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Local government policies and
pharmaceutical clusters in China
Yuanyuan Yu, Zhiqiao Ma, Hao Hu and Yitao Wang
State Key Laboratory of Quality Research in Chinese Medicine,
Institute of Chinese Medical Sciences, University of Macau, Macau, China
Abstract
Purpose – The purpose of this paper is to study how local government policy influences the structure
of Chinese pharmaceutical clusters during their industrial catch-up.
Design/methodology/approach – This paper applies a case study method by targeting
pharmaceutical clusters in Tonghua, Taizhou, and Tianjin.
Findings – The varied structures of pharmaceutical clusters in China demonstrate local
governments’ efforts to utilize local resources accordingly. While the local governments in China
introduce different policies to firms with different ownership in the process of constructing different
cluster composition, all the local governments emphasize motivating the development of small- and
middle-sized enterprises for cluster dynamics.
Practical implications – The local governments should try to reach a balance between short-term
foundation and long-term competitiveness for industrial cluster development.
Originality/value – This paper provides the detailed analysis of local governments’ influences on
the formation of pharmaceutical clusters in China and helps to enrich the knowledge about how local
government promotes industrial clusters to realize industrial catch-up through sectoral innovation
system.
Keywords Industrial cluster, Cluster structure, Pharmaceutical industry, Local policy, China
Paper type Research paper
Introduction
The compound annual growth rate of the Chinese pharmaceutical market reached
16.46 percent between 2001 and 2011, the fastest rate globally. In 2011, the output value
of the Chinese pharmaceutical industry realized 15,025.09 billion RMB. With such rapid
growth, China’s ranking in the global pharmaceutical market jumped from tenth in 2003
to fifth in 2008. In 2006, IMS Health coined the word “pharmerging” to define some
rapidly-growing pharmaceutical markets that would influence the future of the global
pharmaceutical industry, and China was considered to be one of these markets. In March
2010, IMS redefined 17 countries as “pharmerging” and classified them into three classes
according to current and potential market size, among which China is exclusively the
largest. IMS Health predicted that in 2013 China would become the world’s third-largest
pharmaceutical market. With a gross domestic product (GDP) of more than 8 trillion
USD, it is predicted that drug sales in China during 2008-2013 would increase by more
than 400 billion USD, equivalent to the predictive value of sales growth in the US
pharmaceutical market within the same period (Gertler and Levitte, 2005).
Therefore, the pharmaceutical industry in China in the twenty-first century is
widely regarded to be a sunrise industry. The development of the pharmaceutical
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/2053-4620.htm
This study is supported by the research funding of University of Macau (MYRG160
(Y1-L2)-ICMS11-HH).
Received 20 February 2013
Revised 7 November 2013
19 December 2013
Accepted 29 December 2013
Journal of Science & Technology
Policy Management
Vol. 5 No. 1, 2014
pp. 41-58
qEmerald Group Publishing Limited
2053-4620
DOI 10.1108/JSTPM-02-2013-0004
Local
government
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41
industry in China has begun to emerge with the characteristics of regionalization,
large-scale and centralization. After joining the WTO, China’s pharmaceutical industry
was forced to accelerate its development in order to deal with the fierce competition of
the market, especially facing the entry of multinational pharmas. As industrial cluster
is especially important for the development of high-tech industries with systematic
complexity, it is natural that the development of pharmaceutical industrial clusters
is highly encouraged by the policy makers in China.
The pharmaceutical industry is complex, involving varied strands of science
and technology, and thus it is difficult to break through the creation bottleneck
by only developing isolated technologies (Chan and Daim, 2011). It is a typical
knowledge-intensive industry, with the characteristics of high risk and high investment
through the process of innovation, producing, and commercialization (Prevezer, 2008). In
order to improve the efficiency of innovation and break through the growth limit, the
industrial cluster model – with the feature of division and cooperation between near
geo-space enterprises – is regarded as an efficient means to enhance the drug innovation
capability and promote the development of the regional economy (Gertler and Levitte,
2005). For example, the pharmaceutical industry clusters in Boston, San Francisco Bay,
Washington and San Diego, have become not only the backbone of local economy, but
also the driver of innovation and industrialization of bioscience in the USA (Walcott,
2002). Leading enterprises in these clusters established cooperative relationships with
new companies; thus, new small technology companies could develop rapidly and
become large- and medium-sized enterprises or be merged with large enterprises. This
virtuous cycle promoted the development of industrial clusters, and the effects of
investment and the efficiency of research were greatly enhanced. Another good example
is BioRiver – a pharmaceutical cluster in Nordrhein-Westfalen. It provided a valuable
platform for enterprises in the region, furnished great circumstances for new enterprises,
optimized the structure of pharmaceutical industry, and promoted development (Krauss
and Stahlecker, 2001).
Since 1996, the pharmaceutical industry in China has been developing rapidly in
terms of production scope and scale. Nevertheless, it was just one type of progression
to commercialization of imitation drugs, and basic research was seriously lacking.
