Clusters

2. Theoretical Framework
2.1 Introduction
In the past 30 years, particularly since China's admission to the WTO in 2011, China's economy has experienced rapid growth and attracted worldwide attention. China is now the second largest economy in terms of GDP and is a leading producer and consumer of many different product categories. Automobile industry is an good example. However, the auto industry in China is not advanced as the ones in America and Japan. Moreover, the industry is experiencing its bottleneck and the automotive value chain in China is in transition. Industrial clusters could help to deal with these problems and promote the development of China's automotive industry. When clusters are established, the value chain of this industry will be modified and more foreign direct investments will be attracted which will further boost the industry.

2.2 Theory for clusters
2.21 Definition
Born in the strategic management literature, the concept of clusters has spanned over time through a wide range of disciplines, changing, adapting, and gaining theoretical power by finding application to different fields (Porter, 1990, 1998). Today, several definitions of clusters coexist as well as several applications to different social economic contexts, each one of them emphasizing one or more of the specific features of the cluster.

In its literal and most general meaning a cluster is simply defined as "a group of similar things or people positioned or occurring closely together"(The Oxford Dictionaries). In economics, Krugman (1991) stated clusters are not seen as fixed flows of goods and services, but rather as dynamic arrangements based on knowledge creation, increasing returns and innovation in a broad sense.

Porter (1998) described clusters as geographic concentrations of interconnected companies and institutions in a particular field, encompassing linked industries and other entities important for competition. Clusters also often extend downstream to channels and customers and laterally to manufacturers of complementary products and to companies in industries related by skills, technologies, or common inputs. Finally, many clusters include governmental and other institutions, such as universities, standards-setting agencies, think tanks, vocational training providers, and trade associations- that provide specialized training, education, information, research, and technical support. Porter redefined the concept of cluster in a new analysis in 2000, concentrating on the types of relationships between cluster members 'a geographically proximate group of inter-connected companies and associated institutions in a particular field, linked by commonalities and complementarities' (Porter, 2000), and defining its boundaries that can 'range from a single city or state to a country or even a group of neighboring countries' (Porter, 2000).

Three key aspects are involved in the definitions of clusters. The first one is geographical location. Clusters are driven by proximity and are often concentrated in an area within a larger nation, and in one town or sometimes even be generated in a group of neighboring countries. The second aspect is value creation. Companies from different industries in clusters performing activities which are related to each other can create value on the goods or services they produce. The third one is the business externalities. Clusters are driven by various types of externalities, supplier relationships, the use of a common factor inputs like specialized labor markets, government agencies or knowledge spillovers. While many of these positive externalities occur naturally, their dynamics can be stimulate through a mix of networking, collaboration and competition.

The success of a cluster depend on the cooperation between each entities within the cluster. For example, in tourism the ability of a hotel to create value for its customers is strongly relied on the quality of local companies in many other related and supporting industries, from agroindustries, to restaurants, to transportation, to travel agents, to shops, and to financial and health services.
Clusters can create economic benefits (Porter, 2008), The benefits of a cluster can be classified into three dimensions. First, clusters increase productivity and efficiency. Companies gain efficient access to specialized inputs, services, employees, information, institutions, training programs, and other 'public goods' (local outsourcing) the coordination and transactions across firms are also simplified. Moreover, clusters insure the rapid diffusion of best practices. They also encourage companies to make visible performance comparisons and strong incentives to improve their capabilities. Second, clusters stimulate and enable innovations. Clusters improve the likelihood of perceiving innovation opportunities (e.g., unmet needs, sophisticated customers, combinations of services or technologies), with the presence of multiple suppliers and institutions, clusters assist companies in knowledge creation. And given the locally available resources, clusters can ease the experimentation. Third, clusters facilitate commercialization and New business formation. Clusters make the opportunities more apparent for new companies and new lines of established business. Moreover, spin-offs and startups are encouraged by the presence of other companies , commercial relationships, and concentrated demand. Commercializing new products and starting new companies is easier because of available skills, suppliers, etc.

Ketels and Olga (2008) states clusters are to some extend the result of the general business environment, they are more likely to emerge and fully develop in a strong overall business environment. Therefore, the nature and depth of a cluster depends on the development situation of an economy. There is a great number of literature on industrial clustering observed in developed countries. For example in United States, the steel industry is concentrated in Pittsburg, the automobile industry is in Detroit, the financial industry in New York, and the film industry in Hollywood. While in developing countries, clusters are often less developed and the activities firms perform are less advanced. The competition between firms are mainly based on cheap labor or local natural resources, imported intermediary inputs, machinery and technology are also heavily depended. Specialized local infrastructure and innovation institutions, e.g. educational program and industry associations, are inadequate or absent. However, as economies get more advanced, the development of clusters has been improved. In some Asian and south American countries the development of clusters has attracted the attention from worldwide.

