C B

Special Feature : Managing Innovation in Clusters and Networks

SME clusters in China

One way to build up innovation capabilities

Xiangdong Chen and Li-li Cao

While SMEs appear keen to adopt new and emerging technologies, they suffer from
a lack of innovation facilities and resources. One way to overcome these problems
is to develop “clusters”, which can provide a platform for SMEs in a region to share
innovation facilities and new ideas and production resources through closer busi-
ness networks. This article describes the character of Chinese SME clusters, which
are highly concentrated both geographically and by industrial sector. It compares
typical regions of SME clusters and analyzes their innovation capabilities. It con-
cludes that product structure, a favourable innovation environment, learning capa-
bility and enthusiasm for innovation are critical to innovation capability in clusters.

Introduction In a globalizing, knowledge-based

A
ccording to statistical data for economy, SME development in China
2005, small and medium enter- has been severely affected. Innovation
prises (SMEs) account for 99.3 is now a critical force to retain an
per cent of Chinese enterprises, 55.6 enterprise’s competitive strengths; but
per cent of national GDP, 74.7 per cent SMEs face several limitations in carry-
of newly increased production value, ing out innovation activities. Their com-
58.9 per cent of sales, 46.2 per cent of paratively weak financial and techno-
revenue, 62.3 per cent of export value, logical backgrounds cannot sustain
and about 75 per cent of jobs across enormous R&D fees and the fast pace
China. However, in terms of innovation of technology development cycles. It is
Prof. Xiangdong Chen
activity in the country, high-tech SMEs generally difficult for SMEs to invest in
International Technology Transfer generate 80 per cent of all new tech-
and Innovation Studies long-term innovation.
nologies. About 85 per cent of the pat-
Li-li Cao However, clusters of SMEs act as
ents come from SMEs, during the pro-
The School of Economics & cess of industrialization, and about 65 a spatial organization, which can pro-
Management, per cent of the patents is adopted into vide a platform for SMEs in the region
Beijing University of Aeronautics & production by SMEs. In any case, SMEs to share innovation facilities, innova-
Astronautics appear more energetic in adopting tive ideas and production resources
Beijing 100083, P. R.China newly emerged technologies, espe- in a closer business network. This ob-
E-mail: [email protected] cially in the IT sectors. vious advantage for competition has

