chapter 3 trade and industrial interdependence ...- 37 - chapter 3 trade and industrial...

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Chapter 3 TRADE AND INDUSTRIAL INTERDEPENDENCE IN THE PACIFIC REGION

: TEXTILE AND CLOTHING Introduction

The development of textile and clothing industry (for simplicity T&C) is of major importance in order to analyze the mechanism of economic interdependence among the Asia Pacific economies. Since T&C industry is labor-intensive and does not require huge capital, if compared to other industries, this industry is strategic for the developing countries with low wage level and little capital fund to start their industrialization. As a matter of fact, in the past, T&C industry has been actively promoted in the Asian countries, such as Japan, the Asian NIEs and ASEAN. This chapter analyzes the economic interdependence of the industry in the Asian Pacific area during the last thirty years. The Determinants of the Production and Trade Structure

The structure of the T&C production and trade in this region is determined by the telling four factors.

First, the economic policies followed by each Asian countries in the last thirty years have played a central role in a development pattern of the T&C catching-up product cycle. Each government has continued to protect the domestic industry by means of import restrictions until the levels of competitiveness of the imported goods were attained. After succeeding in the internal production, the policies were changed in order to promote export destined to serve the developed country’s market. The T&C industry in the Asian Pacific region has experienced a catching-up product cycle developing pattern according to the sequence of Japan, the Asian NIEs and ASEAN countries.

The second factor is a major shift of export markets. From the end of the second World War to the early 1970’s, during the period of huge economic power of the United States, the developed countries have adopted relative free trade policies in several industries. The Asian NIEs promoted an export oriented industrialization in T&C towards big markets such as the United States and EC. However, since the end of the 1970’s, with the decline of the relative economic level of the United States, Protectionism has erated to become a common practice in developed countries. As a consequence, the relative importance of the United States and EC markets for Asian exports declined, while that of Japan rose, which was completing the process of trade liberalization.

The third factor is a shift of production and trade structure whitin T&C industry. The composition of the world export in textile from 1955 to 1987 is showed in table 1. During the 1950’s, textile trade was mainly occupied by natural fiber and yarn. Afterwards, the share of clothing industry have risen up rapidly. The share of fiber in textile trade declined from 49% in 1955 to 11% in 1987. Whereas the share of clothing rose from 7% to 43%. As clothing industry is labor-intensive and its technology is relatively easy to be mastered, developing countries which are endowed with abundant low wage labor force hold comparative advantage in this production. On the total of textile industry, the share of synthetic fiber is rising. Table 3 shows that, through 1970’s and 1980’s, the share of synthetic fiber increased steadily.

Lastly, managed trade system, including the MFA (Multi Fiber Arrangement), has been

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limiting the development of production and trade in T&C in the Asian Pacific region since the 1960’. Protectionism from developed countries restricted T&C export which is a pulling factor of the industrialization process of the Asian developing countries. The Importance of T&C Industry in Asia

The T&C is very important industry in Asia. Table 2 shows the world trade share of major T&C goods of the Asian countries, the EC, and the United States. Asian countries, as well as EC hold very high share. In particular, the share of synthetic fabrics and clothing trade from Asia is about 1/2 of the world total. The Asian countries play a central role in the world T&C industry.

T&C industry is also very important for each of the Asian countries. Table 3 and 4 show the importance of both textile and clothing industry of each Asian country from the production and employment side. In the 1960’s, T&C industry was a main engine of economic development in Asia. As to production, its share was twice as large as the world average, and it continues to remain above the average also during the following decade, although its pace has been relatively declining.

The importance of this industry for each country turns out more clear from the viewpoint of production growth rate. While the average production grouth rate of Asia was below that of the developing countries as a whole in the 1960’s, it became to exceed the average in the later period. Although the share of clothing industry is still below the world average, its growth rate is expected to rise further. However, we should notice that in the interpretation of this table Asia includes East Asia, South East Asia and Middle East, and excludes Japan and Israel, so it includes several countries whose clothing industry is still at an underdeveloped stage.

The great role of T&C industry for Asian countries becomes more clear in employment. In fact employment share of textile industry in the Asian countries is very high : through the 60’s to the 80’s, as for clothing industry, the growth rate is twice larger than the world average and the employment absorption is expected to increase in the future.

In short, the importance of T&C industry for the Asian economy is very high. Production and Trade Structure from the 1960’s to 1980’s

This subsection deals with the changing structure of textile production and trade from the 1960’s to the 1980’s chiefly by means of a few tables of textile flow matrices among the countries in the Asia Pacific Region, such as Japan, the United States, the Asian NIEs, and the ASEAN countries. EC is also included. Table 2 shows that these regions occupy most of the share in world textile industry. Thus analysis centered on the regions which give the sketch of the production and trade structure in T&C industry. Changing structure of the trade affects the level of domestic supply and demand in several ways in countries concerned. In order to analyze inter-related changes of textile supply and demand both within and between these countries, it is necessary to study the relationship between trade and domestic production and the structure of domestic consumption which affect the trade flow. These world trade matrices show not only trade flows in the region but also the total domestic consumption in a given country and the production for its own domestic market. They enable to

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analyze temporal changes of domestic consumption and production in designated intervals as well as the changes of trade flow at those points in time.

Cotton fabrics (SITC 652), synthetic fabrics (SITC 653) and clothing (SITC 84) are selected as objects of the study. In this subsection, the changing structure of cotton fabrics and synthetic fabrics is studied. As explained earlier, during the 1950’s and 1960’s, the main textile production was done in cotton products. After wards, that, the share of synthetic products and clothing has been increasing gradually. As the comparative advantage of upstream products, such as yarn, are held by industrial countries, these are left to another study.

To sum up, the flow matrices of cotton fabrics, synthetic fabrics and clothing in the Pacific Asia region from the 1960’s to the 1980’s enable us to analyze the interrelationship in T&C trade and production during the last thirty years. World Textile Flow Matrix

The matrices of cotton fabrics and synthetic fabrics shown in Tables 5 and 6 combine trade matrixes of these items, and supply and demand situations in individual countries or groups of them. In the case of Japan, for example, the row and column represent, respectively, countries of destination of its export and countries of origin of its import. The column sum is Japan’s total import and the row sum is its total export. Since Australia and Canada are the industrial countries closest to the Asia region and the United States, respectively, only the import values of these countries are picked up. Their export values are very little.

The total volumes of export and import of these items by individual countries are consulted in the Sen-i handbook (1992), and other similar publications. However, as to synthetic fabrics, it is hard to obtain the Chinese statistics, which occupies a big share in the world synthetic fabrics production. The statistics of Chinese synthetic fabrics are not available in the UN trade statistics. Chinese domestic trade statistics are published only in a rough classification at the two digit level of SITC. Thus trade statistics between the Asian NIEs or ASEAN and China are not available for synthetic fabrics. The statistics between China and industrialized countries, such as Japan, the United States and the EC members, are obtained from the OECD trade statistics. The tables are represented in terms of volume because, in terms of value, there are difference depending on ways of pricing, such as f.o.b. and c.i.f. At first, the amount of export, import and production are obtained from textile statistics of each country. The other denomination, such as yard, square yard and ton are converted to square meter by average converting rates. As the matrix presented in terms of volume is not presented in UN the Trade Statistics, the amount of export in each country are alloted to each cell (horizontal direction) by export share of each country, which is calculated by matrices in terms of value. When all the cells obtained by this way are summed by the colums (vertical direction), it is difficult to exactly match the calculating result with the import consulted from domestic statistics of each country. This is because of different source of statistics and differences of price and quality which are caused by calculation in one unit price.

The clothing matrix is represented in terms of value. Because it is impossible to obtain domestic production statistics of each country, and a wide range of product diversification

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makes difference among the quality of clothing consumed by developed and developing countries.

Figures 1 to 6 chart the changing structure of trade, supply and demand in 1968, 1977 and 1987 based on tables 6 and 7. They enable us to compare changing production and trade structure between developed countries, such as Japan, EC and U.S. and developing countries, such as the Asian NIEs, ASEAN and China. Structure in the 1960s and the 1970s : Cotton fabrics

The changing structure of cotton fabrics production and trade during the 1960s and 1970s is explained by the ‘catch-up effect’. The catch-up effect means that less developed countries which started production later than developed countries reach the same level of competitiveness as developed countries.

To facilitate a better grasp of the catch-up effect using the matrix analysis, the export growth rate from each Asian country to the United States and EC and the latter countries’ import growth rate are presented in Table 7. Further, the temporal changes of each Asian country’s export share in the US and EC markets are presented in Table 8. These tables show the changing export competitiveness of each Asian country by means of their export growth rate and export share in the developed countries’ markets.

Japan, which showed a markedly big export surplus in 1968, steadily reduced its export share and growth rate in the later period. In particular, its export decrease in the US market is remarkable. This indicates that Japanese competitiveness steadily declined during the 1970s.

Japanese export reduction in the US market was due to the export increase from the ASEAN countries and China. Although export from ASEAN to the US remained unchanged in table 7, it is clear that the share of its export increased according to table 8. In ASEAN, domestic demand exceeded production, with a trade deficit in 1968. After that, its domestic production and export increased rapidly, while import declined during the 1970s. As a result, ASEAN as a whole became a net exporter in 1977, indicating that ASEAN competitiveness in cotton fabrics got to the level of countries with export surplus.

As for the Asian NIEs, its export surplus remained big throughout the 1960s to 1970s. It had a 30% export share in the US market though the share in the EC market declined. The reduced share in the EC and Japanese markets was due to export increases of the ASEAN countries.

Product reduction in the developed countries in 1970’s was caused by a demand shift to synthetic products and reduction of domestic demand, accompanied by rapid increases in clothing imports.

These catch-up effects are explained by the “Catching-Up Product Cycle” (CPC) theory. Figure 7 charts the CPC development of cotton fabrics of the selected countries from the

1960s to the 1980s using the import/demand ratio (M/D) and the export/production ratio (X/S). The two ratios are often used to measure the progress of import substitution and export expansion, respectively in each period. South Korea is selected as the representative of the Asian NIEs, and Thailand and Indonesia are the representatives of the ASEAN countries.

Among the Asian countries, Japan was the only cotton producing and exporting country

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during the 1950s. Japan’s X/S ratio is high and M/D ratio is about zero in 1965, indicating Japan’s strong export competitiveness. However, after that, the X/S ratio steadily dropped and the M/D ratio continued to rise. This means that Japan began to lose its edge in both domestic and international markets to new exporting countries, such as the Asian NIEs and the ASEAN countries.

The X/S ratio in South Korea continued to rise after 1965, indicating Korea’s improved export competitiveness. Although this ratio declined from 1972 to 1975, it had a steady increase afterwards. This means that cotton fabrics in the Asian NIEs did not reach the ‘mature’ stage.

In Thailand, the M/D ratio exceeded the X/S ratio until 1972, and in Indonesia, until 1979. This means that import substitution in ASEAN as a whole reached its full cycle and began to expand exports during the 1970s. Japan took a leading role in completing the import substitution of the ASEAN countries. Many Japanese textile firms changed their export increasing policies to production transfer through foreign direct investment. Table 5 shows that Japanese export toward the ASEAN countries steadily declined.

Meanwhile, in the United States, M/D ratio continued to rise and X/S ratio remained zero, thus indicating its ‘reverse import’ stage. Synthetic fabrics

Judging from table 6, the catching up by developing countries with developed counteries had not been completed in synthetic fabrics during the 1970s. Tables 9 and 10 show, respectively, the export growth rate and the export share of synthetic fabrics in a similar way to that of tables 7 and 8.

The Asian NIEs, which had trade deficits in 1968, steadily increased their production and exports throughout the 1970s. As a result, the export share in Japan, the US and EC markets increased. Futhermore, the Asian NIEs’ export to the US and EC increased markedly, in spite of the fact that between 1972 and 1977, macro economic factors, such as the shift to the floating exchange rate system and the recession which was caused by the Oil Crisis, depressed the import demand in the developed countries. The Asian NIEs’ synthetic fabrics reached the level of competitiveness of the other exporting countries in the 1970s.

ASEAN, which showed very big trade deficits in 1968, increased production sharply during the 1970’s. And its export steadily increased and trade deficits were gradually reduced. Although the export growth rate was extremely high, its share in the developed countries’ markets was very small. This means that its competitiveness did not catch up with the level of the countries which had sufficient export competitiveness.

In Japan, the export surplus increased more rapidly than production through the 1960s to 1970s. Its export share in the US and EC markets and export growth rate also constantly kept a high level. This means that Japanese competitiveness increased in this period. Figure 5 shows exports from the US and EC increased on a large scale particularly toward the developed countries. Japan, the US and EC were net exporting countries and their relative status were still high, since developing countries did not catch up with them fully.

This changing structure can also be explained by the CPC theory, in the subsequent analysis.

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Figure 8 shows the CPC development of synthetic fabrics of Japan, South Korea and Thailand from the 1960s to the 1980s. Detailed statistics of China, Indonesia and the US for synthetic fabrics are not available.

Judging from figure 8, the import substitution of South Korea and Thailand were completed in 1972 and 1976, respectively. The Asian NIEs as a whole, also completed import substitution and were in the stage of rapid export expansion. Although Thailand entered the stage of ‘export’, its M/D ratio did not decline sufficiently, and the X/S ratio remained low, indicating that the country was in the early part of this stage. The X/S ratio in Japan continued to increase thoughout the 1960s and 1970s. This means that Japan was in the ‘export’ stage. The Structure in the 1980s

In order to explain the production and trade structure in the 1980s, it is necessary to say that some factors shown in table 11 were interrelated and played major roles in the determi- nation of the trade flow. The most influential factors are the economic boom in the US, the dollar appreciation and the MFA (Multi-Fiber Arrangement). In order to overcome the world recession caused by the second Oil Crisis, the US adopted a finance expansion policy, which brought about in economic boom and the dollar appreciation in the US. These were import promoting factors for the US, which had a huge domestic market.

The MFA was established in 1974, which stipulated that the export of a wide range of textile goods, such as cotton, synthetic products, etc. were to be restrained multilaterally by means of a qnota. In textile industry, there is the history of managed trade in the last thirty years.

The first restraining trade policy in textile industry in the postwar period goes back to the 1950s. In the 1950s the strong competitiveness of Japan, which was only one exporter in Asia in this period, was a menace to U.S. textile industry. It caused Japanese voluntary export restraint in cotton products toward the U.S. from 1957 to 1961. Afterward, in propotion to export growth in the other Asian countries, the U.S. enforced more rigid multilateral restraints.

Table 12 shows the managed trade of textile industry in the postwar period. The Short Term Arrangement was terminated but replaced by Long Term Arrangement and extended several times until 1973. In other words, managed trade of cotton products had been established by the end of the 1960s.

As export of synthetic and woolen products from the Asian countries increased in the 1970s, the U.S. proposed the arrangement of a wide range of textile products including woolen and synthetic goods. The MFA was established in 1974, following the LTA. At present, the main textile importer and exporter join this arrangement (about fifty countries). Although it nominally provides that “the basic objective shall be to achieve the expansion of trade, the reduction of barriers to such trade and the progressive liberalization of world trade in textile products. ..” (Article 1 : 2), actually restrains textile export from exporting countries in order to protect domestic producers in importing countries. The U.S. and EC conclude bilateral arrangements based on the MFA with forty-one and twenty-seven countries and restrain their imports respectively. The managed trade of a wide range of textile products

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was established by MFA. Although it was extended three times and became more rigid, the completion of MFA in ten years has been debated in the Urguay Round (1986-).

It should be noted that restraining effect of the MFA is different between countries. Table 13 shows that the portion of textiles and apparel imports covered by quotas, and the average degree of quota utilization, for all supplier countries that account for 1 per cent or more of the US imports of textiles or apparel. It is clear that the Asian NIEs countries-South Korea, Taiwan and Hong Kong- are tightly controlled in both the share of trade subject to quotas and the degree of quota utilization (although the latter is low for EC imports from Hong Kong). However, for many exporting countries including the ASEAN countries, China, and Japan, it can be conjectured that the MFA quota are in effect not binding since they are not fully utilized. They have lower shares of exports covered by quotas in the US market, and lower utilization rates than the Asian NIEs. In other words, the Asian NIEs are restricted discriminatively from the other exporters. Thus the export restraining effect of the MFA may be clearly understood by comparing the changing trade and production among the Asian NIEs, ASEAN, and China. Futhermore, a comparison between the MFA enforcing importers, such as the US and EC and a non-enforcing importer, Japan, in import changes shows the domestic production protecting effect of MFA.

So far, it has become clear that the regionally managed trade has fosterd the intra- regional trade and limited the one in inter-regional level in the textile industry. MFA, which is likely to exclude the Asian exports from trade in North America and Western European regions, is given as an example of the managed trade in textile industry in the 1980s. Cotton fabrics (1) Phase of development in the each Asian country

Domestic production in the Asian NIEs, ASEAN and China increased steadily. In particular, in ASEAN, it increased so markedly as to catch up with the NIEs’ level. However, export of ASEAN was equivalent only to 1/4 of the export of the Asian NIEs, partly because of their big domestic consumptions. Figure 7 shows that the X/S ratios in Thailand and Indonesia were still low compared to South Korea, although M/D ratios became very low in the 1980s. This means that the ASEAN countries were in the early part of the ‘export’ stage.

It should be noted that the Asian NIEs as a whole was a net importing entity in 1987. However, this does not mean the Asian NIEs was in the ‘reverse import’ stage. It was Hong Kong alone that became a net import country, because export from China via Hong Kong to Singapore, Malaysia and Indonesia grew, markedly increasing Hong Kong’s imports from China. South Korea and Taiwan held big net exports. Figure 7 shows that the X/S ratio of South Korea was still high in the 1980s. However, export toward the Asian NIEs from China, which was a low wage country, increased markedly. Futhermore, its domestic consumption growth rate (66%) and import growth rate (350%) were larger than domestic production growth rate. These show that the Asian NIEs’ low wage competitiveness declined gradually.

On the other hand Japan became a net importer in the early part of the 1980s. Figure 7 shows that Japan entered ‘reverse import’ stage. The US increased its trade deficit, and its M/D ratio also rose in the 1980s.

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(2) Export toward the US and EC Cotton fabrics exports from the Asian countries were strongly influenced by the MFA in

the 1980s. To verify the effects of the MFA, a comparison between the Asian NIEs and ASEAN in

terms of export growth from 1977 to 1987 gives us clear results. Table 14 shows the growth rate of exports from each Asian country toward Japan, the US, EC and the world. This table can prove the effect of MFA in three ways. The first way is shown via a comparison between the import growth from the Asian NIEs and ASEAN to the US market. In 1987, US imports increased four times as much as in 1977, due to the economic boom and the dollar appreciation. However, import growth rates from the Asian NIEs increased only 47% in contrast to import from ASEAN, which rose 297%.

Second is the comparable performance with the EC market in which import increased. The imports from ASEAN and China increased 150% and 184%, respectively. However, imports from the NIEs countries decreased 38%.

The last way is to compare the US and EC markets with the world market. Exports from the Asian NIEs toward the world increased 120%. Import growth rates in the US and EC from Asian NIEs were much lower than 120%. In contrast, the import growth rate in the US and EC from ASEAN was much higher than the world growth rate, which is 96%.

Further, as shown in table 8, the Asian NIEs’ export share in the US market was only twice as large as ASEAN’s share in 1987, and in the EC market, the former’s share was smaller than the latter’s share. However, as described before, the Asian NIEs’ export was four times as much as ASEAN’s export. Besides, judging from figure 7, ASEAN was not a big exporter yet.

