained by historical connections between loss-making SOEs and state-owned banks helps keep lossmaking enterprises afloat and divert capital away from more efficient producers. Research on Taiwan shows that the turnover of firms – entry and exit – has contributed to the changing mix of industry, technological gains and advances in productivity because of the differential between those entering and those leaving the market (Aw et al. 1997). In 2001, private domestic firms, although growing rapidly from a low base, still accounted for only about 9 per cent of manufacturing value

32 Competition and Cooperation: Vietnam Table 2.1 2001

Vietnam total and manufacturing GDP by ownership: 1995 and

Share of total GDP

Share of manufacturing GDP

1995

2001

1995

2001

100.0

100.0

100.0

100.0

Public (state and collective)

50.3

49.1

59.1

51.0

Private (total) Household enterprises Private companies

44.4 40.3 3.1

40.2 32.6 7.6

28.7 26.0 2.7

29.0 20.0 9.0

6.3

10.7

11.4

21.0

Total

Foreign-invested companies Source: General Statistical Office (2002).

added (GDP) (Table 2.1). Compared with its peers, Vietnam has quite an underdeveloped private sector in terms of the contribution made by private companies to the economy as a whole, particularly in manufacturing. Even in China, the equivalent of private companies – the township and village enterprises – account for a larger share of manufacturing value added. Much of this is a direct result of the past embedded institutional and policy bias against the private sector. Approval by the National Assembly of the Private Enterprise Law and Company Law in 1990, and amendments to the 1992 Constitution to recognize the long-term role of the private sector, were important turning points in reducing official discrimination against the private sector. A key far-reaching reform was the enactment and implementation of the new Enterprise Law in 2000. Recently substantial changes have been introduced to address remaining constraints, including a small and mediumsized enterprise (SME) decree, simplification of business licensing, easing of restrictions on private involvement in export trade, providing domestic and foreign investors with similar incentives, relaxation of registration and minimal capital requirements. The result has been a rapid acceleration in new business registrations, currently at a rate of 1600 per month (World Bank 2002). Domestic investors set up 22,000 new enterprises in 2002, with a total investment capital of US$3bn – significantly more than the US$1.33bn in new FDI pledges. A snapshot of enterprises in Vietnam is shown in Table 2.2. The government’s SME decree of November 2001 allowed SMEs to enjoy ‘preferential treatment policies’. Early in 2002, the status of the private sector was enhanced when a ruling party plenum resolved that the private sector is ‘an integral part of the national economy’. Stronger official

Adam McCarty, Richard Record and James Riedel 33 Table 2.2

Enterprises in Vietnam: a snapshot in 2003

Private businesses (registered under the Enterprise Law) Household businesses (registered under Decree no. 02) Cooperatives (registered under the Cooperative Law) SOEs (registered under the State-Owned Enterprise Law) Farm households Foreign-invested firms (registered under the Foreign Investment Law)

100,000 2,400,000 15,000 5,200 10,000,000 3,000

Sources: www.sme.com.vn and the German Technical Cooperation (GTZ).

endorsement of the private sector embodied in recent policy changes has helped build investor confidence. International donor support to the enabling environment for business has included assistance directed at: 1. providing a stable macroeconomic and institutional environment; 2. improving the policy and regulatory environment directly related to SME development; and 3. strengthening institutions and policy implementation to promote SME development. Despite recent progress, much remains to be done. Consultations on business issues are still on an ad-hoc basis, although the Vietnam Chamber of Commerce and Industry (VCCI) does play a large role. Recent reforms have not been consistently implemented in all sectors and provinces. The legal basis for establishing business associations is still not totally clear. (The role of business associations as ‘cluster facilitators’ will be discussed in Chapter 8.) In terms of the policy environment, critical constraints no longer relate to the policies adopted at the national level, which are now reasonably positive, but to the implementation by the various agencies of government below the national level and by the state-owned organizations serving the private sector. Progress is often (at least partially) undermined by administrative inertia. National institutions responsible for ensuring compliance with business regulations remain weak, and there is limited understanding of the intentions of the new policies at the middle and lower levels of government. Outside donors can influence the policy agenda. In some cases, donor support has facilitated and improved the formulation and implementation of government-initiated measures to improve the enabling environment (for example the Enterprise Law). In other cases, donor support has resulted in the issuing of new policy documents (the Comprehensive Poverty

34 Competition and Cooperation: Vietnam

Reduction and Growth Strategy – CPRGS) or regulations (the SME decree) that – while consistent with government policy – are unlikely to have been issued in that form without donor support. The impact of donor conditional lending in these areas is yet to be seen. Disbursements of the World Bank Poverty Reduction Support Credit (PRSC) are tied to CPRGS implementation; similarly the Asian Development Bank ties budget support to policy reforms in such areas as SME development and governance. The ‘watchword’ for such policy reforms is always ‘national ownership’, and this is crucial for such assistance to be effective. The private sector is now experiencing lively growth, a lagged response to policy reforms of recent years that improved the business environment and access to bank credit. The next step is to identify the remaining obstacles and the most productive, feasible interventions. Biases remain, but it may be that Vietnam is now beginning a period of rapid growth led by domestic businesses, rather than by FDI and commodity exports as it was in the 1990s. The emerging private sector is becoming more important as a source of investment and its contribution to national investment is rising fast (from 21 per cent in 2000 to 29 per cent in 2002). Vietnam desperately needs a vibrant private sector to create jobs for the labour market and raise incomes for the poor in the coming decade. The country’s youthful population sees some 1.2 million new labour market entrants every year. The public sector simply cannot absorb such numbers. Given the relatively high capital intensity of state-owned enterprises, compared with their private sector counterparts, the cost of expanding their employment base is simply unaffordable. If anything, employment in stateowned enterprises will contract over the next few years, as a result of restructuring and increased competition in product markets. Hence the expansion of small and medium-sized enterprises is the only reasonable alternative to generate off-farm employment in rural areas, and to give earning opportunities to new migrants in urban areas. Trade The collapse of the Soviet Union and Vietnam’s preferential Eastern bloc (Council for Mutual Economic Assistance) trading network in the late 1980s prompted Vietnam to search for new export destinations. A series of trade reforms, including the unifying of previous multiple exchange rates in 1989, propelled Vietnam into world markets. Initially exporters were extremely successful in penetrating world markets in a number of key commodities. Vietnam is now the world’s second-largest rice exporter; this represents a significant turnround given previous food shortages and faminelike conditions in the mid 1980s. Similarly Vietnam is among the world’s largest coffee and seafood exporters. It also exports sizeable quantities of rubber, pepper and cashew nuts. In fact in some ways one might say that Vietnam has been too successful in expanding commodity exports –

Adam McCarty, Richard Record and James Riedel 35

the collapse of world coffee prices in recent years is largely a result of Vietnam’s unregulated and large-scale entry into the lower end of the coffee market. In addition oil exports continue to play an important part in the nation’s export portfolio, contributing approximately 20 per cent of exports throughout the late 1990s. More recently, Vietnam has begun to capitalize on its principal area of industrial comparative advantage – low-cost labour. Garment and footwear exports, which account for about a third of Vietnam’s non-oil export revenue, increased by respectively 32 and 12 per cent in 2002. Garment exports to the USA increased 16-fold between 2001 and 2002, pushing total exports to the USA above US$2bn, and making it the second most important market after the European Union. Garments may well soon overtake oil as Vietnam’s primary source of foreign exchange earnings. The industry has emerged as one of the key sources of employment generation, particularly in HCMC Binh Duong and Dong Nai provinces, and has attracted large numbers of migrant workers from rural areas. With some 80 per cent of the national population still based in rural areas, where underemployment is a continuing problem, it seems likely that there will continue to be a plentiful supply of willing migrant workers. There seems little likelihood that Vietnam’s comparative labour cost advantage, a key driver in what is a notoriously flighty multinational industry, will be eroded in the near future. Nevertheless, there is scope for Vietnam to ‘move up the value chain’ in the garment sector. Only cutting, trimming and sewing are done on a truly large scale, many of the more valuable inputs in the garment manufacturing process being added in other countries. Vietnam is now the second-largest shrimp exporter to Japan, after Indonesia (Vietnam Economic News 2003b). Exports of seafood to the USA increased 28 per cent in 2002, despite US anti-dumping complaints, which have made market access more difficult for Vietnam. Vietnam has also recently begun to make inroads into the higher-margin commodity exports markets, producing a higher proportion of arabica coffee beans instead of lower-margin robust beans, and producing more high-value seafood exports such as king prawns to specialist premium markets like Taiwan and Japan. The composition of Vietnam’s exports in recent years is shown in Table 2.3. While Vietnamese exports to the US market are encouraging and give credible cause for future optimism, sales to China have not fared so well. The dollar value of exports to China declined by 8 per cent in 2001 and by some 5 per cent in 2002. This poor performance casts doubt on the competitiveness of the Vietnamese economy, not least because other countries in the region have been able to increase their exports to China over 2002. This is of real concern, as the importance of China’s economy in both the region and globally is growing rapidly. Trade with China could counterbalance the impact on Vietnam of a slowdown in other regions. Perhaps

36 Competition and Cooperation: Vietnam Table 2.3

Vietnamese export composition: 1995–2002 (percentages)

Primary products Rice Coffee Sea products Oil and petroleum Manufactured products Garments Leather and footwear Electronics Handicrafts

1995 1996 1997 1998 1999 2000 2001

2002

9.5 10.6 8.3 19.7

11.7 4.6 8.9 18.3

9.5 5.4 8.6 15.6

10.9 6.3 9.2 13.2

8.9 5.1 8.4 18.1

4.6 3.5 10.2 24.2

4.1 2.7 12.3 21.9

4.4 1.9 12.2 19.5

8.3 3.8 – 1.3

15.7 7.2 – 1.1

16.4 10.7 4.8 1.3

15.5 11.0 5.3 1.2

15.1 12.0 5.1 1.5

13.1 10.1 5.4 1.6

13.6 10.8 4.2 1.6

16.4 11.1 3.1 2.0

Source: General Statistical Office.

China, more than any other country, is seen as the model for Vietnam. Hence China’s entry to the WTO has accelerated Vietnamese policymakers’ efforts to follow. However, the evidence of Vietnam’s poor competitiveness compared with China underlines the dangers of following China’s reform process too slowly. In many ways Vietnam needs to be ahead of China. China’s development is a resounding force that cannot be excluded from global economic and investment decisions, whereas recent drops in FDI figures underline the contrasting fact that the small market of Vietnam can quite easily be ignored. Similarly, while Vietnam has a sizeable domestic market to act as a cushion to the export cycle, it is nothing like the cushion China enjoys. Competitiveness State monopolies (or cartels) in key service industries have kept costs very high in areas such as air transport, coastal shipping, railways, power and telecommunications. This goes some way towards undermining the competitiveness of the Vietnamese economy, and can also act as a disincentive to investors. For instance, the telephone installation fee is US$93 in Hanoi, compared with US$66 in Bangkok, US$33 in Jakarta and US$28 in Beijing. Vietnam is one of the most expensive countries in the world for both incoming and outgoing international telephone calls. A three-minute call to Japan costs US$6.9 from Hanoi, more than twice as much as from Bangkok, Jakarta or Beijing (JETRO 2002). Table 2.4 displays some of the weaknesses in Vietnam’s trade-related infrastructure. The above table presents some fairly damning evidence against Vietnam’s internal and external trade infrastructure, and underlines to an even greater extent Vietnam’s recent export achievements in spite of all the above.

Table 2.4

Vietnam’s trade-related infrastructure Ports/ airports

Air freight

Inland waterway shipping

Road freight

Railway freight

Power

Telecoms

Market structure

State cartel

State monopoly Small barge: private sector

Large barge: public sector

Private and public trucks

State monopoly

State monopoly

State monopoly

Availability of service

Reasonable

Good

Good

Good

Good

Unreliable with voltage fluctuations

Reasonable

Price

High

Not available

Depends on location

Competitive

Adequate

Adequate

Very high

Productivity/ reason

Low • Insufficient container handling capacity in ports. • Insufficient airfreight facilities in airports

Low Low • Insufficient • Insufficient cold storage management • Delays due to leading to outdated insufficient security dredging and checks lack of safety • Unsatisfactory enforcement facilities and handling techniques

Overall impact on trade

Varies by region Negative and product

Varies by product and region

Very low Very low • Very high • Delays in power losses new line installation • Restrictions on internetbased business tools

Neutral

Negative

Negative

Negative

37

Sources: Adapted from Hopkins (2002) and Nomura Research Institute (2002).

Low Very low • Underused • Insufficient road railway development capacity and maintenance

38 Competition and Cooperation: Vietnam

Sophistication and productivity is influenced strongly by the quality of the business environment. Firms cannot employ advanced logistical techniques unless a high-quality transportation infrastructure is available. The infrastructure problems described above are a significant reason why so much foreign direct investment and new business activity is taking place in purpose-built investment zones. (Chapter 9 examines further the role of such zones in enabling industrial cluster development.) Key elements in the modern logistics of trade, including e-commerce and web pages, face stringent regulations that are difficult to justify from an economic perspective. Greater private participation in infrastructure services could help address these concerns. In the absence of private provision, government services in Vietnam tend to be driven by what officials think is important to supply, rather than by the demands of exporters (Pham Van Thuyet 2002). Other countries in the region (principally Singapore and Malaysia) have made considerable efforts to invest in worldclass infrastructure, partially as a means to encourage inward investment and partially to facilitate and nurture high-tech, high-value ‘knowledge’ industry clusters. Clearly Vietnam has some way to go in this area. Such sentiment is reinforced by the competitiveness statistics published by the World Economic Forum (WEF) (Table 2.5). The WEF produces two indices, the growth competitiveness index (GCI) and the current competitiveness index (CCI). The GCI aims to measure the capacity of the national economy to achieve sustained economic growth over the medium term. It

Table 2.5

International relative competitiveness in Asia, 2001

Economy

GCI (macro) Rank

CCI (micro) Rank

2000 GDP per capita (PPP adjusted)

Singapore Taiwan Hong Kong Korea Malaysia Thailand China Philippines India Vietnam Sri Lanka Indonesia Bangladesh

4 7 13 23 30 33 39 48 57 60 61 64 71

10 21 18 28 37 38 47 54 36 62 57 55 73

23,000 17,223 24,448 17,311 8,924 6,489 3,953 3,956 2,403 1,974 3,512 3,014 1,561

Source: World Economic Forum (2001).

Adam McCarty, Richard Record and James Riedel 39

looks at the macroeconomic sources of GDP per capita growth, and generates predictions of the ability of a country to improve its per capita income over time. The CCI examines the microeconomic bases of a nation’s GDP per capita and provides insights into the level of GDP per capita that is sustainable in the long term. The index is made up of two sub-indices, the quality of the national business environment and the degree of company sophistication. Both indices are constructed using information and opinions of business leaders from surveys (around 4600 respondents). The GCI (macro) index is constructed of sub-indices covering technology, public institutions and the macroeconomic environment. The CCI (micro) index is constructed of sub-indices covering company operations and the quality of the national business environment. Indices such as those shown in Table 2.5 are purely subjective, and at first glance it might be tempting to dismiss the competitiveness indices as being a function of per capita GDP, that is to say that competitiveness (or productivity) rises with living standards. However, the table does raise some interesting points, most notably how Vietnam is considered to be relatively more competitive in the macro index than the micro. In fact in the breakdown of the CGI (macro) index, as would be expected, Vietnam scores very badly on technology and public institutions, but is propped up somewhat by low labour costs and a stable macroeconomic environment. Improved cluster formation and activity could be the key to improving micro-level competitiveness. Knowledge clusters Spending on research and development (R&D) is one of the key drivers of long-term sustainable economic growth; it is the key to productivity growth and the expansion of the production frontier. However, for many developing countries such as Vietnam, significant medium-term growth can be achieved through the adaptation, assimilation and application of existing foreign technology. Nevertheless, while R&D does not ensure innovation or rapid growth rates, such spending is a necessary condition for long-term growth. In the absence of an adequate volume of R&D outlay, a country will most likely not ascend the technology ladder. The experience of the OECD countries, especially that of the USA, suggests that the private and social returns from R&D can be substantial. Private returns have been estimated in the range of 10 to 20 per cent, with social returns ranging from 20 to 60 per cent (Griliches 1992). If 25 per cent is the median social rate, then a permanent increase in R&D spending equivalent to 2 per cent of GDP could raise the aggregate growth rate by 0.5 per cent. Empirical work indicates the high potential value of investing in R&D, and the creation of an environment conducive to R&D is clearly one of the principle prerequisites for the formation of knowledge and high-tech clusters. Just as important is the creation of an environment where innovators

40 Competition and Cooperation: Vietnam Figure 2.1 Opinions as to whether intellectual property is well protected, selected economies: 7 = strongly agree, 1 = strongly disagree 7

Survey score

6 5 4 3 2

K U

SA U

Ja pa n ng ap or e Si

Vi et na m In do ne si a C hi na Ph ilip Ko pi ne re s a, R ep .o f Th ai la nd M al ay si H a on g Ko ng Ta iw an

1

The score reported is the mean assessment of a survey of an economy’s business people. (Source: Global Competitiveness Report 2000 by World Economic Forum, copyright © 2000 by the World Economic Forum. Used by permission of Oxford University Press, Inc.)

and entrepreneurs have the freedom and incentives to pursue different avenues of R&D, without the fear that the fruits of their endeavors will be expropriated or lost owing to a poor intellectual property regime. On this measure, Vietnam scores rather badly (see Figure 2.1 for a subjective ranking of countries). While this is an imperfect measure, it reflects the distance Vietnam has to travel before would-be innovators can be assured that the gains from their own investment in R&D will accrue to themselves. In addition, the lack of an intellectual property regime is a considerable impediment to knowledge sharing and intellectual clustering, as entrepreneurs are necessarily protective of their own invested capital. While this lack of an effective intellectual property regime might not be considered such a big deal for a developing country such as Vietnam that is still ‘catching up’, it does do enormous damage to creative, media and research-based industries and undermines the prospect of high-tech cluster development – currently the most valuable type of cluster. Commentators have suggested that Vietnam could develop a software development industry along the lines of Bangalore in India. However, the disincentive effects of Vietnam’s poor intellectual property regime are likely to act against this; for example, currently almost no major international software manufacturers provide product support in Vietnam. However, merely clamping down in intellectual property rights abuses is not really an adequate solution. The price of the full version of Microsoft Windows XP Professional is in the region of US$400.1 Assuming a per

Adam McCarty, Richard Record and James Riedel 41 Table 2.6

Comparative educational indicators, selected economies, 1990

Vietnam Thailand Philippines Indonesia Low human development All developing countries

Real GDP/capita (USD, PPP)

Mean years schooling for 25+ years

Adult literacy (%)

1,100 3,986 2,303 2,181 1,110 2,170

4.6 3.8 7.4 3.9 2.3 3.7

88 93 90 82 49 65

Source: United Nations Development Programme (1993).

capita GDP in the USA of around US$30,000, then the cost of Windows XP represents approximately 1.3 per cent of annual per capita income. With a per capita GDP in Vietnam of around only US$400, such a cost represents an astonishing 100 per cent of annual per capita income. Were the price of Windows XP in Vietnam to be of the same per centage of per capita GDP, then its price would need to be around just over five dollars. This still represents a considerable premium over the current ‘pirate’ versions of Windows XP (it sells for about 60c. for a copied version), but it does seem likely that a significant proportion of customers would be prepared to pay a premium of this magnitude for licensed software with a warranty. (A good example where something like this takes place is in publishing, where the Oxford University Press distributes English language training materials in Vietnam at substantially lower prices than in the West, but with lower print quality, and hence the market for photocopied (pirated) English language textbooks is quite small. Similarly popular novels such as the Harry Potter series are divided into sections and distributed separately on cheaper paper.) Clearly the universal provision of high-quality education is also a factor in the development of ‘knowledge’ industries. Table 2.6 shows how Vietnam compares very favourably with neighbouring countries with higher levels of GDP per capita. However, in common with other East Asian education systems, a bias towards the sciences and schooling based on rote learning means that Vietnamese graduates may know a large number of facts, but often do not have the skills employers demand. Nor does such a system encourage creative problem-solving, risk-taking or an entrepreneurial mentality. Investment Another factor affecting the successful development of clusters is the ease of entry (and exit) for firms into a given industry. In small, underdeveloped economies such as Vietnam, the hurdles for starting a new business or

42 Competition and Cooperation: Vietnam

BOX 2.1 The Binh Duong experience Binh Duong was a poor province before it separated from Song Be in early 1997. Today, it is one of the most successful in terms of economic growth, foreign direct investment, exports and employment. Between 1997 and 2001, the industrial output of the foreign-invested sector grew 45.9 percent per year. The corresponding figures for the private domestic sector and the state sector were 29.7 and 8.0 percent respectively. Exports grew 27.9 percent per year during the same period. Based on a local standard, the poverty headcount fell from 8.7 percent in 1996 to 3.0 percent in 2002. The determination of the local authorities to develop the business environment, and to foster trust between government and business, may be one of the main reasons for this success. There are regular opportunities for local leaders to meet, discuss and solve the problems faced by the business community. The people’s committee has established a consulting council for investment under the management of its vice-chairman. This council meets every Thursday to help investors and businesses overcome the difficulties they face. To attract foreign direct investment, a simplified registration procedure was established, allowing licences to be granted within three days. If consultation with central government agencies is needed, licences should be granted in no more than 15 days. A one-stop-shop policy was also adopted, allowing licences to be obtained within 7 days for private enterprises, and within 5 days for household enterprises. Individuals and businesses can transfer land-use rights faster than regulated by the existing legal framework. The process is 5 days shorter, on average, than stipulated in current regulations. Sources: World Bank (2002); Steering Committee for State Administrative Reform (2002).

expanding an existing one into new markets can be cumbersome and slow. Regulatory barriers are the largest obstacles, but other constraints include weak entrepreneurship, labour market constraints, limited organizational skills, unwillingness to dilute family ownership, poor infrastructure and insufficient capital, especially risk capital. New businesses are being established at a rate of 1600 per month; it still takes some 10 steps and up to 68 days in some provinces to register one. Local government is the key factor determining the local business environment for private enterprises. The legislation now exists (the Enterprise Law), but the key, as with so many laws in Vietnam, is implementation and regulation at the local level. Binh Duong province (see Box 2.1) is an excellent positive example of how provincial authorities can make a difference. Binh Duong, and neighbouring Dong Nai and Ho Chi Minh City have emerged as the industrial and export powerhouse of Vietnam, attracting the lion’s share of FDI. These three provinces together attracted some 50 per cent of the total FDI into Vietnam in the first half of 2003 (Table 2.7). Similarly, the same five provinces (HCMC, Binh Duong and Dong Nai in the south, plus Hanoi and Hai Phong in the north) provide the dominant

Adam McCarty, Richard Record and James Riedel 43 Table 2.7 Vietnamese licensed FDI projects January–July 2003: top five provinces Rank

Province

Total FDI investment, Jan.–July 2003 (US$1,000)

Share of total FDI Investment, Jan.–July 2003 (%)

1 2 3 4 5

Ho Chi Minh City Binh Duong Hai Phong Dong Nai Hanoi

207,547 103,679 89,487 77,790 47,671

26.7 13.3 11.5 10.0 6.1

Total (all provinces)

778,178

Source: Vietnam Economic News (2003).

Table 2.8

Vietnamese gross exports January–July 2003: top five provinces

Rank

Province

1 2 3 4 5

Ho Chi Minh City Hanoi Binh Duong Dong Nai Hai Phong

Exports, Jan.–July 2003 (US$1,000) 5,018,284 866,603 819,095 806,742 303,137

Source: Vietnam Economic News (2003).

contribution towards Vietnam’s exports (Table 2.8). For both FDI and export volumes, province in the sixth place is a significant way behind the one in fifth. The export data underlines Ho Chi Minh City’s role as the economic and industrial capital, generating almost six times more export revenue than Hanoi. One of the most striking characteristics of Vietnam’s FDI inflows has been the relatively low, although rising, share of FDI in light, labour-intensive manufacturing – Vietnam’s apparently principal area of comparative advantage. Most FDI has gone into heavy, capital-intensive (and labour unintensive) industry and sectors such as oil, construction, transportation, communications and property (STAR 2003). Much of this has been to serve the temporarily lucrative and protected domestic market, a form of import substitution where particular heavy industries have benefited from protection. Falling tariffs and Vietnam’s entry into multilateral trade organizations will likely spell the end of this FDI phase. At present, while FDI accounts for a significant share of GDP (13.3 per cent), industrial production (35.5 per cent) and domestic investment (18.5 per cent), it accounts for only a minis-

44 Competition and Cooperation: Vietnam

cule share of employment (about 400,000 jobs in a workforce of 40 million). This apparent misallocation of resources could be the reason for Vietnam’s relative lack of competitiveness compared with China. The changing nature of Vietnam’s FDI portfolio is now, however, having more of an impact on export-oriented light manufacturing. Between 1995 and 2000, the share of FDI in manufactured exports increased from 8.8 per cent to 33.8 per cent (Athukorala 2002). This trend is a reflection on the increasingly important role of other East Asian developing countries as foreign investors in Vietnam.

Theoretical literature review Until quite recently, economists have paid only limited attention to the location of economic activity and to the choices firms and households make to decide where to produce or consume. Most economic models are utterly ‘distance-less’ (space is not a factor), in the sense that little or no attention is paid to the friction between space and distance. Much international trade theory disregards the effect of transportation costs and only fairly recently have ‘iceberg’2 models been used widely as a means to incorporate the costs of movement on trade. Alfred Marshall (1920) witnessed in early twentieth-century England how industries such as textiles and garments manufacturing clustered in and around Lancashire, steel making in Sheffield and so on. He commented: ‘Industries tend to cluster in distinct geographic districts, with individual cities specialising in production of narrowly related sets of goods.’ However, economic theory in Marshall’s days lacked the tools to conduct more detailed analysis. The basic problem with doing theoretical work in economic geography has always been rooted in the role of increasing returns to scale. Economists have been historically reluctant to abandon the world of perfect competition and constant returns. While such a world might be mathematically ‘pure’, pursuing this to its logical conclusion one would expect to find an economy characterized by ‘backyard capitalism’ where every household or small group produces most items for itself. While there might be regional differentials in climate, soil conditions and natural resources to explain some differences in human location, this is simply not enough to paint a realistic picture of the real economy – densely populated manufacturing zones and thinly populated farming zones. The spectacular concentration of some industries (Silicon Valley, Hollywood and so on) cannot be explained by a constant-returns world; there must be some kind of self-reinforcing logic – increasing returns. This issue has been sidestepped somewhat in economic theory until recently through a number of theoretical ‘tricks’, such as simply taking the existence of cities as given, or representing increasing returns in a sort of ‘black box’ way as localized production externalities.

Adam McCarty, Richard Record and James Riedel 45

The difference between a constant returns to scale production technology and an increasing returns production technology can best be seen through Cobb–Douglas production functions as shown in equation (1): Y1 = AKα Lβ

where α + β = 1

(1)

Y1 in equation (1) defines output with a standard Cobb–Douglas production function with constant returns to scale, K represents capital, L represents labour and A represents all other elements contributing towards output (which can be taken as total factor productivity to include such factors as technology, management skills, organization and so on). Taking increasing returns to scale as an assumption, the production function can be modified as in equation (2): Y2 = Aγ Kα Lβ

where α + β + γ > 1

(2)

Y2 in equation (2) now defines output with increasing returns to scale; the sum of the superscripts must by definition be greater than 1 for this to be true. The inclusion of a γ term takes into account the role of increasing returns to not only capital and labour, but also the ‘other elements’. This would be intuitive, as firms that cluster may adopt new technology and improve productivity faster if there are other firms nearby to copy than they perhaps would have otherwise. The introduction of space or distance into economic modelling creates problems, but also solves some others. First, without increasing returns to scale, there is no reason for producers to incur transportation costs (the backyard capitalism model). Second, without a spatial model, increasing returns and efficient pricing are incompatible; marginal cost would be below average cost. The existence of competition is also thrown into doubt; taken to its logical conclusion, infinitely increasing returns would see the world dominated by one producer or at least one producer in each industry sector. However, with the introduction of space and time into the increasing-returns world, firms are likely to face a U-shaped average cost curve. Initially firms benefit from returns to scale, pushing average costs down as output expands, but eventually the only way to increase output further is to ship the incremental product further. At some point the increasing costs of transportation outweigh and begin to reverse the gains from increasing returns. Using the iceberg model, then, the size of a firm is limited by its ability to reduce costs faster than the rate of ‘melting’. Hotelling (1929) introduced a microeconomic model for space and transport costs. In it one supposes that there is a beach along which sunbathers are evenly distributed, and on this beach are two ice-cream vendors, each wanting to locate to maximize sales. Every sunbather purchases one ice-

46 Competition and Cooperation: Vietnam Figure 2.2

Hotelling model: competition along a line

a

a′′

a′

b′

b

cream per day and in that sense demand is perfectly inelastic. The sunbathers buy their ice-creams from the nearest vendor. The optimum location is hence fairly obvious – the vendors must locate respectively one-quarter and three-quarters of the way from one end of the beach (at points a and b in Figure 2.2). However, even if the two agents start in these locations, they have strong incentives to shift their positions and move towards each other. In the extreme case, the vendor beginning at point a will move to point a⬘, thus capturing all of the market to the left of point b, three-quarters of the beach. Such a movement of course will not come without a response from the other vendor, who starting at point b will hop over the vendor at point a⬘. The vendors will keep on hopping back and forth until eventually both end up next to each other at the midpoint of the beach (points a⬙ and b⬘). This result is the only stable equilibrium; however it is not the optimum solution, as the average trip length to buy an ice cream is twice as long as in the optimum solution. While this is only a very simple model, and there are a considerable number of simplifying assumptions, it does show how competition can drive economic agents to colocate, or in other words to cluster. In more recent times, since the early 1990s, essentially two schools of thought have emerged on the role of location as a factor in economic activity. The first has become known as the ‘new economic geography’, advocated chiefly by Paul Krugman and Anthony Venables. Seminar papers by Krugman and Venables (1990) and Krugman (1991) led to the development of research in this area. These theories are based firmly upon monopolistic competition tools and emphasize the interaction of increasing returns, transport costs and the movement of productive factors to understand the latent forces of economic agglomeration. Clusters are seen as being primarily geographic in nature and are considered to be a naturally occurring phenomenon. The second ‘school of thought’ is that advocated chiefly by Michael Porter, and has emerged from business school theory. It focuses more on looking at how like-minded firms in a given value chain can cooperate to advance their interests and improve competitiveness on a national or regional level. While clusters may be geographic, the primary focus is on social and institutional networks among firms. Porter advocates that cluster formation can and should be a tool of national industrial policy in order to improve competitiveness and productivity.

Adam McCarty, Richard Record and James Riedel 47

Krugman and Venables Marshall’s three-point classification for the returns to spatial concentration made in 1920 still stands today. In more modern parlance, he argued that industrial districts arise because of: 1. knowledge spillovers (‘the mysteries of the trade become no mysteries; but are as it were in the air’); 2. the advantages of thick markets for specialized skills; and, 3. the backward and forward linkages associated with large local markets. All three of the above are clearly operating in the economy of today. The first two elements are intuitively very convincing but difficult to model, hence much recent theory has focused on the third, ‘linkages’ element. The story is essentially one of producers choosing locations that have good access to markets and supplies of intermediate goods. However, locations where a concentration of producers are already operating for whatever reasons are likely to already have good access to markets and well-developed intermediate supplies. Hence firms agglomerate to take advantage of existing backward and forward linkages. As a result of such linkages, a spatial concentration of production, once established, is likely to persist over time and indeed grow at the expense of smaller production centres. The knowledge spillovers argument is essentially one where increasing returns associated with knowledge, not the accumulation of capital and labour, are the key forces driving the growth of a production concentration. Much of the theory developed under the umbrella of the ‘new economic geography’ was conceived against the background of increasing international economic integration, principally in Europe (the EU) and North America (NAFTA). However the same backdrop of increasing trade, falling tariff barriers and falling transportation costs can be applied to the case of a developing economy where improved transport infrastructure can have a dramatic effect on internal trade. The new economic geography hypothesis is that such a background can lead to the endogenous formation of an ‘industrial core’ and an ‘agricultural periphery’. This has profound implications for industrial structure and the location of economic activity across regions. The ‘dynamic effects of economic integration’ model developed by Krugman and Venables considers an economic environment of one economy with two regions (the North and South of Vietnam could be taken as theoretical regions). Within this economy there are two goods: ‘agriculture’ and ‘manufacturing’. Consumer preferences are identical across all agents and both regions (all producers are also consumers). A constant proportion of expenditure is allocated to manufacturing and agriculture. Manufacturing consumption is composed of a large number of varieties of different manufactured goods. Consumers have a ‘love of

48 Competition and Cooperation: Vietnam

choice and variety’. For endowments the model considers only two factors of production: ‘farmers’ and ‘workers’, where only farmers can produce agricultural goods and only workers can produce manufactured goods. The farmers cannot choose to become workers and vice versa. Hence the economy is endowed with a fixed number of farmers and a fixed number of workers. Crucially farmers are assumed to be immobile (each region is endowed with a given number of farmers), and workers are assumed to be mobile (they will move to whichever region has a higher real wage). Agricultural goods are produced by farmers under constant returns to scale and perfect competition. Manufactured goods are produced by workers under increasing returns to scale and imperfect (monopolistic) competition. Transportation is considered to be costless for agricultural goods. Iceberg transportation costs for manufactured goods are applied where only a fraction τ (where 0 < τ < 1) of each unit shipped arrives. 1/τ captures the size of transportation costs or trade barriers. Hence the model demonstrates a number of dynamic effects that can be analysed to see under what conditions manufacturing activity agglomerates in a single region (the ‘core’), leaving only agriculture in the ‘periphery’. The forces for agglomeration are twofold. First, economies of scale and transportation costs imply that the firms would like to locate close to a large market (backward linkages similar to the Hotelling model). Second, consumers’ love of variety in manufactured goods and transportation costs imply that workers would like to live close to a large market (forward linkages). Together these two forces imply cumulative causation. The force acting to disperse economic activity acts through immobile farmers and transportation costs, implying that firms have an incentive to move out of the core to serve the peripheral agricultural market. The net outcome of these two sets of forces determines whether or not agglomeration takes place. Three parameters are important in determining whether or not agglomeration occurs: 1. the size of transportation costs (1/τ); 2. the share of consumers’ expenditure on manufacturing; and 3. the size of scale economies. A number of effects can be seen when there is a reduction in the size of transportation costs and/or trade barriers. Such changes can be seen in the context of regional integration on an international level, or regional integration on a national level through the ‘opening-up’ of a transitional economy such as Vietnam’s. Doi Moi in Vietnam has seen an improved environment for business, encouraging internal private sector trade and therefore improving parameter (1); and increased expenditures on manufactured goods as incomes have risen – parameter (2). Together, parameters (1) and (2) reinforce parameter (3) – economies of scale.

