November 6, 2013
Recently an interview with Professor Harald Bathelt was published in the Chinese newspaper Wenhui Bao.
The English translation of this interview is below, and the original article can be found here:
By Peng-Fei Li
The miracle of the Chinese economy after economic reforms is, to a large extent, the miracle of cluster economies. Hundreds of thousands of family workshops concentrated in the Yangtze River and Pearl River Deltas decades ago are now world factories offering massive products. International organisations, such as the World Bank, try to introduce such cluster-based economic development to other developing countries. However, in China, now, especially after the financial crisis, transformation and upgrading of clusters and the construction of innovative clusters have been hot topics in academic and policy arenas. Ministry of Science and Technology officially launched the procedures of how to certificate pilot innovative clusters in March and promulgated first ten innovative clusters in August.
In current context, clusters in China are now facing new challenges. On the one hand, other developing regions with lower labor and land costs are attracting global investments, including those from China. On the other hand, cluster firms are confronted with both the rising production costs from the local and more pressures from foreign competitors. How should clusters in China respond to such local and international challenges? During the 2013 Pujiang Innovation Forum, we invited Peng-Fei Li, a post-doc fellow at the Department of Political Science, University of Toronto, to have an interview with Professor Harald Bathelt, a world famous economic geographer.
Prof. Harald Bathelt, born in Germany, taught at University of Frankfurt/Main and other universities, now an editor of Journal of Economic Geography (Oxford University Press). He holds the Canada Research Chair in ‘Innovation and Governance’ and Zejiang Visting Professorship at East China Normal University. According to age-weighed H ratios, he is among the Top 5 Most Influential International Economic Geographers.
The relational economy: successful firms need to build various linkages
Wenhui Bao: In 1990, Michael Porter first developed the concept of “industrial cluster” in his book, Competitive Advantages of Nations, which provides a new perspective to think and analyze national and regional economies. How would you think about this theoretical contribution of industrial clusters?
Prof. Bathelt: I think it is a landmark contribution, not only in academia but also in the public policy area, because Porter pointed out that successful firms rely not only on themselves but also on the environment where they are embedded. This means that even if the firm per se is very strong, if in a bad environment, it will get in trouble. On the contrary, sometimes even if firms per se are not quite strong, they can learn from each other and make progress collectively through various linkages. The concept of “cluster” now more refers to a group of firms at the local or regional level, while Porter discussed industrial clusters at the national level. In developing economies, we now learn that, internal linkages within clusters may not be strong. Only in the recent decade, knowledge sharing both with and beyond clusters has been emphasized.
Wenhui Bao：With the globalization of economies, topics like “temporary clusters” have attracted the attention of economic geographers. What are the directions of cluster research from your perspective?
Prof. Bathelt：In recent years, the cluster concept has been widely used in public policies. Some may be successful, others may not. Sometimes, clusters are overused in practice. In academia, so much research has been done on clusters. Some get tired to think about clusters. However, if we look at the problem today, especially after the financial crisis, there are many areas to explore, in terms of how clusters can create jobs and promote regional economic growth. Some key questions, like how clusters successfully reproduce themselves, how ongoing learning dynamics be supported, how can global linkages be fostered to support cluster development, especially the linkages between clusters, are very important in the future and very little research has been done on these. Also, how knowledge flows between clusters, the role of foreign direct investment in cluster networks, and those transnational entrepreneurs or managers in transferring knowledge flows, these are all important topics.
Wenhui Bao：The theme of 2013 Pujiang Innovation Forum is innovation-driven and the role of enterprises. Two years ago, you gave a lecture at East China Normal University and pointed out that institution is key to innovation. How do you think institution can stimulate dynamics of firms and create cluster effects?
Prof. Bathelt：When I gave the lecture, I do not mean institution only as government, but those patterns of interaction of firms, attitudes among them, trust established, linkages developed and professional capabilities strengthened. In that respect, institutions are the core of clusters. Cluster is about a group of firms connected, sharing knowledge base, sharing ideas and perceptions of how technologies will change. Because of these sharings, firms can develop beyond individual limitations. If firms only focus on themselves and do not communicate with others, the consistent basis of clusters will get lost. So as a cluster, it has to have these institutional bases. These institutional bases are formed by specific polices, bank and financing, educational facilities that provide up-to-date training. In that respect, policy can support these institutional bases. Of course, if entrepreneurs do not like each other, do not talk with each other, there will be no such institutional bases. So, innovative clusters should have institutional bases, coupled with the consensus of entrepreneurs and government officials that everyone is on the same boat.
