The Japanese production system within the AsiaPacific region

1
Unit 3

• The Japanese production system within the
  Asia-Pacific region

2
Objectives (I)

• Describe the magnitude and importance of Japanese
  FDI in the Asia-Pacific region
• Discuss the changing phases of Japanese outward
  FDI since the late 1960s and the various motives
  underlying each stages
• Identify the characteristics of Japanese
  investment in the region
• Analyze the impact of Japanese investment on host
  economies in the Asia-Pacific region and assess
  the welfare effects of a regional production
  system
• Describe the effects of the Asian financial
  crisis on the Japanese businesses have
  restructured operations in the light of the
  crisis

3
Objectives (II)

• Critically evaluate the flying geese model of
  industrial development
• Draw lessons for other aspiring regional economic
  powers such as China
• Understand the changing importance of ownership
  and control versus location in determining
  competitiveness
• Describe the likely transplantation of the
  Japanese management system within the
  Asia-Pacific region

4
Historical FDI flows by Japanese firms in East
Asia (I)

• Parent-nation government allowed for the
  controlled relinquishment of obsolete
• Undesirable industry through wide-ranging
  initiatives, thus facilitating the upgrading of
  Japans industrial structure
• 4 key stages of Japanese economy
• Labour-intensive industrialization
• Heavy and chemical industrialization
• Assembly-based industrialization
• Strategic localization of global business

5
Historical FDI flows by Japanese firms in East
Asia (II)
Industrial restructuring Japans experience
6
Historical FDI flows by Japanese firms in East
Asia (III)
Industrial restructuring Japans experience
7
Historical FDI flows by Japanese firms in East
Asia (IV)
Industrial restructuring Japans experience
8
First wave From 1969 to 1974 (Labour-intensive
industrialization) (I)

• Japanese government policy emphasized
  labour-intensive industrialization as a means of
  creating local employment
• Industrial policy in the early post-war period
  was export promotion
• Cost-competitive export industries
• Balance of payments
• Use of Foreign Exchange and Foreign Trade Control
  Law
• Mandate to authorize each overseas investment
  project individually with a view to curbing
  capital outflows (1949)
• Restricting provisions of law had become
  increasingly harder for Japanese government to
  justify (1967)

9
First wave From 1969 to 1974 (Labour-intensive
industrialization) (II)

• Asian climate for Japanese investors due to
  lingering animosities towards Japanese nationals
• Low-interest loans on terms below the prevailing
  market rate
• Japanese Ministry of International Trade and
  Industry (MITI) and other industrial policy
• Played a pivotal role in early expansion of
  outward-looking firms
• Opportunity to relocate their labour-intensive
  operations into neighboring Asian countries with
  an abundant supply of low-cost labour

10
Second wave From 1978 to 1984 (Heavy and
chemical industrialization) (I)

• Aimed at securing access to supplies of raw
  materials
• Conductive to capital outflows and the offshore
  transplantation of labour-intensive industries
• Benefit from the extension of direct loans and
  other forms of foreign aid provided by their
  government
• The tendency for infrastructure construction
  projects targeted by critics of Japans
  industrial policy

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Second wave From 1978 to 1984 (Heavy and
chemical industrialization) (II)

• To secure long-team contracts, providing them
  with a stable supply of natural resources through
  national resource-seeking FDI
• Sales in local and third markets accounted for
  the biggest share of offshore production
• Incremental increase in reverse-exports
• Complete reconfiguration of Japans export and
  import structure
• Decrease in domestic production of consumer goods
  as offshore affiliate became increasingly
  sophisticated of production scope and capacity

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Third wave From 1986 to 1990 (Assembly-based
industrialization) (I)

• Less resource-based, higher value-added, and more
  assembly-based industries, notably automobiles
  and consumer electronic products
• Maintain their cost competitiveness in world
  markets
• Turn to more sophisticated and differentiated
  goods in the domestic market
• Rising cost structure and loss of international
  competitiveness

