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In 1978 what today is the city of Dongguan in China’s Guangdong province was but a collection of villages and small towns spread over 2,500 square kilometers on the Pearl River, midway between Guangzhou to the north and Shenzhen and Hong Kong, China, to the south. The area’s population of 400,000 relied on fi shing and farming and—though not the poorest in China—was not especially prosperous.

Today Dongguan is home to about 7 million people. More than 5 million of its residents are migrants who work in the thousands of factories that dot the city, churning out a wide range of products in such huge volumes that recent media accounts have assigned Dongguan the label of “factory of the world.” Dongguan’s economy has grown at more than 20 percent annually since 1980, and in 2004 its gross domestic product (GDP) was about $14 billion—greater than Iceland’s. If one includes only registered urban residents (as in official statistics), Dongguan’s GDP per capita of $9,000 in 2004 made it the wealthiest city in China. Even if the city’s floating population of migrant workers is included, its GDP per capita in 2004 was still more than $2,000. Dongguan’s development since the 1970s, and particularly in the last decade, exemplifies (perhaps in exaggerated fashion) the economic forces shaping East Asia’s middle-income economies (see the table below).

Location and favorable factor prices undoubtedly spurred Dongguan’s early growth. For the first decade and a half after China’s reforms began, small and medium enterprises from both Hong Kong, China, and Taiwan, China, were attracted to Dongguan by plentiful supply of land and low-cost labor, and by its proximity to both Guangzhou and Hong Kong, China. Despite these factors, Dongguan’s rapid growth in the 1990s can best be understood through economies of scale, whether in the production of intermediate goods or diff erentiated products, and agglomeration effects, within and across industries. Combined with reductions in transport costs and improvements in logistics, technological progress demonstrates that such effects have emerged as important characteristics of global production.

The internal scale economies are obvious. In 2005 a single plant in Dongguan manufactured more than 30 percent of the magnetic recording heads used in hard disk drives worldwide. Another produced 60 percent of the electronic learning devices sold in the U.S. market. A third produced nearly 30 million mobile phones, more than enough to provide a mobile phone for every man, woman, and child in Peru or República Bolivariana de Venezuela.

Click to enlarge Agglomeration or external scale economies are equally visible. The knowledge spillovers and lower logistics costs from locating close to input providers and export traders have produced globally important industry clusters for knitted woolens, footwear, furniture, and toys. But the cluster that has dominated the industrial landscape of Dongguan since the mid-1990s is telecommunications, electronics, and computer components. Of the parts and components used in manufacturing and processing personal computers, 95 percent can be sourced in Dongguan, and for several products, Dongguan’s factories account for more than 40 percent of global production. Contributed by Shubham Chaudhuri. Source: Gill and Kharas 2007.