Beyond The "Wenzhou Model"

The "Wenzhou Model", as a regional industrialization development model dominated by private economy, has attracted both scholars and governments’attention in the past three decades. Since the policy of reform and open up, Wenzhou has experienced rapid economic growth through the one-step-ahead reform of privatization and marketization. However, with the rapidly changing economic environment in China, the Wenzhou’s regional economy growth slows down obviously in the recent years. Accordingly, the sustainable development of the "Wenzhou Model" has been hotly debated again. In this situation, we should retrospect the development of Wenzhou, and rethink the nature and value of the "Wenzhou Model". What is the concept of the "Wenzhou Model"? As the economic environment changes, what are the new features of the Wenzhou regional economy? Is the concept of the "Wenzhou Model" outdated? And Wither the future of the Wenzhou economy?The industrial district has been a significant research topic in the past three decades. It not only attracted scholarly attention, but also became an important policy tool. However, the current research on industrial districts has several limitations:(1) it is usually seen as a static model, lack of dynamic analysis;(2) view the firm in the industrial district as homogenous entity; overemphasize the meso-level’system’ perspective, but neglect the micro-level’firm’perspective;(3) overemphasize the local network and endogenous growth, but neglect the external linkages;(4) most of the empirical studies focus on the developed countries, but the experiences in developing countries especially transitional economies are still limited.The traditional "Wenzhou Model" is characterized by spatial agglomeration of SMEs, flexible specialization of local production networks, and thick territorial social embeddedness. However, with the further development of marketization and globalization recently, the regional economy has been experienced a series of changes in the features, and beyond the concept of the "Wenzhou Model". By using the theories of Evolutionary Economic Geography, this dissertation attempts to study the evolutionary process of Yueqing low-voltage electrical equipment—the origin of the "Wenzhou Model", from the triple perspectives of organization, technology, and space. The result of the study shows:(1) With the process of "groupification", the organizational structure of the industrial district has evolved from "communitarian market" network composed of SMEs to Hub-and-Spoke network dominated by business groups. The governance of the industrial district has transformed from "self-organizing" mode based on trust to "quasi-hierarchical" mode based on ownership linkages and long-term contracts. The business groups have become the governors of the industrial district. On the one hand, they strengthened the governance inside the business groups by the ownership linkages between the parent company and the controlled companies. On the other, they increased the control of the suppliers through contract and supply chain management. The role of business groups is becoming more important, and the strategies of business groups will dominate the future prospect of the industrial district.(2) With the increasing market competition, the trajectory of technological evolution has transformed from imitation by SMEs to R&D by business groups. In the phase of imitation, the local knowledge network emerged based on the local production network, but the industrial chain is still short; the localized learning process mainly happened in the horizontal dimension, through imitation between each other; the external knowledge network is immature, establishing weak linkages with technicians of state-owned enterprises and research institutions outside of the industrial district. In the phase of R&D, the local knowledge network became hierarchical, with the cognitive division of labor between business groups and suppliers; business groups began to focus on R&D function, and transfer knowledge to suppliers through supply chain management; the external knowledge network is increasingly important, business groups increased the knowledge linkages outside the industrial district through establishing R&D center in large cities, and cooperating with universities, research institutions and MNCs. Meanwhile, the local knowledge services have been established, strengthening the interactions between local knowledge network and external knowledge network.(3) The spatial evolution of the industrial district shows a dual tendency:local extension and non-local expansion. In the past decade, as the demand of domestic market expands, the number of new entrants in the industrial district has dramatically increased. The Kernal Density Analysis of the firm level data in2001and2009shows that the new firms still tend to concentrate in the densely populated area, so the local spatial evolution of the industrial district is "place dependency"; the variables of localization economy, transportation condition, natural condition and newly built development zone have significant impact on the locational choices of the new firms. However, the rapid growth of the firm density in the industrial district also caused the effect of agglomeration diseconomy, leading to the relocation of the firms and the "scaling-up" development of the industrial district. The Analysis of the relocation of business groups in2009shows that the