There were few new drugs and investment in innovative R&D was rare. The
competitiveness of the Chinese pharmaceutical industry is extremely underdeveloped
in comparison with the USA and Japan (Wang et al., 2009). The Chinese Government
hopes to convert the industry from simple pharmaceutical production to
pharmaceutical innovation (Prevezer, 2008), and therefore wants to improve the
competitiveness of the pharmaceutical industry in order to realize industrial catch-up
through establishing industrial clusters. While the central government of China has
carried out a series of policies to promote the development of a pharmaceutical cluster,
local governments also have their own policies for consideration of their own interests
as well as the local resources and the environment, to further promote the development
of local pharmaceutical industry clusters (Conle
´and Taube, 2010). Some academics
even consider local government as one of the most important influencing factors for
emergence and development of industrial clusters in China (Qiu and Xu, 2004; Zhu,
2004). While the significant impact of local government is generally recognized,
research on how local government influenced the pharmaceutical clusters in China
remains less addressed. Therefore, this paper aims to:
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.investigate the structural design of the main pharmaceutical clusters in China;
and
.study the effect of local government policies on pharmaceutical cluster design.
This paper provides a detailed analysis of local governments’ influence on the
formation of pharmaceutical clusters in China and helps to enrich the knowledge about
how local government promotes industrial clusters to realize industrial catch-up within
a national and international context.
This study applies the framework of sectoral innovation system to analyze the
cluster structure and policy design of the pharmaceutical clusters. The research
focuses on three clusters located in three different regions in China. We concentrate on
the relationships among different types of firms, and the affection of institution to the
firms, especially the local government policy. We discuss the ways that different
polices affect the innovation capability of clusters through different types of firms, and
the complementarity role of government in enhancing the relations of firms inside and
outside industrial clusters. In order to observe the relations and interactions more
clearly, we divide the innovation actors into four types according to their properties
and analyze the influence of policy.
The data in this study consists of materials from multiple sources. It includes policy
documents regarding the pharmaceutical industry by Chinese Central Government
from 1949 until now, policy documents of the pharmaceutical clusters studied, official
websites of the studied development zones and industrial parks, and academic papers
relating to Chinese pharmaceutical clusters. In addition, it also includes materials from
interviews with firm leaders and university researchers in the studied clusters, and
government officials in charge of the clusters. All the materials were combined and
analyzed through single clarification and cross comparison.
Theoretical framework
Sectoral innovation system and cluster
As research of industry was concerned more and more about the improvement of
innovation capability, and the simple analytical framework did not to fully explain the
innovation process of industry (Carlsson and Stankiewicz, 1991; Oltra and Saint, 2009),
Franco Malerba proposed the conception of a sectoral innovation system. This is a
framework used to study the interaction mechanism of the technology, organization
and institution which occurred in the process of innovation from the perspective of the
sectoral system (Malerba, 2002), which consists of three parts: knowledge base, actor
and networks, and institutions.
Different sectors have different knowledge bases. The field of knowledge refers to
the specific science and technology of a sectoral innovation activity. The actors contain
enterprises and non-business organizations. Enterprises are the principal instigators of
innovation, involved in the whole process such as production, sale, and application of
new technology. The non-business organizations, such as universities and research
institutions, support the innovation and technology diffusion in different ways, and
promote the integration and complementarity of knowledge, skill, and specialization
(Schmitz, 2006). These actors interact through various methods of cooperation,
competition, exchange, and communication (Malerba, 2002), which form the network of
the sectoral innovation system. The institutions, which include laws, rules, standards,
Local
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43
customs, and routines, constrain actors’ behavior and affect the relations and
interactions between actors (Edquist, 2005).
Porter (1990) proposes that the cluster is a group mainly formed by the enterprises of
a particular area, which are interactively correlated, compete and cooperate with each
other, and are concentrated geographically. The core meaning of cluster in this sense is
the high concentration of industry in a certain range of space, which is helpful to reduce
the cost, and improve the economic efficiency and competitiveness of enterprises. The
cluster is usually associated with a certain industry. It consists of some associated
organizations such as enterprises, financial institutions, and chambers of commerce.
In fact, the cluster can be seen as the main body of the sectoral innovation system, and
the model of sectoral innovation system can be an analysis framework for cluster. It can
help to analyze the relationship among actors, find out the innovation mechanism in a
sector, and the way of policy tool to promote the development of industry.
The enterprises of a cluster are usually interconnected with each other by the
significant industrial characteristics. The organizations in clusters can be seen as the
actors in the sectoral innovation system. And the networks of the sectoral innovation
system can be reflected by the structure of cluster. In the sectoral innovation system,
government policy is an important institution that can influence the innovation process
and the networks of actors (Patana et al., 2013).
