Business and Economic Distributions and Clusters

Business and Economic Distributions and Clusters

 

 

Historically, the Chinese economy has been shaped by the country’s key geographical locations.  More recently, investment and sustained development has significantly increased China’s economic strength.  Modern day China can be divided into 3 large economic regions, each reflecting the differences in the level of economic development and each with its own development characteristics, natural resources and conditions:  The Eastern Region, the Central Region and the Western Region.  Due to its vast territory, China can be further sub-divided into 7 large regions based on its regional economic framework and integrated economic advantage:

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Area: 9,596,960 km² (approximately the same as Europe)

Land: 9,326,410 km²

Water: 270,550 km²

Population: 1.3 billion

Regions:  23 Provinces, 5 Autonomous Regions, 4 Municipalities, 2 Special Administrative Regions (Hong Kong, Macao)

Capital city:  Beijing

Cities:  666 in total

Longest river:  Yangtze (Chang Jiang) ‘Long River’

The Bohai Economic Region

 

• North Eastern Economic Region
• The Yangtze Delta Economic Region
• Central Economic Region
• South Eastern Coast Economic Region
• South Western Economic Region
• North Western Economic Region

 

 

 

 

 

 

 

 

MAP: TO SHOW 7 REGIONS

 

The three wealthiest regions in China are along the east coast, focused on the Lower Yangtze River; along the southeast coast, centred on the Pearl River Delta; and near the Bohai Gulf, in the Beijing–Tianjin–Liaoning region. The rapid development of these regions is expected to have the most significant effect on the economy, and Chinese government policy is designed to encourage growth in these wealthier regions.

 

Yangtze RiverDelta

Shanghaiis the commercial and financial centre of this eastern region, but it is also home to many more diverse regional cities such as Zhejiang and Jiangsu, which are attracting considerable foreign direct investment and achieving significant export sales.  While Shanghai’s economy is dominated by a large State sector, it also houses an emerging services industry.  Zhejiang and Jiangsu’s economies are predominantly centred around the private sector and light manufacturing industry.

 

Most of China’s arable lands lie along the two major rivers; the Changjiang (the Yangtze River) and Huanghe (the Yellow River).  Historically these rivers were central to China’s major ancient civilisations. The most impressive section of the river is made up of three Yangtze River gorges: the Qutang Gorge, Wuxia Gorge and Xiling Gorge, collectively known as the Sanxia, or Three Gorges.  Evidence of human activity was found in this area as far back as 7000 years ago.  The $25 billion Three Gorges Dam construction project on the Yangtze River was completed in 2006 and it is the largest hydro-electric dam in the world, measuring more than 5 times the size of the Hoover Dam!!

 

The Yangtze is flanked by industrial development zones reliant on the major transportation arteries, facilitating transportation to the inland provinces. 

 

The Yellow River (or Huanghe River) is known as the mother river by the people.  It is regarded by most Chinese people as being their spiritual home, acknowledged as the birthplace of ancient Chinese culture and the cradle of Chinese civilisation as well as the most prosperous region in early Chinese history.

 

Pearl RiverDelta

With its excellent communications to the South China Sea, the Greater Pearl River Delta (PRD), incorporating Hong Kong and Macau, is the focus of considerable development to make it a key world manufacturing base, with Guangdong at its centre.  Significant investment has been ploughed into the region by the Guangdong government to overhaul transport links, greatly expanding the railway system and building many new superhighways.

 

East PRDconcentrates on the processing industry, mostly for foreign invested companies, while west PRD is centred around manufacturing, especially for Chinese brands, and the large State sector.  Traditional industries that have dominated the region are garment, footwear and textile manufacturing.  These sectors have now been joined by the burgeoning electronics industry and considerable focus has been placed on the IT sector.  Much of this manufacturing is exported.

 

As the gateway to Hong Kong, the PRD benefits from considerable investment from the region, which also operates as its services hub for areas such as finance, legal services, logistics etc.  As the PRD’s infrastructure develops, more trade is likely to be directed straight to PRD, rather than through Hong Kong.

 

 

BohaiGulf(Beijing–Tianjin–Liaoning)

While traditionally Beijing has been the backbone for any company wishing to lobby government and policy makers, and influence law-making, the city is going through enormous reforms and ‘opening up’, as it basks in its surge in manufacturing and post-Olympic glory.  The city has considerable issues to resolve such as pollution, and serious water, energy and land shortages.  Its long established heavy industry has given way to service industries, especially finance, and the city has enjoyed a major programme of digitisation.

 

Tianjin, is the second city of the region, which has developed as a modern manufacturing centre and harbours the area’s most important port.  It houses several significant development zones, most notably the Tianjin Economic-Technological Development Area, home to many major companies such as Motorola, Samsung and Toyota, and has abundant supplies of land and labour at keen prices.