Adam McCarty, Richard Record and James Riedel 49

When transportation costs are large (τ→ 0), manufactured goods will in general be produced in both regions (to serve immobile farmers). As transportation costs fall (τ rises), it becomes feasible for manufacturing firms to agglomerate in the ‘core’ (where they benefit from large market size) and transport manufactured goods to the agricultural periphery. There is a critical value for transportation costs (1/τ) below, which a core–periphery pattern of industrial development arises. When transportation costs fall to zero (τ→ ), the location of economic activity becomes indeterminate and location is irrelevant. If the two regions are identical, then which region becomes the core and which the ‘periphery’ may depend on historical accident. Krugman (1991) describes how trade and economic activity often take place as a result of more or less ‘arbitrary specialization based on increasing returns, rather than an effort to take advantage of exogenous differences in resources or productivity’. Certainly there is considerable evidence to support this ‘randomness’ theory; many industrial clusters in the West appear to have become dominant for little or no apparent reason. They maintain their dominance from the region’s recognition as a dominant region of a particular industry or sector. This could explain the fact that communications technologies such as the internet have not so far undermined the existence of the world’s major industrial clusters. The key conclusion is that the effects of reduced transportation costs (or tariffs) in models with agglomeration economies may have substantial implications for the location of economic activity and industrial structure in different regions. Such models give us considerable help in understanding the latent forces that lead to the development of industrial clusters. Porter Porter’s (1980 and 1998) analysis takes a much more micro-level analysis of clusters by looking at the firm-level effects and drivers towards agglomeration, rather than an analysis of the macroeconomy. Clusters and cluster strategies are seen within the context of improving firms’ (and thereby a nation’s) productivity and competitiveness. He defines clusters as: geographic concentrations of interconnected companies and institutions in a particular field … They include suppliers of specialised inputs, components, machinery and services. Clusters also often extend downstream to channels and customers and laterally to manufacturers of complementary products … finally many clusters include governmental and other institutions. (Porter 1980) An industry cluster therefore includes members from every part of the value chain including all supporting industries such as packaging, advertising, transporters and so on. In addition to government and institutions,

50 Competition and Cooperation: Vietnam

one could also add business associations and social and collective organizations (social capital). Most clusters include: 1. 2. 3. 4. 5. 6. 7. 8.

end-product or service companies; suppliers of specialized inputs, components, machinery, services; financial institutions; firms in related industries; firms in downstream industries (channels and customers); producers of complementary products; specialized infrastructure providers; specialized training, education, information, research (often universities, institutes and/or think tanks); 9. Vocational training providers; and 10. Standard setting agencies. Porter also stresses how nations are not able to succeed in isolated industries, but in clusters of industries connected through vertical and horizontal relationships. This is similar to the linkages argument first articulated by Marshall. Porter further goes on to describe how the phenomenon of industrial clustering is so pervasive that it appears to be the central feature of advanced national economies. Cluster analyses, strategies and competitiveness initiatives use the ‘Porter diamond of advantage’ shown in Figure 2.3 to summarize the linkages and Figure 2.3

Porter’s ‘diamond of advantage’

Chance

Firm strategy, structure and rivalry

Factor conditions

Demand conditions

Related and support industries (value chain) Government

Adam McCarty, Richard Record and James Riedel 51

related factors considered to be most important in developing a successful cluster. The Porter diamond is essentially a logical structure for looking at the factors that determine the success (or failure) of a business or cluster of businesses. The government is outside the diamond (exogenous) and considered to be a factor only as a facilitator. There is no government–business partnership or the like, nor is there any scope for government activity within the diamond. Crucial to the formation of an effective cluster is the idea of ‘critical mass’. A cluster should include a critical mass of representation from the value chain so as to improve knowledge, share resources and stimulate creativity, innovation and entrepreneurship. The interconnections and spillovers within a cluster often influence productivity growth more than the actual scale of individual firms. Nevertheless, ‘Porter-style’ clusters in developing countries tend to be shallow and to rely primarily on foreign components, services and technology. Firms in such locations most often integrate vertically, producing not only their own components but even back-up electricity and such services as well. Similarly, cluster development in developing countries tends to be impeded by low local education and skill levels, weaknesses in technology, and lack of access to capital and poorly developed institutions. Hence in developing countries, a disproportionate amount of the country’s economic activity is often concentrated around large capital cities, and reflects the absence of infrastructure and the lack of available suppliers. Ultimately the greatest clash between the schools is derived from the use of Porter ideas to advance national ‘competitiveness’. Porter defines competitiveness as: Sustainable increases in productivity leading to improved standards of living for the average person. Porter’s work has been often used to further mercantilist and strategic trade arguments, particularly in developing countries such as Vietnam, that trade is a ‘zero-sum’ game. The idea that export productivity needs to be constantly driven up to combat imports and increase foreign exchange earnings is an alluring one, but ultimately flawed. Ricardian comparative advantage theories show that trade is always and everywhere beneficial, even when a country has no absolute cost advantages. If Porter clusters are not used to support industrial nationalism or mercantilist views, then in many ways Porter clusters are the practical counterparts of the more theoretical results of the economic geography models. A crucial condition to both the Krugman–Venables approach and that advocated by Porter is the idea that smaller firms clustered together can also gain the same (or at least similar) benefits of economies of scale and size that just one larger firm (or a reduced number of larger firms) would gain from producing the same product. A cluster of firms, however, should in theory not be constrained by the limited dynamism inherent in a single larger enterprise acting as a local monopolist.

52 Competition and Cooperation: Vietnam

What are clusters and why are they important? International evidence In the present era of rapid and ongoing technological change, the costs of communications and transportation have plummeted. Foreign travel, once considered to be the exclusive pursuit of the wealthy, is now normal and commonplace. Such changes have led many to speculate upon the ‘death’ of distance, arguing that face-to-face interaction is no longer necessary for business; the telephone, email and the internet make interaction possible between people, enterprises and organizations from anywhere in the world. However, with the ongoing international trend towards tariff reductions, free trade and regional integration (ASEAN, EU, NAFTA and so on) we have seen increasing agglomeration in many industries. In terms of the Krugman–Venables model discussed in Chapter 3, the internet is a tool for reducing transportation costs and edging τ closer towards 1. In 1991, Krugman wrote: ‘The most striking feature of the geography of economic activity is … concentration.’ Developing East Asia has demonstrated significant comparative advantage in high-tech products, and in many East Asian economies manufacturing has been concentrated in industrial parks in major urban centres. Principally this advantage has been confined to product assembly, with most upstream research and development done in the more developed economies and with many intermediate goods and support services sourced from the more developed economies. While such downstream activities can provide valuable learning opportunities to assimilate technology and business practices, the real rewards come from being at the innovative frontier – designing, developing and introducing new products or services. This has to be the long-term aim of all developing countries in East Asia. There is increasing evidence that economies with dynamic knowledgeintensive industries clustered in a few urban venues are most able to move up the value chain. Porter and Stern (2001) noted: Clusters offer potential advantages in perceiving both the need and the opportunity for innovation. Equally important, however, are the flexibility and capacity clusters can provide to act rapidly to turn new ideas into reality. A company within a cluster can often more rapidly source the new components, services, machinery, and other elements necessary to implement innovations. Local suppliers and partners can and do get involved in the innovation process, especially when participants are located nearby. Reinforcing these advantages for innovation is the sheer pressure – competitive pressure, peer pressure, customer pressure, and constant comparison – that is inherent within a cluster. This essentially is a continuation of the knowledge spillovers argument. Going back to Marshall, the principal other factors are the backward and

Adam McCarty, Richard Record and James Riedel 53

forward linkages and the thick labour markets that are inherent within a cluster of firms beyond a certain critical mass. Firm-level proximity can also act as a competitive force for preventing costs from rising too fast, and this is particularly important in an R&D environment. Why are clusters important? To spell it out in more detail, clusters increase productivity and efficiency by allowing: 1. efficient access to inputs, employees (thick markets) and information; 2. ease of coordination across firms (there is a role for business associations here); 3. rapid diffusion of best practices; and 4. ongoing performance comparisons vs. local rivals and therefore quick productivity enhancement and cost control through the rapid spread of industrial best practices. Clusters also stimulate and enable innovations and commercialization through: 1. enhanced ability to perceive innovation opportunities; 2. presence of multiple suppliers and/or institutions to assist in knowledge creation; 3. locally available resources – ease of experimentation; and 4. lower barriers to commercialize new products, services, ideas and business models because of available skills and suppliers. Because knowledge is their lifeblood, clusters thrive on the density of informal networks made possible by proximity and to some extent further reinforced by communications technology. These two factors help develop horizontal relationships, a form of social capital and trust that induces the circulation of knowledge and is the foundation of good governance within producer networks. This social capital is essentially the glue that holds clusters of all types together. World-class clusters Table 2.9 gives examples of some of the most famous clusters around the world. The Silicon Valley cluster is probably the world’s most famous and valuable. An analysis of the key factors contributing to its successful development (Cohen and Fields 1999) found seven principal interactive forces: 1. strong research universities; 2. government policy (in particular defence related research for the US government was of vital significance); 3. venture capital firms;

54 Competition and Cooperation: Vietnam Table 2.9

Examples of some world-class clusters

Silicon Valley

USA

Information communications technology

Bangalore

India

Information communications technology

Las Vegas

USA

Casinos

Sweden

Sweden

Forestry/wood products

London

UK

Financial services

Zurich

Switzerland

Private banking

Hollywood

USA

Films

Baden-Württemberg

Germany

Automobiles

Scotland

UK

Biotechnology

Hsinchu Park

Taiwan

Semiconductors

Antwerp

Belgium

Diamonds

4. 5. 6. 7.

law firms; business networks; stock options; and thick labour markets.

The combination of such forces has provided the technical knowledge, the financial backing, the social capital, the incentives and the supply of specialized labour that has made Silicon Valley such a success. The irony now is that the costs of living and doing business in Silicon Valley and its surrounding area are among the world’s highest. This is a considerable disincentive for firms to operate in the region and for skilled workers to choose to locate there. The same can be said of London, where very high property prices and poor local transport infrastructure ought to drive economic actors away. The fact that this is not happening underlines the power of increasing returns that accrue from agglomeration; such benefits outweigh other negative factors. These clusters are well beyond their critical mass point and hence the forces of agglomeration are selfreinforcing. Of much more importance for Vietnamese policy-makers is how clusters begin. Most international examples of successful clusters started in areas favoured by history and tradition. Development of clusters has generally taken off with the appearance of a cluster engine, such as a major university or research institute, a particularly dynamic firm, or an equivalent transnational corporation. Singapore, for example, initially climbed the technology ladder through knowledge and technology transfers brought in

Adam McCarty, Richard Record and James Riedel 55

by TNCs attracted by government incentives. In most cases cluster development is as much about what governments don’t do as about what they do. Limiting regulation and red tape can do considerably more to assist than crude and mistimed interventions by governments. However, there are cases where government facilitation has played the key role in guiding successful cluster development. The model developed in Baden–Württemberg, Germany’s industrial heartland, is a good early example of how public initiatives can create a system with multiple layers of institutes and research clusters that work with private companies and local chambers of commerce to meet market needs ranging from the identification of technological needs to the adaptation of technology, customized development, original research and training. Hsinchu Park in Taiwan was formed as a result of the deliberate government industrial policy. Starting with the creation of the Industrial Technology Research Institute in 1973, the government founded Hsinchu Park with the specific aim of copying the Silicon Valley model. Government initiatives to encourage the institute to obtain technical capability and human resources through Chinese–American firms in Silcon Valley triggered the very successful development of Taiwan’s semiconductors industry. The presence of transnational corporations in Hsinchu Park, chiefly Philips, also assisted in speeding technology transfer along. The Hsinchu Park story again underlines the tremendous untapped resources and unused potential Vietnam has in its large overseas Vietnamese population in California. Conversely, the financial services industry in the City of London is an excellent example of how light regulation can advance cluster development. London rose to pre-eminence in international financial services in the eighteenth and nineteenth centuries for a number of reasons, including the extent and strength of the British empire, Britain’s strong seafaring tradition and interest in trade, and a low-tax, laissez-faire business environment. In 2003, London is still the world’s largest market for international equities, bonds, commodities and a number of derivative markets. However, all but a few of the major investment banks and brokerage houses operating in London are headquartered there. Most have head offices in New York, Zurich, Frankfurt or Tokyo. Deutsche Bank, for example, employs more staff in London than in Frankfurt. Financial services are now Britain’s largest export. Much of the London-based trade in securities is conducted by the London operations of different foreign banks dealing in third-country securities. London achieved dominance in the eurodollar markets in the 1970s precisely because regulation was heavy-handed in New York, and the eurodollar markets migrated to London. Even with the advent of the Euro, and the European Central Bank being based in Frankfurt, the largest and dominant share of Euro spot and futures trading takes place in London, currently outside the Euro area.

56 Competition and Cooperation: Vietnam

Special markets often require special conditions. A culture of neutrality and, secrecy, with strong laws protecting privacy and a standoffish regulatory culture are the principal reasons for Switzerland’s position as the world’s leading centre for private banking.

Do clusters exist in Vietnam? The evidence (including a Vietnam literature review) Chapter 1.1 ‘The Rediscovery of Geography’, in Fujita et al.’s (2001) The Spatial Economy, begins with an interesting piece of anecdotal evidence on enterprise location and agglomeration in London: Around the corner from the English National Opera lies St Martin’s Court, a short street occupied mainly by sellers of second-hand books and prints. It is a reasonable location for such shops, but there are no doubt other locations that would serve just as well. Why, then, have the shops’ owners chosen to be there? To be near each other. No doubt there is some interesting story about how that cluster of book and print shops originally became established, but what sustains it now is a sort of circular logic: Potential customers come to St Martin’s Court because they expect to find a range of shops to browse in, and shops locate there because they know they will have access to a large pool of potential customers. One could begin with an almost identical paragraph describing the location of economic activity in Hanoi. In fact there are numerous examples of such street-level clusters. The old quarter of Hanoi is famous for the specialization of shops and micro or household enterprises. Many of today’s street specializations date back to the establishment of Hanoi’s merchant guilds in the thirteenth century. Lan Ong Street is famous for herbs and traditional medicine, Lo Ren Street for blacksmiths and metalworking, Hang Gai Street for silk, Hang Bac Street for jewellery, Hang Dau and Cau Go Streets for leatherwear and shoes. There is no specific advantage accrued by sellers and manufacturers of, say, traditional medicine from being on Lan Ong street. So why are they located there? The answer again is that shops’ owners deliberately choose to be near to each other. Sellers locate in Lan Ong street because that is where customers will come when they are looking for traditional medicine, and customers will come to Lan Ong because they know that is where the sellers are located. This phenomenon pervades almost every economy in the world. Agglomeration – the clustering of economic activity, reinforced by a circular logic occurs also at a multitude of levels, from the Old Quarter of Hanoi serving the Vietnamese capital, to international specialized economic regions, such as Silicon Valley in the USA (software) or the City of London in the UK (financial services) that serve global markets.

Adam McCarty, Richard Record and James Riedel 57

However, questions remain as to why some shops or activities cluster while others do not. Why do shops selling for example shoes or electrical goods cluster and agglomerate, while say bakeries or shops selling pho (noodle soup) disperse? Through networking among the various economic ‘actors’, a cluster deepens and accentuates the urban agglomeration effects closely correlated with the productivity of cities. Other things being equal, the benefits of agglomeration are derived from the existence of increasing returns to scale, communication externalities, lower transaction and search costs, and higher returns to human capital as the stock of such capital in an urban location rises. The answer to the pho question is perhaps a result of transaction and search costs. One of the key factors in explaining why some markets cluster and others do not is the level of consumer knowledge with respect to that product market. pho is essentially a commodity good, there is little or no innovation among pho sellers, and consumers know what pho will taste like when they decide that that is what they would like to eat. One does not generally need to ‘shop around’ when purchasing pho. Hence the transactions and search costs rise to prominence; consumers do not want to travel far. Transportation costs (as the Krugman – Venables model shows) are a crucial factor in the formation of all clusters, but for differing reasons. With the greater economic stability inherent in a large economy and the effect of a decline in transport costs, clustering rather than dispersion is further encouraged. Fuijita and Thisse (2002) observe: Low transport costs with sufficient product differentiation push economic agents towards agglomeration. The reason is that product differentiation relaxes price competition and consequently allows firms to attract more consumers when they are clustered than when any firm chooses to stand alone. This reveals another argument for dispersion in the market for pho, lack of product differentiation. Without that product differentiation, the only means of competing is through price. Spatial economics and the analysis of clusters are fairly new concepts in Vietnam. Only a limited number of studies have been carried out. Below are details of some cluster analyses that have recently taken place in addition to the 2002 JETRO study. VNCI project The Vietnam Competitiveness Initiative (VNCI) is a pilot project funded by the United States Agency for International Development (USAID) designed to test the cluster competitiveness theories in Vietnam. The project investigated approximately 20 potential industry clusters during 2002. That research led to a decision to offer assistance to 4 clusters in 2 cities: software/ICT clusters in both Hanoi and Ho Chi Minh City, a fruit cluster in

58 Competition and Cooperation: Vietnam

Ho Chi Minh City, and a fine arts ceramics cluster in Hanoi – Bat Trang village. The VNCI then analysed each of the four clusters to identify weaknesses in their competitiveness, formulate strategies, implement initiatives and remove constraints to growth in the local, regional and global economies. Software/ICT cluster (VNCI 2003c) The emergence of high-tech ICT/software clusters in developing countries such as India should act as a considerable incentive to other developing countries. The Bangalore ICT cluster demonstrates that successful knowledge clusters can develop outside Europe, the USA or Japan. Hence there are now excellent opportunities for Vietnam to develop an ICT sector achieve significant growth. Unfortunately the VNCI software/ICT cluster strategy found that Vietnam has done little to capitalize on these opportunities. The benchmarking analysis carried out indicated that Vietnam possesses strengths in affordable, high-quality labour, a low geopolitical risk to investment and close proximity to the large growth economies of China and India. However, limitations include comparatively expensive high-bandwidth links, poor English language and business skills, and weak international marketing and promotion. Furthermore there is limited commitment at the national level towards e-government and very weak intellectual property safeguards. Such failings, and without a clear commitment to change, mean that Vietnam is not achieving its potential in this sector. For this to change, there needs to be considerable investment in workforce skills, experience, business management and telecommunication infrastructure. In addition, institutional commitments are needed to improve the business environment for knowledge industries and innovation. Fruit cluster (VNCI 2003b) Vietnamese fruit exports jumped from an average of around US$50m. in the mid 1990s to over US$200m. in 2000 and US$300m. in 2001 on the back of a favourable climate, good access to markets and perhaps most importantly of all – low-cost labour in what is a very labour-intensive industry. However, when exports fell by a third in 2002 the need for improved competitiveness was demonstrated. The VNCI fruit cluster strategy concluded that unsophisticated post-harvest technology, poor cooperation between production elements, a low-quality product, poor infrastructure support, high production costs and a lack of management skills were all hindering sustainable growth in the industry. Hence foreign competition and tougher global standards requirements have done damage to the Vietnamese fruit industry. Vietnam’s current low-quality, low-cost, low-profit-margin fruit strategy is not viable for long-term growth. VNCI developed a strategy to raise competitiveness in the sector through the formation of a fruit sector cluster, increased government support through

Adam McCarty, Richard Record and James Riedel 59

training and improved technology, and development of premium branding for Vietnamese fruit. Ceramics cluster (VNCI 2003a) Vietnam’s ceramics industry is worth some US$110m. per year, of which Bat Trang contributes around 40 per cent. However, this figure is dwarfed by China – home to about 60 per cent of the world’s output. Bat Trang is a cluster in the traditional sense; it is a village on the outskirts of Hanoi renowned for pottery and ceramics production. Production occurs at the household, micro and small-sized enterprise level, with 83 per cent of families living in the village producing these crafts. Production of ceramics in Bat Trang has been ongoing for 1000 years. Bat Trang could be classified according to the 2002 JETRO study as a type (1) cluster – one where locally specialized items are produced or a local product district. The top end of the ceramics production in Bat Trang is considered to be among the best in the world, but there is a wide difference between the top- and bottomquality wares produced in the village. Highly skilled artisans are undermined by a village-level reputation for low-quality cheap products. Much of this is a result of almost no product standardization, testing tools, and process knowledge and training. Additionally, Bat Trang producers have very little access to and knowledge of foreign customers’ tastes and requirements. Market signals on popular designs and consumer trends are therefore very slow to reach producers. Again, the existing strategy is to compete on low cost. Bat Trang is an excellent example of a cluster that now finds itself constrained by the limitations of the informal networks that previously facilitated cluster development. Among other things, the VNCI strategy to institutionalize cluster networks and improve the competitiveness of Bat Trang ceramics highlighted the need to: 1. 2. 3. 4.

improve marketing (both internationally and locally), foster quality improvements, improve the design and R&D processes, and plan more at the village level.

Do clusters exist in Vietnam? A GIS approach In this section, Geographic Information Systems (GIS) software has been used to produce maps and analysis testing for the existence of economic clusters in a selection of sectors on a national, regional and local level in Vietnam. The working hypothesis was, not surprisingly, an expectation of finding significant clustering of industries and subsectors around Hanoi to Haiphong in the north, and all around Ho Chi Minh City in the South. More interestingly, the explanation for such clustering was hypothesized to be more related to access to land and infrastructure, rather than to labour or other variables.

60 Competition and Cooperation: Vietnam

Data The data used for the analysis is a subset of enterprise data taken from the 2001 Vietnam Industry Census collected by the Industry Department of the General Statistical Office (GSO), Ministry of Planning and Investment. The Industry Census is comprised of data for every firm registered centrally under 14 ownership classifications (see Table 2.11 below for details). The total number of enterprises in the data set comes to approximately 100,000 (see Table 2.2 above for a snapshot of the breakdown of enterprises in Vietnam in 2003). The data set excludes household enterprises and farming households. It also excludes most small and medium-sized enterprises (SMEs), which are registered with the provincial level authorities (Departments of Planning and Investment) and not at the central level. This is reflected in the large average number of employees recorded for firms in the data set (see Table 2.10 below). Obviously it also excludes unregistered firms, firms in the informal sector and those newly established since 2001. For this analysis, 12 key manufacturing and processing sectors were selected from the data set on the basis that these were the most interesting for cluster analysis and were most likely to accrue benefits from agglomeration. They were also the most interesting from a trade point of view. The following sectors were chosen: automobiles, cement, electronics, garments, motorcycles, paper, rice, seafood, software, steel, sugar, and textiles, comprising some 4400 enterprises. Within these 12, 13 sectors (garments, seafood and textiles) have been chosen for further analysis. These 3 were chosen because there are enough firms in Vietnam (and in our data set) to carry out analysis. Furthermore, they are also the heavily exporting sectors where there are the most advantages from knowledge spillovers in areas such as sales and marketing, access to new markets, production and/or processing technology, quality control, management, hygiene standards in the case of seafood processing, and product design in the cases of garments and textiles. Each entry in the database contains the following information: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

company name; address; province code; district code; commune code; telephone number; type of enterprise (see classifications above); principle sector of activity; number of employees; and annual turnover.

Each province in Vietnam is assigned a standard three-digit code; Hanoi for example is 101, Ho Chi Minh City is 701. See the Appendix for a full map

Adam McCarty, Richard Record and James Riedel 61 Table 2.10 Vietnamese enterprise dataset used for GIS mapping and analysis: labour and turnover Sector

No. of firms

Total no. of Average employees no. of in the sector employees per firm

Total annual turnover in the sector (US$m.)

Average annual turnover per firm (US$m.)

Revenue (turnover) per employee (US$)

Total (12 sectors)

4,402

669,099

152

8,243

1.9

12,320

Automobiles Cement Electronics Garments Motorcycles Paper Rice Seafood Software Steel Sugar Textiles

23 76 106 800 74 513 1,396 472 93 186 93 570

9,574 39,588 14,873 242,552 12,082 40,207 22,022 90,589 1,662 29,405 25,019 141,526

416 521 140 303 163 78 16 192 18 158 269 248

683 808 573 747 773 484 734 1,503 12 589 295 1,042

29.7 10.6 5.4 0.9 10.5 0.9 0.5 3.2 0.1 3.2 3.2 1.8

71,339 20,410 38,526 3,080 63,979 12,038 33,330 16,591 7,220 20,031 11,791 7,363

of Vietnam with province codes. Within each province, each district has a 2-digit code and within each district, each commune has another 2-digit code. Hence each firm in the data set is assigned a 7-digit code allowing its location to be geographically mapped down to the commune level. Of the total number of firms in the data set, 1027 (23.3 per cent) are based in Ho Chi Minh City, 345 (7.8 per cent) are based in Hanoi. Table 2.10 summarizes the data set used for this GIS analysis. The relatively large average size of the firms for the 12 sectors selected here (average of 152 employees and annual turnover of US$1.9m.) underlines the bias towards larger firms through using centrally collected data. SMEs in these sectors are likely to be registered at the provincial level, if at all. The 3 sectors chosen for detailed GIS analysis (garments, seafood and textiles) employ the largest numbers of people in the 12 sectors. The column displaying revenue (turnover) per employee gives an indication of the relative capital intensity of each industry. The very high figures recorded for automobile and motorcycle manufacturing (US$71,339 and US$63,979 respectively) demonstrate the large amounts of fixed capital employed in these industries. Table 2.11 shows the same information as in Table 2.10, but disaggregated by ownership type. Even with the central data, the number of private companies (whether private enterprises or two-or-more-member limited-

62

Total annual turnover by ownership type (US$m.)

Average annual turnover per firm (US$m.)

Revenue (turnover) per employee (US$)

162,974 1,148

1,907

13.4

11,701

Locally owned SOEs

237

128,228

541

1,167

4.9

9,101

Cooperatives

272

14,193

52

58

0.2

4,087

0.3

15,172

1

Centrally owned stateowned Enterprises (SOEs)

2 3

Total no. of employees by ownership type

142

Firm ownership type

No. of firms

Average no. of employees per firm

Table 2.11 Vietnamese enterprise dataset used for GIS mapping and analysis: ownership type

4

Private enterprises

1,942

39,941

21

606

5

Partnerships

0

0

0

0

6

One-member limitedliability companies (state-owned)

3

136

45

1

0.3

7,353

7

One-member limitedliability companies (private)

32

2605

81

50

1.6

19,194

8

Two-or-more-member limited-liability companies (state owned)

18

10,074

560

23

1.3

2,283

9

Two-or-more-member limited-liability companies (private)

1,114

128,411

115

1,121

1.0

8,730

Joint-stock companies with state-funded capital

68

42,401

624

321

4.7

7,571

Joint-stock companies with

96

18,100

189

168

1.8

9,282

367

91,404

249

1,030

2.8

11,269

82

25,860

315

1,670

20.4

64,578

29

4,772

165

121

4.2

25,356

1.9

12,320

10 11

0

non-state-funded capital 12

100 % foreign-invested companies

13

Joint ventures between SOEs and foreign-invested enterprises

14

Joint ventures between non-state-owned enterprises and foreign invested enterprises Totals

4,402

669,099

152 8,243

Adam McCarty, Richard Record and James Riedel 63 Table 2.12 List of GIS maps produced of Vietnam No.

Area

Industry

Type

Filenames*

01

National

All 12

Dot density

dotdens_all_lr

02

National

Automobiles

Dot density

dotdens_automobile_lr

03

National

Cement

Dot density

dotdens_cement_lr

04

National

Electronics

Dot density

dotdens_electronics_lr

05

National

Garments

Dot density

dotdens_garment_lr

06

National

Motorcycles

Dot density

dotdens_motorcycle_lr

07

National

Paper

Dot density

dotdens_paper_lr

08

National

Rice

Dot density

dotdens_rice_lr

09

National

Seafood

Dot density

dotdens_seafood_lr

10

National

Software

Dot density

dotdens_software_lr

11

National

Steel

Dot density

dotdens_steel_lr

12

National

Sugar

Dot density

dotdens_sugar_lr

13

National

Textiles

Dot density

dotdens_textile_lr

14

Northern region

Garments

Commune shading

comm._hanoi_garment_lr

15

Northern region

Paper

Commune shading

comm._hanoi_paper_lr

16

Northern region

Steel

Commune shading

comm._hanoi_steel_lr

17

Northern region

Textiles

Commune shading

comm._hanoi_textile_lr

18

Southern region

Garments

Commune shading

comm._hcmc_garment_lr

19

Southern region

Seafood

Commune shading

comm._hcmc_seafood_lr

20

Southern region

Steel

Commune shading

comm._hcmc_steel_lr

21

Southern region

Textiles

Commune shading

comm._hcmc_textile_lr

22

Mekong delta

Seafood

Cluster density

cluster_seafood_lr

*Both high- and low-resolution maps have been produced. The low-resolution maps are refered to here to economize on file size.

liability companies), dwarfs all other categories including the state sector. However in terms of employment, the SOEs (centrally and locally owned) are still significant, accounting for almost half of total employment for this sample. Centrally owned SOEs tend to be much larger than all other ownership types with an average of 1148 employees per firm. The joint venture sector (between foreign-invested enterprises and SOEs) displays revenue per

64 Competition and Cooperation: Vietnam

employee of almost US$65,000 per year, the highest figure for this sample. This would be an indication of the high capital intensity of these firms; virtually the only way for foreign firms to participate in sensitive heavyindustry sectors such as steel and cement is through joint ventures with a state-owned partner. GIS maps Table 2.12 lists the GIS maps that have been produced for this analysis. They include national dot density maps produced for each of the 12 industries, and then one aggregated map. Commune shading maps have been produced for selected industries, ‘zoomed in’ to the Hanoi–Hai Phong corridor and the Ho Chi Minh City–Binh Duong–Dong Nai triangle, the two principal zones of industrial activity in Vietnam. A further cluster density map has been produced for seafood firms in the Mekong Delta region. Methodology for cluster mapping Identifying clusters can be done in many different ways. It is for instance possible to look at occurrences of firms belonging to a specific sector in an area, such as a province, district or commune. Another approach is carrying out an input–output analysis to study the value added at various intervals of the value chain in vertically integrated clusters, an approach that needs considerable amounts of data. When focusing on the spatial analysis of clusters, cluster analysis comes down basically to identifying spatial patterns. The easiest and most commonly used technique to do this is mapping the occurrences and visually inspecting the map. Quantitative analysis of spatial patterns is a field covered by quantitative geography and often involves substantial data processing and complicated statistical techniques. An indicator often mentioned for spatial clustering is Ripley’s K-statistic, which basically compares the pattern of occurrences with a random pattern. If parameters of occurrences are relevant (that is the turnover of firms) it is possible to carry out spatial regression analysis, which includes routines for analyzing spatial dependence and heterogeneity (similar to, but more complicated than, routines for analyzing temporal dependence, which are standard in any statistical package). Many other methods exist of discovering something about the existence of spatial clusters, though for most methods one needs to define the areas being analysed (local level, regional level) and a cluster needs to be defined. In the case of firm location: How many firms together are required to form a cluster? At what distance is a firm included in a cluster? How close do firms need to be for knowledge spillovers to occur, 1 km, 5 km, 10 km? Ultimately these questions are subjective in nature. For statistical analysis, cluster parameters have to be set arbitrarily beforehand. It should be noted that the total number of firms mapped is just 3940, less than the 4402 firms in the data set. Since 2001 some province, district

Adam McCarty, Richard Record and James Riedel 65

and commune codes have changed as a result of mergers, boundary changes and splitting of provinces and so on. Hence not all the enterprises in the data set could be matched to the maps. Some 462 firms have therefore been ‘lost’. Note on the geography of Vietnam Frequent references are made throughout this analysis to provinces, districts and communes. These are the principal administrative boundaries used in Vietnam. Provinces (tinh) are the largest division; there are a total of 61 in Vietnam. Hanoi, Hai Phong, Da Nang and Ho Chi Minh City are cities (thanh pho) with province status, and included in the 61. Each province is divided into districts (huyen in rural areas, quan in urban areas). There are just over 700 districts in Vietnam. Each district is further broken down into communes (xa) in rural areas and wards (phuong) in urban areas. There are some 10,000 communes and wards in Vietnam. Throughout this chapter, ‘commune’ should be taken as including both communes and wards. National GIS maps: Figures 2.4 to 2.16 Conclusions from the national dot density maps The above maps confirm the locational hypotheses, particularly the bipolar development pattern of Vietnam. With the exception of the software enterprises, access to labour did not appear as a likely explanation for most distributions. More important for developing countries, for both import-substituting and export industries, is access to land and infrastructure (leading to urban markets and ports). Maps on a national scale for a country as large as Vietnam have only rather limited value. It is difficult to see more than the broad patterns of economic activity in the country. Nevertheless, some interesting observations can be made. First, and perhaps most obviously, there is a split between the agricultural and commodity production industries (rice, seafood and sugar) and the manufacturing industries (automobiles, cement, electronics, garments, motorcycles, paper, software, steel and textiles). The agricultural industries are much less concentrated than the manufacturing industries. Second, there also appears to be a split between the relatively ‘new’ light manufacturing industries and the ‘older’ heavy industries. Firms in the electronics, garments, motorcycles and software industries seem to be even more closely located to the twin poles of Hanoi and Ho Chi Minh City, than the heavier and older industries such as cement, paper, steel and textiles. The ownership structure of these industries could well be a factor in these cases also. The heavy industries tend to be dominated by the large state-owned enterprises (SOEs; grouped together as general corporations – a

66 Figure 2.4

Dot density map of Vietnam – all 12 industries

One dot is marked for each firm in the 12 industry sectors. Firms are mapped according to commune. That is, each represents one firm in a given commune. In order that dots do not ‘stack’ in the same commune and remain hidden from view, they are randomly dispersed within each commune. The map shows the broad pattern of economic activity across Vietnam: industry is polarized in the northern and southern delta regions with small amounts of activity along the coast. Hanoi and Hai Phong can be clearly seen as centres of industrial activity. Ho Chi Minh City and the surrounding provinces show the greatest concentration of dots. The inclusion of rice as an industry sector is something of a distortion, as it appears to give undue emphasis to industry in the Mekong Delta, the traditional ‘rice bowl’ of Vietnam. Some small clustering can be seen in the provincial capitals along the coast.

67 Figure 2.5

Dot density map of Vietnam – automobiles

This shows only the location of the 19 automobile firms in Vietnam that could be mapped. Very few conclusions can be drawn from such a map, given that the data set is so small. The 19 include the various component suppliers within the automotive industry supply chain. There are three areas where these firms are located: Hanoi, Hai Phong and Ho Chi Minh City. Automobile assembly takes place on only a very limited scale in Vietnam. Transnational corporations with a presence in Vietnam include GM Daewoo, Daihatsu, Toyota, Ford, Isuzu and Daimler Benz.

