2012年1月1日星期日

Unit 3 - The Japanese production system within the Asia-Pacific region


Unit 3
The Japanese production system within the Asia-Pacific region

I.         Objectives
1.      Describe the magnitude and importance of Japanese FDI in the Asia-Pacific region
2.      Discuss the changing phases of Japanese outward FDI since the late 1960s and the various motives underlying each stage
3.      Identify the characteristics of Japanese investment in the region
4.      Analyze the impact if Japanese investment on host economies in the Asia-Pacific region and assess the welfare effects of a regional production system
5.      Describe the effects of the Asian financial crisis on the Japanese production system and the ways in which Japanese business have restructured operation in the light of the crisis
6.      Critically evaluate the ‘flying geese’ model of industrial development
7.      Draw lessons for other aspiring regional economic powers such as China
8.      understand the changing importance of ownership and control versus ;location in determining competitiveness
9.      Describe the likely transplantation of the Japanese management system within the Asia-Pacific region

II.      Introduction

III.   Historical FDI flows by Japanese firms in East Asia
1.        industrial restructuring model reflecting his conviction, FDI constituted a critical agent of industrial restructuring and acted as a ‘vital catalyst of industrial upgrading’
2.        Parent-nation government allowed for the controlled relinquishment of obsolete and undesirable industry through wide-ranging initiatives, thus facilitating the upgrading of Japan’s industrial structure
3.        4 key stages of  Japanese economy:
a.        Labour-intensive industrialization
b.        Heavy and chemical industrialization
c.         Assembly-based industrialization
d.        Strategic localization of global business

(A)        First wave: From 1969 to 1974 (Labor-intensive industrialization)
1.        Japanese government policy
a.      Emphasized labour-intensive industrialization as a means of creating local employment
b.      Industrial policy in the early post-war period was export promotion. The purposeful development of cost-competitive export industries, thereby bringing more favorable balance of payments

2.        Constrain capital outflows and effectively stifle FDI
a.      Use of Foreign Exchange and Foreign Trade Control Law enacted in 1949
b.      Government with a convenient mandate to authorize each overseas investment project individually with a view to curbing capital outflows
c.       Restricting provisions of law had become increasingly harder for Japanese government to justify (1967)
d.      Reconsider the perceived merits of the Foreign Exchange and Foreign Trade Control Law in 1967
e.       Become increasingly harder for the Japanese government to justify that took advantage of new investment opportunities

3.        Asian climate
a.      Japanese investors due to lingering animosities towards Japanese nationals
b.      Low-interest loans on terms below the prevailing market rate
c.       Japanese Ministry of International Trade and Industry (MITI) and other industrial policy
(1)         Played a pivotal role in early expansion of outward-looking firms
(2)         Opportunity to relocate their labour-intensive operations into neighboring Asian countries with an abundant supply of low-cost labour
(3)         Reformed by the Japanese government’s industrial policy that were no longer appropriate for Japan’s levels of technology and labour

(B)        Second wave: From 1978 to 1984 (Heavy and chemical industrialization)
1.        Aimed at securing access to supplies of raw materials
a.        Conductive to capital outflows and the offshore transplantation of labour-intensive industries
b.        Being a nation with limited resource endowments, japan wea forced to secure raw matrials offshore that facilitate the development of heavy and chemical industries
c.         Benefit from the extension of direct loans and other forms of foreign aid provided by their government

2.        The tendency for infrastructure construction projects
a.        Targeted by critics of Japan’s industrial policy
b.        Perceived motive behind the Japanese government’s interest in bilateral economic assistance was viewed with some suspicion
c.         Considers and dismisses the notion that the foreign aid scheme is not transparent and thical
d.        To secure long-team contracts, providing them with a stable supply of natural resources through national resource-seeking FDI

3.        Sales in local and third markets accounted for the biggest share of offshore production
a.        Incremental increase in reverse-exports from these offshore bases led to complete reconfiguration of Japan’s export and import structure
b.        Decrease in domestic production of consumer goods as offshore affiliate became increasingly sophisticated of production scope and capacity

