The Evolution of an Industrial Cluster in China

We use two rounds of surveys, in 2000 and 2008, in the Zhili Township children’s garment cluster in Zhejiang Province to examine in depth its evolution. Firm size has grown on average in terms of output and employment, and increasing divergence in firm sizes has been associated with a significant increase in specialization and outsourcing among firms in the cluster. Although initial investments have more than tripled, they remain low enough so that formal bank loans remain an insignificant source of finance. Accompanying lower entry barriers, there have been an increasing number of firms in the cluster, which have driven down profit and bid up wages, particularly since the year 2000. Facing severe competition, more firms have begun to upgrade their product quality. By the year 2007, nearly half of the sampled had established registered trademarks and nearly 20 percent had become ISO certified. Declining profit ratios to initial investment and stagnant TFP imply that the future of this industry is likely to rest on using more advanced technology and higher ratios of capital to labor, which imply increases in firm size and initial investment. Thus traditional sources of finance that do not require honest, efficient, and transparent courts are likely to fade as the need for improved legal and financial institutions become critical factor influencing China’s growth prospects.