68 Figure 2.6

Dot density map of Vietnam – cement

The locations of the 66 cement firms are mapped by commune location. Most striking is the relative dispersion of cement plants. The production of cement requires large amounts of (heavy) limestone, mined principally in the northern mountainous areas of Vietnam. High transport costs, as the Krugman–Venables model suggests, means that firms are likely to choose to locate closer to the market. Hence there is a tendency for plants to be located close to supplies of raw materials and serve the local market in that vicinity. There does appear, however, to be some evidence of concentration in the Hai Phong–Hai Duong area. Hai Phong has traditionally been a centre for cement production; the first factory was established in Hai Phong by the French colonial rulers of Vietnam in 1899.

69 Figure 2.7

Dot density map of Vietnam – electronics

This shows the location of 96 electronics firms. Virtually all the firms are clustered very tightly in and around either Hanoi or Ho Chi Minh City. This is perhaps unsurprising given that the electronics industry in Vietnam is still rather undeveloped. Electronics firms tend to require large amounts of semi-skilled labour, of the sort prevalent in the major cities. Consumer electronics firms in Vietnam producing for export will most likely choose to locate close to transport infrastructure. Firms producing for the domestic market will also most likely choose to locate close to the major cities, given that in general it is primarily the comparatively wealthy urban population that can afford to purchase electrical goods.

70 Figure 2.8

Dot density map of Vietnam – garments

This shows the location of 721 garments firms. The garments industry is comparatively new to Vietnam. It has experienced rapid growth in the last ten years and is now Vietnam’s largest export sector after oil, accounting for some 16.4 percent of exports in 2002 (STAR 2003). The industry has generated substantial employment and much of the export growth has been as a result of foreign direct investment from other Asian countries. The garments industry is a historically ‘light-footed’ industry, moving from country to country. This is largely due to the industry’s limited working capital requirements and large unskilled labour requirements. The strongest concentration of firms appears to be in and around Ho Chi Minh City. There also appear to be clusters in Hanoi and Hai Phong. Clustering in this industry is analysed in greater depth further on in this chapter

71 Figure 2.9

Dot density map of Vietnam – motorcycles

This shows the locations of the 68 motorcycle industry firms. There appears to be high concentration in Ho Chi Minh City and Dong Nai in the south, and in Hanoi and Hai Phong in the north; serving the principle population centres. The motorcycle industry in Vietnam produces almost exclusively for the domestic market and is characterized for the most part by foreign invested or joint venture assembly plants with local components suppliers clustered around the major plants. For motorcycle production, Vietnam has mandatory ‘local content’ requirements. Premium motorcycles are imported already assembled.

72 Figure 2.10

Dot density map of Vietnam – paper

This shows the locations of 429 paper firms. Ho Chi Minh City and Hanoi appear to have the largest concentrations of firms, with secondary clusters in Da Nang and Hai Phong.

type of super SOE holding company), with foreign investors allowed to participate in these sectors only through joint ventures with these SOEs. Decisions on plant location may be constrained by non-economic factors such as local patronage, efforts to develop the regions by providing jobs in deprived areas, tradition or pure inertia. Private enterprise, smaller firms and 100-per-cent foreign-invested enterprises account for a much larger

73 Figure 2.11

Dot density map of Vietnam – rice

This shows the location of 1322 rice firms. This is the sector (of the 12 analysed) with the largest number of firms. There is tremendous evidence of clustering in the Mekong Delta region. Obviously rice is grown best in places where there is flat land, good irrigation and water supply, and good soil quality. The Mekong Delta has been Vietnam’s ‘rice bowl’ for generations and is the area that has driven rice production up in the last 15 years to make Vietnam the world’s second-largest rice exporter. Rice now counts for some 4.4 percent of national exports (STAR 2003). Looking at this map one might assume erroneously that rice is grown only in the Mekong Delta. In fact it is grown nationally but mostly on a household scale. Only in the Mekong are there sufficient production surpluses for rice growing to become an industry. Hence in this region there exist a large number of firms registered at the central level, thus skewing the map somewhat.

74 Figure 2.12

Dot density map of Vietnam – seafood

This shows the location of 414 seafood firms. It is not surprising at all that these firms are located along the coastal zones and in the Mekong Delta region. The largest single grouping appears to be in Ho Chi Minh City, with a secondary cluster in Da Nang. The seafood processing industry is another industry that has experienced lively export growth in the last 10 years. In 1995, Vietnam’s seafood exports were less than rice or coffee exports. In 2002, seafood accounted for 12.2 percent of total exports, more than coffee and rice put together. Clustering in this industry is analysed in greater depth further on in this chapter.

75 Figure 2.13

Dot density map of Vietnam – software

This shows the location of 92 software firms. The software industry in Vietnam is still very underdeveloped and plays only a limited role in the national economy. As one would expect, software firms require highly skilled labour of the sort that can only be found in the major urban centres. Hence software firms are located almost exclusively in either Hanoi or Ho Chi Minh City.

share of activity in light manufacturing. Choices on plant location may therefore be freer and made more frequently on pure economic grounds. The following section examines specific industry clusters on a closer scale in the two dominaant industrial areas of Vietnam: the Hanoi–Hai Phong corridor and the Ho Chi Minh City–Binh Duong–Dong Nai triangle.

76 Figure 2.14

Dot density map of Vietnam – steel

This shows the location of 156 steel firms. Steel production appears to be concentrated in Ho Chi Minh City in the south, Da Nang in the central region, and Hanoi and Hai Phong in the north. There also appears to be a steel cluster in Thai Nguyen, north of Hanoi. In common with the cement industry, steel is protected by high tariff barriers in Vietnam. In the first years following on from Vietnam’s ‘opening up’, there was a large amount of foreign investment into the steel sector, principally through joint ventures. These investments were made almost exclusively for the purpose of producing for the local market, where prices have tended to be higher than in other regional economies. Import substitution of this kind has had something of a distorting effect, challenging finite resources of capital into industries where Vietnam does not exhibit any comparative advantage. Steel is an interesting case in that high transportation costs are likely to be a driver towards smaller-scale regional production close to enduse markets. However, this factor is undoubtedly outweighed by the enormous economies of scale gained from steel melting, thereby driving concentration.

77 Figure 2.15

Dot density map of Vietnam – sugar

This shows the locations of 88 sugar-producing firms. As one would expect for agricultural production, firms are dispersed most likely according to where sugar cane is grown. There is very little evidence of concentration, although slightly higher firm densities can be seen in the provinces of the Mekong Delta and in particular in An Giang.

78 Figure 2.16

Dot density map of Vietnam – textiles

This shows the location of 469 textile firms. Again, Ho Chi Minh City and Hanoi have the largest concentration of firms, but firms are not confined exclusively to these cities, large numbers being located in the surrounding provinces. Given that textile firms are part of the same value chain as garment firms, it is not surprising that the location patterns for the two industries are quite similar. However, there do appear to be slightly more textile firms in the rural provinces than garment firms. Vietnam has a much longer history of producing textiles (previously for the CMEA markets), than garments. Hence the state plays a greater role in the textiles industry, and this may explain the relative dispersion, as plants may have been located in given regions for non-economic reasons. Clustering in this industry is analysed in greater depth further on in this chapter.

79

Northern and southern region GIS sector maps: Figures 2.17 to 2.25 Figure 2.17

Vietnam northern region commune-shading map – garments

This is a commune-shading map for garments firms in the region surrounding Hanoi. The insert in the top right-hand corner is the zoomed-in view for the centre of Hanoi. There do not appear to be any striking indications of industrial clustering in this map, although the highest densities of garments firms can be seen in Ba Dinh and Dong Da districts of central Hanoi. As perhaps one would expect, firms tend to be located along the major road arteries. The largest number of firms outside the city centre of Hanoi seems to be located along National Highway 5 running east from Hanoi towards Hai Phong.

80 Figure 2.18

Vietnam northern region commune-shading map – paper

This shows the location of paper firms according to number of firms per commune in and around Hanoi. Interestingly, the locations of paper firms in central Hanoi appear to be in communes other than those containing the garment firms as shown in northern and southern region GIS sector maps. There does seem to be some evidence of clustering along the continuation of National Highway 1A going northeast out of the centre of Hanoi, in Gia Lam district. Hai Ba Trung district in central Hanoi appears to have a higher than average density of paper firms. Finally Hai Phong also has evidence to some extent of a paper cluster.

81 Figure 2.19

Vietnam northern region commune-shading map – seafood

Here are shown the locations of seafood firms in the north of Vietnam. The most striking feature of this map is actually the apparent lack of seafood firms in the region. There are a very small number of firms in Hanoi. Only two small clusters can be seen in the region, and neither is particularly significant, one in Hai Phong and another further down the coast in Thai Binh province. It is, however, interesting to compare this map with Figure 2.23 showing seafood sector enterprise location in the south of Vietnam.

82 Figure 2.20

Vietnam northern region commune-shading map – steel

This shows the location of steel firms. Given the large amounts of pollution generated by steel plants, it is hardly surprising that there are almost no firms located in the centre of Hanoi. Steel plants require very large amounts of fixed capital and hence are generally few in number, but large in size. There is a small steel cluster northeast of Hanoi in Gia Lam district. However, the most striking clusters can be seen in Hai Phong. Three communes located adjacent to river ways in Hai Phong City show quite profound evidence of steel clustering. Two communes in particular (in Hong Bang district on the south side of the Cam river and in Thuy Nguyen district on the north side) show significant evidence of high density clustering with more than five steel firms per commune. It seems highly likely that proximity to river and seaways for transportation are significant in the steel industry.

83 Figure 2.21

Vietnam northern region commune-shading map – textiles

While Hanoi and Hai Phong have a number of textile firms, the communes with the highest densities (five or more firms per commune) can be seen outside the two major urban areas. One such cluster can be seen on the southwest outskirts of Hanoi, just inside Ha Tay province, close to Ha Dong town. Travelling south approximately 40 km an additional cluster can be seen in Van Dinh town, still in Ha Tay. Southeast from there a cluster can be seen at the major road intersection at Phu Ly town, Ha Nam province. East of that point (in the bottom right section of the map), more clusters can be seen in Nam Dinh and Thai Binh provinces. It is remarkable that there are three high-density areas of textile firms in Thai Binh province; one of these is located actually in Thai Binh town itself, but the remaining two clusters are in communes in comparatively rural districts.

84 Figure 2.22

Vietnam southern region commune-shading map – garments

This shows how large the garment industry is in Ho Chi Minh City and the surrounding areas. The critical mass of garments firms appears to be in the western districts of the city, namely Binh Chanh, Tan Binh, Go Vap, Hoc Mon and District 12. Almost every commune in these districts has garments firms, and several have five or more firms. An interesting commune with a high density of garment firms can be seen south of the city centre in District 7, in the loop of the Saigon river. Garments firms are located in all directions leading out of Ho Chi Minh City, but there are two noticeable areas to the northwest and northeast of the city with secondary garments clusters. These two areas respectively are Cu Chi district of HCMC, and Bien Hoa town, Dong Nai province.

85 Figure 2.23

Vietnam southern region commune-shading map – seafood

This map demonstrates clearly how much larger the seafood industry is in the southern region compared with the north. The locations of seafood enterprises actually in Ho Chi Minh City are located in broadly the same industrial dstricts as garment firms, but there appears to be a small bias somewhat towards the southwest. This may be a reflection of the role the Mekong Delta (southwest of HCMC) plays in the industry. Leading southwest about 20 km out of the city along National Highway 1A, an additional cluster can be seen in Ben Luc town, Long An province. Further to the southwest, significant evidence of seafood clustering can be seen in My Tho, one of the larger towns in the Mekong Delta and capital of Thien Giang province. Further investigations of seafood clustering in the Mekong Delta can be seen later on in this chapter.

86 Figure 2.24

Vietnam southern region commune-shading map – steel

This shows the locations of steel firms in and around Ho Chi Minh City. Activity in the steel industry appears to be confined to four main areas, three in HCMC in Tan Binh and Binh Chanh districts and another southwest near Ben Luc town in Long An province. Ho Chi Minh City does not appear to have the same steel sector highdensity clustering exhibited in Hai Phong, in the north of Vietnam (see Figure 2.20).

87 Figure 2.25

Vietnam southern region commune-shading map – textiles

The distribution of textiles firms seems to follow a similar pattern to that of garment firms in the south (see Figure 2.22), with a concentration in the west of the city and secondary clusters to the north. This would make sense given that textiles and garments firms manufacture as part of the same supply chain. High-density communes can be seen again in Binh Chanh district, Tan Binh district, District 7 and District 8. Secondary clusters can be see to the north of the city in three locations. Similar to the garments firms, there are secondary clusters in Cu Chi (northwest) and Bien Hoa (northeast). There is a large secondary cluster directly north of HCMC in Thu Dau Mot town, Binh Duong province. One other cluster can be seen due west of the city centre on the far side of the Nha Be river in an apparently rural commune in Dong Nai province, close to National Highway 51 running towards Vung Tau.

88 Competition and Cooperation: Vietnam

Seafood enterprises in the Mekong Delta We have used density maps to analyse clusters in the Mekong Delta region, where seafood firms are shown as a circle (see Figure 2.26). The shade of the circle denotes the density of firms per unit area surrounding that location. A high density of firms indicates a cluster. The parameters that can be changed are the area that should be taken into account, represented by r, the radius of a circle surrounding a location and the field on which the density is based (count, employment, turnover and so on). In addition the

Figure 2.26

Seafood clusters in the Mekong Delta

Adam McCarty, Richard Record and James Riedel 89

way the density is computed can be changed, resulting in more or less ‘smoothed’ maps. The interpretation of the figures on the density map is as follows (Tim Ormsby, ESRI knowledge base: http://www.esri.com): When you calculate a density grid from a point theme, you specify a search radius. The radius defines a circle, which is applied to each grid cell in turn as it is processed (the circle is centred on each grid cell). All points from the point theme that fall within the circle are counted and summed. The sum is then divided by the area of the circle. The result is the grid cell’s density value, in square units of measure. For instance, suppose you specify a search radius of 0.5 miles. Suppose also that for a particular grid cell, three points (car thefts or whatever) fall within its 0.5-mile-radius circle. The density value for that cell, in square miles, is three divided by the area of the circle (3 divided by πr squared). πr squared in this case is ((0.5 × 0.5) × 3.14) or 0.785. The density value for the grid cell is therefore 3.82 (3/0.785). So what does 3.82 mean? Not 3.82 thefts in that grid cell. It means approximately: If you marked off any square mile that included that grid cell, you would probably find that four auto thefts had occurred in that square mile. If you marked off a bunch of different square miles that included that grid cell, some of them would have only 2 or 3 car thefts occurring in them. Some would have 5 or 6. The average number would be 3.82. ‘Any square mile that includes that grid cell’ is not a strictly accurate formulation (it really depends on the size of the search radius), but it makes it easier to grasp the idea. The point is that the density value reflects the occurrences in a circle drawn around each cell, not the occurrences within the cell itself. To avoid this lengthy explanation you can change the map categorization to broad generalized categories: low clustering–medium clustering–high clustering, as has been done in the seafood maps above. Interpretation of maps Three maps can be seen analyzing seafood clusters in the Mekong Delta and surrounding region. Though the ‘measurement for occurrence’ (count of firms, sum of employment, or sum of turnover per community) has been varied, the general cluster pattern remains unchanged for the most part. In the seafood maps, on looking at the number of firms, a cluster can be found in HCMC and on Phu Quoc Island. However, if we look at the turnover or number of employees Phu Quoc disappears as a cluster and Soc Trang and Ca Mau appear in the Mekong Delta beside HCMC. If we looking at the number of firms, however, these large ‘clusters’ are formed by only a few firms, so obviously these are very large firms and it is some-

90 Competition and Cooperation: Vietnam

what difficult to really speak of there being clusters. We may conclude that we need to take several issues into account when deciding what is a cluster. Perhaps low clustering (in the seafood maps) and low values in the other maps should actually be interpreted as ‘no clustering’, as small clusters might be generated by a single large firm. The question that arises again here is: How many firms do we need to speak of a cluster? For example, a large seafood-processing firm may be the largest and principal seafood-processing firm in a province. The location of that firm, in terms of turnover per community or sum of employment, may register as an area with comparatively high industrial density. One firm should surely not be a cluster. However, the single large firm may support a large number of suppliers and intermediate firms in the value chain. Such firms may be registered at the provincial level, or not at all, in which case they would be missing from our data. This would fit with the type (2) cluster identified in the 2002 JETRO study: one where a large core firm has many subcontracting or parts makers surrounding it or the so-called industrial castle town. Similarly, Phu Quoc island, a cluster in terms of the large number of (small) firms only, could be a cluster following type (1) of the 2002 JETRO study: one where locally specialized items are produced or local product districts. Cluster analysis The cluster index (Table 2.13) was computed as follows: 1. First, density maps were generated. The density was computed for 500 by 500-meter grid cells for the total area of Vietnam, using a search radius of 5 kilometres. This gives for each cell a density per square kilometre, based on an area of πr squared (= 78.5 km2). The distance of 5 km can be interpreted as a small region: the longest distance between two firms to be considered in the same cluster is in this case 10 km. (Note: that smaller values for r do not most likely substantially change the outcomes of these computations; a smaller r will result in higher density values for sectors with firms that are located nearby and lower density values for sectors with larger distances between firms.) 2. Second, each grid cell (with a density value) has been classified in the categories 0, 0.25–0.50, 0.50–0.75 and so on. After the reclassification for each category the number of grid cells was computed. 3. As the density is affected by the number of firms in a sector, the values were weighted (divided) by the total number of firms. 4. Finally, for clearer figures the weighted clustering numbers are computed as a fraction of the clustering of all firms together. In this way it is possible to compare the relative clustering of sectors.

Table 2.13

Cluster index of Vietnam – all 12 industries

Classes

0.25–0.50

0.50–0.75

0.75–1.00

1.00–1.25

1.25–1.50

1.50–2.00

2.00–3.00

3.00–5.00

5.00–10.00

Count

1.000

1.000

1.000

1.000

1.000

1.000

1.000

1.000

1.000

Textiles Garments Seafood Cement Rice Steel Sugar Software Paper Motorcycles Automobiles Electronics

2.441 1.656 2.890 8.534 1.961 3.443 6.262 1.098 2.248 3.891 6.288 2.464

0.825 0.556 0.503 – 0.805 0.255 – 2.910 1.256 – – 1.291

0.943 1.212 0.300 – 0.911 – – 1.967 1.892 – – –

1.427 1.822 3.123 – 0.644 – – – 1.182 – – –

0.305 1.569 – – 0.028 – – – – – – –

– 3.415 – – – – – – – – – –

– 2.161 – – – – – – – – – –

– – – – – – – – – – – –

– – – – – – – – – – – –

Source: Calculated from the industry dataset.

91

92 Competition and Cooperation: Vietnam

Conclusions The garment sector has the greatest tendency to cluster in our sample, followed by textiles, rice, seafood and paper. On visual inspection of the maps, this seems quite reasonable. The cluster index is, however, still quite considerably affected by the number of firms, so one has to be careful in drawing strong conclusions, especially when comparing different sectors where there are large variances in the numbers of firms included in the data set. The fact that there are more firms may be shown as an indication of clustering.

The role of business associations in facilitating cluster formation and development Clustering can act as a significant driver for the formation and development of business alliances and organizations. The presence of many different producers in one place facilitates the establishment of formal associations. Such associations can assist by way of advice or information, or they may offer regulatory services and help industries develop codes of conduct, establish set business practices, or arbitrate in commercial disputes. In addition, clustering promotes the development of distinctive business cultures and etiquette in particular places, thus helping the constituent firms to communicate with and understand one another. Business associations can be the institutional glue that binds firms within a cluster together, through lobbying, providing business support services, gathering statistics, hosting events and interfacing with government authorities. They can help institutionalize cluster linkages. There are approximately two hundred business associations in Vietnam. They range from the large and highly influential Vietnam Chamber of Commerce and Industry (VCCI) to sector-specific associations such as the Vietnam Leather and Footwear Association (LEFASO), right down to smaller regional ‘business clubs’, cooperative alliances and ‘young entrepreneurs’ clubs’. Such associations actually provide rather less services to their members than their respective equals in other countries. But this can hardly be unexpected given the historical underdevelopment of the private sector in Vietnam. A survey of enterprises and business associations in 2002 by the Mekong Project Development Facility (MPDF 2002) found that business associations in Vietnam performed fairly well in the following areas: 1. providing information on policies and legal issues to members; 2. making policy and legal recommendations on behalf of their members; and 3. providing or organizing short-term training courses.

Adam McCarty, Richard Record and James Riedel 93

However, the survey also revealed that business associations were considered to be still relatively weak at: 1. providing technical advice and consulting; 2. providing information on markets; and 3. providing assistance in assessing both domestic and export markets. The constraints inhibiting Vietnamese business associations from providing high-quality professional services highlighted by the survey included: a general lack of resources, a lack of capacity and lack of professional staff, and the lack of a clear legal framework for the activities of business associations. Such limitations are in many ways a result of Vietnamese associations’ poor ability to raise funds through membership dues, collection of service fees and fundraising. Reform in this area was one of the principal recommendations of the study. Other recommendations included the need to ‘professionalize’ activities and services, and the need for the Government to streamline the legal and regulatory environmental with respect to business associations. Describing the Silicon Valley and Route 128 (Massachusetts) high-tech clusters in the USA, Saxenian (1994) wrote: The nature of business culture – particularly the openness to new ideas, the flexibility of business arrangements permitting easy entry of firms into an industry, and the richness of social capital – sets the pace of technological advance and the emergence of business models relevant to the times. ‘Social capital,’ although a somewhat unfamiliar term in Vietnam, is actually very much in evidence. Vietnamese mass organizations have traditionally played a strong role in both society and business. Grassroots organizations such as the Women’s Union and the strong tradition of cooperatives and cooperative alliances all contribute to the ‘richness’ of Vietnam’s social capital. The fabric of these organizations represents tremendous potential for Vietnam to also adopt a dynamic business culture of the kind described by Saxenian. In Vietnam, business associations could fill an important gap in helping firms to enter new export markets. The global marketplace is a relatively new place for Vietnamese firms to compete. Vietnamese firms have expanded rapidly into new export markets in East Asia (including Japan), the European Union and most recently the USA (following the signing of the US–Vietnam BTA accord in 2000). However, the ‘success’ of the various product groups’ export boom has been somewhat mixed. The manifold ‘success’ in many sectors of Vietnamese manufacturing exports to the USA (garments exports to the USA rose by some 1700 per cent between 2001 and

94 Competition and Cooperation: Vietnam

2002; STAR 2003) has to be contrasted with the apparent ‘failure’ of coffee and catfish, to name two examples. These two product sectors’ export story can be described as failures in the sense that with coffee, apparent naivety with respect to world markets caused Vietnam to collapse world prices and find that even as export volumes rose, revenues fell. Oversupply and lower prices than anticipated have resulted in significant difficulties for large numbers of coffee farmers in the central highlands. The ‘small country’ assumption and horizontal supply curve did not apply to Vietnam in this case. Clearly there could have been a role for better and ‘smarter’ industry regulation to anticipate Vietnam’s impact on world markets. Similarly Vietnam is largely wedded to the production of robosta, the coffee bean of lowest value. More strategic application of industry regulation could drive up quality and help farmers move to higher-yielding products. Equally in the case of catfish, an extremely rapid expansion of export quality production channelled to the US market prompted the US Department of Commerce in 2003 to impose punitive restrictions on Vietnamese catfish, ban retailers from marketing Vietnamese catfish as ‘catfish’ – forcing them to market the produce (in Vietnamese) as basa or tra, and label Vietnam a ‘non-market’ economy. The anti-dumping charges were based largely on very weak economics, and dumping has clearly not taken place; the reality is that production (principally labour) costs are several multiples lower in the Mekong Delta than in the southern USA. However, again, a better understanding of world markets and the ‘intricacies’ of trade policy could have helped Vietnam avoid such a situation. While the size of the Vietnamese catfish export market is in actual fact very small, the impact of the dispute was much larger in terms of the coverage it received in the media and among policy-makers. A stronger, smarter and more savvy business association might have advanced the interests of the catfish industry cluster and lobbied more effectively against the punitive tariffs. Informal actions and institutions played a key role in the rapid expansion of household and micro businesses in Vietnam during the early Doi Moi period, and have underpinned much of the recent employment growth in Vietnam. This is not unique to Vietnam. In many developing market economies, especially in Asia, transactions are conducted with limited reliance on formal contracts and a binding enforcement mechanism. Instead, parties to a contract rely on relationships to enforce or adjust commitments, and/or to address non-performance of commitments. Penalties for non-performance are linked to reputation and opportunities to engage in future business. However, as firms grow the limitations of informal institutions include: 1. The need to deal with ‘outsiders’ and ‘foreigners’ such as bankers and traders increases as the scale of business grows – either party may doubt that informal mechanisms will result in transparent and equitable outcomes.

Adam McCarty, Richard Record and James Riedel 95

2. Opportunities to enter contracts depend on established relationships based on past business contacts. Thus, informal institutions have a bias against new entrants with negative consequences for equity and efficiency. 3. The formal financial sector often requires formal contractual arrangements to reduce transaction costs, and risks, in assessing and enforcing debt repayment. 4. Informal arrangements can breakdown during general economic downturns. Borrowers continue to operate loss-making businesses longer than they should, losses increase, and financial problems can spread to suppliers and creditors. These limitations are particularly pronounced in Vietnam because business networks – and informal ‘rules of the game’ – that played a pivotal role in financing private investment elsewhere in East Asia are less developed in Vietnam. Such limitations could well be mitigated through increased activity by business associations in helping to ‘formalize’ the activities of businesses. Clusters could well be the basis upon which groups of small businesses enter into more formal contractual arrangements with customers, suppliers, partners and financing institutions (especially those abroad), while still maintaining the ‘insider’ status of firms within the cluster. Relying on informal contacts and instructions limits dramatically the pool of potential business partners. Failing to grow beyond informal networks is one of the reasons why household enterprises fail to grow into successful small and then medium-sized enterprises.

The role of IZs and EPZs in facilitating cluster formation and development Increased factor mobility throughout the East Asian region has played a critical role in stimulating the development of clusters in several regional economies. One of the implications of increased factor mobility is the now heightened competition for inward foreign direct investment (FDI). The development of EPZs and IZs has been an important tool in many developing countries, not least China, in attracting such investment. If the attractiveness of a site to any firm seeking to invest is dependent somewhat on the presence of other firms, then polices that encourage investment may be a crucial factor in facilitating the development of clusters. The key conclusion is that today’s factor mobility does not guarantee that economic growth will take place in a geographically balanced manner. Overview of foreign direct investment in Vietnam Vietnam’s FDI inflows have fallen significantly since 1996. The poor state of Vietnam’s trade infrastructure is no doubt a contributing factor to this

96 Competition and Cooperation: Vietnam

(see Table 2.4 above), but in reality Vietnam has gone through something of an FDI ‘boom and bust’; as the world’s newest market opened up, too much FDI flooded in in the mid 1990s. Many changes have been made to the FDI business environment to try and encourage and facilitate further investment. Changes included adjustments to foreign investment laws and substantial alterations in the domestic business environment. These changes have ensured an increased role for and strengthening of the private sector, highlighted by the new Enterprise Law in 2000, which has made it easier to establish and register a private enterprise with an assurance of equal recognition by the government. Trade agreements also continued to be signed, most notably the US BTA in 2002. However, despite these substantial changes for the better, and an improvement in foreign investor sentiment, FDI has not returned to the levels seen in previous years and appeared in the first half of 2002 to be in substantial decline, some 55 per cent below the previous year’s figures (Freeman 2001). In many ways these changes have simply mirrored a general liberalization throughout Asia as well in other developing countries and reflect a level of freedom many investors feel is simply a minimum to secure their investments. Though Vietnam’s legal system may be more in tune with FDI needs, other requirements such as local skills, hard and soft infrastructure, services, supply networks, institutions and property rights are not. Equally, Vietnam’s general business environment remains hindered by bureaucracy and red tape, a major continuing complaint of inward investors. On top of this, FDI itself has substantially changed. Previous ‘greenfield’ FDI activity, which was a large source of FDI in Vietnam in the past, where a company comes and establishes operations, has been in decline around the world over the last few years. In its place has grown increased merger and acquisition activity, a source of investment Vietnam has found hard to attract owing to its restrictive enterprise and share ownership laws. On the whole, given similar FDI policies in other developing countries, especially in Asia, Vietnam should perhaps consider more radical changes in its current foreign investment strategy. This will be necessary if Vietnam is to achieve the US$12–16bn target it has set itself for foreign private capital inflows between 2001 and 2005. Vietnam needs a more considered list of targets, showing an understanding of where the country has the ability to make best use of its comparative advantage and where it requires not only investment but know-how and the other attributes that FDI might bring. In terms of Vietnam’s position in the regional and global value chain for transnational corporations (TNCs), recent studies have highlighted the division of high-value elements of the chain such as research and development to Japan, sales and marketing to Singapore and production and assembly to second- and third-tier Asian countries such as the Philippines and Vietnam (Giroud 2002). Not only in leather and footwear (as discussed

Adam McCarty, Richard Record and James Riedel 97

in the previous chapter) is Vietnam limited to a small, low value added section of the value chain. Regional integration, measured by the level of input sourcing and production exporting to ASEAN, appears to be of a minimal level, with integration of TNC and FDI production at more of a global than a regional level. Data so far indicate that as little as 5 per cent of exports and inputs are sent to and received from other ASEAN countries (Giroud 2002). While ASEAN investors are much in evidence in Vietnam, export processing is more often than not destined for the EU, Japan and now increasingly the USA. The ASEAN Investment Area (AIA) aims to raise this and promote greater levels of regional integration. Domestic linkages also appear to be at a basic level, with foreign producers sourcing mainly low-technology inputs from ASEAN local suppliers. This is despite the view within TNCs that local suppliers have improved many areas of performance, such as quality and delivery efficiency, but are still considered to have poor technological capabilities. The Giroud survey also found that TNCs in Vietnam rate the level of their employees’ competency and know-how very highly, with many TNCs complaining that they suffered from human capital ‘bottlenecks’ with the supply of human capital not keeping up with firms’ requirements. This development of a skilled workforce via foreign investors’ transfer of knowledge can have beneficial knock-on effects for local firms as they employ and learn from TNC staff. The same survey found that the presence of TNCs has not hindered the development of locally based industries in the sectors where FDI is prevalent. Many domestic firms are able to compete with foreign investors in the local market and are ‘poaching’ trained staff to help develop their businesses. This would imply some sector-wide beneficial effects from agglomeration; local firms are strengthened by the presence of transnational investors, rather than supplanted by them. The Giroud Vietnam survey findings illustrate an interesting meso picture. While on the one hand FDI may not bring about a great degree of regional integration, linkages may remain low-ended unless measures are taken to improve technical know-how of suppliers as well as ensuring quality. Human resource development and competitive effects do appear to provide more non-tangible benefits in addition to par dollar value of foreign direct investments by TNCs. The question is how Vietnam can ensure its firms take full advantage of the development of an FDI workforce and capitalize on these spillover effects to help industrial clusters develop further. IZs and EPZs Government-led industrial parks and estates are the fourth type of cluster identified in the 2002 JETRO study, and are the source of much economic activity and evidence of industrial clustering in Vietnam. The example of

98 Competition and Cooperation: Vietnam

the first wave of economic development in East Asia (the ‘Asian tigers’) shows how modern technologies, skills and management practices can be assimilated through FDI and the presence of TNCs at the hub of special economic zones. In a developing country such as Vietnam, where public goods (infrastructure, utilities and so on) are not provided universally to a high standard, export-processing zones (EPZs), industrial zones (IZs) and industrial parks (IPs) can ‘fill the gap’ for foreign investors by providing an area where such facilities are provided to a high standard. Companies may choose to produce within an EPZ to take advantage of exemptions from customs duties for equipment, raw materials and commodities imported into the zones, and for finished goods and products exported from the zones, subject to specific provisions regulating EPZs. All the production within an EPZ must be exported. IZs have been developed to offer tax advantages for establishing factories within the zones. Companies can produce within an IZ for the domestic market or for export. The companies pay no duties when importing raw materials, if the end products are exported. The first EPZ was established in Vietnam in 1991. According to figures published in 2000 by the US Department of State, Vietnam has 63 IZs and 3 EPZs. As of the same time there were 914 licensed enterprises in the zones with total registered capital of US$7.8bn, including 569 foreign enterprises with US$6.4 bn in registered capital. About 40 per cent of the registered capital was disbursed at that time. In 2000, the IZs and EPZs attracted 262 projects with US$900m. registered capital. In 2000 the IZs and EPZs accounted for 25 per cent of gross industrial output and 16 per cent of total export value. Investors opting to locate in such areas also receive tax incentives and preferential treatment. Projects located in EPZs and IZs enjoy the following investment incentives, among others: 1. exemption from export tax on finished products exported directly to foreign markets; 2. lower production tax rates; 3. exemption from tax on profits for the first few years of activity; 4. the ability to carry forward cumulative losses for several years to offset against profits; and 5. Low tax rates on profits remitted abroad. In general the incentives are more generous for firms to locate in EPZs, which focus almost exclusively on exporting, than in IZs, where firms produce for both domestic and export markets. The procedures for the granting of investment licenses can be somewhat simpler if investing through an EPZ or IZ. EPZ and IZ management com-

Adam McCarty, Richard Record and James Riedel 99

mittees have full authority delegated by their respective provincial authorities to issues licenses. Companies submit license applications and pay taxes directly to the management committees. Clearly there are a number of formal benefits that can accrue to foreign investors choosing to site their plants in EPZs and IZs. However, with respect to domestic enterprises, things are not always so clear. There can be something of a disincentive for firms to locate in designated zones, as this forces them to ‘display’ their activities to the authorities. Many domestic firms are, perhaps understandably, reluctant to advertise success. Some commentators, including Dapice et al. (1999), have also stressed that provincial authorities need to do more than just build IZs and EPZs, and then watch industry develop. Dapice et al. contrasted the cases of various zones in Vietnam. The Nomura IZ opened in Hai Phong in 1995 and attracted only 5 tenants in the first 5 years of operations. Domestic private firms complained that Nomura IZ was too expensive (many firms did not require such high-quality infrastructure) and in a poor location (not close to plentiful supplies of unskilled labour). Dapice contrasted Nomura with the success of IZs in Dong Nai province in the south of Vietnam. Here the authorities were able to provide a range of zoned areas from just-cleared land, to semi-developed areas, right up to the high-quality infrastructure sites similar to Nomura. Again this highlights the need for IZs and EPZs to capitalize on Vietnam’s comparatively low-cost labour and light manufacturing advantages, not work against them. If an EPZ or IZ attract only foreign firms then the scope for knowledge transfers and overspills to take place between foreign and local firms is severely constrained.

