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A Study on Sustainable Development of Local Industrial Cluster

GUO Nan-yun1 SUI Guang-jun1,2 1. Institute of Industrial Economics, Jinan University, P.R.China, 510632 2. Guangdong University of Foreign Studies, P.R.China, 510420 gnywq@126.com Abstract This paper reviews literatures about sustainable development of local industrial cluster and indicates that simply introduction of foreign capital and embedding into global value chains system is not the sufficient and necessary condition for sustainable development of local industrial cluster. It is innovation uncertainty that influences sustainable development of industrial cluster. To solve the innovation uncertainty problem is the key to realize sustainable development of industrial cluster. Individual enterprise, network organization, and social environment are three aspects which need optimization. The paper architectures the mechanism of sustainable development of industrial cluster based on the optimization of these three aspects and analyzes its impact towards industrial cluster development. Keywords Industrial Cluster Uncertainty Sustainable Development


The improvement of industrial cluster towards local economic development has reached consensus. While local industrial cluster brought growth to local economy, its own development encountered some problems as the mode of economic growth changed. Many local industrial clusters stepped into a fixed low efficiency status, which means in the cluster, industry stays at the bottom of value chain and with low technique and added value, but with high pollution and energy consumption. China government proposed scientific outlook on development towards this and conducted adjustment and upgrading to industrial structure. Sustainable development of industrial cluster becomes the hot problem among researchers. With the overview of researches, the focuses are about how to enhance the industrial cluster innovation and how to improve industry towards the higher end in global value chains.

2 Extant Literature Review about Sustainable Development of Local Industrial Cluster

Extant literature review about sustainable development of local industrial cluster mainly focuses on three aspects: one is global value chains perspective, the second is internal organizational structure and governance perspective, the third is industrial cluster life cycle perspective. 2.1 Global Value Chain Perspective Global value chain is a relatively new perspective. Kaplinsky & Morris (2001) indicate that from value chain perspective, local industrial cluster upgrading has four different types, i.e. process upgrading, product upgrading, functional upgrading, and chain upgrading. Gereffi (1999) indicates that transnational companies management towards value chain helps developing countries local industrial cluster achieve gradual upgrading in value chain. However, Wen & Zeng 2005 indicate that transnational companies play the determinant role in global value chain. The upgrading of those local industrial clusters who embedded in global value chains with semi-hierarchical relationship would be promoted or impeded by the value chain governors global leading companies , and the action is depends on whether local industrial clusters upgrading hampers their core competitiveness or not. Due to the core competitiveness of leading companies in research, development, design, branding, and marketing, they would lessen the threat of competition from local industrial cluster enterprise by

impeding them out of these fields. So under the leading companies rule, local industrial cluster could achieve product upgrading and process upgrading but could not achieve functional or chain upgrading Humphrey & Schmitz . Global value chain has a strict ranking system in space. Each rank indicates many local industrial clusters in the same level. If the core industry of local cluster belongs to low value type, the supporting parts would also be in low type. Finally the whole cluster economy belongs to the low rank. Only through the core industry upgrading can the whole cluster reaches development Zhang, 2005 . 2.2 Internal Organizational Structure and Governance Perspective Meyer-Stamer(1998,1999) compare ceramic industrial cluster with textile cluster in Santa Catarina, Brazil and indicate that ceramic cluster overcame the crisis in 1990s and realized upgrading through cooperation between enterprises, while textile cluster failed to realize upgrading because of no cooperation between local companies. From inner organizational structure of industrial cluster, core enterprise leading cluster has the Schumpeterian technology innovation and upgrading ability because the core enterprise has the monopoly profit in the cluster, that is the ability to functional upgrading and chain upgrading Zhang & Liu, 2006 . So, to raise a monopoly enterprise and develop core enterprise leading industrial cluster is a viable mode. Zhang did research on Spanish shoe industrial cluster upgrading problem and indicates that Spanish shoe industrial cluster achieved upgrading under the pressure from both sides of global value chains. The main reason is the realization of self-design ability and the differentiate strategy which replaced the low price strategy. Inner supporting system in the cluster is very sophisticated. Inner organization structure helps to stabilize the industry cluster, which could help other enterprises utilize all the resources in the network. 2.3 Life Cycle Research Perspective Chen & Wang 2005 indicate that China industrial cluster development has enter a fixed period, which would leads to the inefficient status of the cluster. To achieve the sustainable development of industrial cluster, public policy adjustment should be made, including the breaking of administrative region, planning the local industrial cluster enhancing the social credibility guiding cluster to be embedded in global value chains; and moving to high-end development. For example, Dong Guan development mode is stepping into the path-dependent of foreign capital-driving and extensive growth Song, 2007 , whose processing is high in terms of the contribution towards local GDP, but low in the profit. It is the path of high pollution, high energy consumption, and resource dependence, which could not achieve sustainable development. Sun & Yuan 2007 indicate sustainable development of industrial cluster origins from the cohesiveness of industry, which means to put the industrial value chain-related enterprises and sectors to a special region and manage the manufacturing operation and service in order to raise industrial cluster competitive advantage and ensure the continuous growth. According to the analysis of researches in sustainable development of industrial cluster problem, although the literature emphasizes the importance of innovation, which means the combination between research, education, and the government should take charge to set industrial policy, raise the government investment in research, and deepen the reform of technical system. In the real world, innovation is still a problem. Powerful enterprises may not have innovation motivation; while enterprises with innovation motivation may not be powerful. To understand industrial cluster sustainable development problem, the author indicates that we should start from the real situation of China and realize all the uncertainty of industrial cluster development. Then, starting from these uncertainty, search the path of sustainable development of industrial cluster in China.


