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Cluster and Regional Innovation System of Chiang Mai/Lampoon Twin City

P. Chairatana, R. Vorrakitpokartorn IKE Group, Department of Business Studies, Aalborg University, Fibigerstrde 4, Aalborg st, 9220, Denmark, Tel. +45 96358236, Fax +45 98156013, E-mail: Department of Management Science, Strathclyde Business School, Strathclyde University, 40 George Street, Graham Hill Building, Glasgow, G1-1QE, UK, Tel: +44 141 5484361, Email:

1. Introduction The upper part of northern Thailand had been recognized as LANNA or The Million Rice Field 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 government has planned several mega projects to develop this area since the beginning of the first National Economic and Social Development Plan in 1961. Traditionally, the first five plans (1961-1985) were heavily focused on constructing infrastructure to support the national economic development 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 creating Chiang Mai/Lampoon Twin City was approved under the cabinet at that time on 2 August 1991, following by the Economic Quadrangle initiatives to integrate the economy of South West China, Myanma, Laos and Nothern Thailand together. The nature of economic structure in the northern part of Thailand is heavily concentrated on agriculture and tourism sectors (see table 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 small comparing with the above two sector, but have been grown very fast since the early 1990s. Table 1: The Economic structure of the Upper Northern Thailand
Agriculture National Regional 1985-1989 1992-1998 15 13.4 25.4 17.7 Manufacturing National Regional 25.5 29.2 6.2 13.7


Tourism National Regional 13.3 13.0 15.4 18.8

Other National Regional 46.2 44.4 53.0 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 phenomenon in the more fiercely market. Most of the innovation perceived by general public is mainly in technological product innovation. Apart from those hi-tech innovations, these new combinations could be less sophisticated technological breakthrough that happened to be a successive product or process innovation, which the most important contribution embedded upon the activities in the surrounded environment. The process and institutional innovation is conceded 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 Mae Hong Son

The resurgence of regional economies, and of territorial specialisation in an age of increasing ease 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; sectors that one might expect, given the enormous recent developments in the new information 2 technologies, to be the least sensitive to the need for geographical proximity . Attempting to elucidate these phenomena, attention has shifted away from individual firms to the productive system within which firms operate, with particular emphasis being given to the region-specific qualities of the linkages, existing between firms (Lawson, 1997). This movement has not been yet unified or systemic, consequently, there now exists a relative excess of new terminology including terms such as industrial district, industrial cluster, technological complex, technological district, innovative milieu, nexus of untraded interdependencies, Regional Innovation System, (RIS) and so on. It is not so far crystallised to what extent these terms, or the literatures giving rise to them, share commonalities either at the substantive or the methodological level. These concepts have an essence to systematize the innovation process and 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 (especially innovation) to those firms operating within its arena. This paper starts with the literature reviews 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 and Lampoon. 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 the 3 concept of external economies, by observing industrial districts . Marshall questions the imperative of economies of scale by stressing the possibility of setting up a system of smallscale 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 a Marshallian 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 for innovation and growth in other parts of the system. Thus, a cluster of industrial complexes is expected 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 Marshalls work, 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 knowledge at unprecedented speed and over unprecedented distances; however, that knowledge is produced in specific places and often used and enhanced most intensively in those same places.

These positive externalities are caused by three major forces: (a) knowledge spillovers between firms, (b) specialised inputs and services from supporting industries, and (c) a geographically pooled labour market for specialised skills (Peneder, 1999).

and the label Italian industrial district is often used for such local systems. Industrial district in 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 vertical 4 integration and the production process is carried out through the collaboration among firms . In other words, industrial district is a geographical concentration of specialise industrial activity, performed by highly specialised firms linking their narrowed tasks together via the 5 extensive collaboration . Another region that is usually seen as an industrial district is Silicon Valley . 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 many informal contacts between employees of different firms led to a high flow of knowledge within the region (Brenner, ibid, p.12). Therefore, this area can be seen as a combination of a knowledge-based and a public-based milieu, with a relatively high accumulation of R&Drelated human capital. From Piore and Sabels book (1984) until now the literature on industrial 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 the integration of the system; at the same time forces of competition keep it flexible and innovative. This derives from the fact that competition in the particular socio-economic district environment promotes better utilisation of available resources and above all, development of latent capabilities and diffuse creativity (Dei Ottati, 1994, p.476). Nevertheless, in Porters The Competitive Advantage of Nations (1990), geographic industry concentration and domestic 7 rivalry are treated as key success factors to national competitive advantage . Yet, the concept of industrial districts attracted many critiques. For instance, it has been criticised for giving inadequate attention to scale economies, and to the advantages of vertical integration in many industries (Robertson and Langlois, 1995). Lazonick (1993) argued that a small innovative firm might be unable to pursue investment strategies that would adapt it to the innovative environment, simply on the grounds of size. The dichotomy between vertical integration and horizontal division of labour through local networking is the centre of this debate. Transaction cost theory (Williamson, 1993) proposed a more systematic theoretical account of relation between industrial structure, spatial organisation, and local linkages. Baptista (1998) said that it (transaction cost theory) can be used to organised production to recognise and exploit the interdependencies between separate phases, and hence to coordinate the 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 industrial districts. 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 5