38 TECH MONITOR z Jul-Aug 2006

38 C B
C B
Special Feature : Managing Innovation in Clusters and Networks

attracted the attention of many re- Figure 1: Distribution of SMEs in China (2005)
searchers and policy makers. The clus-
ter strategy has become an important
symbol of regional competitive advan- Other 23
23 other
tage.
provinces
provinces &
and regions
regoins Guang-Dong
Guang-Dong
Characteristics 36.61% 12.51%
Clusters of SMEs are regional agglom- 36. 61% 12. 54%
erations of SMEs with close business
relations and frequent interaction Zhe-Jiang
Zhe-Jiang
within a locality. Fu-Jian
Fu-Jian 12.51%
12. 51%
The industrial cluster has been a 4. 11%
4.11%
phenomenon in China, and is espe-
cially significant in faster growing Jiang-Su
Jiang-Su
economies. One finds similar phenom- He-Bei 12. 03%
12.03%
ena in ancient times, such as for Shang-Hai Shan-Dong
Shan-Dong
needlework in Suzhou, china produc-
4. 21%
5.35% Shang=Hai He-Nan
He-Nan 7.22%
5.41% 7. 22%
tion in Jingdezhen and rice paper He-Bei
5. 35% 5. 41%
manufacture in Anhui.1 However a truly 4.21%
rapid development of such a cluster
in China has emerged only during the
last 20 years, playing an increasingly Source: Development of SMEs in China, Yearbook 2003,
active role in the regional economy China Economics Publisher, April 2004.
and in industrial development. Today
there are thousands of industrial clus- Table 1: Per capita GDP (RMB) in the three economic zones
ters, mainly comprising SMEs. Where
high-tech clusters are concerned, Economic zones 2001 2002 2003
SMEs account for more than 95 per Pearl river delta economic zone 11079.96 12203.42 12826.74
cent.2
It would be therefore useful to in- Yangtize river delta economy zone 15690.55 17458.8 20371.56
vestigate the research on SME cluster Bohai Rim economy zone 13680.71 14976.08 17130.84
development. Where China is con-
cerned, several characteristics can be Source: China’s Statistical Yearbook, 2002-2004
observed.
Regional contrasts Hui-Zhou, and part of Shen-Zhen)
Uneven geographic distribution The rapid development of SME clus- clearly focuses on IT, and the west bank
Although SME clusters have been well ters has been actively and positively on the electrical and mechanical sec-
established in many regions, their pro- influencing the growth of regional econ- tors. In fact, a so-called electronic cor-
duction efficiency and technological omies. According to statistical data for ridor has gradually emerged, covering
contents are unevenly diversified, with 2003, SME clusters developed best in telecommunication, computer, home
imbalanced innovation resource dis- Shenzhen, Dongguan, Wenzhou, appliances, video and audio equip-
tribution across geographical regions. Guangzhou, Zhongshan, Shanghai, ment, and basic components. Produc-
Statistical data from the Ministry of In- Foshan, Taizhou, Ningbo, Beijing, Sha- tion in these sectors from this region
formation Industry reveal that only oxing, Xiamen, Hangzhou, Zhoushan, accounts for about 30 per cent of the
some 160 cities out of about 280 pro- Quanzhou, Huizhou, Huzhou, Suzhou, country's overall production. Within
duce industrial clusters, of which the Jiaxing. These are the top 20 cities, this, the sub-sector of newly developed
major constitutents are SMEs. Most measured by typical indicators such as porcelain-electronic components
Chinese SME clusters are heavily con- per capita income (Table 1). would probably account for as much
centrated in the Pearl River Delta Eco- Records also show that Guang- as 50 per cent; while intellectualized
nomic Zone, the Yangtize River Delta Dong, along with the related Guang- and energy-saving components, and
Economy Zone, and the Bohai Rim Dong Pearl Delta Economic Zone, is environment-friendly services would
Economy Zone (Figure 1). At the end gradually becoming the largest region- be even higher at about 60 per cent.
of 2005, Guangdong province had al cluster, the fastest developing pace Thanks to the rapid development
21,764 SMEs, the largest number in in China, mainly around electronic of SME clusters, the Pearl River Delta
China, accounting for 12.54 per cent telecommunication. These clusters are and Yangtize River Delta Economic
of SMEs in the country. In Zhejiang, the based mainly on sector and technolo- Zone have grown into regions with
figures were respectively 21,615 SMEs gy. For example, Pearl River East Bank higher social welfare and great finan-
and 12.50 per cent. (including Guang-Zhou, Dong-Guan, cial strength. Especially in Zhejiang and

