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This paper examines learning by a local Chinese cluster from external sources, based on a detailed case study of the Yunhe wood toy cluster, in Zhejiang Province. Employing the theorems of global value chain and cluster learning, the paper explores various external channels of knowledge and the role of learning for local firms. The channels include international trade relations, FDI, expositions and domestic knowledge centers, and the Internet. The paper ends with a discussion on findings on externally sourced learning and policies for promotion of learning in the cluster.
KEYWORDS
local cluster; global value chain; learning; wood toys
INTRODUCTION
This paper discusses the learning of local clusters from external sources from examination of the wood toy cluster in Yunhe, Zhejiang Province of China. (1)
Recently industrial clusters have received significant attention (Porter 1990, 1998; Nadvi & Schmitz 1999; UNIDO 2001; Hubert Schmitz 2003). Geographical proximity characterizes the firm-clustering phenomenon with varying degrees of vertical and horizontal specialization. The Yunhe wood toy cluster now consists of more than 400 firms, developed since its start in the 1970s.
This paper's analysis of Yunhe wood toy cluster learning follows the theorem of learning in a global value chain (GVC) (Kaplinsky & Morris 2001; Gereffi & Kaplinsky 2001; UNIDO 2003; Gereffi, Humphrey & Sturgeon 2005). In a globalizing economy, the whole process of production is often widely dispersed geographically, and producers in developing countries are generally located at the lowest end of the value chain.
Our analysis takes the stand that learning is the most important process for clusters in developing countries, if they expect to improve their situation in the value chain and to become competent in innovation and competitiveness (Lorenzen 1998; Hofmaier 2001; Bathelt, Malmberg & Maskell 2004). For the learning of local firms in the global value chain, we distinguish learning from internal cluster sources and learning from external sources. Because of limits of resources in the local milieu, learning from external sources is crucial in order to avoid becoming locked-in to the low end of production (UNIDO 2003). This paper focuses on externally sourced learning.
Section 2 presents the wood toy global value chain and the evolution of the Yunhe wood toy cluster. Section 3 probes the role of different external sources in learning at the local wood toy cluster in Yunhe. Section 4 discusses the findings.
YUNHE WOOD TOY CLUSTER IN A GLOBAL VALUE CHAIN
Wood toy global value chain
The wood toy global value chain (Figure 1) starts with the forestry sector. Cut logs pass to the sawmill industry, which obtains its primary equipment from the machinery industry. Sawn timber moves to toy manufacturers who obtain inputs from the machinery, adhesives, paint and other industries, and also draw on design, financial support and management skill from the service sector. Through different distribution channels, toys reach the final customers. Ultimately, the toys will be recycled. This global chain connects different phrases relative to wood toy industry including production, design, transport, marketing, distribution, retailing and recycling all over the world. Due to different technological ability and market status, each respective stage in the chain gains varying added value.
[FIGURE 1 OMITTED]
In a typical buyer-driven chain, global buyers dominate value distribution across the world (Table 1) (Gereffi 1999). Super retailers set up hundreds of retail sites, mainly in developed countries, providing toys purchased from different suppliers across the world, mainly in developing countries. By controlling distribution channels and promoting private brands, super retailers increase their influence on the global chain and gain a large share of value-added profits (Gereffi 1999). Brand markers focus on design and marketing while outsourcing toy production. Brand manufacturers like LEGO and HAPE used to produce toys themselves but since the 1990s show a preference for outsourcing. Their brand reputation and advanced technology maintain the brand markers and manufacturers in favorable positions in the global value chain over manufacturers in developing countries. Super retailers, brand markers and manufacturers constitute the group of global buyers. Producers in the toy global chain are increasingly located in developing countries. With limited design and distribution abilities, most of these focus on production only, especially the less experienced producers such as in China. For Chinese producers, Hong Kong businessmen often stand between them and international buyers, linking the two ends with subcontracting and logistic services.
