TCI 2015 Building Economic Zones and Cluster Ecologies in Emerging Asia: approaches and early lessons

Building Economic Zones and
Cluster Ecologies in Emerging
Asia: approaches and early
lessons
Jong Woo Kang
Plenary Session 1: Asian Cluster Model: New Perspective and Trends

Economic Research and Regional Cooperation Department
Building Economic Zones and
Cluster Ecologies in Emerging
Asia: approaches and early
lessons
Jong Woo Kang
Principal Economist
Regional Cooperation and Integration Division (ERCI)
Economic Research and Regional Cooperation Department (ERCD)

Outline
 Background
 Cluster-based City Economic Development (CCED)
Analysis
 Country Examples
 Special Economic Zones in Asia
 Conclusion

Background
 Asia is rapidly urbanizing
 In 1950, some 232 million people, or 17% of the
population of Asia, lived in the urban areas. By 2030,
about 2.66 billion, or almost 55%, will be urban
 Bangladesh, Cambodia, Lao PDR, and Sri Lanka are the
least urbanized, while in Malaysia and the Philippines the
population is more than 60% urban
 Japan and the Republic of Korea are more than 85%
urbanized, indicating that urbanization is not incompatible
with high living standards

Urbanization and GDP per Capita of
Asian DMCs

Cluster-based City Economic
Development (CCED) Analysis
 Started by ADB in 2008; framework of analysis
 CCED works toward sustainable economic growth and
development in cities by fostering agglomeration, innovation,
integration, and clustering of productive economic activity and
land-use activities
 CCED aims to capitalize on both supply- and demand-side
approaches to economic development
 Supply side: governments introduce policies, provide
specialized infrastructure, and offer financial incentives to
companies that locate in a city or region
 Demand side: specialized skills, technologies, networks, and
markets catalyze investment and development by giving a
competitive advantage to businesses

Step 1. Compiling profiles of National Economic
Strategy
 The first step of analysis involves a macro-level
overview
 Much of the necessary information can be collected from
existing public reports and studies.

Step 2. Understanding Six Key Building Blocks of City
Competitiveness
 Building blocks of Competitiveness of Cities Index
 Enabling environment
 Business dynamism
 Human resource and training
 Endowed resources
 Infrastructure
 Catalysts

Step 3. Identifying the Competitiveness of Industry
Clusters at the Local Level
 It is important to identify the industry clusters in a
selected city (or city region) which can best contribute to
increase local GDP
 This involves a multi-sector industry analysis at the local
level, comparing local performance with the national
level to understand the changing patterns and structure
of local industry and local economic potentials

Rise and fall of industry clusters in a hypothetical
urban area: location quotient and shift share analysis

Step 4. Spatial Mapping of Industry Sector Cluster in a
Selected Local Area
 This analysis identifies significant spatial concentrations
of employment and business activities and financial
related transactions
 The spatial mapping of industry clusters in a city will be
useful for planning and locating key strategic
infrastructure and development projects
 Spatial plans can be used to encourage the co-location
of supporting industries and logistics facilities that the
cluster needs

Step 5. Conducting Gap Analysis for Industry Clusters
 This step aims to assess the relative competitiveness of
the selected industry by using a scoring or ranking
nominal scale or symbols (+) to evaluate the strength of
five factors (Porter 1990) using 47 indicators:
 Input factor condition
 Demand conditions
 Firm strategy, structure and rivalry Condition
 Related supporting industries
 Government’s role

Step 6. Preparing a Strategic Business Plan Based on
the Results of the Gap Analysis
 After obtaining a strong commitment from stakeholders, a
consensus on how to develop a cluster should define:
i. A Business Plan. What should each industry cluster’s
stakeholders intend to achieve collectively?
ii. Time-Bound Action Plans. What needs to be done to
foster the development of the cluster?
iii. Benefits of Participating. What do stakeholders
potentially gain from participating in the development of
a cluster?

