Made In China: Coastal Industrial Clusters and Regional Growth

Upon us is a new era where globalization is inevitable. With this, the global climate significantly changes with the level of economic influence emerging markets have. China is one such country. Though still considered an emerging market, the speed of its economic growth places it in direct competition with more mature economies, such as the United States and the European Union, both economically and politically. After wasting away its resources under a centrally planned system, China’s economy made a turn towards free market activities in 1979. Its prodigious growth is in part the result of certain economical units acting as “hot spots” for regional development. This study examines the effect of the development of industrial clusters on regional growth in China. As a form of industrial organization, it cannot be said with certainty whether such production proximity between firms will necessarily imply economies of scale or, as they are referred to in the urban economics literature, economies of urbanization or agglomeration. Clusters located in developed and developing nations often have different origins, organizational structures and competitive factors. Across industries, it is unsurprising that the effect of clustering varies greatly given the diverse nature of the industries themselves. Clusters have been a significant component of the provincial economies of coastal China. Literature cites it as a new source of growth for non-metropolitan areas, enabling them to attract investment and resources that would otherwise be concentrated in major cities (Zhang et. al, 2004 Sonobe et. al, 2002). Empirical evidence and case studies in China have also found that clusters have increased standards of living in rural areas by enabling small amounts of capital to be integrated into a larger production chain. Our study contributes to this growing pool of knowledge by quantitatively examining whether such industry agglomerations are indeed the workhorse of the economy. We use an endogenous growth model as our theoretical framework. Empirical parameters are used to determine the presence of a cluster as well as any economic effects the cluster has on the overall economy. By using data from different size economies, we simulate the “ripple effect” of clusters to measure their economies of scale at different administrative levels.