These points show that the Asian NIEs could not increase its export to the US and EC sufficiently, despite the favorable macro economic factors such as the economic boom in the US and the dollar appreciation, since the MFA depressed it to less than their quota. (3) Promotion of Economic Interdependence

MFA will promote economic interdependence in Asia in the future. Table 15 compares the export shares of the Asian NIEs and ASEAN in the Asian markets, which includes Japan, The Asian NIEs, ASEAN and China, and the other region including the US, EC and Canada. As for the Asian NIEs, the share in Asia steadily increased, while the share in the others decreased gradually. This shows the export restraining effect of the MFA. As for ASEAN, which did not suffer the MFA effect so much, the share in the latter was much larger than the former in 1987. However, when ASEAN’s quota of MFA is fulfiled in the future, it is likely that its share in Asia will be increased.

To sum up, it become clear that MFA promotes the close economic interdependence within the cotton fabrics industry in Asia. Synthetic fabrics

US became a net importing country during the 1980s, indicating the decline of its competitiveness. Its domestic production increased as a result of the expansion in its domestic demand. In Japan, both its domestic production and export steadily declined. Its export toward the US had a tendency to decrease. But its exports to the Asian NIEs and

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ASEAN, remained almost unchanged. Japan was still a net exporter. ASEAN as a whole was still a net importer, though Thailand entered the ‘export’ stage as

shown in figure 8. ASEAN’s exports to each country and country group did not increase during the 1980s except for the US. This is explained by the difficulty in mastering the technology of synthetic fabrics production. As for staple fabrics production, which is close to cotton in terms of material, it is easy for developing countries to catch up the exporting countries. However, it is difficult to master the production of filamentary fabrics.

The trade relationship in synthetic fabrics between China and the Asian NIEs, which is not available in table 6, is very extensive. In the trade between China and the Asian NIEs, the propotion of indirect trade via Hong Kong was very large, because of rupture of the diplomatic relations between China and both Taiwan and South Korea. There were two reasons why Hong Kong was selected as a junction port. First, the transportation cost could be saved. Hong Kong was located in the center of the Asian region, and closest to China. It had a sufficient infrastructure to be the center of finance, commerce and industry in Asia. It also had a computerized electoric communication network. Furthermore, its harbor facilities and shopping service were of low cost and modern. The large-scale facilities, and repairing systems were also available.

The second point was the low cost of its business management. There were little language difficulties in trade, as the people in Hong Kong understand both English and Chinese. There were specialists in business correspondence and trade law. Besides, the support system promoted reexport in terms of market research, sales promotion, finance, insurance and law.

The trade between China and both South Korea and Taiwan has been increasing particularly since 1986, and is shown in tables 16 and 17. These tables show the trade between China and South Korea and Taiwan, respectively. The proportion of synthetic fabrics in this trade is very large. It is noticeable that the share of synthetic fabrics in Chinese imports from South Korea and Taiwan declined gradually, and in Chinese exports toward them, its share steadily increased. At the early stage of textile industrialization, Chinese exports mostly consisted of fibers (SITC 2). After that, China mastered the technology of synthetic fabric production through imports of them from the Asian NIEs.

The Asian NIEs’s export increased markedly in contrast to cotton fabrics, whose export was reduced because of MFA. This is explained by the decline of US competitiveness and the unaccomplishment of import substitution in ASEAN. To deal with the catching up effect of developing countries, each industrialized country adopted the industrial adjustment policy in the textile industry. The competitive position of synthetic fabrics in the US was sustained by the introduction of labor-saving technologies which made possible the low cost production despite of its relative high wage. This adjustment policy was different from those of EC and Japan, which aimed at the diversification of high-quality and expensive products. Thus, the quality of products made in the US was more close to those in the Asian NIEs and ASEAN. However, the competitiveness of synthetic fabrics in the US steadily declined as shown in table 6. On the other hand, ASEAN, which had the advantage of low cost, did not have enough production capacity to meet its domestic demand. Therefore, it was possible for the Asian NIEs to extend their export shares in the US market. However, export from the Asian NIEs

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will be restrained when ASEAN and China complete import substitution in near future. The Effect of the MFA

In order to identify the effect of the MFA in the different way from the section 3, supply and demand coefficients are used. First, trend of demand and supply before introduction of MFA is estimated by the regression using the export from Asian NIEs, ASEAN and China toward US, EC and Japan between 1964 and 1974. Then export from each Asian country toward the each industrialized country in 1977, 1980 and 1987 is hypothesized in the case that MFA was not introduced, by extending these trends. The effect of MFA could be analyzed by comparison between their actual exports and hypothesized exports.

There are some difficulties in this analysis. First, macro economic fluctuation cannot be taken into consideration. For example, it could be thought that import and domestic production of US in 1980s deviated from these trends ; the import was larger and the production was smaller.

The second one is the shift of the competitive position of both industrialized and developing countries. In general, the catching up pace of developing countries toward industrialized countries accelerated with increasing the production of developing couuntries. For example, Asian NIEs could reach the ‘export’ stage with more rapid pace than Japan in some industries.

Further, the price competitiveness of cotton fabrics in Asian NIEs steadily dropped during the 1980s. This means their actual export became a little bit smaller than the hypothesized export.

In order to resolve the above difficulties, to obtain more information of each import and export country is very difficult. It should be noted that this analysis is not necessarily an accurate estimation and one of the many estimations which obtain the effect of MFA. Estimation Method

The demand and supply trends are estimated using the coefficients in the following manner. Supposing that Xi. stands for the total production of i country, X.j for the total consumption of j country, Xii for the domestic production in the total consumption of i country, and Xij for the export from i country to j country, the coefficient a ij holds that :

a ij=Xij/X.j The coefficient a ii holds that :

a ii=Xii/X.i The demand and supply trends are obtained in estimating OLS regression equations from these coefficients. The regression results are in table 18-a. The exports from each Asian country to Japan, US and EC are hypothesized by the demand and supply trends. The results are in table 18-b and 18-c. The results from the regressions whose correlation coefficients are low are not in the table because the trends are judged not confident. The upper are hypotheti- cal figures and the lower are actual figures. In each cell in the first and second rows, when the upper figure is larger than the lower, it could be thought that the exports are constrained to the excess. In the cells in the third row, when the lower is over the upper, it could be thought that the domestic production in the developed countries is protected. The imports to

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Japan and EC from each country are hypothesized for the figures in 1980 and 1987, while the import from US for in 1977, 1980 and 1987.

Although MFA was established in 1974, EC enforced the restraint in the late 1970s because of the disagreement about MFA among the EC countries. As a result, the effects of MFA were observable after 1980. Observation

The effect of MFA is observable in mainly two points. First, the actual productions in US and EC are over the hypothesized figures throughout 1977 to 1987. Espetially in US in 1987, the import promoting factors, such as the dollar appreciation and the boom in the early 1980s, must have played a role in depressing the domestic production. However, the domestic production in US increased not deviating the trend in the 1970s. This indicates that MFA has been protecting the domestic production in the developed countries.

The second point is found in the difference between the export from Asian NIEs to US and EC and the export from ASEAN to US and EC. For example, as for the export of cotton fabrics toward US in 1987, the actual figure is over the hypothesized one in ASEAN, while the former is lower than the latter by about 30% in the case of NIEs. To consider the import promoting factors of US, it could be thought that the restraining export effect of MFA is very large. Further, as for the export of synthetic fabrics to EC in the 1980s, it could be thought in the similar way.

As for Japan, although the actual figure is lower than hypothesized one, it could not be thought that the domestic production was restrained by MFA. As already mentioned, this indicates that the competitiveness in Japanese textile industry steadily declined. The estimated trend is based on the data in the 1960s and the early 1970s, when the competitive position of Japan was still high.

To sum up, it is difficult to distinguish the effect of MFA from the other factors which influenced the trade flow in textile industry. This analysis explains the one of the several implications about the effect of the MFA. However, it could be thought that MFA restrained the export from targeted Asian countries toward the developed countries which put the MFA into effect. Perspective about the Economic Interrelationship in T&C

As already mentioned, clothing industry occupies very high share, about a half, of the T&C industry. This industry is increasingly expected to play a central part in the T&C production and trade from now on. In other words, the trade and production relation in clothing industry has a great influence on the economic structure in T&C industry as a whole.

In this section, it becomes clear that the economic interdependence in clothing industry in Asia is becoming closer, using an example of Japanese import, in order to prospect about the economic interdependence in the Asia Pacific region. Analysis about Export toward Japan

The share of cotton fabrics of Asian NIEs and ASEAN in the Japanese market declined (table 8). However, cotton and synthetic fabrics in Asia NIEs and ASEAN are in the ‘export’

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stage (figure 7 and 8). The cotton fabrics in Japan entered ‘reverse import’ stage, and its competitiveness was clearly declined (figure 7). The share of the export in synthetic fabrics also dropped rapidly in the 1980s (table 10), and the M/D ratio of this has a tendency to increase. Besides, because Japan does not put the MFA into effect, the export toward Japan is not restrained by the MFA.

This was brought by the expansion of trade in clothing industry. This is explained by the trade coefficients in table 20. This coefficients are based on the matrix of clothing industry (table 19). Supposing that Xij stands for the export from i country to j country, Xi. for the total export from i country, X.j for the total import to j country, and X.. for the world total trade, the trade coefficient of i country toward j country, I ij, is :

..Xj.X.iXijX

ijI =

The numerator represents the ratio of the export to j country of the total export of i, and the denominator the ratio of the total import of i in the world total trade. The trade coefficient is based on the opinion that the export share to j country in the i’s total export usually meets the market scale of j. Because the composite weighted average of the trade coefficients in all import markets is 1. If the trade relation between export and import countries is closer than the world average, the coefficient is larger than 1. If relatively distant, smaller than 1. For example, if 30% of Japanese export is toward US and US total import occupys 20% of the world trade, the the trade coefficient from Japanese side toward US is 1.5, indicating that the trade relation between them is closer than the world average. However, it does not mean that the trade coefficient from US side toward Japan is larger than the world average. I ij and I ji is independent with each other.

In table 20, the Asian NIEs’ coefficient toward Japan increased in the 1980s, while those toward US and EC declined. The clothing industry developed rapidly in Asian NIEs in the 1980s. As a result the cotton fabrics and synthetic fabrics were input to the domestic clothing industry, and the clothing export was extended. In other words, the center of the export toward Japan shifted from fabrics to downstream industry, clothing.

As for ASEAN, trade relation toward Japan has tendency to decline. The coefficient was far from 1. On the other hand, although the coefficient toward US declined in the 1980s compared to 1977, the export value from ASEAN increased rapidly in the 1980s. Compared to the 1980s, the export from ASEAN was very little in the 1970s.

The difference between Asian NIEs and ASEAN is as follows ; Asia NIEs were closely related to the Asian countries, such as Japan and China, on the other hand, ASEAN extended the trade with US, EC and the rest of the world. The clothing industry is still underdeveloped in ASEAN. The cotton and synthetic fabrics are still in ‘export’ stage, and does not suffer the restraining effect of MFA. This means that ASEAN can diversify the market in the world. It could be thought that after ASEAN fill the MFA quota by developing its industry the trade relation between ASEAN and the other Asian countries become closer. The Perspective

- 49 -

It is expected that the interdependence of T&C industry in Asia will become increasingly closer in the future by analyzing the economic relation of clothing industry in the Asia Pasific region. Table 20-b shows the trade coefficients between US and EC and the regions except Asia. It indicates that the both countries have the tendencies to strengthen the trade relation with the regions. On the other hand, the coefficients of Japan and Asian NIEs toward ‘the rest of the world’ declined. In particular, Japanese coefficient decreased to less than 1. Conclusion

To sum up the changing production and trade structure of T&C industry in the Asia Pacific region in the last thirty years is as follows ;

(1) Until the early 1970s, Japan (1950s), Asian NIEs (1960s and 1970s) and ASEAN (1970s) had developed the textile industries by increasing their exports toward the developed countries, such as US and EC under the relative free trade system. (although the US and EC enforced the STA and LTA in cotton products.) In other words, they had experienced the process of catching up toward the industrialized countries. The interdependence between the Asian countries and US and EC was very close in this period.

(2) MFA, which put into effect in 1974, depressed the Asian countries’ exports toward the industrialized countries. The effect was showen more clearly for EC, which experienced neither the economic boom nor the appreciation. The interdependence between the Asian countries which suffered its effect and US or EC began to decline steadily. The outlet from the export decrease were turned toward Asia. For example, the center of the export from Asian NIEs in the clothing industry, which has the biggest share of production in the T&C industry, steadily shifted from US to Japan.

In this study, it is clear that MFA has contributed to the closer interdependence of textile industry in Asia.

(3) MFA is expected to be abolished within ten years. However, it is hardly expected that the trade restraints are completely abolished. Thus based on the experience of Asian NIEs, it could be assented that when ASEAN develop the competitiveness to fill its quota, the interdependence of T&C industry in Asia will become closer. However, it is worried that Japan also began to request the voluntary export restraint to Asian NIEs including South Korea.

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REFERENCE Sen-i sougo kenkyuzyo, Sen-i handbook’92 Ippei Yamazawa, 1985. Azia taiheiyo shokoku no boueki to sangyo tyousei Azia keizai kenkyuzyo (Institute for Developing Economies) W.R. Cline, 1987. The future of World Trade in Textiles and Apparel, Institute for International Economics Ippei Yamazawa, 1990. Economic Development and International Trade : The Japanese Model, East-West center Hirohisa Kohama & Hirokazu kaziwara, 1987. “Structual Change in Steel trade and International Industrial Adjustments,” The Developing Economices United Nations, Trade statistical yearbook various years United Nations, Industrial statistical yearbook various years Finance Ministry, Nippon boueki geppo various years I.C.A.C., Cotton world statistics various years Food and Agriculture Organization, Per caputa fiber consumption, various years

- 51 -

Table 1 Trade Structure of Textile Products in the World(bil.$,f.o.b.)

1955 1963 1970 1975 1980 1985 1986 1987

Manufactures 44 72 166 458 980 1,084 1,307 1,553 excl.textile products (a) All textile 10.8 15.3 24.7 53.5 115.2 120.3 146.0 182.3 products (b) Fibres (c) 5.3 6.1 5.9 10.2 19.2 17.1 17.0 20.6 Textile (d) 4.7 7.0 12.4 26.5 56.1 55.9 68.1 84.1 Clothing (e) 0.8 2.2 6.4 16.7 39.9 47.3 60.9 77.6

Source : OECD, Textile and Clothing Industries Sen-i sogo kenkyuzyo, Kasen Handbook

(a) SITC 5 to 8 minus (65 + 68 + 84) (b) SITC 26 + 65 + 84 (c) SITC 26 (d) SITC 65 (e) SITC 84

Table 2 Trade share of each reagion in the world (1987,%)

Cotton Fabrics Synthetic Fabrics Clothing

Asia 27.8 (import) 37.3 (import) 10.8 (*1) 26.0 (export) 48.1 (export) 47.3 (export) EC 51.4 (import) 36.6 (import) 51.9 (import) 51.8 (export) 41.7 (export) 33.6 (export) U.S.A 85.0 (import) 83.3 (import) 91.2 (import) +Canada 81.8 (export) 94.4 (export) 83.3 (export)

*1 : Clothing import in Asia includes only Asia NIEs, ASEAN and Japan In 1987 *2 : Clothing trade is based on the statistics in 1983 Source : UN, Trade Statistics

- 52 -

Table 3-a Textile Share in the World (Production) (%)

1963 1975 1980

Asia 12.7 4.6 4.7 Japan 10 5.3 4.0 North America 3.4 2.8 2.4 EC 6.3 4.4 4.2 World 5.2 4.5 4.4

Table 3-b Textile Share Growth in the World (Production) (%)

1960-72 1970-82 1977-89

Asia 4.5 3.8 4.6 All LDCs 4.7 3.0 3.2 North America 4.5 1.0 1.6 EC 2.2 -0.5 0.2 World 4.4 1.7 1.4

Table 3-c Textile Share in the World (Employment) (%)

1963 1975 1980

Asia 27.1 21.2 18.2 Japan 14.2 8.6 7.3 North America 5.1 5.4 4.7 EC 8.2 6.7 6.8 World 12.9 10.7 9.9

Table 3-d Textile Share Growth in the World (Employment) (%)

1960-71 1970-81 1977-89

Asia 1.0 3.7 -0.8 All LDCs 0.9 3.3 -0.6 North America 0.8 -1.8 -1.6 EC -2.1 -4.7 -2.4 World 0.5 1.0 -1.5

Source : “Industrial Statistics Yearbook” U.N.

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Table 4-a Closing Share in the World (Production) (%)

1963 1975 1980

Asia 4.6 2.2 1.8 Japan n.a. 1.9 1.5 North America 4.0 2.9 2.6 EC 4.5 3.7 3.9 World 4.3 3.8 3.4

Table 4-b Closing Share Growth in the World (Production) (%)

1960-72 1970-82 1977-89

Asia 5.3 6.7 7.0 All LDCs 4.8 4.8 4.1 North America 1.5 -0.1 -0.3 EC 2.1 -0.6 -1.5 World 4.0 2.2 1.0

Table 4-c Closing Share in the World (Employment) (%)

1963 1975 1980

Asia 11.8 10.9 13.6 Japan 4.7 4.9 North America 9.2 7.0 6.6 EC 9.2 7.2 5.4 World 9.7 8.2 8.8

Table 4-d Closing Share Growth in the World (Employment) (%)

1960-71 1970-81 1977-89

Asia 5.0 9.1 3.2 All LDCs 4.8 4.6 6.1 North America 0.1 -1.9 -2.8 EC 0.3 -3.5 -2.1 World 2.9 2.8 1.2

Source : “Industrial Statistics Yearbook” U.N.

- 54 -

Table 5 World Textite Flow Matrix (Cotton fabrics) (million square yards) ANIEs ASEAN China Japan Australia U.S.A. Canada EC Others Total export Total import Production Consumption AsianNIEs 68 79 70 0 17 80 175 9 173 138 740 376 1,256 392 72 94 52 0 96 101 213 15 210 143 923 416 1,687 1,177 77 121 120 0 25 81 163 14 196 267 988 552 2,461 2,026 80 87 209 38 46 72 159 12 167 294 1,084 679 1,684 1,279 87 178 328 301 90 101 311 76 122 400 2,174 2,435 2,262 2,573 87 Hong Kong 38 217 301 55 68 110 46 1,249 2,211 851 1,813 87 Souse Korea 31 10 n.a. 16 7 49 9 376 174 539 510 8T Taiwan 70 40 n.a. 1 7 88 6 549 100 871 422 ASEAN 68 2 80 0 1 1 17 0 20 0 121 755 903 1,537 72 9 51 0 15 6 36 4 19 20 159 256 1,351 1,440 77 13 35 0 9 18 36 7 80 69 267 184 1,929 1,846 80 n.a n.a. n.a. n.a. n.a. 87 22 48 0.3 15 25 143 12 199 52 522 418 3,573 3,469 China 68 181 147 1 60 0 10 50 219 667 n.a. 6,600 5,934 72 246 121 74 121 9 47 128 237 983 n.a. 8,030 7,047 77 327 83 45 82 44 18 118 283 1,000 n.a. 11,160 10,166 80 n.a. n.a. n.a. 2,002 41 12,795 10,988 87 1,974 206 372 n.a. 293 n.a. 335 n.a. 3,563 332 14,642 11,411 Japan 68 68 58 0 87 103 13 31 221 581 22 2,744 2,186 72 69 20 0 42 30 12 31 148 382 273 2,264 2,155 77 91 28 0 42 30 12 31 148 382 106 2,766 1,989 80 120 19 8 21 21 2 29 96 316 224 2,202 2,110 87 178 53 20 18 73 6 44 59 451 560 1,837 1,946 U.S.A 68 6 29 0 5 9 79 60 125 313 629 8,224 8,540 72 22 8 0 60 11 84 104 93 381 736 5,669 6,054 77 6 9 0 4 11 50 180 110 370 547 4,381 4,557 80 11 7 9 7 22 74 255 135 520 831 4,258 4,569 87 5 7 2 5 6 55 172 102 327 1,360 3,990 5,396 EC 68 3 5 0 6 19 51 10 425 410 929 1,364 4,495 4,930 72 4 3 0 13 15 51 19 776 383 1,263 1,933 4,258 4,929 77 10 4 0 17 14 31 7 1,020 552 1,655 2,670 3,669 4,684 80 12 4 1 36 12 32 1,140 n.a. 1,925 3,059 3,816 4,950 87 13 3 1 16 9 100 6 806 1,599 2,553 4,987 4,158 6,592 Others 68 37 366 0 -8 23 283 55 605 72 -41 24 0 15 -38 325 147 671 77 -16 -72 0 6 27 243 105 1,045 80 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 87 156 -152 0 61 n.a. 511 n.a. 2,768 Total 68 376 755 0 22 279 629 176 1,364 import 72 413 256 0 273 293 736 327 1,933 77 552 184 0 106 275 547 213 2,670 80 679 n.a. n.a. 224 n.a. 831 n.a. 3,059 87 2,485 418 332 560 n.a. 1,360 n.a. 4,987

Source : Institute of developing ecenomies, Ajia-Taiheiyo shokoku no boeki to sangyo chosei Japan Textile Association, Kasen Handbook U.N. Industrial Statistical Yearbook various years Finance Military, Nippon Boueki Geppo I.C.A.C Cotton World Statistics

- 55 -

Figure 1 Production and Trade in Cotton Fabrics (1968)

（注）Slant line represents domestic production, and black means domestic consumption. Sise is in pression to volume. Arrows show the direction of trade. Figure is volume of trade. Size of arrow is in propotion to size of trade volume. Figures in the rectangles are trade volume within each area. Small sized trade volumes are omitted for simplicity.