Wenhui Bao: Your new book, the Relational Economy, has a very interesting title. Some Chinese readers may feel strange about the book. Could you briefly introduce it?
Prof. Bathelt: What the book says is that we commonly in theory say maximizing profit and minimizing costs, in reality this is very difficult to achieve. And in reality firms do not act individually. While every firm wants to make money, they really operate in relations to their customers, to their competitors, and to other related firms. And they cannot make decisions at once, they need to study to make decisions, to build structures to anticipate and benefit from the generation of knowledge, have to develop learning capability, to be successful in the longer term. In order to develop these, they need to develop system linkages to their users, to their suppliers, to interact with them to develop further. In short, what the book really has is that firms are not individual entities as in the conventional economic theories. Firms to be successful need to develop linkages, and this is what is meant by the relational economy.
Long-term economic growth should focus on innovation and learning capabilities, rather than costs.
Wenhui Bao：After the financial crisis, especially last year, many industrial clusters in coastal areas in China are facing many new challenges, like the decreasing orders and increasing labor costs. It is widely realized by governments and enterprises for the importance of upgrading of clusters. But for traditional industries, such as textile and clothing, the transformation process is hard. Do you have some suggestions?
Prof. Bathelt: Of course, I am not an expert on industrial clusters in China. I am just an observer, and can give some comments from an observer. I think, in a way, the Chinese government has in a few years ago tried to stimulate investment in the west of China, where costs are lower. Some expects probably relocations take place, and can make up for the higher costs in the coastal area. But in general, focus on costs, especially labor costs, is very dangerous. It is necessarily a short term consideration. So to have sustainable economic growth, it is just not enough to reply on low labor costs, and development potentially is more about knowledge-intensive industries, innovative industries, development in services, in education systems. So long-term economic growth should focus on learning capabilities, rather than costs.
The problem is still how such development leads to profits at this point. I think in a way, it is a catch-22 situation, like a track. In the world economy when we are doing better, the cost is good. But the world economy is not always good, so these clusters also have to learn, to deal with the situations that are more difficult. Now maybe, there is a point, if these clusters want to not only focus on the China market, but also on the international market, which a lot of them do, then maybe there is a point now to realize that it is not enough to produce in China to these markets, but to learn more about these markets, to get more involved to intensify networks and investments in these markets, to be there, to have a better idea to the right customers, users, to have an idea of what to be needed, to learn from the local and national industries in different contexts, to be able to provide solutions for these specific customers, these specific countries, these specific regions. Now China is successful, also in intensifying these. But this is just the beginning. So far internationalization is primarily from these very big, very successful firms.
Wenhui Bao: Yes. In terms of internationalization, it is a big challenge not only for clusters in traditional industries, but also for those in capital-intensive sectors, such as the Shanghai auto industries. Germany has many world-class clusters in these equipment manufacturing areas. Could you introduce some German experience?
Prof. Bathelt: In terms of how cluster firms can go beyond local context and internationalize, an interesting case would be the Germany case. Germany, in a very long time, has very large firms in many areas, but many of the firms that have internationalized, are SMEs. It is almost like a class of firms that have developed and also still family-owned. These firms traditionally are not very well internationally networked, but their operations very much focused on specific areas, and developed strong capabilities in learning around user industries. It is pretty very like the story of Michael Porter, who said that very strong and demanding users put a lot of challenges to the producers that have to adjust to those. They are not distributed through Germany, but a lot of competitors have developed from the local. Let us look at the sport shoe industry. That is a different area, but two of the largest firms worldwide, Adidas, and Puma, are developed by two brothers in the same village, a very small village in Germany. There are many such stories. There are very large firms in some clusters, but most firms in many clusters are small and mediate-sized firms. These areas have a long tradition of people establishing business, to be good and to produce better products all the time. Some firms were successful in establishing international markets, so others tried that too. Of course, they did not share all the secrets, but they could observe very well, could find out how they did this. They were not enemies. So they talked with one another. At the beginning, they exported to foreign market. But the German machinery sector was in huge problems in the 1990s. My Canadian colleague, Prof. Meric Gertler (now the president of University of Toronto), studied how German machinery firms didn’t produce in other countries, and found that Germany managers developed very sophisticated machineries along with domestic demanding users. But those machines were too sophisticated to be used in other countries where users were less demanding. Germans did not understand that very well because they produced everything in Germany and all the research focused on domestic issues. So in the 1990s, due to changes in exchange rates, all of the sudden, machines from Italy and standardized machines from Japan, they came very competitive. So this was when German SMEs decided they needed to be close to their customers, they needed permanent residence in many of these markets.
