Group Assignment 1

Case: Chinas Industrial Cluster

Submitted by Group J LIJOSHJOSE (2012PGP065) MOHIT

DHAMI (2012PGP070)
(2012PGP075)

PALLAVI

POULOMI PAL

(2012PGP078) SHIVANK GOEL (2012PGP092) SUKSHIT KAPUR (2012PGP097) UJJWAL SHANKAR (2012PGP103)

Case: Chinas Industrial Cluster

Paper Title Study of Chinas International Specialization Status in Advanced Technology Industry: A case study of Zhejiang Pinghu Opto-Mechatronics Industry Cluster Authors Huang Xianhai and Yang Gaoju

Questions and Answers

1. What is Opto-Mechatronics? Opto-Mechatronics, as an engineering discipline, strives to optimally integrate mechanical, electronic and computer systems in order to create high precision products and manufacturing processes. Optical sensing and data processing technologies are being integrated, at an accelerated rate, into opto-mechatronic systems because these optical based technologies provide components for high precision, rapid information processing, and intelligent functions. As a result of this evolution, consumer products and industrial processes are becoming smarter, more accurate, and more human-friendly than those of the past. These opto-mechatronic technologies will continue to play a leading role in the development of intelligent products and systems in the coming years. Applications Using Opto-Mechatronic Technology Vision / optical based machine / process monitoring and control Intelligent vision systems for sensing and control Optoelectronic precision, positioning measurement, and inspection Opto-mechatronics for photonic network Bio-opto-mechatronics Robotic / manufacturing applications Design of smart products and structures

2. In your lecture you have learned that countries should export goods or services in which it has comparative advantage.

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Case: Chinas Industrial Cluster a. Traditionally in what type of goods or services China has comparative advantage? Why? According to comparative advantage principle, a country should export the products that use its relatively abundant factor intensively and import the goods that use its relatively scarce factor intensively. As a labor-abundant underdeveloped country, China would appear to have a comparative advantage in labor-intensive products and thus tend to export them to world markets. The rationale underlying the comparative advantage principle is that the latter will determine export performance. A highly populated country (such as China) might be expected to export low cost laborintensive manufactured goods. A large number of offshore producers have been attracted to China in order to take advantage of Chinas comparative advantage in low-cost labor and have the more labor intensive parts of the manufacturing process produced in China. This involves a continuous process of imports of large volumes of components, materials, and intermediate goods, followed by their re-export as finished or semi-finished products. This has been traditional way of functioning of Chinese industries b. How do you think the industry cluster of Pinghu challenges the established view of comparative advantage? Explain your answer. Pinghu is challenging the traditional system by having a strong industrial cluster with focus on products that cater to high advanced technology segment and high international presence in high value segment by Creating better infrastructure Focus on research and development By creating a flux of vertical and downstream companies Advanced technology high Export component like most of the companies like Nidec export 70% OF PRODUCTS Creating training centers for employees and focusing on educational relevant educational opportunities so as to increase the focus on research and development of capital intensive products 3. What were the driving forces behind opto-mechatronics industry cluster in the Pinghu? Driving forces behind Opto-mechatronics industries cluster: The government of Pinghu focused on establishing a public technology platform to promote self-innovation and to upgrade the local opto-mechatronics industry. Japanese funded enterprises were present in the economic development zone Knowledge spillovers Markets for specialized machineries and ability to use them in economies of scale Pooling of skilled labor with skills specific to industries

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Case: Chinas Industrial Cluster The primary driving forces are the government initialization in attracting foreign investment and providing specialized services for them The sustaining driving forces are the focus on establishing public technology platform and public innovation platform

4. What is vertical and horizontal linkage? Give example of vertical and horizontal linkage in the case of Pinghu. Vertical linkage: Vertical linkage is enabled when there is a co-operation between firms to get a product from the start of product till it reaches the final consumer. Vertical linkage between firms at different levels of value chains plays an important role in supporting the upgrading capacity of the chain. The vertical linkage inter relates the firms in different levels of value chain.