4.        Changing trade patterns of the 1070s and 1980s
a.        labour-intensive and low-value exports
b.        textiles played a greatly diminished role in Japan’s export composition
c.         manufactured goods accounted for a sizable portion of both import and export compositions
d.        decrease in domestic production of consumer goods as offshore affiliates became increasingly sophisticated in terms of production scope and capacity

(C)        Third wave: From 1986 to 1990 (Assembly-based industrialization)
1.        The third phases of industrialization
a.        Less resource-based, higher value-added, and more assembly-based industries, notably automobiles and consumer electronic products
b.        Labour-intensive and resource-processing industries were relocated in developing Asian countries
c.         Changing macroeconomic factors threatened export opportunities and profitability, competitiveness against imports in the domestic market
d.        Maintain their cost competitiveness in world markets, forced to shift production offshore and turn to more sophisticated and differentiated goods in the domestic market

2.        Rising cost structure and loss of international competitiveness
a.        Greatly diminished export prospects on the others, was shift and decisive
b.        First wave of investment expansion, one of defining elements of the third wave was the salient FDI activity by Japanese SMEs
c.         Asian NIEs and China being net beneficiaries of this growth in FDI
3.        Earnest a network of manufacturing bases
a.        Building a foundation for what would become a lasting presence in Asia
b.        Japanese FDI moved from natural resource-seeking FDI to focused offshore production of increasingly sophisticated product lines
c.         Devote increased attention to these products in increasingly capable Asian manufacturing plants which to expand their global market share through cost minimization
d.        High degree of export orientation, more pronounced in the wake of the appreciating yen

4.        Asia was being utilized as an export-oriented manufacturing hub
a.        Not able to absorb local production, forcing Japanese subsidiaries to generate sales through export operations
b.        Reveals discernible linkages between Japanese parent companies and their Asian based subsidiaries
c.         Trend for Japanese companies to export to their subsidiaries overseas and add some degree of local content and then to export to third countries

5.        Intra-company export trade grew rapidly over the period 1980-86
a.        Noticeable jump in import trade form offshore subsidiaries to the parent firm in Japan
b.        More expensive and thus less the advanced countries, that rise of Asian countries as the man source of intra-firm imports shipped to Japanese parent firms
c.         Located their less competitive production operations offshore and began to supply the Japanese market through reverse-exports

(D)       Fourth wave: From 1991 to 1997 (Strategic localization of global operation)
1.        Final phase of Japan’s industrial upgrading
a.        Transition from a reactive strategy to a more strategic regrouping of the affiliates dispersed throughout the region
b.        Response to higher domestic cost structures to purue the capture the regional synergies of Asian-based operations

2.        Regrouping of the various offshore affiliates
a.        Sharp appreciation of the yen vis-a-vis the US dollar can be seen as a key determinant of Japanese business strategy
b.        Profit from exports at an exchange rate below 110 yen to the dollar
c.         Insights into the motivations of Japanese SMEs seeking new ventures overseas
d.        Falling profits and desire to search for new market access routes to free themselves form continuing dependence on large trading houses
e.         Many manufactures step up purchases of local parts to capitalize on cheaper materials and labour abroad
f.          Displaced by local production of Japanese-based multinational firm
g.        Displacing both final goods produced domestically for internal consumption and intermediate goods produced domestically

3.        Hollowing out argument
a.        Perceived transformation in Japan’s industrial structure resulting from robust growth in FDI
b.        Concentration of overseas production in the case of transport and electric machinery industries
c.         Japanese automobile manufacturers have been shifting the preponderance of their production out of Japan
d.        Mass production with high ratios of labour costs, and fields where there is relatively little demand for sophisticated technology and high quality

4.        Asia accounted for an increasing portion of Japanese FDI
a.        The region blossomed with the region accounting for an estimated 32% of Japan’s total overseas manufacturing investments in 1993, up from around 20% in 1990
b.        The Japanese firms were still received financial assistance from their government that change in the motivation of Japanese FDI in Asia
c.         The first, second and third waves of FDI expansion involved Japanese foreign investment aimed to capturing the low labour costs for use in labour-intensive industries
d.        The fourth wave of FDI expansion is characterized y Japanese firms increasingly focusing foreign investments on penetrating local markets

