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    Cluster and Regional Innovation System ofChiang Mai/Lampoon Twin City

    P. Chairatana , R. Vorrakitpokartorn

    IKE Group, Department of Business Studies, Aalborg University, Fibigerstrde 4, Aalborgst, 9220, Denmark, Tel. +45 96358236, Fax +45 98156013, E-mail: [email protected]

    Department of Management Science, Strathclyde Business School, Strathclyde University,40 George Street, Graham Hill Building, Glasgow, G1-1QE, UK, Tel: +44 141 5484361,

    Email: [email protected]

    1. Introduction

    The upper part of northern Thailand had been recognized as LANNA or The Million RiceField Kingdom, before its unification to Siam century ago. Chiang Mai and Lampoon are

    strategic provinces of both economic and security in the Northern Thailand. Thai governmenthas planned several mega projects to develop this area since the beginning of the first NationalEconomic and Social Development Plan in 1961. Traditionally, the first five plans (1961-1985)were heavily focused on constructing infrastructure to support the national economicdevelopment and industrialisation; such as roads, dams, electricity generating plants, hospitals,and educational institutes. At the end of the sixth plan (1986-1991), the idea to creatingChiang Mai/Lampoon Twin City was approved under the cabinet at that time on 2 August1991, following by the Economic Quadrangle initiatives to integrate the economy of SouthWest China, Myanma, Laos and Nothern Thailand together. The nature of economic structurein the northern part of Thailand is heavily concentrated on agriculture and tourism sectors (seetable 1). The agriculture sector dominates Gross Regional Productivity, which ranks among the

    highest in the country, following by tourism sector. The industry sector is considerably smallcomparing with the above two sector, but have been grown very fast since the early 1990s.

    Table 1: The Economic structure of the Upper Northern Thailand1

    Percentages

    Agriculture Manufacturing Tourism Other National Regional National Regional National Regional National Regional

    1985-1989 15 25.4 25.5 6.2 13.3 15.4 46.2 53.0

    1992-1998 13.4 17.7 29.2 13.7 13.0 18.8 44.4 49.8

    Source : National Economic and Social Development Board (NESDB) statistical survey

    Today, an innovation or a new combination of new ideas appears to be a general phenomenonin the more fiercely market. Most of the innovation perceived by general public is mainly intechnological product innovation. Apart from those hi-tech innovations, these newcombinations could be less sophisticated technological breakthrough that happened to be asuccessive product or process innovation, which the most important contribution embeddedupon the activities in the surrounded environment. The process and institutional innovation isconceded to be a key infrastructure in delivering the new combination.

    1 The Upper Northern Thailand comprises 8 northern provinces, Chiang Mai, Chiang Rai, Lampoon, Lampang, Phrae, Nan, Payao and MaeHong Son

    mailto:[email protected]:[email protected]:[email protected]:[email protected]
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    The resurgence of regional economies, and of territorial specialisation in an age of increasingease of transportation and communication of inputs and outputs is may be the major

    phenomenon in need of explanation in economic geography (Storper, 1995). Surprisingly, it is particular strong in the case of firms in high-technology, information-intensive sectors; sectorsthat one might expect, given the enormous recent developments in the new information

    technologies, to be the least sensitive to the need for geographical proximity 2. Attempting toelucidate these phenomena, attention has shifted away from individual firms to the productivesystem within which firms operate, with particular emphasis being given to the region-specificqualities of the linkages, existing between firms (Lawson, 1997). This movement has not beenyet unified or systemic, consequently, there now exists a relative excess of new terminologyincluding terms such as industrial district, industrial cluster, technological complex,technological district, innovative milieu, nexus of untraded interdependencies, RegionalInnovation System, (RIS) and so on. It is not so far crystallised to what extent these terms, orthe literatures giving rise to them, share commonalities either at the substantive or themethodological level. These concepts have an essence to systematize the innovation processand to understand the historical and regional background of the specific region.

    This paper primarily aims to develop the better understanding of why industrial clusters exist,and to what extent, this dynamic mechanism brings about competitive advantage (especiallyinnovation) to those firms operating within its arena. This paper starts with the literaturereviews on the relevant concepts and definitions, which have been explored so far. The second

    part illustrates the empirical study of the present economic and social status in Chiang Mai andLampoon. The last section discusses the implications of the concepts to the City.