- 56 -

Table 6 World Textite Flow Matrix (Synthetic fabrics) (million square yards) ANIEs ASEAN China Japan Australia U.S.A. Canada EC Others Total export Total import Production Consumption AsianNIEs 68 28 56 0 1 1 7 2 6 19 121 341 297 517 72 157 129 1 14 9 46 10 166 126 657 594 694 631 77 200 194 0 80 26 41 13 189 350 1,093 807 1,420 1,133 80 285 447 188 137 26 108 18 229 694 2,132 922 1,941 1,310 87 1,437 502 931 60 101 233 71 436 1,554 4,937 3,195 4,959 3,212 87 Hong Kong 143 100 931 7 9 5 9 12 n.a. 1,171 2,713 38 1,580 87 Souse Korea 557 220 n.a. 41 49 187 31 207 n.a. 2,189 368 2,979 1,158 8T Taiwan 737 172 n.a. 12 43 31 31 217 n.a. 4,577 114 1,937 47 ASEAN 68 1 32 0 0 0 0 0 0 4 36 398 323 685 72 8 60 0 0 0 2 0 1 13 85 532 710 1,157 77 22 81 0 9 2 4 10 45 74 247 386 1,610 1,749 80 47 152 1 19 3 15 18 152 200 607 922 n.a. n.a. 87 36 91 1 17 15 52 15 125 208 560 n.a. n.a. n.a. China 68 0 0 2 7 0 2 7 55 73 35 308 270 72 16 0 0 7 0 7 90 109 212 52 520 360 77 24 0 0 6 0 6 40 41 93 100 1,523 1,530 80 113 44 18 n.a. 1 n.a. 119 n.a. 1,274 89 n.a. n.a.

87 n.a. n.a. 206 22 36 43 72 n.a. 1,481 205 (86) n.a. n.a.

Japan 68 204 219 13 34 125 30 24 445 1,094 22 3,512 2,440 72 317 270 22 64 340 86 46 687 1,732 24 3,987 2,279 77 400 163 67 67 206 56 66 965 1,990 97 3,935 2,042 80 357 192 77 63 120 21 103 949 1,882 183 4,021 2,322 87 413 182 84 54 154 47 209 684 1,827 553 3,307 2,033 U.S.A 68 6 10 0 1 6 56 35 60 173 159 5,248 5,234 72 6 8 0 6 5 69 48 47 189 392 5,034 5,237 77 9 14 0 4 14 139 71 89 342 261 5,692 5,611 80 36 26 67 3 22 170 220 387 931 346 9,174 8,589 87 15 13 33 5 9 85 44 212 416 656 9,393 9,633 EC 68 19 12 0 17 9 52 26 785 486 1,465 1,066 3,450 3,051 72 14 11 1 29 22 154 78 1,342 729 2,380 1,807 3,623 3,050 77 27 15 0 28 56 93 34 1,797 1,035 3,085 2,506 4,272 3,692 80 36 26 1 5 33 168 41 2,164 1,461 3,935 3,870 4,755 4,693 87 70 13 1 23 25 210 47 2,353 1,516 4,258 3,799 5,413 4,954 Others 68 83 69 22 1 5 -25 22 605 72 76 54 28 -25 -47 -50 -55 671 77 125 -81 33 -24 -83 -83 -4 1,045 80 218 35 -245 1 n.a. -66 n.a. 793 87 n.a. n.a. 0 242 n.a. -29 n.a. 2,768 Total 68 341 398 35 22 62 159 138 1,066 import 72 594 532 52 24 60 392 195 1,807 77 807 386 100 97 88 261 254 2,506 80 1,092 922 89 183 n.a. 346 n.a. 3,870 87 3,253 n.a. n.a. 311 * n.a. 656 n.a. 3,799

Source : Institute of developing ecenomies, Ajia-Taiheiyo shokoku no boeki to sangyo chosei Japan Textile Association, Kasen Handbook U.N. Industrial Statistical Yearbook various years Finance Military, Nippon Boueki Geppo I.C.A.C Cotton World Statistics

- 57 -

Figure 4 Production and Trade in Synthetic Fabrics (1968)



- 58 -

Figure 7 Catching up Product Cycle in Cotton Fabrics

Figure 8 Catching up Product Cycle in Synthetic Fabrics

- 59 -

Table 7 export growth rate in the 1970s (Cotton Fabrics) (%)

Importer

U.S.A EC

Asian NIEs 68→72 21.7 21.4 72→77 -23.5 -6.7

ASEAN 68→72 111.8 -5.3 72→77 0 76.3 China 68→72 900 156.0 72→77 388.9 -7.8

Japan 68→72 -1.0 -19.4 72→77 -70.6 24.0

Import growth 68→72 21.7 36.0 of the importer 72→77 -2.9 31.0

Source : Table 5

TABLE3-07

- 60 -

Table 8 Change Pattern of Export Share (Cotton Fabrics) (%)

ANIEs ASEAN Japan U.S.A. EC EC

Asian NIEs 68 21.0 9.3 77.3 27.8 12.7 72 22.6 20.3 35.2 28.9 10.9 77 21.9 65.2 23.6 29.8 7.3 80 12.8 n.a. 92.7 20.5 19.1 5.6 87 7.2 78.5 90.7 16.1 22.9 3.2 ASEAN 68 0.5 10.6 4.5 2.7 1.5 72 2.2 19.9 5.5 4.9 1.0 77 2.4 19.0 8.5 6.6 3.0 80 n.a. n.a. n.a. n.a. n.a. 87 0.9 11.5 2.7 10.5 4.0 China 68 48.1 19.5 4.5 n.a. 3.7 72 59.6 47.3 27.1 1.2 6.6 77 59.2 45.1 42.5 8.0 4.4 80 n.a. n.a. n.a. n.a. n.a. 87 79.4 49.3 66.6 21.5 6.7

Japan 68 18.0 7.7 16.4 2.3 72 16.7 7.8 13.9 1.3

77 16.5 15.2 5.5 1.2

80 17.7 n.a. 2.5 0.9

87 7.2 12.7

5.4 0.9

Source : Table 5

Table 9 export growth rate in the 1970s (Synthetic Fabrics) (%)

Importer

U.S.A EC

Asian NIEs 68→72 557.1 266.7 72→77 -10.9 13.9 ASEAN 68→72 - - 72→77 100.0 45.0

China 68→72 - 1,185.7 72→77 - -55.6

Japan 68→72 172.0 91.7 72→77 -39.4 43.5 Import growth 68→72 146.5 69.5 of the importer 72→77 -33.4 38.7

Source : Table 6

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Table 10 Change Pattern of Export Share (Synthetic Fabrics) (%)

ANIEs ASEAN Japan U.S.A. EC

Asian NIEs 68 8.2 14.1 4.5 4.4 0.6 72 26.4 24.2 58.3 11.7 9.2 77 24.8 50.3 82.5 15.7 7.5 80 26.1 48.5 74.9 31.2 5.9 87 44.2 n.a. 19.3 35.5 11.5 ASEAN 68 0 0 0 0 72 1.3 0 0.5 0 77 2.7 9.3 1.5 1.8 80 4.3 10.4 4.3 3.9 87 1.1 5.5 7.9 3.3 Japan 68 59.8 78.6 2.3

72 53.4 61.2 2.5

77 49.6 78.9 2.6

80 38.7 34.7 2.7

87 15.2

23.5 5.5

Source : Table 6 Table 11 Determinants of Trade Flow in the 1980s o : Promoting factor

x : Depressing factor

Japan U.S.A EC ANIEs ASEAN China

Factor

Ex Im Ex Im Ex Im Ex Im Ex Im Ex Im

Final High Growth in U.S. o o o o

Demand Low Growth in Japan o x x x

Currency Dollar Apprecistion o o o o o

(the rarly 1980s)

Textite Industrial Adjustment x x x x

Industry in U.S.

in Japan & EC x x

Development in ANIEs o o o

Development in ASEAN o o o

Development in China o o o

Pact MFA x x x x x

Ex : Export

Im : Import

- 62 -

Table 12 Managed Trade of Textile Industry

1957-61 Japan voluntarily limited its exports of selected cotton textiles

61-62 Short Term Arrangement (STA) 62-73 Long Term Arrangement (LTA) 71/72 Bilateral Agreements restricting US

imports from Japan, South Korea, Taiwan and Hong Kong

74-78 Multi-Fiber Arrangement (MFA) I 78-82 MFAII 82-86 MFAIII 86-91 MFAIV

Table 13 Average quota coverage and utiliztion : textite and clothing imports into the US and

EC, selected countries, 1982

U.S. EC

percentage of percentage of percentage of percentage of trade subject quota trade subject quota to quota utilized to quota utilized

Hong Kong 75.7 90.8 94.7 52.6 Taiwan 69.4 94.4 n.a. n.a. South Korea 76.4 87.3 95.1 61.7 China 51.4 77.7 n.a. 64.2 Japan 53.3 63.1 n.a. n.a. Philippines 86.3 45.6 64.6 66.2 Singapore 86.3 66.1 75.6 40.2 Mexico 45.4 66.9 6.4 6.0 Dominican Rep. 36.7 78.3 n.a. n.a. Macao 75.7 81.4 78.9 66.8 Sri Lanka 74.5 88.3 26.0 41.8 Thairand 71.8 77.3 63.3 74.6 Brazil 12.2 39.8 75.22 43.3 Pakistan 51.1 59.7 36.7 68.5

Source : W. R. Cline, The Future of World Trade in Textiles Apparel Institure for International Economics, 1987

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Table 14 Export and Production Growth Rate (77→87) (Cotton fabrics)

Japan U.S. EC

Asian NIEs 160% (2.3times) 47% (1.5times) ∇38% ASEAN 66% 297% (4times) 150%

China 1,142% 565% (6.5times) 184%

Source : Table 5

(Synthetic fabrics)

Japan U.S. EC

Asian NIEs ∇25% 468% (5.5times) 130%

ASEAN 88% 1,200% (13times) 178%

Source : Table 6

Table 15 Export share in the selected regions(%)

Asia US + EC + Canada

Asian NIEs 1977 26.9 37.8 1980 35.1 31.2 1987 41.3 23.4

ASEAN 1977 21.3 46.1 1987 16.3 67.8

Source : Table 5

Table 16 Trade between China and Sourth Korea via Hong Kong (Synthetic Fabrics, Million US dollars)

Export to China Share Export to S.Korea Share

1981 49.8 34.2 34.7 46.0 1984 74.4 45.7 32.1 34.0 1986 76.3 27.6 61.0 53.0 1987 131.4 26.7 397.1 59.7

Coution : Share means the synthetic fabrics share in total trade berween South Korea and China Exports to South Korea are catagorized in SITC 65, and it they include all yarns and fabrics

Table 17 Trade between China and Taiwan via Hong Kong

(Synthetic Fabrics, million US dollars)

Export to China Share Export to Taiwan Share

1981 85.0 22.1 0.2 0.2 1984 108.0 25.4 5.1 4.0 1986 181.9 22.4 10.7 7.4 1987 278.9 22.9 28.5 9.5

Coution : Share means the synthetic fabrics share in total trade berween Taiwan and China

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Table 18-a Trend by regression from 1964 to 1974 (Cotton fabrics)

U.S. → U.S. Y=-0.0114X+1.6952 r=-.9637 Japan → Japan Y=-0.0135X+1.8972 r=-.6432 EC → EC Y=-0.0296X+2.7767 r=-.9807 ANIEs → Japan not significant ANIEs → U.S. Y= 0.0022X-0.1325 r= .97068 ANIEs → EC not significant ASEAN → Japan Y= 0.014X-0.093 r= .92012 ASEAN → U.S. Y= 0.0006X-0.0392 r= .72796 ASEAN → EC Y= 0.0007X-0.0454 r= .72680 (Synthetic fabrics) ANIEs → U.S. not significant ANIEs → Japan Y= 0.0044X-0.3032 r= .79715 ANIEs → EC Y= 0.0076X-0.4988 r= .95576 ASEAN → U.S. not significant ASEAN → Japan Y= 0.0005X-0.0351 r= .78754 ASEAN → EC Y= 0.0014X-0.0996 r= .95289 U.S. → U.S. not significant Japan → Japan Y=-0.0144X+1.2961 r=-.7322 EC → EC not significant

Table 18-b Hypothesized volime (Cotton fabrics)

Japan U.S. EC

1987 80 87 80 77 87 80

ANIEs - - 316 199 168 - - export - - 240 159 163 - -

ASEAN 40 56 86 40 32 102 58 export 15 n.a. 143 n.a. 36 199 80

Importer’s 1857 1724 3796 3528 4095 3881 3079 production 1837 2110 4363 4258 4381 4158 3816

* : The upper is hypothesized volume. and the lower is actual volume.

Table 18-c Hypothesized volume (Synthetic fabrics)

Japan EC

87 80 87 80

ANIEs 87 95 805 423 60 137 436 229

ASEAN 47 38 110 48 n.a. n.a. 125 98 Importer’s 4128 4832 - - production 3307 4021 - -

* : The upper is hypothesized volume, and the lower is actual volume.

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Table 19 Clothing flow matrix (US million dollars)

ANIEs ASEAN China Japan Australia U.S.A. Canada EC Others Total export Total import Production Consumption

Asian NIEs 74 13 25 0 511 149 1,200 158 1,088 396 3,540 113 n.a. n.a.

80 54 63 17 757 155 3,970 317 3,155 1,838 10,326 712 n.a. n.a.

87 92 128 234 3,012 244 11,013 892 5,064 2,520 23,204 3,402 n.a. n.a.

ASEAN 74 4 6 0 11 7 110 4 53 31 226 85 225 84

80 29 53 0 24 327 14 471 302 1,220 190 1,183 153

87 38 141 0 72 1,619 118 973 749 3,710 578 n.a. n.a.

China 74 44 10 99 5 n.a. 26 n.a. n.a. n.a. n.a. n.a.

80 457 17 239 278 n.a. 256 n.a. 1,936 n.a. 6,733 4,896

87 2,837 24 833 2,193 161 988 n.a. 3,756 n.a. 6,967 3,456

Japan 74 10 5 0 6 180 13 34 81 329 826 5,426 5,923

80 33 14 2 9 209 9 70 154 500 1,530 38,758 46,025

87 70 14 7 8 365 23 114 64 665 4,649 51,324 55,308

U.S.A 74 11 9 0 15 7 50 59 267 418 2,323 25,100 27,005

80 13 10 0 78 6 63 333 716 1,219 6,945 37,700 43,426

87 21 14 1 98 4 46 155 804 1,143 22,133 44,500 64,690

EC 74 24 6 0 95 32 246 70 4,139 968 5,580 7,422 n.a. n.a.

80 81 18 0 260 31 392 72 10,390 2,918 14,162 21,260 33,329 40,427

87 203 36 3 537 46 1,527 254 15,961 4,522 23,089 34,742 37,773 49,426

Others 74 7 24 n.a. 95 582 2,023

80 45 15 n.a. 172 1,769 6,585

87 141 221 n.a. 97 5,416 11,487

Total 74 113 85 n.a. 826 2,323 7,422

import 80 712 90 n.a. 1,530 6,945 21,260

87 3,402 578 n.a. 4,649 22,133 34,742 Source : UN. Trade Statistics

- 66 -

Table 20-a Trade coefficients

ANIEs Japan U.S.A. EC Others

Asian NIEs 74 0.50 2.62 2.19 0.62 0.97 80 0.28 1.92 2.22 0.58 1.21 87 0.10 2.24 1.72 0.50 1.00

ASEAN 74 2.24 0.89 3.14 0.44 n.a. 80 1.33 0.53 1.55 0.73 1.69 87 0.24 0.33 1.58 0.61 1.87 China 74 n.a. n.a. n.a. n.a. n.a. 80 13.10 3.24 0.83 0.25 n.a. 87 18.00 3.83 2.12 0.61 n.a.

Japan 74 3.75 3.53 0.21 2.12 80 3.67 2.42 0.26 2.10 87 2.50 1.99 0.39 0.89

Table 20-b Trade coefficients with the rest of the world

U.S. 74 5.51 EC 74 1.49 80 3.99 80 1.40 87 6.50 87 1.81

Source : Table 19

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CHAPTER 4

TRANSFER OF JAPANESE ELECTRONICS INDUSTRY TO MALAYSIA

1. TRANSMISSION OF INDUSTRIAL DEVELOPMENT : ANALYTICAL FRAMEWORK Since the mid-1980s, the economic interdependence in the Asian Pacific Region (APR)

has been rapidly increasing due to a process of industrial relocation occurring through flows of international trade and foreign direct investment (FDI), from more advanced countries to less developed ones. Following the change in the structure of comparative advantages, some labor-intensive industries have already been almost entirely transferred and other more capital or technology-intensive ones are proceeding along the same direction. Such a dramatic shift in the location of international production is taking place according to a pattern of specialization for the developing countries which is similar to that previously experienced by the more industrialized ones. In particular, the idea that the process of industrial development can be “transmitted” is based on the relocation process of some strategic industries (like textiles, steel or electronics) which has been occurring from Japan towards Asian countries.

The purpose of this section is to introduce the “product cycle” theories’ analytical framework, which provide a consistent explanation to three main problems related to the transmission of industrial development. First, understanding the reasons why an industry is gradually transferred from one country to another. Second, predicting the changes which will occur in each country’s structure of comparative advantages and pattern of specialization. Third, identifying a particular sequence of countries and industries according to which the process of industrial development transmission takes place. 1.1 Limits of the Neoclassical Approach

The neoclassical model of international trade affirms that a country will enjoy comparative advantages and specialize in the industry which uses more intensively the factor of production that country is relatively more well endowed. Taking for simplicity only labor and capital as factors of production, the pattern of trade is decided as follows : a labor-abundant country will specialize in the production and export of labor-intensive industries and will import capital-intensive products from capital-abundant countries. This model is very useful in understanding the “reasons” of trade, but the strict assumptions on the supply and demand side and the static comparative nature limit its ability to fully explain the international movement of factors of production and the flow of goods with similar factor requirements, as well as to predict the dynamic changes in the “pattern” of trade.