5.        The focus of Japan’s outbound FDI has changed considerably in 1990s
a.        The oversea investment reduce trade friction and to combat the impact of the strong yen on competitiveness
b.        Japanese subsidiaries located in Asia are starting to reinvest their loan and reserve capital on a large scale in the region, with setting up their own subsidiaries in neighbouring nations
c.         Farming out obsolete or low value-added manufacturing, target to Asian consumer markets

IV.    Characteristics of Japanese FDI
(A)    Ownership strategies
1.        Determination of ownership form constitutes one of the key decision that firm undertaking FDI faces
a.        Primary among these are the degree of control versus local knowledge and experience
b.        Contingent upon the appropriate selection of ownership mode, the usual business operation considerations

2.        Japanese firms generally prefer full to shared ownership of their ASEAN affiliates when:
a.        More experienced in international business
b.        Invest in culturally more distant countries
c.         Establish greenfield foreign affiliates
d.        More R&D intensive
e.         Establish their existing organizational and other related routines in culturally distant host countries. More likely to share ownership to obtain complementary resources
f.          Product-specific know-how or market-specific knowledge from their equity partners

3.        Equity capital by taking local partners
a.        Local financing dilutes the firm’s exposure to types of risks are associated with a host country’s balance of payments
b.        Currency inconvertibility and depreciation, associated with a possible deterioration of a host country’s balance of payments
c.         Japanese preference for joint ventures as an ownership mode
d.        The premium the Japanese place on good information lead them to link up with companies run by Overseas Chinese
e.         Business networks that extend into every major market in Southeast Asia

4.        The sharing of ownership
a.        Through a joint venture to result in a cordial and balanced operation between two partners
b.        Japanese companies exercised almost total control over the joint venture partners through their technological edge
c.         The parent firm in Japan or from subcontracting out the maintained of simple parts, the subsidiary under the parent firm’s umbrella
d.        Create inefficient operations in order to meet local domestic content requirements and it imposed by the local government
e.         Ensure domestic companies gained reasonable access to foreign technology and management expertise

5.        Japanese management systems (Transfer of technology and management procedures)
a.        Gained widespread acceptance in Thailand due to the dominance of Japanese firms in the economy since the 1960s
b.        Flexible and accommodating approach to terms imposed by host government
c.         Stance taken by Honda in circumventing a government-imposed ban on Japanese car imports in South Korea, market long closed to the Japanese automotive industry

(B)    Degree of subsidiary autonomy
1.        Operate independently of guidance and requirements
a.        Control over decisions relating to large-scale investments, management appointments and changes in technology or produce mixes
b.        Given seemed to be determined to some extent by the industry that the firm operated
c.         Automotive industry believed that their subsidiaries do not have the technical capabilities to diversity and the closer one gets to the sale of a finished vehicle
d.        Willing to tailor their products to local conditions but in practice do little in the way of process modification
e.         Japanese parent firm plays a key role in the design of plants and processes used by offshore manufacturing facilities
f.          Lower cost per unit of output and the greater assurance of high standards of quality that identified robust fund procurement activities undertaken by Japanese subsidiaries in Asian as a Positive new trend in the sense that such activity supplements investment
g.        Local procurement of funds provides a surrogate indication of degree of subsidiary autonomy

2.        JETRO note that Japanese subsidiaries
a.        Starting to reinvest their loan and reserve capital on a large scale in the region
b.        Entrenched in their host countries and strengthen their earning power, more able to raise investment funds locally
c.         Subsidiary autonomy is the extent to which the affiliate is permitted to operate independently of guidance and requirements of the parent company
d.        Example of Malaysian subsidiary of Sharp Corporation, that operate as a regional operational headquarters, providing design, development and procurement facilities

3.        The nature of the manufacturing practices within the subsidiary
a.        Little deeding, as most product design still originates from the parent company
b.        The majority of the sample firms were engaged in assembly, inspection and testing activities
c.         Tends to involve either customization or standardization, rather than total designing activities
d.        Willing to provide as Asian subsidiary with relative autonomy to manage Asian itself supervises regional operations