Examples Japanese enterprises: Chuandian Co. and Kuroda Chinese enterprises: Kangpaier, Jiangmao, Mechanism & Metal and Shangai purlux machinery Horizontal linkage: Horizontal linkages are longer-term cooperative arrangements among firms for the mutual growth. The horizontal linkages include interdependence, trust and resource pooling in order to jointly accomplish common goals

Examples Japanese enterprises: Kanto tatsumi electronics Chinese enterprises: Dongte, Pacific Landeng, Meija insulated Container Co. in pinghu and Jiaxing Hengye electronics co. 5. What are the main advantage and disadvantages of forming an industrial cluster? Advantages Geographical and cost benefits are the main advantages of forming clusters. The distance between the enterprises and the downstream component enterprises is very important. Thus the clusters are formed at places that are well connected and close to major cities. The

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Case: Chinas Industrial Cluster smaller the distance the better it is. The small distance brings the customers of the company closer enabling them to supply speedy customized services which its distant rival cannot. This also reduces the cost of doing the business compared to the rivals. Government support and service system are another advantage of forming clusters. The government provides improved infrastructure and also creates a living environment for the foreign investors. It also provides professional services through several government departments to provide favorable environment for the industry. Not only that, it also gives several other incentives like tax exemptions, easier rules and regulations etc. to the organizations. Easy availability of skilled, specialized and cheap labor in the neighboring areas is also one of the advantages of clusters. Clustering also helps the enterprises to concentrate more on their core activities and adopt new production technologies.

Disadvantages: Since similar firms are located in close vicinity there is the threat of knowledge spillover. This can be extremely costly to the firm in terms of lost competitive advantage. Also focus on cluster development may result in imbalance in economic development across the region or segments of the population. It detracts the government from taking a more holistic view of the regional development. Moreover the foreign firms in the cluster do not invest much in local R&D. They are more engaged in assembly line production involving low skills. Thus the workers do not acquire good skills and the value addition to the product is low. It is also believed that if a firm is located in the vicinity of a non-innovative firm it leads to the lack of innovation in the surrounding firms also thus hindering growth and innovation in the industry

6. Do you think government support is essential for any activity that aims at promoting industrial cluster? Explain your answer. Government plays a major role during the initial as well as the sustaining phase of the establishment of any industrial cluster within the country. It is also required that both the local government and the central government work in harmony so as to provide a friendly environment and give a sense of level of commitment to achieve the common goal. At the initial stage of the exogenous industry clusters development, the local government plays the key role in attracting investment and providing specialized services. At this point, important concerns for potential investors include whether government can offer investmentrelated services that are convenient and effective and whether it will fulfill commitments it has made to the investors so that investors need not worry about the risks from information asymmetry. The government encourages the introduction of foreign capital to start the engine of

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Case: Chinas Industrial Cluster industrial development. By providing supporting services for the foreign enterprises, domestic enterprises accumulate capital, technology, and management experience. Example Pinghu Government built a high speed road which helps convenient transportation and reduces the driving time from Hongqiao airport, Shanghai, to Pinghu from 4 hours to 45 minutes within one year to show their level of commitment to Nagamori Shigenobu, president of Japans Nidec Corporation. Even the statistical data verifies that during the initial stages i.e. pre 2004 in Pinghu, the main reason for many companies to invest was because of the Government support and policy. In fact, the lead firm of Pinghu, Nidec Shibaura (Zhejiang) Co. Ltd which initially didnt want to invest in Pinghu decided to change their mind primarily because of the level of support and commitment shown by the local government. After the cluster becomes large enough, the governments roles in terms of preferential policies, supporting measures, and its own credibility all become explicit information. Once the industry cluster has developed to a certain extent, the local government builds a public platform for R&D and innovation to promote the R&D and innovation capabilities of local enterprises, encouraging interactive development between foreign and local enterprises and thereby stimulating the growth of the industrial cluster. Companies making investment decisions will then pay more attention to judging development opportunities and market potential, as well as to supporting industries. In case of Pinghu, Trained staff for Japanese-led companies Government opened Japanese-language schools Built a street named Japan street with a number of Japanese style luxury villas