Brusco (1982) See e.g. Russo (1992), Brenner, 2000 6 See Saxenian (1994) 7 Two elements: domestic rivalry and geographic industry concentration, have especially great power to transform the diamond into a system, domestic rivalry because it promotes upgrading of the entire national diamond, and geographic concentration because it elevates and magnifies the interactions within the diamond (Porter, 1990, p.131).

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 differentiate geographical clusters based upon product based technological learning from those based on other 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 systems engaged 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 PBLT industries from other kinds of industrial localisations in three ways: (1) in the economic sense that they have dynamic economies of scale, owing to the nature of technological change, that counteract equilibrium tendencies; (2) in the organisational sense that their production networks 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 conventions of 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 the technopole (see Castells and Hall, 1994). Table 1.1 below lists some of the major technology districts/technopoles identified in empirical research (Dicken, 1998, p.174). Table 2: Some leading technology districts/technopoles
USA Southern California (including Silicon Valley) Boston, MA Austin, TX Seattle, WA Boulder, CO Raleigh-Durham, NC Europe M4 Corridor, London Munich Stuttgart Paris-Sud Grenoble Montpellier Nice/Sophia Antipolis Milan Asia Tokyo Seoul-Inchon Taipei-Hsinchu Singapore

Many of these districts are associated with major metropolitan areas though some of them have developed 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, pathdependent 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 national economic 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 Group de Recherche Europeen 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 and innovation process. Camagni (1991, p.3) defined an innovative milieu as the set, or the complex network, of mainly informal social relationships on a limited geographical area, often determining a specific image and specific internal representation and sense of belonging, which enhances the local innovative capability through synergetic and collective learning processes.

The GRIMI contributions are obviously concerned with high-technology regions; however, the main focus of its attention is rather upon incubator-type innovation (unlike typical produceruser-type innovation as seen in many of industrial district literatures) and the importance of geographical proximity to this particular type of innovation. The milieu itself also could be seen as uncertainty-reducing operator (Lawson, 1997, pp.15-16). Perceptibly, GREMIs researchers have paid large amount of attention to the so-called hightechnology industries. According to Keeble and Wilkinson (1999, p.296), these hightechnology firms are not necessarily found just in manufacturing given that they can include firms and industries whose products and services embody new, innovative and advanced technologies developed by the application of scientific and technological expertise. As already mentioned, 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 and northeast 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 this concept by the fact that the jobs created in this particular area are very high quality and in industries with excellent long-term growth prospects. More decisively, technological change is given as a central role in almost theories of regional growth. There is a clear logic for policy makers to focus on these firms, which are self-evidently important in the growth process, and thus it may be possible for them to replicate the conditions found within the best innovative milieux (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 activity may 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 is an 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, also see further details in Porter, 1990). To put it another way, economic self-interest is ultimately the glue that binds the cluster together. Moreover, related and supporting institutions are also very crucial to the competitiveness of the cluster. These include industry associations, technical and community colleges with specialised industry programs, universities, government industrial extension programs, network brokers, and the like. Figure 1: Industry Cluster

Source: Bergman and Feser,

Measurement issues have played an important role in defining clusters. One of the only consistent 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 value chains of the economy. However, partly as result of conceptual differences and partly because of data and definitional limitations, input-output based derivations cannot fully capture the set of interrelationships specified in the modern industry cluster concept. Additionally, inputoutput analysis does not link actors, but rather statistical and sometimes heterogeneous industry groups (Roelandt et al, 1998). To overcome such constraints, monographic case studies, popularised by Porter, are employed in collaborative with statistical analysis. Still, using this qualitative approach alone also has its drawbacks. Porter analysis is designed for mapping competitiveness and system dynamics at the meso level. Therefore, for strategy formulation, it needs the combination of the other quantitative data i.e. I/O tables, in order to use at both the macro and micro levels. Accordingly, the approach is subjectively qualitative and thus the results are hard to compare across clusters. To compromise, Roelandt stated that combining the more qualitative cluster studies (monographic case studies) with input-output analysis could 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 research institutions and higher education institutions and industry. Secondly, at the meso-level, the analyses 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 negative competitive dynamics into strategic cooperation and differentiation-based competition. Lastly, at the micro-level, cluster studies provide a basis for initiating and supporting innovative micro-level cluster projects aiming to increase cooperation between major companies, their (main) suppliers, (semi-) public knowledge institutes, as well as various other bridging institution (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