13
Third wave From 1986 to 1990 (Assembly-based
industrialization) (II)

• Asian NIEs and China being net beneficiaries of
  this growth in FDI
• Devote increased attention to these products in
  increasingly capable Asian manufacturing plants
• Expand their global market share through cost
  minimization
• Not able to absorb local production, forcing
  Japanese subsidiaries to generate sales through
  export operations
• Reveals discernible linkages between Japanese
  parent companies and their Asian based
  subsidiaries
• Intra-company export trade grew rapidly over the
  period 1980-86

14
Fourth wave From 1991 to 1997 (Strategic
localization of global operations) (I)

• Transition from a reactive strategy to a more
  strategic regrouping of the affiliates dispersed
  throughout the region
• Sharp appreciation of the yen vis-a-vis the US
  dollar can be seen as a key determinant of
  Japanese business strategy
• Profit from exports at an exchange rate below 110
  yen to the dollar
• Many manufactures step up purchases of local
  parts to capitalize on cheaper materials and
  labour abroad

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Fourth wave From 1991 to 1997 (Strategic
localization of global operations) (II)

• Displaced by local production of Japanese-based
  multinational firm
• Displacing both final goods produced domestically
  for internal consumption and intermediate goods
  produced domestically
• Perceived transformation in Japans industrial
  structure resulting from robust growth in FDI
• Concentration of overseas production in the case
  of transport and electric machinery industries
• 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

16
Fourth wave From 1991 to 1997 (Strategic
localization of global operations) (III)

• The fourth wave of FDI expansion is characterized
  y Japanese firms increasingly focusing foreign
  investments on penetrating local markets
• The oversea investment reduce trade friction and
  to combat the impact of the strong yen on
  competitiveness
• Farming out obsolete or low value-added
  manufacturing, target to Asian consumer markets

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Characteristics of Japanese FDI (I)

• Ownership strategies
• Determination of ownership form constitutes one
  of the key decision that firm undertaking FDI
  faces
• Japanese firms generally prefer full to shared
  ownership of their ASEAN affiliates when
• More experienced in international business
• Invest in culturally more distant countries
• Establish greenfield foreign affiliates
• More RD intensive
• More likely to share ownership to obtain
  complementary resources
• Product-specific know-how or market-specific
  knowledge from their equity partners

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Characteristics of Japanese FDI (II)

• Local financing dilutes the firms exposure to
  types of risks are associated with a host
  countrys balance of payments
• Currency inconvertibility and depreciation
• Japanese preference for joint ventures as an
  ownership mode
• The premium the Japanese place on good
  information lead them to link up with companies
  run by Overseas Chinese
• Japanese companies exercised almost total control
  over the joint venture partners through their
  technological edge

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Characteristics of Japanese FDI (III)

• Create inefficient operations in order to meet
  local domestic content requirements and it
  imposed by the local government
• Japanese management systems have gained
  widespread acceptance in Thailand due to the
  dominance of Japanese firms in the economy since
  the 1960s
• Flexible and accommodating approach to terms
  imposed by host government
• Honda
• Government-imposed ban on Japanese car imports in
  South Korea
• Japanese automotive industry

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Degree of subsidiary autonomy (I)

• Control over decisions relating to large-scale
  investments, management appointments and changes
  in technology or produce mixes
• Willing to tailor their products to local
  conditions but in practice do little in the way
  of process modification
• Japanese parent firm plays a key role in the
  design of plants and processes used by offshore
  manufacturing facilities
• Lower cost per unit of output and the greater
  assurance of high standards of quality
• Positive new trend in the sense that such
  activity supplements investment
• Local procurement of funds provides a surrogate
  indication of degree of subsidiary autonomy

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Degree of subsidiary autonomy (II)

• Reinvest their loan and reserve capital on a
  large scale in the region
• Subsidiary autonomy is the extent to which the
  affiliate is permitted to operate independently
  of guidance and requirements of the parent
  company
• Example of Malaysian subsidiary of Sharp
  Corporation
• Operate as a regional operational headquarters,
  providing design, development and procurement
  facilities
• Japanese parent companies manage Asian itself
  supervises regional operations

