Recently, there has been widespread interest in the issue of technological innovation in SME clusters. Research on the clusters in developed countries claims that knowledge spillovers can contribute to innovation growth. However, in developing countries such as China, lots of traditional SME clusters show the opposite situation: the imitative behaviors caused by knowledge spillovers discourage enterprises to innovate. For this reason, most Chinese traditional SME clusters face technological innovation bottleneck except a few clusters. The objective of this paper is to explore how these successful clusters effectively control the free riding behaviors. We find that active horizontal cooperation among enterprises plays an important role in answering this question. Although many horizontal cooperation activities among enterprises have no direct relation with technological innovation activities, according to Institutional Economics, they can be linked tactically as a whole and the method linking them can be regarded as a kind of institutional arrangement. Particularly, a theoretical framework is built consisting of two basic models, capturing the essence of technological innovation activities and horizontal cooperation activities respectively, and a linked game model, revealing the internal relationship of the former two models. Finally, apply the theoretical framework to a case study of Chinese Yiwu industrial clusters.
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