National level (macro) Branch or industry level (meso) Firm level (micro)

Industry group linkages in the economy as a whole Inter- and Intra-industry linkages in the different stages of the production chain of similar end product(s) Specialsed suppliers around one or more core enterprises (inter-firm linkages)

Specialisation patterns of a national/regional economy. Need for innovation and upgrading of products and processes in mega-clusters SWOT and benchmark analysis of industries. Exploring innovation needs Strategic business development Chain analysis and chain management Development of collaborative innovation projects

It could be said that most cluster studies use a combination of different techniques at different levels of aggregation to overcome the limitations of a single technique and to answer different questions (Hertog et al, 1999). Table 3: The examples of dominant international cluster models.
Level National Advantage Model SME Networking Model

Aim to improve
National advantage in certain sector or value chains SME-competitiveness

Typical action
Identify clusters and create supporting conditions Increase interactions with external knowledge carriers to compensate for lack of capabilities to innovate and learn from others Stimulate business specialization pattern by investments and networking initiatives Creating critical mass in emerging technology by attracting research facilities, investors and firms

Typical countries
Canada, Denmark, Finland, Sweden, the Netherlands Australia, New Zealand, Norway, USA

Micro/(Meso )

Regional Development Model IndustryResearch Link Model


Attractiveness, economic performance and development of a region Collaboration and networking between industry and research

Canada, Scotland, Wales, USA Austria, Germany, the Netherlands

Micro/(Meso )

Source: Boekholt and Thuriaux, 1999

The cluster methodology has already been widely used in many countries throughout the world. The examples of dominant international cluster models are shown in the table 2. These countries participate in what we called cluster-based policies. In most countries with clusterbased policies, theses incentives have originated from a trend towards designing governance forms and incentive structures to reduce systemic imperfections within their systems of innovation (Roelandt and Hertog, 1999). However, each country applies different approach. One fundamental difference refers to the distinction between a bottom up approach and a top down approach. Roelandt and Hertog further illustrated this point that the first approach (a bottom up approach) basically focuses on fostering dynamic market functioning and removing market imperfections and the starting point lies in market-induced initiatives with the government acting as a facilitator and moderator without setting national priorities (like for instance 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, formulates a challenging view for the future and before starting the process of dialogue decides on the actors to be involved in the dialogue process (like for instance in some of the Nordic

countries). After having set national priorities and having initiated the dialogue groups the clustering 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 evolutionary theory. The emergence of organising concept is on the national level, which can be traced back to the work of Lundvall, the National System of Innovation or National Policies of Innovation 8 started in the mid 1980s . 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 units may be technical, commercial, legal, social and financial in as much as the goal of the interaction is the development, protection, financing or regulation of new Science and Technology (Niosi et al, 1996, p. 139). Several scholars have defined national System of Innovation or system in the analysis of economic growth. For Instance, Lundvall concentrated on 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 public and private institutional network whose activities and interactions related to new technoeconomic paradigm. He also stressed the role of social institutional adjustment such as, social behaviour, government policy and ways of organising production. Nelson used his evolutionary economic framework idea and his work on the role of public policy in innovation as a concept description. He emphasised on the wider institutional structure within corporate R&D and technical changes. The government play a crucial role as a pool of basic scientific knowledge. These different components of concept can be focused on each author. Lundvall concentrated on interactive process and system of production. Freeman insisted on institutions and technology, while, Nelson idea is based on institutional structure of technology, corporate R&D, and technical changes. The co-operation between social institutions plays the leading role in NIS. The government is the major institute of system as it provides NISs with R&D funds, controls and supports infant industries, promotes the training of scientific and technical personnel, and formulates national goals and policies. In fact, the concepts, has been studied in many levels, national, sectoral, 9 regional and corporate levels (See Figure 2). The figure illustrates how different levels of innovation systems integrated. The Regional Innovation System (RIS) has a sense of geographical economic specialization. In this regard, there are three key institutional forms crucial to RIS capacity; the financial, learning and productive cultures that exist in region. Figure 2: Innovation Systems Model


See also Christopher Freeman (1987, 1988) and Richard Nelson (1988).