In other words, the simple structure of the international division of labor depicted by the neoclassical approach does not offer any explanation to some striking characteristics of actual international specialization patterns, like the flow of foreign direct investments and the intra-industry (and intra-firm trade) which are primary factors to the increasing economic interdependence among the countries of the Asian Pacific Region. Moreover, what is more crucial in the analysis of the international transmission of industrial development, is that this model is unable to enlighten on the temporal sequence which occurs in the process

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of gaining and losing comparative advantages for specific countries in specific industries. In particular, it does not provide any clear explanation of the reasons why, during the past thirty years, the specialization pattern of Japanese industrial structure shifted from textile to steel and then to electronics industry, or why the development of the same industries was initially experienced by Japan and then transmitted firstly to the Asian NIEs (Newly Industrializing Economies) and lately to the ASEAN4 countries1. 1.2 The Product Cycle Theories

The analysis of the interactions between the process of industrial development and the pattern of trade, according to each country’s evolving structure of comparative advantages, is the core of the “product cycle” theories. Presenting a dynamic explanation of the changes in the pattern of specialization, these theories are able to overcome the limits of the neoclassical approach and offer a good analytical framework for the problem of the transmission of industrial development from a more advanced country to a less developed one.

In particular, two different hypothesis have contributed to this purpose : the “Product Cycle” (PC) theory and the “Catching-up Product Cycle” (CPC) theory2. Their common message is that, under the assumption of a sequence of product development stages with different technology requirements, a more advanced country will enjoy comparative advantages in the innovative industries, while a less developed country will specialize in the standardized ones. The pattern of trade with the less developed country will then show the more advanced one to export technology and skill-intensive products and import mature, unskilled labor-intensive goods. Such a kind of international division of labor will occur not only between different industries. It will also depend on the various production stages of the manufacturing process inside a same industry : each stage will be relocated to different countries according to the structure of comparative advantages they offer. At the same time, as the effect of learning-by-doing in production takes place and increasing income levels affect the demand structure, the innovative industry will become standardized in the advanced country and will be gradually transferred to the developing one. Each country will then experience a shift in the pattern of industrial specialization according to the evolving structure of comparative advantages and in particular the industrial development will be transmitted from the more advanced to the less developed country.

The “product cycle” theories provide therefore a consistent explanation to : 1) the intra- industry trade occurring between countries at different development stages ; 2) the flow of FDI from the more advanced countries, leading the process of industrial relocation.

In contrast to these “static similarities” in the explanation of the product cycle stages, the structure of comparative advantages and the pattern of trade, the “PC” and the “CPC” theories present some “dynamic dissimilarities” in the identification of the forces underlying the transmission of industrial development. In particular, a main difference lies on the role played by local firms vis-a-vis multinational enterprises : the “PC” theory presents the overseas investment strategy of US companies, while the “CPC” theory is based on the Japanese experience of industrial development.

Put in a simple way, according to the “PC” theory the advanced countries are the “actors”, and the flow of FDI is the “mechanism” for the industrial relocation. On the other

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hand, the “CPC” theory assumes that the “actors” are the developing countries and the principal “mechanism” is international trade3. In the second case (CPC), a typical “catching- up” sequence in the growth of imports-production-exports will take place. This is based on the activity of local entrepreneurs which direct the industrialization process first by substituting imports with internal production and then by expanding their export markets. In order to achieve the CPC-type development, however, the technology should be standardized and attainable by the local developing firms. Actually, this is a time-spending process for learning-by-doing and managerial resources’ accumulation. FDI can play an important role in fostering the catching-up industrialization, but at the initial stage capitals are drawn from domestic sources. This makes a clear distinction with the PC model, which affirms instead that since the beginning the industrial transfer will occur by means of FDI flows.

Finally, the two theories have different implications in terms of strategies for industrial policy. The CPC model clearly suggests that the most suitable policy will promote import- substitution at the initial stage and later export-expansion. On the other side, the PC model apparently does not support any particular strategy, but in reality it implies a policy allowing the industry to start directly with EE. In fact, to the extent that for the developing country the industry is an innovative one, it will be unlikely to have a very well developed internal market for consumption and industrial goods, hence transferred firms will more likely produce for export.

2. THE ELECTRONICS INDUSTRY IN THE ASIAN PACIFIC DEVELOPMENT 2.1 Composition and Characteristics Composition

The electronics industry covers a very wide range of operations which require a different use of factors of production, level of technological knowledge and size of firms. Due to the complexity of the production process, a quantitative analysis of the electronics industry presents several problems of homogeneity for international comparisons and consistency with the classifications adopted domestically.

Firstly, international statistics are collected as follows4 : a) on production, under the International Standard Industrial Classification (ISIC) item 383 (Electrical Machinery) and more in particular under item 3832 (Electronics Equipment) ; b) on trade, under the Standard International Trade Classification (SITC) (revision 3) under item 7 (Machinery and Transport Equipment) and more in particular under items 76 (Telecommunication and sound reproducing apparatus and equipment) and 77 (Electrical Machinery).

Secondly, individual countries generally collect internal data according to a functional classification into three sub-sectors : 1) Consumer electronic goods, 2) Industrial equipment goods, 3) Electronic active parts and components. With regard to Japan, in 1990 the EIAJ (electronics industry Association of Japan) identified a total of 250 product categories : 30 in consumer goods, 128 in industrial equipments and 92 in electronic parts.

Figure 2.1 shows the composition of Japanese electrical and electronics industry, including each sub-sector’s main products. A more proper analysis of the industrial structure, accounting for the differences from the supply and demand sides in terms of : a) relative intensity of factors of production ; b) market structure ; c) speed of technological change and

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d) length of the product cycle, would however require a different classification. In particular, Household electrical appliances, consumer electronic goods and some not particularly high- technology intensive products otherwise classified as industrial equipment goods (like telephone machines or copiers) should be included in a wider “electrical and electronics equipment” industry; industrial equipment goods be divided into the “computer” and the “telecommunication” industry and finally the sub-sector of electronic parts be separated in order to identify the “microelectronics” industry and the more fragmented, low technology- intensive “electronic components” industry.

Although data availability for international comparison limits the observation to the sub-sector composition as in figure 2.1, when referring to its peculiar characteristics and to the transmission of the industrial development process, the electronics industry (though still in broad terms) should be more properly analysed according to its sub-industry composition as in the following scheme :

Sub-Sectors : Sub-Industries : a) Household Electrical Appliances -> 1. Electrical and

b) Consumer Electronic Goods Electronics Equipment c) Industrial Equipment Goods -> 2. Computer -> 3. Telecommunication d) Electronic Parts -> 4. Microelectronics

5. Electronic components

Characteristics The electronics industry, as previously defined, covers a wide spectrum of products

whose economic characteristics are not easily treatable as homogeneous. However, accepting a certain loss in consistency for the purpose of generalization and differentiation from the other manufacturing activities, some basic and very important peculiarities can be underlined.

1) A first main characteristic of the electronics industry is the very high degree of technology intensity required in production and the rapid pace of technological change occurring through innovation. This is especially true for microelectronics, computer and telecommunication industries, whose research and innovation activities are one of the most dynamic sources of the overall technological development and originate spillovers which greatly benefit all the sectors of the economy. Furthermore, the need of huge investments in R&D imposes big dimensions for the firms involved in these production activities. Large dimensions is a condition also forced by the presence of economies of scale, like in the case of electrical and electronics equipment, where huge plants and expensive machinery are required to reach the mass production size. Small and medium enterprises (SMEs) usually manage the production of intermediate goods, in particular electronic components, where the process is more labor-intensive, less sophisticated and requires fewer investments. Moreover, firms of medium sizes are frequently present in some specialized operations of the computer

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FIGURE 2.1 Composition of Japanese Electrical and Electronics Industry ( Sub-sectors and Main Products )

1) HOUSEHOLD ELECTRICAL APPLIANCES (*)

- Refrigerators

- Washing machines

- Electric fans

- Microwave ovens

2) CONSUMER ELECTRONIC GOODS (**)

- Radios - Stereos

- Television sets - Car stereos

- VTRs - Video cameras

- Tape recorders - CD players

3) INDUSTRIAL EQUIPMENT GOODS (**)

- Computers - Telephones

- Calculators - Communications systems

- Copiers - Electrical measuring instruments

4) ELECTRONIC PARTS (**)

(Components) (Active parts)

- Resistors - Semiconductors

- Connectors - Integrated circuits

- Acoustic components - Transistors

- Motor and machine parts - Cathodic ray tubes

- Modifiers

- Switches

Definitions:

ELECTRICAL AND ELECTRONICS INDUSTRY (1+2+3+4)

ELECTRONICS INDUSTRY (2+3+4)

HOME APPLIANCES (1+2)

Data sources: Japan’s Association for Electrical Home Appliances (*) Electronics Industry Association of Japan (**)

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and telecommunication industries which require high technological skills and extreme flexi- bility to changes. Advanced technology requirements, availability of capital to be invested in R&D and of human resources with the necessary skill and experience, as well as big dimensions and economies of scale concur to form strong entry barriers in electronics. International competition is usually a game among giant, largely diversified and integrated companies capable to transmit the innovations and their costs from the research centres to the process of industrial application. Innovation, in particular, occurs both in product and process technology and in recent years peculiar activities are those of “product engineering” and “product development”5.

2) A second peculiar characteristic of electronics lies on the high degree of backward and forward linkages occurring not only at the inter-industry level but also among the several productions of the industry itself (intra-industry level). In particular, forward linkages (created by inputs-supplying industries) imply the spread out of the technology originated by the internal R&D activity and benefit more or less directly all the sectors of the economy. On the other side, backward linkages (created by inputs-requiring industries) help to the upgrading of the industrial structure by widening the domestic demand. Electronic parts and particularly microelectronics stand for the typical example of forward linkages. They serve in fact as basic inputs not only to the other sub-sectors of electronics (consumer and industrial goods), but also to several other industries, like machinery and transport equipment. The typical case of backward linkages is that of electrical and electronics equipment industry. Take for example products like stereos or television sets : their assembly process requires a very high number of parts and components sourced from electronics as well as from other industries, like plastic and metal manufacturing. A more complex shape of backward and forward linkages occur in the telecommunication and computer industries as they include both intermediate and final products, demanding inputs from several industries and supplying sophisticated machines and apparatus for industrial or private consumption use. Furthermore, they present a large spectrum of forward linkages with activities of the manufacturing and of the service sectors, including commerce, tourism, information, software applications, and so on.

3) A third characteristic of the electronics industry concerns the very large use of intermediate goods. Although high quality standards are usually required, parts and components are in general easily disposable in production lines and are not subject to physical deterioration. Moreover, due to the light weight and the relatively small size of the products, the transport cost does not particularly weights on the industrial location policy of the firms6. These peculiarities help in turn to facilitate the decision from multinational enterprises (MNEs) to relocate to the developing countries only one part of the whole production process through flows of FDI. A typical case is that of assembly operations, which normally imply the production for export markets, also including the case of re-import towards the investing country. The result is a very complex shape of the trade pattern : the investing country, through the network of its foreign affiliates, exports capital and intermediate goods to import final products. This also concur to strengthen the interdependence between the countries where the complementary industrial production activities are located. Therefore, the very high degree of intra-industry and intra-firm trade and the flows of FDI may be

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partially explained by the intermediate nature of the electronics industry. 2.2 The Electronics Industry in the Asian Pacific Region : an Overview

By rapidly increasing its share on the total of manufacturing employment, output and trade, the electronics industry is assuming a central role for the economic development of the APR. In particular, it presents a high degree of intra-regional trade and a massive cross- country amount of FDI7, standing for one of the manufacturing sectors where the growth of the Asian economic interdependence is occurring at a faster pace.

Table 2.1 presents the evolution of electronics’ share on manufacturing output and total GDP in the USA, Japan, South Korea and Taiwan. The remarkable figures registered by the Asian countries led by Japan and the forecast for further increase in the following decade, clearly show the importance of this industry for the APR economies. In particular by the year 2000, electronics industry in Japan, South Korea and Taiwan should exceed 20% of the total manufacturing output and reach 7% of GDP.

The growth of Japanese electronics industry from 1965 to 1988 is showed in table 2.2. Although the figures are affected by the inflationary trend, an overall dramatic increase may be clearly observed. Production gradually shifted from 2.4 billion Yen in 1965 to 14.6 billion Yen in 1975, then to 77.8 billion Yen in 1985 and finally to 165.3 billion Yen in 1988. During the period concerned, exports grew faster than production. Also imports grew faster than internal demand, though at a slower pace : while in 1965 only 25% of production was destined to export and 5% of demand was served by imports, in 1988 these ratios increased respectively to 43% and 9%.

In the remaining of this section, some principal aspects of electronics industry’s development in the APR will be briefly analysed with regard the characteristics of the country-groups (Japan, NIEs, ASEAN4) and to those of the three sub-sectors (consumer goods, industrial equipment, electronic parts).

Japan Japan is the centre of the Asian electronics technology and the pioneer of a catching-up

process with the USA which started in home appliances, moved to microelectronics and finally reached computer and telecommunication industries. Although a proper “import- substitution” phase as depicted by the “CPC” theory was not experienced, since the 1950s, Japanese companies were able to catch up in technology with the American ones and eventually to gain the leadership in a widening range of electronic goods which required an increasing degree of sophistication. In other words, Japan gradually succeeded in replacing the USA on the technology frontier for many products8, in such a way that following the sub- sectorial classification of figure 2.1, it can be identified a process of “technological catching- up” pictured by the sequence of : consumer goods - electronic parts - industrial equipments.

The overall growth of total production and trade in Asian electronics shows the presence of another catching-up process : that one occurring between countries. In particular, due to the shift in the structures of comparative advantages, the NIEs are catching-up with Japan and the ASEAN4 with the NIEs. In this case, however, the process of technology transfer is assuming a shape which is different from the catching-up of Japan with the USA. In fact,

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TABLE 2.1 SHARE OF THE ELECTRICAL EQUIPMENT INDUSTRY IN SELECTED COUNTRIES (SITC 382) (1975 - 1980 - 1985 - 2000*) (percentage)

Manufacturing Output GDP

1975 1980 1985 2000* 1975 1980 1985 2000*

USA 8.1 9.7 11.1 15.0 1.8 2.2 2.5 3.3

JAPAN 9.3 11.5 17.5 22.0 2.3 3.5 6.2 7.0

S.KOREA 9.7 8.1 12.0 25.0 2.1 2.3 3.6 7.0

TAIWAN NA 11.6 14.6 20.5 NA 4.8 6.1 7.0

Note: Adapted from L. Richard “The International Electronics Industry”,1990 (*) Forecasts by Line Richard

Source: Unido, Industry and Development, “Global Report, 1987”

TABLE 2.2 TREND OF JAPANESE ELECTRONICS INDUSTRY (1965-1988) - Billion US$

1965 1970 1975 1980 1985 1988

Production (S) 2.4 9.4 14.6 39.7 77.8 165.3

Export (X) 0.6 2.4 6.7 20.1 40.6 70.9

Import (M) 0.1 0.6 1.1 3.1 4.3 9.8

Int.Demand (D) 1.9 7.6 9.3 22.7 41.5 104.2

growth %

Production (S) 291.7 55.3 171.9 96.0 112.5

Export (X) 75.0 215.0 200.0 102.0 74.6

Import (M) 500.0 45.5 181.8 38.7 127.9

Int.Demand (D) 300.0 22.4 144.1 82.8 151.1

Ratios

X/S 0.25 0.26 0.46 0.51 0.52 0.43

M/D 0.05 0.08 0.12 0.14 0.10 0.09

Source: Adapted from EIAJ “A perspective on the Japanese Electronics Industry, 1990”

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contrary to the domestic capitals driven nature of Japanese technological development, the growth of electronics technology in the NIEs and in the ASEAN4 countries has been largely induced by the inflow of FDI from more advanced countries. Consequently, the process of industrial technological development has been considerably influenced by the strategies followed by the foreign investors.

This problem will be treated more in detail in the following sections with regard to the industrial transfer occurring from Japan to Malaysia. For the moment what should be pointed out is that, when the high technology intensity and its very fast velocity of change are main peculiarities of an industry (like in the case of electronics) the process of industrial and technological development is affected by the inter-relations between the level of competition on international markets and the degree of autonomy from foreign capitals. The catching-up process of Japan, for example, started by borrowing technology from the more advanced USA. However, since investments were originated domestically, technological autonomy could be gradually attained by increasing R&D efforts and Japan could eventually reach the international lead in many productions by rising quality standards.

On the contrary, the capital formation in the electronics industry of other Asian Pacific countries is relying on the inflow of FDI. This condition, however, implies the dependency on the process of technology transfer from the more advanced countries, which is affected by several economic and social factors and usually occurs at a slower pace than the speed of product and process innovation. To this regard, the industrial policies of the recipient countries in combination with the strategies adopted by the foreign investors are of primary importance for the economic development of the former.

The problem of technology transfer is of utmost consequence for the process of industrial development transmission and would require an extensive analysis. However, this topic will not be deepened here but only briefly mentioned with regard to the case of Japanese companies in Asian Pacific countries, since due to a presumed “peculiarity” of the Japanese production and management systems, the recipient countries often complain a scarce will of Japan to transfer the technology. On the one hand, the critics usually refer to the following problems : 1) reluctance to employ local staff in strategic positions ; 2) difficulty for local workers to receive a proper technical training9 ; 3) discrimination for local firms to participate as subcontractors to the production network of the Japanese MNEs. On the other hand, it must be observed that the process of technology transfer is limited by two main problems which are internal to the developing countries. First, in order to attract FDI, local governments usually adopt incentive policies which privilege 100% export-oriented projects and allow the total free-tax provision of intermediate goods from the investing countries. Such policies, in turn, discourage the creation of industrial linkages and the spread out of technological spillovers10. Second, the absorption capability of the transferred technology is often limited by the scanty availability of skilled labor and the absence of local firms able to provide the quality standards required by the Japanese investors11.

The NIEs Closer to the Japanese pattern of electronics industrial development, which can be

assumed as totally autonomous from foreign capitals and highly competitive on international

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markets, are South Korea and Taiwan. Although the internal industrial structures of the two countries present several differences12, a common characteristic lies in their decreasing dependency from foreign investments (especially from USA and Japan) and increasing efforts in R&D activities. They have reached the technological autonomy in several productions of electrical and electronics equipment industry, and other fields where the technology is more standardized. Their production frontier is also gradually expanding toward industrial equipment goods, including the development of local engineering and part supplying industries. A further typical feature of these two countries, which originated during the second half of the 1980s, is the dramatic outflow of FDI flows towards the group of ASEAN4 and China.

The other two NIEs seem to follow a different development pattern. Singapore is rapidly increasing in importance as a financial and R&D centre, where foreign multinationals tend to locate their regional headquarters. It is still poor in terms of technological autonomy from foreign capitals, but has reached very high levels of international competition, especially in microelectronics. On the contrary, despite being largely independent from FDI, Hong Kong’s competition on international markets is relatively low and the role played for the regional development of electronics industry still remains a secondary one.

The ASEAN4 The development of electronics in the ASEAN4 countries has been induced by dramatic

inflows of FDI coming from more advanced countries (USA, Japan, Europe and recently also from the Asian NIEs). Like the NIEs, the sectors which experienced a faster development and reached higher levels of international competition are those of electrical and electronics equipment and of microelectronics.

Malaysia and Thailand are the countries where the rapid growth of foreign investments followed to the currencies realignment of 1985 had been initially concentrated. They offered good labor market conditions, good infrastructures, convenient packages of investment incentives and a quite stable political situation. However, since the pace of starting new manufacturing projects was very fast and several bottlenecks occurred with regard to the availability of skilled workers and the need of new infrastructures, operational costs sudden- ly started to increase. As a consequence, in the very recent years also Indonesia and the Philippines have been addressed growing amounts of FDI. A main characteristic of the ASEAN4 countries is therefore their remarkable dependency on foreign capitals. While they have greatly benefiting from these investments13, their process of technological development remains largely dependent on the induced transfer and on their absorption capability.

