In the past decade, Chinese firms have been competing aggressively in the world labour-intensive industries and have substantially increased their market share. This study explores the mechanisms Chinese firms employ to develop and sustain their cost advantage in labour-intensive industries. The evidence shows that Chinese firms mainly rely on country-specific factors in the initial stage and cluster-specific factors in the growth stage. They integrate these country- and cluster-specific factors to develop firm-specific resources and capabilities in the mature stage. This integration and the dynamics of these resources and capabilities result in the sustainability of their cost advantage. The findings of this study have important managerial implications for those Western firms that wish to duplicate Chinese cost advantages by setting up manufacturing facilities in China and those that are competing against Chinese firms in the world market.
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