For the global toy chain, toy expositions such as the world's Top Three Toy Fairs of Nurnberg, New York and Hong Kong, offer channels for information dissemination. In China, toy expositions in Shanghai, Guangzhou and Yiwu are among the most important for trends in patterns, designs,demands and pricing, as well as providing platforms for communication between suppliers, buyers and competitors. Attendance at toy expositions has been one of the gateways for Chinese producers to enter and compete in the industry.
Another information channel is industrial standards (Nadvi & Waltring 2003). Such standards (Table 2) address a wide range of issues including quality management procedures, health and safety norms, labor conditions, and environmental and social concerns. Various agencies such as UN agents, NGOs, national states and transnational corporations (TNCs) take keen interest in these standards. Regarding Working conditions and workers' welfare is regulated by a Code of Business Practices for the global toy industry, introduced by the International Council of Toy Industries (ICTI) in 2001, and global buyers such as Toys R Us and Hasbro must urge supplier compliance to this Code. To meet international standards serves as motivation too for producers in developing countries to improve their technological and management capabilities.
Progress in information and communications technologies such as the widespread accessibility of the Internet has made knowledge transmission cheaper and faster. To an extent the Internet contributed to worldwide dispersion of the value chain. All nodes in the global chain--toy producers, designers, retailers and consumers--increasingly make use of the Internet in their businesses.
Yunhe wood toy cluster
China is one of the most important wood toy exporters. Its wood toy production is concentrated in Zhejiang province, especially in Yunhe county in the southwest mountain area. It is known in China as 'the hometown of wood toys' (Figure 2).
[FIGURE 2 OMITTED]
As early as the 1970s, some local firms in Yunhe had commenced toy production, and trade agents in Shanghai were responsible for product sales abroad. Massive development of the industry opened it to international trade in the '80s. The entry of private businesses altered the industry structure from previously state-owned and collective ownership, and a clustering division of labor evolved. A few of the largest enterprises in China, such as XinYu and HeXin, produce end products, while small firms are developing around produce parts and components. Local suppliers for paint and adhesives and related services in transportation and package have also been established.
Recently with the support of local government and self-organization of producers, the technological infrastructure is strengthening. A Wood Toy Industrial Park came into existence in Yunhe in 1992. Since 1995, initiated by the toy industry association, the Yunhe Mood Toy Productivity Center, the Wood Toy Quality Testing Center, the Wood Toy Research Institute and the Wood Toy Information Center have been established.
Yunhe now has the biggest toy manufacturing and export base in China. Its production capacity constitutes one-third of China's total. In 2003 more than 400 Yunhe wood toy producers produced outputs of 762 million Yuan (exchange rate with US Dollar: 8.3:1) of which 454 million Yuan was in exports, to 30 end consumers in North America, Europe and Japan. Back in 1983, outputs were 1.88 million Yuan, and before the reforms of 1973, they were a mere 0.1 million Yuan.
Although the Yunhe cluster has grown in many aspects, it remains in a disadvantageous competitive position. One of its weaknesses is in international marketing. The majority of local firms are still heavily dependent on Hong Kong trade agents for international sales, except the few biggest which are able to manage trade with international buyers. The second weakness rests in its inadequate design capability. Most enterprises except a few, manufacture on samples provided by middlemen traders or global buyers. Yunhe producers therefore sit at the bottom of value creation chain, and price competition depresses their profit margin. In addition, local forestry resources reached their limits in the 1990s, since when Yunhe has to secure timber supplies from elsewhere. The sustainability of the industry is confronted as well with challenges from resource restrictions.
LEARNING FROM EXTERNAL SOURCES
Learning is an interactive process, stimulated and channeled through links (Lundvall 1992). We distinguish between local learning, which proceeds through local links, and learning from external sources, which at the center include international links. With insertion of local production into the global value chain, learning from international sources played a most important role for growth of the cluster. We discuss various forms of such externally sourced learning of benefit to the local cluster.
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