In China industrial clusters consisting of small and medium enterprises have been proliferating in areas where private sectors have successfully developed. This study inquires into the process of forming a new industrial cluster in the garment industry in China. We found that the local marketplace, where enterprise managers can easily purchase materials from and sell products to local traders, plays a critical role in stimulating the entry of new enterprises in the early stage of cluster

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... ment. As a cluster develops, however, entrepreneurial ability in producing improved products and marketing them to urban traders plays a more significant role. development of industrial clusters and to identify the factors affecting the advantages of industrial clusters. Yet, to our knowledge, no rigorous empirical study on the development of industrial clusters in China has been attempted. This study reports the results of our own case study of small, privately owned garment enterprises in Jili town in the Zhejiang province of China, which is located 140 km southwest of Shanghai. 2 Major products used to be low-quality garment products 3 for children, which are relatively simple and homogeneous. In the early stage of cluster development, the marketplace was established by the township government, where producers purchased standard parts from and sold their simple products to local traders. At this stage of cluster development, price competition among enterprises was intense. In the 1990s, however, leading enterprises began to upgrade the quality of their products and, hence, the quality competition intensified. This quality improvement partly represents a response to the increased demand for high-quality garment products in the domestic markets of China associated with the rapidly rising income levels. An important question is how the industrial cluster achieved the quality improvement. It is found in the cluster literature that vertical cooperation through the specialization and division of labor among enterprises is strengthened when the quality of products, as well as speed and flexibility of production, is improved [e.g., Schmitz 2000 ]. In the case of Jili, such vertical inter-enterprise cooperation has developed only gradually between garment enterprises and embroiderers as well as supportive service industries, such as printing, machinery repairing, packing, and shipping. More importantly, close cooperation between local manufacturing enterprises and urban traders has developed. According to Humphrey and Schmitz [1996] , the establishment