Key Factors for Local Industrial Cluster Sustainable Development

Capital Introduction and Embedded in Global Value Chain is not the Sufficient and

Necessary Condition for Industrial Cluster Sustainable Development Capital introduction and embedded in global value chain is not the sufficient and necessary condition for local industrial cluster sustainable development. Judging from the China economic development recent decades, introduction of foreign capital largely improved China economic growth and technology innovation. Introduction of foreign capital also improved exchange between local enterprises and foreign capital enterprises through participate in global industry work division systems, China local industrial cluster entered global value chain systems and technology level improved. Products have been moving from domestic market to international market. Entry of technology and capital continuously improved local industrial cluster development. However, local industrial cluster embedded in global value chain systems could not help the sustainable development of industrial cluster. China industrial clusters have already embedded in global value chain systems. For example, Fo Shan ceramic industrial cluster, in this value chain systems, Italy and Spain are at the top level, who control research and development of ceramic machinery, ceramic tiles and color glaze. China entered manufacturing process of global value chain through the introduction of Italian ceramic production line and OEM. As a newcomer in international market, technology level in China ceramic industry is low, international market is unfamiliar, and market self-determinant ability is poor, which lead to much dependence to external communication Wen, 2004 . Although through OEM, China local cluster enterprises accepted external technology, improvement of research and development were not developed yet. To ceramic industry, it is not only at the bottom of the value chain, but also high pollution, high energy consumption, and resource dependence, which is not the sustainable development. During China industrial structure switching period, limitation to the development of high pollution, high energy consumption industry is the policy guidance. Now ceramic industry is facing the bottleneck of development, stop or change, whatsoever, it is an obstacle for Fo Shan ceramic cluster sustainable development. Foreign capital-driven industrial cluster could not form the sustainable development necessarily. Now that local industrial cluster embedded in global value chain could not realize sustainable development, could those foreign capital-driven industrial clusters that embedded themselves in global value chain through introduction of foreign capital truly realize sustainable development or industry upgrade? The answer is absolutely not. Through observation towards foreign capital-driven industrial clusters, most clusters are manufacturing enterprises, which is the result of global manufacturing shifts. Transnational companies did not put the research and development or operation function together to the targeted nations, which formed enterprises in targeted nations the solely manufacturing position. The development in this kind of industrial cluster is not sustainable, especially when local production costs kept rising, foreign capital enterprises would switch again to other places. If local network is not tightly connected with foreign capital enterprises network, shaped the advantages of research, marketing or branding, these foreign capital-driven industrial cluster would decline. Dong Guan IT industrial cluster belongs to this sort of external embedded local network systems. Most enterprises in the cluster are Taiwanese enterprises. This network joined in global value chain division system from the very beginning and, like the ceramic industry, is at the bottom manufacturing chain. From the development of Dong Guan IT cluster these ten few years, enterprises production is mainly the external order and no self research systems at all. Enterprises suppliers and customers are mainly Taiwanese or transnational companies with low local enterprises connections. Now the source costs in Zhujiang Delta Region are keeping rising, many enterprises are thinking of the switching towards hinterland and even Burma or Vietnam. Although every place is thinking of the change of industrial structure to upgrade industry level, the high dependence of foreign capital made cluster development influenced by many factors. 3.2 Key to Industrial Cluster Sustainable Development Innovation Uncertainty A conclusion could be draw from literatures: innovation is the main driver of industrial cluster sustainable development. Why innovation is not at the satisfied level up to now even though we paid that much attention to it? This is related to innovation uncertainty. Innovation uncertainty includes industry or product technology path uncertainty, system environment uncertainty, innovation risk