 

In an effort to revitalise the flagging northeast of the country, special incentives have been made available to companies to set up in the provinces of Jilin, Liaoning and Heilongjiang.  Traditionally the country’s old industrial base, the northeast had until more recently suffered a lack of business drive and growth at the hands of its more wealthy neighbours.  As a result, in 2002, the central government undertook a programme of restructuring state-owned enterprises, technical modernisation and domestic and overseas investment.    

 

 

1st, 2nd, 3rd tier cities

 

China has a further 666 cities (11 of which have a population of over 2 million people, and 23 with populations of between 1 and 2 million people).  Around 600 million people live in cities, and this figure is predicted to increase to 1billion by 2030. There are around 270 cities in China with a population in excess of 1 million.

 

Traditionally, business interest from the West has focused on a small number of large established cities.  However, as these markets are maturing, competition is intensifying and input costs (especially in relation to labour and land) are now increasing.  Meanwhile, emerging cities are fast becoming the focus for local and foreign investment.  Typically, Beijing, Shanghai and Guangzhou are considered the 1st tier cities.  This governmentranking is based on levels of investment, development, population, or a combination of all three.  They have the highest capita GDP and the bulk of the country’s spending power.

However, the fast growing 2nd and 3rd tier cities should not be underestimated, especially by big brands and retailers.  2nd tier cities are secondary provincial capitals of around 25 cities;  3rd tier cities are prefecture or county level city capitals.  Some 13 2nd tier cities account for 19% of China’s total GDP and are growing at 2% above the national economy, despite only forming 8% of the country’s total population.

For example, Shenyang is the capital of Liaoning province, in China’s northeast. This city of 5 million people controls an economic area with a population of 24 million. It was the centre of China’s heavy industry until the 1990s, but is now striving to establish itself as the financial centre of northeast China, to build up its car industry, and attract more investment to its economic development zones.

Wuhanhas a population of 4 million in the city and a further 4 million in surrounding areas, making it the largest city in central China. However, it is a city of contrasts.  It looks like a big city, with many impressive buildings in the centre, but in the back streets near the Yangtze, street life continues much as it did many years ago.  On the south side of the Yangtze is the bustling East Lake High-Technology Zone, established 20 years ago. The Wuhan Economic Technological Development Zone in the west of the city houses large modern factory buildings set amid wide boulevards and manicured hedges.

The change in Chengdu in the west of the country has been immense.  It is now a vast sprawling city of 10 million people, and towering office blocks.  The city has benefited from the ‘Go West’ directive of central government, and government money has poured into the infrastructure.  Its economic development zones such as the western High-Tech Industrial Zone have attracted considerable foreign investment.

There has also been a development in ‘city clusters’, in which several regional cities have expanded in close proximity to an established first tier city. For example, Tianjin

(an important seaport and the traditional gateway to Beijing), Shijiazhuangand Tangshan each fall within a 170-mile radius of the capital city; Zhuhai, Dongguan and Foshanare less than 65 miles from the provincial capital of Guangzhou; and Suzhou (49 miles), Wuxi (73 miles) and Hangzhou (102 miles) are developing in close proximity to Shanghai.

 

The clustering of regional cities means that multiple city-based markets can potentially be served from a single or small number of business location/s, reducing transportation and

communication costs, and minimising potential cultural differences stemming from wider geographical territories.

 

Within these regional hubs, labour and manufacturing is cheaper, there is less competition and a massive export opportunity exists for the rest of the world. 

 

These cities’ citizens are hugely influenced by marketing and advertising.  They are driven by prestige and the behaviour of their peers, and the need to demonstrate their increasing wealth.

 

 

China’s business clusters

China’s industrial and economic development can also be defined by business clusters.  These are geographical concentrations of interrelated businesses in different industries that have formed in certain areas.  Whether they are buyers, suppliers or customers, the key advantage these enterprises all enjoy is that they can gain a competitive edge through their co-location and through a value-added production chain.  This spirit of c-operation and competition has fostered thriving local economies and has enhanced the regions’ growth and development.

 

Business clusters in China are mostly developed around major towns and cities in the eastern coastal region, especially around the Yangtze River Delta (YRD), the Pearl River Delta (PRD) in Guangdong, and in the Bohai-rim region in the north.  Products manufactured in these business clusters make up the majority of goods produced in China. 

 

There are two types of business linkage that form a cluster:

 

• Vertical linkage:  supplier and customer relationship
  This type comprises core businesses that produce products and services aimed at the end user consumer.  It also includes companies in the initial stages of the value chain that supply raw materials, intermediate goods and services used in the assembly of the final products, and independent distributors.  This business cluster benefits from considerable interactions.