Clusters have been in this world for a long time, there are a variety factors which affects and triggers the emergence of clusters. These include geographical location, local demand, suppliers, transportation infrastructure, and chance events like wars, crucial innovations, and political and economic shocks. Once a cluster is established a self-reinforcing cycle will automatically promote its growth, especially with the help of local public and private institutions.

2.2.2 Types of Clusters
Clusters differ in many aspects: the type of products and services they produce, their stage of development, and the knowledge environment that surrounds them, to name a few(Ketels, 2003).
First, clusters can be categorized by the type of product and/or services they supply. There are clusters in automobile, in financial services, in tourism, in film, and many more. Second, clusters can be classified by the stage of development they have reached. Generally, there are four types of clusters : Geographical cluster - a geographic concentration of related businesses, suppliers, and associated institutions in a particular field; Sectoral clusters -a bunch of related businesses performing activities together from the same commercial sector; Horizontal cluster-interconnections between businesses at a sharing of resources level ; Vertical cluster is a supply chain based cluster. Thirdly, clusters can be classified by different kinds of knowledge. Two types of clusters are identified: High-tech clusters - they are high technology-oriented and adapt to the knowledge economy; Historic know-how-based clusters - firms within this clusters generate traditional activities which maintain their advantage in know-how over the years or even over the centuries.
According to the categorization above, each cluster is unique because of different classification standards. However, Markusen (1996) states that there are still similar characteristics which can be shared among different industry clusters, therefore clusters can also be categorized into four general types: Marshallian, hub-and-spoke, satellite platforms, and state-anchored clusters.
Marshallian clusters are comprised of small, locally owned firms that make investment and production decision locally. Firms in these clusters generally are concentrated in technical expertise industries,design-intensive industries, or advanced producer and financial services industries.
Hub-and-spoke clusters are dominated by one or several large, vertically integrated firms surrounded by suppliers and service providers, examples are Toyota city in Japan and Seattle in United States.
Satellite platforms are industry clusters composed of branches of large, externally owned and headquartered firms, cooperation and linkages between firms are relatively high. An outstanding high-end example is North Carolina' Research Triangle Park.
State-anchored industry clusters as regions where the local business structure is dominated by one or several large government institutions such as military bases, states or national capitals, large public universities surrounded by suppliers and customers. Scale economies in each part are high here.

2.2.3 Advantages and Disadvantages of an Industry Cluster Strategy
2.2.3.1 Advantages
Targeting an industry cluster strategy will provide a great number of local economic development benefits. The principal advantages associated with clusters are grouped into four areas(David & Mark, 2001):
clustering strengthens localization economies:
The concentration of an industry at a particular location may result in significant cost savings to firms in the cluster. These cost savings are considered as localization economies.
clustering fosters industrial reorganization:
The transition in industrial organization from large firms engaged in mass production to small firms focused on specialty production is well documented. This change in industrial structure is attributed to increased global competition and the emergence of new production technologies.
Clustering stimulates networking among firms:
Networking is cooperation among firms to take advantage of complementaries, exploit new markets, integrate activities, rare resources or knowledge. Within industry clusters this kind of cooperation occurs more naturally and frequently.
clustering encourages greater focusing on public resources:
The implementing of industry development efforts permits regions to use their limited economic development resources more efficiently.

2.2.3.2 Disadvantages
The potential benefits of industry clusters are strong incentives to pursue a strategy focused on cluster development. However, some shortcomings are still inherent in a clustering strategy. The principle one is that the possibility of carrying out such a strategy may be low for many regions. Industry clusters are difficult to establish for three reasons (David & Mark, 2001):
regions will have difficulty picking winners:
Communities may have a hard time identifying clusters that best fit their local economies and firms that are most desirable for these clusters. In other words, 'picking winners' is very difficult.
latecomers may not be competitive:
The benefits available to members of a cluster provide early clusters with distinct competitive advantages over late imitators. Latecomers may have difficulty in overcoming the advantages inherent in existing clusters.
supportive institutions are not easy to establish:
Communities will have difficulties (financial and political) in developing the institutional environment required to support the establishment and development of industry clusters.

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