22
Agents of technology transfer (I)

• 5 aspects of technology transfer to developing
  nations by Japanese firms
• Orderly transfer of technology
• Embodied in and achieved through FDI
• Transfer of technology was easier and its effect
  spread more widely
• Mature and standardized technology
• Required little technical modification
• Largely know-how or modernization experience and
  skill
• Highly labour-intensive
• Participation of the transferors at the
  production and management levels

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Agents of technology transfer (II)

• Capital ownership and management participation
• Compensate for the bargain scale of knowledge by
  securing or monopolizing the supply of
  intermediate goods
• Involvement of Japanese trading companies
• Intermediated the shipping of required machinery,
  equipment, raw materials and semi-finished
  products
• Requisite technology to the Korean conglomerates
  undertaking sub-contract work for Japanese
  companies on an OEM basis

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Agents of technology transfer (III)

• Involved in common pursuit of profits, were
  sharing responsibilities and solving technical
  and managerial problems as they arose
• Both Korean firms and Japanese affiliates were
  heavily reliant on the Japanese for licensed
  imports of technology
• Japanese firms hold the balanced of power over
  joint venture partners
• Through technological dominance achieved by
  supplying sophisticated parts or subcontracting
  out of simple parts
• Japanese-style technology transfer has been
  labour-intensive, allowing recipient firms to
  assimilate new techniques and production
  processes

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The impact of Japanese investment on the Asian
NIEs and ASEAN nations (I)

• East Asian economies (liberalization led to
  capital inflows) can be characterized as a
  virtuous cycle of development
• Japanese expansion in Asia is often described of
  Flying geese (with 3 stages)
• One group of countries moves up the ladder of
  industrial development another group replaces it
  at the bottom
• Shifting competitiveness of an industry over time
  by focusing on the dynamic changes in factor
  endowments
• Promote the transformation of trade structures by
  transferring factors of production from the more
  advanced countries to the less developed ones
• Finds support in the international business
  literature

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The impact of Japanese investment on the Asian
NIEs and ASEAN nations (II)

• The newly industrializing economies (NIEs)
• Hong Kong, Singapore, South Korea and Taiwan
• Loss of macroeconomic comparative advantage
  relative to the second-tier ASEAN nations
• China has also become the focus of increasing
  attention by Japanese firms
• The model (Flying geese) gives excessive credit
  to the role played by Japan in Asian economic
  development
• Failed to give due recognition to the
  distinctive indigenous efforts of the Asian
  NIEs
• Technology and export overseas

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The impact of Japanese investment on the Asian
NIEs and ASEAN nations (III)

• Flying geese model should be distinguished from
  the product cycle theory
• Emphasizes change over time in the production
  process, taking factor endowment in the countries
  involved as give
• Leading firms to move to a country at a lower
  level of development
• Replaced by more sophisticated industries moving
  from a country higher on the ladder

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Japanese investment and the regional production
systems (I)

• Capital outflows from Japan to neighboring Asian
  countries as Japanese industries responded to
  diminished competitiveness
• Yen had the effect of making foreign investment
  not only a more attractive option
• With low domestic interest rates prevailing in
  Japan
• Asian-based affiliates derive their high
  profitably from a lower overall corporate cost
  structures
• Japanese firms focus local investment
• Maximizing returns by achieving greater economies
  of scale

29
Japanese investment and the regional production
systems (II)

• Japanese FDI has been concentrated in
  geographical locations according to industry
  type
• Malaysia
• Concentrated in electrical and electronics
  products, chemicals and chemical products, food
  manufacturing, textiles and textile products,
  wood products and basic metal products
• Indonesia
• Concentrated in chemicals, paper and paper
  products, textiles and increasingly metal
  products
• Thailand
• FDI relates to electrical and electronic
  products, chemicals, textiles and machinery and
  transport equipment

30
Japanese investment and the regional production
systems (III)

• Increasing trade and intermediate products at
  production stages between Japan, the Asian NIEs
  and ASEAN countries
• Requiring specialized machines and
  technology-intensive processes
• Intra-firm and inter-firm trade linkages created
  bt FDI flows from Japan to other nations in the
  East Asian region
• Export of intermediate products to
  foreign-affiliated manufacturers accounted for
  more than one-quarter of total Japanese exports
• Intra-firm trade is organized mainly as a
  downstream process (Much larger upstream
  component)