Conclusions: What kind of cluster model for Vietnam? Industrial policy recommendations Competitiveness, productivity and long-term growth Competitiveness is relative, and politically the competitiveness of China is a major concern in Vietnam. China’s entry to the WTO, free trade between China and ASEAN in 2010, and its lead in many areas of reform is pushing Vietnam’s own reform process. That process has sped up in recent years, relative to the 1990s, and is likely to accelerate in coming years, even in the more difficult areas of state enterprise and banking reform. On the external front, there is concern that Vietnam’s inherent structural weaknesses have the potential to undermine its competitiveness in external markets. The high level of tariff and non-tariff protection on many manufacturing and assembling activities will soon decline or vanish once Vietnam starts complying with its regional and international obligations such as AFTA and USBTA in the short run and WTO in the long term. Labour costs in Vietnam are low (see Figure 2.27), even compared with those of China, but utility and infrastructure costs are higher and productivity in general is low.

100 Competition and Cooperation: Vietnam

Hourly labour wages (US$)

Figure 2.27

Hourly labour costs, selected developing countries

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2

Vi et na m

Su In bdi Sa a ha ra n Af ric a Ba ng la de sh

Sr

iL

an ka

hi na C

nd Ph ilip pi ne s

Th ai la

er ic a Am

S.

M

al ay s

ia

0

Data are based on interviews with industry experts carried out by J.E. Austin Associates. The figure for South America is the minimum wage, actual levels vary across countries in the continent. The figure for Sub Saharan Africa is an average for the region. Source: J.E. Austin Associates (2001).

In fact labour costs in Vietnam are less than half those of China. However, low wages are not a strong basis upon which to base competitiveness or industrial development. Similarly, abundant natural resources, government incentives or cheap currency are not long-term sources of advantage. At best they offer a limited ‘window of opportunity’ for Vietnam to climb the productivity ladder. Sustainable increases in productivity are the only way to permanently improve living standards. Cluster building can be the driver of productivity growth. The high costs of doing business in the Vietnam were noted at Vietnam Business Forum (9 December, 2002). Participants highlighted the need to: 1. introduce greater competition to reduce costs closer to the regional levels in sectors such as telecommunications, power and shipping; 2. ease restrictions on technology transfers; 3. make business policies and regulations more transparent in their formulation as well as using consistent enforcement to enhance predictability for investors; 4. broaden the currently narrow tax base that puts a disproportionate burden on honest taxpayers and slows the growth in employment; 5. accelerate deregulation and to implement the Enterprise Law aggressively outside the main urban areas; 6. correct misconceptions on the role of the private sector and enhance its role; and the importance of encouraging corporate social responsibility.

Adam McCarty, Richard Record and James Riedel 101

Thus the nature and pace of reform in Vietnam is itself an important macroeconomic variable in explaining short-run growth performance, much more so than in more developed economies with efficient markets where the growth returns to reforms are less significant. From this perspective, there are still large growth gains to come from trade liberalization, from financial sector and state enterprise reform, and from business deregulation. Many international donor agencies are actively trying to support the development of SMEs in Vietnam. Donor and government interventions to support a given firm or sector will always accelerate development of the given firm or sector. The real question is: Are such interventions sustainable and do they justify the costs? While there is no doubt that Vietnam needs a dynamic private sector, not least to provide jobs for the growing labour market, there are real questions as to how the private sector should be developed. The evidence to date suggests that reform is the principal driver of economic growth in Vietnam. The long-term growth prospects remain good for Vietnam, irrespective of fluctuations in the external environment. This is because central planning placed Vietnam’s economy well away from its production possibilities frontier (growth potential), and ongoing reform is a steady process of moving towards full protection. Thus while Vietnam’s factor and product markets remain weak by international standards, they are much stronger than they were only five years ago and are improving every year. This process unleashes potential, increases productivity and generates ‘once-off’ supply responses to institutional reforms such as the Enterprise Law. Provided these reforms are implemented successfully at the local level, the further development of a healthy business enabling environment will act as a considerable spur to growth. Vietnam’s long-term development may therefore be pictured as the progressive blossoming of an economy that had been restricted by central planning regulations. As those regulations are removed, economic activity and growth responded – led by booming household and agriculture sectors. In the 1990s, foreign investment and rapid export growth added more speed. Then, after a relatively slower period, a new phase of growth led by an emerging private corporate sector may be beginning. Hurdles do however remain. While Vietnam’s low labour costs are a source of regional comparative advantage in the production of certain labour intensive exports, low productivity and the high other costs such as utilities and poor quality infrastructure diminish this advantage. Such issues of competitiveness are likely to leave Vietnam more exposed in the years ahead given trade commitments to AFTA and possible accession to the WTO. Given continuing private sector development, combined with ongoing institutional reforms and macroeconomic stability, a decade or more of high growth rates may well be expected.

102 Competition and Cooperation: Vietnam

Revisiting the conclusions from the 2002 JETRO study Summarized again, the 2002 study described how agglomerations can be grouped together into four broad categories: 1. clusters where locally specialized items are produced or local product districts; 2. clusters where a large core firm has many subcontracting or parts makers surrounding it or the so-called industrial castle town; 3. clusters in large cities where lots of basic production processes are treated or urban processing clusters; and 4. government-led industrial parks and estates often seen in developing countries. There certainly seems to be some evidence of type (1) clustering in Vietnam. The case of ceramics produced by a large number of small firms in Bat Trang village, as discussed by the VNCI project, would serve as a good example here. The seafood clusters analysis in the Mekong Delta (see Figure 2.26) also revealed some evidence of a large number of small producers on Phu Quoc Island. Phu Quoc is famed throughout Vietnam for the production of highly pungent fish source. There also seems to be some evidence of type (2) clustering; the steel industry in Hai Phong would be an example for this case. Perhaps also the large number of textiles clusters seen in the provinces south of Hanoi and the seafood clusters seen in Soc Trang and Ca Mau in the Mekong Delta would fall under this classification. The heavy incidence of garments manufacturing in the west of Ho Chi Minh city and northeast and northwest satellites (Bien Hoa and Cu Chi) could be considered under both cluster types (3) and (4). So all four types of cluster are evident in Vietnam to some degree. The 2002 JETRO study also concluded that the success of industrial agglomerations depended on three main factors: 1. infrastructure (highways, ports, electricity supply, and so on); 2. institutional frameworks (legal systems, participatory actors, coordination among actors, and so on); and 3. government support (or foreign assistance) in terms of laws, taxation and finance. Certainly infrastructure is of vital importance. The basic contention of the Krugman–Venables core and periphery model shows the importance of transportation costs the quality of infrastructure being the key factor in lowering that cost. The evidence suggests that the quality of Vietnam’s state-dominated provision of infrastructure and facilities is fairly poor and expensive. This has obvious knock-on effects with respect to productivity.

Adam McCarty, Richard Record and James Riedel 103

However, these things take time and significant progress has already been made in the provision of basin infrastructure. Institutional frameworks are clearly significant. The evidence does suggest that reform has been the principal factor in generating private sector growth. The 2000 Enterprise Law put much of the basic legislation is in place now, and remaining efforts will need to focus on implementation. In terms of participatory actors, Vietnam has a strong basis with its existing network of business associations, cooperatives and alliances. There is a long history of collection action and cooperation. However, any notion of institutions needs really to take into account the strength of the rule of law and perceptions with respect to corruption. Transparency International,3 the world’s leading NGO concerned with fighting corruption, publishes an annual ‘Corruption Perceptions Index.’ The highly regarded index ranks 102 countries and reflects the perceptions of business people and country analysts, both resident and non-resident. In the 2002 index, Vietnam is ranked at number 85, lower (considered more corrupt) than China (59), Thailand (64) and the Philippines (77), but higher (considered less corrupt) than Indonesia (96). Cambodia and Laos were not surveyed. Finally the notion of government support fits closely with the institutional frameworks concept. Special IZs and EPZs have been quite a successful means of encouraging investment through tax breaks and financial incentives, but the evidence shows that the costs and quality of services provided in such zones need to be graded to cater for a wider range of would-be investors. The case of the provincial authorities in Binh Duong (see Box 2.1) highlights the importance of the attitude and approach of the local-level authorities in dealing with the emergent private sector. There does seem, however, to be one more factor that needs to be added to the ‘menu’ above, namely the environment for risk-taking and entrepreneurship. This is the final key that is perhaps needed to ensure that clusters, particularly of the more valuable types, can be formed. While there is some evidence of economic agglomeration in Vietnam, clusters of the kind seen in countries such as the USA or Japan have yet to emerge. The GIS maps confirm the locational hypotheses, particularly the bipolar development pattern of Vietnam. With the exception of the software enterprises, access to labour did not appear as a likely explanation for most distributions. More important for developing countries, for both import-substituting and export industries, is access to land and infrastructure (leading to urban markets and ports). The World Economic Forum’s The Global Competitiveness Report 2000 included a survey of business people in 50 economies. The respondents were asked to assess the extent to which they agreed with the following statement: ‘Clusters are present in most international industries and include not only suppliers, but specialized institutions such as university research programs and training providers.’ The mean response for each

104 Competition and Cooperation: Vietnam Table 2.14 Perceived role of clusters, selected Western and East Asian economies Economy Finland United States Germany Singapore Taiwan Japan Hong Kong Korea, Rep. of Malaysia China Philippines Thailand Vietnam Indonesia

Ranking 1 2 3 4 5 8 11 17 25 28 35 38 39 46

Source: Global Competitiveness Report 2000, World Economic Forum, copyright © 2000 by the World Economic Forum. Used by permission of Oxford University Press, Inc.

economy was calculated and the lowest possible ranking was 50. The results for selected economies can be seen in Table 2.14. The list of top countries is not surprising, although the position of Taiwan at number 5 in the rankings ought to act as some inspiration to Vietnam. Vietnam compares reasonably favourably with its peers in ASEAN (Philippines, Thailand and Indonesia), but rather disappointingly trails China by some distance. If clusters are dynamic centres of growth, then understanding better how they might be created and managed in Vietnam is a matter of great significance for the future. The experience of the leading economies of East Asia, especially Japan and Korea, should serve Vietnam well. The evidence from these countries suggests that a culture that is open to ideas, but is also successful in conserving core values, is most likely to thrive in a global economy where knowledge is the dynamic driving force of economic development. Questions as to the extent of the role of the state in Vietnam’s market economy abound. The example of Japan’s post-1945 industrial development is particularly relevant. Japan’s state-oriented and cooperative drive towards modernity achieved astonishing results in allowing Japan to emerge from the ashes of wartime destruction to achieve equal status with the world’s leading industrial nations by the 1980s. However, Japan’s economic stagnation over the last ten years now sends a different message to its East Asian neighbours. The role of the state in directing technological catch-up is much diminished. Private enterprises are now the international drivers of technological development. While research in universities and in government and private institutes makes a major contribution to global

Adam McCarty, Richard Record and James Riedel 105

R&D, in East Asia and across the world firms do the dominant share of applied and basic research. Increasingly, technological advance rests with researchers spurred by a highly competitive environment that rewards excellence, and it depends on large, research-oriented corporations, universities and private financiers willing to support research. Malaysia serves as another warning to Vietnam in this regard. Malaysia’s high-profile drive towards the ‘K’ or knowledge economy was launched amid much fanfare in the late 1990s with the setting-up of the ‘multimedia technology corridor’ and city of Cyberjaya. The results from the investments in infrastructure have been very disappointing. The world’s largest investment fund (Calpers) has withdrawn all investments from Malaysia, saying the lack of press and political freedoms undermined Malaysia’s longterm prospects (BBC News, 29 May 2003). Perhaps the most important requirement for the successful development of a knowledge-based cluster economy is an environment where there is freedom of expression, opportunity and thought, where individuals are truly able to experiment, innovate and become entrepreneurs. Vietnam has some distance to travel in this regard. The lesson for Vietnam is that government is no longer the principal actor in driving economic and technological development; its role has changed to one of setting the stage and creating a conducive enabling environment to freely allow entrepreneurship and innovation.

Acknowledgements The authors would like to thank Mekong Economics Ltd for their assistance towards completing this report – in particular, for the GIS inputs of Dr Joost Buurman and for the research inputs of Scott Robertson. Mekong Economics Ltd is a private Vietnamese company, supporting the development of a competitive market-based economy in Vietnam and the Greater Mekong sub-region. Established in 2000, Mekong Economics specializes in economic research, consulting and Official Development Assistance (ODA) projects and programs (http://www.mekongeconomics.com).

Appendix: Vietnam provincial codes Each of the enterprises included in the GIS maps and analysis was assigned a 7-digit geographical location code. The first 3 digits represent the province, the next 2 digits represent the district, and the last 2 represent the commune. The map (Figure 2.28) shows the provincial codes for Vietnam. These are standard and assigned by the Ministry of Science, Technology and Environment (MOSTE). Owing to changes in province, district and commune boundaries, a number of enterprises in the 2001 data set were allocated codes which no

106 Figure 2.28

Vietnam provincial codes

Adam McCarty, Richard Record and James Riedel 107

longer exist. Hence out of the total 12-sector data set of 4402 firms, only 3932 enterprises were mapped and analysed.

Notes 1. From Amazon.com. 2. ‘Iceberg’ transportation costs: only a fraction of each unit shipped arrives. 3. http://www.transparency.org

Bibliography and references Asian Development Bank (ADB). 2003. Asian Development Outlook 2003. Manila. Athukorala, Prema-Chandra. 2002. Foreign Direct Investment and Manufacturing Exports: Opportunities and Strategies. Washington, DC: World Bank. Aw, Bee Y., X. Chen and M.J. Roberts. 1997. ‘Firm Level Evidence on Productivity Differentials, Turnover and Exports in Taiwanese Manufacturing’, Working Paper no. 6235, National Bureau of Economic Research. Cambridge, MA. Cohen, Stephen S. and Gary Fields. 1999. ‘Social Capital and Capital Gains in Silicon Valley’, California Management Review, 41(2), pp. 108–30. Dapice, David O., Brian J.M. Quinn, Pham Anh Tuan, Bui Van and Ho Dang Hoa 1999. Trade and Industrial Development Strategies for the Ha Long Bay Region. Development Discussion Paper no. 683, Harvard Institute for International Development. Cambridge, MA, March. Freeman, Nick J. 2001. ‘Understanding the Decline in Foreign Investor Sentiment Towards Vietnam During the 1990s’, Asia Pacific Business Review. Autumn. Vol 8, no. 1, pp. 1–18. Fujita, Masahisa, Paul Krugman and Anthony Venables. 2001. The Spatial Economy – Cities, Regions, and International Trade. Cambridge, MA: MIT Press. Fujita, Masahisa and Jacques-François Thisse. 2002. Economics of Agglomeration. New York: Oxford University Press. Giroud, Axèle. 2002. Vietnam in the Regional and Global TNC Value Chain. Draft paper, DFID Globalisation and Poverty Research Programme Workshop, Hanoi, September. Griliches, Zvi. Nov. 1992. ‘The Search for R&D Spillovers’, Scandinavian Journal of Economics Vol. 94 (Supplement 1992), pp. 29–47. General Statistics Office. 2002. Statistical Yearbook. Statistical Publishing House, Hanoi. Hopkins, B. 2002. The Impact of Vietnam’s Infrastructure on Exporters: A Survey. Background paper, World Bank study: Vietnam Exports: Policy and Prospects. Hanoi. Hotelling, Harold. 1929. ‘Stability in Competition’, Economic Journal. Vol. 39 pp. 41–57. Japan External Trade Organization (JETRO). 2002. Industrial Agglomeration: Facts and Lessons for Developing Countries. Tokyo: Institute of Developing Economies, JETRO. J.E. Austin Associates. 2001. Survey of Competitiveness in Developing Countries http://www.jeaustin.com/index.html Krugman, Paul. 1991. Geography and Trade. Leuven University Press. Krugman, Paul and Anthony Venables. 1990. ‘Integration and the Competitiveness of the Peripheral Industry’, in C. Bliss and J. Braga De Macedo, (eds), Unity With Diversity in the European Economy: The Community’s Southern Frontier. Cambridge University Press.

108 Competition and Cooperation: Vietnam Marshall, A. 1920. Principles of Economics, (8th edn). London: Macmillan. Mills, Edwin S. and Bruce W. Hamilton. 1994. Urban Economics, (5th edn). New York: HarperCollins. Porter, Michael E. 1980. The Competitive Advantage of Nations. New York: Free Press. Porter, Michael E. and Scott Stern. 2001. ‘Innovation: Location Matters’, MIT Sloan Management Review, 42(4), 28–36. Pham Van Thuyet. 2002. ‘Vietnam: Regulatory Environment and Support Services for Export Development’, background paper to the World Bank study Vietnam Exports: Policy and Prospects. Hanoi. Saxenian, Anna Lee. 1994. Regional Advantage: Culture and Competition in Silicon Valley and Route 128. Cambridge, MA: Harvard University Press. STAR – Vietnam. 2003. An Assessment of the Economic Impact of the United States – Vietnam Bilateral Trade Agreement, Annual Report for 2002. Hanoi: National Political Publisher. Steering Committee for State Administrative Reform 2002. Impact of Public Administrative Reform on Socio-Economic Development in Binh Duong province, unpublished manuscript. Hanoi. United Nations Development Programme. 1993. Human Development Report. New York: Oxford University Press. United States Department of State. 2000. FY 2001 Country Commercial Guide: Vietnam. Washington, DC: US Department of State. Vietnam Administrative Atlas. 2002. Hanoi: Cartographic Publishing House. Vietnam Competitiveness Initiative (VNCI). 2003a. Bat Trang Ceramics Competitiveness Strategy, report prepared by J.E. Austin Associates for USAID. Hanoi. Vietnam Competitiveness Initiative (VNCI). 2003b. Fruit Cluster Strategy, report prepared by J.E. Austin Associates for USAID. Hanoi. Vietnam Competitiveness Initiative (VNCI). 2003c. Software/ICT Cluster Strategy, report prepared by J.E. Austin Associates for USAID. Hanoi. Vietnam Economic News. 2003. Tuesday, 5 August 2003 pp. 12 World Bank. 2002. Vietnam Development Report 2003 – Vietnam: Delivering on its Promise, World Bank in collaboration with the Asian Development Bank, Vietnam Consultative Group Meeting, Hanoi, December 10–11. World Economic Forum. 2000. The Global Competitiveness Report 2000. New York: Oxford University Press. World Economic Forum. 2001. The Global Competitiveness Report 2001. New York: Oxford University Press.

Part II Industrial Clusters in China

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3 Industrial Clusters in the Tianjin Area Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu

Introduction Regional industrial clusters in evolution In this time of economic globalization, economic regionalization develops rapidly. The reason is that the region has been an agglomeration centre for enterprise clusters, qualified personnel, funds, markets, information, infrastructures, important regional studies and networks as well as a tie of integration. Economic globalization benefits from the development of transportation and information technology. A well-developed network of information and transportation in modern society makes it possible for one industrial sector to very conveniently gain material support from a distant region and then sell its products to more distant markets. However, as we have observed, economic globalization has not successfully reduced the distinction among regions, though the economic level of each region has taken on a dynamic look. Instead, many superior industrial sectors are still tightly connected with geographical features. The Competitive Advantage of Nations (1980), written by Michael E. Porter, an American scholar, listed some lasting industries, such as chocolate in Switzerland, flowers and plants in the Netherlands, computers in the USA and so on. All of these industries have the characteristic of regional agglomeration. Both economic globalization and regionalizing are trends that can be accomplished without conflict. Taking technological innovation as the motive force and regarding transnational corporations as the carrier, economic globalization is, essentially, a worldwide adjustment of industrial setup. In this process, developed countries turn to innovation-driving and developing countries speed up industrialization so that economic resources can be redistributed on a large scale around the world. The distinction of economic development levels and the speed of different regions (including various regions within developed countries) is usually directly related to the uniqueness of their industrial setup. Moreover, the economic vigour of 111

112 Industrial Clusters in the Tianjin Area

a region is first displayed by a group of superior industrial sectors. Research in economics shows that traditional theory, which emphasizes only the comparative advantage of natural resources and other cost factors, cannot explain the development and changes of regional economy or how each superior industrial sector in a region has its own complicated and dynamic supporting system. A so-called industrial cluster comprises both the industries that gather within a certain region and their supporting system. Porter generalized this supporting system as having the following four aspects: demand condition, competition condition, factor condition and support condition. He considered that these four aspects form the paints of a diamond shape that interrelate and interact. He particularly emphasized that a competitive advantage on the basis of only one or two aspects of the diamond has been proved to be unstable because other competitors may easily surpass it and that prolonged competitive advantage can be produced only by mutual support and the coordinated development of all four aspects. Component factors of industrial clusters Industrial clusters include upstream industrial sectors that provide raw materials and means of production for core industrial sectors and those industrial sectors each of whose production technology affects the others. That is not to say that each region must have a complete system. The role of upstream industrial sectors can be displayed by a well-developed international purchasing network, and this kind of network has become a symbol of developed regions. The blending trend of correlated industries is increasingly obvious during the evolution process of modern industries. For example, the computer, TV sets, communication and software industries are merging into an organic whole. Such a phenomenon also appears in industries like agriculture, food, medicine, textiles, plastics, chemistry and garments. Thus, it is difficult to distinguish which industry is upstream and which downstream. Through combination of production technologies, numbers of new industries have been formed. Concerning regional economic environment, a favourable regional economic environment should have at least, six key factors in order to forcefully participate in the competition of the global economy. These factors are as follows: 1. Rich technological resources and appropriate distribution media. Technology is one of the most fundamental motivations that promote the development of a regional economy. The effect of technology on the development of a regional economy is as follows. First, technology is a key factor for increasing output and improving productivity. The purpose of technological improvement is to provide new material, new energy resources and new methods of exploiting energy. Second, technology can change the input–

Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu 113

output structure of production. In addition, technology can also change the existing condition and relative value of regional factors through substitution among factors. Third, technology may raise the competitive power of a regional economy. Both producing new products and producing old products by new methods can enhance the relative competitive power of a regional economy. The source of technological resources includes universities, national labs and scientific research institutes in enterprises. They can offer research achievements that are necessary for industrial sectors to seek a more consolidated competitive position. These achievements can be timely and efficiently transferred into industrial sectors through distribution media. 2. Human resources with high adaptability and organizations for development and training. One of the difficulties that underdeveloped countries and regions are facing is the shortage of human resources with high adaptability. In quantity, there is surplus labour in underdeveloped countries and regions. Nevertheless, modern industry needs not only ordinary physical but also qualified labour with professional skill and high adaptability. Economic development requires that regions provide lots of professional personnel and skilled workers for enterprises. Besides, through basic occupational education, higher education and continuous in-service education, regions should give human resources the knowledge and skill that allow them to adapt to competition and changes. 3. Abundant sources of funds. The competitive power of regional industries cannot do without the strong support of financial organizations. The functions of these financial organizations include raising enough funds for economic development and establishing investment mechanisms that can fully reflect guidance of competitive market power. 4. Favourable macroeconomic environment with efficient management. This kind of management level is embodied in two aspects: one is that macroeconomic regulations can guide enterprises effectively and at the same time do not destroy the independence and competitive relation of enterprises; the other is that the tax system is beneficial to competition, and at the same time meets the needs of economic development and the public. 5. Well-developed infrastructure of software and hardware. The efficiency of regional economic activities is, to a large extent, affected by the condition of infrastructure. Therefore, if a region wants to reach its goal of economic development, it must arrive at a comparatively high level of communication facilities, transport and storage facilities, environmental protection facilities, living facilities that can attract qualified personnel and a friendly environment in term of public policy and the administration of justice and so on.

114 Industrial Clusters in the Tianjin Area

6. Groups of customers with discriminatory ability. Views of these customers and their requirements for products can reflect the basic trend of market changes and should be regarded as the basis for product innovation by enterprises. Three hierarchies of regional competitive power In the three hierarchies of regional competitive power (Figure 3.1), the competitive power of enterprises is the highest and it is the final manifestation of regional economic competitive power. However, the competitive power of an individual enterprise does not necessary depend on an industrial cluster. With a unique resource advantage or a special nucleus ability, an enterprise may keep its favourable market position for a long time. The competitive power of an industrial cluster is expressed as the competitive power of the chief enterprise within it. Besides resource condition, nucleus ability and dynamic ability within the enterprise, this kind of competitive power is supported by other component factors in a cluster, including an orderly competitive relationship among its enterprises, which provides the external motive force for sustained innovation by them a developed international supply chain which ensures that enterprises can easily purchase raw material, components which are up to international quality standard, and a worldwide market network which can collect plenty of market information and supply unblocked market channels for the enterprises. A platform for regional economic development must offer the necessary condition for the development of industrial clusters, and at the same is the Figure 3.1

Hierarchical structure of regional competitive power in China

Competitive power of enterprises

Resource advantage

Nucleus ability

Dynamic ability

Competitive power of industrial clusters

Interior competition

Supply chain

Market network

Government policy

Service industry

Innovation system

Infrastructure

Human resource

International status

Platform of Economic development

Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu 115

basic factor of regional economic competitive power. The components of this development platform decide whether the chief industrial clusters in a region are rooted, that is, whether the regional environment has an active effect on running costs, opening up markets and innovation efficiency for each level of enterprises within the industrial clusters. Industrial clusters in Tianjin After decades of development, the industrial system in Tianjin is making a show of its distinguished characteristics with large-scale groups of basically foreign-funded enterprises, complete processing and manufacturing industry, and heavy industry. High-tech and capital-intensive industries, such as electronic information and automobiles, and traditional industrial clusters, such as bicycles and garments, have appeared in an embryonic form. In the process of industrial agglomeration, both high-tech industrial clusters and traditional industrial clusters each have their respective characteristics in shaping the process, features and development trends. Among high-tech industries in Tianjin, we chose the electronic information industry and the green battery industry for environmental protection. Among traditional industries there, we chose the automobile manufacturing industry and bicycle manufacturing industry. These four industrial clusters are representative in Tianjin. Taking them as our research object we can, through comparison and analysis, understand their respective characteristics, shortcomings and development trends, and thus help to improve the effect of industrial clusters, strengthen industrial competitive power and cultivate Tianjin’s new industrial clusters.

New motive force in the development of Tianjin electronic information industry In recent years, the electronic information industry in Tianjin has developed rapidly. The ratio of the electronic information industry’s output value to the gross industrial output value of the whole city increased from 18 per cent in 1998 to 24 per cent in 2001. The ratio of its value added to industrial value added over the same period rose from 14.5 per cent to 24.6 per cent in. The proportion of its pre-tax profits in the gross pre-tax profits of Tianjin has remained at about 30 per cent for a long time. In 2000, the gross industrial output value, value added and profits of Tianjin’s electronic information industry respectively reached fifth, third and second positions, respectively, in the national information industry. In 2000, total sales of the electronic information industry in China were RMB 556.4bn. Total profits were RMB 33.9bn. and the average profit rate was 6 per cent. In the same year, total sales of the electronic information industry in Tianjin were RMB 57.158bn. Total profits were RMB 6.82bn. and its proportion in total profits of the electronic information industry of China was 20.1 per cent.

116 Industrial Clusters in the Tianjin Area

Gross Industrial Output Value of Electronic Information Industry (100m. Yuan)

718.76

948.23

Ratio of Electronic Information Industry to Gross Industrial Output Value (%)

24.4

31.4

14.5

22.2

Ratio of High-tech Industry to Gross Industrial Output Value (%)

31.3

41.99

23.8

Ratio of Electronic Information Industry to High-tech Industry (%)

80.5

69.25

54.69

Ratio of foreign-funded enterprises to output value of electronic information industry (%)

94.3

87.0

Zhejiang

Jiangsu

Guangdong

Shanghai

Beijing

Tianjin

Table 3.1 Comparison of the development characteristics of the electronic information industry in six Chinese provinces and cities, 2001

1013.09 3109.91 1070.92 329.00

–

9.1

4.2

–

–

–

–

–

–

78.3

76.6*

48.1

The ratio of foreign-funded enterprises to the electronic information industry in Jiangsu is the ratio of foreign-funded enterprises to the value added of the electronic information industry. Sources: Related data of above designated size industrial enterprises in Statistical Yearbook of Provinces and Cities in 2002 and 2002 China Statistical Yearbook.

The profit rate was 11.9 per cent, twice the national level and the highest in China. A comparison of six provinces and cities whose electronic information industry has the largest scale and developed most quickly shows that the healthy and rapid development of Tianjin’s electronic information industry leads the whole country and has become the first-pillar industry of Tianjin (Table 3.1). Characteristics of electronic information industrial clusters in Tianjin Regional industries can be compared and measured by the location quotient (LQ), which expresses the comparative advantages or relative special agglomeration of a certain industry in a certain region. Also, the LQ is the

Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu 117

Jiangsu

3.46

1.54

2.36

1.08

0.44

3.29

3.27

1.50

2.44

1.2

0.52

Zhejiang

Guangdong

2.6

Specialization rate of value added, SVu

Beijing

Location quotient, LQ

Tianjin

Shanghai

Table 3.2 Comparison of the degree of agglomeration in the electronic information industry in six provinces and cities in 2001

Sources: Compiled from Statistical Yearbook of Provinces and Cities, 2002; 2002 China Statistical Yearbook.

basis for judging the local economic base, local industrial resources, local economic advantages and industrial activity tendencies. The specialization rate of value added (SVu) can express the degree of specialization in the electronic information industry. For Tianjin, these two indicators are respectively 2.6 and 3.29 (Table 3.2), ronking it respectively second and first of six provinces and cities. This shows that the electronic information industry in Tianjin has a comparatively high degree of specialization and agglomeration and has formed a certain scale of industrial clusters. Specifically, the electronic information industrial cluster in Tianjin has the following characteristics: Exogenous industrial clusters The motive force shaping industrial clusters comes from the entry of foreign-funded enterprises into the electronic information industry. The exogeneity of electronic information industrial clusters is expressed in the following aspects. The first is the dependence on foreign funds. Here, the dependence on foreign funds is indicated by the ratio between the volume of the contract foreign funds of the electronic information industry and the volume of its gross contract investment. In 2001, major electronic industries in the Tianjin Economic-Technological Development Area took up 90 per cent of the whole electronic information industry in Tianjin. The data from the technological development area can reflect the export-oriented characteristics of the electronic information industry in Tianjin, the ratio of the volume of the contract foreign funds of the industry to the volume of its contract investment having been 93.01 per cent in 1998, 89.62 per cent in 1999, 94.37 per cent in 2000 and 93.71 per cent in 2001. These ratios have shown strong dependence on foreign funds. The second aspect is the increasingly large scale of foreign funds in the electronic information industry. This indicator is expressed by the ratio of the accumulated contract foreign funds invested in the industry in the

118 Industrial Clusters in the Tianjin Area

economic and technological development area to the total accumulated contract foreign funds of all industries in the area. This ratio was 26.4 per cent in 1998, 26.03 per cent in 1999, 39.3 per cent in 2000, and 39.9 per cent in 2001. This trend tells us that foreign funds are highly concentrated in the electronic information industry. The third aspect is the ratio of foreign funds in the electronic information industry to gross funds, which the following data reflect. The ratio of Hong Kong, Macao and Taiwan and foreign-invested economy to the gross output value of Tianjin’s electronic information products manufacturing industry was 95.4 per cent in 2000 and 94.3 per cent in 2001. The ratio of Hong Kong, Macao and Taiwan and foreign-invested economy to scale income was 95.4 per cent in 2000 and 95.1 per cent in 2001. Thus foreign funds have taken up a large percentage. Industrial clusters with the structural characteristics of a ‘single core’ First of all, let us see the average scale intensity of enterprises that is expressed by the ratio of the gross output value of the electronic information industry to the numbers of enterprises. In 2001, Tianjin’s ratio was 2.68. In the same year, Beijing’s 3.26, Shanghai’s 2.43, Guangdong’s 2.19, Jiangsu’s 1.55 and Zhejiang’s 0.69. Tianjin ranked second, and its enterprises had a very large scale of production. Second, regarding the scale structure of enterprises, large-scale enterprises took up 91.37 per cent of the gross output value of the electronic information industry and 91.02 per cent of sales income in 2000. These ratios were respectively turned into 91.05 per cent and 91.13 per cent in 2001. Large-scale enterprises occupy centre stage. Third, ‘single-core’ enterprises of industrial clusters are largescale transnational corporations. The gross sales of Motorola in Tianjin were 57.8 per cent of those of Tianjin’s electronic information industry in 2000. In the same year, its profits were equal to 45 per cent of the gross profits and 74.63 per cent of profits of the whole electronic information industry in Tianjin. The profit rate was 15.3 per cent, which was higher than 11.9 per cent, the average profit rate of the whole electronic information industry in Tianjin. In 2001, the gross sales of Motorola in Tianjin took up 63.33 per cent of gross sales of Tianjin’s electronic information industry. Regarding investment structure, investment from the USA has occupied a comparatively large part of the electronic information industry (37 per cent) because of Motorola. After the USA comes Korea. Investment structural proportions from Hong Kong, Japan and Taiwan also show the structural feature of a single core. Rooting of industrial clusters and foundation of local production network The rooting of industrial clusters is, in fact, the social and cultural characteristics within the clusters and the institutional source of industrial cluster advantages. It plays an important role in the further development of high-

Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu 119

tech industrial clusters. Tianjin is a famous old industrial base in China. The development in Tianjin of state-owned enterprises has laid a solid industrial foundation, trained a large number of skilled industrial technical workers and a created 9 manufacturing industry culture, an industrial atmosphere and an institutional environment there. If foreign funds can be regarded as the direct motive force for the formation of electronic information industrial clusters, the industrial culture and institutional environment founded on the basis of the original industry are the potential motive force for such formation. The interaction and integration of the two kinds of force form a large-scale, enterprise-centred local production network where numbers of auxiliary specialized enterprises share work and cooperate with each other and where related enterprises and downstream enterprises develop in concert. Meanwhile, the interaction and integration give the economic activities of enterprises within industrial clusters their rooting in the local network. The foundation of the local production network in the economic information industry in Tianjin is realized by the interaction and integration of foreign-funded enterprises and state-owned enterprises. First, stateowned enterprises speed their steps of institutional innovation and technological improvement through pooling capital and cooperation. Second, in order to lower costs and improve market reaction ability, transnational corporations begin to seek local suppliers and sub-suppliers. At the same time, state-owned enterprises extend their industrial chain by cooperation with transnational corporations. This kind of industrial cluster with rooting has supplied a sort of glue for agglomeration that makes many enterprises stick together. It is beneficial both for building a regional innovative environment and for giving enterprises deep roots in the local area. Industrial clusters with a product chain Within the electronic information industrial clusters in Tianjin, the economic bodies connect with each other to form an inner value chain through the supply and manufacture of accessories and the production, processing and service of upstream and downstream products. It is a typical clustering mode of product chain. In this chain, three kinds of enterprises share work and cooperate with each other to form a product chain cluster with competitive power (Table 3.3). Main problems of electronic information industrial clusters in Tianjin Relatively strong dependence This kind of dependence is shown through the following two aspects. First, dependence on funds. The percentage of foreign-funded enterprises in Tianjin changed from 89.9 per cent in 1995 to 94.3 per cent in 2001, which was far higher than the national average level (73.76 per cent) and ranked first. Besides, the investment scale of foreign funds keeps increasing.