Cluster structure as policy design
The formation, development and renewal of industrial clusters have received
considerable attention during the past decades. In most of the relevant literature,
clusters are hailed as a universal panacea for local and regional development (Yeung et al.,
2006). With rising attention on industrial clusters, scholars have noticed the structural
differences. Using measures of types and scale of enterprises, structure of industry chain,
actors network, interdistrict mobility of labor, state role, and capital sources in district
formation and character, Markusen (1996) proposed four types of industrial districts:
Marshallian and Italianate industrial districts, hub-and-spoke districts, satellite
industrial platforms, and state-centered districts (Markusen, 1996). Marshallian and
Italianate industrial districts is the widely acknowledged cluster mode that has been
discussed in literature (Brusco, 1982). The characteristics of Marshallian structure are
defined as intensive networks of trade and cooperation among many small, locally
owned firms that make key investment decisions locally, scale economies are relatively
low and strong innovative tendencies depending on the trade networks and local
government investment (Coe, 2001; Markusen, 1996). In addition, Gordon and McCann
(2000) also suggested a classification model of industrial clusters: a classic model of pure
agglomeration; an industrial complex model; and a social network model. All of these
imply the realities of structural variation among industrial clusters.
Furthermore, the spatial, institutional, and network of cluster development have
been deeply differentiated by globalization today (Phelps, 2004), which results in a
more complex structure of industrial clusters. Additionally, different types of
structures of industrial clusters may co-exist and overlap in the same agglomeration as
“sticky mixes”, and the structure of a cluster can also transform over time (Coe, 2001).
For example, a new hybrid of cluster is found in Vancouver’s film industry, which is
named as a “satellite-Marshallian type”, sharing features between the satellite platform
type and the Marshallian type (Coe, 2001). The nature of Suzhou Industrial Park
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in China is largely that of a satellite platform type and is forecast to be likely a satellite
neo-Marshallian type in the future (Wei et al., 2009).
As more and more industrial clusters are established and developed around the
world, the competition among them is becoming increasingly fierce, which leads to
rising attention on the structure of the industrial cluster. This is regarded as an
important factor to improve the particular cluster’s innovation capacity and distinguish
its competitiveness from others (Cao et al., 2008; Dayasindhu, 2002). Under different
resource endowments, a suitable structure can make resource allocation more
reasonable and efficient among all actors of a cluster. Raw materials, information, and
infrastructures can be commonly shared with high efficiency, which then improves
productivity and innovation efficiency of these actors (Niu et al., 2008). At the same time,
the embeddedness of the cluster structure, which focuses on the role of social relations
and the structures of these relations, is another key factor for innovation performance
and can lead to the creation of cluster knowledge by forming a dense innovation network
beyond only economic relations (Casper, 2007; Dayasindhu, 2002).
Because of the significant importance of the cluster structure, how to design
appropriate government policy to construct a specific cluster structure becomes a
crucial concern (Prevezer, 2008). Research has indicated that cluster structure is not
only influenced greatly by location, resource, industrial base, and specialization but
also by public policy (Rosenfeld, 2005). Lundequist and Power (2002) discuss the
usefulness of policy tools in the cluster building process and summarize some
common elements shared by successful clusters. Gordon and McCann (2000)
studied clusters in London and found that policy action affected the distinction
between clusters and the contrasts in policy implications were important features of
different clusters.
Local government policy and industrial cluster
While realizing the importance of policy in cluster formulation and development,
researchers also draw attention to the impact of different national and local government
policies. Because of their different powers, local governments and central government
have a clear division of policy function. Policy implemented by central government is
carried out throughout the country. Because of the different regional economies, cultures,
and resource endowments, the effects of central government policies are different. Local
government policy is formulated based on the specific circumstances of the region. It is
more targeted and is the individual development and complementarities of central
government policy. While national policy usual can determine the distribution and
competitiveness of the whole industry, local government policy plays a more important
role in an individual cluster’s structure formation and development (Goodwin and
Painter, 1996). For many local governments, various policies are carried out for different
kinds of companies in the cluster, which can influence the formation of a cluster structure
by supporting or neglecting some types of companies (Su and Hung, 2009).
The literature also looks at how local government should contribute to industrial
clusters. Whether local government should get itself actively involved in cluster
development, is controversial. Cooke (2001) believed that local government was helpful
in developing clusters. In particular, policies should be introduced that stimulate the
growth of private investment to motivate investment institutions to step into the
development of industrial clusters. Su and Hung (2009) compared two clusters and
Local
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45
found social capital and accompanying networks were the main factors that shaped
a cluster’s configuration, which depended heavily on policy promotion. On the
contrary, some scholars do not think that it is wise for local government to involve
itself in cluster development. Comparing China and the USA had identified deficiencies
of policy, such as difficulty in shifting away from government-led responsiveness to
funding programs, problems in promoting cooperation between domestic science and
firms, and defect of policies aiming at returnees or financing support to small and
medium-sized enterprises (SMEs) (Prevezer, 2008).
According to the role of institutions in the formation of clusters, the model of
influence of government to the cluster can be divided into two types: bottom-up and
top-down (Wang and Dong, 2005). The bottom-up model is demand-induced. It means
the cluster has already enjoyed certain advantages, such as favorable natural
conditions, and sorts of enterprises. The government must only provide policies to help
or guide the formation of the cluster. The top-down model means the cluster is created
by the government, who plans and decides its development strategy.