Along the way when the industrial sector has been properly established, government starts withdrawing their role so as to transform the industrial model from exogenous to endogenous type so as to increase competitiveness which will ultimately increase the skill set of the employees and thus help in the overall growth and development. 7. India promoted the development of Industrial Cluster through promotion of Special Economic Zone (SEZ) a. Presently there are how many SEZs in India? List five big SEZs. No. Of formal approvals= 585 (according to Ministry of external affairs, ITP dept) No. Of operational SEZs in India= 143

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Case: Chinas Industrial Cluster Five major SEZs in India 1. 2. 3. 4. 5. Madras SEZ Kandla SEZ Vishakhapattnam SEZ Falta SEZ Cochin SEZ

b. What are the major GOIs policies towards SEZ in India? Major GOI Policies towards SEZs in India Power of the Authority to Expenditure: The Chairperson shall have,(i) Powers to approve minor works and maintenance works of the Zone; (ii) Powers to approve recurring expenditure in connection with Salaries, Overtime allowances, Travel Expenses, Advertisement and Publicity, Rent, Rates, Taxes, Professional services and legal expenses Term of Office: The term of office of members of the Authority (other than ex-officio Members) shall be for a period of two years from date of their nomination and they shall not be eligible for re-nomination immediately after expiry of their term but can be nominated for a subsequent term. Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units Exemption from Central Sales Tax, service tax Single window clearance for Central and State level approvals.( single window clearance means that instead of having to get clearance from individual departments like the Town and Country planning Dept, Electricity Board, Public Health Dept, Labor Dept etc., a clearance for all is given all at once

c. What are the major impediments faced by SEZs in India? What are the new policy interventions taken by the GOI to address these impediments? The major problem that India is facing today about SEZs is the limitation on land. The limitation of land as well as limit of foreign investment also stops growth significantly. Chinas SEZs are huge. Shenzhen, the most important SEZ, covers 32,000 hectares. In India, there are just two or three privately developed SEZ, exceeding 1,000 hectares. Most of the others approved are less than 100 hectares. But it is heartening to realize that the government has decided to up the ante and have made guidelines to have a minimum of 1000 hectares of area for approving an SEZ. It hardly needs reiteration that only a large sized zone can generate economic Group J

Case: Chinas Industrial Cluster activity on some reasonable scale. In a small zone, the requisite infrastructure and services cannot be provided nor can multiple economic activities be promoted d. According to you what are the new policy changes required in India to encourage industrial development in SEZs of India. The SEZs could drastically improve the economic activity in the country, make the countrys export competitive and globally noticeable, be net foreign exchange earner and provide immense employment opportunity. But this should not be done at the cost of bringing down the agricultural activities, Land grabbing and real estate mafia should be properly regulated so that the common man is not the net sufferer to get the net foreign exchange earner up and running. As compared to china where majority of the SEZs were setup by the government, similar should be adopted in India, if not fully it should be a public-private partnership and regulatory bodies should be properly managed to weed out fallacies. To be economically viable SEZs should be approved over a particular land area (greater than 1000 acres) for rapid economic growth in the area and for it to be profitable and self-sustainable. Relaxed Tax norms, Labor laws and DTA regulations will surely attract foreign investment and major industries to setup industries in the SEZs making it profitable and meeting its desired results. 8. Contrast the similarities and the difference between SEZs in India and the Industrial Cluster of China. Size

In China, area under SEZ can cover thousands of hectors whereas in India there is a limit of 1000 hectares. Location

In China, they are mainly located near the coasts whereas there are no such demarcations in India. Labour laws

They are much relaxed in China compared to those in India Investors

Mainly foreign investors in China whereas local investors are a majority in India

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