TECH MONITOR z Jul-Aug 2006 39

39 C B
C B
Special Feature : Managing Innovation in Clusters and Networks

Table 2: Typical case: Distribution of different sectors in Guang-Dong Shi electrical products, Nan-Xun timber
products, Shuang-lin mechanical elec-
Districts SME clusters
tronic, Hai-ning spinning and weaving,
Chaozhou Hardware production, food, printing and packing, tea, porce- Jin-Tang plastic, and Yun-He wooden
lain, electrical machinery, farming and planting, aquatic toys. Most clusters in Zhejiang are con-
products. centrated on labour-intensive indus-
Dongguan Electron communication, physical flow, garments, hardware tries, such as spinning, garments and
production, trade service industry. machinery (Table 3).
With the rapid development of the
Fuoshan Spinning and garment, hardware production, woodwork manu- SME clusters, the market share and
facture, aquatic breeds. Flower, shoes, toy, porcelain, con- competitiveness of products from
struction materials, housing-electric appliance, furniture, poul- Zhejiang are high; and new and high
try and farming, electron, auto-parts. technology SME clusters are emerg-
Guangzhou Light industry. ing, such as the software parks in
Hangzhou and Ningbo Districts, and
Heyuany Agricultural products and by-products. communication equipment in Fuyang.4
Huizhou Shoe industry.
Jiangmen Motorcycles and its parts, hardware made through stainless Jiangsu province
steel, electronic components. This is a key province in terms of over-
all GDP contribution. On one hand,
Jieyang Food and its related machinery, electronic piano, and gar- Jiangsu Province has one of the larg-
ments, etc. est industrial production bases; on the
Maoming Ocean products, agricultural products, and fruits and veg- other, the province generates impor-
etables. tant SME clusters (Table 4).
Meizhou Audio products, porcelain, craft weaving, textile, etc.
Clusters by industrial sector
Qinyuan Electronics, porcelain, hardware and manufacturing.
The distribution and development of
Shantou Toys, knitting and garments, packaging, fine chemicals, wool SME clusters in China are somewhat
weaving, electronics, food, and construction materials. influenced by government policies, at
both the central and local government
levels, which set up high-tech develop-
Guangdong province, the develop- ence and Technology of Guangdong
ment areas, authorize special economic
ment of SME clusters has been at- Province, 139 SME clusters were scat- zones, put in place local preferential tax
tracting greater attention from business tered in regional towns. Some of these policies, etc. But SME clusters also de-
researchers and policy makers. geographically defined towns encom- velop in a market economy. In places
pass more than one industry, which im- where the market economy is more de-
Regional comparison plies that SME clusters are both intra- veloped, and the market mechanism
SME clusters in China spread very rap- industry and inter-industry oriented; more perfect, the clusters are healthier.3
idly from east to west, mainly around and the latter especially can improve This is the reason why SME clusters in
sophisticated products, which require sustainability of the local region (Table China are mainly distributed in littoral
larger numbers of manufacturing firms 2). This is the case in the Guang-Dong and special economic zones, where the
to work together in production; such as area. market is more mature and policies
a motorcycle manufacturing cluster in more favourable. In recent years, SME
Chongqing, and the auto parts indus- Zhe-Jiang province clusters in western China have grown
tries in Guang-Dong and Jiang-Su. According to incomplete statistical data fast under west-developing policies.
Also, sectors with larger varieties of (June 2002) from Zhe-jiang, one of the However, clusters are also generated
products, such as the lighter and the largest SMEs clusters in the region, by the nature of the sectors.
shoes industries, produce clusters in there were 519 SME clusters in the
order to increase efficiency, such as in manufacturing and the agricultural sec- Better in certain industries
Wenzhou; and a similar situation can tors, with a total annual production value It is obvious that SME clusters develop
be found in Guangdong province. of RMB 599.3 billion, accounting for through certain industrial sectors. For
The following are the three re- about 49 per cent of the entire province; example, in Zhe-Jiang province, there
gions that contain the most important with three clusters exceeding RMB 10 are clear clusters covering typically 12
clusters of SMEs in China. billion. There are 12 famous SME clus- industries - spinning and garments,
ters in Zhejiang - Xiao-Shan textile, Fu- food products and beverages, elec-
Guang-Dong province Yang Chun-jiang paper, Tong-lu pens, tronic and electric equipment, machin-
By the end of 2005, according to statis- Zhou-Quan chemical fibre, Pu-Yuan ery manufacture, furniture production,
tical data from the Department of Sci- woollen sweaters, Da-Tang socks, Liu- and so on (Figure 2).

40 TECH MONITOR z Jul-Aug 2006

40 C B
C B
Special Feature : Managing Innovation in Clusters and Networks

Figure 2 shows that the most ob- Table 3: Typical case: Distribution of different sectors in regional clusters
viously clustered industries are spin-
Districts in SME clusters in the nature of
ning and garments, and machinery
Zhe-Jiang Province industrial sectors
manufacture. Most of the 12 industries
are traditional and labour-intensive. Hang Zhou Machinery and equipment, electro-communication,
Their strengths are specialized produc- electrical appliances, medicine.
tion, informal social relationships and
Ning Bo Spinning, printing and dyeing, machinery, pharma-
systems of management. They coop-
ceuticals, chemical industry, chemical fibres.
erate in order to reduce costs. In con-
trast, capital-intensive industry clusters Jia Xing Spinning, leather, machinery and instruments.
based on high and new technology and Hu Zhou Spinning (feather spin, printing and dyeing), gar-
innovation are a minority. Their tech- ments, construction materials.
nology content and value addition are
low. This is visible in the industry clus- Zhou Shan Aquatic products, drugs based on ocean products,
ter in Guangdong province. machinery.
According to Zhe-jiang data (Fig- Wen Zhou Machinery, plastics, packaging and printing, instru-
ure 3) clustering takes place in labour- ments, electronic components/appliance.
intensive industries. It also happens in
high and new technology, like electron- Tai Zhou Auto parts, craftwork, shoes, plastic.
ics and communication, chemicals and Jin Hua Machinery, hardware, instruments, farm processing,
pharmaceuticals. Electronics and com- weaving and spinning, garments.
munication account for 8.9 per cent,
and chemicals and pharmaceuticals for Qu Zhou Fertilizers, construction materials (cement), electric-
8.3 per cent. als and machinery.
It is clear that the main part of the Li Shui Timber manufacturing, craftwork, farm produce
SME cluster in Zhejiang is still labour- processing.
intensive. This is truly reflective of the
nature of SME clusters. SME clusters Data source: Zhu Hua-chen, PhD student thesis, Peking University, 2002
mainly comprise labour-intensive in-
dustries, although there are some high- Table 4: Typical regional clusters in Jiangsu province
tech clusters like Zhongguancun in
Districts in SME clusters
Beijing and Dong-guan in Guangdong.
Jiangsu Province