As mentioned before, clusters with different structures have different innovation
drivers (Fujita, 2012). Therefore, one core question involves designing local policy
specific to firms with different ownership in clusters. There are many different firms in a
cluster, such as multinational companies (MNCs), SMEs, large private enterprises, and
state-owned enterprises (SOEs). In a cluster, MNCs often showed significant effect of
agglomeration, including intra-company and inter-company concentration, accumulation
of countries of origin, as well as cross-functional copolymer (Defever, 2006). Through
geographic concentration and radiation function, the branches of MNCs could strengthen
the leadership and industrial clustering ability of a region; the separated value chain
could generate the vertical contact, which would promote the collaboration among cities
(Ma and Delios, 2009). SMEs also play an important part in clusters. SMEs could
transform R&D achievements of universities and research institutions into products
more efficiently, and at the same time transfer market demand information to research
institutions. In China, private enterprises have become an important part in the
development of industry. Large private enterprises have flexible, strong profitability,
and high degree of internationalization (Zhao and Xiang, 2010). In a cluster, they can
easily play the leading role because of their emphasis on the integration with SMEs, and
their professional development strategy. But they can be severely influenced by the
external environment, such as the economic restructuring, financial crisis, national or
local policies. SOEs is are also important for clusters. If the formation of industrial
clusters came from the original structure of the planning economy, then SOEs would be
the basic part of the cluster (Wang and Yang, 2010). The obvious advantages of SOEs
are occupations of valuable resources, such as human resources, capital, government
support, information resources, and so on. But their utilization of resources is relatively
inefficient and their reaction to information is also slower than SMEs. Sometimes SOEs
play a leading role in clusters through sharing resources with SMEs, in order to
implement a diversification strategy (Li, 2009).
For clusters, the role of government is to guide the rational and orderly development
of industrial clusters, to create a good external environment conducive to innovation, and
to prevent the degradation of industrial clusters towards recession. In China, local
government plays significant roles in deciding local policy for MNCs, SOEs, large private
enterprises, and SMEs. As indicated by Luo (2001), the relationship between MNCs
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and local government is established on the foundation of “resource complementarity,
organizational credibility, political accommodation, and personal relations”. MNCs tend
to invest in the region with good infrastructure facilities, strong scientific research
strength, and great technical market potential. As the R&D centers of MNCs are engaged
in continuous technological innovation activities, their requirements for intellectual
property protection are especially strong (Jiang and Lu, 2006). These quests are difficult
to complete via the market alone, and support from local government is necessary.
Therefore, the formulation of local policies could largely affect the location choice of
MNCs (He and Xiao, 2011). The development of SMEs – as one type of vulnerable group
in the market competition – usually requires government intervention. For example,
China’s local governments often support SMEs through preferential treatment in tax
relief and bank loans, and drive the innovation of SMEs by formulating science and
technology plans. The influence of government on large private enterprises is mainly
reflected by the specific long-term planning for the area, effective supervision of financial
systems, and the monitoring mechanism of government officials. While SOEs enjoy rich
resources, they mostly lack innovative capabilities and their resource utilization is low.
In order to avoid resource waste, local government has to display its capabilities of
resource scheduling and consolidation (Dong, 2007). And through industrial planning,
government procurement, major projects construction, it also helps SOEs to clarify their
innovation directions and to transform their innovation results quickly into new
products and service.
Pharmaceutical clusters in China
The pharmaceutical industry can be seen as a sectoral innovation system because its
innovation involves many actors, such as firms, research organizations, financial
institutions, government authorities, and consumers. And its innovation network
consists of relations among actors, and other features that can influence the actors’
behavior or the development of technology. In the past few decades, with the transition
of the economy and medical systems in China, the pharmaceutical industry
experienced a high-speed growth and development (Wang et al., 2009). However, due to
various development routes, resource dependences, and historical reasons, the
distributions of the pharmaceutical industry in China shows obvious regional
characteristics. The distribution of resource endowment mostly laid an influential
foundation for Chinese pharmaceutical clusters’ formation and development (Conle
´and
Taube, 2010). At present, there are around 20 relatively mature pharmaceutical clusters
in China. Because the development of the traditional Chinese medicine (TCM) industry
is much more mature than the other pharmaceutical industries in China, the clusters
that are comprised of many TCM enterprises were formed first. They are mainly
located at the regions where there are abundant Chinese herb resources, such as the
Changbai Mountain region and Sichuan Province. The clusters with manufacturing
enterprises of chemical drugs are mostly formed in Jiangsu and Zhejiang Province,
which are famous for abundant chemical raw materials and manufacturing capacities.
During the formation of clusters, the changes of organizations and networks are also
obvious through merger and acquisition processes and collaboration.
In addition to the resource endowment, the government of China played a very
important role in the formation, development and distribution of pharmaceutical
clusters. And the policies are important institutions that influence the action of
Local
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47
innovation actors and the interaction among them. In particular, the Chinese state wants
to implement a rapid catch-up for the pharmaceutical industry. Biopharmaceuticals has
been confirmed as the top priority in China’s medium-to-long-term plan, including the
11th five-year plan for high-tech industry development and the 12th five-year plan for
biotechnology industry development (Conle
´and Taube, 2010; Wang et al., 2009). Under
the guidance of the “National Torch Program” and other state policies, China has
experienced an interesting phenomenon known as “development zone fever”, and many
pharmaceutical industry parks and bases in the Economy and Technology Development
Zones are built around the country, most of which claim to focus on modern medicine
such as biopharmaceutical industry (Yeung et al., 2006). At present, there are 23 national
biotech industry bases, and more than 50 biopharmaceutical industry parks have been
established. Based on these industry parks and bases, many pharmaceutical clusters
focusing on modern biotechnology have emerged. These clusters are mostly
concentrated in coastal areas and some large cities. However, the policies of local
government are different among regions, which may affect actors differently.