    2. Concepts, definitions and classifications

    2.1 Marshallian and Italian industrial districts

    Marshall was one of the first economists who wrote about clusters. He came up with theconcept of external economies, by observing industrial districts

    3. Marshall questions the

    imperative of economies of scale by stressing the possibility of setting up a system of small-scale producers, organising and producing as efficient as those big-scale producers (Gelsing,2000). The way in which innovation and growth are produced and spread throughout aMarshallian district, is described referring to the existence of dynamic complementarities within a system of interdependent economic entities that influences specialisation patterns in

    production. Innovation and growth in one of the economic units can exert positive impulses forinnovation and growth in other parts of the system. Thus, a cluster of industrial complexes isexpected to perform better than the sum of its individual units when scattered (Peneder, ibid).Later on, with the intensive studies of several regions in North Italy, inspired by Marshallswork, the concept of industrial districts has been changed significantly. It has become narrower

    2 Dicken (1998) argued, Of course, the development of highly sophisticated communications systems facilitates the diffusion of knowledgeat unprecedented speed and over unprecedented distances; however, that knowledge is produced in specific places and often used andenhanced most intensively in those same places. 3 These positive externalities are caused by three major forces: (a) knowledge spillovers between firms, (b) specialisedinputs and services from supporting industries, and (c) a geographically pooled labour market for specialised skills (Peneder,1999).

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    and the label Italian industrial district is often used for such local systems. Industrial districtin this sense would be small firms grouped in relatively small zones according to their

    products giving rise to monocultural areas in which all firms have a low degree of verticalintegration and the production process is carried out through the collaboration among firms

    4.

    In other words, industrial district is a geographical concentration of specialise industrialactivity, performed by highly specialised firms linking their narrowed tasks together via theextensive collaboration

    5.

    Another region that is usually seen as an industrial district is Silicon Valley6. In this particular

    case, a strong support by the government has been given to the companies in terms of purchasing/ordering. Moreover, a frequent switch of the labour force between firms and manyinformal contacts between employees of different firms led to a high flow of knowledge withinthe region (Brenner, ibid, p.12). Therefore, this area can be seen as a combination of aknowledge-based and a public-based milieu, with a relatively high accumulation of R&D-related human capital. From Piore and Sabels book (1984) until now the literature onindustrial districts has been emphasised that the central feature if the industrial district is the

    balance between competition and cooperation among firms (You and Wilkinson, 1994, p.259). Asheim (1995, p.9) cites that cooperate elements contribute in a decisive way to theintegration of the system; at the same time forces of competition keep it flexible andinnovative. This derives from the fact that competition in the particular socio-economic districtenvironment promotes better utilisation of available resources and above all, development oflatent capabilities and diffuse creativity (Dei Ottati, 1994, p.476). Nevertheless, in PortersThe Competitive Advantage of Nations (1990), geographic industry concentration and domesticrivalry are treated as key success factors to national competitive advantage

    7.

    Yet, the concept of industrial districts attracted many critiques. For instance, it has beencriticised for giving inadequate attention to scale economies, and to the advantages of verticalintegration in many industries (Robertson and Langlois, 1995). Lazonick (1993) argued that asmall innovative firm might be unable to pursue investment strategies that would adapt it to theinnovative environment, simply on the grounds of size. The dichotomy between verticalintegration and horizontal division of labour through local networking is the centre of thisdebate. Transaction cost theory (Williamson, 1993) proposed a more systematic theoreticalaccount of relation between industrial structure, spatial organisation, and local linkages.Baptista (1998) said that it ( transaction cost theory ) can be used to organised production torecognise and exploit the interdependencies between separate phases, and hence to coordinatethe economic structure of the firm (i.e. should firms seek to trade in markets and/or networks

    or should they integrate in a hierarchical manner) .

    2.2 Technological districts

    The concept of technological districts has much in common with the concept of industrialdistricts. Again, the concept is based on a region with large number of small enterprises,cooperating with each other, however, this type of agglomeration focuses more on the learning

    4 Brusco (1982)5 See e.g. Russo (1992), Brenner, 20006 See Saxenian (1994)7 Two elements: domestic rivalry and geographic industry concentration, have especially great power to transform thediamond into a system, domestic rivalry because it promotes upgrading of the entire national diamond, and geographicconcentration because it elevates and magnifies the interactions within the diamond (Porter, 1990, p.131).

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    process and the persistent innovative activity in the region than on the craft-based production process (see Storper, 1992). Storper employs the term technology district to differentiategeographical clusters based upon product based technological learning from those based onother types of industrial district.

