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
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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 [email protected]
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