(C)    Agents of technology transfer
1.        5 aspects of technology transfer to developing nations by Japanese firms:
a.        Orderly transfer of technology
(1)   Embodied in and achieved through FDI, and began in those industries where providing and receiving countries or firms was smallest
(2)   Transfer of technology was easier and its effect spread more widely
b.        Mature and standardized technology
(1)   Largely know-how or modernization experience and skill associated with standardized production techniques
(2)   Required little technical modification
c.         Highly labour-intensive
Participation of the transferors at the production and management levels
d.        Capital ownership and management participation
(1)     Compensate for the bargain scale of knowledge by securing or monopolizing the supply of intermediate goods
(2)     Such as raw materials, parts and components
e.         Involvement of Japanese trading companies
Intermediated the shipping of required machinery, equipment, raw materials and semi-finished products

2.        The predominant theme underlying FDI packages is the reliance of Asian nations, on Japanese industry for technological know-how
a.        Technological dependency fitted Japanese interested
b.        Strong belief in consistent quality
c.         Requisite technology to the Korean conglomerates undertaking sub-contract work for Japanese companies on an OEM basis

3.        Joint ventures acted as a mechanism of labour-intensive technology transfer
a.        Involved in common pursuit of profits, were sharing responsibilities and solving technical and managerial problems as they arose
b.        South Korea had a high propensity to import their inputs rather than to use local sources and capital goods imports with their embodied technology
c.         Both Korean firms and Japanese affiliates were heavily reliant on the Japanese for licensed imports of technology

4.        Japanese firms hold the balance of power over joint venture partners
a.        Technological dominance achieved by supplying sophisticated parts for assembly
b.        Subcontracting out the manufacture of simple parts that technological dependency is not temporary but is semi-permanent
c.         Japanese-style technology transfer has been labour-intensive, allowing recipient firms to assimilate new techniques and production processes

V.       The impact of Japanese investment on the Asian NIEs and ASEAN nations
(A)    The East Asian region has accounted for a disproportionate share of Japanese FDI flows
1.        East Asian economies (liberalization led to capital inflows) can be characterized as a virtuous cycle of development
a.        Turn filtered through to investment and production activity stimulating economic growth and development
b.        Asian nations to undertake the necessary policy initiatives to attract FDI

2.        Japanese expansion in Asia is often described of ‘Flying geese’ (with 3 stages)
a.        One group of countries moves up the ladder of industrial development another group replaces it at the bottom
b.        Shifting competitiveness of an industry over time by focusing on the dynamic changes in factor endowments
c.         Promote the transformation of trade structures by transferring factors of production from the more advanced countries to the less developed ones

3.        The newly industrializing economies (NIEs)
a.        Hong Kong, Singapore, South Korea and Taiwan
b.        Loss of macroeconomic comparative advantage relative to the second-tier ASEAN nations
c.          Finds support in the international business literature

4.        The effect of these changes was a dilution of Japanese activity
a.        With respect to Japanese FDI in Asia, Japan was the second largest investing nation in both Thailand and Malaysia
b.        Dominant source of FDI flows into Indonesia
c.         China has also become the focus of increasing attention by Japanese firms
d.        Japanese companies ranked China as the most attractive location in which to set up a new plant

5.        The model (Flying geese) gives excessive credit to the role played by Japan in Asian economic development
a.        Failed to give due recognition to the ‘distinctive indigenous efforts’ of the Asian NIEs
b.        To accumulate technology and to export overseas

6.        Flying geese model should be distinguished from the product cycle theory
a.        Emphasizes ‘change over time in the production process, taking factor endowment in the countries involved as give’
b.        ‘Product cycle’ theory of development , in which industrial competitiveness in one country is eroded
c.         Leading firms to move to a country at a lower level of development
d.        Replaced by more sophisticated industries moving from a country higher on the ladder

7.        Japanese industries have farmed out labour-intensive or low value-added manufacturing operation
a.        The result has led to unexpected consequences for some East Asian nations
b.        Asian economies may not only have set themselves on a growth path to prosperity
c.         Irrevocably subsumed by Japanese enterprise operating in the region

(B)    Japanese investment and the regional production systems
1.        Capital outflows from Japan to neighboring Asian countries as Japanese industries responded to diminished competitiveness
a.        Yen had the effect of making foreign investment not only a more attractive option
b.        With low domestic interest rates prevailing in Japan

