TCI 2015 Clusters as a Basis of Capitalism 5.0

Clusters as a Basis of Capital-ism 5.0

Dong-Sung Cho

Opening Session: New Direction of Cluster Policy in a Creative Economy

Cluster as a basis of Capitalism 5.0:

A Case of Dongdaemun Fashion Cluster

TCI Global Conference

2015. 11. 4

Dong-Sung ChoProfessor of Strategy, Cheung Kong Graduate School of BusinessProfessor Emeritus, Seoul National University Business School

Cluster As a Basis of Capitalism 5.0

Mechanism for Creating Cluster-led Capitalism 5.0

Dongdaemun Fashion Cluster

A Case of Dongdaemun Design Plaza

Content: Invisible hands leading free market economy

Period: 1776-1929 Theorist: Adam Smith

Capitalism 1.0

Effect: Base theory of free trade policy by England and France in their entry to overseas market.

Classic Capitalism

Problems:In 1917, communist revolution in RussiaIn, 1929, market failure in the US leading to the Great depression In 1931: abolition of the gold standard in the Great Britain

Evolution of Capitalism

Content: Adjustment of market failure through government intervention

Period : 1929-1979Theorist: John Maynard Keynes

Capitalism 2.0

Effect: The US overcame the Great depression by creating effective Demand through state investment in social infrastructure

Revised Capitalism

Problems:In 1965, The Vietnamese War caused massive fiscal deficits in USIn 1971, the US abolition of the gold standard In 1973 and 1979, energy crises

Evolution of Capitalism

Content: Letting firms take care of welfare with conservative view

Period: 1979-2008Theorists: Milton Friedman, Anthony Giddens

Capitalism 3.0

Effect:In 1979, Conservative Thatcher became the UK Prime MinisterIn 1981, Republican Ronald Reagan became the US PresidentIn 2008. MB Lee became the Korean President

New Capitalism, Neoliberalism

Problems:In 1991, disintegrated USSR allowed US global hegemonic powerIn 2001, Enron disappeared due to hubris-based illegal practicesIn 2008, Financial crisis in USIn 2011, Occupy Wall Street

Evolution of Capitalism

Problems:In 2011, “Occupy Wall Street” movement lasted 73 days without any alternative ideas

Period: 2008-2011Theorist: Edward Freeman, Anatole Kaletsky

Capitalism 4.0

Content:99% People in society should take over the economy that has been led by 1%, big corporations that are angel-faced villains

People-Centered CapitalismCSR Capitalism

Evolution of Capitalism

-8-

Need for a New Capitalism 5.0

Market-centeredCapitalism 1.0

Adam SmithClassic capitalism

Gov’t-centeredCapitalism 2.0

John M. KeynesRevised capitalism

Firm-centeredCapitalism 2.0

Milton FriedmanAnthony GiddensNew capitalism

Society-centeredCapitalism 4.0

Edward FreemanAnatole KaletskiCSR capitalism

?-centeredCapitalism 5.0

A new form of capitalismneeded

Evolution and Revolution of Economic Thoughts

-9-

Peter Drucker proposed “Every single social and global issue of today is a business opportunity in disguise.”

Michael Porter and Mark Kramer coined the words “Creat-ing Shared Value.”

