Cluster-based industrialization in China

Wall Street Journal article highlights past successes and future challenges

Source: IFPRI/Xiaobo Zhang
The Bestex Textile Company is trying to break its dependence on low-cost labor by investing more in equipment.

Despite the significant role of “clustering” in China’s rapid industrialization, the survival of millions of small manufacturers that follow this business model is threatened by rising wages and a stronger yen, according to a recent article in the Wall Street Journal.

Clustering—or the banding together of small businesses, which are part of the same industry, to specialize in one narrowly defined stage of production—has helped Chinese entrepreneurs overcome the hurdles to running a business in a state-dominated economy, said Xiaobo Zhang, an IFPRI research fellow who has studied extensively the contribution of clusters to rural development.

The Journal’s Andrew Batson accompanied Zhang on a recent visit to China’s Zhejiang province to hear firsthand about the opportunities and challenges of rural industrial clusters.

“With production split up among many firms, each one can give credit to its customers and get credit from his suppliers, easing the burden of financing” and lowering the barriers to entry, explained Zhang in the article.

The effects of China’s rising wages and stronger currency, however, are challenging this once successful model. “The cluster-based model is labor intensive,” added Zhang. “The real question is whether it can survive in the new environment of labor scarcity and higher labor costs.”

To cope with the shortage of workers, many factories now recruit young married couples and provide them with individual apartments. Other businesses are instead turning to technology to reduce their labor needs.

“Right now is a critical transitional period. Some clusters will survive, some will collapse,” concluded Zhang.

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