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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