In conclusion, one of the principal differences in the pattern of development of electronics industry among Japan, the NIEs and the ASEAN4 countries is the degree of the trade-off between autonomy from foreign capitals and competition on international markets. Due to the high technological content, the later the industry started to develop, the stronger the need to rely on FDI. To this regard, the process of industrial development transmission which is occurring in the APR will not necessarily induce to the same pattern experienced by Japan. However, South Korea and Taiwan already seem to move towards a similar direction.

Consumer goods

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The transfer of consumer goods from Japan started during the second half of the 1960s and was initially concentrated to serve the internal markets of the recipient countries. It followed the import-substitution strategy, initially introduced by the NIEs and lately adopted also by the ASEAN4 countries.

Since the mid-1970s, the Japanese MNEs moved to the creation of export bases in Asia for mass-production and labor-intensive consumer goods to be destined to the markets of the western countries. They followed the strategy of export-expansion introduced by local governments, although the motive of serving the internal markets still remained an important reason for production relocation in this sub-sector.

After 1985, the intensification of FDI flows from Japan and the NIEs14 helped the process of industrial transfer to further accelerate. For many consumer goods the technology has become quite standardized and much accessible to the late starting countries. However, while South Korean and Taiwanese companies are undertaking autonomous efforts for product and process development, ASEAN4 countries are much more dependent on technology transferred from abroad and seriously lack of efficient indigenous firms. Local authorities usually did not require local sourcing of parts and components and only rarely asked for equity sharing with domestic joint-venture partners. The result was a very limited creation effect of backward linkages.

Industrial equipments The process of industrial relocation in the sub-sector of industrial equipment goods is

occurring at a slower pace than in the other two. Here, technology is more sophisticated and its speed of change is much faster. Among Asian countries, only Japan is able to reach the levels of international competition. Companies require heavy investments in R&D activities as well as the support of a highly upgraded industrial structure15. These characteristics, however, are only partially present in the NIEs and are still in their infancy in the ASEAN4 countries. Moreover, the development of this sector often depends on the formation of public demand, especially for the telecommunications industry.

The typical case of industrial relocation is the manufacture of low sophistication products (like telephones, etc.) but in the recent years, also some assembly operations of computer peripherals (disk-drives, keyboards) have started to be relocated. Furthermore, Japanese companies are engaged in supplying telecommunication equipment to several national authorities of Asian countries, which usually request equity sharing with public owned companies. In the recent years, the markets of the computer and the telecommunication industries are moving towards a convergence both from the supply (components and systems) and the demand sides (utilisers). Consequently, a great deal of strategic alliances, takeovers, mergers and acquisitions is occurring between American, Japanese and European companies, in order to increase the level of international competition and capture shares in the new markets.

Electronic Parts : Microelectronics The initial wave of FDI in semiconductors towards Asian countries, started in the late

1960s, first to Singapore and immediately later to Malaysia16. The first investors were

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American MNEs pursuing cost-reduction strategies. Japanese firms began to relocate their production bases during the early 1970s towards the NIEs and Malaysia, while during the 1980s they also moved towards the Philippines, Indonesia and Thailand. A peculiar charater- istic of the recent years is the increasing role of Asia as a market for microelectronic devices. This is principally due to the process of industrial relocation occurring in the Region, which in turn induces the activity of reciprocal local sourcing from the various countries to increase.

Electronic Parts : Components The industrial transfer in the production of non-microelectronic parts and components is

driven by small and medium enterprises which follow the previous relocation of their customers. They usually serve under subcontracting foreign producers of consumer goods, the sub-sector were the most intense transfer process is occurring. In particular, the industrial relocation trend was accelerated during the second half of the 1980s in the wake of the FDI growth from Japan, Taiwan and South Korea towards the ASEAN4 countries. Despite the fact that usually the required technology is not particularly difficult to be mastered, especially in the ASEAN4 countries it seems difficult for local firms to develop and enter the production network of the foreign MNEs as parts suppliers, due to several problems mainly related to quality standards, delivery time, and experience in dealing with foreign partners.

3. JAPANESE ELECTRONICS INDUSTRY AND ITS STRATEGY IN ASIA-PACIFIC 3.1 Recent trend of Electronics in Japan

Since the 1980s, Japanese electronics industry presents two major tendencies. First, the relative share of Japan to the overall international industrial production is rapidly increasing. Second, electronics has been playing a leading role in terms of contribution to the development of the internal economy.

The Japanese model of production is loosing its traditional vocation to the export of household consumer electronics and is becoming more and more oriented towards high- technology equipment goods and electronic parts for industrial use. This tendency is marked by the gradual reaching for Japan of independence from western and in particular from American technology in the more sophisticated goods. In fact, the process of electronics development in Japan was started by technology borrowing from the more advanced countries and relied for long time on foreign efforts for research. Internally, the focus was primarily on the development of new products, which in turn fostered the Japanese success in the field of consumer goods. In the recent years, however, the engagement in basic research has been increased, and Japan is gradually shifting its structure of comparative advantages towards more technology intensive products, like telecommunication equipments and computers.

Table 3.1 shows the relative shares of Japan, USA, Europe and East Asia to their combined output for electronics in 198817. Japan was leading the overall production with a share of 35.9%, and in particular was still relatively very strong in consumer electronics (54. 4%) as well as in electronic parts (37.9%). With regard to the output of industrial goods, however, the United States held the largest share (41.6%), followed by Europe (31.6%) and finally by Japan (22.1%).

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TABLE 3.1 REGIONAL CONTRIBUTION TO THE COMBINED OUTPUT OF ELECTRONICS INDUSTRY

(1988) - percentages

JAPAN E.ASIA USA EUROPE TOTAL

Consumer Electronics 54.4 17.9 7.8 19.9 100.0

Industrial Equipment 22.1 4.7 41.6 31.6 100.0

Electronic Parts 37.9 10.6 33.9 17.6 100.0

Total Electronics 35.9 7.7 29.8 26.6 100.0

Note: E.Asia = NIEs + ASEAN4 Source: EIAJ “Facts and figures on the Japanese Electronics Industry 1989” TABLE 3.2 JAPAN : SHARE OF ELECTRICAL MACHINERY ON MANUFACTURING INDUSTRY Some Major Indicators (1989)

TOTAL MANUFACTURING ELECTRICAL MACHINERY SHARE (%)

Number of Facilities 421,479 35,005 8.3 Employment 10,960,000 1,918,000 17.5 FDI Stock (51-89 - US$ Mil.) 66,127 14,676 22.2 Production (US$ Bil.) (*) 540.2 165.3 30.6 Exports (US$ Bil.) (*) 205.5 70.9 34.5

Note: (*) = 1988

Source: Adapted from B. Yamada “International Strategies for Japanese Electronics Companies. Implications for Asian NIEs”, 1990 - and EIAJ “A perspective on the Japanese Electronics Industry, 1990”

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TABLE 3.3 PERFORMANCE OF JAPANESE ELECTRONICS INDUSTRY Internal Production, Exports, Imports, Domestic Demand Billion Yen - (1981, 1985, 1990)

Bil.Yen

1981

(%)

Bil.Yen

1985

(%)

Bil.Yen

1990

(%)

PRODUCTION

Consumer Goods 3,669 33.9 4,912 26.5 4,436 18.5 Industrial Goods 3,817 35.3 7,614 41.0 11,335 47.4 Electronic parts 3,333 30.8 6,027 32.5 8,150 34.1 Total 10,819 100.0 18,553 100.0 23,921 100.0

EXPORTS


IMPORTS

Consumer Goods 33 4.7 24 2.3 113 5.5 Industrial Goods 274 38.8 398 38.4 692 34.0 Electronic parts 398 56.5 613 59.3 1,233 60.5 Total 705 100.0 1,035 100.0 2,038 100.0

DOMESTIC DEMAND


Note: Domestic Demand is obtained by the sum of Internal Production and Imports, less Exports Source: EIAJ “A perspective on the Japanese Electronics Industry, 1990”

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The contribution of electronics industry18, with regard to the Japanese internal manufacturing sector, can be easily gathered by some major indicators as those showed in table 3.2. The shares on manufacturing production and export for 1988 were respectively 30.6% and 34. 5%, while in 1989, electronics industry accounted for 8.3% of total Japanese manufacturing facilities, 17.5% of employment and 22.2% of the accumulated stock of FDI. These values are self-explaining to the high dependency of Japanese economy on electronics, although a more proper understanding of the strategic importance of this industry should also take into account the effects in terms of industrial linkages, technological development generation and stimulus to innovation and entrepreneurship, as indicated in section 2.

The evolution of the Japanese electronics industry during the 1980s is presented in table 3.3. As a general tendency for internal demand, production and export, the figures show a dramatic shift from consumer to industrial goods, due principally to the increased sophistication of the Japanese market and the production structure. In particular, the total value of production and export for consumer goods experienced an absolute net decrease in the last five years : production of consumer goods decreased from 4,912 billion Yen in 1985, to 4,436 billion Yen in 1990, while exports were reduced from 3,805 billion Yen in 1985 to 2,618 billion Yen in 1990.

The trend of domestic demand shows that consumer goods’ share decreased from 18.9% of the total in 1981 to less than 13% in 1990, while the industrial goods’ one increased from 46.9% to 57.2% during the same period. Also the structure of production experienced a similar shift, as consumer goods’ share decreased from 33.9% in 1981 to 18.5% in 1990 and that of industrial goods increased from 35.3% in 1981 to 47.4% in 1990. This change reflects the saturation of Japanese demand for consumer goods and the rapid increase of sophistication for Japanese electronics, marked by a fast technological development especially in the production of computers, telecommunication equipment and advanced microelectronics19.

Trade figures clearly show the shifting away of the Japanese electronics industry from the traditional model to a more articulated structure influenced by the evolution of overseas manufacturing activity, with particular regard to the APR. Following the relocation of the more labor-intensive productions, export share of consumer goods from Japan decreased from 45.8% in 1981 to less than 24% in 1990. At the same time, in response to the increased production of industrial goods, export share in this sub-sector grew from 23.7% to 31.5%.

In industrial electronics goods, the relatively smaller value of export compared to that of production is due to the initial focusing of Japanese firms on the domestic market and to the higher sophistication of the internal demand with respect to the foreign one. However, the growth of parts’ share in trade figures is showing that the intensity of intra-industry trade in electronics is increasing and that the structure of the international division of labour is changing towards an higher degree of interdependence.

Finally, the trend of imports does not show any particular change in terms of relative shares of the three sub-sectors but is marked by a considerable increase in the absolute values, which have doubled in the last five years of the decade20. The sum of total imports is however still very low with respect to that of exports (only one fifth in 1990), and this problem of trade balance is causing Japan to face persistent trade frictions.

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3.2 Evolution of Japanese Electronics Industry in Asia The history of Japanese electronics industry’s overseas production in the APR can be

divided into three stages, according to the main characteristics of the investments : 1) the 1960s; 2) since the 1970s to the first half of the 1980s ; 3) since the mid-1980s to today.

Table 3.4 summarizes the results of a research conducted by EIAJ on Japanese production facilities abroad in electronics and is helpful in underling the major structural changes occurred in the pattern of industrial transfer towards Asian countries. The last part (D) of the table shows the total number of facilities up to 1990, divided by regions and groups of products. The three other parts follow the time partition : up to 1969 (A), since 1970 to 1984 (B), and since 1985 up to 1990 (C).

At the end of the period, the cumulative stock of FDI originated from a total of 770 companies of which around 60% where located in Asia21, 15% in Europe and 20% in North America. More than half of the projects were involved in the production of electronic parts (452), especially microelectronics, around 30% in consumer goods (224) and less than 20% in industrial goods (146)22. The largest share of the total production transferred to Asia was held by electronic parts (68%), followed by consumption goods (25%) and finally by industrial goods (7%). The concentration of projects in the sub-sector of electronic parts was higher in the case of the NIEs (75%), while the ASEAN4 countries received a fairly good share also in consumer goods (35%). Among the NIEs, Taiwan received the largest number of Japanese projects (98), while among the ASEAN4 the preference has been addressed to Malaysia (94 cases).

First stage : the 1960s During the 1960s, the NIEs were starting their process of industrialization by means of

import substitution policies aimed to increase the internal standards of production and lessen the dependency from the competitiveness of the imported products. In particular, among the tools adopted by the governments, there were high tariffs on imported consumption goods, also levied on consumer electronics products. It was in this environment that the Japanese electronics multinationals started to transfer their production activities to the Asian countries, mainly for the purpose of serving the internal markets for home appliances, following the policy for infant-industry protection. Japanese MNEs initially started with assembly operations in simple consumer goods, like black and white television sets or radio receivers, which would have been eventually expanded to electric fans, refrigerators and irons.

At the end of 1969, Japanese production facilities abroad amounted to 75 for the whole electronics industry. Out of these, 46 were relocated to Asia (NIEs and ASEAN4), principally in the field of consumer electronics (19) and electronic parts (25). Taiwan, in particular, was able to attract the largest share of FDI receiving 10 projects in consumer electronics and 19 in the production of electronic parts. With regard to the total of Asian countries, a larger share of projects in electronic parts compared to that in consumer goods, as indicated in table 3.4, can be misleading to the real tendency occurring in this period. In fact, if accounted in terms of capital flows instead of number of projects, the total amount of investments in consumer electronics resulted almost ten times larger than that in electronic parts. Furthermore, according to the results of the above-mentioned research (not presented in the table),

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TABLE 3.4 JAPANESE ELECTRONICS INDUSTRY : OVERSEAS PRODUCTION FACILITIES Sub-sectorial, Regional, Time distribution - N.of firms established abroad

A) 1951 - 1969

NIEs ASEAN4 OTHER TOT.ASIA EUROPE N.AMERICA OTHER TOTAL

Cons. Goods 12 7 - 19 4 4 7 34

Ind. Goods 7 - - 7 2 6 2 17

Elect. Parts 25 1 - 26 3 6 2 37

TOTAL 39 7 - 46 7 13 9 75

B) 1970 - 1984


Cons. Goods 24 16 10 50 21 23 14 108

Ind. Goods 19 4 2 25 7 18 5 55

Elect. Parts 112 23 7 142 23 33 14 212

TOTAL 144 41 14 199 47 70 31 347

C) 1985 - 1990


Cons. Goods 8 32 3 43 20 18 1 82

Ind. Goods 8 12 10 30 23 20 1 74

Elect. Parts 47 74 15 136 27 38 2 203

TOTAL 65 112 26 204 67 73 4 348

D) 1951 - 1990


Cons. Goods 44 55 13 112 45 45 22 224

Ind. Goods 34 16 12 62 32 44 8 146

Elect. Parts 182 98 22 304 53 77 18 452

TOTAL 248 160 41 449 121 156 44 770

Source: Adapted from EIAJ “ ’90 Kaigai Houjin Risuto”, 1991

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around 90% of the total investment in consumer goods was destined to serve the internal markets, while in the case of electronic parts this share decreased to less than 50%.

A peculiarity of the Japanese model of industrial transfer, emerged since the first stage, is the “market orientation” of the investment strategy which concurred to affect the production and trade performance of the foreign affiliates. According to this strategy, the pattern of investment maintained until the beginning of the third stage (1985) a “bipolar structure”. The relatively more labor-intensive production facilities in consumer goods were principally transferred to serve the needs of the internal markets for home appliances, while the relatively more capital and technology-intensive projects in electronic parts were almost entirely destined to the export markets.

Second stage : 1970s and first half of 1980s In the 1970s the situation dramatically changed from the side of the recipient countries

as well as that of MNEs. On the one hand, the NIEs, followed by the ASEAN4 countries experienced a period of explosive growth based on the policy of export expansion which relied on the inflows of foreign investments in trade oriented projects, especially in the manufacturing sector. Various measures were generally adopted to attract FDI, like generous tax and fiscal incentives. On the other hand, these efforts coincided with the search of the Japanese MNEs for cheaper labor force in order to cut production costs at a time when inflation peaked on the wake of the two oil shocks and the international competition was strengthening due to the fight for market shares.

Referring to the period 1970-1984 (B), table 3.4 shows that Japanese companies established in Asian countries more than 60% of their total overseas production facilities, experiencing also a major growth of investments towards Mainland China23. Among the NIEs, not only Taiwan but also South Korea and Singapore received greater attention. In terms of sub-sectors, the leading position in Asia was taken by electronic parts (142), followed by consumer electronics (50) and finally by industrial equipment goods (25)24.

During these years, 18 new Japanese production facilities started to operate in Malaysia and were concentrated in microelectronics (semiconductors, integrated circuits and transistors). This transfer, in particular, followed those of American MNEs and was attracted by an inviting incentive policy of the local authorities aimed to the fast development of this sub-sector. Furthermore, around the early ’80s, the transfer of high labor intensive production processes started to shift from the NIEs to the ASEAN4 countries, namely to Malaysia and Thailand, following a change in the structures of comparative advantages from the former countries, which gradually improved in infrastructures, higher value added and skill- intensive operations.

The bipolar strategy induced by the market orientation continued to be a characteristic of the investment pattern : on the one hand Japanese production of microelectronics established in Asia was mainly exported to the markets of USA and Europe, while on the other hand, assembly operations and partial manufacture of consumer goods were chiefly destined to serve local markets25. Moreover, the relatively higher technology-intensive production of industrial appliances still remained “inside” Japan : during these years the transfer in this sub-sector mainly occurred in the production of very simple telecommunica-

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tion apparatus26. During this second stage, the export oriented investments in Asia had generally been

made for taking advantage of the abundant supply of low cost labor force. The relocated productions tended to be unskilled or semi-skilled operations, resulting in relatively low opportunities for the technology to be transferred. Local governments, especially those of the ASEAN4 countries, provided generous incentive packages and adopted a very liberal investment policy, without imposing any particular requirement for local sourcing of parts. As a consequence, the Japanese MNEs involved in the export re-processing activities tended in most cases to import their requirements from Japan and the result was a weak backward linkage effect with the local manufacturers, which did not easily enter the production sphere of the multinationals.

Third stage : second half of the 1980s to today During the mid of the 1980s, several factors contributed to the starting of a new phase

for the evolution of Japanese electronics industry in Asia. In 1984, the recession of the United States caused large repercussions throughout the Asian Region and many countries, included Japan, experienced in 1985 a fall in the output and exports of electronics. Although this recession proved to be caused by the cycle of the demand and the industry could quickly recover, the growing trend of industrial production and export were broken off and the new development pattern, which started since the second half of the decade, was based on a different international economic environment. Three main changes caused economic interdependence among the Asian Pacific countries to increase :

1) Yen appreciation - In September 1985, by the so-called “Plaza Accord”, a dramatic appreciation of the Yen against the Dollar and the main currencies of the advanced countries was decided : in broad terms, the Yen/Dollar rate halved in a few months from a level of 250 to a new rate of 125. This abrupt change forced Japanese companies to undertake a process of economic rationalization and affected two major conditions for international trade and investment : a) the exports from Japan to US and European markets became increasingly more expensive ; b) the financial cost of establishing overseas production plants, especially in countries like the ASEAN4 whose currencies generally followed the dollar trend, was drastically reduced. Consequently, Japanese firms were induced to undertake a huge transfer process of their international production operations to the Asian Pacific countries, as they found much more convenient to serve the markets of the advanced countries by relocating their export-basis to the ASEAN4. Subsequently, the Yen appreciation was followed by a similar trend for the currencies of the NIEs, and the changes which affected the Japanese model of production transfer were partially extended to those countries as well. In particular, the NIEs began to relocate the more labor-intensive productions by means of massive FDI flows towards the ASEAN4, China and also other developing Asian countries like Vietnam and Cambodia.