For Regional Innovation Systems see more on Storper (1995), Cooke, Uranga and Extxebarria (1997) and Malmberg and Maskell (1997).

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 the traditional or services industrial regions. This imperfect indicators problem has been raised in both developed and developing economies. In addition to this, it seems that the study of innovation 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 local authorities yet, the two cities are already economically and culturally integrated. These historical and geographical elements are the main reasons for this initiative. Chiang Mai ranges the second in the country, in terms of land areas, after Nakorn Ratchasrima province. Chiang Mai is the regional centre of the Northern Thailand10. In contrary, Lampoon is at least 3 times smaller than its nabouring city; it is the centre of the regional industry by hosting the Northern Industrial Estate. The twin city shares more than half of the regional infrastructure and resources (see table 4). In 1998, Gross Provincial Products (GPP) (at market prices) of Chiang Mai and Lampoon amounted to 108,44 million Baht (US$ 2,711.1 million). Chiang Mai/Lampoon's GPP accounted for about 49.23 percent of the Upper Northern GRP and about 2.34 percent of the National Gross Domestic Product (GDP). Per capita income of the Twin City in 1998 was estimated at 59,050.50 Baht (US$ 1,373.27) per annum, ranging the first in the north. This is; however, lower than the average of the country's per capita income of 75,749 Baht (US$ 1,761.70). Through the support of agriculture and industries and an improvement in

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

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
Population Education Institutes Primary & Secondary Vocational Tertiary Health care facilities Bank Share of regional employment (percentage) Share of regional investment Per Capita GPP Chiang Mai/Lampoon 1,884,000 1,369 11 8 449 146 49.47 53.62 59,050.50 The Upper Northern Region 5,776,720 4,101 25 14 1,389 295 50.53 46.38 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 innovation generates within the region is considerably low. This reflects from the centralized planning from the government since the beginning of the introduction of the first National Economic and Social Development Plan in the early 1960, and the regional specialization or productive culture in traditional craftsmanship and small sized agriculture. The main production sectors of Chiang Mai/Lampoon comprise services, manufacturing, agricultural and wholesales and retails trade sectors, respectively. (See table 5). The Twin city is regional economic hub as every economic activity is heavily concentrated here. Chiang Mai is the education, tourism and service centre, while Lampoon is industrial hub (see figure 3). Both are the rice bowl of the region 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)
Chiang Mai Agriculture Manufacturing Services (Tourism) Banking and Real Estates Transportation and communication Whole sale and retail trade Other Gross Regional Production (GRP) 14.67 16.47 23.93 10.47 7.36 9.40 17.70 37.05 Lampoon 15.29 47.34 8.22 3.80 2.06 9.34 13.95 12.18 Percentages The market share of Twin city With the whole Upper Northern region 41.25 86.40 52.43 51.94 52.33 34.54 37.20 49.23

Source: National Social and Economic Development Board (2000)

Tourism becomes major successive cluster, because of its local assets, historical heritages and nature. Apart from that, many infrastructures have been constructed and introduced to the region 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 the sector, does not play a crucial role to leverage the local technological capability, because of less incentive for interacting between firms and knowledge creation institute and the most of

the research resources in the region are concentrated on biotechnological research and rural area development. Figure 3: Industry structure by sector in Chiang Mai and Lampoon, 1998. (N1=2,383 and 11 N2=809)

Other manufacturing


Metal and non-metal products

Chemical and plastic

Textile and garment Wood and wood products, except furniture construction

Food and beverage

Agricultural Industry 0 200 400 600 Chiang Mai Lampoon 800 1000 1200

Sources: Industry Office, Chiang Mai and Lampoon

In all, innovation in the Twin City is mostly generated in services and agriculture clusters such as; packaging, services, environmental preservation, landscape and special planning, post harvest and organic farming technology. Tourist police is one of institutional innovation in tourism cluster to provide the safety and services for tourists. Trekking and Agro-tourism has recently become popular activities among the visitors. This requires organized security and one-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 trial and error among the hoteliers, local farmers (the Hill tribes), and public organization to meet the demand of the tourists. It should be noted that the public transportation in Chiang Mai does not 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 and reducing 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, Royal institution plays only a symbolic role, but in Thailand, it is an influential institution in both social and politic. Royal projects may be considered to be the citys successive institutional innovation as it is the channel that main players such as researchers, users, and society can interact under this Royal initiatives. Royal projects provides education, training, medical services, 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)