Implementing Cluster Development Projects— the Key
Intervention Areas
 The range of activities needed to support the
development of industry clusters :
i. Logistics and infrastructure catering to the local
industry cluster
ii. Human resource development
iii. Institutions and regulatory systems
iv. Technology development and dissemination
v. Business systems

Examples of Best Practices
ICT cluster in Bangalore, India
 IT industry cluster accounts for a significant share of global market
in software and ICT services; contributed 33% of India’s IT exports
in 2006–2007; the city has a diversified economic base, with
several major ICT, biotechnology, and fast-moving consumer
goods companies based outside the city
 Success attributed to responsiveness of economic policies,
enabling mechanisms, and networks that have developed through
the Indian diaspora
 The clustering process in Bangalore has worked at different levels:
job creation, inward investment, innovation, skill formation, and
development of physical, digital, and social infrastructure
 Recently, however, the industry of Bangalore has been under
stress, mainly due to the lack of urban infrastructure to
accommodate flows of people, goods, and services

Education cluster in Sleman, Indonesia
 Sleman is one of five local governments or regencies that make up
the Yogyakarta Special Territory and forms the northern part of the
city of Yogyakarta
 Known as Indonesia’s City of Education: houses Gajah Mada
University and 35 other large and small public and private
universities
 The university campuses and their activities naturally attract
economic development; level of education of Sleman residents is
relatively high
 Initiatives taken to support education cluster and emerging
agribusiness and tourism: performance-based management, local
policies and initiatives

Multi-industry cluster development, Chiang Mai, Thailand
 National Science and Technology Development Agency has
supported a cluster-based economic development model to meet
the challenges of a knowledge-based economy
 Key industries are tourism and handicrafts, but Chiang Mai is
unique because it hosts the only center in Thailand dedicated to
private sector innovation
 R&D activities have led to development of new products and
quality improvements in existing products
 Industry clusters include: food and agri-industry, construction,
handicrafts, fashion, health, tourism, knowledge-intensive services

Special Ec0nomic Zones in Asia
Why SEZs in Asia?
 Second best, temporary distortionary measure
- With greater, nationwide economic and
developmental benefits expected
 Promotion of export, FDI, spillover effects,
industrial development / test bed for structural
reform
=> Growth pole for development
18

Evolution of SEZs
 Initial stage zones focus on employment and skills
upgrading through FDI attraction, labor-intensive
manufacturing for export of a limited range of goods
 Secondary stage zones focus on export competitiveness
and product diversification
 More advanced stage zones focus on improving labor
productivity, innovation, policy experimentation, and
social cohesion and environmental enhancements
19

Economic Impact of SEZs
National level
• Presence of an EPZ increases per capita income by 0.9
percent annually based on endogenous growth model using
annual country data for 87 countries for the period of 1961-
1999 (Tyler and Negrete, 2009)
City/municipal level
• SEZs affect not only levels but also trends in FDI, TFP growth
and wages. Most FDI is new activity rather than simple
relocation from non-SEZ areas in PRC (Wang, 2013)
Firm level
• PRC’s zone program has a large and positive effect on newly
entered firms and relocated Firms. Firms in capital-intensive
sectors benefit more than those in labor-intensive sectors (Lu,
Wang, Zhu, 2015). 20

Success and failure factors
Success Factors Failure Factors
• Fiscal incentives may be necessary for firms to
undertake initial investment; other institutional
factors exercise a greater pull.
• Cheap factory sites, abundant labor supply, and
strategic location and multi modal connectivity
with resources and major trading destinations
are crucial.
• Non-fiscal incentives expedite decision-making
and streamline day-to-day operations.
Institutional efficiency, dependable judicial
system and adequate security are prerequisites.
• State and local governments’ strong
commitment and policy stance ensure higher
probability of zone successes.
• Ambitious goals relative to
country’s comparative advantage
• Zones as industrial islands
(enclaves)
• Governance capacity and rent
seeking
• Abuse of land
• Lack of localized strategy for
upgrading industrial chain and
creating technology spillovers
21

Conclusion
 Clusters and zones should be linked to the
country’s development strategy
 Backward and forward linkages with the
domestic economic economy ensures
nationwide impact
 Public and private partnership is crucial
22

Thank you
Jong Woo Kang
jkang@adb.orgEcono
mic Research and Regional
Cooperation Department (ERCD)

TCI 2015 Building Economic Zones and Cluster Ecologies in Emerging Asia: approaches and early lessons

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TCI 2015 Building Economic Zones and Cluster Ecologies in Emerging Asia: approaches and early lessons