    The leading edges of economic activity are highly identified with production systems that are flexible in the specific, narrow sense of being organised to carry out continuous production innovation. Production systemsengaged in such product based technological learning (henceforth PBLT) account for important and increasing

    percentages of world exports; they are essential element in the globalisation of economic relations. Yet the key parts of such PBLT industries tend to be highly concentrated in distinctive subnational regions, in what I call technology districts ., (Storper, 1992. p.61)

    Storper (ibid, pp.89-90) has also distinguished the agglomerations at the centre of PBLTindustries from other kinds of industrial localisations in three ways: (1) in the economic sensethat they have dynamic economies of scale, owing to the nature of technological change, thatcounteract equilibrium tendencies; (2) in the organisational sense that their productionnetworks are frequently characterised nether by market nor by hierarchies, but by other kinds

    of durable interfirm relationships; and (3) in the sociological sense that they have conventionsof economic life that mobilise resources and regulate interactions so as to make PBLT possible.A similar idea, although articulated in different way, could be captured in the concept of thetechnopole (see Castells and Hall, 1994). Table 1.1 below lists some of the major technologydistricts/technopoles identified in empirical research (Dicken, 1998, p.174).

    Table 2: Some leading technology districts/technopolesUSA Europe Asia

    Southern California (including Silicon Valley) M4 Corridor, London TokyoBoston, MA Munich Seoul-InchonAustin, TX Stuttgart Taipei-HsinchuSeattle, WA Paris-Sud SingaporeBoulder, CO GrenobleRaleigh-Durham, NC Montpellier

    Nice/Sophia AntipolisMilan

    Many of these districts are associated with major metropolitan areas though some of them havedeveloped outside the metropolitan sphere in rather less urbanized areas. Dicken (1998, p.175)concludes that most of them are the outcome of the historical process of cumulative, path-dependent growth processes even though a few are deliberate creations of national technology

    policy. To sum this up, Storper states that the global economy can be depicted as consisting, in

    part, of a mosaic of technology districts, which constitute the leading edge of nationaleconomic growth. This mosaic of technology districts exists both within and across the

    boundaries of national innovation systems (Dicken, ibid, pp.173-4).

    2.3 Innovative Milieux

    The basic conception of an innovative milieu has been mostly contributed by GREMI Groupde Recherche Europe

    en sur les Milieux Innovateurs (see especially Aydalot and Keeble, 1988;Camagni, 1991; Lawson, 1997). The concept is based on the notion of a local learning andinnovation process. Camagni (1991, p.3) defined an innovative milieu as the set, or thecomplex network, of mainly informal social relationships on a limited geographical area, oftendetermining a specific image and specific internal representation and sense of belonging, whichenhances the local innovative capability through synergetic and collective learning processes.

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    The GRIMI contributions are obviously concerned with high-technology regions; however, themain focus of its attention is rather upon incubator-type innovation (unlike typical producer-user-type innovation as seen in many of industrial district literatures) and the importance ofgeographical proximity to this particular type of innovation. The milieu itself also could beseen as uncertainty-reducing operator (Lawson, 1997, pp.15-16).

    Perceptibly, GREMIs researchers have paid large amount of attention to the so-called high-technology industries. According to Keeble and Wilkinson (1999, p.296), these high-technology firms are not necessarily found just in manufacturing given that they can include firms and industries whose products and services embody new, innovative and advancedtechnologies developed by the application of scientific and technological expertise . As alreadymentioned, these high-technology firms astonishingly tend to form spatial clusters. Frequently,empirical research can be found in the case of Silicon Valley (California), Cambridge(England), Grenoble and Sophia Antipolis (France), Munich (Germany), Pisa, Piacenza andnortheast Milan (Italy). Policy makers are also attracted to the concept of innovative milieux.Armstrong and Taylor (2000, p.298) argued that policy makers are greatly drawn into thisconcept by the fact that the jobs created in this particular area are very high quality and inindustries with excellent long-term growth prospects. More decisively, technological changeis given as a central role in almost theories of regional growth. There is a clear logic for policymakers to focus on these firms, which are self-evidently important in the growth process, andthus it may be possible for them to replicate the conditions found within the best innovativemilieux (Armstrong and Taylor, 2000, pp. 298-299).