To investigate the impact of local government’s policy on pharmaceutical clusters,
a detailed case study focusing on representative clusters is more appropriate than whole
coverage of all the pharmaceutical clusters in China. In order to get a comprehensive
understanding of the Chinese pharmaceutical clusters, a series of dimensions according
to the theory of sectoral innovation system are applied to identity the target clusters
for this study, including types and scale of enterprises, structure of industry chain, actors
network, role of the state and capital sources. With these dimensions, the influential
pharmaceutical clusters in China were studied and compared, first according to
second-hand material and data; second, suggestions from key government officials and
industrial opinion leaders were consulted to confirm the selection of pharmaceutical
clusters further. Lastly, the pharmaceutical clusters in Tonghua, Taizhou and Tianjin
cities were selected in order to analyze their cluster structures and local government
policies for their formation and development.
Structural analysis of three clusters
These three clusters represent the general structure features of three types of
pharmaceutical clusters in China. The economic and structural information of three
clusters are summarized in Table I.
The structure of the pharmaceutical cluster in Tonghua
The Tonghua cluster is located at the Changbai Mountain region in the south-eastern
Jilin Province. It has been selected as the Chinese Herbal Medicine Demonstration Base
under the “National Torch Program”, the National Biological Industry Base, and one of
the first batch National Biopharmaceutical Industry Bases for export innovation. Until
2011, there were about 95 pharmaceutical enterprises in the cluster, but most of them are
private SMEs and no leading firm has emerged. Most of these enterprises concentrate on
TCM, including the plant of Chinese herbals, R&D, manufacturing, and sales.
The Tonghua cluster has a large amount of plant bases for Chinese herbals, all of
which have the good agriculture practices (GAP) certification, such as Xingkaihe
ginseng and fritillary bulb planting bases. In addition, the cluster also has 26 R&D
institutions and 34 medical wholesale enterprises. The pharmaceutical enterprises in
the cluster cover almost the whole industrial chain of TCM. The enterprises can meet
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most of their supply demands by exchange with other enterprises within the cluster,
particularly for the supply demand of Chinese herbals. Only some chemical raw
materials are needed from outside of the cluster. There is a strong networking among
enterprises within the cluster, from herb planting, processing, to manufacture. Now
even more and more manufacturing enterprises have started to plant Chinese herbals
by themselves. Because the production technology of TCM is relatively simple, the
product portfolios of many manufacturing enterprises within the cluster are quite
similar. Among these enterprises, there are fierce competitors and low cooperation.
The products of these pharmaceutical enterprises are mostly sold to pharmaceutical
companies outside. Then the pharmaceutical enterprises in the Tonghua cluster
invested greatly to build networks with many sales companies outside.
The structure of the pharmaceutical cluster in Taizhou
The Taizhou cluster is located in the middle of Jiangsu Province. As one of the center
cities of Yangtze River Delta Economy Zone, the Taizhou city has set up the first
national medicine high-tech zone in China. It has the biggest anesthetics and vitamin
manufacture bases. At present there are 87 pharmaceutical enterprises, including
drugs manufacturing, drugs wholesales, and chemical raw materials manufacturing.
Among these enterprises, the sales of the Yangtze River Pharmaceutical Group, the
Jichuan Pharmaceutical Company, the Jiangshan Pharmaceutical Company, and the
Suzhong Pharmaceutical Company account for 85 percent of the sales of the whole
Taizhou cluster. The Yangtze River Pharmaceutical Group is one of the biggest
pharmaceutical enterprises in China, which functions as leading company in the
cluster. In addition to these big domestic pharmaceutical enterprises, the cluster also
has many private SMEs that carry out specialized production and provide a series
related services. These SMEs have formed strong networks with core firms such as the
Yantze River Pharmaceutical Group. Because of the existence of these SMEs, local
suppliers can meet most of core pharmaceutical enterprises’ demands. The core
companies do not have any motivation to connect with suppliers outside. But these
core firms build mature networks with many sales companies around the country to
sell their products. Some of their products are even sold to the international market.
Tonghua Taizhou Tianjin
Number of firms 95 87 284
Main firm type SOEs, SMEs Four leading large private
enterprises
75 foreign invested
enterprises
SMEs SOEs
SMEs
Industry chain Herb planting R&D R&D
Manufacturing Manufacturing Manufacturing
R&D Sales
Sales
Internal
networking
Strong Strong Weak
Scale economic Low High High
Cluster structure Marshallian model Hub-and-spoke model Satellite platform model
Table I.