The main attraction Nanjing Badminton, electronics and information, medicine,

Most SME clusters in China are “low- electricity automation.
cost” clusters. This kind of cluster is not Xuzhou Trade service, tourist, supply chain, real estate, food,
based on innovation to promote re- mechanical, auto-industries.
gional economy. In these “low-cost”
Suzhou Weaving, silk weaving and spinning, optical cable,
clusters, though firms work in a quite
new materials.
close sector, they rarely communicate,
and share very limited information. As Nantong Electrical tools.
a result of lack of trust and collabora-
Lianyungang Agricultural product, tourism, trade finance, real es-
tion, such clusters do not gain great
tate, auto-parts, medicine and pharmaceutical ad-
advantage.
ministration.

Cluster sizes Yancheng Computer-aided knitting, silk industries.

Most SME clusters in China with lim- Yangzhou Toys, electronic components, glass.
ited innovation capability are small in
Zhenjiang Auto-parts, optical electronic components, electri-
size, developing slowly, rated low and
cal power and new materials.
competitively weak. Technology, qual-
ity and labour force are all treated as Taizhou Auto-parts, numeral control cutting machine, harbour
commodities by companies of this type. and ships, chemicals, textile, medicine, electrical
Generally, in order to be more success- motors, etc.
ful, SMEs are looking for smaller size
and more flexible operations. Smaller
firms tend to imitate and learn within Innovation capabilities typical of China, plays a critical role in
the family workshop, and this is what accelerating innovation and competi-
leads to the “one town one product” Advantages tive advantage in SMEs. There are sev-
economy in the countryside.5 The clustering innovation format, so eral reasons for this.

TECH MONITOR z Jul-Aug 2006 41

41 C B
C B
Special Feature : Managing Innovation in Clusters and Networks

Figure 2: Distribution of technology resource of SMEs in different resulting paucity of technical per-
sectors sonnel, just-in-time inventory, and
finances - inhibits innovation. By
clustering, SMEs can overcome
these constraints to be able to in-
novate.
c) The free flow of information in a
cluster supports innovation by en-
couraging "intellectual overflow"
among employees of different or-
ganizations communicating infor-
mally in many ways. As a result of
their close contacts, new technol-
ogies will diffuse in the cluster and
stimulate the next innovation.
d) It is thus easy to form an active in-
novation culture, as people in the
same region generally have the
same concepts and follow the same
conventions.

Problems and difficulties

Data Source: China SMEs Development Yet, these clusters have limitations. An
Yearbook 2003, China Economics Press, April, 2004. SME cluster in China would typically
suffer from a number of problems.
Figure 3: Typical SME clusters in Zhe-jiang province
Low innovation capability
Excessive imitation and inadequate
innovation lead to low technology con-
tent and value addition. Innovation in
SME clusters leads usually to low con-
tributions to the economy, and have very
limited effects. Statistics show that the
contribution to the economy of such
technical innovation is only 30 per cent;
while in developed western countries,
the figure is more than 80 per cent. So
also, the degree of industrialization
and commercialization of technical
productions is comparatively low. The
conversion of technical innovation to
practical application is only to the ex-
tent of about 20 per cent. Thus the key
issue for the next phase of operation of
SME clusters is the building up of in-
novation capability. In order to increase
the technical content and value addi-
Data source: SME administration (http://www.zjsme.gov.cn) tion of innovations, SMEs need to use
higher and newer technologies to im-
a) The inflow and outflow of technical b) SME clusters not only enhance in- prove production.
personnel lead to rapid technical novation capacity and flexibility in
diffusion. SMEs in certain clusters business operations, but also lead Low innovation consciousness
have similar or related operations. to economies of scale, so neces- High-tech SMEs are an exception in
When people change from one en- sary for innovation. Usually SMEs that they are quite active in new tech-
terprise to another, techniques are face great difficulty in diversification nology areas. Many of them are at work
diffused across companies. This and innovation because of the exploiting new production methods, as
leads first to imitation and thence complexity of high and newer tech- well as taking some management risks,
to innovation. nologies. Their small size - with the like research, trial-manufacture and