relocation activities of the business groups can be classified into two types, namely industrial upgrading and diversified investing. The destinations of industrial upgrading relocation are mainly concentrated in Yangtze River Delta Region, especially Shanghai; while the destinations of diversified investing relocation are more widely distributed in the whole country.The theoretical implications of this study are:(1) Challenge the canonical concept of the "Wenzhou Model". Since the development of regional economy and society is a process of evolution, there’s no static "model" in the real world. The traditional "Wenzhou Model" is conceptualized under the historical conditions in a certain period, characterized by "small commodity, large market", family based enterprise, specialized market, and the development of small towns. However, as the economic environment changes, the industrial district in Wenzhou has experienced the process of restructuring, going beyond the concept of the "Wenzhou Model". Thus, I argue the study on the regional development should go beyond the paradigm of the "Wenzhou Model", view the regional development as a dynamic process and pay more attention to the evolutionary process and the driving forces.(2) Challenge the concept of the Marshallian Industrial District. With the changing external environment, the industrial district has been undergoing restructuring in terms of organization, technology and space. In the perspective of organization, with the emergence of business groups, the organizational structure of the industrial district tends to be more hierarchical. In the perspective of technology, the process of technological upgrading relies more on R&D, and the combination of localized learning and distant learning. In the perspective of space, with the relocation of firms, the trans-regional linkages are strengthening, and the boundary of the industrial district is becoming more blurring. These trends all challenge the traditional concept of MID. That is to say, MID is a type of industrial organization in the early period of regional industrialization. It will evolve to other types as the external environment changes.(3) Business groups play an important role in the evolutionary process of the industrial district. Providing the heterogeneity of firms in the industrial district, those with fitter routines can take advantage of the opportunities of environment changes to become the leading firms in the local production networks, and dominate the development strategies of the industrial district. The boundary of the industrial district is dependent on the match between the demand of firms’economic activities and the supply of local resource endowment. If the mismatch happens, the firms will relocate outside of the industrial district to search for expansion. The experience of Yueqing low-voltage electrical equipment industrial district shows:with the strategies of industrial upgrading and diversifying investment led by the business groups, they will leave the industrial district to establish larger-scale strategic network through trans-regional relocation. Accordingly, the industrial district becomes a node of the strategic network, and the prospect is highly influenced by the strategies of the business groups.(4) The external linkages are significant to the evolutionary process of the industrial district. In the background of globalization and knowledge economy, the flexible local production networks can’t guarantee the sustainable competitiveness of the industrial district. Instead, innovation had become the main sources of competitive advantage. It requires the industrial district to strengthen both local technological capability and the external knowledge linkages, and build up the open innovation system. Especially for the industrial district in developing countries with weak knowledge infrastructures, establishing the linkages with external knowledge sources is of critically importance. The experience of Yueqing low-voltage electrical equipment industrial district shows: the development of the industrial district has been highly dependent on the external knowledge linkages whether in the phase of imitation or R&D. With the advantages of low cost labor decreases in recent years, the industrial district began to focus on strengthening the’institutional thickness’, and enhance the interaction between local knowledge networks and external knowledge networks.(5) Further the research on industrial district in developing countries and transitional economies. The evolution of Yueqing low-voltage electrical equipment industrial district has similarities with the evolution of Italian industrial districts, including "groupification","learning at the boundary", and firm relocation. However, there are also dissimilarities due to the different context and development phase. In the term of technology, the innovation of the Yueqing low-voltage electrical equipment industrial district more relies on acquisition of external knowledge providing the weak local knowledge infrastructures. In the term of spatial expansion, the relocation of Italian industrial districts is in the international scale, driven by MNEs’FDI and subcontracting activities in developing countries. On the contrary, the relocation of the Yueqing low-voltage electrical equipment industrial district more concentrates in the regional and national scale, driven by the local firms’industrial upgrading and diversifying investment activities.