    2.4 Industrial/Economic Clusters

    In economics, the cluster concept normally implies more than literal meaning of density by

    reference to a hypothesis which states that the geographic agglomeration of economic activitymay lead to improved technological or economic performance of the participating units(Peneder, 1999). As seen in the figure 1, Cluster maybe generally characterised as a group of

    business enterprises and non-business organisations for whom membership within the group isan important element of each member firms individual competitiveness (Bergman et al, 1999).Firms are bound together through buyer-supplier relationships, or common technologies,common buyers or distribution channels, or common labour pools (Enright, 1996, p.191, alsosee further details in Porter, 1990). To put it another way, economic self-interest is ultimatelythe glue that binds the cluster together. Moreover, related and supporting institutions are alsovery crucial to the competitiveness of the cluster. These include industry associations, technicaland community colleges with specialised industry programs, universities, government

    industrial extension programs, network brokers, and the like.

    Figure 1: Industry Cluster

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    Source: Bergman and Feser, http://www.rri.wvu.edu/WebBook/Bergman-Feser/

    Measurement issues have played an important role in defining clusters. One of the onlyconsistent and detailed sources of data on cross industry linkages is input-output tables(Bergman et al, 1999). This focuses on trade linkages between industry groups in the valuechains of the economy. However, partly as result of conceptual differences and partly becauseof data and definitional limitations, input-output based derivations cannot fully capture the setof interrelationships specified in the modern industry cluster concept. Additionally, input-output analysis does not link actors, but rather statistical and sometimes heterogeneous industrygroups (Roelandt et al, 1998). To overcome such constraints, monographic case studies,

    popularised by Porter, are employed in collaborative with statistical analysis. Still, using thisqualitative approach alone also has its drawbacks. Porter analysis is designed for mappingcompetitiveness and system dynamics at the meso level. Therefore, for strategy formulation, itneeds the combination of the other quantitative data i.e. I/O tables, in order to use at both themacro and micro levels. Accordingly, the approach is subjectively qualitative and thus theresults are hard to compare across clusters. To compromise, Roelandt stated that combiningthe more qualitative cluster studies (monographic case studies) with input-output analysiscould reinforce each other considerably (Roelandt et al, 1998).

    The study of the clusters can be divided into three main levels as summarise in table 1. Firstly,at the macro-level, for instance, it is used as an input in discussions on industrial and

    innovation policy-making and on how to improve the (mis) match between the public researchinstitutions and higher education institutions and industry. Secondly, at the meso-level, theanalyses serve as a starting point for strategic advice on competitiveness of individual cluster,identifying key knowledge issues, designing and upgrading strategies and how to turn negativecompetitive dynamics into strategic cooperation and differentiation-based competition. Lastly,at the micro-level, cluster studies provide a basis for initiating and supporting innovativemicro-level cluster projects aiming to increase cooperation between major companies, their(main) suppliers, (semi-) public knowledge institutes, as well as various other bridginginstitution (e.g. engineering companies, innovation centers and so on) (Roelandt et al, 1998).

    Table 2: Cluster analysis at different levels of analysis (Hertog et al, RISE 1999)

    Level of analysis Cluster concept Focus of analysis

    http://www.rri.wvu.edu/WebBook/Bergman-Feser/http://www.rri.wvu.edu/WebBook/Bergman-Feser/
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    National level(macro)

    Industry group linkages in theeconomy as a whole

    Specialisation patterns of anational/regional economy.

    Need for innovation and upgrading of products and processes in mega-clusters

    Branch or industry level(meso)

    Inter- and Intra-industry linkages inthe different stages of the productionchain of similar end product(s)

    SWOT and benchmark analysis ofindustries.Exploring innovation needs

    Firm level (micro) Specialsed suppliers around one ormore core enterprises (inter-firmlinkages)

    Strategic business developmentChain analysis and chain managementDevelopment of collaborative innovation

    projects

    It could be said that most cluster studies use a combination of different techniques at differentlevels of aggregation to overcome the limitations of a single technique and to answer differentquestions (Hertog et al, 1999).

    Table 3: The examples of dominant international cluster models.Level Aim to improve Typical action Typical countries

    NationalAdvantageModel

    Mega/Meso National advantage incertain sector or valuechains

    Identify clusters andcreate supportingconditions

    Canada, Denmark,Finland, Sweden,the Netherlands

    SMENetworkingModel

    Micro/(Meso)

    SME-competitiveness Increase interactions withexternal knowledgecarriers to compensatefor lack of capabilities toinnovate and learn fromothers

    Australia, New Zealand, Norway,USA

    Regional

    DevelopmentModel

    Meso/Micro Attractiveness, economic performance anddevelopment of a region

    Stimulate businessspecialization pattern byinvestments andnetworking initiatives

    Canada, Scotland,Wales, USA

    Industry-Research LinkModel

    Micro/(Meso)