2.        Asian-based affiliates derive their high profitably from a lower overall corporate cost structures
a.        Japanese firms focus local investment
Maximizing returns by achieving greater economies of scale
b.        Japanese FDI has been concentrated in geographical locations according to industry type:
c.         Malaysia
Concentrated in electrical and electronics products, chemicals and chemical products, food manufacturing, textiles and textile products, wood products and basic metal products
d.        Indonesia
Concentrated in chemicals, paper and paper products, textiles and increasingly metal products
e.         Thailand
FDI relates to electrical and electronic products, chemicals, textiles and machinery and transport equipment

3.        Relocation of assembly-based manufacturing operation to neighboring Asian countries
a.        Specialization of products and production processes in electronics
b.        Precision instruments and automobile parts
c.         Increasing trade and intermediate products at production stages between Japan, the Asian NIEs and ASEAN countries
d.        Requiring specialized machines and technology-intensive processes

4.        Intra-firm and inter-firm trade linkages created bt FDI flows from Japan to other nations in the East Asian region
a.        Export of intermediate products to foreign-affiliated manufacturers accounted for more than one-quarter of total Japanese exports
b.        Intra-firm trade is organized mainly as a downstream process (Much larger upstream component)

5.        Japanese manufacturing firms in Asia has been to utilize the region
a.        Low-cost export base by establishing ‘regional core networks’ of complementary manufacturing facilities across the region
b.        Transplanted Japanese manufacturing assembly firms play an important role in Asia with the growth of export-oriented auto investments
c.         Keirtsu (Japanese) defined as institutionalized relationships among firms based on localized networks of dense transactions
d.        As a framework for exchange, the patterns of periodic collective action

6.        Dualistic industrial structure
a.        Small and medium-sized enterprises (SMEs) coexist alongside a limited number of large-scale firms
b.        Instrumental in producing the networks of cooperative subcontracting arrangements which require numerous subassemblies, parts components and accessories
c.         Advantages for SMEs involved in Keiretsu
(1)   Access to low-cost and long-team financial assistance, management and technical support and the likelihood of regular orders from the parent arm
(2)   Example, Toyota’s pyramidal organization
d.        Disadvantages for SMEs involved in Keiretsu
(1)   Core companies endeavor to maintain their current operation
(2)   Applying pressure to their suppliers to reduce costs

7.        The counter-argument to the Keiretsu-based integration
a.        Japanese manufacturing industries are considered in isolation
b.        Japanese firms have not achieved anything resembling a dominant position in the region

8.        Japan in the total investment received by East Asia has been declining since the end of 1980s
a.        East Asian subsidiaries are increasingly sourcing inputs from firms other than their suppliers
b.        Keiretsu relationships are becoming less relevant as a result of 3 factors:
(1)     Prolonged recession in Japan
(2)     The appreciation of the yen
(3)     Increased foreign competition as the trend towards globalization intensifies
c.         Japanese firms are effectively using industrial structure to subsume Asian companies under their wing as second-tier suppliers

VI.    The East Asian crisis and Japanese FDI in the region
(A)    The Asian currency crisis and the Japanese regional production system
1.        East Asian crisis was the rapid reversal of foreign capital inflows
a.        Asian countries sought to accumulate capital in order to maintain a high level of domestic economic growth
b.        In 1990s, endorsed the investment-oriented policies of East Asian nations
c.         Developing Asian nations grew threefold during the six-year period from 1990
d.        Multinational firms and commercial banking institutions played a large role in this increase in capital inflows

2.        Given the degree of severity of the East Asian crisis, for the most part, completely unanticipated
a.        Explained in terms of fundamental factors:
(1)     Trade spillovers and competitive devaluations
(2)     Common domestic and external shocks leading to co-movement of stock markets
(3)     Exchange rates and other asset prices, financial, investment and trade links between the countries transmitting real shocks from one country to the probability of capital and asset valuations of other countries
b.        Regional vulnerability to finical panic that arose from certain emerging weaknesses in these economies, combined with a series of policy mis-steps and accidents that triggered the panic
c.         IMF and the World Bank identify shortcomings in Asian finical institutions