Structure of three
pharmaceutical clusters
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49
The structure of the pharmaceutical cluster in Tianjin
The Tianjin cluster is located in the Tianjin Economic-Technological Development Area
(TEDA). As one of the first batch National High Economic-Technological Development
Areas which were approved by the State Council, TEDA is located at Bohai Coastal
region, which has a perfect development environment for foreign and export-oriented
industries and commerce. The pharmaceutical industry is one of the nine important
industries in TEDA. Until 2009 there were 284 pharmaceutical-related enterprises. Most
of these concentrate on manufacturing, and only 19 enterprises focus on related services.
Among these enterprises, there are 75 big foreign invested enterprises, which are the core
of innovation and play the leading role for the pharmaceutical cluster in TEDA. At the
same time, there are many private SMEs around these foreign enterprises to provide
specific services. A few big domestic pharmaceutical enterprises also existed in this
cluster, but compared with the foreign invested enterprises as branches of MNCs, their
contribution is still small. Except for keeping a few connections with some SMEs that
provide services, the foreign invested enterprises mainly connect with their parent
companies overseas to get innovation information and manufacturing resource. But their
target market is also located in China.
Analysis of local government policies
During the formation and development of the pharmaceutical industry clusters, the roles
of local governments are different among clusters. In order to support the development
of local pharmaceutical clusters, local government introduced a series of policies specific
to its own resource endowments and cluster objectives. The analysis of three clusters
from the perspective of sectoral innovation system is summarized in Figure 1.
Local policy for the pharmaceutical cluster in Tonghua
The formation of the Tonghua cluster was spontaneous. Because of the abundant
Chinese medicinal materials in the Changbai Mountains, many state-owned TCM firms
grew in the late 1980s, which attracted more private enterprises to move into this region.
With the continuous concentration of enterprises, the demand for industrial resources is
increased and market capacity becomes insufficient. The cluster has further requests for
infrastructure construction, investment, and financing environment, which is difficult for
private SMEs to obtain by themselves. In this case, the Tonghua government plays
the role of “night watchman”. It provides the bottom-up model support to the cluster.
But the policies are different according to different enterprises. The government involves
in the system reform of SOEs directly activating the capital through enterprise
reorganization. This measure is helpful to the market allocation of resource. To SMEs,
the government provides policy support instead of direct management. First, it helps to
adjust the allocation of resources, especially financial flows. It helped SMEs to get bank
loans by functioning as a loan guarantor, which makes up the shortage of R&D and
manufacturing funding for most SMEs in the cluster. Second, the local government
provides proactive fiscal policy. It formulated several policies such as tax preference,
land-use preferences, and administrative fee abatement for the SMEs moving into the
cluster. Third, it takes efforts to create a favorable market environment. It established
pharmaceutical industry association to coordinate and strengthen market supervision.
In general, the Tonghua Government plays an indirect role in the formation
process of the pharmaceutical cluster. Its main policy target is SMEs emerging from
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the cluster internally. The establishment of the cluster depends mainly on enterprises
themselves. The policy efforts of local government is mainly about mobilizing the
vitality of the cluster, increasing internal dynamics of cluster, and creating a healthy and
positive market environment, all of which promote the interactions of innovation actors
in Tonghua cluster.
Local policy for pharmaceutical cluster in Taizhou
While the pharmaceutical industry cluster in Taizhou started from four large private
enterprises, its formation also depends heavily on the promotion of local government.
Figure 1.
Analysis of three clusters
State-owned
enterprises
Small and
middle-sized
enterprises
Large private
enterprises
Multinational
companies
Marshallian
model (Tonghua)
Hub-and-spoke
model (Taizhou)
Satellite
platform model
(Tianjin)
Shareholding reform
Market allocation of
resource
Loan guarantee
Reduce administrative
expense
Reduce tax
Increase credit support
Encourage integration
Attract state research
projects
Set up exchange
service center
Purchase large
scientific research
equipment
Foreign investment
drawback
Allow the local
stock issue
Innovation subsidies
Networks Innovation
actors
Institutions
(Policy)
Policy design Formation Development
Bottom-up
Bottom-up
Top-down
Top-down
Top-down
Bottom-up
Local
government
policies
51
In order to make full use of the industrial base, the local government of Taizhou
integrated these core companies and local SMEs initiatively to apply for establishing
the international pharmaceutical high-tech zone. It also drove the cooperation and
connection between SMEs and four core companies to improve the structural dynamics
of the cluster. Moreover, the local government led the core enterprises to cooperate
actively with advanced research institutions and even invested directly into some
research program to improve pharmaceutical innovation.
The formation of the pharmaceutical industry cluster in Taizhou is a result of local
government promotion. The government played an important role in enhancing the
networks between different types of actors. It supplemented the cap between SMEs and
large private enterprises and made the cooperation easier. However, after the preliminary
founding of the cluster, the local government did not intervene in designing the
development strategy of the cluster and returned instead to the role of “night watchman”.
It carried out a series of proactive fiscal policies and established the financial platform to
assist the future cooperation in the cluster. Consequently, the structure of the Taizhou
cluster can be regarded as a result of both government promotion and market driven.