    Collaboration andnetworking betweenindustry and research

    Creating critical massin emerging technology

    by attracting researchfacilities, investors andfirms

    Austria, Germany, the Netherlands

    Source: Boekholt and Thuriaux, 1999

    The cluster methodology has already been widely used in many countries throughout theworld. The examples of dominant international cluster models are shown in the table 2. Thesecountries participate in what we called cluster-based policies. In most countries with cluster-

    based policies, theses incentives have originated from a trend towards designing governanceforms and incentive structures to reduce systemic imperfections within their systems ofinnovation (Roelandt and Hertog, 1999). However, each country applies different approach.One fundamental difference refers to the distinction between a bottom up approach and a topdown approach. Roelandt and Hertog further illustrated this point that the first approach (a

    bottom up approach) basically focuses on fostering dynamic market functioning and removingmarket imperfections and the starting point lies in market-induced initiatives with thegovernment acting as a facilitator and moderator without setting national priorities (like forinstance in the USA and the Netherlands). In the latter approach (a top down approach),government (in dialogue with industry and research agencies) set national priorities, formulatesa challenging view for the future and before starting the process of dialogue decides on theactors to be involved in the dialogue process (like for instance in some of the Nordic

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    countries). After having set national priorities and having initiated the dialogue groups theclustering process further is a market-led process without much government interference.

    2.5 Innovation System (IS)

    The roots of Innovation System concepts are based on the neo-schumpeterian economics,which focuses on innovation and entrepreneurship, including the Darwinian evolutionarytheory. The emergence of organising concept is on the national level, which can be traced backto the work of Lundvall, the National System of Innovation or National Policies of Innovationstarted in the mid 1980s

    8. A National System of Innovation is the system of interacting private

    and public firms (either large or small), universities and government agencies, aiming at the production of Science and Technology within national orders. Interaction among these unitsmay be technical, commercial, legal, social and financial in as much as the goal of theinteraction is the development, protection, financing or regulation of new Science andTechnology (Niosi et al, 1996, p. 139). Several scholars have defined national System ofInnovation or system in the analysis of economic growth. For Instance, Lundvall concentratedon the interactive process between innovation and learning. He also emphasised on system of

    production (industrial structure) in a nation and information exchanges between users and producers important for innovation related to production. Freeman emphasised on the publicand private institutional network whose activities and interactions related to new techno-economic paradigm. He also stressed the role of social institutional adjustment such as, social

    behaviour, government policy and ways of organising production. Nelson used hisevolutionary economic framework idea and his work on the role of public policy in innovationas a concept description. He emphasised on the wider institutional structure within corporateR&D and technical changes. The government play a crucial role as a pool of basic scientificknowledge. These different components of concept can be focused on each author. Lundvall

    concentrated on interactive process and system of production. Freeman insisted on institutionsand technology, while, Nelson idea is based on institutional structure of technology, corporateR&D, and technical changes.

    The co-operation between social institutions plays the leading role in NIS. The government isthe major institute of system as it provides NISs with R&D funds, controls and supports infantindustries, promotes the training of scientific and technical personnel, and formulates nationalgoals and policies. In fact, the concepts, has been studied in many levels, national, sectoral,regional and corporate levels

    9 (See Figure 2). The figure illustrates how different levels of

    innovation systems integrated. The Regional Innovation System (RIS) has a sense ofgeographical economic specialization. In this regard, there are three key institutional formscrucial to RIS capacity; the financial, learning and productive cultures that exist in region.Figure 2: Innovation Systems Model

    8 See also Christopher Freeman (1987, 1988) and Richard Nelson (1988).9 For Regional Innovation Systems see more on Storper (1995), Cooke, Uranga and Extxebarria (1997) and Malmberg andMaskell (1997).

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    As a result, the existing science and technology indicators use to measure the innovative

    performance, namely R&D data, patent data and biliometrics, are frequently irrelevant to thetraditional or services industrial regions. This imperfect indicators problem has been raisedin both developed and developing economies. In addition to this, it seems that the study ofinnovation systems in particular to the study of regional specialization should be based on both

    qualitative and quantitative indicators along side with the interdisciplinary discussion.