120 Table 3.3

Electronic industrial clusters in Tianjin

Type

Contract manufacturers

Characteristics

Upstream semiconductor/ key parts and union production firms

Downstream components and parts and union manufacturers

Features of Enterprises

TechnologyIntensive

InvestmentDriving

Market-Driving

Competitive Power

Mastering Key Technology and Industrial Criteria

Comparatively High productive capacity, Advanced Technology of Manufacturer and Considerable Technical Strength

Varied Products

Additional Value of Products

Highest

Participation in the Distribution of Additional Value

Relatively Low

Market Share

Considerable, with Own Network of Sale and After-sales Service

Building Stable Market by Longterm Contract with OEM Customers

Market Divided in Detail

Production Mode

Integration and OEM Manufacture by Contract Manufacturer

Digesting Design Technology of Union Firms and Producing Products According to Requirements of Given Market (EMS)

Enlarging Scale and Carrying on Plural Production

Status

Leading Enterprise Which Guides Industrial Development

Important Link in Industrial Chain

Edge

Market Entry Barrier

Patent Right and Capital Volume

Service and Quality/ Cost Advantage

Not High

Representative Enterprises

Taking Foreignfunded and Foreignholding Enterprises as the Dominant Factor, Motorola, Samsung Electronics, Mitsumi and Panasonic

Taking State-owned and State-holding Enterprises As the Dominant Factor, 754 Plant, 712 Plant, 764 Plant and 609 Plant

A Fairly Large Number of Joint Ventures and Stateowned and Stateholding Enterprises of Medium and Small Size

Sources: Tianjin Zhonghuan Electronic Information Group Co. Ltd; Tianjin Optical Electrical Communication Corporation (754 Plant); Enterprise Survey Group of Tianjin Municipal Statistical Bureau.

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Second, the strong dependence on external funds leads to the technological dependence of the electronic information industry in Tianjin. The development of the electronic information industry in Tianjin relies, in a large degree, on pooling capital with foreign businessmen and manufacturing complete sets of equipment for foreign-funded enterprises and foreignholding enterprises. Although the technology and management of the electronic information industry in Tianjin have been improved to a certain extent through pooling capital and manufacturing accessories, foreignfunded and foreign-holding enterprises still dominate in the key technology for semiconductors and overall product design. These foreign-funded and foreign-held enterprises gain the greatest additional value. In contrast, local enterprises get only the spread of peripheral technology and management knowledge, and their ability for self-development and design is limited. Institutional factors restricting further development The development of electronic information industrial clusters in Tianjin has a strong ‘path dependence’. As an initial condition for the formation of industrial clusters, basic industrial environment and institutional environment that have been created by investment accumulation, technology and human capital accumulation of original state-owned enterprises play a fundamental role in the formation of local production network. However, the further development of industrial clusters needs further innovation in the institutional network. The three main reasons are as follows. First, stateowned enterprises have small-scale, insufficient investment and slow-speed development. Regarding average scale intensity of large and medium-sized state-owned enterprises in the electronic information industry, this indicator was 0.34 in 2001, and it is far below the industrial average of the whole city (2.68). Concerning input, in 2002 there were altogether 8 ratified technical reform projects of state-owned enterprises and the total investment value was 149m., which was 14.7 per cent of gross investment value for technical reform of the whole industry, which was RMB 1,012m. Severe insufficiency of input to state-owned enterprises restrains their further development. Second, state-owned enterprises have inadequate input in technical development, low ability, weak competitive power and brain drain, and lack inner motive force for reform. From the viewpoint of intensive characteristics of industrial factors, the LPK (expressed by numbers of the employed absorbed by fixed net assets) value of large-scale and medium-sized state-owned enterprises in the electronic information industry in Tianjin was 0.115 in 2001. In contrast, the average value of the electronic information industry in the same year was 0.051. This tells us that state-owned enterprises in the electronic information industry have obvious labour-intensive characteristics and have fallen short in technology. Third, many enterprises in the electronic information industry are

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enterprises solely owned by the state. Their shortcomings, such as rigidity in system and many chiefs in management and separation, limit the development of enterprises. As a key factor in institutional network, the further reform and development of state-owned enterprises in the electronic information industry in Tianjin will play a significant role in sustained and stable development of industrial clusters. Local production network not embedded to a large extent In electronic information industrial clusters in Tianjin, foreign-funded enterprises are the important source for forming the local production network. However, in the local production network of electronic information industrial clusters in Tianjin, foreign-funded enterprises have a comparatively low degree of localization in the commercial connection of high-tech products. Regarding the product market and the factor market, the connection of foreign-funded enterprises is mainly national and international, and their technical spread is quite limited. This is reflected in the following aspects: on the one hand, some key components and parts and raw materials are imported mainly from foreign countries; on the other hand, with the coming of union production firms, firms producing accessories for key components move so that foreign-funded enterprises have a weak connection with local enterprises. Although local enterprises producing accessories are increasing, they are concentrated mainly in sectors whose additional value is low. Therefore, though the local production network of the electronic information industry in Tianjin has been founded and become a regional knot in the global network of transnational corporations, it is still in the production sector with low additional value and a peripheral position in the global network and has not been deeply inlaid in the global production system. Fragility and instability of the ‘single-core’ structure of industrial clusters One of the extremely important characteristics of electronic information industrial clusters in Tianjin is the structural one of having a ‘single core’. Such a characteristic is a necessary stage in the formation and development process of electronic information industrial clusters in Tianjin. However, in the long run, industrial clusters with it are easily affected by political and economic changes in the mother country of single-core enterprises and hence have some risk. Meanwhile, the electronic information industry is a technology-push industry. Furthermore, the market share of each singlecore enterprise in a single-core industrial cluster directly influences the development of the industrial cluster as a whole, and thus industrial clusters have market risk. Within a region, the development of leading industries is, in fact, monopolistic and lacks motive force in transferring technology to local enterprises because single-core enterprises dominate in the key technology. This makes the technical spread of foreign-funded

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enterprises limited, restricts technological improvement of local enterprises, causes further dependence of local enterprises on core enterprises, forms a vicious circle and finally leads to the fragility and instability of industrial clusters. Lack of a knowledge network connection helpful to innovation Electronic information industrial clusters in Tianjin are more or less typical product chain industrial clusters. Enterprises are connected only through sharing work in the product chain. The technology overflow effect and the study effect of foreign-funded enterprises are not clear. Because of the lack of a sound cooperation mechanism, universities and research institutes in Tianjin have failed to become an important overflow source of industrial innovation in electronic information. In addition, compared with the connection founded on the basis of products, enterprises are short of formal connection based on common technology. In particular, the information and knowledge spread mechanism that is helpful to innovation is lacking between foreign-funded enterprises and local enterprises. In order to protect a monopoly on advanced technology, foreign-funded enterprises usually manage to avoid too quick an overflow of key technology to a local area. Their technical innovation and reform have a vertical connection only with mother enterprises and have no horizontal connection with local enterprises. In such product chain industrial clusters, the cooperating R&D mechanism and interaction mode among enterprises and among enterprises, universities and research institutes have not been found. Thus the competitive advantage of industrial clusters cannot be brought into full play. Solutions for development of electronic information industrial clusters in Tianjin According to the above analysis, the future development of the electronic information industry in Tianjin should start with the following: Combining industrial advantage, policy advantage, low-cost advantage and location advantage, and exactly positioning the electronic information industry in Tianjin according to regional competitive advantage The advantages of the electronic information industry in Tianjin are reflected mainly through the following aspects: 1. Industrial advantage. Electronic information industrial clusters in Tianjin have appeared on a certain scale, and formed industrial agglomerations to relatively good effect. Moreover, the industrial clusters have acquired some mutual dependence with transnational corporations. The electronic information industry has a comparatively high ability in manufacturing accessories and a relatively complete industrial chain.

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2. Policy advantage. In the development process of the electronic information industry, Motorola and Samsung settled down in Tianjin entirely thanks to the open, and favourable policy advantage of the area. 3. Low cost advantage. As a famous old Chinese industrial base, Tianjin has a large number of skilled technical workers, a complete training system at each level and low labour force costs. These together compose the low cost advantage of the electronic information industry in Tianjin. 4. Location advantage. Tianjin is located in the centre of the Bohai Sea economic region where China’s city clusters, industrial clusters and port clusters concentrate most densely. This region has become a key investment region preferred by foreign businessmen. While making foreign investment strategy, foreign businessmen mainly consider a production base, an R&D base and an operation base. Taking the comparative advantage of Tianjin into account, foreign businessmen may locate their R&D centres and operation headquarters in Beijing and build their production base in Tianjin. The development direction of electronic information industrial clusters in Tianjin may be rationally formulated according to this basic layout. Using the development of the structure of industrial clusters from single-core to multiple-cores to form a competitive pattern within the region and to transfer and improve electronic information industrial technology With its technical advantage, transnational corporations in electronic information industrial clusters in Tianjin are in a monopolistic position. Industrial clusters with this kind of structure are not helpful for the technological improvement and industrial structure upgrade of local enterprises. This kind of single-core structure should be changed through two channels. One is that, regarding investment promotion, transnational enterprises are still the dominant factor. Tianjin should continue to keep Motorola’s central position, attract more foreign funds from Samsung and Japanfunded enterprises, and meanwhile seek investment from Southeast Asia and the developed regions of Europe and America so as to promote competition among transnational corporations. The other is that Tianjin should cultivate leading state-owned and state-holding enterprises in the electronic information industry as well as state-owned enterprises which can compete with transnational corporations. Cultivation of local industrial clusters with self-strengthening mechanisms and turning product chain clusters into innovation chain clusters so as to change regional comparative advantage into competitive advantage If the electronic information industry in Tianjin wants to realize its industrial escalation and technological improvement through a change from OEM to ODM, enterprises must have quite high technological design abil-

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ity. To gain this kind of ability depends on the foundation of a selfstrengthening mechanism that can maintain sustained innovation in technology. This mechanism can be realized through the following channels: strengthening personnel and information communication among universities, research institutes and industries, building studying-type plants, and encouraging further development of a ‘production–study–research’ cooperation mechanism through the intervention of local government. Through these channels, the mechanism of regional knowledge flow and innovation study can be strengthened so as to change comparative advantage into competitive advantage. Speeding up the steps of reform of state-owned enterprises in the electronic information industry and further completing institutional network within industrial clusters Since Tianjin is an old industrial base, its state-owned enterprises make up a large percentage of the electronic information industry. These stateowned enterprises lack competitive power and motive force, and hence they are in an unfavourable position in competition. Thus, to speed up the development of state-owned enterprises has become an important link in further completing institutional networking within electronic information industrial clusters. The development of state-owned enterprises can be divided into two cases. First, after intense market competition, some large and medium-sized state-owned enterprises have rapidly improved their technical grade and quality level. The asset quality and the technical level of these enterprises have been pushed up a gear. For example, built in 1960, the Zhonghuan Semiconductor Co. Ltd, with more than 900 employees, imported advanced technology, equipment and management methods to take it to international level. However, depending just on imports, the company was always at the stage giving low priority to technology. In order to change this kind of situation, it increased input in R&D and carried on self-exploitation and self-innovation. In 2002, the input to R&D reached 3.63 per cent of the total output value of that year. Today, more than 90 per cent of the products are researched and exploited by the company itself. The company has its own intellectual property right and its output and sales have increased by 50–60 per cent. The quality of products keeps improving. To this kind of enterprise should be given a policy environment equal to that of foreign-funded enterprises. Every favourable policy that foreign-funded enterprises enjoy should also be given to this kind of enterprise. In addition, we should support it to realize asset reorganization, to perfect the share reform of pluralistic investment bodies, and to build a competitive environment that is equal to that of foreign-funded enterprises. Second, numbers of medium-sized and small state-owned enterprises are market-driving enterprises. The blind enlargement of their scale of production may cause too much production capacity, and vicious price com-

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petition, and lead finally to their quitting the market. Government should carry on regulation, adjustment and reorganization on a case-by-case basis. As regards small-scale enterprises producing components and parts, if they have not been brought into the production unit of electronic components and parts, they may be sold so that those enterprises with some advantage can make use of venture capital risk to develop. The electronic information industry developing towards specialization, interconnection, internationalization and clustering through a combination of technology, institute and market Government can improve the technical ability of local enterprises that manufacture accessories through encouraging foreign-funded enterprises to supply drawings, training and other services. By offering favourable loans to enterprises, government may stimulate accessory manufacturing enterprises to raise their self-innovation ability so as to integrate with transnational corporations in technology. Government should stop its direct micromanagement of enterprises and turn to making policy, regulating industries, stimulating investment and constructing public facilities. In addition, it should speed up the marketing process of state-owned enterprises in order to realize integration with transnational corporations. To develop industries requires the analysis and correct understanding of the structure of both the domestic and the international market. Those low additional value products whose technology is mature and widespread should not only occupy the domestic market but also expand their market share internationally. Through accepting high-tech products from foreign countries, domestic enterprises should produce foreign famous-brand products and enter the international market with ‘Made in China’, stride forward toward the great goal of an international manufacturing base and realize market integration. With these three kinds of integration the electronic information industry in Tianjin can develop towards specialization, interconnection, internationalization and clustering. Advancing from promoting investment by favourable policy, sound infrastructure and convenient trade environment to promoting investment by improving the investment environment of enterprises in regional clusters In promoting foreign investment, the favourable policy whose main content is to reduce tax on enterprises and allow them to retain more profits has played an important role in the earlier stage of Tianjin’s opening-up and reform. However, this method has increased costs and its appeal to foreign funds is weakened not only now that, foreign funds policies of various developing countries and regions tend to be liberalized, but also and especially because the favourable degree of policy to various domestic regions has increased. Taking global competition into consideration, transnational corporations have changed their forms of operation

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around the world. First, many transnational corporations and consortia have transferred their production base of electronic information products to the Chinese mainland. They have set up research centres in China and realized the localization of R&D and service. Second, with the development of technology and the globalization of markets, enterprises should try their best to give all their attention to core competitiveness. As for activities outside of core competitiveness, enterprises should adopt specialized outsourcing. In order to make efficient use of foreign funds and speed up the development of the electronic information industry in Tianjin, investment promotion policy must be adjusted according to the investment targets of transnational corporations. Changing from the competition of ‘initiating enterprises’ to that of ‘improving investment environment’, the electronic information industry in Tianjin will finally go on its way, from dependence to independence, through improving the soft and hard environment which attracts transnational corporations, including industrial chains, enterprise clusters and the enterprise commercial environment of regional economic bodies.

Rise of the green battery industry in Tianjin A ‘green’ battery is a new type of environmental protection battery, of high quality pollution-free, which has been put into use in recent years or is being researched and exploited. Green battery production is generally recognized as high-tech industry that has rich technological content and great market potential, and its development should be given priority. National Projects 863 and 973 listed green batteries and their relative materials as a key item and gave them full backing. The Tianjin municipal government considers new energy and resources (taking green batteries as the dominant factor) as one of the three pillar high-tech industries which will be developed as a key point. Here the pillar industry means the core industry in China’s economic development. Also for Tianjin New Technological Industrial Park new energy and resources are regarded as a priority field. Basic situation of the industry In China, Tianjin has obvious advantages in developing the green battery industry. The industry in Tianjin has reached a certain level not only in R&D but also in scale of enterprise. It has a great variety of products and it has successfully opened up markets at home and abroad. Strong power of R&D and high ability of production So far, Tianjin leads in the research, development and production of green batteries in China. The Eighteenth Institute of the China Electronic Technological Corporation (original the Eighteenth Institute of the

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Ministry of Information Industry), Nankai University, the Tianjin University, Tianjin Lishen Battery Joint-Stock Co. Ltd, the Tianjin Peace Bay Power Co. Ltd, the Tianjin Jinneng Battery Co. and so on represent the research and production level of the green battery industry in China. The Tianjin Peace Bay Power Co. Ltd, the Tianjin Lishen Battery Joint-Stock Co. Ltd, the Lantian Power Co., the Tianjin Jinneng Battery Co., the Lantian Sanyo Co. and some others are the key enterprises of the industry in Tianjin. Besides these, the Tianjin Tong Yee Industrial Co. Ltd is a peripheral enterprise. The Tianjin High-Tech Industrial Park is where green battery enterprises are concentrated. This region is close to many colleges and universities, such as Nankai University and Tianjin University, which have sound technological and teaching resources. Against this backdrop, Tianjin is actively pushing ahead with its program as the green battery base. The Eighteenth Institute of China Electronic Technological Corporation was founded in 1958. It is a comprehensive institute of chemical and physical power as well as a military electronic institute. It was the earliest institute in the national battery industry and has the largest scale and most complete kinds of products. It has successfully researched more than 30 series and about 400 kinds of power products that are widely used. The Tianjin Peace Bay Power Co. Ltd was founded in September, 1996. It mainly produces and sells the communication-use Ni–MH battery, the power Ni–MH battery and its downstream products. With overall capital investment of nearly US$80m., the company is equipped with fully computerized automatic Ni–MH battery production lines. The R&D centre, grouped with pairs of experts from various academic fields, keeps pace with the fast development of world battery technology. And through the achievement of ISO9001, the company demonstrates its commitment to quality. The company is the largest Ni–MH battery manufacturer in China. It is the industrialization model base (conferred by the Ministry of Science and Technology and the Ministry of Information Industry in January, 1999) of the Ni–MH battery. The company has the most advanced production facilities and production technology for the Ni–MH battery in the world and has formed a production capacity of 60 million small-sized Ni–MH batteries and 200 million A h Ni–MH battery plates per year. Peace Bay plays a leading role in the R&D for communication and power batteries. With its own intellectual property rights, the corporation has realized significant technological innovation and is considered to have reached the world’s most advanced level. Moreover, the company is a main undertaker of the Ni–MH battery item in National Project 863. The corporation produces various types of Ni–MH rechargeable battery cells and packs, including types AA, AAA, 4/3A, D, F6, F6M, C1U cylindrical and prismatic cells and also 100-A-h, 50-A-h, 18-A-h, 8-A-h power use batteries and packs. These products provide excellent rechargeable and envir-

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onmentally friendly power sources for the Walkman, digital cameras, camcorders, two-way radios, cordless phones, laptop computers, measurement instruments and meters, power use vehicles and e-bikes, and so on The corporation also produces disposable lithium cell batteries, Li-ion batteries, zinc–air batteries, nickel–zinc batteries (under development), battery power management circuits, battery chargers, e-bikes and so on. The Tianjin Lishen Battery Joint-stock Co. Ltd, in Tianjin Huayuan Hi-Tech Industry Park and with a total occupying area of 30,000 m2 and a total built area of 24,000 m2, is sponsored jointly by eight shareholders, namely the Tianjin Jinneng Investment Corp., the Tianjin Lantian Power Sources Corp., the Tianjin Huaze Co. Ltd, the Tianjin Communication Service Corp., the SDIC Electronics Company, the Tianjin Taimen Investment Consultation Co. Ltd, the Tianjin Hi-Tech Holding Group Co. Ltd and the Tianjin Science and Technology Developing Investment General Corp. Its registered capital is RMB 193m. and its total investment has reached RMB 720m. Taking the Tianjin Institute of Power Sources as its strong R&D support, Lishen is mainly engaged in the R&D and production of Li-ion batteries, and has become the leading LIB and LIP producer in China. Lishen was founded in December 1997. With technological support from the Eighteenth Research Institute, it carries on R&D and production of green high-energy batteries and is a Li-ion battery production company with the largest investment scale and highest technology level. Lishen has independently completed the R&D for polymer batteries and has a production line that can produce 300,000 polymer Li-ion batteries per year. So far, the whole production capacity of the company has reached 50 million Li-ion batteries, the products including polymer, soft-package and automobile-use power Li-ion batteries. Thanks to Lishen’s advantages of an industrialized scale for Li-ion batteries and product technology, it was elected as a chief unit for the ‘Promotion Committee of Mobile Telephone Battery Localization’, a subsidiary committee of the Information Industry Ministry. Entrusted by chief departments of state, Lishen drafted the first ‘National Standard of Cell Phone-Use Li Battery’, which was put into practice in July 2001. In 1998, with approval from the State Development Planning Commission, the Lishen Li-ion battery industrialization project was formally launched with the aim of a 5 million annual production capacity of cylindrical cells. After successive three-phase investment and expansion, Lishen has realized an annual production capacity of 50 million cells. The advanced automatic equipment can make high-consistency products consisting of more than 30 specifications, ranging from cylindrical LIB to prismatic LIB, laminated LIB and LIP. The quality and performance of Lishen cells are on the same level as Japanese products, and some types of cells have exceeded their rivals. Meanwhile, Lishen pays much attention to

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quality management, and has proudly obtained the certifications ISO9002, ISO14001, CE and UL. The success of these third-party certifications has paved a brilliant road for Lishen to march into international and domestic markets. So far, Lishen has realized volume supplies to transnational corporations like Motorola ESG, TDI and Samsung, making it an aggressive competitor to its Japanese counterparts. Lishen has been designated as the first supplier by major Chinese mobile phone manufacturers and is steadily shipping cells to them. Founded in 1992, the Tianjin Lantian Power Sources Co. is a full funded company of the Eighteenth Institute of the China Electronic Technological Corporation. The company engages mainly in technological development and industrialized scale production of a new type of green environmental protection battery. In 2000, Tianjin Lantian Power Sources Co. began to build the production line that can produce 10 million power-driven tooluse Ni–MH batteries of high-powered Sc type. The lead–acid battery department produces 72,000 large and medium-sized maintenance-free lead–acid storage batteries and 260,000 small maintenance-free lead–acid storage batteries, which add up to 30,000 kW h. Thermoelectric cooling module products have reached an advanced level compared with the same type of products around the world. The company is China’s leading researcher on power materials. As the main sponsor, it founded the Tianjin Lantian Hightech Power Sources Joint-stock Co. Ltd in April 2000. The capital of this latter company is RMB 85.4m. It is a professional manufacturer engaged in the research, development, production and sales of rechargeable batteries, including Li-ion batteries, Ni–MH batteries, NiCd batteries and sealed lead–acid batteries. The company has more than 500 employees, with an R&D staff of more than 150, including 10 national specialists. All senior management personnel of the company have the Executive Master of Business Administration (EMBA) title. The company has filed 6 patents and 6 patents are pending. Certified with ISO9001:2000, CE and UL, the company is trying its best to satisfy every customer with high quality, competitive prices and good service. The Tianjin Lantian Sanyo Energy Co. Ltd was founded in March 1999. Its total investment is US$34.60m. its registered capital US$14.64m. The company imported first-class technology and production equipment for Ni–MH batteries from the Japan Sanyo Electrical Motor Co. Ltd. It mainly produces Ni–MH batteries with large capacity and high reliability. The annual production capacity of the company may reach 30 million batteries. The Tianjin Lantian Electric Source Co. was invested in solely by the famous Chemical and Physical Electric Source Institute – formerly the Eighteenth Institute of the Ministry of Electronic Industry. The institute is engaged in research, development and production of chemical and physical electric sources, and most of its products come up to the first standard in China, with some of them reaching international standards. Its technical

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competence in research, development and production of nickel–hydrogen batteries is on the first footing in China. The Sanyo Motor Co. is a worldfamous transnational group. Its technical competence and technology equipment for the production of nickel-hydrogen batteries are world-class. The Japan Toyota Business Co. is a comprehensive enterprise under the Japan B Toyota Co., engaged mainly in business and various services. Being jointly invested in by these three parties, the Tianjin Lantian Sanyo Co. Ltd embodies the alliance of power and power. Utilizing the technical competence of investing parties, following the newest development of technical competence of nickel–hydrogen batteries in the world, the Tianjin Lantian Sanyo Electric Source Co. Ltd will produce high-quality products to meet the demands of our age. The Tianjin Jinneng Battery Technological Co. Ltd was jointly funded by the Tianjin Jinneng Investment Company, the state-invested high-tech pioneering company of the State Development Company, Tianjin Elec-Mech International Trade Inc. and Nankai University. Having imported first-rate production and testing equipment from the USA, the company has a production capacity of 5 trillion watts’ worth of solar cells. Complete types of products and rudimentary industrial Chain In Tianjin, the production of green batteries is connected closely with market demand. Besides meeting the needs of the present market, green battery companies develop new products continuously. Meanwhile, the agglomeration effect of the green battery industry becomes more and more remarkable. Some auxiliary industrial items of green energy and resources have settled in Tianjin and an industrial chain is gradually being completed. According to the industrial situation, green battery products can be divided into three hierarchies. The first includes communication-use liquid Li-ion batteries and polymer Li-ion batteries, Ni–MH batteries, maintenancefree lead–acid batteries and so on. These batteries have realized production in batches and have acquired some market share. The second grouping includes amorphic Silicon solar cells and power Ni–MH batteries; they are in the process of construction. The third includes Zn-air batteries, fuel cell and power-force Li-ion batteries, which are at the R&D stage. Besides the abovementioned, there are some accessories of the green battery industry, such as thermoelectric cooling modules and battery materials. The Lishen Company is a production enterprise for the Li-ion battery. Its product quality has reached the level of that of Japan, the world leader. Indeed, some products have even surpassed Japanese batteries. The Lantian Power Sources Company has researched and exploited a series of batteries of large capacity. The production line for the Li-ion battery can produce 3 million batteries per year. Enterprises producing Ni–MH batteries include Peace Bay, Tianjin Lantian Power Sources and Lantian Sanyo. The Ni–MH battery that was

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independently researched and developed by Peace Bay has reached the world’s most advanced level and supplies an ideal power source for partly power-driven bicycles, fully power-driven bicycles, motorcycles, powerdriven cars and aviation. The production capacity of Lantian Sanyo is 40 million Ni–MH cells and 10 million batteries and its production level is the best in the world. Maintenance-free lead-acid battery. The Tianjin Lantian Power Sources Company’s 12 V, 3 A h battery has a 10-year history of exports to the USA and dominates the market for mowers. Its lead–acid battery with high power has been used in Beijing’s trolleybuses. In 2001, the annual production capacity of Lantian Power Sources Company was 110,000 and production value was RMB 23.4m. Now the company is preparing to extend its production scale so that its production capacity can reach 80,000 kW h. Thermoelectric cooling module. The technology for thermoelectric cooling modules is a kind of new refrigeration technology without any pollution or noise. The products of the Lantian Company have reached the world’s advanced technology level. The company has developed more than 40 series of products and 80 per cent of them are exported. At present, the annual production capacity of thermoelectric cooling modules is 500,000. Battery materials. The Lantian Power Sources Company has the production technology of cobalt that is necessary to produce LiCoO2. In battery materials, the production scale of cobalt has reached 100 tonnes per year. The company has developed and produced dozens of battery materials of the highest quality. And new projects the company is preparing to undertake include a high-quality, low-cost production line for lithium cobalt oxide, with an investment of RMB 20m. The first phase of the project is to build a production line that produces 400 tonnes of lithium cobalt oxide per year to meet the needs of the domestic market. Vast range of market prospects and large development potential It is reported that the total market value for batteries and storage batteries was US$28.5bn from April 1999 to March 2000. Of this, the total market value for batteries was US$10.1bn, the total market value for lead–acid batteries US$11.8bn and the total market value of small-type storage batteries US$6.5bn. It is also reported that, in the small-type battery market, new NI–MH batteries, Li-ion batteries and polymer Li-ion batteries have increased by threefold in the 10 years since 1990. Moreover, the market demand of Li-ion and polymer Li-ion batteries will go on rising. Within China, the national economy is developing rapidly and the information industry is making giant strides. This has spurred the improve-

Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu 133

ment of chemical power sources within the country. Accordingly, new products are constantly emerging and the applied field of battery power source is widening continuously. In particular, the research and development for wireless computing batteries is now in the ascendant. The domestic market demand for electronic facilities, such as mobile telephones and portable computers, is increasing. Especially with the development of the communication industry, the sales volume of mobile phones keeps rising. Correspondingly, demand for batteries, as an accessory, will also rise. Besides the accessory market, the capacity of the products that substitutes battery is still large because of the special national conditions. At present, China is a leading production and trade country for semiconductor materials and its market scale ranks fifth. These factors have all contributed to an increased market opportunity for the green battery industry. According to the type and purpose of green batteries, products can be divided into small Li-ion batteries, small Ni–MH batteries, power-use Li-ion batteries, power-use Ni–MH batteries and maintenance-free lead–acid batteries. In the field of green battery industry the products of Tianjin’s green battery industry have considerable competitive power. In 2001, the production capacity of cylindrical LIB and prismatic LIB cells was 6 million and 110 million, respectively. Their actual outputs were 600,000 and 18.8 million. In 2001, the production capacity of the Lishen Company reached 5 million cylindrical LIB cells and actual output was 500 thousand. The percentage of production capacity and the percentage of real output in the country as a whole were 83 per cent and 83 per cent, respectively, which ranked first in the country. In the same year, the production capacity of the Lishen Company reached 10 million prismatic LIB cells and actual output was 1.13 million. The percentage of production capacity and the percentage of actual output as a percentage of the country as a whole were 9 per cent and 6 per cent, respectively, which ranked third in the country. In the period of the Ninth Five-Year Plan, the Tianjin Lantian Power Sources Co. undertook the ‘Research on the Power System of the Li-ion Battery for Electrically Operated Automobiles’ project, at the behest of the Ministry of Science and Technology. The company researched and developed 55-A-h Li-ion batteries and an knowledge management system. The project is cutting-edge and the Li-ion power researched by the company shows good overall quality and has a vast range of prospects. In 2001, the annual production capacity of the Tianjin Peace Bay Co. Ltd was 40 million batteries and actual output 22 million, which respectively took up 25 per cent and 18 per cent of those of the whole country. The annual production capacity of Lantian Sanyo Co. Ltd was 30 million and actual output was 22 million, which respectively took up 19 per cent and 18 per cent of those of the whole country. In output, both the Tianjin Peace Bay Co. Ltd and the Lantian Sanyo Co. Ltd ranked second.

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The Sanyo Company is the world’s largest production enterprise of Ni–MH batteries. It is preparing to import six of the world’s most advanced production lines so that its output can reach 200 million in 2004 and its sales income can reach RMB 600m. Lead–acid batteries are the only kind of battery that is produced in batches for electrically operated vehicles. The technical level of the Tianjin Lantian Power Sources Co. is the highest in China. As already stated, the company’s high-efficiency lead–acid battery has been used in Beijing’s trolleybuses. Moreover, its 12-V, 3-A-h battery has some market share in the USA. Shortcomings and problems After 10 years of development, the green battery industry in Tianjin has a certain scale. However, as a growing industry, it still has some problems that demand prompt solutions: 1. The industrial chain needs further improvement and industrial clusters remain to be developed. The industry has not formed a rational enterprise group structure that is adaptable to market competition. The whole level of the industry and the emergence of the market need improvement. 2. Compared with international enterprises, green battery enterprises in Tianjin have inadequate R&D input and insufficient technological innovation. 3. In spit of advanced equipment and a high degree of automation, production enterprises have a low degree of flexibility of production. Fewer types of products, high costs and the slow speed in meeting market needs are the main reasons why production energy cannot be brought into full play. 4. In the long run, the production capacity of domestic battery materials is limited. This, plus quality problems, means that production is controlled by foreign suppliers and that generous profits are earned by foreign battery material companies. Although the enterprises in Tianjin are producing batteries, there are a lot of problems that haven’t been completely solved. Industrial construction By 2005, Tianjin New High-Tech Industrial Park will be the largest green battery base in China and the green battery industry will have become a pillar high-tech industry. By then, Tianjin will have become a region where domestic high-energy battery enterprises concentrate most densely and types of battery production are most complete. By 2005, a group of highenergy battery industrial clusters, such as Peace Bay, Lishen, Lantian Power Sources, Jinneng Battery and Lantian Sanyo, will have been formed within

Table 3.4

Output and output value of main products in the green battery base in Tianjin (10,000/RMB 100m.)

Type of product

2001

2002

Output

Output value

Output

Output value

Li-ion batteries

1,500

0.25

1,500

Ni–MH batteries

4,561

3.1

7,852

Amorphic silicon

0

0

0

2003

2004

2005

Output

Output value

Output

Output value

1.0

5,000

9.55

5,000

9.55

6.9

12,150

0

2.5 MW

10.9 0.625

21,080 5 MW

19.0 1.25

Output 5,000 3,000 10 MW

Output value 9.55 31.0 4.0

batteries Source: Tianjin Statistical Yearbook 2003.

135

136 Industrial Clusters in the Tianjin Area

the base. Furthermore, the production capacity will have reached 50 million Li-ion batteries, 300 million Ni–MH batteries and 10 MW amorphic silicon solar cells. Sales income of leading products in the base will have reached RMB 5.7bn. and, including other battery enterprises and accessory manufacturing enterprises, this income will have reached RMB 10bn. The output and output value of leading products within the green battery base are as shown in Table 3.4. The product power targets for 2005, are for Li-ion batteries to have a market share of 30 per cent, for Ni–MH batteries will try to have a market share of 80 per cent and for maintenance-free lead–acid batteries a market share of 30 per cent. Regarding the amorphic silicon solar cell and power Ni–MH battery plant that is being built, the first phase of the project should be shortened and the second phase should start as soon as possible in order to enable large-scale production to take place. In the case of the Zn air battery, fuel battery, power-use Li-ion battery and battery materials that are being researched and developed, trial production should begin soon so as to turn achievements into productive forces. Furthermore, a complete battery industrial chain, as well as a world-class R&D institute, should be built within the green battery base. The leading position of technology should be maintained in order to preserve development strength of the base. Tianjin should build up as an influential trade centre related to the battery industry, making it a growing point that can push sustained economic development. Industrial suggestions In order to promote the development of the green battery industry, both enterprises and related departments of government should take some active measures. Enterprises should do as follows: 1. Speed up the steps of development and set market position. Enlarge the scale of enterprises and try to occupy a market share of 30 per cent through cooperation, mergers and acquisitions in order to have the decisive right to speak for the industry. 2. Strengthen the technological development power and increase the central competitive power of enterprises. In order to be adaptable to the rapid changes of the market, enterprises should have comparatively strong research power. So far, main enterprises in the base have built the ‘R&D Centre’. In future, enterprises will still need to increase R&D input and try to keep their technological advantage. 3. Strengthen international cooperation, including developing joint ventures and cooperate on research. Improve technology of enterprises and gain the competitive advantages in markets at home and abroad. Establish effective institutes so as to attract, cultivate and keep qualified personnel.