N1 = Chiang Mai and N2 = Lampoon

Three key institutional forms crucial to RIS capacity in Chiang Mai/Lampoon Twin City are heavily relied on the traditional economic institutions. Firstly, the productive cultures elements are dominated by long tradition of agriculture, handicraft and natural and historical identities. 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 the rest of the country as the region is situated in the mountainous area. Agriculture and services are 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 in the estate, with the majority of the Japanese and other North East Asian investment. Most of the firms here are Original Equipment Manufacturing (OEM) plants. Rice, paddy, garlic, longans, lychees, onion, Virginia tobacco, soybean and cold weather vegetables and fruits are among the cash crops of the Twin City. After the 1997 Asian financial crisis, Chiang Mai/Lampoon economy contracted from the previous year, owing to liquidity 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 overall agricultural outputs fell. Production of agriculture declined, reflecting mainly from the decline in cash crop outputs, such as longans and lychees. Production of other crops rose, resulting mainly from the expansion in planted areas. Recently, oranges and traditional herbs become new bright future cash crops, thanks for the integration of advanced technology and the of the local 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 bordertrade points between Thailand and Myanmar at the end of 1998. Production of non-agricultural decreased across all categories. Industrial output fell mainly as a result of a slowdown in demand 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 fell in the latter half of the year as the currency strengthened. The decline was also due to more competition problem in the export markets for products such as handicraft, ready-made garments, ceramics, and agricultural processing products. Trade activity moderated following lower 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 by 17.3 percent in the first half of the year as a result of unfavourable economic 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 in comparison with 42.3 percent in the previous year. Secondly, the Twin citys financial institution performed badly after the crisis, the credit extension 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 previous year. The financial institutions and commercial bank branches in the Twin City are accounted for 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

banks in Chiang Mai and Lampoon accounted for about one-third of the overall deposit and credit outstandings in the north. In Fiscal Year 1998, Chiang Mai/Lampoon government revenue 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 financial sector of the region; there is no evidence to of the direct connection of the sector to the innovative activities in the area, because of lacking interaction among the creditors and innovators. 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 the economic quadruple which includes Myanma, Laos, South West China and Northern Thailand. There are 3 universities and 5 university colleges. Chiang Mai University was established in 1964. The university is the countrys first regional university. It is currently hold 16 faculties and 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, indicated the important of the two clusters to the region. According to Bergman and Fesers Industry Cluster model, the above empirical study found that two major and innovative clusters in the area are agriculture and services (tourism). The electronics cluster, heavily dominated by the foreign firms is less innovative performance. The RIS of this are is not followed a traditional research triangle but rather perform well in the interaction among the agents between the first two major clusters in terms of process innovation in services and food industry (see figure 4). According to its rapid growth and development in both commerce and tourism, the rate of growth in Chiang Mai has in the past been centralised with little social care for the outlying regions. There is an attempt to implement a new policy in beginning to decentralize the provincial administration to allow regional offices of development that do not rely solely on the central Government. Without a fully supported system and because of a lull in the economy this has not yet been implemented. To improve the economy in the province, agriculture, and this economic backbone needed to be encouraged and support especially 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 share of resources and infrastructure project among the two. Both the Economic Quadrangle and Chiang Mai/Lampoon Twin City projects are mostly emphasized on Chiang Mai greater area and always neglect Lampoon as the manufacturing plants of the region. Less concentrated on environmental protection comparing with the nabouring Chiang Mai is a good example. The contrasted nature of tourists attracted Chiang Mai and manufacturing Lampoon can be seen as a 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

Transportation and Customs

Other Manufacturing and Science based Industry

Metal Industry Farming Machinery Industry

Jewelry and ornament Industry

Plastic Industry Education Institutes -

Research Institutes

Food processing industry Frozen food industry Food and beverage industry Pharmaceutical and Chemical Industry Organic and Green Farming

Health, Food and Beverage products

Packaging Industry

Royal Projects

Textile and garment Industry

Tourism Supporting Industry

Tourism Industry

Tourist Police

Financial Institutes and Public Administration

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 provincial economic is mostly occurred in the informal way. Agriculture and tourism are the most important clusters in the City. The case shows that the traditional industry still competitive to some extend, but it is truly needed more adjustment and interaction among the players to leverage its regional innovation. The regional innovation is dominated by process and product innovation with increasing technology component. Biotechnology and Information Technology will 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 spread out the existing knowledge and innovation. The government has to commit a fully support and co-ordinate, as well as initiate, any private or public endeavours that are doing innovation.

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