Local policy for pharmaceutical cluster in Tianjin
Different from the other two clusters, the pharmaceutical cluster in Tianjin mainly
depends on local government planning. According to its own resource characteristics
and macro policy demand, the Tianjin Government guided the generation of this
particular cluster through a top-down model. With superior policy environment, rich
clinical research status, and sufficient human resources, the Tianjin Government led
the whole construction and development of the pharmaceutical cluster. It formulated
a series of preferential policies to attract investment of MNCs. It provided many
benefits to attract MNCs, such as tax relief, land-use concession, investment tax
rebate, etc. It also helps local enterprises to get financial investment from overseas
biopharmaceutical companies. Moreover, it provides direct help to SMEs, such as
setting up special financial support and subsidizing SMEs to buy large scientific
equipment to pave the way for early drug discovery and development.
In a word, the formation and development of pharmaceutical cluster in Tianjin is
mostly a result of local government efforts. The government plans and guides the
cluster development strategy and provides direct support from capital to technology.
The structure of the cluster in Tianjin also depends on the policy preference,
particularly its preference to attracting MNCs.
Discussion and conclusion
By comparing the three pharmaceutical clusters, significant structural variations can be
identified. Many structural characteristics of the Tonghua cluster are very similar to
the Marshallian structure defined by Markusen (1996). The innovation actors in Tonghua
cluster are many private SMEs that focus on TCM. The exchange among cluster
enterprises is frequent and close. As most raw materials, business services and technology
support are available within the cluster, these enterprises make most investment
decisions locally, and there is low degree of cooperation with other enterprises outside the
cluster. The scale economy of Tonghua cluster is relatively low but its internal dynamics
provide much motivation and benefits to every enterprises within the cluster as described
in the literature (Knorringa and Meyer-Stamer, 1998; Markusen, 1996).
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The structural characteristics of the Taizhou cluster are more like the “hub-and-spoke
district” which is mentioned in the literature (Markusen, 1996). The four large private
enterprises are the main actors of drugs and new manufacturing technologies innovation
in the cluster. They act as the hubs or anchors to the cluster’s economy. Many SMEs
around these core enterprises are responsible for related activities and supplies for
chemical raw materials and services. These SMEs depend upon the core enterprises’
activities and play a role of spokes of a wheel. The dynamism of Taizhou cluster mainly
depends on the domestic and international market performance of these four large
private enterprises. The network between SMEs and core enterprises in the cluster is
strong. Besides many SMEs in the cluster, these core enterprises also keep substantial
links with some suppliers and competitors outside of the cluster. Thus, they have close
cooperation and connections with other enterprises both locally and externally. Under
the strong network, the Taizhou cluster has relatively high level of scale economy.
The pharmaceutical cluster in Tianjin has a lot of large foreign invested enterprises
that are owned and headquartered externally, which dominate the innovation capacity
and business structure of the Tianjin cluster. These foreign invested enterprises have
no long-term connections and commitments with enterprises locally. On the contrary,
they maintain a connection with their parent companies outside of the cluster. Their
parent companies are the biggest suppliers and provide innovation, human resources,
and information networks to their branch companies. They also help the branch
companies make many key investment decisions externally. The structural
characteristics of the Tianjin cluster has many similarities with the “satellite
platform” structure defined by Markusen (1996), while there are still some differences.
In addition to many foreign invested enterprises, local SMEs are also important parts
of the Tianjin cluster. The development of these SMEs mostly depends on the
innovation resources spilling from the foreign investment enterprises or other research
institutions in the Tianjin cluster. But the cooperation network between these two
kinds of enterprises is still weak.
The pharmaceutical industry system is so complex that a single cluster structure
design cannot meet the development demands completely. The clusters with different
resources and developed routes should have corresponding characteristics of cluster
structure. As mentioned before, the interaction among actors in clusters is an important
factor for improving clusters’ competitiveness. The similar “Marshallian” structure, in
which the innovation actors have strong interactions, contributes to the competitiveness
of the pharmaceutical industry in Tonghua by making efficient use of the abundant
local Chinese herb resources. The Taizhou cluster utilizes its pharmaceutical industrial
base and gives full space to its core pharmaceutical enterprises’ advantages by
“hub-and-spoke” cluster structure design. The Tianjin cluster has a good satellite
platform structure for many foreign enterprises to attract capital and increase innovation
capacity and competitiveness of its pharmaceutical industry.
The interaction in different structural clusters is varied. And the difference depends
on the nature of firms in the cluster and the cluster structure. In the cluster that
consists of similar firms, such as in Tonghua, the network of actors is strong and the
interaction is active. But its network with the outside is weak, because most of these
firms are SMEs. In the cluster, which consists of different types of firms, the network
among actors is weak but the relations with outside are stronger. The intensity of
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government
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53
network depends on the nature of firms in cluster, such as the difference between the
Taizhou and Tianjin clusters.
For industrial clusters, the main role of government is to maintain market order and
to create good external environments (Cooke, 2001). As different types of firms have
different features and demands, government needs to provide different policies to meet
these demands. Even more importantly, changes in the relations among actors, and
new relations and new networks from new actors lead to higher demands on the role of
government. The local government in China makes different policies to promote the
development of clusters and to enhance the long-term competitiveness. The effect of
local government in the formation and development of clusters is positive as long as
the local government makes proper policies and pays more attention to the real
demands of clusters (Prevezer, 2008; Rosenfeld, 2005). The local government policies
for pharmaceutical clusters in China give meaningful implications:
.The influence model of local government to the formation of clusters depends on
the resource endowments, industrial bases, locations, and government requests.