(B)    The effects of the East Asian financial crisis on Japanese FDI
1.         East Asian crisis was swift and the unraveling of hitherto favorable business conditions rapid
a.         Slumping regional equity markets and plummeting Asian currencies vis-à-vis the US dollar

2.        Asian-based subsidiaries face 3 main problems:
a.         Receding East Asian markets
(1)          Represents a seismic shift from earlier investment waves
(2)          Japanese firms were intent on building a regional manufacturing hub
(3)          Exhibit varying degrees of internationalization and more export-oriented than others
b.        Depreciating Asian currencies
(1)          East Asian crisis amplified latent foreign exchange risks, which had either been overlooked or underestimated by Japanese
(2)         Recognize their respective intra-regional corporate structures by reducing the degree of dependency on Japan
(3)         Increasing local procurement of raw materials and parts
(4)         Overseas operating strategy was the outlook of the R&D and production functions
(5)         Japanese firms included the avoidance of exchange risks, along with cost factors and expansion of local markets
(6)         Badly Japanese firms are affected by exchange rate fluctuations:
(i)           The proportion of the venture’s output that is consumed in the host country, and the proportion of inputs that is procured locally
(ii)         The more a firm sources raw materials from offshore locations , and the more firm engages in export operations, the greater the vulnerability to foreign exchange risk
(iii)       Example, Sony
(7)         Firms were unable to reply on traditional Asian markets for export opportunities as local demand for fished products fell across the region
(8)         Japanese affiliates in the region through increased costs of imported raw materials and greater competition in Asian
(9)         Strong correlation with the yen-dollar rate since most Asian currencies are pegged to US dollar
(10)     Japanese Ministry of Finance indicates a fall in Japanese FDI in Asia prior to the onset of the Asian crisis

c.         Deteriorating macroeconomic fundamentals in Japan
(1)      Subject to a prolonged and sustained slump in economic activity in the wake of a collapse in the ‘bubble economy’ of the late 1980s
(2)     Inextricable trade and investment decoupling links between Asia and Japan
(3)     Japan and East Asia have fuelled the downward spiral in regional trade and investment
(4)     Japanese FDI in the region as the need for capital goods and technology is greatly diminished
(5)     Japanese banks have become increasingly cautions about expanding loans not only to the East Asian region
(6)     Japan bring about a liquidity crunch for firms in dire straits without capital
(7)     Raising fears of mass closures of Asian-based Japanese ventures that would inevitably bring about further shocks in the region
(8)     East Asian crisis undercapitalized Japanese banks with heavy exposure in the rest of Asia began to call in loans to revisable their balance sheets

(C)    The effects of the East Asian crisis on Japanese operations in the region
1.        Japanese firms to the East Asian crisis can be grouped:
a.        Proactive in the sense that the firm avoided some of the most catastrophic effects of the regional economic fallout
b.        Reactive in terms of downsizing, restructuring and retrenchment

2.        Japanese firms rendered themselves vulnerable to the economic shocks during the East Asian crisis
a.        Caught up in the furore over East Asia’s rapid growth
b.        Made strategic miscalculations with regard to foreign exchange policy
c.         The value of Asian currencies relative to the US dollar plummeted, thus engendering a climate of self-reinforcing panic

3.        Turning to the common crisis management strategies, retrenchment and restructuring feature prominently
a.        Japanese subsidiaries had little alternative other than to shelve expansion plans and curtail production
b.        Toyota for example
(1)     Reduced production by 15.8% in March 1998 as exports to Asia halved
(2)     Domestic sales fell almost 25%
(3)     Made adjustments to regional business operation
c.         Japanese automobile industry was several affected by the East Asian crisis
d.        Undertaking restructuring by curtailing production volumes and employment levels
e.         Some firms were able to respond more positively and proactively

4.        Japanese companies with a high exposure to the East Asian region
a.        Have undoubtedly been adversely affected in the wake of the regional economic crisis
b.        Speculate on the extent to which the crisis directly contributed to demise in Japanese FDI in the region
c.         The process of restructuring their business operations with a view to position themselves as viable and capable competitors when the aftershocks of the East Asian crisis recede


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