The governance and evolution of local production networks in a cluster: The case of Taiwan's machine tool industry

The competitive advantages of spatially concentrated and networked production systems, in terms of flexibility and adaptivity, have been well documented. This paper contributes to this literature by improving our understanding regarding the underlying mechanisms behind the governance and evolution of such a production system. By using the case of Taiwan's machine tool (MT) industry, this paper demonstrates how lead firms depend on their relational capabilities or relation-building skills, nurtured greatly by cluster embeddedness, to effectively govern their suppliers in the production networks. While the production systems constantly evolve, this paper also discusses the ongoing reconfiguration of Taiwan's MT production networks stimulated by lead firms' efforts to tackle the cluster's emerging diseconomies so as to sustain their competitiveness. This paper concludes that a cure to deal with the cluster's diseconomies would be the reinforcement of industrial clustering. © 2009 Springer Science+Business Media B.V.