Cluster Innovation Mechanism and Its External Effects on China's Small and Medium-Sized Enterprises

The competitive advantage of cluster firms includes the cost (basic) and the innovation (long-term) advantages. As a new virtual organizational structure of firms, cluster could effectively combine SMEs' innovation vitality with the innovation scale economy of cluster, cultivating SMEs' distinguished innovation capabilities. This paper starts with the horizontal as well as vertical level of cooperation and competition behavior among the cluster firms. Then it explores the cluster innovation mechanism for the Chinese SMEs, and its potential external economic and non-economic effects on the Chinese SMEs. It is concluded that cluster innovation will be a feasible option for the Chinese SME industrial cluster in gaining innovation advantage in the long run