uncertainty, policy environment uncertainty, and so on. Uncertainty means change; a little change in environment would determine the prosperity or decline of industrial cluster. Industry or product technology path is uncertain. Infant industry or product is a doubt in future; mature industry or product is also the same situation. Small enterprises lack of the control of market due to the limitation of capital, technology, so that they are hard in forecasting the industry and dare not carry out the technology innovation activities. They preferred to do improvement in technology. Big enterprises rely on the capital, technology, and human resource to suit the frequently changed and multiple path industry and thus control the industry product innovation. However, big enterprises do not always do product innovation. To lengthen product market lifecycle, big enterprises prefer to maintain technology, rather than do the fundamental innovation, which finally suppress the cluster innovation. System environment uncertainty is the intelligence property rights protection and patent system, rather than the non-production interest-seeker or system space. Technology overflow effect makes single enterprise innovation information spreads in network fast. Technology is copied by other enterprises at low costs. Innovation enterprises get average innovation return soon. In the absence of intelligence property rights and patent protection system, single enterprise innovation return is most likely to be less than innovation investment, which makes enterprises lost the driver of innovation Zhang, 2007 . China is now at the absence of intelligence property rights and patent protection, which leads to cluster enterprises copies everywhere and lacking of innovation. Innovation risk uncertainty includes innovation process and innovation result uncertainty. For electronics, biology, new materials, this sort of high technology industry takes a long time to achieve innovation. The requirement of human, capital or equipment is high, innovation investment is large. In addition, innovation process maybe uneven. The fault in design, the change in environment, and the emergencies may lead to innovation failure. Only big companies dare to face the high innovation investment and result uncertainty; while many small enterprises dare not to attend it. Policy environment is uncertain. Now local governments set a lot of policy for industrial cluster. However, industrial cluster policy is shortsighted, not stable or executively. Many local governments paid attention to attract foreign capital while pay no attention to the infrastructure. This kind of policy uncertainty is not good for the healthy development of cluster. Any development involves uncertainty factors. We can lessen the disadvantages of uncertainty. From uncertainty factors, industry or product technology path or innovation risk uncertainty could be very much relieved through cluster enterprises subjective efforts and cooperation; while system and policy environment uncertainty belong to objective factors, which need government efforts. Only through the improvement of both subjective and objective environment to evoke enterprises and cluster innovation, industrial cluster would sustainable development.

4 Industrial Cluster Sustainable Development Mechanism: Individual EnterpriseCluster OrganizationSocial Environment Optimization
Industrial cluster is a network system, including individual enterprise, cluster organization, and social environment. All types of innovation uncertainty are everywhere in three dimensions of industrial cluster and affecting each other, which finally influence industrial cluster development. How to lower different uncertainty and improve enterprises and industrial cluster innovation ability? This needs to consider all three dimensions. From individual enterprise, organization structure, and social environment optimization to lower innovation uncertainty and to realize local industry cluster sustainable development. 4.1 Individual Enterprise Level- Microscopic Activities optimization Enterprises microscopic activities optimization is to improve innovation through heightening enterprises activity and lowering industry or product technology path uncertainty towards the trend of industry product. Enterprises are core factors of industrial cluster, as industrial cluster microscopic individual,