People-Centered CapitalismCSV Capitalism

Period: 2012- Theorist: Peter F. Drucker, Michael E. Porter

Capitalism 5.0

-10-

Evolution of Capitalism

GOVERNMENT

FIRM CONSUMERS

SOCIETY LABOR

STOCKHOLDERS

MARKET

Market-Based Capitalism 1.0

MARKET

FIRM CONSUMERS

SOCIETY LABOR

STOCKHOLDERS

GOVERNMENT

Government-Based Capitalism 2.0

GOVERNMENT

MARKET CONSUMERS

SOCIETY LABOR

STOCKHOLDERS

FIRM

Firm-Based Capitalism 3.0

GOVERNMENT

FIRM CONSUMERS

MARKET LABOR

STOCKHOLDERS

SOCIETY

Society-Based Capitalism 4.0

GOVERNMENT

FIRM CONSUMERS

MARKET LABOR

STOCKHOLDERS

CLUSTER

Cluster-Based Capitalism 5.0

New Paradigm in Capitalism

FirmGovern

mentMarket Soc

iety

Laissez-faire

Capitalism 1.0

Mercantilism

Capitalism 3.0

Paternalism

Capitalism 2.0

Constitutionalism

Capitalism 4.0

Cluster-basedCapitalism 5.0

Market-based Capitalism 1.0

Adam SmithClassic Capitalism

Government-basedCapitalism 2.0

John M. KeynesRevised Capitalism

Firm-basedCapitalism 3.0

Anthony GiddensNew Capitalism

Society-basedCapitalism 4.0

Anatole KaletskyPeople Capitalism

Cluster-basedCapitalism 5.0

Peter DruckerMichael Porter

CSV Capitalism

Evolution of Capitalism

Clustered business district

Non-clustered business district

Geographic dispersion Densely populated Sparsely populatedInfrastructure sharing Necessary Not necessaryTransaction cost Low HighInformation sharing Easy DifficultCompetitive spirit and rivalry High Low Innovative spirit High LowPhysical contacts Many Few Anonymity Low High Trust High Low Community spirit High Low Regulation Self regulation Rule of lawGovernment subsidy Collective IndividualCSR Collective Individual

Nature of Industrial Clusters

Causes for Industrial Clustering

• Vision of entrepreneurs and government• People• Market• Infrastructure (hospitals, cultural centers, schools)• Raw materials• Transportation• R&D capabilities• Intended government policy

Classification of Industrial Clusters by Region

1. Inter-city Cluster:

2. Intra-city Cluster:

3. Street Cluster:

4. Industrial Zone:

London Savile Row Men’s Clothing

Seoul Dongdaemun Fashion Cluster

Silicon Valley IT Cluster

Los Angeles Fashion District

New York Wall Street Financial Center

Tokyo Ginza Department Cluster

Seoul Shindangdong Dduck Bok-ki Street

Sophia-Antipolis Research Park

SNU Science Park

New York Garment District

New York 5th Avenue Shopping Street

Beijing Zhongguancun IT cluster

Single Vertical Cluster Single Horizontal Cluster Single Complex ClusterR&DDesignMaterialProductionWarehousingLogisticsSalesAfter service

(as an example)

Baby clothes

Ladies’ clothesM

en’s clothesSpecial clothesEtc.

Classification of Industrial Clusters by Business Scope

Multiple Vertical Cluster Multiple Horizontal Cluster Multiple Complex Cluster

…… …… ……

Multiple: combination of multiple industries Complex: combination of related and supporting industriesUpstream: clusters in the upper part of the value chain Downstream: clusters in the lower part of the value chain

Nature

Single

Multiple

Vertical

Horizontal

Complex

Upstream

Downstream

Vertical

Horizontal

Complex

Full

Upstream

Downstream

Partial

Full

Classification of Industrial Clusters by Business Scope

Savile Row men’s clothing

Dongdaemun Fashion Cluster

Zhongguancun IT Cluster

LA Fashion District

Wall Street Financial Center

Ginza department cluster

Shindangdong Dduck Bok-ki Street

Sophia-Antipolis Research Park

SNU Science Park

NY Garment District

Full

Upstream

Downstream

Silicon Valley IT Cluster

5th Avenue shopping street

Region

Nature

Cluster

Classification of Industrial Clusters

Single

Multiple

Vertical

Horizontal

Complex

Upstream

Downstream

Vertical

Horizontal

Complex

Partial

Full

Upstream

Downstream

Partial

Full

Inter-city Cluster

Intra-city Cluster

Street Cluster

Industrial Zone

Traditional classification New classification

• Industry-specific classification

• Region-specific classification

• Inter-City

• Intra-City

• Street

• Industrial Zone

• Nature of Business Scope

• Single (Vertical-Horizontal-Complex)

• Multiple (Vertical-Horizontal-Complex)

Cluster productivity ↑

• Beyond geographically assembled

cluster

• Value chains are embedded in virtual

cluster

Creating Shared Value ↑

RegionalCluster

VirtualCluster

Generic Cluster

New Classification of Industrial Clusters

New Classification of Industrial Clusters

Cases of virtual clusters

• Mileage alliance by Airline carriers

• Affiliated companies of major manufacturers

• Franchises

• Others

The new definition of clusters will include the great

majority of economies.