2) Technological development - The second change is related to the relatively higher technological content of the transferred operations, due to the rapid process of technological innovation occurred in electronics. At the overall industrial level, greater emphasis was placed on product design and development, on response to a growing demand for product

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differentiation and a harsher international competition for market shares. In particular, a new and more sophisticated demand for computer and telecommunication apparatus induced remarkable improvements in microelectronics production. Furthermore, government policies fostered the process of technological development and pushed increasing efforts in basic research, like for software or new materials. Thanks to successful programmes for skilled workers formation and the provision of appropriate infrastructures for technological purpose, Singapore is becoming an important location for the research centres of electronics MNEs in the APR. Among the ASEAN4, Malaysia and Thailand seem to have offered better conditions for the relocation of the relatively more technology intensive productions. Their governments have adopted a liberal policy to attract FDI and have actively promoted the improvement of infrastructures and education, in order to meet the requirements of more technology- intensive production processes. As a consequence, Japanese companies were induced to transfer not only the assembly operations, but also some “technology-higher” phases of production, which require greater knowledge and involve increasing opportunities for the process of technology transfer. Moreover, such an improvement of the economic environment in the ASEAN4 countries did not imply an upgrading of local producers especially in terms of quality requirements. Therefore, according to the Japanese system of production, the transfer of the MNEs was necessarily followed by that of a large number of SMEs operating as subcontractors for part supplying.

3) Growth of Asian markets - The third factor which is contributing to the reinforcement of economic interdependence among Asian Pacific countries is the fast growth of their internal markets. One of the most impressive results of the economic development process experienced during the last decade by the NIEs and the ASEAN4 countries is the rapid growth of GDP per-capita. This trend has implied an increase of the domestic demand for consumption goods and in particular of household electronics, which are given great privilege in the preference structure of Asian consumers. Moreover, the relocation trend of foreign MNEs has caused the demand for industrial goods to increase, especially in the case of electronic parts and components. The result was a new relocation trend, addressed to serve an APR internal demand no more confined inside each domestic market. This implied the new concept of investing, say to Malaysia, in order to produce for the wider “Asian market” of final and intermediate goods.

The third part (C) of table 3.4 shows the trend of production relocation from 1985 to 1990. If this period of six years is compared to the fifteen years of the second stage (1970-1984), it is immediate to note that as the total number of investments is almost the same (347 against 348), during the third stage Japanese electronics firms experienced a rapid growth of FDI27. The main characteristics of this massive relocation were : a) high concentration in the ASEAN4 countries, as the number of projects in ASEAN4 (112) were almost double than those towards the NIEs (65) and three times larger than those occurred during the second stage (41) ; b) growth of FDI in Mainland China (26 projects in “Other Asia”) ; c) increasing share of industrial equipment goods, which amounted to 21.3% of the total, against 15.8% of the second stage ; d) still high share of electronic parts, which covered 66.7% of the Asian share and 58.3% of the total ; e) relative growth of Europe, whose share on the total increased

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to 19.2%, against the 13.5% of the second stage. In conclusion, after the second half of the 1980s, major currencies realignments heavily

affected the terms of trade and forced Japan to undertake a process of industrial restructuring, which together with the new trend of technological development concurred to the formation of a new structure of comparative advantages among the Asian Pacific countries. These factors fuelled the speed of the catching-up industrialization occurring in the Region and induced massive investment flows not only from Japan to the NIEs, the ASEAN4, and China, but also from the NIEs towards the ASEAN4 and China.

The strategy of Japanese investment in Asian electronics was gradually loosing its characteristic bipolar structure and started to move towards a more structured pattern. New productions, in particular of the industrial goods sub-sector, began to be transferred and the traditional investments of MNEs were followed by those of SMEs. Moreover, due to the process of economic development, the growth of the Asian markets is inducing Japanese firms to relocate their production facilities in order to serve a more sophisticated internal demand for consumption goods as well as for industrial electronic equipments and parts. 3.3 Japanese Investment in Malaysia and Trade Pattern

The process of production transfer occurring from Japanese electronics to Malaysia presents the main characteristics discussed in the previous section (3.2). In particular, after the rapid growth of FDI flows experienced since 1985, the “bipolar” structure (big projects form MNEs concentrated in consumption goods for the domestic markets and in microelectronics for the export to western markets) is rapidly transforming into a more articulated shape. Japanese MNEs have enlarged their production activities to consumer and industrial goods, primarily destined for the export to the Asian markets. Furthermore, a massive process of production relocation from SMEs in the “non-active” field of electronic parts is taking place.

According to this new model of investment, also the pattern of trade was induced to significant changes towards an intensification of the interdependence between the two countries. The two-ways trade flows in electronic parts have been dramatically increasing and Japanese imports of consumer and industrial goods have been experiencing a rapid growth. In comparison to the other ASEAN countries, Malaysia offers several advantages. Not only cheap labour and political stability, but also good infrastructures, educated and diligent manpower, tax incentives, language facilities and a warm welcome from the government, which since the 1970s actively promoted foreign investment in electronics, and during the 1980s adopted the so-called “look-East” policy in order to learn from the Japanese experience of economic development.

Pattern of Investment Table 3.5 shows the dramatic increase experienced by Japanese FDI in Malaysian

electrical machinery industry since 1986 to 1990. Total investments in the manufacturing sector show a spectacular growth from 116 million ringgits (45 projects) in 1986 to more than 4 billion ringgits (134 projects) in 1990. During the same period, the share of electrical machinery on the total of the manufacturing sector increased from 1/3 to almost 1/2, as

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TABLE 3.5 JAPANESE DIRECT INVESTMENTS IN MALAYSIA : MANUFACTURING SECTOR AND ELECTRICAL MACHINERY INDUSTRY

Projects Approved - Thousand Ringgits - 1986-1990

1986 1987 1988 1989 1990

TOTAL MANUFACTURING SECTOR

Number of Projects 45 54 82 127 134

Called-up Capital 58,065 230,848 561,105 1,065,343 1,777,694

Total Investment 116,303 715,139 1,221,976 2,690,367 4,212,582

ELECTRICAL MACHINERY INDUSTRY

Number of Projects 15 24 31 43 51

Called-up Capital 16,569 116,982 362,535 468,106 897,139

Total Investment 31,093 393,291 669,878 1,146,867 1,864,298

Source: MIDA and JETRO, Kuala Lumpur

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investment flows were respectively 31 million ringgits (15 projects) in 1986 and 2 billion ringgits (51 projects) in 1990.

The sub-sectorial classification of the Japanese electronics industry’s production facilities in Malaysia (confronted to the total for ASEAN4 countries, Asia and the World) is shown in table 3.6. At the end of 1990, EIAJ registered a total of 94 Japanese companies operating in Malaysia, mainly concentrated in electronic parts (64) and consumer goods (30). Malaysia covered a relatively high share with respect to the total of the ASEAN4 and more in general of Asia. Considering the total of electronics industry, Malaysian share was in fact 20% of Japanese FDI towards Asia (449 projects) and 59% of that towards the ASEAN4 countries (160). The relative importance of Malaysia in ASEAN4 is higher in the case of electronic parts (64 projects - 65%) and lower for industrial goods (5 projects - 31%).

With regard to the size of the firms, Japanese investments can be divided into two groups which present remarkable differences : projects of MNEs and those of SMEs28. “Globalization” is the new strategy adopted by Japanese electronics MNEs in response to the increasing level of international competition and the markets’ evolution, after the second half of the 1980s. According to this strategy, their production and commercial operations - planned from a global perspective - have been re-organized into four areas : Japan, Asia, North America and Europe. As for Asia, the new production operations tend generally to be located in the ASEAN4 countries, while part of their head-quarters, R&D and commercial centres is gradually shifting from Tokyo to Singapore.

These changes have induced an intensification of the intra-firm and intra-industry trade in the Region for two main reasons. First, the reciprocal sourcing of parts among Asian Pacific countries has been dramatically intensified by the industrial transfer occurred from Japanese electronics firms. Second, export-oriented government policies. Take for example the investment incentive packages offered by Malaysian authorities : projects whose production is totally destined to export markets receive greater privilege. Consequently, locally established firms may be induced to export 100% of their output to other Asian Pacific countries and eventually to re-import from Singapore the share needed for internal consumption29.

The strategy to invest in Malaysia followed by the Japanese electronics SMEs is basically different. Their process of relocation started only during the late 1980s, as they were forced to follow the shift of the markets for their products from Japan to Asia, due to the massive transfer occurred from the MNEs. In fact, Japanese electronics SMEs are generally part suppliers, linked to the big companies through sub-contracting or OEM30 contracts which strictly limit their strategic decisions.

There are two main patterns they usually adopt to invest in Malaysia. The first one is when their market is restricted to only one company and they usually receive many pressures but also assistance to follow the previous transfer from the MNEs. The second one is when they sell their output to several producers and they are induced to go abroad due to the overseas relocation of their customers. In this case, in particular, they may not have any preferential relationship with one big company and can afford the investment decision more independently. In both cases the risk is high. SMEs usually lack of experience and of adequately prepared personnel. Moreover, they might be hampered by the eventual presence

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TABLE 3.6(A) PRODUCTION FACILITIES OF JAPANESE ELECTRONICS INDUSTRY IN MALAYSIA

Sectors Classification - Number of firms established until 1990

Malaysia ASEAN4 Tot.ASIA TOTAL

Televisions 8 20 33 79 VTRs and Telecameras 7 7 12 41 Radios (no Car radios) 4 6 13 27 Headphone systems 4 7 13 14 Radio Cassettes 4 8 22 40 Stereos 7 9 28 57 CD Players 3 3 17 30 HiFi Speaker Systems - - 1 11 Car Audio Systems 5 6 15 32 Other Telecommunications 5 6 23 37 Microwave ovens - 1 4 17 Electric Fans 2 12 15 18 Refrigerators 3 14 18 22 Washing Machines 2 9 12 13 Air Conditioners 4 12 19 23 Compressors 2 3 6 8 Others 8 28 54 80 CONSUMER GOODS 30 59 112 224

Telephones (incl. Cordless) 2 4 16 24 Car Telephones - - 1 13 Pocket Bells - 1 3 5 Facsimile - 1 3 13 Other Communic. Apparatus 1 3 8 17 Personal Computers - - 1 5 Computers (main frame) - - 3 11 Computers (memories ) 1 1 4 11 Computers (printers) - - 4 15 Other Calcul. Machines 1 3 13 30 Electronic Measurement Machinery - 3 12 21 Electronic Calculators - - 5 6 Copiers - - 1 17 Other Office Machinery - - 1 14 INDUSTRIAL GOODS 5 16 62 146

(continued)

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TABLE 3.6(B) PRODUCTION FACILITIES OF JAPANESE ELECTRONICS INDUSTRY IN MALAYSIA

Sectors Classification - Number of firms established until 1990

Malaysia ASEAN4 Tot.ASIA TOTAL

Resistors 7 10 31 38 Accumulators 5 10 50 70 Transformers 14 18 60 79 Sound Machinery 1 3 20 34 Magnetic Heads 4 6 22 24 Small Size Motors 8 11 31 37 Connectors 4 5 20 32 Switches 10 14 41 53 Small Mechanisms Parts 9 9 30 38 Complex Parts 10 14 45 66 Magnetic Record. Machinery - - 1 14 Other Components 11 21 43 63 Semiconductors 5 10 25 36 Integrated Circuits 5 7 21 36 Cathodic Ray Tubes - 1 5 11 Other Active Parts 3 5 14 30 ELECTRONIC PARTS 64 98 304 452

TOTAL ELECTRONICS INDUSTRY 94 160 449 770

Note: A single production facility may be involved in more than one category, so the total does not necessarily equal the sum of the items

Source: Adapted from EIAJ “ ’90 Kaigai Houjin Risuto”, 1991

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of domestic competitors. However, this last factor is ineffective in Malaysia, as local electronics firms are very few in number and size and can not afford to compete with the Japanese ones, especially in terms of the standards required by the MNEs.

The trade pattern followed by the SMEs usually varies according to the time length of their overseas presence. During the first years, almost 100% of parts are imported from Japan and 100% of sales are exported, principally to Japan. However, as time goes by and they get more accustomed to work overseas, they may eventually increase the share of parts locally sourced and of those provided by the other Asian Pacific countries31.

In conclusion, the process of industrial transfer occurring by Japanese electronics firms in Malaysia can be summarized according to size (MNEs, SMEs), sub-industry (consumer goods, industrial goods, electronic parts) and output market (Export, Internal) into the following five types :

Until 1985 : 1) MNEs - consumer goods - internal market 2) MNEs - electronic parts - export market

1986 - 1990 : 3) MNEs - consumer goods - export market 4) MNEs - industrial goods - export market 5) SMEs - electronic parts - export market

As previously observed, despite the growth of the internal Malaysian market, the concentration on export markets occurred after 1985 is due from the one hand to the privileges accorded to the export-oriented projects by the investment incentives packages and from the other hand to the initial export orientation to Japan of SMEs’ output. As these two conditions will change, the share of the internal market on the sales destination will tend to increase.

Finally, table 3.7 presents some indicators about procurements and sales of Japanese affiliates in Malaysia, obtained from a survey conducted in 1990 by JETRO Kuala Lumpur and the Embassy of Japan in Malaysia. According to these results, during the period 1987- 1989 the value of production for electrical and electronics (E&E) industry increased about 2.5 times in value (from 1,835 to 4,671 million ringgits) and from 51.5% to 55.8% as a share of the manufacturing sector. Such a trend underlines that the process of industrial transfer from Japan is concentrated in electronics. As previously discussed, the relocation of the MNEs’ production system offers increasing opportunities for local sourcing of parts, but due to the scarce presence of Malaysian firms and their low quality standards, Japanese SMEs are able to maintain a high position inside the network of the MNEs. In fact, data show that the share of local procurements supplied by Japanese affiliates is increasing. The number of Japanese subcontractors grew more than five times during the three years observed, from 78 in 1987 to 406 in 1989 and the share of local procurements supplied by Japanese firms increased from 18.8% to 23.8%32. Furthermore, imports from Japan increased more than two times during the three years observed (from 698 to 1,518 million ringgits). With regard to sales, the share of output destined to exports increased from 79.7% in 1987 to 83.1% in 1989 and consequently

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TABLE 3.7 INDICATORS OF JAPANESE AFFILIATES’ LOCAL PRODUCTION IN MALAYSIAN ELECTRICAL AND ELECTRONICS INDUSTRY (E&E)

Million Ringgits (1987-1989)

1987 1988 1989

ALL SECTORS Value of Production 3,562 5,637 8,365 Local Procurements 700 1,236 1,981

E&E INDUSTRY Value of Production 1,835 2,982 4,671 Domestic sales 373 518 788 Exports 1,462 2,464 3,883 Exports to Japan 239 490 592

“ to USA 41 142 271 “ to Singapore 222 417 540 Import from Japan 698 1,070 1,518 Import from Singapore 251 359 679 Local Procurements 546 901 1,519

Local Procurem/Production (all sectors) 19.6 21.9 23.7 Production E&E/Production (all sectors) 51.5 52.9 55.8 Local Procurements E&E/Production E&E 29.8 30.2 32.5 Domestic sales E&E/Production E&E 20.3 17.4 16.9 Exports E&E/Production E&E 79.7 82.6 83.1

% Composition of Local Procurements by nationality of suppliers TOTAL 100.0 100.0 100.0 Local 45.2 49.7 44.5 Japan 18.8 15.9 23.8 Usa + Europe 21.2 29.4 21.9 Other ASEAN 10.2 3.2 7.0 NIEs 4.6 1.8 2.8

Number of Subcontractors TOTAL 400 733 1.214 Local companies 299 433 675 Japanese Affiliates 78 163 406 USA + Europe 11 17 25 Other ASEAN 12 16 21 NIEs 10 108 93

Source: Adapted by the author on the basis of surveys by JETRO Kuala Lumpur and Embassy of Japan in Malaysia, March 1990

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that one destined to the internal market decreased from 20.3% to 16.9%. Once more, the pattern of industrial transfer discussed above is confirmed.

Pattern of Trade The composition of Japanese trade in electronics industry by area and sub-sectors, is

showed in table 3.8. Data are referred to 1990, when the trade balance surplus for Japan registered a huge amount of about 9 billion Yen. Electronic parts held the highest share of total exports (44.6%) and of total imports (60.5%), although exports (4,879,772 million Yen) were four times larger than imports (1,233,011 million Yen). The most important regional trade partner for Japan is North America (37.8% of exports and 57.1% of imports), followed by Asia and Europe. In particular, for industrial goods import-export flows are mainly towards North America, consumer goods are primarily exported to North America and imported from Asia, and electronic parts are mainly exported to Asia and imported from North America.

Japan-Malaysia trade figures are presented in table 3.9 and 3.10. The first one shows that after 1985 Malaysian total trade balance with Japan shifted from surplus to deficit (-6,895 million ringgits in 1990). This change is due to the faster increase registered during the 1980s by imports (+3.6%) with respect to exports (+1.9%). Trade in machinery (SITC7) greatly affects this performance, as in 1990 Japanese share of imports was 30% against a smaller 8% share of exports. Nevertheless, Malaysian exports of electrical machinery to Japan have been rapidly increasing during the last decade (15.2 times in value). Although electronics industry covers only a part of SITC7, the increasing and huge trade deficit that Malaysia is experiencing since 1980 with Japan in this sector reflects the massive inflow of FDI in plants and machinery for production activities, which at their initial phase require large amount of capitals. Typically Japanese companies import this machinery from Japan as they privilege long term relationships formerly established with the suppliers and the local machinery industry is not able to provide the required quality and technology standards. However, as these projects will enter into operation and the rate of growth of FDI will eventually slow down, trade balance for Malaysia in this sector should improve.

Table 3.10 shows the rapid increase of the two-way trade flows in electronics since 1975. During the last five years, Japanese imports are growing faster than exports : in 1985 exports were 7.3 times larger than imports, while in 1990 this value decreased to only 4.2 times. The sub-sector of electronic parts covers the largest share of Japanese total trade, although it is changing over time. In particular the export share is increasing (from 65.3% in 1985 to 82.4% in 1990) while the import share is decreasing (from 94.5% in 1985 to 74.9% in 1990). Accordingly, the trend for consumer goods is opposite. While in 1980 exports of consumer goods were ten times larger than imports, they were only 1.5 times larger in 1990.