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4. Widen the channels for raising funds and strengthen the actual power of enterprises. Green batteries are to an industry that the country encourages to develop and advance. The enterprises in the green battery base should actively ask for special projects and seek support for government bonds to create favourable conditions for their development. The government should do as follows: 1. At municipal level, in both finance and organization, support enterprises in the base to develop fuel batteries. Government should also decide the research and development direction for fuel batteries and suggest R&D objects that focus on PEMFC and SOFC. 2. Encourage the development and production of upstream and downstream products for batteries. Adopt an open strategy and favourable policies that will attract battery material companies and technological development companies. Meanwhile, battery companies should also extend their products to downstream products, such as power-driven toys, power-driven bicycles and power-driven automobiles. 3. Provide services for investment and raising funds, services for personnel exchange and training, services for information network, services for technological property right trade, services for returned personnel exchange, services for technical consultation, services for social consultation and support services for government purchase. 4. Strengthen the connection base for the green battery industry, mobile phones, digital audio-visual equipment, electronic mobile commercial systems, economical cars and motorcycles. 5. Strengthen environmental protection legislation, protect the green energy industry, increase propaganda and report to green energy (mainly including Ni–MH batteries and Li-ion batteries) enterprises and encourage the use of Ni–MH batteries within society. 6. Departments of technological supervision, industrial and commercial management and customs should devote major efforts to attacking fake commodities, purify the market environment, regulate market order and standardize market activities in order to create a fair competitive environment for enterprises. 7. Provide support on equipment import tariffs, enterprise income taxes and project construction taxes and fees. 8. Build nationwide green battery trade centres and green battery joint research centres including research institutions and enterprises.

Development environment, characteristics and direction of automobile industrial clusters in Tianjin China has a comparatively high tax rate on imported automobiles, so its automobile industry does not have a high degree of participation in inter-

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national competition. Since reform and opening up to the outside world, the development of the automobile industry has been promoted by foreign funds. From the world’s angle, China’s automobile industry is one of the industries with the highest degrees of internationalization. Accordingly, to probe into the development of the automobile industry in Tianjin we must begin by examining the domestic and international background. Domestic and international background of the development of automobile industrial clusters in Tianjin International background The automobile industry has a long life-cycle and will not decline. However, for it to stay this way, constant changes in both organization and technology are required. The following international background of the development of the automobile industry reflects this trend: 1. During the 1990s, mergers and the reorganization of American, European and Japanese enterprises have formed an international market structure of oligopoly. In that period, the world’s automobile industry formed the ‘6 + 3’ oligarch competition pattern in which American, European and Japanese enterprises occupied the leading position. Reorganization was not limited to automobile enterprises. Mergers and reorganization also occurred in the components industry so as to form the ‘16 + others’ pattern for components. Global large-scale reorganization take the chain of investment, R&D, production, purchase and sales of the automobile industry across borders to realize optimized distribution throughout the world. The design and exploitation of products no longer simply copy conform to domestic modes and begin to meet diversified needs. This global adjustment has completely changed automobile industry strategy from scrambling for markets in developed countries to scrambling for markets worldwide. Therefore, the development of an automobile industry in any developing countries faces serious challenges. 2. The main players in the auto industry scramble for markets in developing countries in the form of exports and direct investment. Seen from the standpoint of the global automobile consumption market, we find that the economic situation in the USA, EU and Japan is not optimistic, and that consumption is generally in a slump. In sharp contrast to that, the prospects of the automobile industry in developing countries are rising. Especially in some Asian countries such as China and Korea, automobile sales keep increasing. Take China as an example. In the past ten years, the average annual growth of the domestic automobile market was 15 per cent, of which the average annual growth of the car market was 24 per cent. At present, the average profit rate of the automobile manufacturing industry is about 10 per cent. Therefore, to enter

Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu 139

3.

4.

5.

6.

rapidly into this expanding auto market has become the common strategy of the transnational automobile oligarchs. This has created much fiercer competition among the main players for the markets of the developing countries. The scramble is expressed in the form of investment and trade. Moreover, directly exporting automobiles and intermediate products to developing countries is another way of entering the market. The automobile industry has developed into an industry with typical inner trade characteristics. Global reorganization and the scramble for markets in developing countries, which are led by the transnational automobile magnates, have pushed the automobile industry to the present typical inner trade characteristic. The rapid development of trade within transnational corporations forces more and more intermediate products to enter become the mainstream of the automobile trade and makes the ‘nationality’ of automobile products vague. The automobile industry uses its ability of continuously exploiting products to prolong its ‘mature period’. Strategy reorganization and the operation of trade and investment cannot ensure profits are earned continuously. In order to ‘thrive and never to decline’, the automobile industry must continuously carry on R&D for new products. At present, the funds needed for R&D on new products are increasing, mainly for the following reasons. First, diversified market demand and increasingly fierce competition have spurred the pursuit of new products; it is the introduction and exploitation of new products that usually decides success in competition. Second, regulations on environmental protection, safety and energy saving are more rigid in many countries. Development and integration with new technology has become a new focus of industrial competition. The exploitation of new products is expressed by constant integration with new technology. Another such focus is the automobile industry introducing the latest achievements in high-tech fields, such as new materials, new energy and micro-electronics. Meanwhile, by means of exploitation, the international automobile industry makes use of information to carry on technological cooperation. The system of the international supply chain is increasingly open. In order to lower the costs of production and R&D, the international automobile industry has begun to abandon the traditional organizational form of the vertically integrated division of labour to reduce the production and stocking of components and parts by a large margin, to increase outsourcing and to realize the global purchase of components. The partner relationship of the vertical integration of the division of labour between automobile enterprises and component enterprises has gradually been displaced by a network organizational mode that regards a contract as a tie. Thus the international supply chain is increasingly open and is realizing global distribution.

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Domestic background The history of the development of China’s automobile industry is not short. However, almost all the significant changes took place after reform and opening-up to the outside world, even in recent years. Furthermore, it is expected that China’s automobile industry will experience more radical changes in the future. The trends of the automobile industry are as follows: 1. With China’s entry into the WTO, the protected position of the automobile industry has gradually weakened and its degree of participation in international competition has risen. Protections on imports and exports, retail, financial services, entry restrictions and other aspects will be cancelled or lessened, and the industry will have to face fierce international competition, a rigorous test for its enterprises. 2. The market structure of a group oligarchy that takes transnational automobile enterprises as the centre is being formed. After China entered the WTO, ‘acquisitions and mergers’ in China’s automobile industry surged forward and the dynamics of reorganization are unprecedented. Through reorganization and integration at home and abroad, international automobile manufacturers’ 6 + 3 and component manufacturers’ 16 + others entered China in all aspects. The group oligarchy has what we call the ‘3 + 9’ pattern, being headed by three giant groups. 3. With economic growth and development, the formation of a high- and medium-income class has cultivated a rapidly growing automobile consumption market, pushing the development of the industry. In addition, policies such as tax and fee reduction or exemption and automobile credit will appear. All this has led both transnational automobile enterprises and domestic automobile manufacturers to have optimistic expectations of future economic growth. 4. Competition between local governments on policy that fosters the automobile industry has become fiercer. As the resources of the production, purchase and selling network of the automobile industry achieve global distribution, local governments grow into major players. The suddenly formed 3 + 9 pattern of China’s automobile industry cannot do without the support of local governments. To lay a solid foundation, various regions are competing in setting out automobile industrial policies. They regard the automobile as a pillar industry and suggest cultivating and developing component industrial clusters. 5. The market for automobile accessories continuously raises its nationalization rate. At present, China has more than 700 foreign-funded enterprises manufacturing automobile accessories. Almost all the world-famous enterprises manufacturing automobile accessories have built joint ventures or foreign-funded enterprises in China. Among them, the nationalization rate of leading automobile brand names has been above 80 per

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cent and the rate of the nationalization of cars has shortened from 6–8 years to 3–4 years. Development characteristics of automobile industrial clusters in Tianjin The automobile industry in Tianjin is an important part of the national industry. Especially in the twenty years since reform and opening-up to the outside world, the industry in Tianjin has both risen and fallen. It is now facing the development opportunity of starting an undertaking once again. After decades of development, automobile industrial clusters in Tianjin have appeared in an embryonic form and taken on development characteristics. Mastering the development characteristics is the prerequisite of cultivating sustained competitive advantages for the automobile industry in Tianjin. The development characteristics of automobile industrial clusters in Tianjin are as follows. The accumulated development basis of the industry forms advantage of human resources. The mandatory distribution mode of resources in the period of China’s planned economy made Tianjin an important machine-building base. Both the first tractor and the first mini station wagon in the history of New China were born in Tianjin. Also, Tianjin formed a production system of components and parts in order to coordinate with the production of automobiles. In particular, Tianjin accumulated some technological and human resources, which played a significant role in its becoming a production base of light-duty cars in the 1980s. In the special development environment of the country, the industrial development basis that has been formed in history is a two-edged sword. On the one hand, the close production system leads to too much dependence on a single strength (assembly production enterprises). This kind of dependence prevents the production system from having any dynamic competitive power. On the other hand, once the development environment changes, human resources, as the active main body in the development, may form a kind of innovative strength outside the original production system and thus become a main source of competitive advantage. The unique product positioning under the national industrial policy has gained some pre-emptive advantages The development of the automobile industry in China shows obvious signs of government guidance. In particular, the state restrains the product positioning of enterprises through production entry restrictions. The development of the automobile industry in Tianjin began from the production of machines for agriculture and light-duty lorries and formed a distinct product dislocation together with the traditional FAW and Shanghai

142 Industrial Clusters in the Tianjin Area

Automobile Group corporations. In order to consolidate this kind of product dislocation, when Tianjin began the production of cars in the 1980s, the industrial policy of the state positioned enterprises in Tianjin to produce economical cars differing from the car enterprises such as the FAW and the Shanghai Automobile Group. The rapid development of the automobile industry in Tianjin from 1985 to 1995 is attributable to the increase in demand for economical cars. However, with the state loosening its restrictions on product positioning, economical cars have become a competitive focus in China’s automobile market. And the uniqueness of the product positioning of the automobile industry in Tianjin has begun to disappear. The industrial agglomeration that regards Toyota as the centre exists together with original industrial agglomeration The automobile industrial clusters in Tianjin are composed of two different parts. One is the Tianjin Automobile Group Corporation, a state-owned joint-stock company, including assembly and component enterprises of Xiali cars, Huali cars, Yanpai light-duty lorries and Sanfeng station wagons. The other is a foreign-funded enterprise cluster that takes Toyota as the centre. At the time Toyota planned to build automobile production enterprises in Tianjin, the main enterprises manufacturing automobile components and parts in the Toyota system began to enter Tianjin. Hence, as soon as with its Toyota entered Tianjin automobile production enterprises, the enterprise clusters of automobile accessories including tens of enterprises were rapidly formed around it. Enterprises of key components and parts, such as engines, air conditioners and seats have played a significant role in enhancing the vigour of Tianjin’s enterprises manufacturing components and parts. What exists together with the new enterprise agglomeration of Toyota is the enterprise agglomeration within Tianjin Automobile Group. At present, it has a longer history and a more stable relationship and greater competitive pressure. The fixed trade relationship between automobile enterprises and component enterprises has weakened the competitive environment for component enterprises. Therefore, when the pulling power of automobile enterprises is weakened, the enterprises manufacturing components and parts will land themselves in a predicament and have no power of infiltrating into other enterprises. This is also the reason why the scope of another enterprise cluster is gradually widened. Participation in the formation of a domestic oligarchic market structure through alliance with the FAW Competition within China’s automobile industry is fundamentally in the process of change from monopolistic competition to oligopoly. However, the usual market structure for the automobile industry in a developed

Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu 143

country is an oligopoly and the rate of market centralization is 95 per cent or so. Hence, with the increasing degree of market competition in China’s automobile industry, the general trend is to change toward the market structure of oligopoly, and for the existing automobile enterprises it is an advisable choice to participate in this. On 14 June, 2002, the signing ceremony for the joint reorganization of the FAW and the Tianjin Automobile Group Corporation was solemnly held in the Great Hall of the People in Beijing. The reorganization took the form of a share transfer. The Tianjin Automobile Group Corporation held 84.97 per cent of the share rights of the Tianjin Automobile Xiali Stock Co. Ltd. At the ceremony, the Tianjin Automobile Group Corporation transferred 60 per cent of the 84.97 per cent share rights to the FAW, namely 50.98 per cent of the total capital stock of the Xiali Company. Meanwhile, the Tianjin Automobile Group Corporation transferred all the 75 per cent of Chinese share rights that were held by the Huali Company, one of its subsidiary companies, to the FAW Group Corporation. The alliance of the Tianjin Automobile Group Corporation and the FAW Group Corporation made use of the tie of assets to connect the FAW Group Corporation and the Toyota Company of Japan. Thus the three parties participated in the competition in the formed oligarchic market structure as a whole. For Tianjin’s automobile industry, possible participation in the competition in the formed an oligarchic market structure is no guarantee of occupying a position in the competition. Only the dynamic competitive power of automobile industrial clusters can decide the future market competitive position of Tianjin’s automobile industry. To acquire this kind of dynamic competitive power requires hard work by enterprises and effective action by government. Because the industry is in the key stage of change from comparative advantage to competitive advantage, the competitive advantage of the industry is not outstanding. Comparative advantage is mainly expressed as low production cost, caused by resource endowments, geographical position and the availability cheap of factors production. Low production costs are the first manifestation of industrial competitive power. Comparative advantage is easy to imitate and change and cannot be sustained for a long time. If comparative advantage can be said to be a kind of cost advantage, then competitive advantage is expressed as a kind of technological advantage. An enterprises can keep its sustained competitive advantage if its competitors cannot imitate its technology or if it can innovate faster than or at least as faster as its competitors can. The development of Tianjin’s automobile industry is attributable to its comparative advantage. Particularly under the effect of national industrial policy, unique product positioning has made Xiali cars the main brand

144 Industrial Clusters in the Tianjin Area

purchased by individuals in China. Economical cars are the main area on which competition in the future automobile market will focus and the bright prospect of market demand and fewer entry barriers attracts more and more enterprises to enter into their production. In addition, overall price competition directly attacks the price advantage of Tianjin’s products. All of these factors lead to the change from seeking comparative advantage to seeking competitive advantage. Whether this change can be realized will directly affect the competitive power of Tianjin’s automobile industry. Accordingly, the automobile industry in Tianjin takes cultivating technological advantage as the breakthrough and its change from comparative advantage to competitive advantage is in a crucial stage. The competitive power of enterprises manufacturing automobile components is in decline on the whole, but some enterprises suddenly come to the fore Relying mainly on the Tianjin Automobile Group, the enterprises manufacturing automobile components were very prosperous and had considerable strength in the production of accessories. In the middle 1980s, the market occupation rate of automobile components in Tianjin ranked second in the country and its profits ranked third. As Germany’s Volkswagen, America’s General Motors Corporation and other companies respectively founded joint ventures in Shanghai, a group of enterprises manufacturing components rapidly emerged around that city. These enterprises began to grow in a comparatively tough market and the super-critical customers made them feel the market pressure. For Tianjin, however, the product positioning of the Tianjin Automobile Group has not played a positive role in improving the competitive power of component enterprises. In addition, no supercritical customers have applied pressure, so there has been no strengthen of industrial competitive power. The comparatively close enterprise clusters manufacturing components have no opportunity to accept incentives from the outside world. The innovative ability of the network system of enterprises has not been cultivated at all and the network system lacks any dynamic ability that is adaptable to the changes in environment. Correspondingly, the competitive power of enterprises has begun to decline. However, when the competitive power of the original enterprises manufacturing components and parts began to decline, some enterprises manufacturing components and parts outside the system were, with their high-quality products, inlaid in the system of the international supply chain, and successfully played the role in the supply chain of transnational corporations, gaining a sustained competitive advantage with their technology. At the beginning of their development, these enterprises had managed to squeeze into the relatively open supply chain which the transnational corporations founded in Chinese enterprises in order to seek development opportunities, just because they had no way to infiltrate the system of the supply chain of the Tianjin Automobile Group Corporation. This has, from

Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu 145

another angle, shown that a market environment with pressure is the essential condition for cultivating the competitive power of enterprises. The localization system for R&D of products has not been formed Generally speaking, Tianjin’s automobile industry has not formed its localized R&D system. Xiali cars, the main product of the Tianjin Automobile Group, were developed on the basis of advanced technology and production equipment that were imported from Japan. Owing to its insufficient R&D ability and single type of product, the Tianjin Automobile Group has not been able to rely on product innovation to create new market value. Accordingly, the enterprises manufacturing components and parts in the system find it impossible to have a corresponding R&D ability. Japan’s Toyota Company has brought improvement in production management and operation concepts to Tianjin’s automobile industry. However, the effect of technological spread has not appeared at the most crucial technological link. This may, on the one hand, be attributed to the conservative attitude of Japanese enterprises on technical transfer. On the other hand, it may be because Tianjin has not formed a localized R&D environment that takes qualified personnel and mechanism as a prerequisite. Enterprises and industries cannot gain sustained competitive advantage without their continuous improvement from the bottom of the value chain to the top. To establish a localized R&D system with competitive power is, beyond doubt, a way to indicate an intention to reach the top. The means by which government affects industrial development are facing the requirements of change In the process of cultivating industrial clusters with competitive power in a region, the function of government is to create a environment for regional development. Objectively speaking, there are two parts that are interrelated and at the same time separated in Tianjin’s automobile industrial clusters. One is the Tianjin Automobile Group, a state-owned stock company, which includes more than fifty enterprises. Owing to historical evolution, the management methods of government have yet to adapt to the market. This part of the cluster is a closed system with a high ability to produce accessories. The vigour produced by institutional change has yet to be released in Tianjin Automobile Group. In particular, human resources are still limited by the system. However, with the alliance with the FAW Group, the closed system has begun to weaken and the management methods of government are facing the requirements of change. The other part of Tianjin’s automobile industrial clusters is the foreigninfiltrated enterprise clusters centred on the Tianjin Toyota Company. As restrictions on national industrial policy are loosened, the degree of foreign infiltration is rising. Because of the special position of this part, the effect of government on it is close to the methods employed under conditions of a

146 Industrial Clusters in the Tianjin Area

complete market economy. Hence, in order to keep and extend the contributions of these enterprises to local economic development, government must start creating a regional development environment that can attract enterprises – that is, begin making a new economic platform. Construction direction of automobile industrial clusters in Tianjin The above description of the development characteristics of automobile industrial clusters in Tianjin is an objective account of the present situation. Judged by the standard of competitive power and especially by the standard of constructing industrial clusters with dynamic competitive power, Tianjin’s automobile industrial clusters have many aspects that need to be improved. The construction directions are as follows. To construct two interrelated systems of value chain As the value chain of the industry becomes increasingly open and international, industrial competition has changed from competition between enterprises to competition between value chains. The capability of being inlaid in a value chain with international competitive power is an essential prerequisite to measuring and improving the competitive power of enterprises. To take the present situation of Tianjin’s automobile industry, two interrelated systems of value chain may be constructed. These are the system of value chain in which the Toyota Company is the main part and the system of component value chain that faces large international corporations. As the value chain of the industry becomes increasingly open and international, transnational corporations have become the central part that maintains the value chain. Toyota Company is an international tycoon enterprise in the automobile industry. So far, part of its value chain has been extended to Tianjin. This is a rare opportunity for Tianjin’s enterprises manufacturing components and parts. However, the system of value chain of which Toyota Company is the main part has not been completely formed. It has two kinds of manifestation. On the one hand, the length of the value chain is limited. In particular, the activities that can produce great value have not appeared at all. On the other hand, only a few local enterprises manufacturing components can be inlaid in the value chain in which Toyota is the main part, and they tend to be further reduced. What exists together with the system of value chain in which the Toyota Company is the main part is another system of component value chain that faces the large international corporations. So far, the latter chain has not been formed and owing to the generally weakened competitive power of Tianjin’s enterprises manufacturing components. From the point of view of cultivating automobile industrial clusters, these two kinds of system of value chain supplement and complement each other. Enterprises are the main part in constructing the system of

Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu 147

value chain, and innovation is the essential power in constructing the value chain. For government, maintaining the development environment favourable to innovation is more or less manifestation of its functions. In the above two different value chains, the functions of government are different. In the value chain in which Toyota Company is the main part, government should bring its function of being an information centre into full play. In the component value chain which faces large international corporations, the function of government is to create a looser development environment for privately owned enterprises and medium- and small-sized enterprises, so that environment is no longer a barrier to the development of enterprises. To further participate in the competition of oligopoly market structure in the form of the whole industrial cluster Nowadays, market competition is gradually changing from competition between enterprises to competition between value chains and even competition between industrial clusters. The number of oligarchs in the market structure is not purely the number of enterprises. Instead, it is the number of enterprise alliances that appear in the form of value chains and industrial clusters. If Tianjin’s automobile industry wants to occupy a certain position in the market structure of oligopoly in China in the future, it must participate in fierce market competition in the form of the industrial cluster as a whole. At present, the automobile industrial clusters in Tianjin have several factors that are favourable to improving competitive power. One is the existence of Toyota, another is the accession of the FAW Group and a third is development advantages such as human resources, which are accumulated by enterprises like the Tianjin Automobile Group after a long period. Of course, these favourable factors are not necessary to bring overall competitive advantages. Institutional restrictions may be a barrier and competition within industrial clusters is also an essential condition. Therefore, from the angle of government, to loosen institutional restrictions is a prerequisite in order to facilitate the overall relationship of competition and cooperation between automobile industrial clusters. Medium-scale and small-scale enterprises with quality management and innovative ability are an important factor in maintaining the competiveness of the value chain The automobile industry by its nature contains a division of labour. In order to improve the quality of the automobile, the quality of components, raw materials, production machinery and equipment must be improved at the same time. In countries with a developed automobile industry, the medium- and small-scale enterprises producing components and parts that have competitive advantages play a significant role.

148 Industrial Clusters in the Tianjin Area

The value chain composed of large numbers of medium- and small-scale enterprises with quality management and innovative ability is the kind of value chain that can retain dynamic ability. In order to construct such value chains, Tianjin needs to take institutional changes and development environment optimization as the breakthrough. Through institutional changes, the potential of enterprises can be spurred onwards under the pressure of market competition, and enterprises can bring into play the full effect of the survival of the fittest. For those medium- and small-scale enterprises manufacturing components outside the present system, optimizing the development environment is crucial to improving their competitive power. At present, though those enterprises are not numerous, they have a fairly high technological ability and quite a strong innovative ability and can participate in the system of supply chain of large international corporations. To promote the change of value chain from comparative advantage to competitive advantage and even to dynamic competitive advantage There is no need for reticence in recognizing that the market competitive power of Tianjin’s automobile industry comes mainly from its comparative advantage, namely the price advantage caused by low costs. However, the advantage of low costs and low price is the advantage that is the easiest to displace and surpass. Hence, for Tianjin’s automobile industry, it is extremely urgent to realize the change from comparative advantage to competitive advantage caused by technology and brand. At present, Tianjin’s automobile industry has some favourable conditions for creating competitive advantage. The first is that its advantage of the commodity brand is increasing. With the settlement of Toyota and the alliance of the FAW and Tianjin Automobile, the product structure of cheap automobiles that was represented by Xiali has been changed. The value of Toyota’s international brand and the intangible assets of the FAW must be further exploited. The automobile industry of Tianjin should make use of the high quality these brands have to form the quality requirements for those enterprises manufacturing components so as to force the enterprises to change from seeking cost to seeking technology and quality. In this process, those enterprises should create the brand effect for components and also use brand to enhance the improvement of technical ability. Next comes getting the automobile industry to acquire the competitive advantage of technology. In the present situation, it is not realistic for enterprises to complete this kind of improvement by themselves. Accordingly, government must bring into full play its corresponding functions to create a mechanism favourable to technological overflow. For industrial clusters, dynamic competitive advantage is a kind of manifestation of higher ability. It takes comparative advantage as the prerequisite. However, from the angle of industrial development in the long run, it is about making sure to research the dynamic ability that makes industrial clusters

Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu 149

adapt to changes in the development environment at the same time as creating competitive advantage. In this aspect of cultivating industrial dynamic competitive advantage, government is able to develop its ability to the full. Government plays a positive role in cultivating industrial dynamic competitive advantage The dynamic competitive advantage of industry refers to the ability by which regional industry can adapt itself to changes in the development environment and keep its sustained competitive advantage. The main embodiment of this kind of advantage is whether to form a regional innovation environment. In creating a regional innovation environment, government has full scope for its talents. Government functions can be divided into two types. One is to invest in building a good regional transport system, an information communication network, a platform of information exchange between enterprisers and an attractive natural and social environment. Regarding the automobile industry, Tianjin should consider guiding enterprises to forming open, non-governmental associations and studying the methods of connecting enterprises with technology, like those the Toyota Company has formed in Japan, in order to push forward technical communication and spread it among enterprises. The other is to provide data and information services for enterprises and industries, to perform legal supervision, to establish industrial regulations, to enhance the combination of government, production and study, and to develop education to supply the qualified personnel needed by the industry. Regarding the automobile industry, long-term plans for automobile fairs that are just in their beginning stage should be made. Government should promote the foundation of the Tianjin Toyota Automobile Research Institute, improve ability for cultivating present qualified personnel in automobile technology, provide special fund support for R&D activities for medium- and small-scale enterprises and offer measures supporting the utilization of academic achievements in colleges, universities and research institutes. In brief, in cultivating industrial dynamic competitive advantage, government should first make clear its positive attitude and then take practical measures to ensure its influence.

Analysis of the formation and development of Tianjin’s bicycle enterprise clusters Appearance of the problem Tianjin is the birthplace of the bicycle industry in China. In the 1970s and 1980s, Tianjin’s bicycle industry was a very prosperous one and became the pillar industry of Tianjin. From 1950 to 1990, it realized profits of RMB2.42406bn in all and tax of RMB1.68681bn, in total RMB4.11097bn. Tianjin’s bicycle industry made great contributions to the economic devel-

150 Industrial Clusters in the Tianjin Area

opment of Tianjin. However, with the development of the reforms, of the early 1990s, the state-owned bicycle enterprises were landed in a predicament and began to go into deficit. The goods were piling up in stock and could not be sold. The state-owned bicycle enterprises stopped production and the employees were laid off and had to sell their assets. In sharp contrast to state-owned enterprises, privately owned bicycle enterprises developed on the basis of supplying accessories to state-owned bicycle enterprises. By the end of 2000, there were 655 bicycle enterprise. Among these 655 bicycle enterprises, there were more than 283 privately owned ones that had a 74.67 per cent market share. The annual output of bicycles by those privately owned enterprises was 13 million, or more than 25 per cent of the total national output. After Guangdong and Jiangzhe, Tianjin was third in bicycle production. Tianjin’s privately owned bicycle enterprises have, once again, pushed forward the economic development of Tianjin. In spatial distribution, a new form of organization has appeared, namely, the specialized enterprise agglomeration in which medium- and small-scale enterprises for the main part have appeared spontaneously in suburbs. These medium- and smallscale privately owned enterprises can be found in the districts of Xiqing, Dongli, Wuqing, Beichen and Dagang. Eight enterprise clusters have appeared in embryonic form. Through specialized division and cooperation, these enterprise clusters have not only improved the competitive power of Tianjin’s bicycle industry but also have effectively solved local employment problems. The historical process from rise to fall and to rise again forces us to further consider some questions, including how to improve regional competitive advantage through increasing the innovative ability of local enterprise clusters, how to make use of the advantage of agglomeration to realize the structural escalation of local industries, how to make different enterprises in the same industry gather together to bring the clustering effect into full play and improve industrial competitive power through division and cooperation, and how government should position itself during the process of fostering medium- and small-scale enterprises and in creating a regional environment of innovation. This part of the chapter attempts to make a preliminary probe into the above questions through positive research and theoretical analysis, so as to provide new ideas for the economic and social development strategy of Tianjin. Case analysis: development of bicycle enterprise clusters in Wangqingtuo Town Formation and characteristics of bicycle enterprise clusters in Wangqingtuo Town Wangqingtuo Town, which is famous for bicycles, is situated in Wuqing district, Tianjin City. Between 80 and 90 per cent of the local workforce are

Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu 151

employed in occupations that relate to bicycles. The bicycle industry in Wangqingtuo began in 1994. At that time, there were only a few bicycle assembly enterprises in the whole town and there were no enterprises that produced components and parts. However, by 1995, there were more than 20 enterprises that produced 1.2 million bicycles in all. With a workshop production mode, low-grade accessories, a flexible sales mechanism and low price, these enterprises grasped the opportunity to alter the original situation and finally displace many well-known state-owned bicycle enterprises. In the bicycle world, this phenomenon is called the ‘Tianjin Phenomenon’. In order to promote the development of the privately owned economy in the bicycle industry and to regulate competitive activities, Wangqingtuo founded ‘two associations’ (the Administrative Commission of the Privately Owned Economic Area and the Association of the Bicycle Industry) and ‘two centres’ (the Service Centre of Quality Management of the Bicycle Industry and the Service Centre of Bicycle Accessory Supply). Through them, the function of government and sectors can be brought into full play. Service promotes development and management ensures quality. To date, the bicycle industry in Wangqingtuo has entered a new stage in which it competes with others in brand, input reform and development speed. The bicycle enterprise clusters in Wangqingtuo have the following characteristics: 1. Most bicycle enterprises are family enterprises and not large-scale. These family enterprises belong to individuals and have clear property rights. 2. These enterprises, being individual, lack competitive power. However, as a whole, they have become a bicycle and component production base that is quite influential in Tianjin and even in the whole country. 3. These small enterprises that are independent and meanwhile interrelated have formed an industrial chain that is difficult to imitate and copy. This kind of industrial chain based on the division of labour and cooperation can produce new productive forces, overcome the shortcomings of the weakness of individual enterprise and improve overall scale strength. 4. The bicycle enterprise clusters have displayed of characteristics dynamic change. Because of fewer barriers to entering or leaving clusters, the clusters in Wangqingtuo are in dynamic development. In recent years, competition in the domestic bicycle industry has been very fierce and profit margins have become smaller and smaller. However, the bicycle industry in Wangqingtuo continues to develop rapidly. Tracing the source, we find that it is the production organization mode of the bicycle industry network that supports its rapid development (Figure 3.2).

152 Industrial Clusters in the Tianjin Area Figure 3.2 Local production system of bicycle enterprises in Wangqingtuo Town, Tianjin City Transport industry

Raw material suppliers

Firms producing components

Bicycle firms

Customers

Agents of distribution flywheels

Industrial associations and administrative centres

Local governments

Analysis of the formation factors and development mechanism of bicycle enterprise clusters in Wangqingtuo 1. Condition of location. Internal relationships of economic activities and the external economic pursuit of agglomeration make the regions which have won in the initial location competition more attractive to other enterprises and thus lead to the spatial agglomeration of the same enterprises. Once this kind of agglomeration happens, it will self-strengthening through circulation and accumulation. Wangqingtuo, 20 kilometres from Tianjin, is where the Jingtong Road meets the Jinbao Expressway and the supplementary route of the Jingjiu Railway. The geographical location on the outskirts of a large city makes it easy for Wangqingtuo to accept the resources, information and technology spread from Tianjin. The factory director of the Aosheng Bicycle Factory, the first to apply for a state production licence, has made his fortune by assembling bicycles. In the period of the market monopoly by state-owned bicycles, he assembled bicycles whose brands were Red Flag and Pigeon. In the early 1990s, when state-owned bicycle factories were in decline, he saw a market demand for bicycles and built his own bicycle factory in 1994. However, unlike the Aosheng factory director who anticipated the pro-

Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu 153

spects within the bicycle market, most other bicycle factory directors are laymen in the field. Never the less, they have developed their own enterprises by making use of their location advantage, technology, and the administrative background of original state-owned bicycle enterprises. The development of Wangqingtuo’s bicycle industry from 4 enterprises to more than 230 is attributable to its location advantage. 2. Factors of technology and market. Uncertainly over both market conditions and the technical path to follow have displaced the once endogenous and exogenous fixed market conditions. Characterized and diversified market demand and technical improvement have placed the vertically separated mode of production and organization increasingly in the ascendent and produced a flexible mode of production. The rigid mode of production and the vertically integrated mode of organization of Tianjin’s original state-owned bicycle enterprises lacked efficiency, effect and flexibility. Thus, their disintegration and the rise of privately owned medium- and small-scale enterprises became inevitable, as the formation of the bicycle enterprise clusters in Wangqingtuo that have replaced them clearly shows. The development of Wangqingtuo’s bicycle enterprises have in turn promoted the production of accessories, while on the other hand the production of accessories has pushed the development of bicycles forward. Thus, a virtuous circle has been formed. 3. Factor of institution. The economic effect of a country is decided by its basic institutional arrangements, institutional structures, institutional environment and institutional trends. The formation of bicycle enterprise clusters in Wangqingtuo can be said to be the epitome of the institutional changes in the process of the economic development of China. Wangqingtuo’s bicycle industry began in 1994 when the marketoriented economic system in China was in development. At that time, the market system was not perfected and popular consumption demand was changing from simplistic product demand under a planned economy to diversified choice. Because people in Wangqingtuo have been aware of the diversified consumer demand for bicycles, they, with the original mode of production, have used their own position in the market, having completed their original capital accumulation, to start their own undertakings. If the market vacuum between a planned economy and a market-oriented economy can be said to have presented a crucial opportunity to the development of Wangqingtuo’s bicycle industry, granting production licences to bicycle enterprises have made it prosperous. The production of bicycles is not allowed without production licence granted by the Light Industry Bureau of the state. However, to acquire a licence takes a long time, that is at least half a year from the application. In addition, not all bicycle enterprises can achieve the requirements for a licence. Taking local interests

154 Industrial Clusters in the Tianjin Area

into consideration, local governments have adopted the granting of temporary licenses that ensure the production continuity of enterprises. The temporary period is usually from 3 to 6 months. During the period of the rise of the bicycle enterprises, our country has adopted an encouraging attitude toward the development of privately owned enterprises. Local governments have played a significant role in promoting the development of privately owned enterprises, lowering operation costs within the privately owned economy and improving the outer environment for the development of privately owned enterprises. 4. Factor of social culture. The new economics of institutions holds that the institutional effect of ideology and cultural mentality plays a positive role in lowering trade costs, promoting economic development and maintaining social stability. The formation of bicycle enterprise clusters in Wangqingtuo has proved this. Wangqingtuo has a comparatively high terrain, sandy loam and no rivers. It has no favourable natural conditions for agriculture. Thus, people in Wangqingtuo are engaged in buying and selling agricultural products, selling eggs, manufacturing garments and producing bicycles. In this process, their sense of commodity has been strengthened. Furthermore, people in Wangqingtuo have formed their own network of social connections in the trade of commodities, and their economic activities are rooted in this net. Such rooting has played an important role in regional economic development. 5. Factor of capital. Here capital includes financial capital, social capital and human capital. After years of development, Wangqingtuo’s bicycle industry has passed the primary stage of the original accumulation of capital and each enterprise now has the more or less idle financial capital that is necessary for enlarging production and improving the industrial structure. Social capital refers mainly to social connections. Because of relationships with neighbors, relatives, friends or partners in business, managers of enterprises believe in each other to a large extent and often gather to exchange market information and to make market forecasts and judgments. This kind of belief and cooperation have become the basic condition which allows innovative factors such as knowledge and information to flow rapidly in a region, and meanwhile have strengthened the regional accumulation of knowledge and information as well as the regional innovation function. This is an important condition, on which Wangqingtuo’s bicycle enterprises can quickly develop. Human capital in Wangqingtuo is expressed mainly as people’s sense of market, enterprising spirit and characteristic ability to bear hardships.

Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu 155

Shortcomings and problems 1. Wangqingtuo’s bicycle industry has insufficient technical innovation within industrial clusters and less connection with colleges, universities and research institutes, so its innovation comes mainly from imitation and self-design. 2. Competition focuses on price. Many enterprises have not attached great importance to improving quality and perfecting style. This will lead to vicious competition and finally affect overall production efficiency and the outer scale economy of the industry. 3. The bicycle industry in Wangqingtuo lacks famous-brand products. It should, via setting an overall brand, namely a regional brand, combine this regional brand with a product brand to improve the market competitive power of local products. 4. The industry has not enough connection with other industrial clusters in Tianjin. This will lead to low-level repetitive construction and is not favourable to the overall development of bicycle industrial clusters in Tianjin. Wangqingtuo’s enterprise cluster should find its exact position among Tianjin’s bicycle industrial clusters and develop itself in a planned way.

%

Bicycle enterprises

%

Distribution of Tianjin’s bicycle enterprises Components and parts enterprises

Table 3.5

Wangqingtuo

112

32.7

143

43.4

255

36.9

District of Wuqing

143

41.7

105

31.8

248

35.9

Beichen District

56

16.3

46

14

102

14.8

Dongli District

48

14

67

20.3

115

16.7

Dagang District

21

6.1

3

1.0

24

3.4

Xiqing District

32

9.3

36

10.9

68

10.0

Jinnan District

14

4.1

13

4.0

27

3.9

Hebei District

20

5.8

10

3

30

4.3

Other regions

57

16.6

33

10.3

90

13.1

Regions

Total enterprise

%

The above numbers are counted according to the latest statistical data from the Tianjin Bicycle Association in July 2002, so they are different from the data published in newspapers.

156 Industrial Clusters in the Tianjin Area

Development and structural features of Tianjin’s bicycle enterprise clusters In addition to Wangqingtuo’s bicycle enterprise clusters, Tinajin has formed bicycle enterprise clusters in Wangqinzhuang industrial park, Xinhou industrial park, Dabizhuang industrial park and Wangzhuang industrial park in Beichen district, Yangzhuangzi industrial park, the Xinbao Bicycle Company and Nanhe industrial park in Xiqing district, Dongli district and Dagang district. The distribution of bicycle enterprises is shown in Table 3.5. The enterprise clusters just listed have something in common with Wangqingtuo’s bicycle enterprise clusters. First, the vertically integrated, rigid mode of production in state-owned enterprises has not been adaptable neither to the diversified and characterized market demand nor to technical improvement. These enterprise clusters are, rather, the substitute for such a mode of production. Another is that these enterprise clusters are located in suburbs where it is easy to obtain a flexible labour force. Also, the convenient conditions of transport and communication make it possible for enterprises to communicate with each other in commodities, service, information, labour force and technology. Second, medium- and small-scale enterprises with a relatively high degree of specialization have formed clusters, and the relationship between enterprises in the same industry or between related enterprises is one of dynamic competition as well as cooperation. This kind of relationship helps clusters to maintain their energy and competitive power. However, there are some differences between Wangqingtuo’s enterprise clusters and other enterprise clusters in terms of inner structure. Wangqingtuo’s enterprise clusters are in the primary stage of the development of enterprise clusters, that is, scattered agglomeration. As regards in inner structure, they belong to the form of Marshall’s industrial region. Within the clusters are purely medium- and small-scale enterprises. The scale of privately owned enterprises is small. The number of employees in several large enterprises is just 100 or so. The annual output of these enterprises is 200,000–300,000. Moreover, each enterprise focuses on a single function in the production chain. Their intermediate products are sold in Tianjin and the final products are sold in the whole country. This kind of agglomeration of enterprises that belong to different links of the industrial chain and adopt family management has provided enterprises many opportunities of formal or informal face-to-face communication and cooperation. Meanwhile, it has effectively lowered the trade costs and material costs which are inevitable when enterprises seek production factors and market information. In contrast to this, other enterprise clusters are in the stage of core development and belong to the structure of ‘leading enterprises + network’. The so-called ‘leading enterprises’ refer to those enterprises that have a comparatively large scale, a comparatively high output, comparatively high

Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu 157

quality, comparatively advanced technology and some influence in the whole country. For example, the Fushida Bicycle Enterprise in Dongli’s bicycle enterprise clusters has adopted the group system of management, production and selling. It has carried on independent operation and finally entered the high-grade market. Fushida has become a shining star in Tianjin’s bicycle industry. The Jigang Bicycle Company, which is in the bicycle enterprise clusters in Nanhe industrial park, Xiqing district, is the first enterprise in Tianjin to pass ISol9001 in 1997. At present, its annual output is 500,000, half of which are exported. Its bicycles, brand name ‘Black Horse’, are a famous brand in China’s bicycle industry. The Kelin Bicycle Co. Ltd in Dagang Economic–Technological Development Area is one of the top 100 enterprises in China. In 2001, its output reached 600,000 and its ‘Saike’ bicycles dominated the domestic market and were exported to Korea, Japan, Southeast Asia and Europe. The model effect and technical overflow effect of these leading enterprises has improved the overall strength of the enterprise clusters. The ‘leading enterprises’ play the role of horizontal support in production, vertical tie-in selling, and innovation and guidance in R&D for key technologies. Medium- and small-scale enterprises and family factories form networks and realize the socialization of production, interrelated organization and marketing circulation. On the one hand, these enterprises open up the market by themselves and on the other hand, they need to depend on the leading enterprises and networks within the region because of their limited market ability. They are independent of and at the same time dependent on each other. Analysis of competitive advantage of Tianjin’s bicycle enterprise clusters The changes in competitive power of Tianjin’s bicycles can be reflected, to some extent, by changes in the output and export volume of bicycles. From Tables 3.6 and 3.7 and Figure 3.3, we can see that Tianjin’s bicycle industry has experienced a tortuous course of development in both output and export volume. Output rose from 2.2517 million in 1978 to 5.6317 million in 1985. However, the percentage in the total output of the whole country fell from 26.4 per cent in 1978 to 17.4 per cent in 1985. In addition, the export volume also kept falling. In the 1990s, the annual export volume Table 3.6 Changes in the percentage of the output of bicycles in Tianjin compared with that in all China Year

1978

1980

1985

1990

1995

1998

2000

Output (10,000)

225.17

293.24

563.17

536.69

576.36

310.6

1300

26.4

22.5

17.4

17.1

12.9

13.4

%

44.1

158 Industrial Clusters in the Tianjin Area Table 3.7

Changes of annual export volume of Tianjin’s bicycles

Years

1980

1981–88

1990–97

1998

1999

2000

2001

Export volume (10,000)

19

10

5

6.1

23

63

110

Sources: Survey Report of Tianjin Bicycle Association; Tianjin Statistical Yearbook; China Statistical Yearbook.

Figure 3.3

Tianjin annual bicycle production as a percentage of that of all China

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1978

1980

1985

1990

1995

1998

2000

was 50,000 or so and the export value was not more than US$2m. In contrast, the bicycle industry in Guangdong, Jiangsu, Shanghai and Zhejiang developed rapidly and the export volume increased greatly. Hence, Tianjin was left behind. After 1998, the percentage in the total output in the whole country and in exports went up again. In 2000, the output of Tianjin’s bicycles reached 13 million, or 44.1 per cent of the total output of the whole country. At that time, Tianjin’s output ranked second in the country. The export volume of Tianjin’s bicycles rose from 630,000 in 2000 to 1.1 million in 2001. This gave Tianjin an important position in both the domestic and the international market. Tianjin is accordingly known as ‘the bicycle industrial base with the vastest range of prospects’. In 2001, the First International Exhibition of Bicycles, Assistance-Bicycles and Accessories of North China, held jointly by the Tianjin Bicycle Industrial Association, the National Quality Control and Test Centre and the International Exhibition Centre, achieved great success and Tianjin’s position as the ‘base’ in production and sales was beyond doubt. Tianjin’s bicycle industry has great economic energy and competitive power because of the formation of bicycle enterprise clusters that are composed of medium- and small-scale privately owned enterprises. These enterprises have both a comparative advantage (price flexibility) and a

Zhang Donggang, Xie Siquan, Bai Xuejie and Luo Ruoyu 159 Figure 3.4

Competitive advantage of enterprise clusters

Direct economic factors: production cost, trade cost, varied products, regional sale and competitive position in market

Competitive advantage of enterprise clusters

Indirect economic factors: institutional advantage, regional innovation system and region of studying type

competitive advantage (characteristic flexibility) when they participate in competition in the form of clusters. The competitive advantage of enterprise clusters is reflected in two aspects (Figure 3.4). Let us analyse the aspect of direct economic factors, shown uppermost in the figure. In Tianjin’s bicycle enterprise clusters, the specialized division of labour has improved production efficiency, and the relative concentration of geographical location has allowed enterprises to obtain materials from local sources. It has reduced purchase cost, storage cost, circulating funds and the cost for changing processing links. Meanwhile, the close location and the networking founded on the common basis of social culture have lowered trade expenses for enterprises and have at the same time saved the time and money enterprises have to spend in searching for production factors and market information. Moreover, this kind of interrelated organizational structure forms an outer scale economy so as to meet the diversified and characterized demands of the market. The industrial environment within clusters makes enterprises in clusters more adaptable to the market environment and its changes. With this kind of industrial environment, enterprises in clusters can make use of the feedback mechanism between the diversification of products and the occupation rate of the market to gain market power. Seen from the aspect of indirect economic factors, shown below in the figure, we find that the micro basis of Tianjin’s bicycle enterprises is basically non-state-owned enterprises or privately owned enterprises, which have the advantage of constituting a flexible system. With the development of clustering, industrial organization is increasingly strengthened and networking for medium service is being perfected day by day. All of these factors lead to the formation of an overall coordination advantage for the clusters. The enterprises within the clusters get the relative market information about advanced technology, advanced accessories and equipment

160 Industrial Clusters in the Tianjin Area

supply much earlier than those outside the clusters. Within clusters, information, knowledge and best practice can spread rapidly in the region, and thus the creative ability of enterprises and institutes has been improved and a regional innovation system formed. The interrelated organization structure within clusters makes various knots in the network believe in each other and continuously accumulate knowledge through interaction and study. The region of studying type is thus formed. The regional innovation system and the formation of the studying type region increases the innovation ability of Tianjin’s bicycle enterprise clusters. From the above analysis, we conclude that the formation of Tianjin’s bicycle enterprise clusters is the result of many factors, such as geography, economy, society, institutions, technology, the market and history. It has not resulted simply from the action of enterprises, nor was it able to appear in a short time. Enterprises within the clusters have an obvious coordination effect. Once this kind of organizational structure is formed in a region, other regions have difficulty in copying it quickly. It should be considered a significant factor in the continuous improvement of the competitive power of Tianjin’s bicycle enterprise clusters.The bicycle industry should catch hold of favourable opportunity to upgrade the industry arrangement by the formation of industrial clusters. We have, from the micro angle, analysed the formation and characteristics of Tianjin’s bicycle clusters and the competitive advantage those clusters have brought. Tianjin’s bicycle industry should grasp the opportunity of economic globalization and the opportunity that Taiwan, Europe, America and Japan transfer their labour-intensive industry to the outside in the industrial structure adjustment. Also, as regards industrial agglomeration, structural adjustment and outward development, Tianjin’s bicycle industry should also make use of the clustering advantage to improve its own level through constructing bicycle industrial clusters. Structure of Tianjin’s bicycle industrial clusters In terms of the development of the bicycle market, China is the biggest country. China is a vast territory and its economic development is uneven. Meanwhile, diversified demand has appeared in the international market, its trend increasingly obvious. Because Tianjin’s bicycle market is diversified, Tianjin’s bicycle industry should, according to different characteristics of various enterprise clusters, be directed rationally and develop coordinatedly in order to construct a comparatively complete interrelated organizational structure, that is, to form the structural mode of ‘large core enterprises + leading enterprises + network of medium- and small-scale enterprises’. The ‘large core enterprises’ refer to these world-famous bicycle enterprises. The ‘leading enterprises’ are local enterprises that are advanced in scale, technology and management. The ‘network of medium- and small-scale enterprises’ refers to a kind of network which is composed of

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specialized medium- and small-scale enterprises and public institutions, such as local education and training institutions, research institutions, financial institutions, institutions of medium service, industrial associations and government. Industrial clusters with this kind of structure have four functions: • Regional system of flexible production – flexible changes take place in production mode, mode of organization within enterprises and relationships between enterprises. • Region of studying type – various bodies of action including enterprises in the region, commercial institutes and research institutes promote regional development and innovation of enterprises through study and cooperation. • Regional innovation system – an innovation system is formed within the region and rooted in the local social and cultural environment. The interaction between the innovation system and the local social and cultural environment promotes the perfection of the self-regulation and innovation function of the regional production system. • Open and interrelated organization structure – specialized enterprises which are independent within industrial clusters depend on the connection of knots in the network and their common interests to form a network connecting the globe with the locality through the interactions between enterprises and close network connections outside the region. Some thoughts and suggestions Thoughts on high-tech industry and traditional industry When high-tech and knowledge-intensive industries are mentioned, we usually think immediately of the information industry, of the biotechnology industry and others. When the adjustment and escalation of industrial structure are spoken of, we think at once of the escalation from labourintensive industries to technology-intensive industries. And we know, Tianjin’s bicycle industry is considered a ‘sunset industry’. However, the rise of an industry with low technology makes us reconsider our attitude toward traditional industries. For the background of economic globalization, economic growth and employment in each region presents us with a more serious challenge. Does that stereotyped practice of developing hightech industries conform to reality? The rise of Tianjin’s bicycle industry should make us realize that there are no sunset industries but sunset enterprises. When the capital (we call it agglomeration capital) produced by enterprise agglomeration is added to traditional labour-intensive industries, the traditional industries at this time have become knowledge-intensive industries. The reason is that once traditional industries without high technical content agglomerate in some region, the improved specialist division of labour and cooperation ability have significantly increased the technical

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content of those traditional industries. By this means, traditional industries are gradually changed into knowledge-intensive industries with a certain technical level and their advantage of increasing returns is obvious. Therefore, instead of giving all of our attention to high-tech industries and industries with high value added, should we rathers, from a new angle of view, reconsider the position of traditional industries that can efficiently solve the problem of unemployment such as the bicycle industry? Is it a mistake for government to use its policy strength intervene in economic operation merely, to support the key industries and key enterprises which it subjectively considers promising, and to pay no attention either to superior industries produced by agglomeration, or to enterprise clusters which have established a sound pattern of cooperation? Thoughts on industrial parks The development of industrial clusters is a social process changing from production of Fordist type to specialized production. In this process, social capital is formed, institution is innovated and the importance of local government is greatly improved. Tianjin’s bicycle enterprise clusters are formed by non-governmental force. To this kind of enterprise cluster, government should give conscious guidance and support to promote their rapid growth and proliferation. Meanwhile, government should make use of the outstanding industrial characteristics of spontaneous agglomeration and should cultivate the kinds of factors and environment which industrial development needs to actively support the conception, implantation, gestation, birth, and growth of specialized industrial clusters. Further, government should promote the perfection of such factors and environment through the development of industrial clusters. In fact, the construction of high-tech industrial parks and economic–technological development areas is a kind of means by which industrial clusters can be developed. However, the facts prove that it is often not successful. The reason, we think, is as follows. The vitality of industrial clusters lies in their rooting and innovation ability. When foreign technology and enterprises cannot be rooted in the local historical, social and cultural environment as well as the institutional environment, their innovative ability will inevitably be restricted. When we shift our view from the construction of high-tech industrial parks and economictechnological development areas to the construction of industrial parks with distinctive features, we have, in fact, realized that characterized regions have the greatest potential. At present, Tianjin is building industrial parks. Industrial parks are the extension of the concept of enterprise clusters. Hence, when we choose industries for industrial parks, we should draw lessons. Those enterprises that cannot be rooted in a region should not be chosen, and we should pay attention to industries with distinctive features. From our survey, we have found that each district and each town is con-

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structing industrial parks and they have formulated various kinds of favourable conditions and measures to attract new enterprises. However, they must avoid getting into the prisoner’s dilemma, where various regions compete to attract enterprises only to find that the value brought by those enterprises that cannot be rooted in a region is not as great as that brought by local enterprises. To construct enterprise groups and to develop medium- and small-scale enterprises The rise of Tianjin’s bicycle industry is to be attributed to the formation of groups of medium- and small-scale enterprises that are privately owned. However, in the process of our survey, we have heard two voices. The departments concerned hold that Tianjin’s bicycle industry has a scattered layout, disorderly brands and small scale, that this industry of Tianjin should construct an enterprise group to regulate its enterprise members and should unite the brands. Only in this way, they say, can the industry speed up its technical improvement, promote the adjustment of product structure and strengthen its market competitive power. The other voice is that of most privately owned enterprises and industrial associations. Their views are different from the above. Through practical survey and analysis, we think that when constructing enterprise groups we should realize that resources have their own price and in the market-oriented economy their occupation has to be paid for. If resources cannot bring returns, they are a burden instead of a benefit to the occupiers. Therefore, enterprises need to pay costs when they extend their scale and occupy more capital. If returns brought by new resources cannot compensate for the costs of the new resources, this kind of capital expansion lowers the market competitive power of enterprises. This is why some superior enterprises feel a heavy load after a large-scale merger and expansion. Tianjin’s bicycle industry makes use of agglomeration of medium- and small-scale enterprises and constructs different forms of network to improve regional and industrial competitive advantage. We should pay more and more attention to this industry. Meanwhile, the development mode of medium- and small-scale enterprises in Tianjin’s bicycle industry has provided a new idea for the development of Tianjin’s medium- and small-scale enterprises generally – namely, that through agglomeration we can improve the overall production efficiency of medium- and small-scale enterprises, lower operation costs and display flexible operations and scale economies so as to strengthen the competitive advantage of enterprises.

Conclusion: cultivating new type local industrial clusters in Tianjin An industrial cluster may have one of two typical forms: either a vertically integrated or vertically controlled cooperative system of enterprises or an

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interrelated cluster composed of medium- and small-scale enterprises. As we have analysed, after the decades of the development of Tianjin’s industrial system, high-tech industries and technology-intensive and capitalintensive industries, such as electronic information, green batteries for environmental protection, and automobile and traditional industrial clusters, such as bicycles and garments appeared in embryonic from. On this basis, the characteristics and development trend of Tianjin’s new industrial clusters should be as follows. A developed interrelated industrial cooperation system in which foreign-funded enterprises are the centre Unlike the industrial clusters composed of medium- and small-scale enterprises in Taiwan, Guangdong and Jiangzhe, Tianjin’s industrial clusters take large foreign-funded enterprises as their centres. So far, in Tianjin, there have been more than 80 enterprises producing accessories for Motorola, more than 20 enterprises producing accessories for Samsung and tens of enterprises producing accessories for Toyota. Strictly speaking, this kind of industrial cluster is still in the hierarchy of the division of labour in the product chain and enterprises within clusters have not formed the interrelated connection of innovation networks. Local enterprises depend on core enterprises for funds and technology and this will lead to the fragility and instability of industrial clusters. On the whole, the present local industrial clusters are still at the bottom of or outside the global network and have not been embedded in the global production system. In view of the above facts, industries with a comparatively long industrial chain, such as electrical household appliances and automobiles, should, with the backing of an international supply chain and with the advantage of resources, attract transnational corporations to come to local regions to build industrial clusters which depend on each other instead of clusters which carry on vicious competition. In addition, those industries should also promote local medium- and small-scale enterprises to move towards key technical links. They should continuously improve themselves in their administrative systems, provide transnational corporations with powerful networks of accessory production, equipment maintenance and sales service, and lower their overall trade cost. Moreover, those industries should cultivate the developed networks in which enterprises can communicate and cooperate with each other, form local industrial clusters with a self-strengthening mechanism, realize the counter-escalation of industry, draw support from the expansion (such as external investment and exploitation of new products and new markets) of transnational corporations to embed themselves in the international industrial value chain and play a significant role in the pattern of the international division of labour with their strong and stable industrial clusters.

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To be good at study, imitation and innovation and to bring dynamic ability into full play Medium- and small-scale enterprises in technology-intensive industries that are represented by medicine, electronics, information and automobile accessories may, according to their own development strategy, form an alliance for technical R&D with other enterprises or the fixed relationship of cooperation. They should imitate advanced technology and make innovations in order to lower the costs and risks of product exploitation. Through an alliance, medium- and small-scale enterprises may form scale economies, maintain and strengthen technical competitive advantages of their own and improve core and dynamic abilities. Compared with individual enterprises, industrial clusters can better reflect the essence of competition and are more capable of cultivating the competitive advantage of local industries. Competition is first reflected in local clusters of the same kind, such as the enterprise clusters within the Tianjin Automobile Group Company and the foreign-funded enterprise clusters whose centre is the Toyota Automobile Corporation. Competition is then reflected in the competition between local industrial clusters, enterprise clusters or enterprises and those at home and abroad. For example, the enterprise clusters in Zhejiang, whose centre is Jili, imitated motors produced by Tianjin Toyota and thus caused competition. Last but not least, enterprises within clusters maintain moderate competition. This kind of orderly competition between enterprises within clusters has provided the outer motive force for the continuous innovation of enterprises. With the tie of market, industries in urban areas and industries in rural areas should be combined to form a rational structure of priorities So far, Tianjin has formed a pattern of industrial clusters with the characteristic of distribution according to priorities in urban and rural areas. The enterprise clusters in capital-intensive or technology-intensive industries, such as electronics, automobiles, high-precision machinery processing, new energy and resources, and the biomedicine and chemical industry gather in economic–technological development areas, free-trade zones, new technical industrial parks and some development areas in counties. Traditional industrial clusters including bicycles, garments and textiles have appeared in Beichen, Dongli, Xiqing and Wuqing, as well as in some industrial parks in villages and towns. Relying on new technology and new concepts of management, these traditional industrial clusters are being reformed into new traditional industrial clusters. From the angle of development conditions, this kind of distribution according to priorities is not rational. The industrial clusters of metropolis industry (non-polluting processing industry) have not been formed and some problems still exist in the above two kinds of clusters. Some industrial clusters are not spontaneously formed by the market. Instead, they are

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formed by administrative orders or by direct transplantation from foreign countries. There are even some clusters whose members simply settle themselves down in parks with no regard to gains and losses. These clusters have no specialized division of labour, no scale returns and no fixed industrial characteristics. Labour-intensive industrial clusters, such as bicycles and garments, are mainly a group of privately owned medium- and small-scale enterprises. Although they regard the market interests as a tie, they are short of a platform for product innovation and R&D. Nowadays, characterized and diversified market demand has become the mainstream. If these clusters have no high-level plans and arrangements for product design, technological process and qualified personnel training, they face the pressure of competition R&D and innovation day by day. In central urban districts, tertiary industries such as commerce, catering and real estate are the main body in most of the industrial function areas. Industries have in part formed areas where commerce and business concentrate. However, industrial clusters of metropolis industry are lacking in central urban districts. In addition, the service industries for producers, such as logistics, accounting, lawyers, consultation and so on are not developed, not to mention agglomeration returns. These three different parts are a process of gradual development and cultivation and they should be improved in order to maintain the sustained competitive power of the industrial clusters of Tianjin’s industry. Moreover, these three clusters are different from the usual scattered structure. Instead, they are united on the global market and form interrelated industrial clusters which can extend to the world. Support by a developed international supply chain and market network In the system of a developed international supply chain, upstream and downstream enterprises cooperate in production, goods supply and operation. They divide labour and share information as well as risks, seeking a competitive advantage that cannot be displaced in the fluctuations of the industrial environment. However, this kind of ideal level is difficult to reach. It’s reported that only 36 per cent of American enterprises are willing to share information on production and selling and information on demand changes with their cooperative partners. The situation in China is more serious. If self-interest and risk are taken into consideration, enterprises are usually not willing to frankly exchange information on production and selling. Besides, they lack the basis on which to believe in each other and instead cooperative partners suspect each other. All of this means that upstream suppliers are much too optimistic or pessimistic about downstream suppliers, product supply falls short of demand or else exceeds its

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and so the whole supply chain loses its market competitive advantage and this ends up with the overall cooperative relationship of the alliance of production and selling in a state of disintegration. Cooperation in the international supply chain is the best choice for entry into the international market. However, the final goal is not the internationalization of enterprises. The final goal of an enterprise is to occupy market share and gain profits. The market network can collect rich market information for enterprises and provide unblocked channels for selling. Hence, enterprises must build complicated global production networks, lower production costs by basing themselves on local resources, keep close to market demand, support relative assisting industries, perfect the local logistics network which is composed of operation, storage, delivery and information, and meanwhile extend their sales network to the world. The positive pioneering concept and cluster culture A distinguishing characteristic of an industrial cluster is its rooting in local areas. This kind of rooting is usually difficult to copy. Thus, clusters are usually close and exclude people, things and enterprises that do not belong to their group. This kind of closed culture restricts the growth and expansion of industrial clusters. Therefore, Tianjin’s future industrial clusters of the new type should maintain and develop a coordinated and open clustering culture. In addition, future industrial clusters in Tianjin should incorporate a foreign advanced culture and cultivate compound competitive advantage. So far, many industrial clusters in the Tianjin economic–technological development area have formed and cultivated the unique culture of foreign-funded enterprises. Here are some examples. The enterprise culture with European and American characteristics, represented by the Tianjin Motorola Company, pays attention to personal encouragement. The enterprise culture with Japanese characteristics, represented by the Tianjin Toyota Automobile Company, has regard for rules and hierarchies and emphasizes employees’ orderliness, preciseness, discipline and collectivism. The enterprise culture which borrowed from Hong Kong, Taiwan, Korea and Singapore, whose representative is the Tianjin Tingyi International Food Co. Ltd, maintains loyalty and dedication in relations to the family network and absorbs the essence of European and American enterprise culture as well as Japanese enterprise culture, so it has strong affinity with other firms. Besides the culture of foreign-funded enterprises, the local enterprise culture of Tianjin has rich characteristics including patriotism, the spirit of enterprise and the spirit of human unity. Those old ideas and concepts that have been discarded by history need to be rejected in the process of the integration of Chinese and foreign advanced cultures.

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Bibliography and references China Bureau of Statistics. 2002. 2002 China Statistical Year Book. Beijing: China Statistics Press. Chu Xiaoping, Li Hua. 2002. ‘The Overview on the Theories of Small Enterprise Clusters’, Academic Research, issue 5, pp. 25–9. Jin Xiangrong and Zhu Xiwei. 2002. ‘The Startup and Development of Specialized Industrial Regions’, Economic Research, issue 8, pp. 18–24. Li Yonggang and Zhu Qing. 2003. ‘Preliminary Analysis on the Development of Zhejian Small Enterprise Clusters’, Review of Finance and Economics, issue 5, pp. 56–60. Luo Ruoyu. 2002. ‘Analysis on China’s Enterprise Clusters among Different Regions’, Nankai Economic Research, Issue 6. Porter, Michael E. 1980. The Competitive Advantage of Nations. New York: Free Press. Tianjin Municipal Bureau of Statistics. 2002. 2002 Tianjin Statistical Year Book. Beijing: China Statistics Press. Tianjin Municipal Government. 2003. The Future Development Project on Tianjin Green Battery Industry. Tianjin Municipal Government. Wang Jici. 2001. Innovative Spaces: Enterprise Clusters and Regional Development. Beijing University Press. Wang Yingjun, Zhou Liqun, Bai Xuejie and Luo Ruoyu. 2003. The Report on Tianjin New Industries. Nankai University. Xie Siquan. 2003. ‘Institution Reform and Industry Development A Case-Study on the Tianjin Bike Industry’, Theory and Modernization, issue 6, pp. 54–59. Xie Siquan and Huang Jiuli. 2003. ‘The Institution Reform and Accommodation with Demand Constraint: The Case of the Tianjin Bike Industry’, Nankai Economic Research, issue 3, pp. 22–32. Zhou Liqun and Luo Ruoyu. 2003. ‘The Characteristics of Tianjin Telecommunication Enterprise Cluster and Suggestions for Future Development’, Tianjin Social Science, Issue 5 pp. 81–5.

4 A Flowchart Approach Akifumi Kuchiki

Introduction Policy for forming industrial clusters – industrial cluster policy – plays an important role in the development of any region in East Asia. Such policy is followed not only in Japan by the Ministry of Economy, Trade and Industry but also in most countries in the area, such as Malaysia and Singapore. Silicon Valley in the USA and Bangalore in India are well-known success stories of development in information technology. Agglomeration theory and cluster theory explain that an industrial cluster is effective in generating external economies and reducing transportation costs. But we need to be clear about what the required conditions are for forming a cluster, particularly when we are discussing the growth strategy for developing countries. Porter (1998) studied industrial cluster policy as a growth strategy. According to Fujita and Thisse (2002), the central issues of spatial economics are to explain the mechanism for forming an agglomeration, and linking an industrial agglomeration to innovation. Porter (1998) considered the latter more important than the former, and examined how an industrial cluster brought innovations by using his diamond approach in cluster theory. There are two kinds of explanation of the mechanism of the formation of an agglomeration: one is in terms of the factors involved, while the other is to discuss which equilibrium point becomes a core industrial agglomeration under certain conditions in the case of multiple equilibria. The latter case of equilibrium theory is mathematically easy to analyse; we can find the equilibrium analysis of urban agglomeration in Nishikimi and Hamaguchi (2003). Many papers, such as that of Sonobe and Kawakami (2001), have explained industrial agglomeration in a country by econometric methods. Kuchiki (2003) found that the conditions for forming new clusters in northern Vietnam were (1) industrial zones, (2) the capacity-building of physical infrastructure and institutional reforms in investment procedures and 169

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(3) anchor firms in the manufacturing industry – showing that industrial zones together with the combination of infrastructure and institutions played a crucial role in an industrial agglomeration and that the sogoshosha (see below) of Japanese trading corporations played an important role in inviting Japanese manufacturing firms to the industrial zones. The anchor firm of the cluster, Canon, a Japanese firm, exported its products. This case was called the Canon effect. This chapter will generalize the typical pattern of forming industrial agglomerations in East Asia by illustrating another case. The purpose of this chapter is to build a framework with which to analyse industrial cluster policy. The framework is a flowchart that can be applied to the analysis of a region from the view point of industrial cluster policy. We will make clear which factors are crucial to forming an industrial cluster. We will take into account both the role of governments in making industrial cluster policy and that of multinational firms, whose value chain management determines the deployment of plants; industrial cluster policy should be consistent with value chain management. By taking a flowchart approach to industrial cluster policy, we will show how firms are agglomerated. The approach chosen for this chapter is to study the case of Toyota’s investment in Tianjin, China. Toyota has adopted cross-dock logistics to supply components from Shanghai to Tianjin so as to achieve a local content of 80 per cent; its transportation costs depend on these logistics. We will also refer to Kuchiki (2003), who discussed the roles of industrial zones in forming industrial clusters in East Asia after 1986. We propose a simple calculation method to find the critical factors needed to form an industrial cluster. We consider the variables in transportation costs, the external effects of agglomeration, the costs of building a new plant and scale economies. Having examined Toyota’s cluster in Tianjin, we conclude that the three factors key to forming industrial clusters in implementing industrial cluster policy are (1) industrial zones, (2) capacity-building and (3) anchor firms. Capacity-building functions by combining the facilitation of physical infrastructure, institutional reform, human resource development and preparation of living conditions. Institutional reform includes one-stop service and the deregulation of investment procedures. Toyota’s cluster is not like that of Canon’s cluster in northern Vietnam in the procuring of components. The cross-dock logistics of the Toyota just-in-time system contribute to value chain management to inhibit the formation of an industrial cluster. We found two factors had positive effects in forming an industrial cluster: a keiretsu relationship (see below) between an anchor firm and its related firms, and scale economies. The two stages in the formation of an industrial cluster are as follows: I. An anchor firm moves into an industrial zone if conditions on (1) the industrial zone and (2) capacity-building hold.

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II. Its related firms move into the industrial zone, provided the minimum requirement obtains that the anchor firm attains sufficient production for the scale economies to apply. Note that an industrial zone is not enough to attract an anchor firm without the prospect of capacity-building, and that infrastructure is not enough to satisfy the condition of capacity without institutional reform. Figure 4.1

Industrial cluster formed by an anchor firm Market with saucers

Domestic

(1)

(2)

Export

Export-processing zone

Industrial zone

Capacity-building (a) Infrastructure (b) Institutions (c) Human resources (d) Living conditions

(3)

Anchor firm

(4)

Related firms

Industrial cluster

Regional economic growth

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In Figure 4.1 we summarize this process as a flowchart. Sometimes an anchor firm and its related firms take their decisions at the same time, and in these cases we do not need a flowchart. At other times the related firms do not follow the anchor firm’s decision and there is no agglomeration. In such cases our flowchart approach is needed to give priority to measures of industrial cluster policy. The flowchart is crucial to the success of policy implementation, since budgets are limited. An action plan is needed to implement the flowchart. The flowchart approach of Kuchiki (2003) was applied to evaluate a project of the Japan Bank for International Cooperation in northern Vietnam (see JBIC 2004). Our flowchart approach is practical and can be applied to developing countries as a growth strategy by checking whether conditions (1) and (2) in Figure 4.1 are present in sufficient strength to invite anchor firms and their related firms. The next section of the chapter explains how a firm deploys plants according to value chain management. The third section presents a flowchart approach to the forming of an industrial cluster and examines what conditions are critical to formation. The fourth section is a case-study of Toyota’s investment in Tianjin, China. A procurement process is part of Toyota’s value chain management and cross-dock logistics have a negative effect on the formation of the industrial cluster. Finally, we focus on decision-making in a component firm, analysing in detaie the behaviour of Denso, a keiretsu company related to Toyota. The remainder of this chapter is a case-study of Toyota’s cluster in Tianjin and tries to generalize a pattern for forming a cluster. In it we will build a prototype model of a flowchart approach to industrial cluster policy, but the prototype model has many variations. Note that to justify the generalization more cases are needed in order to study various types of industrial cluster policy; the flowcharts for biotechnology clusters and information technology clusters for example may well be different from those for industrial clusters in electronics and automobiles.

Value chain management This section explains how a firm deploys a plant from the point of view of value chain management, according to our interpretation of value chain management as seen in Porter (1998). Value chain Under free competition, private companies cannot survive without competitive advantages. Value chain management and the establishment of core competence can effect such an advantage. We will now explain the mechanism, using Figures 4.2 to 4.6.