How did these SMEs go out? This is a very difficult question. Individually, they have very little knowledge about international markets, and they have limited resources to hire people to provide this knowledge. In this respect, German firms were very much supported by associations. Germans established Chamber of Commerce in many countries, providing information about markets to SMEs. There are many industry associations and chambers of commerce in Germany, nationally and locally, some focused on specific sector and some for the entire industry. And they provide specific direct help for cluster firms to go abroad, primarily in the form of transferring knowledge, helping them to find places, find partners and etc.. In the sector like automobile industry, it was the large firms who went first. They really encouraged SMEs to come after. Of course, what we have taken now is a different situation that that in decades ago. Now there is more interaction between the firms.
Wenhui Bao: Industry associations in Germany are not government, but autonomous organizations, right?
Prof. Bathelt：Completely autonomous. In Germany, these industry associations play a very important role. In Germany, the state does not have a direct role in governing labor relations. The role of the state is to establish the rules of safety, environment conditions and how contracts need to be negotiated. They guarantee that these rules are in place. The relationship between firms and their workers are completely self-organized. And that is primarily done in the form of business and labor associations. Labor associations and unions are quite different from those in the U.S. They are not just negotiating wages and engaging in labor fights. They are very crucial about industries. For instance, there are constant collaboration talks between labor representatives of unions and the management at the industry associations, to define what kind of qualifications workers need in certain professions, and what the education system needs to provide. So they say this, this, and this to establish in schools.
Wenhui Bao: the training system in Germany is also very unique, compared to other countries.
Prof. Bathelt：Yes. That is an important part for the learning capabilities of SMEs. Workers learn theoretical and practical skills in their schools and have to pass certain certificates. Otherwise, they are not allowed to work in certain professions. To pass the certificates, after you have school education, you have to work three years, at relatively low entry level. In the first three year, you may work four days a week, and get one day or one day and half for school. In the second year, the time to study at school may be one day. And you have constantly back between work and theory. To get a certificate in certain professions, you have to pass some exams, both theoretical and practical exams. But let’s say the managers of a firm plan to restructure the firms on new technologies. Let’s say half a year before the start, the firm will know we will lose a lot of workers. So the workers then are sent to be re-trained for jobs elsewhere.
Wenhui Bao: It is the firm’s responsibility for re-training these workers?
Prof. Bathelt: Yes. This is also very different from the U.S. where the training is very much of the responsibility of the individuals. The individuals invest in training, and will then maximize their incomes. Firms in Germany are constantly re-training their workers for further education. Every year, workers have the opportunity to do that. This is well planned, where workers will collaborate with the process, where there will be no abrupt change, where capabilities are carried over to the next step. Such constant training and learning of workers support SMEs’ internationalization processes. Policy-makers need to develop institutional frameworks to support the improvement of firms’ learning capabilities and to promote cluster firms to go abroad.
Wenhui Bao: What kind of role do local governments play for cluster development in Germany?
Prof. Bathelt: In Germany, local governments are not allowed to spend money directly to support local industries. The handing of money to local industries has been always much controlled. So the role of local government is very often indirect, in the sense of providing active indirect support, to bring people together that would be competitors, to build organizations for education and training, and to develop technology centers. These are very important for clusters.
Successful clusters require strong knowledge ecologies beyond the local
Wenhui Bao: We have talked a lot about internationalization of clusters. You also talked about the importance of learning capabilities of cluster firms. Clusters build competitive advantages, not just from localized learning, but also from capabilities to acquire and mobilize global resources and ideas. For clusters in developing economies, such as in China, how to build these capabilities?