enterprises goal is the optimization of economic return. No matter suppliers or enterprises, they care for sales and production, based on which innovation is carried out. Enterprises activities innovation is limited to the learning ability or technology level. This needs enterprises to enhance the connection and to participate in network division system. To make fully use of industrial cluster to improve the learning ability and sensitivity to market information and forecasting of future needs. From copy technology to simulate innovation, and then self-determinant innovation, companies set up brand and enhances enterprises competitiveness. This is the foundation of industrial cluster sustainable development. However, enterprises as network core has a shortcoming, that is enterprise cares only its own interest, which results in the conflict between individual enterprise interests and cluster, social environment interests. For example, technology spillover in cluster and the free ride of other enterprises would lower the enterprises innovation, and thus lower the clusters overall innovation. Organizational structure optimization is then required to set up an enterprise innovation cluster structure. 4.2 Cluster Organization Level Organization Structure optimization Organization structure optimization helps to solve the knowledge overflow and lack of activity under innovation risk uncertainty. Due to network level innovation return and enterprise level innovation have intrinsic conflict, industrial cluster innovation power and spillover effect are conflicting. Microscopic enterprises do innovation because they expect innovation return is higher than innovation investment. To those special market-leading local industrial clusters, small product-centric enterprises gather in the structure. Under this organizational structure, single enterprises product innovation return would be separated in the network by the overflow effect quickly, and thus single enterprise innovation investment could not be covered. If network has a structure according to the scale, large-scale enterprises could use the scale effect to cover the product innovation investment and set the advantage. Furthermore, the core enterprise in the core enterprise-leading industrial cluster structure could on one hand use the cooperation to control the largest share of the innovation, on the other hand, through rating the subcontractors, the leading enterprise could accumulate the Schumpeter monopoly profit Zhang, 2007 . This could solve the conflict of innovation power and spillover effect. Thus, cluster organization structure optimization should shift the special market-leading cluster to core enterprise-leading industrial cluster structure.

4.3 Social Environment Level System Optimization Policy optimization System and policy optimization is through external environment construction to lessen external environment uncertainty against industrial cluster sustainable development. To set up and improve social environment by government sectors to facilitate technology innovation is the innovation leading nations and districts successful experience. Technology innovation leading nations such as U.S, government participation and support are observed. U.S Taxation Law requires that technology-related research or experimental cost could be deducted and not calculated as accumulated depreciation. If research and development cost is above the average level of last three years, 25% of the exceeded part is tax free Yuan, 2006 . Law of Domestic Product Purchase regulates U.S government conduct protective purchase to technology industry and government should purchase the product in growing period, and even the middle research result, the key technology. This solves the technology product market insufficient requirement in early period. To small and mediate enterprises product, the law also regulates that government purchase contract should first consider them, so that small and mediate enterprises innovation could be encouraged Xu, 2007 . China should also set up good environment through system and policy optimization. In taxation, new taxation system should be set to support enterprises self-determinant innovation through using taxation policy to leverage enterprises to add more research and development investment setting up multilayer financial systems, setting the compensation mechanism from commercial banks to enterprises technology research and development, self-determinant innovation activities; conducting support self-determinant innovation government purchase policy; considering first of those who have self-determinant intelligence property rights

product; using government purchase as leverage to promote enterprises technology innovation, product innovation, and industrial cluster upgrade; improve intelligence property rights protection system; ensuring enterprises innovation return. Besides system and policy optimization, government should introduce innovation source by setting up government-driven enterprises public technology innovation and promotion sectors to serve the cluster enterprises with new product design and experiment, etc.


Local industrial cluster sustainable development is the topic which attracts lots of researchers. This analysis indicates that foreign capital and embedded in global value chain systems is not the sufficient and necessary condition for local industrial cluster sustainable development. The key to industrial cluster sustainable development is innovation uncertainty. Industrial cluster is a complicated system including individual enterprise, cluster organization, and social environment. Individual enterprise is the core of industrial cluster development. Cluster organization is the bond, and social environment is the foundation. Industrial cluster sustainable development will not appear with the merge of local and external market. It is far from enough to achieve industrial cluster sustainable development depending on foreign capital and embedded in global value chain. Individual enterprise, cluster organization, and social environment, these three dimensions should be considered together. From three-dimension optimization to improve enterprises and industrial cluster overall innovation and finally achieve sustainable development of local industrial cluster.

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