Akifumi Kuchiki 173 Figure 4.2

Value chain from design planning to marketing

Design and planning

Procurement

Assembly

Marketing

D

P

A

M

Figure 4.3

Efficiency in production only Procurement

Figure 4.4

Marketing

A

Optimization for customer satisfaction

D

P

Figure 4.5

A

Customer satisfaction

M

Measures of value chain management: an example D

Alliance

Figure 4.6

P

A

Outsource

Outsource

M

Mergers and acquisitions

Core competence (selection and concentration)

D

P

A

Core

Outsource

Outsource

M

Mergers and acquisitions

As shown in Figure 4.2, a value chain is a whole process of research and development, design, the procurement of parts and components, assembly and marketing, including aftercare service in order to generate value for customers. Production functions in economics focus on assembly and production. The objective of private companies is to maximize profit on the basis of production functions. But Figure 4.2 shows that the maximization is based on the value chain of the whole process of design, procurement, assembly and marketing. The situation here is different from that of production-only given in textbook economics and shown in Figure 4.3.

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Figure 4.4 makes clear that the optimization of a value chain is to maximize competitive advantage for customer satisfaction, as we explain below. This is different from the Japanese characteristic of product-out, which means producers think that they can sell their products if the products are of good quality. Producers are satisfied that their product, made according to its particular characteristics, is of the best quality. As shown in Figure 4.5, it is not always the optimal case for one company only to take part in the whole process. US multinational corporations take strategies of mergers and acquisitions, alliances, and outsourcing, which is why they enjoy advantages in cost performance over Japanese companies. A company that has a competitive advantage in the long run must have a core competence as part of its value chain. It cannot have competitive advantages over the whole value chain, and must select a core competence and focus on it. Examples of value chains in the entertainment industry are games, television broadcasting and character goods in the case of sports, and movies, theme parks and musical shows in the case of Walt Disney. We may summarize the component parts of of a value chain as follows: Design and plan → Procurement of Parts and Components → Assembly → Marketing (logistics and aftercare service). Strategies for value chain management are as already mentioned: (1) outsourcing, (2) M&A (mergers and acquisitions) and (3) alliances. IBM puts an emphasis on marketing and R&D in its value chain. Ford and GM each started an internet business for marketing from the main process of assembly and production (see Figure 4.6). Sony is interested in financial sectors including banking and insurance. Nissan (Japan) merged with Renault (France). A French manager, who changed the Japanese subcontracting system, and its employment systems, makes important decisions. A merger of Zaibatsu, between the Sumitomo and Mitsui banks, was announced in 1999. Competitive advantage The role of foreign direct investment is crucial for developing countries if they are to generate employment opportunities. Michael Porter uses the concept of competitive advantage instead of comparative advantage to explain this situation. Our understanding of his definition of competitive advantage is as follows: VCM denotes value chain management, and independent variables of competitive advantage are VCM and core competence. Thus: 1. Competitive advantage = f1 (VCM, core competence). And VCM depends on cost performance, quality and speed, and must attain the minimum cost. Value chain management by MNCs requires value chain networking in Pacific basin countries.

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2. VCM = f2 (cost performance, quality, speed). Core competence can be obtained by the generation of a brand name, or 3. Core competence = f3 (brand name). Brand marketing depends on commercial considerations as well as culture and tradition: 4. Brand marketing = f4 (commercial, culture and tradition), where brand marketing (for example televisions, personal computers and mobile phones) is one of the crucial measures in order to have a competitive advantage. A product consists of a function and a brand name. We can illustrate it as follows. On the one hand a necktie without a brand name costs US$10, and on the other a designer necktie costs US$200. The difference of US$190 is generated by the brand name. A personal computer with an Intel component Figure 4.7

Cost structure Total cost

Cost

Proportional cost (wages, materials)

Capital equipment

R&D

Fixed cost

Brand marketing

0

Quantity

176 A Flowchart Approach

can be sold well. It is necessary for a company to invest and have strategies in order to diffuse the brand name, as shown in Figure 4.7. Costs of branding strategy are fixed costs since investment in branding strategy is the same as that in capital goods. Figure 4.8 shows that the larger the scale of a company, the lower the average cost. Figure 4.9 illustrates a case where a company outsources its processes of procurement of parts and components, and assembly. Consumers buy a commodity for function and brand name. That is why brand marketing is crucial for MNCs to survive in international competition. We will now explain competitive advantage in terms of cost, using Figure 4.9. Total cost is equal to proportional cost plus fixed cost. Here proportional costs are wages, materials, etc. Fixed costs are fixed equipment, design and development, and costs for brand marketing. For a country, it is also important to obtain a competitive advantage over other countries. Michael Porter indicates the following four factors in determining the competitive advantage of a country: 1. resource endowments (natural resources, artificial resources, capital, and infrastructure), 2. clustering of related industries and local suppliers, 3. hard competition among companies, and Figure 4.8

Average cost

Average cost

Capital equipment

R&D

Brand marketing Proportional cost

Akifumi Kuchiki 177 Figure 4.9

Average cost, brand marketing and R&D

Average cost

R&D

Brand marketing

4. a large-scale domestic market with high-end customers. This chapter discusses how value chain management can enhance an industry’s competitive advantage; only some of the items discussed in it overlap with the items indicated by Porter’s four factors. Global optimization and regional optimization of multinationals in the network We will show a typical case of regional optimization under the conditions described above under ‘Value chain’ and ‘Competive advantage’. The examples discussed here are taken from the actual economy. For instance, Tianjin, China, is regarded as an automobile cluster, and this section examines the role of Tianjin in the Chinese industry’s network formation. In the optimization of a value chain network, a process of assembly and manufacturing does not exist independently from the processes of design, procurement and marketing. In other words, a value chain must be considered comprehensively, that is, as is consisting of: 1. research and development, 2. procurement of parts and components,

178 A Flowchart Approach

3. assembly and production and 4. aftercare service. That is, D, P, A and M in Figure 4.2. In studying the global optimization of a supply chain as part of value chain management, the point to be considered is whether the Asian strategy, European strategy and American strategy can each, for the time being, as a first step, be examined independently. We will explain why a solution for the global optimization of value chain management is the same as those for optimization independently by Asia, America and Europe. One objective of value chain management is to reduce costs, thus ensuring an ‘international competitive advantage’. The important factors for cost reduction are the tax system (such as customs duty), transportation costs (from Asia to Mexico), labour costs and stock costs (in particular, interest). Customs duty is greatly influenced by (1) the industrial policies of a country, (2) regional cooperation and (3) international economic cooperation. The examples are as follows: 1. preferential tariff rates to introduce foreign direct investment, 2. free-trade agreements that will be activated for regional cooperation in East Asia, and 3. liberalization policy of the World Trade Organization (WTO). These elements all had an influence on the determination of the customs duty by each country and by each region, which also influenced the costs of firms. This concept is applicable to East Asia also. The elements are: first, improvement of laws that positively affect direct investment in each country, including Thailand and Korea after the Asian currency crisis; second, as for regional cooperation, early implementation of the reduction of customs duty within the area by the early realization of the Asian Free Trade Area (AFTA). Any firm when forming a globally optimal value chain network in order to maintain a competitive advantage must consider as a precondition whether a tariff system is influenced by these factors. Even when value chain management is global, multinational firms will be found to optimize regionally where transportation costs are too high to procure components from another region or regions (the regions in this context being the Asia-Pacific region, the EU, and America). Then the AsiaPacific region is a size to be optimized locally. The objective of value chain management is to maximize competitive advantage for customer satisfaction in Asia. We illustrate a value chain network in Figure 4.10. In this example, the value chain network strategies of M&As, alliances and outsourcing are

Akifumi Kuchiki 179 Figure 4.10

Toyota’s value chain network in China

D

P

1 Japan

1 Japan

1

2

–

2 Tianjin

3

–

3

4

–

4 Shanghai

1 = domestic,

2 = M&A,

A

–

3 = alliance,

M

–

1

–

2 Tianjin

2

–

3

–

3 China

4

–

4

–

4 = outsourcing (cross-dock logistics)

taken among the Asian countries. The core competence of this company exists in design and planning. Recently, US companies have focused on a process of marketing and aftercare service. Optimal size of a region of value chain management Here we illustrate an optimization of the value chain network in Asia alone. CA denotes competitive advantage. An objective function to be maximized is as follows: CA = f (Dj,n1, Pk,n2, Al,n3, Mm,n4)

where j, k, l, m = 1, 2, 3 or 4

and each of n1, n2, n3 and n4 in Asia represents a name of its location such as Tianjin, Shanghai or Japan, where 1, 2, 3 or 4 denotes domestic production, mergers and acquisitions, alliances and outsourcing, respectively. Optimization of the value chain network means that we evaluate all the cases of combination, and choose the highest rate of CA. When multiple solutions are available, a chief executive officer (CEO) of a multinational chooses one of them. A value chain network of Toyota is shown in Figure 4.10. The value chain network has two characteristics. First, it is different from the model of intra-firm trade that is internationally a vertical or horizontal division of labour of parts and components in Asian-Pacific nations. Second, due to the first characteristic, outsourcing strategy is a key factor to reducing cost. Contract manufacturers play important roles, which are also different from those of subcontractors with close relationships to parent companies of multinationals. The management system is changing from an internationally horizontal division of labour by intra-firm trade to a regional value chain network. As will be shown later, Toyota decided to

180 A Flowchart Approach

build a plant in Tianjin and procure components from Shanghai, Japan and Tianjin in order to maximize competitive advantage by using the crossdock logistics that will be explained below.

A flowchart framework A typical economic growth model in East Asia consists of the following factors: (1) industrial zones: port, roads, (2) capacity-building the facilitation of (a) physical infrastructure, (b) institutional reform, (c) human resource development, and (d) preparation of living conditions (3) anchor firms, and (4) related firms. These factors form a cluster and enhance regional economic growth. Figure 4.1 is a flowchart of industrial cluster policy as generally applied in East Asia. First, we consider the market for product sales by taking into consideration (1) industrial zones. There are two types of market, domestic and foreign. The export-processing zone in Kaousing in Taiwan (established in 1965) was the first in Asia. The free-trade zone in Penang, Malaysia, (1971) and the export-processing zone at Tan Tuan near Ho Chi Minh City, Vietnam, (1993) have the same anchor firm as in Kaousing. Products in most developing countries are exported since their populations are small and incomes are relatively low in the early stages of development. It is usual for developing countries to have to establish export-processing zones to attract foreign direct investment. But industrial zones are not enough to invite anchor firms; to form an industrial cluster, capacity-building (item (2) above), which as we have noted, consists of the factors of physical infrastructure, institutions, human resources and living conditions, is also needed. Kuchiki and Yamada (1997) showed that 100 per cent ownership of capital and tax reduction or exemption was crucial to success in inviting foreign direct investment in East Asia as part of institutional reforms. Cheap labour in the 1980s in East Asia as an initial condition was also a crucial factor for success as part of human resource development. Human resources are classified as unskilled labour, skilled labour or professionals such as accountants and researchers. Living conditions are facilities like hotels, international schools, banks, shopping, entertainment and hospitals. An anchor firm (3) with its related firms (4) forms a cluster. Matsushita’s Panasonic division is a Japanese electronics firm in Shah Alam in Selangor, Malaysia, and with its related firms is a typical case of an industrial cluster in East Asia. Two relevant terms here are sogoshosha,1 Japanese for a trading firm playing the role of gate-keeper of a closed business circle, and keiretsu, a firm that plays a key role in inviting Japanese investors into industrial zones in East Asia (see below, p. 188). Sogoshosha firms that established industrial zones in Asian countries such as Thailand and Malaysia asked their keiretsu firms to be tenants, and formed agglomerations of Japanese firms in the industrial zones.

Akifumi Kuchiki 181

In summary, industrial zones or export-processing zones (1) and capacitybuilding (2) are conditions to invite anchor firms (3) as step I of industrial cluster policy. Then, as step II, their related firms (4) build plants near the anchor firm, provided sufficient conditions for the related firms hold. These steps are shown in Figure 4.1. In the fifth section we will show that in the case of Toyota’s related firms one of the sufficient conditions is scale economies.

Step I: Toyota’s cluster in Tianjin Tianjin city has saucers to accept anchor firms and their related firms (see Table 4.1). The city is 120,000 km2 in size, has 9.19 million people, the largest artificial port in China, and is under the direct control of the central government. Industrialization has been accomplished by establishing industrial zones all over the city. The GDP growth rate of the city is 12.6 per cent. The value of the contracted amount of foreign direct investment in Tianjin is US$5.81bn and corresponds to that of Vietnam. We apply the flowchart of Figure 4.1 to Tianjin Toyota’s case in Figure 4.11. In the implementation of industrial cluster policy, the three factors of (1) industrial zones, (2) capacity-building and (3) anchor firms are the key to forming industrial clusters. There are three special characteristics as follows. First, Toyota’s market is domestic, not foreign. Second, Tianjin Table 4.1

Tianjin’s industrial zones

Name

Rank

Year

Tianjin New Technology Industrial Park

Nation

1988

22

Tianjin Economic Development Area (TEDA) Tianjin Port Tax-Free Zone Tianjin Export-Processing Zone Tianjin Tanggu Ocean Hi-tech Development Zone National Tianjin Beichen Science Park Tianjin Wiquing Hi-tech Development Zone Tianjin Hangu Economic Development Zone Tianjin Dagang Economic Development Zone Tianjin Dongli Economic Development Zone Tianjin Xiqing Economic Development Zone Tianjin Jinnan Economic Development Zone Tianjin Baodi Economic Development Zone Tianjin Ninghe Economic Development Zone Tianjin Jinghai Economic Development Zone Tianji Jixian Economic Development Zone

Nation Nation Nation Nation Nation Nation City City City City City City City City City

1984 1991 2000 1992 2002 1991 1992 1992 1992 1992 1992 1992 1992 1992 1992

130 7 2 24 17 25 2 2 2 8 14 10 2 14 5

Source: Sato (2003).

Planned area (km2)

182 A Flowchart Approach Figure 4.11

Toyota’s cluster in Tianjin Market

Domestic

(1) Industrial zone

(2) Capacity-building (a) Infrastructure (b) Institutions (c) Human resources (d) Living conditions

Value chain management

Cross-dock logistics

(3) Anchor firm

(4) Related firms

Cluster

Regional economic growth

has a problem of capacity-building in fostering entrepreneurs. Third, crossdock logistics as a just-in-time method related to value chain management affected the formation of an industrial cluster in Tianjin. The Toyotatsusho Corporation collects components in Shanghai and transports them to Tianjin. Tianjin Toyota needs to neither buy nor import; nonetheless its local content of components in China was 80 per cent in 2002. 1. Industrial zones The city has seven industrial zones which the central government approved to establish. These are Tianjin New Technology Industrial Park, Tianjin Economic and Technological Development Area (TEDA) established in 1984, Tianjin Port Tax-Free Zone, Tianjin Export-Processing Zone, Tianjin Tanggu Ocean Hi-tech Development Zone, National Tianjin Beichen Science Park and Tianjin Wiqing Hi-tech Development Zone. There are many industrial development zones in Tianjin, as Table 4.1 shows. Japanese firms in the rubber, glass, steel, non-ferrous metal, machinery, electric appliances, transport equipment and precision equipment industries total 106, and 53 per cent of them have invested in development zones (see Sososha 2003, for a list of Japanese firms’ investments in China). The TEDA at the national level is the largest among all of these.2 It is located in the southeast of the city, about 45/km from downtown and 140 from Beijing. The TEDA enjoys easy access to North China, Northeast

Akifumi Kuchiki 183

China and Northwest China. The Beijing–Tianjin–Tanggu expressway runs through the TEDA and divides it into two parts, with the financial, trading and residential area of 8.5 km2 to the south and an industrial park spanning acreage of 24.5 km2 to the north. The TEDA is 130 km2 in size and its pillar industries are electronics and electricals, food and beverages, pharmaceuticals and machinery. The TEDA is the largest saucer in Tianjin to accept foreign firms. 2. Capacity-building This sub-section explains (a) infrastructure, (b) institutions and (c) human resources. (a) Physical infrastructure The port is one of the most attractive facilities in Tianjin. Other physical infrastructures are sufficient to invite foreign firms. As the largest freight terminal in North China, the harbour has an annual handling capacity of over 100 million tonnes, and 2 million TEUs (20-foot equivalent units) can be handled here each year, which will increase to 5 million TEUs by 2010. The port has freight exchanges with over 300 ports in 160 countries and regions around the world. With 47 container liner routes and nearly 200 international container liner routes, it is one of the world’s container hubs. Table 4.2

Infrastructure of Tianjin Economic Development Area

The current water supply capacity of TEDA is 180,000 tonnes per day, and the goal is 400,000 tonnes per day. Power supply capacity is 200,000 kV A by double circuit feeding. TEDA can provide dedicated power supply circuits to big users or those who have special needs Sewage treatment capacity is 100,000 tonnes per day. Gas supply capacity is 87,000 cubic meters per day. The capacity for treating the electroplating waste liquids is 1,000 tonnes per day. The liquids can be treated on site or carried away by specialized vehicles. All specialized companies in the infrastructure have been ISO 9002 certified. ISDN and IP telephone services are available in TEDA. In 1998, Motorola successfully had a videophone meeting for five hours. This meeting was made possible by three dedicated lines of 2B+D ISDN connected with Motorola’s functional departments around the world. It was also the first meeting of its kind ever held in China. The 8M-DDN dedicated line provided by China Telecom is very advanced. Motorola once rented a 6M dedicated line in 2000. The TEDA ‘Urban Wide-Band Network Project’ was put into implementation in October of 2000. 1-10M broadband and 10-100M services are available. Source: http://www.teda.gov.cn/englishnew/invest/inf.htm

Tax system of Tianjin Economic Development Area

184

Table 4.3

Productive enterprise Advanced-technology- Export-oriented oriented enterprise enterprise

Energy, communications and construction project

Tax rate (%)

15

15

15

Enterprise income tax

Preferential treatment

Enterprise may be granted a reduction in income tax by half for 3 more years(and pays at a tax rate of 10% if the tax rate after reduction is less than 10%). See Note (1).

Enterprise whose export value exceeds 70% of its output value of the same year pays enterprise income tax at a rate of 10% after reduction.

Sino-foreign equity joint venture with an operational period of over 15years in the field of harbor and wharf construction, upon its application as well as approval of the taxation authorities of the local province, autonomous region or municipality, may be granted 5 years of tax exemption and another 5 years of 50% tax reduction, commencing in the year in which the enterprise begins to make profits. See Note (2).

Income tax on remittance of profits gained by a foreign investor

Tax rate (%)

10

10

10

Preferential treatment, See Note (3).

Same as left

Same as left

Same as left

Notes: 1. According to state regulation, an enterprise remains advanced-technology-oriented after the exemption reduction period is over. 2. ‘5 years of tax exemption and another 5 years of 50% tax reduction’. 3. A foreign investor without an establishment within China pays withholding tax at an after-reduction rate of 10% on his interest, retails, royalties, or other earnings from TEDA, except for those exempt from the tax according to law; one who provides funds or equipments under favorable conditions or transfers advanced technologies may, once approved, receive extra tax deduction or tax exemption treatment. Source: http://www.investteda.org/en/flfg/tzzctx_ss.html

Akifumi Kuchiki 185

With its 12-m-deep, two-way navigation channels, the port serves North China, Northeast China and Northwest China as the primary gateway for imports and exports. The port is used by Toyota to import components and export products. Table 4.2 illustrates the infrastructure of the TEDA, which provides a water supply, a power supply, sewage treatment, a gas supply, communications and so on. (b) Institutional reform Preferential treatment such as tax exemption or reduction and streamlined investment procedures in Tianjin are crucial to inviting foreign investors and are almost the same as those of other cities in Guangzhou and Shanghai. Table 4.3 shows the preferential tax treatment of the TEDA’s productive enterprises such as advanced-technology-oriented enterprises, export-oriented enterprises and energy, communications and construction projects. The rate of enterprise income tax for advanced-technologyoriented enterprises is 15 per cent. An advanced-technology-oriented enterprise may be granted a reduction in income tax by half for 3 more years. It is intended that investment within the TEDA should be streamlined, and Figure 4.12 shows the TEDA’s consulting services procedures. The TEDA Economic Development Bureau (EDB) and Investment Promotion Centre (IPC) function to accept foreign investors at the point of entry. The main processes are as follows: to make an on-site trip to the TEDA, to do feasibility studies, to decide investment, to apply for work permits and visas, to arrive in the TEDA and to register establishment of the enterprise. Until 2000 the TEDA had followed a policy of inviting large-scale firms, but this policy changed and it started inviting small- and medium-scale firms to provide supporting industry, partly because of Toyota’s involvement in 2002. The TEDA encourages the following automobile component industries: brake assemblies, driveshaft assemblies, transmissions, diesel fuel pumps, pistons, bulbs, hydraulic tappets, sliding bearings, aluminum radiators, bumpers, car air-conditioners, locks, back millers, power windows, unit meters, motors, lights, die-castings for automobile use and so on. Under this policy component firms are invited to supply components to assembly firms in Beijing, Tianjin and other cities near Tianjin. The number of registered foreign firms in the TEDA is more than 3000, but large-scale firms with more than US$20 million in total investment number only 200 (see Sato 2003). The policy of supporting small- and medium-scale firms has gone as follows since 2000. First, exhibitions are held to give small- and medium-scale component firms the opportunity to negotiate with large-scale assembly firms. Second, the TEDA Credit Guarantee Centre was established in 2002 to provide loans to small- and medium-scale firms. Third, TEDA Venture Capital provides loans to venture firms. Fourth, a committee was established to help enhance the productivity of small- and medium-scale firms. Fifth, an industrial area specifically for small- and medium-scale firms will be established.

186 A Flowchart Approach Figure 4.12

Consulting services procedures in Tianjin TEDA Economic Development Bureau (EDB) Investment Promotion Center (IPC) Introduce TEDA investment environment Make an on-site trip to TEDA EDB/IPC makes trip arrangements Do feasibility studies EDB/IPC provides related helpful data

Select the residence of the proposed enterprise

Decision is made to invest

EDB/ICP assist

Apply for allowances

Select the residence of the proposed enterprise Apply for allowances

Register establishment of the enterprise EDB/IPC provides suggestions Apply for work permit and visa

EDB/IPC introduces professional lawyers and accounting firms to assist

Arrive in TEDA

EDB/ICP assist

Look for an apartment

Accompanied children get in school

Register establishment of the enterprise

Fit in the local community

Source: TEDA Administrative Commission.

(c) Human resource development We consider the three kinds of labour noted above, that is unskilled, skilled and professionals such as accountants and researchers. Tianjin is attractive in having many university students and almost unlimited cheap labour.

Akifumi Kuchiki 187

What Tianjin lacks in the field of human resources is entrepreneurs who will engage in capacity-building to invite foreign investors. However, there are 20 universities and colleges in Tianjin, boasting 79,581 students, of whom 73,630 are undergraduates and 5951 postgraduates. There are 26,150 staff members, of whom 9589 are full-time teachers, including 1093 professors, 3142 associated professors, 3674 lecturers, and 1060 assistant lecturers (1997 figures). 3. Anchor firms Toyota is an anchor firm agglomerating automobile component firms in the Tianjin area. In 1980 Japan surpassed the USA for the first time to become the world’s top auto-producing country. At around that time, the Chinese authorities become interested in Toyota as an investor and joint venture partner. However, Toyota continued for the meantime its strategy of exporting to China, setting up sales networks but refusing to manufacture locally. According to Water (2003), we may summarize Toyota’s history of manufacturing in China as follows. The company took a multi-faceted approach to establishing a base for passenger car production in China. First, it had set up an extensive sales network and a considerable number of service facilities in China, and in 1995 it invested US$132m. to set up the Toyota China Technology Centre in Tianjin. This facility was used to train parts and components suppliers, to support dealers and service facilities, and to provide Toyota motor vehicle repair centers with factory-sponsored technical training. The second move was to begin a series of targeted investments in China’s automotive industry. Between 1995 and 1999, Toyota invested more than US$321m. in a joint venture engine plant with the Tianjin Automotive Group. The Tianjin Automotive Group was a producer of mini cars, trucks and buses that also produced the Daihatsu Charade under a licensing agreement. In addition, Toyota established a facility to produce 150,000 Toyota 1.3-litre engines per year, and three major automotive component ventures for the production of universal joints, castings and steering components in Tianjin. In May 2000 Toyota established the Tianjin Toyota Motor Company in a joint venture with the Tianjin Automotive Xiali Company, Daihatsu’s joint venture with a Chinese firm, to produce Toyota’s small-car model, the Vios. Toyota had been negotiating with Tianjin for several years for a joint venture and also assisted the Tianjin Automotive Group to increase production to 150,000 Charades per year to qualify as a key producer in China’s automotive sector. Since then, the newly formed Tianjin Toyota Motor Company has established several ventures with Chinese automotive suppliers and has induced some of its major Japanese suppliers to move operations to the Tianjin area to more effectively support Toyota’s new small-car venture.

188 A Flowchart Approach

In February 2002 the FAW Group acquired a majority stake of 51.9 per cent in the Tianjin Automotive Group. About a year later, in mid-summer 2003, Toyota and the FAW Group agreed to launch four Toyota models by 2005, the Land Cruiser Prado and the Crown. Meanwhile, the joint production of the Toyota Vios small-car in Tianjin has been unable to keep up with demand simply because of inadequate production capacity. Tianjin Toyota started operating in 2002 as an assembly firm.The TEDA is building capacity for small- and medium-scale firms to supply components to Toyota. Toyota’s local contents ratio at the Tianjin plant is 80 per cent.3 Tianjin is developing an industrial cluster as a group of many industrial zones including the TEDA.

Step II: the related firms A keiretsu,4 already mentioned, is a loose conglomeration of firms organized around a single bank for their mutual benefit, and playing an important role in forming an industrial cluster. The firms sometimes, but not always, own equity in each other. Part of the formation, symbolized by vertical relationships, is the manufacturers’ keiretsu integrating a pyramid of suppliers and component manufacturers in one structure. The large, horizontal keiretsu spans a wide range of industries, including banking, insurance, steel, trading, manufacturing, electricals, gas and chemicals. The companies within it, whether they are customers higher up in the pyramid or subcontractors, behave as one firm: giving loans, technology, development costs, long-term supply agreements etc. This is known as the one-set principle. Agglomeration depends on the behaviour of components industries and anchor firms. In the case of Tianjin, Toyota took opted for crossdock logistics, which is why components firms need not establish subsidiaries in Tianjin. We will now see how this works. And we will use the case of Denso, a typical component supply firm in the keiretsu of Toyota, to see how scale economies were crucial to establishing a plant producing components (in this case, air-conditioners) in Tianjin. Cross-dock logistics Cross-dock logistics5 allow component firms to avoid establishing plants in Tianjin by reducing the transportation costs of components from Shanghai (see Figure 4.13). Toyota uses such means to transfer parts and components over this route. The Shanghai branch of Toyotatsusho, Toyota’s keiretsu company, is responsible for the logistics. We may see how the component industry in Shanghai developed in the 1990s from Tables 4.4 and 4.5. Table 4.4 shows output value by region of automobiles, engines and components in 1993. Jilin, Hubei and Shanghai are in order of output value of automobiles. Sichuan, Guangxi, Jiangsu, Beijing and Liaoning are in order of output value of engines. Shanghai, Sichuan, Hubei and Zhejiang are in

Akifumi Kuchiki 189 Figure 4.13

Cross-docking at work

Shipping

Sorting

Receiving

Source: Gue (2001).

order of output value of components. The situation regarding automobiles and engines in 1993 is almost the same as that in 2001. It is noteworthy that Sichuan dropped in the output of automobiles. The most striking change between 1993 and 2001 is that Shanghai’s output value of components rose by five times. It is further clear, by taking Jiangsu and Zhejiang into consideration, that the Shanghai region has formed an agglomeration of components. Shanghai, Jiangsu and Zhejiang are in order of output value of components from the highest in 2001. We can find that Tianjin’s Toyota has an incentive to reduce the transport costs by collecting components in Shanghai and transporting the components packed by cross-docking from Shanghai to Tianjin. It is cheaper for Tianjin’s Toyota to import components from Shanghai than to produce them in Tianjin. The cross-dock logistics therefore have a negative effect on cluster forming in Tianjin.

190 A Flowchart Approach Table 4.4 Yuan)

Total output of the Chinese automobile industry, 1993 (million

Commodities Province

Engines

Parts & components

5,810 6,854 1,368 512 188

379 1,120 136 30 0

1,299 1,592 866 235 216

Liaoning Jilin Heilongjian

4,662 16,523 656

1,114 23 471

1,523 820 395

Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong

10,674 6,134 1,171 974 938 3,474 2,403

247 1,329 478 128 0 214 585

4,527 1,776 2,112 647 392 656 1,298

Henan Hubei Hunan Ghangdong Guangxi Hainan

787 14,995 744 5,045 3,199 0

24 22 376 26 1,430 0

919 2,492 1,594 833 476 11

7,189

2,173

3,056

Tianjin Beijing Hebei Shanxi Inner Mongolia

Sichuan

Automobiles

Source: China Automotive Industry Yearbook 1994.

Toyota’s keiretsu firms and other related firms in Tianjin are shown in Tables 4.6 and 4.7, respectively. They make clear the following three characteristics. First, all of the firms except two Toyota Motor Corporations are of either joint venture type or technical assistance type. Of the Japanese firms, 33 per cent are wholly owned and the others are joint ventures with Chinese firms. It follows that capacity-building by local firms as partners of joint ventures is key to attracting foreign firms. Tianjin is said to be lacking in entrepreneurship compared with other regions in China, which is one of the reasons why it is slow to introduce foreign direct investment compared with southern China and the Shanghai region (my interview to a staff member of Marubeni Corporation in Tianjin, 28, August 2002). Second, all the keiretsu firms and related firms except Daihatsu in Tables 4.6 and 4.7

Akifumi Kuchiki 191 Table 4.5 Yuan)

Total output of the Chinese automobile industry, 2001 (million

Commodities Province Tianjin Beijing Hebei Shanxi Inner Mongolia

Automobiles

Engines

Parts & components

3,841 5,065 669 436 598

661 106 120 159 0

2,053 863 2,278 969 219

Liaoning Jinlin Heilongjian

8,627 58,242 4,060

1,855 65 1,859

6,116 3,639 1,926

Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi

43,099 8,882 2,204 6,466 4,668 8,238

299 454 0 2 0 0

22,733 7,891 7,676 1,766 1,777 680

Shandong Henan Hubei Hunan Guangdong Guangxi Hainan

4,503 2,662 47,359 3,423 12,480 4,352 0

333 0 0 89 287 1,869 0

3,543 2,299 5,265 2,201 2,820 1,315 27

4,492

774

2,272

Sichuan

Source: China Automotive Industry Yearbook 2002.

started operating in and after 1995 (Daihatsu operated in 1985 independently of Toyota and later merged with Toyota). Third, Toyota’s keiretsu firms such as Denso and Aishin started operating in 1995, 1996, 1997 and 1998. The three related firms invested in the form of technical assistance. To take Aishin’s inlet modularity as an example, it set up five components such as throttle bodies, inlet pipes and variable inlet bulbs. Modularity increases measurement capacity and transportation costs, letting keiretsu firms establish a new plant in a cluster. Conditions sufficient for building a new plant at a cluster In order to consider whether an anchor firm and its related firms will form and develop a cluster we take scale economies and external economies of the anchor firm into consideration.

Keiretsu companies of Toyota in Tianjin

Technical assistance Technical assistance Joint venture Technical assistance Joint venture Joint venture Joint venture Joint venture Joint venture Wholly owned Joint venture Joint venture Joint venture Joint venture Wholly owned Joint venture Joint venture Technical assistance Joint venture Joint venture Wholly owned

1985,01 1994,09 1995,04 1995,10 1995,12 1995,12 1995,12 1996,03 1996,05 1997,02 1997,06 1997,07 1997,07 1997,12 1998,02 2000,06 2000,10 2001,02 2001,02 2001,05 2001,07

Source: Toyota’s Activities in China, Toyota, April 2002.

Daihatsu Motor Co. Ltd Aishinseiki Co. Ltd Toyotatsusho Corporation Denso Corporation Toyota Motor Corporation Denso Corporation Toyota Gosei Co. Ltd Denso Corporation(asumo) Toyota Motor Corporation Toyota Motor Corporation Aishinseiki Co. Ltd Toyota Motor Corporation Denso Corporation Denso Corporation Toyota Motor Corporation Toyota Motor Corporation Toyota Gosei Co. Ltd Denso Corporation Tokairika Co. Ltd Aishinseiki Co. Ltd Toyota Motor Corporation

192

Table 4.6

Technical assistance to Daihatsu Disc calipers Copper plate prints Distributor Constant-velocity joint Alternator, scooter Brake hoses Small motors Engines Material for casting of c.v. joints Clutch parts, brake parts Steering, propeller shafts Electric parts Car air-conditioners Consulting on car New compact car Weather strips Air cleaners Switches Door locks, window winders, hinges, etc. Support of Toyota’s marketing strategy in China

Table 4.7

Japanese companies related to Toyota in Tianjin

Joint venture Joint venture Joint venture Joint venture Technical assistance Technical assistance Technical assistance Technical assistance Joint venture

1995,10 1995,12 1995,12 1995,12 2000,08 2000,08 2000,09 2001,05 2002,02

Araco Corporation Aisan Industry Co. Ltd Tokai Rubber Industries Ltd Fujitsu Ten Limited. Chuo Spring Co. Ltd Futaba Industrial Co. Ltd Chuo Spring Co. Ltd Maruyasu Industries Co. Ltd Futaba Industrial Co. Ltd

Panels, doors, roofs Fuel supply devices, throttle bodies, carburettors Engine mountings, water hoses Audio products Control cables Exhausts Coil springs Brakes, fuel pipes Body parts

Source: Toyota’s Activities in China, Toyota, April 2002.

193

194 A Flowchart Approach

Hypothesis: Development of an industrial cluster depends on demand – the quantity of production of the anchor firm. If an anchor firm expands production because of an expected expansion of sales in China, then its related firms will establish a new plant in the cluster. Independent variables of transportation costs are distance, cross-dock logistics and modularity in the following. That is: t = f (distance, cross-dock logistics, modularity) We assume that an increase in transportation costs caused by technological progress of modularity depends on management and technology: m = g (management, technology) It is well known that externality depends on a number of related firms in a cluster. Notations are as follows: t = transportation costs per unit, m = increase in transportation costs per unit caused by technological progress of modularity, e = external economies, s = movement costs for a related firm to establish a new plant, and q = quantities of production We assume that cross-dock logistics do not change, that the technology of modularity does not change, that movement costs are fixed and that the number of related firms is fixed. Then, we can conclude that the quantities of production decide the inequality. Related firms’ decisions depend on the quantities of production of an anchor firm. A related firm compares the total transportation costs, tq, with the movement costs, s, as follows: s < tq

or

s