 

-  Horizontal linkage: competitor and collaborator relationship

This type comprises businesses that produce the same or similar products and services at a specific level within the value chain.  Competition and co-operation is paramount in this cluster.  There is fierce competition to win and retain customers.  Yet efficiencies are also generated through networking leading to reduced transaction costs, availability of skilled labour, acceleration of innovation through greater market penetration etc.

 

Key business clusters in China

There are many long-standing business clusters in China, some of them dating back more than several hundred years.  However, China’s reform policies introduced in 1979 have given rise to emerging and established business clusters.

 

• Self-augmented clusters

Accelerated by small and private enterprises back in the early 1980s, self-augmented clusters began with the urbanization of Wenzhou in Zhejiang, driven by the peasants in rural areas setting-up their own cottage industries.  Catapulted by marketing innovation and technological progress, these businesses have been hugely successful and have been replicated by other entrepreneurs and family-oriented enterprises located in the same areas, especially along China’s coastal regions.

 

Typical clusters include:

• Lighting in Wenzhou in Zhejiang
• Metal processing in Xiaolan in Guangdong
• Fireworks manufacturing in Wanzai in Jiangxi and Liuyang of Wunan

 

 

• Export-oriented clusters

These business clusters are predominantly fuelled by foreign direct investments, formed largely back in the early 1980s when some cities created special policies to attract overseas investors to set up export-processing factories thanks to lower land and labour costs, and other tax concessions.  Today, these regions have also become key sourcing centres as well as manufacturing centres.  Business clusters include:

• Electronics and electrical goods
• Textile and apparel
• Footwear
• Plastic ware
• Financial services
• Logistics

 

• High-tech clusters

Formed by groups of scientists and scholars in the areas of their universities, colleges and research institutions back in the early 1980s, these business clusters are focused on knowledge generation.  

 

The flagship centre is Zhonguancun (ZGC) in Beijing, where several high-tech research institutes are based, predominantly belonging to the Chinese Academy of Sciences.  Their proximity to Central government and funding agencies in Beijing has spawned the position of researcher as entrepreneur.  As a result, there are many high-tech research and development centres in ZGC and it has become the largest IT distribution hub in northern China.

 

• Resource-driven clusters

Formed around the availability of regions’ natural resources, these business clusters have built specialist centres focused on their core product.

 

Chinahas abundant mineral resources with over 160 kinds of minerals discovered so far.  Total reserves rank third in the world.  The minerals found include coal, iron ore, petroleum, natural gas, mercury, tin, tungsten, antimony, manganese, molybdenum, vanadium, magnetite, aluminium, lead, zinc and uranium.  China’s recent surprise discovery of iron ore in Liaoning estimates the mine can harvest 3 million tons, as demand for iron ore is surging due to the boom in steel consumption corresponding with the nation’s fast economic growth.  China’s natural reserves of rare earth metals have resulted in it becoming one of the world’s leading exponents in the mining of such resources.

 

• Market-driven clusters

Determined by market dynamics, market-driven clusters are defined by their favourable geographical location and convenience to transport links.  They attract considerable investment, giving rise to associated industries, and boosting manufacturing, commercial and logistics development.  An example is the wood cluster in Linyi in Shandong, which has created 44 wholesale markets and over 5,000 wood manufacturers.

 

Distribution of business clusters

 

Replicate map

 

Role of government in supporting cluster development

Local governments play an active role in supporting the development of clusters, especially through the establishment of experiment zones in Beijing and industrial parks aimed at attracting IT enterprises.

 

Preferential policies have been introduced favouring land use, taxation, administration services, charges etc, creating a positive environment for external investment.  Several initiatives have been designed to boost competition in the commercial distribution sector, which have had a beneficial impact on cluster development.

 

(Source:  Li & Fung Research Centre:  Industrial cluster series)

 

 

Government strategies on relatively poorer regions

Since the mid 1990s, addressing concerns over the rising inequality and consistent poverty sustained by some interior regions of China, namely the Northwest, the government has launched several institutional reforms, driven by the Great Western Development Strategy launched in 1999.  Through a series of policy initiatives designed to respond to infrastructure, education, resource development, energy and industrial development, and environmental protection, the State has opened up the region to foreign and other investment, and has introduced special subsidies and investment projects.

These strategies are aimed at the relatively poorer regions in China in an attempt to prevent widening inequalities:

• Great Western Development, designed to increase the economic situation of the western provinces through capital investment and development of natural resources.
• Revitalize Northeast China, designed to rejuvenate the industrial bases in the northeastern China. It covers 3 provinces: Heilongjiang, Jilin, and Liaoning.
• Rise of Central China Plan, designed to accelerate the development of its central regions. It covers 6 provinces: Shanxi, Henan, Anhui, Hubei, Hunan, and Jiangxi.
• Third Front, focused on the southwestern provinces.

However, development of these poorer regions remains a challenge.  Several development zones targeting external developers and investors have led to many environmental issues, including desertification, land degradation, water shortage and endangered species. 

 

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