    3. A Case Study of Chiang Mai/Lampoon Twin city

    3.1 Economic Structure

    As mentioned earlier, Chiang Mai and Lampoon situate in the upper-northern part of Thailand.Although, the Chiang Mai/Lampoon Twin City project has not implemented by the localauthorities yet, the two cities are already economically and culturally integrated. Thesehistorical and geographical elements are the main reasons for this initiative. Chiang Mai rangesthe second in the country, in terms of land areas, after Nakorn Ratchasrima province. ChiangMai is the regional centre of the Northern Thailand 10. In contrary, Lampoon is at least 3 timessmaller than its nabouring city; it is the centre of the regional industry by hosting the NorthernIndustrial Estate. The twin city shares more than half of the regional infrastructure andresources (see table 4). In 1998, Gross Provincial Products (GPP) (at market prices) of ChiangMai and Lampoon amounted to 108,44 million Baht (US$ 2,711.1 million). ChiangMai/Lampoon's GPP accounted for about 49.23 percent of the Upper Northern GRP and about2.34 percent of the National Gross Domestic Product (GDP). Per capita income of the TwinCity in 1998 was estimated at 59,050.50 Baht (US$ 1,373.27) per annum, ranging the first inthe north. This is; however, lower than the average of the country's per capita income of 75,749Baht (US$ 1,761.70). Through the support of agriculture and industries and an improvement in

    10 Mountains and forests cover 82.7 percent of the land area and about 12.8 percent is cultivated area.

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    the economy, the government plans to leverage the average income of 2007 to be 251,370 baht(US$ 5,850) per person, per year.

    Table 4: The Infrastructure of Chiang Mai/Lampoon and Upper Northern Region

    Chiang Mai/Lampoon The Upper Northern RegionPopulation 1,884,000 5,776,720Education InstitutesPrimary & SecondaryVocationalTertiary

    1,369118

    4,1012514

    Health care facilities 449 1,389Bank 146 295Share of regional employment (percentage) Share of regional investment

    49.4753.62

    50.5346.38

    Per Capita GPP 59,050.50 38.060

    Sources: National Social and Economic Development Board (2000) and Center for Industrial Promotion 1

    Even Chiang Mai/Lampoon is the centre in all-economic activity, technological innovationgenerates within the region is considerably low. This reflects from the centralized planningfrom the government since the beginning of the introduction of the first National Economicand Social Development Plan in the early 1960, and the regional specialization or productiveculture in traditional craftsmanship and small sized agriculture. The main production sectorsof Chiang Mai/Lampoon comprise services, manufacturing, agricultural and wholesales andretails trade sectors, respectively. (See table 5). The Twin city is regional economic hub asevery economic activity is heavily concentrated here. Chiang Mai is the education, tourism andservice centre, while Lampoon is industrial hub (see figure 3). Both are the rice bowl of theregion as well. More than half of the production capacity is in the Twin City.

    Table 5. The Market structure of Chiang Mai/Lampoon Twin City (1998) Percentages

    Chiang Mai LampoonThe market share of Twin city

    With the whole Upper Northernregion

    Agriculture 14.67 15.29 41.25Manufacturing 16.47 47.34 86.40Services (Tourism) 23.93 8.22 52.43Banking and Real Estates 10.47 3.80 51.94Transportation and communication 7.36 2.06 52.33Whole sale and retail trade 9.40 9.34 34.54Other 17.70 13.95 37.20Gross Regional Production (GRP) 37.05 12.18 49.23

    Source: National Social and Economic Development Board (2000)

    Tourism becomes major successive cluster, because of its local assets, historical heritages andnature. Apart from that, many infrastructures have been constructed and introduced to theregion to serve this growing industry. Agriculture and tourism sector are relied on each other.Food and catering, hotels, art and craft industry, retail and whole sales, banking, transportation,and health care sectors are among the forming clusters of services. In contrast, manufacturing,the more value added sector, is performed well in terms of export shares, but not generate high

    proportion of technological innovation. Foreign Direct Investment (FDI), which dominates thesector, does not play a crucial role to leverage the local technological capability, because ofless incentive for interacting between firms and knowledge creation institute and the most of

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    the research resources in the region are concentrated on biotechnological research and ruralarea development.

    Figure 3: Industry structure by sector in Chiang Mai and Lampoon, 1998. (N1=2,383 and

    N2=809)11

    0 200 400 600 800 1000 1200

    Agricultural Industry

    Food and beverage

    construction

    Wood and wood products,except furniture

    Textile and garment

    Chemical and plastic

    Metal and non-metal products

    Services

    Other manufacturing

    Chiang Mai Lampoon

    Sources: Industry Office, Chiang Mai and Lampoon

    In all, innovation in the Twin City is mostly generated in services and agriculture clusters suchas; packaging, services, environmental preservation, landscape and special planning, postharvest and organic farming technology. Tourist police is one of institutional innovation intourism cluster to provide the safety and services for tourists. Trekking and Agro-tourism hasrecently become popular activities among the visitors. This requires organized security andone-stop services of both private and public organization, as Chiang Mai/Lampoon shares the

    border with Myanma, which is considering a volatile area. Learning process is occurred by trialand error among the hoteliers, local farmers (the Hill tribes), and public organization to meetthe demand of the tourists. It should be noted that the public transportation in Chiang Mai doesnot existed. This requires an improvement in the near future.

