Industrial Cluster, Industrial Structure And Productivity

In the early stage of China Reform and Opening Up, Zhejiang Province adopted a rural-based industrialization development model by supporting economic activities in private sector in rural area. With the boomed development of local markets and industrial clusters, Zhejiang’s manufacturing industries grew rapidly over the past30years and some of them became the largest industries in nation level in terms of total output. However, Zhejiang’s development model has shown its constraints and limits when Zhejiang entered into the late stage of industrialization. Zhejiang’s manufacturing sector has been dominated by light industries for a long time, including textile, apparel, low end general equipment and electric machineries. Meanwhile, productivity and value added rate of Zhejiang’s major manufacturing industries are continuously lower than that of its comparable provinces.Based on the stylized facts and existing literature, we tests three hypotheses to study the adjustment process of industrial structure, and the relationship between market structure and productivity and value added rate. The empirical results show that industry structure adjustment can be achieved by conditional convergence of industries without government’s intervention, but the process could be extremely slow. Meanwhile, mature industries may be eventually declined due to lack of industry diversity. For those mature industries in Zhejiang, the relationship between market structure and productivity and value added rate has a nonlinear "inverted-U" pattern. Current highly fragmented market structure has negative effect on increasing industries’ productivity and value added rate. However, market structure is not that important for the development of high-tech industries. Instead, industrial cluster and industry diversity contribute to the improvement of productivity and value added rate.Our study has explicit policy implications. Firstly, due to relatively strong structure rigidities among industrial clusters in Zhejiang, local governments should take measures to guide resources in mature industries to enter upper value chains or new industries. Secondly, government should adopt tailored industrial policies for different industries by taking industry’s life cycle into consideration. For the mature industries, government should facilitate the growth of leading players and restrain ruthless competition; for the high-tech industries, government should focus on providing more public goods and better public services. The industrial policies taken by Zhejiang government in recent years are consistent with our empirical results.