4. THE ELECTRONICS INDUSTRY IN MALAYSIA 4.1 Historical Overview

The electronics industry in Malaysia started in the 1960s and since the beginning relied on investments and technology supplied by foreign companies. The government initially favoured the development of the infant industry by introducing a policy of “import-substitu-

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TABLE 3.8 JAPANESE TRADE OF ELECTRONICS INDUSTRY Sub-sectors, Regions - 1990 - Million yen

ASIA (%) EUROPE (%) N.AMERICA (%) TOTAL (%)

EXPORTS

Consumer goods 590278 5.4 930452 8.5 937971 8.6 2617798 23.9 Industrial goods 588563 5.4 1146678 10.5 1510968 13.8 3442747 31.5 Electronic parts 1824817 16.7 1163481 10.6 1697082 15.4 4879772 44.6 TOTAL 3003658 27.5 3240611 29.6 4140038 37.8 10940316 100.0

IMPORTS

Consumer goods 91615 4.5 9332 0.4 11968 0.6 130090 5.5 Industrial goods 113421 5.6 75407 3.7 479245 23.5 692421 34.0 Electronic parts 445236 21.8 101595 5.0 671917 33.0 1233011 60.5 TOTAL 650273 31.9 186334 9.1 1163129 57.1 2038522 100.0

Trade Balance

(Exp-Imp) 2353385 3054277 2976909 8901794

Source: Ministry of Finance of Japan, Trade Statistics

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TABLE 3.9 MALAYSIAN TRADE FIGURES : TOTAL TRADE AND TRADE WITH JAPAN - ALL SECTORS AND SITC-7 Million Ringgits

1965 1970 1975 1980 1985 1990

TOTAL TRADE EXPORTS 3,783 5,163 9,231 28,172 38,017 79,549 IMPORTS 3,356 4,288 8,530 23,451 30,438 79,120 TRADE BALANCE 427 875 701 4,631 7,579 429

TRADE OF SITC-7 EXPORTS 64 83 572 3,240 7,071 28,717 IMPORTS 728 1,196 2,722 9,099 13,271 39,876 TRADE BALANCE -664 -1,113 -2,150 -5,859 -6,200 -11,159

TRADE WITH JAPAN:

(Total) 1980 1985 1988 1990 90/80

EXPORTS 6,423 9,276 9,347 12,184 1.9 IMPORTS 5,365 7,006 10,153 19,079 3.6 TRADE BALANCE 1,085 2,270 -806 -6,895

(SITC-7) 1980 1985 1988 1990 90/80

EXPORTS 149 473 915 2,269 15.2 IMPORTS 3,149 4,379 6,406 12,825 4.1 TRADE BALANCE -3,045 -3,906 -5,491 -10,556


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TABLE 3.10 JAPANESE TRADE FIGURES : TRADE FLOW WITH MALAYSIA OF ELECTRONICS INDUSTRY

Million Yen - 1975-1990

1975 1980 1985 1989 1990

EXPORTS

Consumer Goods 3,263 12,763 19,374 6,476 12,518 Industrial Goods 2,792 7,183 15,236 13,799 22,928 Electronic Parts 6,850 31,867 65,183 121,525 166,556 TOTAL 12,095 51,813 99,793 141,800 202,002

IMPORTS

Consumer Goods - 1,272 266 3,703 7,453 Industrial Goods 180 531 492 1,378 4,682 Electronic Parts 2,861 7,982 12,979 19,971 36,195 TOTAL 3,041 9,785 13,737 25,052 48,330

Source: Electronics Industry Association of Japan

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tion”. Since the presence of local producers was lacking, American, European and Japanese firms were invited to invest in Malaysia in order to serve the internal market by replacing imports with local production. The first manufacturing projects regarded labor-intensive assembly operations destined to the internal market for simple consumer goods (like radios or black & white television sets) and electronic parts (dry cells, batteries, cables and lamps). The real take off of the industry occurred during the first half of the 1970s, when Malaysian authorities introduced a package of incentives in order to attract foreign capitals in export oriented projects. A new strategy of industrial development based on “export-expansion” was started. Microelectronics industry (semiconductors, integrated circuits, transistors) was accurately selected and Malaysia rapidly became one of the world’s top producers in this field.

Until the second half of the 1980s, the three sub-sectors of electronics industry performed rather differently. The pioneering investments of consumer electronics were generally from American or Japanese MNEs, also involved in the production of electrical appliances33. The main purpose of these projects was that of serving the internal needs, but the structure of the demand limited the opportunities for a fast development of this sub-sector : the level of the GNP per-capita was rather low and the size of the domestic market was small34.

Similarly, the production of industrial equipment goods started during the 1960s, followed the import-substitution strategy, and relied on foreign capitals. However, the economic environment of a country like Malaysia concentrated on the efforts to begin the process of industrialization did not offer the proper conditions for the internal production of industrial electronic goods to expand. Consequently, the scarce industrial demand accompanied by a lack of infrastructures and technological ability caused this sub-sector to remain much underdeveloped until recent years.

On the contrary, the sub-sector which since the beginning experienced a rapid growth (benefiting from the export oriented policy) is that of electronic parts and in particular that of microelectronics. Foreign presence is dominant and local firms are only scarcely present in the field of non-active components. The abundance of low-cost, docile labour force and the active promotion from the government attracted American firms first, followed by Japanese and European ones later. Since the establishment of the first assembly plant in Penang in the early 1970s, the production for the export of semiconductor has rapidly developed to become one of Malaysia’s major industries within the manufacturing sector and a significant contributor to the whole country’s economy, especially in terms of employment creation, GDP growth and foreign exchange earnings.

The industrial structure started to change after the second half of the 1980s, in the wake of the currencies revaluation and the induced inflow of FDI, especially from Japan and the NIEs. The new investment pattern was characterized by an increase of two types of projects : those destined to serve the domestic market35, and those from SMEs of Asian countries (especially Japan and Taiwan). The lacking of local electronics firms certainly facilitated the transfer of these production facilities from SMEs and in turn the dependency from foreign capitals and technology was reinforced. Malaysian authorities, have succeeded in providing good infrastructures and advantageous labor market conditions, but have in fact only recently started to give more attention to the local sourcing of parts and the development of

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linkages among the electronics sub-sectors. 4.2 Growth of Investments

One of the peculiarities of the Malaysian electronics industry is the high dependency on foreign investments. The share of autonomous local firms on the total number of companies is generally very small with a concentration in the production of simple parts and components. Foreign owned capitals control all the main projects and since 1986 especially those from Asian countries have rapidly increased in all the sub-sectors.

Table 4.1 shows the total of received application and approved investment projects in Malaysian manufacturing sector in 1990. These figures are referred to the projects submitted to MIDA (Malaysian Industrial Development Authority) in order to obtain the manufacturing licence and eventually the eligibility to the system of incentives. The real presence of local SMEs is however underestimated because no registration is required for projects involving less than 75 employees or 2.5 million ringgits36. In 1990, investments in the manufacturing sector were booming. In particular, the number of received applications (1,862) was more than twice that of approved projects (906), which amounted to more than 28 billion ringgits. The share of electronics on the total manufacturing sector was 23.5% of approved projects (213) and 19.3% of received applications (360). The figures clearly show three main characteristics of this industry. First, the great employment creation effect (around 50% of total employment is in electronics). Second, the relative small size of the projects (an average of 20 million ringgits against 30 million ringgits for the whole manufacturing sector) which, in turn, reflects the growth of projects from SMEs. Third, the dominant presence of foreign companies (198 approved projects and 332 received applications cover more than 90% of the total).

The dramatic increase of FDI inflow experienced since 1986 originated especially from Japan and Taiwan. Table 4.2 shows the inflow of manufacturing FDI by country of origin. The total number of projects increased 2.3 times from 1985 (304 cases) to 1990 (709 cases) and in particular those from Taiwan increased more than 10 times (from 25 in 1985 to 270 in 1990) and those from Japan increased more than 3 times (from 46 in 1985 to 134 in 1990). The relative share on the total amount shifted from 1985 to 1990 according to the following percentages : Japan from 25% to 28.5%, Taiwan from 4.5% to 37%, the other NIEs from 23.5% to 10% and USA from 11% to 3%. Hence, in 1990 Taiwan was the biggest foreign investor in Malaysian manufacturing sector. The largest part of Taiwanese FDI originated from SMEs and were concentrated in traditional sectors like textiles and food processing. Moreover, the growth of investments from Taiwan and the other Asian countries is supported by the tight connection of Malaysian businessmen to the network of overseas Chinese in Asia.

The growth of investments in electronics originated principally from Japan. This can be seen from table 4.3 which presents some figures related to the Japanese FDI share in Malaysian manufacturing sector and electrical and electronics (E&E) industry. In fact in 1990, more than half of FDI in E&E industry came from Japan37 and also E&E industry covered the largest share on the total of Japanese FDI38. Table 4.3 also shows that from 1985 to 1990, the share of E&E industry on the total amount of FDI increased from 8.5% to 26.6%

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TABLE 4.1 INVESTMENT PROJECTS IN MALAYSIAN MANUFACTURING SECTOR - 1990 Applications Received and Projects Approved Number of projects (N), Potential employment (E), Million Ringgits (R)

Applications Received

Projects Approved

(N) (E) (R) (N) (E) (R)

TOTAL 1,862 286,372 48,733 906 169,764 28,168

Propriety: Joint-Ventures 453 92,832 34,856 370 64,334 19,878 Wholly Foreign Owned 594 164,077 13,877 339 79,862 6,817

E&E Industry

TOTAL 360 139,861 7,335 213 65,369 4,212 Foreign Owned 332 6,818 198 3,773


TABLE 4.2 FOREIGN DIRECT INVESTMENTS IN MALAYSIAN MANUFACTURING SECTOR Countries of Origin - 1985, 1988, 1990 Number of Projects Approved and Thousand Ringgits

1985 1988 1990

Number Amount Number Amount Number Amount

TOTAL 304 324,869 470 2,010,475 709 6,227,979

Japan 46 81,748 82 561,105 134 1,777,694 Taiwan 25 14,647 111 384,333 270 2,353,396 Singapore 92 47,185 134 172,137 147 321,382 Hong Kong 18 18,415 50 129,515 43 136,138 S. Korea 9 10,410 11 23,310 25 164,237 USA 26 36,760 55 252,582 29 187,120 U.K. 17 10,700 19 94,806 13 315,420 France 3 2,675 4 131,750 3 6,450 W.Germany 12 2,570 10 25,575 11 57,945 Holland - - 4 2,515 5 15,975 Others nd 99,722 nd 232,848 nd 892,231

Note: The figures include also Joint-Ventures which account for more than 50% of ownership Source: MIDA & JETRO Kuala Lumpur

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TABLE 4.3 JAPANESE SHARE OF DIRECT INVESTMENT IN MALAYSIAN ELECTRONICS INDUSTRY

Number of Projects Approved and Thousand Ringgits (1985, 1988, 1990)

1985 1988 1990

Number Amount Number Amount Number Amount

TOTAL FDI in Manuf.Industry

304 324,869 470 2,010,475 709 6,227,979

Japanese FDI in Manuf.Industry

46 81,748 82 561,105 134 1,777,694

Total FDI in E&E Industry

44 27,516 84 596,534 198 1,654,823

Japanese FDI in E&E Industry

12 10,805 31 362,535 51 897,139

Shares (%)

Japanese FDI Total FDI

15.1 25.2 17.4 27.9 18.9 28.5

FDI E&E Ind Total FDI

14.5 8.5 17.9 29.7 27.9 26.6

Japan FDI E&E Total FDI

3.9 3.3 6.9 18.0 7.2 14.4

Japan FDI E&E Tot Japan FDI

26.1 13.2 37.8 64.6 38.1 50.0

Japan FDI E&E FDI E&E Ind

27.3 39.3 36.9 60.8 25.8 54.2

Source: Calculations from data published by MIDA & JETRO Kuala Lumpur

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and that during the same period, the number of Japanese FDI in Malaysian E&E industry increased more than 4 times (from 12 to 51 cases). 4.3 Trend of Production and Export

Malaysia is today among the world’s top producers of room air conditioners and semiconductors. Table 4.4 shows the evolution of physical production for some of the most important electronics items for Malaysia during the 1980s. Room air conditioners increased 5.3 times from 1982 to 1990, when around one million of pieces were produced. Among consumer electronics, the production of radio receivers grew 10.5 times and that of television sets 8.7 times : in 1990 Malaysia produced more than 2 million TV sets. The growth of industrial goods was limited, while that of microelectronics was continuously high. During the eight years observed, the production of integrated circuits increased 2.8 times, that of semiconductors 1.5 times and that of transistors 2.7 times.

Table 4.5 presents the export trend of Malaysian E&E industry. In 1970, E&E industry accounted for only 8.5% of total manufacturing exports. This share increased fastly : in 1975 it was more than 25%, in 1985 shifted to 52.1% and finally in 1990 reached 56.2%. Until 1985, export of electronic components was dominant, but since 1986 its relative share started to decrease, while export of consumer and industrial goods were increasing.

The performance of Malaysian electronics industry during the second half of the 1980s, is presented in table 4.6. Growth rates of employment, output and export are impressive as in the five years considered, the industry has developed at a very fast pace. In 1990, the industry employed 144,000 workers (about 12% of total manufacturing employment), showing a more than 2.5 times increase from 1986. In the same year, output was more than 20 billion ringgits, while it was only 6.5 billion ringgits in 1986 : the average annual growth was around 33%. A similar increase was also marked by electronics exports, which shifted from 7.1 billion ringgits in 1986 to more than 22 billion ringgits in 1990 (around 47% of total manufacturing exports).

The structural composition of production and export is similarly marked by a substantial change. The relative share of electronic parts is decreasing, while those of consumer and industrial goods are increasing. Moreover, the share of industrial goods is growing faster than that of consumer goods. In particular, in 1986 the electronic parts sub-sector contributed to 81.5% of the total output and to 81.7% of exports. In 1990, these shares decreased respectively to 57.6% and 52.9%. On the contrary, for industrial goods’ shares there was an increase from 6.2% to 19.2% in production and from 5.6% to 22.2% in export. Also consumer goods increased from 12.3% to 23.3% in production and from 12.7% to 24.9% in export shares.

To summarize, until 1985 Malaysian industrial structure for electronics was presenting the above mentioned main peculiarities. The presence of foreign MNEs was dominant and there was a clear dualism between the production of home appliances (for the internal market) and semiconductors (totally destined to be exported). Manufacture of industrial equipment goods was limited to a few items and domestic producers, only firms of medium and small dimension, were partially operating as part suppliers. The strategy followed by the government shifted from import-substitution to export-expansion and by means of advantageous investment packages was able to attract massive flows of foreign capitals. The

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TABLE 4.4 COMPOSITION OF MALAYSIAN ELECTRONICS INDUSTRY

Selected Products - Annual physical production

1982 1985 1988 1990 90/82 ELECTRICAL APPLIANCES (units)

Room air conditioners 184,013 148,253 273,082 981,245 5.3 Household refrigerators 192,615 148,424 197,134 212,018 1.1 CONSUMER ELECTRONICS (units)

Radio receivers 3,538 8,828 21,070 37,019 10.5 Television sets 249,000 568,387 1,221,336 2,168,817 8.7 INDUSTRIAL GOODS (tonnes)

Teleph.& Telegraph cables 25,360 22,370 4,667 10,757 0.4 Insulated wire-cables 21,098 13,765 16,936 33,623 1.6 ELECTRONICS PARTS (million units)

Integrated circuits 2,193 2,561 4,709 6,084 2.8 Semiconductors 1,663 1,468 2,182 2,656 1.5 Transistors 2,212 3,450 5,545 5,956 2.7

Source: Department of Statistics, Malaysia TABLE 4.5 MALAYSIAN GROSS EXPORTS OF ELECTRICAL AND ELECTRONICS INDUSTRY

Selected years (1970-1990) - Million Ringgits

1970 1975 1980 1985 1988 1990 Electronic Components 2,292 4,439 8,716 11,664 Electronic Appliances 227 458 1,234 2,425 Other Electrics 447 1,569 5,211 12,406 TOTAL ELECTRICAL AND ELECTRONICS 52 507 3,016 6,493 15,162 26,495

TOTAL MANUFACTURING SECTOR 614 2,020 6,319 12,471 26,850 47,151 (%) of E&E (8.5) (25.1) (47.7) (52.1) (56.5) (56.2)

Source: Bank Negara Malaysia

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TABLE 4.6 PERFORMANCE OF MALAYSIAN ELECTRONICS INDUSTRY Employment, Output, Exports (1986 - 1990)

1986 1987 1988 1989 1990

EMPLOYMENT

Thousand of workers (Annual growth %)

57 89 (56.1)

106 (19.1)

123 (16.0)

144 (17.1)

OUTPUT

Billion Ringgits (Annual growth %)

6.5 8.9 (36.9)

12.2 (37.1)

15.9 (30.3)

20.3 (27.7)

OUTPUT % COMPOSITION

Consumer Goods 12.3 15.7 18.0 22.6 23.2 Industrial Goods 6.2 7.9 10.7 13.2 19.2 Electronic Parts 81.5 76.4 71.3 64.2 57.6 EXPORT

Billion Ringgits (Annual growth %)

7.1 9.2 (29.6)

12.4 (34.8)

17.2 (38.7)

22.1 (28.5)

EXPORT % COMPOSITION

Consumer Goods 12.7 17.4 19.4 23.8 24.9 Industrial Goods 5.6 7.6 10.6 Electronic Parts 81.7 75.0 70.0 59.3 52.9

Source: MIDA, Kuala Lumpur

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domestic economy benefited from the process of production relocation especially in terms of employment creation, GDP growth and foreign exchange earnings. However, only modest linkage effects were created. Malaysian authorities did not request for any particular condition on local content or minimum shares for local ownership. As a consequence, the process of technology transfer was lagging behind and local firms did not easily succeed in entering the industry.

After 1985, the currencies adjustment caused a dramatic inflow of FDI especially from Japan and the NIEs. The situation has been starting to shift towards a more balanced pattern in terms of sub-sectors, as the upgrading of the industrial structure induced the internal market for industrial equipment goods to grow, and in turn the transfer of more technology intensive productions, like parts for computers and telecommunication apparatus. Furthermore, the growth of GNP per-capita and that of the domestic demand are inducing the transfer of new projects aiming to serve the internal market for consumption goods. The massive relocation process which started after the second half of the 1980s reinforced the heavy dependency from foreign capitals. Furthermore, the lack of local firms induced many projects of SMEs especially from Asian countries to be transferred together with those of the MNEs.

5. TRANSMISSION OF INDUSTRIAL DEVELOPMENT : WHICH PATTERN? 5.1 Some Theoretical Reconsiderations

From the analysis of the previous sections, we can now try to outline the process of industrial development transmission occurring in electronics from Japan to Malaysia. We will first discuss the suitableness of the PC and the CPC’s analytical frameworks and, in order to evaluate the likelihood of the explanation they offer, we will later attempt a comparison between the two theories. Finally, in paragraph 5.3 we will discuss some policy implications and the future prospects for electronics industry in Malaysian economic development process.

With regard to the suitableness of the two analytical frameworks a first difficulty concerns the proper level of disaggregation to be chosen. In fact, while data availability limits the quantitative appraisal to the sub-sectors of consumer goods, industrial equipment and electronic parts, for a more qualitative analysis which takes into adequate consideration the characteristics of the markets and the production function’s technology, we need to follow the sub-industry classification, as proposed in section 239. At first consideration, the PC hypothesis would better fit the case for microelectronics, where production was started by and continued to grow on the inflow of foreign capitals, destined to export markets. On the contrary, the pattern of industrial transfer occurred in electrical and electronic equipments (particularly in Home appliances) seems closer to the explanation offered by the CPC theory, since after an import-substitution phase, there has been a shift towards export-expansion.

These observations are, however, only partially correct. In fact, if we try to reconsider the matter from a more general point of view, it seems that neither the PC nor the CPC theory provide a satisfactory explanation to the real nature of the industrial development transmission pattern under analysis. The point is that “electronics in Malaysia” is the case of an innovative and technology intensive industry in a developing country. This possibility

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is not properly considered by the two hypothesis previously discussed40, because : a) the PC theory offers only the stand-point of the advanced countries in innovative industries and does not adequately consider its relevance for the process of industrialization of the developing countries towards which the transfer occurs (from the view-point of Malaysia) ; b) the CPC theory, although being founded on the Japanese experience as a developing country, focuses on traditional industries and does not provide a complete explanation for those where, due to the rapid speed of innovation, the product cycle is short and the high technological content entails the need of a technology transfer process through FDI from the more advanced country (from the view-point of electronics).

In other words, in order to fully understand the implications of the process of industrial development transmission from Japan to Malaysia in electronics, we need an explanation based on innovative industries and where the actors are the developing countries. Since the development of the local industry is largely dependent on the transfer of foreign technology, the case may be referred to as “Technology Catching-up Product Cycle” (TPC).

PC Advanced Country Innovative Industry Transmission of TPC Developing Country Industrial Innovative Industry Development CPC Developing Country Traditional Industry

Although a proper analytical framework in this sense is still not available, there are at least three main problems to put on the agenda for future research.