42 TECH MONITOR z Jul-Aug 2006

42 C B
C B
Special Feature : Managing Innovation in Clusters and Networks

new technology acquisition. In Ameri- ogy show that the average level of hi- some obstacles to those companies
ca, more than 50 per cent of technol- tech SMEs in high-tech development with less power and technology ac-
ogy innovations come from SMEs, but areas is 1.92 per cent, compared to the cumulation to imitate and to collabo-
in China’s SME clusters, innovation average international level, which is rate with partners with higher level
consciousness is not intense, and tech- vastly different. R&D intensity (the ra- of technology capacity.
nical production is low. tio of R&D costs to value addition in
On an average, there is less than primary industry) from OECD shows
References
one technical invention or patent ema- that it is 3.6 per cent in China, 27.9 per
1. SME in China: Integration develop-
nating out of each enterprise; and 82.8 cent in America, and 19.1 per cent in
ment (in Chinese) Wu, De-jin, Agri-
per cent of SMEs have no technical in- Japan. We can see that there is a tre-
cultural Economics, No. 9, 2004.
ventions or patents at all.8 Innovation mendous discrepancy between SMEs
consciousness is weak, and the level and the highest international levels. 2. SME Year book 2003, China Eco-
of technical equipment low; and these nomic Press, April 2004.
reduce the probability of improving pro- 3. “Integration development: Current
Conclusion Situation and Development Char-
duction quality or of added greater
It is clear that the building up of inno- acteristics”, Wang, Ji-c. Area
value.
vation capability has many aspects. Research and Development, Vol.
1. The product range within an SME 22, No. 3, December 2003.
Insufficient R&D resources cluster is crucial: if inappropriate, 4. “SME and National Competitive
Most SME clusters lack research per- the average value addition of the Advantage”, Zhang, Dong-feng,
sonnel for high-end technologies, as ultimate product will be low. China Enterprises Daily, February
well as for management. They also lack 2. Clusters need a favourable envi-
2006.
employees with experience in foreign ronment for innovation, including
trade and with an understanding of in- 5. “SME’s Integration Process - Wen-
auxiliary services, basic innovation
ternational business. In general, em- zhou SME”, East China Economic
facilities, and financial support.
ployees who have a junior college di- Management, August 2003, Vol. 17,
3. Clusters call for a capability to learn
ploma or above account for less than No. 4.
and an enthusiasm to innovate.
10 per cent; those who have senior First, because of close contacts in 6. “Constructing Technical Innovation
high school or technical secondary clusters, imitation is excessive and Capability of Industrial Cluster and
school diploma account for 30 per cent; innovation can be inspired. Clus- Governance”, Liang, Hong, doc-
and those who have junior high school ters also call for mutual trust within. toral dissertation of Huazhong Uni-
diploma or below account for about 60 4. The SME cluster is the result of an versity of Science and Technology,
per cent. opening-up policy and from the com- 30 March 2005.
SMEs in high-tech development paratively higher levels of technol- 7. “Cluster Growth and Regional De-
areas have more R&D resources avail- ogy transfer and technology diffu- velopment”, Wang, Jun, Economy
able to them than do traditional labour- sion. After China joined the WTO, Press of China, 19 November 2004.
intensive enterprises. Statistics from the consciousness of Intellectual 8. “Yearbook 2003 of China Small and
the National Bureau of Statistics and Property protection has enhanced Medium Enterprises”, Economy
the Ministry of Science and Technol- gradually, then it might be setting up Press of China, 1 April 2004. ˆ

Books on Innovation Management

Inspire to Innovate - Management and Innovation in Asia
This book draws upon substantial research and interaction with senior managers in Asia and argues that effective
innovation in Asia will require specific ways of managing innovation that will be different from existing models and
approaches.
Innovation Management - Strategy and Implementation using the Pentathlon Framework
The book introduces a new ‘pentathlon’ framework for discussing the key issues in managing innovation. Presenting
key theoretical findings and showcasing best practice from successful organizations through more than sixty
international case examples, the authors provide pragmatic tools for the effective management of innovation and
develop strategies for improving innovation performance in both service and manufacturing companies.
For more information, contact:
Palgrave Macmillan Ltd.
Houndmills, Basingstoke, Hampshire RG21 6XS, UK
Tel: (+44) 1256 329242; Fax: (+44) 1256 328339
E-mail: [email protected]

TECH MONITOR z Jul-Aug 2006 43

43 C B