    Apart from this the Royal Projects at Chiang Mai University plays a crucial role in biotechnology research and highland farming technology. To improve the socio-economic andreducing the deforestation and opium production of the Hill tribes in the provinces, the Royal

    projects plays a crucial and influential roles to achieve this goal. In many countries, Royalinstitution plays only a symbolic role, but in Thailand, it is an influential institution in bothsocial and politic. Royal projects may be considered to be the citys successive institutionalinnovation as it is the channel that main players such as researchers, users, and society caninteract under this Royal initiatives. Royal projects provides education, training, medicalservices, self-help organisaiton and rice bank for the Hill tribes, while add up the value of their

    primary and secondary products by market it in the brand name so called Doi Kam.3.2 Chiang Mai/Lampoon Clusters and its Regional Innovation System (RIS)

    11 N1 = Chiang Mai and N2 = Lampoon

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    Three key institutional forms crucial to RIS capacity in Chiang Mai/Lampoon Twin City areheavily relied on the traditional economic institutions. Firstly, the productive cultureselements are dominated by long tradition of agriculture, handicraft and natural and historicalidentities. The people in the region are specialized in agriculture and handicraft together with

    the warm hospitality to the visitors. The agrarian land in this area is small comparing with therest of the country as the region is situated in the mountainous area. Agriculture and servicesare the major clusters in the region, while manufacturing cluster is heavily situated in the

    Northern Industrial Estate in Lampoon. Electronics is dominated the manufacturing sector inthe estate, with the majority of the Japanese and other North East Asian investment. Most ofthe firms here are Original Equipment Manufacturing (OEM) plants.

    Rice, paddy, garlic, longans, lychees, onion, Virginia tobacco, soybean and cold weathervegetables and fruits are among the cash crops of the Twin City. After the 1997 Asian financialcrisis, Chiang Mai/Lampoon economy contracted from the previous year, owing toliquidity problem linked to the continued countrys financial institution crisis, weaker

    purchasing power and unfavorable condition, the latter caused severe drop in major cash crop productions, especially longans and lychees. Despite an increase in other crops, the overallagricultural outputs fell. Production of agriculture declined, reflecting mainly from the declinein cash crop outputs, such as longans and lychees. Production of other crops rose, resultingmainly from the expansion in planted areas. Recently, oranges and traditional herbs becomenew bright future cash crops, thanks for the integration of advanced technology and the of thelocal brand name initiatives and international marketing.

    Outputs of non-agricultural production also declined across all categories, including industry,trade and construction. Services, however, grew satisfactorily, mainly reflecting good

    performance of tourism. Cross-border trade also grew in line with more openings of border-trade points between Thailand and Myanmar at the end of 1998. Production of non-agriculturaldecreased across all categories. Industrial output fell mainly as a result of a slowdown indemand in the local market. And, even though export revenue (excluding longan and lychee

    products) increased in the first half of the year purely benefiting from weaker currency, it fellin the latter half of the year as the currency strengthened. The decline was also due to morecompetition problem in the export markets for products such as handicraft, ready-madegarments, ceramics, and agricultural processing products. Trade activity moderated followinglower purchasing power linked in part to unemployment problem.

    There are 219 hotels and 14,344 rooms in Chiang Mai. The number of foreign tourists rose by

    14.9 percent, mostly from Europe and United States. The number of domestic tourists fell by17.3 percent in the first half of the year as a result of unfavourableeconomic conditions. However, there was an upturn by 4.1 percent in the latter part of the year

    because of travel season. For hotel business, occupancy rate increased to 46.5 percent incomparison with 42.3 percent in the previous year.