Comparison of Apparel ClustersLocation Seoul Los Angeles New York

Name Dongdaemun Fashion Cluster LA Fashion District NY Garment District

Size Densely populated30 blocks 90 blocks

23th-42nd streets &5th-9th Avenues(1 square mile)

Comparison of Apparel ClustersLocation Seoul Los Angeles New York

Name Dongdaemun Fashion Cluster LA Fashion District NY Garment District

Size Densely populated30 blocks 90 blocks

23th-42nd streets &5th-9th Avenues(1 square mile)

Year started 1953 1960s Early 20th century

Comparison of Apparel ClustersLocation Seoul Los Angeles New York

Name Dongdaemun Fashion Cluster LA Fashion District NY Garment District

Size Densely populated30 blocks 90 blocks

23th-42nd streets &5th-9th Avenues(1 square mile)

Year started 1953 1960s Early 20th century

Characteristics Multiple-Vertical-Downstream

Multiple-Vertical-Full Multiple-Complex

Comparison of Apparel ClustersLocation Seoul Los Angeles New York

Name Dongdaemun Fashion Cluster LA Fashion District NY Garment District

Size Densely populated30 blocks 90 blocks

23th-42nd streets &5th-9th Avenues(1 square mile)

Year started 1953 1960s Early 20th century

Characteristics Multiple-Vertical-Downstream

Multiple-Vertical-Full Multiple-Complex

Strengths throughSynergy

Speed to the market,Direct distribution via the Internet

Supply of labor from Mexico, proximity to Korea Town

Chelsea with fine arts, Museums such as MOMA, 5th Avenue, global fashion media

Comparison of Apparel ClustersLocation Seoul Los Angeles New York

Name Dongdaemun Fashion Cluster LA Fashion District NY Garment District

Size Densely populated30 blocks 90 blocks

23th-42nd streets &5th-9th Avenues(1 square mile)

Year started 1953 1960s Early 20th century

Characteristics Multiple-Vertical-Downstream

Multiple-Vertical-Full Multiple-Complex

Strengths throughSynergy

Speed to the market,Direct distribution via the Internet

Supply of labor from Mexico, proximity to Korea Town

Chelsea with fine arts, Museum such as MOMA, 5th Avenue, global fashion media

Strategic Issues Being sandwiched Rule of law Global economy coupled with real estate price

Comparison of Apparel ClustersLocation Seoul Los Angeles New York

Name Dongdaemun Fashion Cluster LA Fashion District NY Garment District

Size Densely populated30 blocks 90 blocks

23th-42nd streets &5th-9th Avenues(1 square mile)

Year started 1953 1960s Early 20th century

Characteristics Multiple-Vertical-Downstream

Multiple-Vertical-Full Multiple-Complex

Strengths throughSynergy

Speed to the market,Direct distribution via the Internet

Supply of labor from Mexico, proximity to Korea Town

Chelsea with fine arts, Museum such as MOMA, 5th Avenue, global fashion media

Strategic Issues Being sandwiched Rule of law Global economy coupled with real estate price

Problems Lack of R&D Counterfeiters Lack of growth versus real estate price hike

Comparison of Apparel ClustersLocation Seoul Los Angeles New York

Name Dongdaemun Fashion Cluster LA Fashion District NY Garment District

Size Densely populated30 blocks 90 blocks

23th-42nd streets &5th-9th Avenues(1 square mile)

Year started 1953 1960s Early 20th century

Characteristics Multiple-Vertical-Downstream

Multiple-Vertical-Full Multiple-Complex

Strengths throughSynergy

Speed to the market,Direct distribution via the Internet

Supply of Mexican labor, proximity to Korea Town

Chelsea with fine arts, Mu-seum such as MOMA, 5th Av-enue, global fashion media

Strategic Issues Being sandwiched Rule of law Continued differentiation,Real estate price

Problems Lack of R&D Counterfeiters “Save the Garment Center”Real estate price hike

