# **1. Introduction**

E-commerce has developed rapidly in China. From early 2000 to 2016, total e-commerce sales boomed, rising from zero to US$750 billion, making China the world’s largest e-commerce market with a global share of over 40 percent (Woetzel et al. 2017). The growth in e-commerce is expected to continue. According to a recent report by Goldman Sachs (2017), China’s e-commerce market will be US$1.7 trillion by 2020, more than twice its size in 2016. As a modern model of conducting business, e-commerce in China has also been revolutionizing the traditional way of buying and selling in brick-and-mortar stores, bringing convenience to consumers and increasing competition among producers. For example, the penetration rate of e-commerce – the proportion of e-commerce sales of total retail sales – surpassed that of the United States in 2013 and is now 15 percent (Zhang and Chen 2019).

While e-commerce is more developed in urban areas – nearly three-quarters of online stores and internet users are in urban areas – the development of online sales has grown sharply in rural areas. Online retail transactions in rural areas have grown much faster than the national average. Rural online retail transactions increased by 153 percent, from 353 billion yuan in 2015 to 895 billion yuan in 2016, compared to a growth rate of 26 percent for national online retail transactions (Ministry of Commerce of the People’s Republic of China 2016). The rural share of total online retail transactions also climbed from 9 percent in 2015 to 17 percent in 2016.<sup>1</sup> The development of e-commerce in rural areas shows strong signs of clustering. E-tailers with frequent and large amounts of online transactions have emerged in villages. The number of Taobao Villages, defined by AliResearch as administrative village with e-tailers clustering and total annual e-commerce transaction volume of more than RMB 10 million (about US$1.5 million), as well as at least 10 percent of village households actively engaging in e-commerce or at least 100 active online shops operated by villagers, primarily with the use of Taobao.com and Tmall.com marketplace – increased from 212 in 2014 to 2,118 in 2017 and to 3,202 in 2018 (Figure 1). Most Taobao Villages are in coastal areas and show significant trends of clustering (Map 1). By 2018, most of the 3,202 Taobao Villages were in the eastern region of China, while more than 100 Taobao Villages were in the central and western regions and 13 were in the northeastern region. Development of Taobao Villages shows a trend of clustering, and new Taobao Villages tend to emerge next to existing Taobao Villages. In 2018, 70 percent of Taobao Villages are in Zhejiang, Guangdong, and Jiangsu provinces; 69 percent of new Taobao Villages are in 76 existing Taobao Village Clusters.<sup>2</sup> The number of Taobao Towns, defined as town or districts with more than three Taobao Villages, increased from 17 in 2014 to 242 in 2017, and to 363 in 2018. According to Ali Research (Nanjing University and AliResearch 2018), the clustering trend results from a developed industrial base in old Taobao Villages, attractiveness from e-commerce success in existing nearby Taobao Villages, and the rapid development of an e-commerce service ecosystem. The number of active online shops in Taobao Villages increased from 70,000 in 2014 to 660,000 in 2018 (Figure

> 1 Calculated based on data from the Ministry of Commerce of the People’s Republic of China, “E-Commerce in China.” Total rural online retail transactions refers to the sum of online retail sales transactions from e-commerce enterprises (including individuals) operated in the administrative regions at the county level or below (excluding city districts) (http://dzsws.mofcom.gov.cn/article/ztxx/ndbg/201706/20170602591881.shtml).

> 2 A Taobao Village Cluster is defined as a cluster with more than 10 neighboring Taobao Villages.

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