    Secondly, the Twin citys financial institution performed badly after the crisis, the creditextension for trade fell by 12.5 percent. Only service sector expanded in line with a 7.9

    percent increase in the number of tourists, comparing with a 0.3 percent rise in the previousyear. The financial institutions and commercial bank branches in the Twin City are accountedfor nearly one-fourth of bank branches in the north, including three credit extension offices,

    three Provincial International Banking Facilities offices. Among all financial institutions,commercial bank plays the most important role. Deposit and credit outstandings of commercial

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    banks in Chiang Mai and Lampoon accounted for about one-third of the overall deposit andcredit outstandings in the north. In Fiscal Year 1998, Chiang Mai/Lampoon governmentrevenue transferred to the Treasury was about one-third of total revenue collection in the north,

    but representing only 0.5 percent in terms of its share for the whole country. The province's budgetary expenditure was 9.3 percent of the region's budgetary expenditure and 5.2 percent of

    the whole country's budgetary expenditure. Even the Twin city plays a crucial role in financialsector of the region; there is no evidence to of the direct connection of the sector to theinnovative activities in the area, because of lacking interaction among the creditors andinnovators.

    Chiang Mai/Lampoon Twin citys education institutes are among the best in the country.Chiang Mai is the education centre for not only the upper northern Thailand but also theeconomic quadruple which includes Myanma, Laos, South West China and Northern Thailand.There are 3 universities and 5 university colleges. Chiang Mai University was established in1964. The university is the countrys first regional university. It is currently hold 16 facultiesand 100 departments, with over 15,000 students and nearly 2,000 lecturers. Maejo University(established 1934) is agricultural university with 5 specialised faculties dedicated to the field.Payap University (Christian University) is specialized in business and tourism management.There have Food Science and agricultural economics department in all universities, indicatedthe important of the two clusters to the region.

    According to Bergman and Fesers Industry Cluster model, the above empirical study foundthat two major and innovative clusters in the area are agriculture and services (tourism). Theelectronics cluster, heavily dominated by the foreign firms is less innovative performance. TheRIS of this are is not followed a traditional research triangle but rather perform well in theinteraction among the agents between the first two major clusters in terms of processinnovation in services and food industry (see figure 4).

    According to its rapid growth and development in both commerce and tourism, the rate ofgrowth in Chiang Mai has in the past been centralised with little social care for theoutlying regions. There is an attempt to implement a new policy in beginning to decentralizethe provincial administration to allow regional offices of development that do not rely solelyon the central Government. Without a fully supported system and because of a lull in theeconomy this has not yet been implemented. To improve the economy in the

    province, agriculture, and this economic backbone needed to be encouraged and supportespecially in the areas of job creation, new agricultural projects and value-added industries.Attention will be paid to up-grading skilled staff, introducing new

    agriculture techniques and concentrating on high value added crops.

    One negative impression of the Chiang Mai/Lampoon Twin City is that the imbalanced shareof resources and infrastructure project among the two. Both the Economic Quadrangle andChiang Mai/Lampoon Twin City projects are mostly emphasized on Chiang Mai greater areaand always neglect Lampoon as the manufacturing plants of the region. Less concentrated onenvironmental protection comparing with the nabouring Chiang Mai is a good example. Thecontrasted nature of tourists attracted Chiang Mai and manufacturing Lampoon can be seen asa perfect combination of the division of labour among the two, at the same time it is social time

    bomb. On a more humanitarian front, welfare such as education, environmental protection,equally shared resource, public hearing and cultural heritage conservation will help shaping the

    innovation in the region.Figure 4: Chiang Mai/Lampoon Twin City Innovation System and its Clusters

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    Health,Food andBeverage products

    - Food processing industry- Frozen food industry- Food and beverage industry- Pharmaceutical and Chemical

    Industry- Organic and Green Farming

    TourismIndustry

    Textile andgarmentIndustry

    TourismSupporting

    Industry

    Transportationand Customs

    Plastic Industr

    PackagingIndustry

    FarmingMachinery

    Industry

    MetalIndustry

    Jewelry andornamentIndustry

    EducationInstitutes

    ResearchInstitutes

    TouristPolice

    RoyalProjects

    Financial Institutes and Public Administration

    OtherManufacturing

    and Science basedIndustry

    Conclusion

    Chiang Mai/Lampoon Twin City is transforming to be the regional centre for

    tourism, trade especially agricultural, commerce, finance, banking and telecommunications,without the waiting for the governmental initiatives. The development of the provincialeconomic is mostly occurred in the informal way. Agriculture and tourism are the mostimportant clusters in the City. The case shows that the traditional industry still competitive tosome extend, but it is truly needed more adjustment and interaction among the players toleverage its regional innovation. The regional innovation is dominated by process and productinnovation with increasing technology component. Biotechnology and Information Technologywill be the important technology for the city. The interaction between the classic institutions,the government, businesses and the knowledge institution needed to be done more to spreadout the existing knowledge and innovation. The government has to commit a fully support andco-ordinate, as well as initiate, any private or public endeavours that are doing innovation.

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