Solution Concurrent Development of Government Policy and Corporate Strategy

Cluster As a Basis of Capitalism 5.0

Mechanism for Creating Cluster-led Capitalism 5.0

Dongdaemun Fashion Cluster

A Case of Dongdaemun Design Plaza

Role of the Government in Business

1. Rule-Setter - legislation of laws and regulations- intermediary, coordinator- management of market order

2. Supporter - guarantor and loans- subsidizer through financing and tax shelters- planner- information provider- insurance provider

3. Regulator - protector of consumerism- protection of labor- enforcer of anti-trust, fair trade laws- discretionary intervention

4. Active Participant - producer - buyer - co-decision maker

5. Others

Paradigm of Business-Government Relations

Hi

Supporter

LoRegulatorLo Hi

Laissez-faire

Mercantilism Paternalism

Constitutionalism

Evolution of Korea’s Business-Government Relations

Hi

Supporter

LoRegulatorLo Hi

Laissez-faire

Mercantilism Paternalism

Constitutionalism

President Syng-man Rhee(1948-60)

President Park Chung-Hee& Chun Doo-Hwan

(1961-88)

President Rho Tae-Woo& Kim Young-Sam

(1988-1998)

President Kim Dae-Jung& Rho Moo-Hyun

(1998-2008)

?

Hi

Supporter

LoRegulatorLo Hi

China

Korea

Finland

UK USA

Business-Government Relations by Nations

Japan

?

New Paradigm in Capitalism

FirmGovern

mentMarket Soc

iety

Laissez-faire

Capitalism 1.0

Mercantilism

Capitalism 3.0

Paternalism

Capitalism 2.0

Constitutionalism

Capitalism 4.0

Cluster-basedCapitalism 5.0

Mechanism for Creating Cluster-led Capitalism 5.0Combination1. Subject: vision of the leader (entrepreneurs and government) and people2. Environment: market and infrastructure3. Resource: raw materials4. Mechanism: transportation, R&D capability, and intended government policy as

the mechanism

Permutation5. Market-led Cluster Development6. Government-led Cluster Development7. Firm-led Cluster Development8. Society-led Cluster Development9. Jointly- and Concurrently-led Cluster Development

Time10. Old versus New11. Fast versus Slow12. Long-term versus Short-term

Causes for Industrial Clustering

• Vision of entrepreneurs and government

• People

• Market

• Infrastructure (hospitals, cultural centers, schools)

• Raw materials

• Transportation

• R&D capabilities

• Intended government policy

Subject

Subject

Environment

Environment

Resources

Mechanism

Mechanism

Mechanism

GP

CS

R&D Policy IndustrialPolicy

TaxPolicy

LaborPolicy

EnvironmentPolicy

M&AStrategy

Lowering exit barriers through flexible applica-tion of anti-trust act

Limitation im-posed on labor union movement

Generic strategy

Environment protection as a source of differ-entiation

Product(R&D)strategy

R&D support for new product development

Tax incentivefor new product development

Market strategy

Government in-surance for FDI

Tax incentive forGlobalization

Survival strategy

Financial re-structuring

Tax exemption for factory clo-sure

Concerted effort for labor flexi-bility

Jointly- and Concurrently-led Cluster Development:Synchronized Development of Market’s Invisible hands, Government Policy,

Corporate Strategy, and Societal Pressure

Goal Policy 1 2 3 4 5

Government Pol-icy

Economy

Do-main

MacroGrowthInflationInternational balance

MicroIndustrial policyTaxLabor

Means

InformationInsurance

Administrative

Support

Regula-tion

Licensing

Support-backing regulation

Health/Safety/Sav-ing/Environment

FinanceFiscal

Welfare Inclusive welfareSelective welfare

Goal Strategy 1 2 3 4 5

Cor-porate Strat-egy

Corporate value(Profitabil-ity)

Enterprise Starting new venture/new busi-ness developmentM&A

Corporate

Generic strategy

Low-cost

Differentiation

GlobalizationDiversification

Other strategies(Example: ____________)

Social value(Public in-terest)

Creating employment opportunityNew technology developmentEnvironment protectionBalance in income distributionOthers(Example:____________)

