Opportunities for Future Development

Given the PRC's existing economic policymaking structure, any successful move toward the globalized fast follower mode must take into account the appropriate scope of government involvement. This suggests that reform of the SME sector vis-à-vis technological aspects—like establishment of cooperation among SMEs, as argued above—is best undertaken in the context of the existing NIS. Indeed, the key advantage of operating through the PRC's NIS is that most of the necessary actors are already in place. More important are the changes in organizational boundaries surrounding the activities that occur within the NIS, as well as the incentives that exist for actors to undertake these activities and to perform well. These changes need to be undertaken alongside an effort to enhance the links between actors.

The dynamism of the network cluster induces local governments as well as intermediary agents to build up supporting institutions and target specific policies toward the rapidly evolving clusters. This feature distinguishes network clusters from simple agglomerations of foreign investments such as those that exist in export processing zones; in the latter, agglomeration economies are usually confined to the final assembly stage, and inter-firm cooperation is almost nil. Strengthening the NIS system in the PRC in this regard is therefore an important and useful step. We recommend the following components for a network cluster strategy oriented toward SME promotion.

Improving the Regulatory Environment for Private Business
The PRC's firms often suffer from a regulatory framework that imposes high costs in terms of time and money in their relationships with government authorities. In the short run, nationwide reform may not be realistic. A balance must be reached in terms of practical measures that would provide a positive environment for private business establishment and operation. These measures should include the establishment of long-term consultation mechanisms between the local business community and local government, the removal of unnecessary red tape and simplification of bureaucratic procedures to promote efficiency, the introduction of agencies that assist in business formation at the local level, and the provision of better training to local civil servants, coupled with meritocratic recruitment policies.

Stimulating Inter-firm Cooperation
Firms in the PRC that are currently organized as clusters often do not engage in much inter-firm cooperation. Creating an awareness of the necessity for substantial improvements is a crucial precondition for intensified inter-firm cooperation. To accomplish this, government policy could offer tax incentives to highlight the advantages of cooperation within the network cluster. Alternatively, policymakers could adopt benchmarking schemes with firms elsewhere. Such benchmarks may show firms how far behind they are compared to the industry leaders.

Sharing Information, Advice, and Training
Informational asymmetries are currently a significant inhibitor of SME growth in the PRC, especially with respect to the financial constraints that they face. One advantage of the network cluster approach is that a network cluster may make it feasible for financial institutions to establish long-term relationships with the network cluster. The government could play a role in the dissemination of information by establishing dissemination standards.

A related problem that existing clusters in the PRC face is the poor match that occurs between the supply of and the demand for trained personnel. Often, the demand for qualified workers outstrips supply. The government could act as an intermediary agent that organizes clearinghouses that facilitate the exchange of human resource needs between firms and training institutions, and aid in matching skill training to firm needs.

R&D and Domestic Technology Transfer
The mere creation of an infrastructure for the promotion of R&D activities does not guarantee that the infrastructure will be put to use. Communication is key to ensuring the effective use of infrastructure. In industrialized countries, business associations often endogenously develop in order to fill the important roles of moderators and facilitators. A middle-ground approach would be for the PRC's policymakers to relax the rules that apply to business-related associations. Another approach would be for the government to establish intermediary organizations that act as brokers in the formation of inter-firm networks within network clusters. Such organizations could then assist companies in linking up with support services. The goal of such organizations would not be to actively promote technology transfer; rather, they would offer a medium by which SMEs could make clearer demands to technology suppliers such as universities, technological institutes, and industrial development centers. This would render technology transfer more demand-driven, and hence would cater to the idiosyncratic cultural aspects of the PRC's domestic market. At the same time, these organizations could also create a national referral network, which would permit these suppliers of technology and know-how to be better matched with SMEs that have need for their specific technology. As such, “innovation networks” could be established that involve firms and institutions such as universities, R&D institutes, and engineering consultancies. These networks could be the basis for indigenous research capabilities, which would help wean the PRC off its dependence on foreign designs and methods.

International Technology Transfer
International technology transfer has been somewhat limited by concerns over intellectual property protection. The PRC's intellectual property regime remains marginal at best. In the medium to long run the PRC will need to develop a more comprehensive intellectual property regime, especially if it is to encourage the indigenous development of research. A step forward may be to establish network cluster-specific intellectual property offices that take enforcement more seriously, especially within the network cluster. With repeated interactions, intellectual property violations may be more easily detected and enforced. In the future, these offices could be expanded into regional intellectual property strategy headquarters. This decentralized approach may be more feasible than the PRC's existing centralized approach, headed by the State Intellectual Property Office.

Technological knowledge could also be acquired from external sources by, for example, the use of international consultants, licensing arrangements between local and foreign companies, sending local workers abroad for training, and encouraging multinationals' affiliate plants to engage in mentoring partnerships with their local supply chains—all of which would benefit from the infrastructure and stability provided by a network cluster.

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