Prof. Bathelt: I think this is probably the key question. I am not sure I know how they could be success. But there is a lot that can be learned from developed countries. One what we know is that, cities, city-regions, clusters are core to the internalization process. Some clusters in developing countries are declining; while a lot of new clusters are developing. Research have in many years studies why some clusters grow, why some not. They try to understand what makes some clusters so successful. So the traditional understanding has very much that goes respect to a regional question, focus very much on clusters in a way diminishing the overall cost. However, we know that this is not always the case in the development of successful clusters. So what we have learned in the last decade or so, is that really importance of successful clusters is the knowledge process, the learning capabilities. We know that the learning capabilities in these clusters do not depend on the individual capability, but also on the environment. That really directly suggest innovative clusters need not only being in the local, but also go to expand, which is necessarily to do, to have the knowledge about their market. They need to develop what we called pipelines to other markets, to create knowledge, to know what others users want. Successful clusters need strong knowledge ecologies. This is to go beyond to international markets, to other countries, to other regions, other cities, and so on. And of course, important precondition for this is a high-skilled, dynamic adjustment of labor market, that can go hand in hand, that can be strongly supported through schools and training systems. As in the case of Germany, associations help channel this development. Firms might be very strong competitors, but still the owners of the firm, the managers, have quite normal contacts with each other, and have an understanding that to be successful, they can be strong together. One that Germany is so successful is that it is not necessary to follow the path of having short-term success, quick payback, in terms of the investment. But you need to think about investment in a long term that meant to have a labor force that management should really care, provide a lot of benefits to labor force, and constantly train and re-educate labor, to enhance capabilities, but also to create a commitment. What is not aware at all is that workers they really identify themselves to their firms. A lot of knowledge is created in being constantly the re-use and re-use of firms, rather than shift firms. And the long term consequence of that is German firms have been able to, even in a crisis situation, continue to innovate. Clusters have to be open, focusing on innovation and knowledge generation, rather than their past success. This may be some lessons for Chinese clusters.
Wenhui Bao: Let’s turn our discussion to Canada. As a professor from University of Toronto, what do you think of the performance of Canadian clusters? Is there some lessons?
Prof. Bathelt: Canada is a large country in area, but a very small economy in terms of people. In the financial crisis, the bank is not involved as much as other countries, which speaks to, maybe, the conservative nature of business culture. However, Canadian economy is small domestic market, a disadvantage for Canadian firms. Another disadvantage for Canadian firms is being close to U.S. which is almost like a natural home market. The consequence is that Canadian firms, in many industries, on average, are not much internationalized and have much less international linkages with other countries. In that respect, maybe both China and Canada are similar. Quite a large part of Canada’s success really rely on resources, which can be reflected when you look at international export. The challenge Canadian economy has now is that manufacturing has decreased a number of jobs. And part of the solution to this is could be to develop stronger international basis to foster international investment, to going offshore. But also Canada has an interesting target for foreign direct investment. Canada has developed strong telecommunication, automobile industries, and high-level services. There have been interesting spots where Chinese firms can invest. There is a huge potential to be developed between China and Canada.
Wenhui Bao: Last month, Premier Harper attended the APEC conference in Indonesia, and the governor general of Canada also visited China. So the government of Canada also is eager to promote collaboration Canada with China.
Prof. Bathelt: Yes. I think much so, not just at the federal level. Ontario government where I am from has been very eager to develop linkages with China. There are successful cases on both ends. I think for Canadian firms, particular SMEs, they need to realize that China is not just a place of a large population, or low-cost location for production, but important future market for investment, while Chinese firms may realize that Canada is more than resource-based, but there are skilled labor markets and industries that are doing well for collaboration.
Wenhui Bao: Let’s focus on the cluster level. As a small economy, Canada builds successful clusters in telecommunication and finance sectors. Is there some experience that Canada can share with China?
Prof. Bathelt: Let’s take an example of Telecommunication. Telecommunication industry did not exist in the 1960s. The birth of Canadian telecommunication industry was a failure. Canada wanted to develop semiconductor industry, and established a joint-venture on a research project. The project wasn’t a commercial success. But then in 1975, there were a large number of spin-offs from the Ottawa region, which developed into a vibrant telecommunication cluster, as illustrated by Nortel. Of course, Nortel failed now. We face a similar situation with Blackberry. It is difficult to say whether Blackberry will survive. There has been a lot of speculation with Blackberry. Blackberry has a lot of skills, a lot of excellent well-trained engineers, researchers. There are a lot of potentials. The case of Nortel and the problem of Blackberry all support how difficult for Canadian firms to be successful internationally. Failure of these large firms in no way says anything about the failure of these industries because in spite of the failed Nortel and Blackberry, there are still vibrant SMEs and investments. There are a lot of potentials for the two clusters. People will drive further in new directions. Nortel was a firm that tried to internationalize to some degree. It still very much focused on the North American market. Blackberry, of course, production is much focused on North America. One lesson for policy makers may be to strengthen learning capabilities of firms on a global scale. That might something both of these companies that might not have done well, especially Blackberry.