And the model can convert after the formation process. The formation of a
biopharmaceutical industry cluster in Taizhou is a top-down model. However,
after the cluster’s preliminarily foundation, the local government did not
intervene in designing the development strategy of the cluster and convert to the
model of bottom-up in the cluster development process.
.The three local governments in the different clusters have the same policy of
strong support for SMEs. On the one hand, because of its private ownership
structure, the interactions among enterprises is weak, which needs government
to be an initiator to help them to cooperate. They also need many supports from
the local government, especially finance support. On the other hand, as the
advantage of SMEs is flexible, SMEs always play important roles in industry
innovation. Most of innovations are originated or initiated from SMEs, which are
the main driving force for clusters. The cluster in Tonghua is made up of SMEs
and the Tonghua Government plays an indirect part in the development of the
cluster, which is helpful to keep the vitality of this kind of cluster.
.SOEs need the guidance from local government because of their ownership
structure and their slow reaction to the change of market (Cao et al., 2008; Luo,
2001). So the government can play a very important and direct part in the
primary stage of development or transition of SOEs in the cluster, such as the
Tonghua cluster. When SOEs find out their own development direction, too
much administrative intervention will restrict the development of SOEs.
.The impact of government to the large private enterprises is not as direct as for
SOEs, but the influence degree is similar because the private enterprises are very
sensitive to the policy. The cluster in Taizhou is formed from four large private
enterprises. The local government promoted the formation of cluster but did not
interrupt the detail development strategy of the cluster, which provide the strong
support and try hard to keep the activity of private enterprises.
.As the location choice of MNCs depends mainly on investment circumstance
and development potential, which lie on the local government policy and
administration (He and Xiao, 2011). The local government can plays a direct role
in attracting investments from overseas; the connections among MNCs, SOEs
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and SMEs also need initiation from local government. The cluster in Tianjin is
made up of three types of firms and one-third of firms in the cluster are branches
of big MNCs. So the Tianjin Government promotes the formation of the by giving
directly administrative support to the cluster.
.The government can play a complementary role in enhancing the relations of
firms in and out of cluster. As mentioned before, the interactions among firms
are important for the innovative activity. However, the intensity of the
relationship and network among actors depends on the nature of enterprise in the
cluster. In addition to directly influencing the behavior of firms, government can
also affect the innovation capacity of clusters through enhancing the relations
between actors, such as establish the cooperation platform, the international
pharmaceutical high-tech zone, or promote the cooperation of research between
enterprise and university.
As shown in this study the local policy for pharmaceutical clusters in China has
two purposes. The first purpose is to make full use of local resource, including
natural resource, infrastructure facilities, industrial base, and so on, to facilitate the
establishment of industrial cluster efficiently to help to realize industrial emergence
and benefit industrial competitiveness. While the specific local policy depends on
the nature of cluster resources, promoting internal dynamics within clusters for
enhancing long-term competitiveness is generally emphasized. The second purpose is
a complementarity to the relations and interactions among innovation actors. The
similarities of local governments’ policy for promoting the cooperation between
innovation actors demonstrate that the local government in China has put much effort
to not only establish industrial cluster but strengthen industrial competitiveness
through enhancing the interactions among firms in the industrial clusters and the
networks between cluster and outside world, which is particularly meaningful for other
economies that are thinking about policy design for industrial clusters.
While this paper focuses on the influence of local policy on pharmaceutical clusters in
China, it is necessary to indicate that the pharmaceutical clusters in China are relatively
new, such as the Tianjin cluster. The long-term effect of local policies needs to be studied
in the future. In particular the following need longitudinal observation: how local
government implements their policies on SMEs and how local government deals with
future entries of firms with different ownership into its cluster. In addition, this paper
focuses on the pharmaceutical cluster. Comparison studies in other clusters with high
industrial complexity should provide further knowledge about industrial cluster as
effective tool for industrial catch-up and how local government can contribute.
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About the authors
Yuanyuan Yu is a PhD candidate of medicinal administration at ICMS, University of Macau.
Her major research area is about pharmaceutical clusters and national medicine industry
in China.
Zhiqiao Ma is a Master graduate of medicinal administration at ICMS, University of Macau.
He has a Bachelor’s degree of science in Peking University that is one of the top universities
in China. His major research area is about pharmaceutical clusters and pharmaceutical industry in
China.
Hao Hu is an Assistant Professor at ICMS, University of Macau. He holds a BA of industry
economics, an MA of management science, a doctorate in management from Sichuan University,
and a post-doctorate from HEC Montre
´al. His research focuses on sectoral innovation of
pharmaceutical, policy management of Chinese medicine, and industrial standardization of Chinese
medicine. Hao Hu is the corresponding author and can be contacted at: polo.haohu@gmail.com
Yitao Wang is a Full Professor at ICMS, University of Macau. He is a famous expert in the
Chinese pharmaceutical industry. His research focuses on industrial upgrading and
standardization of Chinese medicine.
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