Cluster As a Basis of Capitalism 5.0

Mechanism for Creating Cluster-led Capitalism 5.0

Dongdaemun Fashion Cluster

A Case of Dongdaemun Design Plaza

Night Life in Dongdaemun Fashion Cluster< http://cafe.naver.com/hanseom204/1>

Night Active Consumers as a New Tribe

Common Corporate Behaviors in Dongdaemun Fashion Cluster

Case 1

• If a customer cannot find a suitable piece from a store, the store person helps her/him find the right one in nearby stores. He/she even escorts the customer to the store that has the item he/she is looking for. (developed by Ellen Song)

Issues on Dongdaemun Fashion Cluster

Multiple-Vertical-Downstream Cluster

• Sandwiched between Paris/Milano and Shenzhen• Lacking R&D capability in vertical integration

City Cluster

• City Government policy on DFC without enough communication and co-ordination with the business community in DFC

• City’s growth with high value-added industries resulting in an increase in real estate prices, which drive out marginal members of DFC (fatal issue to New York Garment District as well)

Key Success Factors in Dongdaemun Fashion Cluster

1. Trust and other social capitals supporting the transactions within the cluster

2. vision and objective of the central/local government3. R&D capability of firms and universities4. Understanding of, and confidence in, the role of clusters by

the society

Jointly- and Concurrently-led Cluster Development: Synchro-nized development of market’s invisible hands, government policy, corporate strategy, and societal pressure

Cluster As a Basis of Capitalism 5.0

Mechanism for Creating Cluster-led Capitalism 5.0

Dongdaemun Fashion Cluster

A Case of Dongdaemun Design Plaza

Agony of Mayor Oh Se-Hoon

1. Which is a better strategy between “Low-cost leadership” and “Dif-ferentation” for Dongdaemun Fashion Cluster?

2. Should Mayor Oh sign the contract for constructing DDP that will cost $1 billion?

① + DDP may become Seoul’s landmark building.② + DDP may support Dongdaemun Fashion Cluster.③ - The oldest baseball and football stadiums must be destroyed.④ - Construction cost is huge, and construction period is too long.

3. In case DDP is built, should it be used for “fashion design” or “industrial design”?

4. Will DDP construction help Mayor Oh winning his second Mayoral elec-tion in 2011?

Concurrent Development of GP and CS

GPCS

R&D Policy IndustrialPolicy

TaxPolicy

LaborPolicy

EnvironmentPolicy

M&AStrategy

Attracting universi-ties and design schools as R&D cen-ter

Policy guideline for M&A between F&D companies

Tax incentive for M&A between F&D companies

Restrictions imposed on labor union in F&D companies’ M&A

Generic strat-egy

DDP as a venue for F&D shows

Policy guideline for F&D convergence through DDP

Tax incentive for creative projects in-volving DDP

Incentive for job cre-ation in F&D con-vergence

Environment protec-tion as a source of F&D differentiation

Productstrategy

R&D support for convergence of F&D,Protection of design patent and design-re-lated IP

Global designer edu-cation and promotion

Tax incentivefor new product de-velopment in F&D

Market strat-egy

E-commerce support,Government insur-ance for F&D going global

Tax incentive forGlobalization of F&D

Provision of 24 hour service.Restrictions imposed on labor movement against F&D going global

Survival strategy

Financial restructur-ing

Tax exemption in factory closure

Concerted effort for labor flexibility

Concurrent Development of GP & CSfor Transforming DFC to Globally Competitive DDC

Time

$100

$10,,000

$25,000

GNP

Stage Undeveloped Coun-try

DevelopingCountry

Semi-developedCountry

Developed Coun-try

Physical Factor Factor conditions

Context for firm strategy an rivalry

Related and supporting industries

Demand conditions

Human Factor Worker Politician & Government official

Enterpriser Professional

Art Plaza(The first modern

shopping mall)

Dongdaemun Design Plaza (DDP)(Total design plaza)

Traditional shopping district

Korea’s largest wholesale and retail

clothing cluster

One of the competitive

fashion clustersin Asia

The most competitive design cluster

in the world

New Shopping Mall

(One-stop-shop-ping,

Multiplex mall)

20131953 1970s

1990s

$1,000

71

Thank you for listening to my lecture.

Please correct if you find any mistakes, and advise if you do not agree with any parts, in my lecture note.

Thank you.

Dong-Sung Cho010-8133-8888dscho@snu.ac.kr

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