The role of institutions in the performance and evolution of traditional industrial agglomerations: the case of specialized market, trade fair, and electronic market in Foshan, China

Most existing literature in economic geography discusses specific issues of the institutions, the performance of spatial agglomerations, and the evolution process separately. Institutional economic geographers hold divergent institutionalisms and often static research perspectives, while the recent evolutionary approaches face a risk of theoretical relegation of institutions. This leads to the situation that currently the institutional and the evolutionary school lack enough empirical connection. The complex relationship between the institutions and the evolution of geographical agglomeration still remains underexplored. This situation inspires this study to integrate the three separately-discussed issues and better understand the underlying institutional dynamics in the evolution of industrial agglomerations. By looking at three market institutions—the specialised market, trade fair, and electronic market, of a furniture industrial cluster in Foshan, China, this study attempts to reveal the effects of the three institutions on the performance and evolution of traditional low-tech industrial agglomerations. The study is positioned within a framework that facilitates a comprehensive examination of Marshallian externalities, supply chain network, and firm performance. Except that the degree of institutional effects is analysed in quantitative methods, all other results and complex causal relationships in the institution-led evolution process are elaborated upon qualitatively. Results show that the overall evolution of the three market institutions is a layering process, which indicates the path dependence of the two older institutions, despite the fact that the partial replacement or conversion of these two institutions also occurred. This path dependence tells that newer institutions may not reduce the actual transaction costs borne by suppliers while older institutions may complement the newer ones with potential benefit. The institutional layering increases the heterogeneity of firms. In consequence, certain Marshallian externalities become exclusive to firms following the electronic market, and cannot be widely shared among other firms. Local supply chain networks continue to develop, and are recently restructured rather than being impaired, because the electronic market cannot replace the existing inter-firm hierarchical governance and its disintermediation effect further generates new outsourcing-contract-manufacturing relations in a hub-and-spoke structure. Newer institutions polarize the performance of firms. Currently firms in the specialised market are worst affected by the newly-emerging electronic market. However, the path dependence on older institutions does not mean a negative lock-in of Chinese traditional industrial clusters: most firms interpret the market institutions flexibly, and more importantly, the trade fair continuously updates the knowledge base of cluster firms, mainly through the non-pipeline mechanisms that were downplayed in existing literature