1) How much the technology and the speed of innovation affect the process of industrial development transmission? A highly technology-intensive industry like electronics, where the speed of innovation is typically very fast; requires huge investments in R&D as well as time for the process of skilled labor formation to take place. At first stages of the industrial transfer, in order to be competitive in international markets, the developing countries need to borrow the technology from the more advanced ones, aiming to eventually reach technological autonomy in a second phase. Without the knowledge, the network and the organization of the foreign MNEs, in fact, it will be quite difficult for local companies alone to allow the industry to take-off. The possibility of achieving effective technological autonomy in the future will be however influenced by the several different forms the process of technology transfer may assume. Furthermore, the conditions of the internal market will largely affect the pattern of development. During the initial stage, we can reasonably think that the structure of the demand for final and in particular for intermediate goods will be limited by the level of the GNP and by the overall development of the industrial structure. Therefore, if the products are competitive on international markets and are not destined to serve the internal demand, the industry can directly enter an export-expansion phase, with no need to pass through an

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import-substitution one41. 2) What is the role played by the industry in the process of economic development for the

country considered? Electronics is a main source of linkages and dynamic externalities which concur to the upgrading of the industrial structure. In section 2, we stressed the potential of the backward and forward linkages creation effect. We should now consider some other dynamic externalities as the development of electronics will bring about the diffusion and accumulation of engineering skills and mechanical knowledge, stimulate inventions and innovations, and finally create new demand. However, these effects will depend on the recipient countries’ capacity to absorb the technology that is transferred through foreign investments42. Direct growth effect on employment, output and export should be observed in combination with the various spillovers implied by the linkages on the whole economy.

3) To what extent will the form assumed by the process of technology absorption affect the late comers’ development? Since the developing countries need to borrow the technology from abroad, the way it is transferred has a large influence on their future possibility of reaching technological independence. Japanese experience was such that at the initial phase of the development process, foreign technology was borrowed by means of imports. Lately, thanks to the availability of local capital and human resources, a process of imitation, modification and improvement of the imported goods was started and technological autonomy was eventually reached. Nowadays, since the speed of innovation has become much faster, it is much more difficult for the developing countries to embark upon such a time requiring process of trials and errors, as Japan did. Furthermore, they need human resources as well as entrepreneurs able to absorb and transform into market potentials the technologies which are usually transferred through FDI. The problem, here, can be seen from two different points of view. First, the will of the advanced countries to effectively transfer the technology. Second, the real capacity of the developing countries to absorb it43. The form assumed by the process of technological absorption, which strictly depends on skilled labor’s availability, is crucial for reaching not only an autonomous development, but also a more general upgrading of the whole industrial structure. 5.2 Comparison between PC and CPC

In the previous paragraph we discussed the likelihood of the PC and CPC theories as good explanations of the relocation process occurring in electronics industry from Japan to Malaysia. Our conclusion was that, since the “actor” is a developing country and the industry is a highly innovative one, the case is not properly covered by any of the two approaches. Nonetheless, as our purpose is of better understanding the process occurring at the sub- industry level, we will anyhow propose a simple comparison between the two theories, but first let us briefly reconsider the peculiarities and the limits of PC and CPC.

The PC hypothesis presents the evolutionary trend of trade and investment’s flows towards developing countries, from the stand-point of foreign MNEs (following a cost- reduction strategy). In particular, it is referred to the case of innovative products exported to more advanced countries and, in terms of industrial policy, entails the process of produc-

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tion relocation to be accompanied by a strategy of export expansion. However, if one also intend to draw implications for the recipient country’s development process, the PC model is not able to clarify the industry’s role and its growth potential.

In contrast, when the process is conducted by the initiative of local entrepreneurs and the production is more standardized, the pattern of industrial development transmission may be referred to as one of the CPC-type. Since the strategy followed by the transferring firms is more market oriented, a preliminary phase of output concentration on internal demand (import-substitution) will precede that of export expansion. Accordingly, the main obstacles to the application of this approach are given by the relatively scarce presence of indigenous firms and the high technological content of production. In addition, we remember from section 1 that according to the PC theory the initial mechanism of the industrial relocation process is based on FDI flows, while the CPC theory stresses the role played by trade44. Of course, both hypothesis do consider the interactions between investment and trade, but the focus laid on the main agent is basically different.

Finally, we should decide a rule for assigning the process of electronics sub-industry development transmission occurring from Japan to Malaysia as closer to the interpretation offered by the PC or the CPC theory. In principle, both models provide incomplete explanations. The PC is not a proper theory of industrial development. Similarly, since every sub- industry was started on the inflow of foreign capitals and presents a serious lack of indigenous firms, the CPC is not supported by empiric confirmation.

In accordance with these limitations, we propose to adopt the explanation provided by the PC model when the production relocation activity was oriented towards exports since the beginning, without experiencing any previous phase of concentration on the internal market. On the contrary, we will intend the process of industrial development transmission as closer to the CPC explanation when it initially followed the strategy of import substitution (aiming to serve the needs of the domestic demand) and successively shifted to one of export expansion (in order to produce for the international markets).

The most suitable case of PC-type development is that of microelectronics sub-industry. Here, there is no presence of local firms and the main purpose of production relocation is the exploitation of the internal costs advantages in order to reach high levels of competitiveness in international markets (export orientation). Only recently, in response to the upgrading of the industrial structure and the increase of the local demand, some products have been destined to serve the domestic market45. Also the manufacture of telecommunication and computer products may be intended, for the same reasons, as closer to the PC explanation. Nonetheless, these sub-industries are underdeveloped and still at their infancy, especially in the case of more sophisticated goods.

On the other hand, the case for CPC industrial development may be illustrated by the sub-industries of electrical and electronics equipment, and that of electronic components. In particular, the first one has already experienced both stages of import-substitution and export-expansion, while the second one is still concentrated on the production for the internal market. As previously observed, however, the application of the CPC approach is in conflict with the still very few number of indigenous Malaysian firms. The main problem lies in the strong reliance on foreign companies for industrial development : in the case of electrical and

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electronics equipment it concerns the pervasive presence of Japanese MNEs, while in the case of electronic components it mainly regards the massive relocation process recently undertaken by SMEs. 5.3 Future Prospects for the Malaysian Electronics Industry To conclude, let us briefly discuss about electronics’ role in Malaysian industrial development process and some of the policy options which could be adopted by local authorities. We start by introducing three main issues, as they originated from our previous analysis :

1) Over-dependence on foreign companies From the comparison between the PC and CPC theories, we observed the existence of a

trade-off between “high technology intensity” and “scarce presence of local firms”. In turn, this is one of the main problems which Malaysian electronics has been facing : the need of increasing locally originated technology. To this regard, one position is that the dominating presence of foreign firms in will not cause any serious obstacle to the process of economic development. Malaysian population is still small, electronics is only one of the several manufacturing activities, and internal resources, it is said, could be more efficiently distributed to the development of other sectors where local entrepreneurs are traditionally stronger (like services or activities related to natural resources). This view, however, does not properly consider the relative importance of the industry46 itself and underestimates its relevance in terms of linkages for the upgrading of the overall industrial structure, as we discussed in section 2. In particular, electronics is able to generate a rapid growth of employment, foreign exchange earnings, GDP, being one of the main sources of innovations and spillovers which, in turn, benefit the whole economy. Consequently, the competitiveness of a large part of the manufacturing sector relies on technologies originated inside this industry, and the development of electronics should be considered as a necessary condition for industrialization.

Related to these previous observations it is the problem of foreign MNEs’ over-presence. May a country like Malaysia depend on foreign capitals and technology for ever, or is it necessary to enlarge the locally controlled share? At present, Malaysia is lacking of indigenous firms. Moreover, domestic entrepreneurs do not seem to be able of keeping pace with the rapid evolution of new product technologies, or undertaking activities for product design and development47.

The nature of electronics products is such that not only a deep knowledge on the hardware, but also a great ability in managing the software is required. In other words, once the machine is built, there is the need of a pool of expertises and technicians holding the know-how of the systems incorporating the technology and able to make a proper use of it. The government should therefore programme a long term industrial policy in order to improve technological skills and create a locally-controlled electronics industry of a certain importance.

For the moment, due to the presence of several entry-barriers48 there seems to be two possible ways for local firms to increase their participation in the electronics field and in particular in the sub-industries of electrical and electronics equipment and components : a) Subcontracting with foreign MNEs, which require little capital outlay and offers the possibil-

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ity to be transformed into OEM contracts in the future49 ; b) Joint-venturing especially with foreign SMEs, a practice which has already been followed to a certain extent in the production activities with Japanese and Taiwanese firms and gives the opportunity to upgrade domestic technologies.

2) Creation of linkages A second critical problem for Malaysian electronics industry concerns the need of

integration with different sectors and of diversification among its sub-industries. Integration is related to the appropriate development of the backward and forward linkages which are generated not only inside electronics but also with other service-related or manufacturing sectors50. In addition, the need of diversification is due to the over-dependency on microelectronics, with particular regard to employment and exports’ shares. Although, as we saw in section 4, the situation is gradually improving51, the problem still remains in terms of technology-intensity. In fact, foreign companies have relocated only some of the simplest assembly productions of the computer and telecommunication sub-industries, while the more technology-intensive ones have still not been transferred.

3) Technological development Other main problems affecting the pattern of Malaysian electronics development are

related to the process of technological development. We will shortly discuss three points : a) the need of improving the effectiveness of technology transfer occurring by means of FDI ; b) the need of stressing on educational activities and infrastructure ; c) the need of increasing public efforts in R&D investments.

With regard to the first point, we have already underlined that from the one hand, foreign MNEs are not required to follow any particular regulation (discouraging the pursuing of a local strategy); while from the other hand, the problem lies in the local absorption capability, which is related to a lack of indigenous entrepreneurs, firms and skilled labor. Consequently, the second point is referred to the need of creating new education facilities, which should be more oriented towards the technical fields52, in order to satisfy the increasing demand for specialized workers. Furthermore, the relocation of generally more sophisticated productions has implied the growth of a new demand not only for basic, but also for more specialized infrastructures, which need to be provided in a relatively short time53. Finally, the third point is related to the fact that the growth of a local, more autonomous, industry implies the increase of public investments in research and development activities. The technology transfer provided by foreign companies responds to business strategies and it is often not sufficient for a complete technological development of Malaysian firms.

Our discussion may finally converge to some policy implications. In particular, Malaysia could try to take advantage of the process of industrial development transmission occurring from Japan in electronics. This will create enormous potential for Malaysian entrepreneurs to venture into the industry, and they will succeed according to the degree the technology catching-up industrialization will be followed. Consequently, the strategies of industrial development for electronics in Malaysia can be divided according to the following time partition :

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1) Short-term strategy - continuing to provide incentive packages in order to attract investments which generate employment creation, foreign exchange earnings and GDP growth. The benefits accorded to foreign companies should especially aim to increase the local participation54 ;

2) Medium-term strategy - catching-up the technology with the NIEs and with Japan in the relatively lower sophistication products and less skill content. This implies in particular the creation of a pool of expertises and technicians able to absorb the technology and the development of locally managed companies.

3) Long-term strategy - stressing on the creation of backward and forward linkages. A more articulated industrial structure will indeed be indispensable for reaching an autonomous development. The need is to develop capacities for applying electronic systems in order to improve efficiency and productivity. The creation of higher technological standards through efforts in R&D activity will, in turn, induce to the acquisition of new comparative advantages and new development opportunities.

In conclusion, we saw in the previous sections that electronics products “made in Malaysia” are becoming more and more competitive on the international markets, as the speed of industrial development has been greatly accelerated by the relocation process occurring from Japan. Although this development relies on a foreign engine and long time is required to develop and master local technology, starting by specializing in the production of “high quality-low sophistication” electronic parts and components, could be for Malaysian entrepreneurs a first step in the right direction.

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NOTES 1. Asian NIEs = Hong Kong, Singapore, South Korea and Taiwan; “ASEAN4” = Thailand,

Malaysia, Indonesia and Philippines. 2. For the “PC” theory, see R. Vernon (1966) and for the “CPC” theory see I. Yamazawa

(1984) and (1990). Note that the “CPC” theory was initially introduced by N. Akamatsu under the name of “Gankou Keitai” (Flying-Wild-Geese) and published for the first time in English in 1961 (Akamatsu, 1961).

3. According to Yamazawa (1990), an important role is also played by FDI, which contribute to accelerate the process of “catching-up”.

4. International data are usually available with an average delay of five years. 5. “Product engineering” is an activity devoted to transform R&D into products for the

market, while “product development” aims to the increase of market shares by raising quality standards, introducing new varieties and creating new demand.

6. Paradoxically, from the interviews carried on in Malaysia to part supplying firms, has emerged that one of the reasons of the production relocation from Japan lays on low transport cost. For example, the cubic meter cost of a shipment by truck from Tokyo to Osaka results more expensive than an air shipment from Tokyo to Kuala Lumpur.

7. The direction of FDI is also typical of the catching-up sequence among the Asian countries. Japan is the traditional investor country (towards the NIEs and the ASEAN4), while ASEAN4 countries are the typical recipient countries (from Japan and the NIEs, although Malaysia and Thailand are recently investing in less developed countries like China, Cambodia or Vietnam). The intermediate place is covered by the NIEs, which are shifting from the position of net borrowers (from Japan) to that of net investors (especially Taiwan and South Korea towards the ASEAN4).

8. In particular, computer and telecommunication are the industries where the US technology is still more advanced than the Japanese one.

9. For example, skill formation in the Japanese production system relies on the “on-the- job-training” which is not as fast as the schools-teaching method of the “off-the-job-training”. For a specific analysis of technology transfer and the labor market conditions, see Koike and Takenori (1990).

10. Furthermore, local authorities may allow 100% foreign owned property or may choose to regulate the equity sharing, by requiring a certain minimum presence of domestic capital. Such a stricter policy may yield two opposite effects on the process of technology transfer. One is negative, due to the probably reduced inflow of FDI. Another one is positive, as foreign companies will be somehow forced to transfer their knowledge to local investors.

11. See for example the case of Malaysia in sections 3 and 4. 12. Some of the main differences regard the role of SMEs or the weight of “light” and

“heavy” industries. See for a clear study : Oshima H.T. “Economic growth in Monsoon Asia. A comparative survey” - Tokyo : The University of Tokyo Press, 1987

13. Consider, for example the effects on employment creation, foreign exchange earnings or GDP growth.

14. After 1985, also an increasing number of small and medium enterprises from Japan and the NIEs started to invest in the ASEAN4 countries, especially in Malaysia and Thailand.

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However, in contrast to the export-orientated nature of the investments originated by the multinationals, those of the SMEs were mainly domestic-oriented.

15. Like, for example the existence of a developed precision engineering industry. 16. To this regard, Malaysian government played a crucial role by actively promoting the

introduction of FDI and eventually allowing the country to become, by the mid 1970s, the leading off-shore assembly location for US and Japanese companies.

17. Japan, USA, Europe and East Asia are the four major areas of electronics production. 18. These figures are referred to the “electrical machinery” industry (ISIC 383). 19. Take for example, the production of VLSI (very large scale integrated) circuits. 20. In fact, imports of Japanese electronics increased from 1,035 billion Yen in 1985, to

2,038 billion Yen in 1990. 21. Out of 449 projects destined to Asia, 248 were located in the in the NIEs, 160 in the

ASEAN4, 31 in China and 10 in other Asian countries. 22. Note that the sum of each sub-sector exceeds the total number of cases due to

operation facilities classified in more than one sub-sector. 23. Note that Mainland China covers the largest share of the part which is referred to as

“other Asia”. 24. For electronic parts, a large share of investments was in the field of microelectronics,

while consumer goods covered mainly audio products and colour TV sets. 25. For example, with regard to Thailand and Indonesia at least until the end of the 1970s,

when more advanced productions were started to be transferred, the domestic market represented the main target for Japanese investments.

26. Like telephone machinery. 27. Almost three times as faster as in the second stage. 28. The following remarks are based on the results of an interview carried on by the

author in August 1991, to six Japanese electronics firms in Malaysia. Three of them were plants of MNEs : Toshiba (semiconductors), NEC (semiconductors) and Sony (floppy disk drives). The other three were projects of SMEs : Moritetsu (wires and parts for speakers), Hirose (connectors) and Kenseisha (chassis for floppy disk drives).

29. In fact, from the above-mentioned interview emerged that the three MNEs have a very similar, trade “oriented” structure. While their output is totally exported to the neighbour Asian Pacific countries, only 25% of the total need for parts is locally supplied, 25% is imported from Singapore and around 50% is supplied from Japan.

30. OEM = Official Equipment Manufacturing. 31. From the interview emerged that in all the three cases of SMEs, parts were totally

provided from Japan. However, the investment were very recent (1989) and they showed the intention to increase local sourcing in the future.

32. Note that these values refers to the whole manufacturing sector. 33. For example, the first huge Japanese investment in this sector was that of Matsushita

in 1967, devoted to the production of radios and black & white television sets. 34. Today, Malaysia has a population of about 18 million. 35. More in general, it is registered an increase of projects aimed to serve the internal

Asian market.

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36. According to MIDA, at the end 1990 the total number of approved companies in electronics was 420, distributed among the three sub-sectors as following : 81 in consumer goods, 85 in industrial goods and 254 in electronic parts (Cfr. Cheah, 1991).

37. In 1990, the share of Japan on the total amount of FDI in electrical and electronics industry (Japan FDI E&E / FDI E&EInd) was 54.2%.

38. In 1990, the share of electrical and electronics industry on the total amount of Japanese FDI was 50.5%.

39. See section 1. The proposed sub-industry classification is : 1) Electrical and Electronics equipment ; 2) Computer ; 3) Telecommunication ; 4) Microelectronics ; 5) Electronic components.

40. See section 1. 41. With regard to this point, we can learn from the different experience of industrial

policy of South Korea and Taiwan in contrast to that of India and Brazil. The Asian countries started with an EE strategy, which eventually allowed them to benefit from export earnings and than gradually reach technological autonomy. On the contrary, moved from a desire of independence, India and Brazil started with an IS strategy, aiming to first obtain technological autonomy and lately to gain from export earnings through EE. However, due to the fast speed of technological change, India and Brazil were afflicted by the problem of technical obsolescence which prevented them from achieving the levels of international competition and eventually reach the EE phase.

42. The concept of capacity for absorbing investment is referred not only to capital equipment and production plants, but also to human resources (availability of skilled labor) capable to absorb technologies from abroad.

43. From our interviews conducted in Malaysia, it emerged that at this stage, the problem of technological dependence from FDI lies more on the absorbing capability of local firms than on the transferring will of the foreign ones. In particular, this is due to a lack of entrepreneurs and skilled labor in electronics.

44. In particular, flows of imports from more advanced countries. 45. Remember from section 4 that, according to the system of investment incentives,

products are usually re-imported from Singapore to Malaysia. 46. Electronics holds a share of around 30% both of production and employment and more

than 50% of exports on the whole Malaysian manufacturing sector. 47. To this regard, it is our impression that the NEP (New Economic Policy, 1970-1990), by

discriminating non-Bumiputera entrepreneurs, may have created a certain “discouraging effect” on the flourishing of local SMEs. For further discussion see : a) FONG Chan Onn “Small and Medium Industries in Malaysia : Economic Efficiency and Entrepreneurship” The Developing Economies Vol.XXVIII N.2, June 1990 ; b) ONOZAWA Jun “Restructuring of Unemployment Patterns under the New Economic Policy” The Developing Economies - Vol. XXIX N.4 - pp.314-329, December 1991.

48. The main entry-barriers are : R&D investments, technology skills and know-how, quality standards, economies of scale, availability of skilled labor. See section 2.

49. This is a process already experienced by Taiwanese and South Korean firms. 50. See section 2. For instance : precision machinery, metal and plastic working industries

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(manufacturing sector) or computer and software-related services (service sector). 51. In fact, the two sub-sectors of consumer and industrial equipment goods are growing

faster than that of electronic parts. 52. Like, for instance, vocational schools. 53. The risk is the formation of bottlenecks, both in the availability of skilled labor and of

infrastructures. 54. Like for instance some rules on equity sharing or local sourcing.

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