China Goes Global

Hollywood, Silicon Valley, Wall Street… and Shenzhen

clusters

Hollywood, Silicon Valley, and Wall Street: these three places have their own distinct subcultures, and all three are famously dominated by their own distinct industries. Wall Street is dominated by banking, Silicon Valley by IT and internet, and Hollywood by films and entertainment.

Business Clustering

T hese three are examples of what economists call “business clustering”: situations where businesses in the same industry (often even competing with each other) cluster in close physical proximity, creating efficiencies that would be impossible if they were further apart. More and more businesses of the same industry move into the area, and the flow-on benefits also increase.

The businesses relate to the same industry, but are not necessarily all of the exact same type. For example, Hollywood has film studios, but it also has modeling agencies, make-up artists, animation studios and other similar businesses forming the one cluster. Silicon Valley has corporate headquarters of large technology companies, but it also has a plethora of tiny tech start-ups, angel investors, and Stanford University.

Businesses in these clusters create (and receive) what economists call “positive spillovers” or “positive externalities”—incidental (or initially non-deliberate) benefits of being close together. Businesses are surrounded by a workforce that is already trained in their area. Employees from different companies interact outside of work, giving rise to a cross-pollination of ideas between companies and a thriving culture of entrepreneurship. Companies are close to their suppliers and can find their customers easily.

Michael Porter of Harvard Business School has described modern day clustering as a paradox: In this globalized era where a business can trade with clients or customers literally on the other side of the planet, the other businesses that are in the immediate, physical, geographic vicinity remain more important than ever.

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Shenzhen

So where does China fit into all of this, and what does this have to do with Shenzhen?

Clustering has played an important role in China’s economic transformation, from the first historic set of reforms in 1979 until today. In 2010, the Hong Kong based Li & Fung Group estimated that there were around 100 industrial clusters in China. Some are highly specific, like a sock-making cluster in Zhejiang.

Shenzhen itself is a business cluster, and arguably the most important one in China. It is a port city with modern infrastructure, and is strategically located next to the financial juggernaut of Hong Kong. Because of these factors, after Shenzhen opened up to the global economy, the city and its surrounding Pearl River Delta quickly became the world’s most important manufacturing hub.

One of Shenzhen’s initial advantages of cheap labor is being eroded as Chinese wages rise. However, companies continue to invest and produce in Shenzhen. Why? To quote The Economist Magazine:

What Shenzhen has to offer on top is 30 years’ experience of producing electronics. It has a network of firms with sophisticated supply chains, multiple design and engineering skills, intimate knowledge of their production processes and the willingness to leap into action if asked to scale up production.

Shenzhen is making a shift from a conglomeration of cheap manufacturing clusters into a hub for more technologically sophisticated businesses, building on both Shenzhen’s natural advantages and its years of networks and industrial experience.

Shenzhen is home to many of China’s prominent tech companies like Huawei and ZTE. It is also the home of many of China’s smaller startups. This networking effect will likely mean that Shenzhen will continue to draw in high-tech and globalizing companies. This is why CSOFT’s Globalization •Ÿ Shenzhen 100 is focusing on Shenzhen, and why the trends in the city’s globalizing companies have such importance to both China and the global economy.

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