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Japanese investment and the regional production
systems (IV)

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

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Japanese investment and the regional production
systems (V)

• Dualistic industrial structure
• Small and medium-sized enterprises (SMEs) coexist
  alongside a limited number of large-scale firms
• As Keiretsu
• Access to low-cost and long-team financial
  assistance, management and technical support and
  the likelihood of regular orders from the parent
  arm
• Example, Toyotas pyramidal organization
• Disadvantages
• Core companies endeavor to maintain their current
  operation
• Applying pressure to their suppliers to reduce
  costs
• Japanese firms have not achieved anything
  resembling a dominant position in the region

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Japanese investment and the regional production
systems (VI)

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

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The east Asian crisis and Japanese FDI in the
region-The Asian currency crisis and the Japanese
regional production system (I)

• Asian countries sought to accumulate capital in
  order to maintain a high level of domestic
  economic growth
• Multinational firms and commercial banking
  institutions played a large role in this increase
  in capital inflows
• Given the degree of severity of the East Asian
  crisis, for the most part, completely
  unanticipated
• Regional vulnerability to finical panic that
  arose from certain emerging weaknesses in these
  economies
• IMF and the World Bank identify shortcomings in
  Asian finical institutions

35
The east Asian crisis and Japanese FDI in the
region-The effects of the East Asian financial
crisis on Japanese FDI (I)

• East Asian crisis was swift and the unraveling of
  hitherto favorable business conditions rapid
• Slumping regional equity markets and plummeting
  Asian currencies vis-a-vis the US dollar
• Asian-based subsidiaries face 3 main problems
• Receding East Asian markets
• Represents a seismic shift from earlier
  investment waves
• Japanese firms were intent on building a regional
  manufacturing hub
• Exhibit varying degrees of internationalization
  and more export-oriented than others
• Depreciating Asian currencies
• East Asian crisis amplified latent foreign
  exchange risks, which had either been overlooked
  or underestimated by Japanese

36
The east Asian crisis and Japanese FDI in the
region-The effects of the East Asian financial
crisis on Japanese FDI (II)

• Overseas operating strategy was the outlook of
  the RD and production functions
• Japanese firms included the avoidance of exchange
  risks, along with cost factors and expansion of
  local markets
• Badly Japanese firms are affected by exchange
  rate fluctuations
• The proportion of the ventures output that is
  consumed in the host country, and the proportion
  of inputs that is procured locally
• 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
• Example, Sony
• Firms were unable to reply on traditional Asian
  markets for export opportunities as local demand
  for fished products

37
The east Asian crisis and Japanese FDI in the
region-The effects of the East Asian financial
crisis on Japanese FDI (III)

• Japanese affiliates in the region through
  increased costs of imported raw materials and
  greater competition in Asian
• Strong correlation with the yen-dollar rate since
  most Asian currencies are pegged to US dollar
• Japanese Ministry of Finance indicates a fall in
  Japanese FDI in Asia prior to the onset of the
  Asian crisis
• Deteriorating macroeconomic fundamentals in Japan
• Subject to a prolonged and sustained slump in
  economic activity in the wake of a collapse in
  the bubble economy of the late 980s
• Inextricable trade and investment decoupling
  links between Asia and Japan
• Japan and East Asia have fuelled the downward
  spiral in regional trade and investment
• Japan bring about a liquidity crunch for firms in
  dire straits without capital

38
The east Asian crisis and Japanese FDI in the
region-The effects of the East Asian financial
crisis on Japanese FDI (II)

• Overseas operating strategy was the outlook of
  the RD and production functions
• Japanese firms included the avoidance of exchange
  risks, along with cost factors and expansion of
  local markets
• Badly Japanese firms are affected by exchange
  rate fluctuations
• The proportion of the ventures output that is
  consumed in the host country, and the proportion
  of inputs that is procured locally
• 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
• Example, Sony
• Firms were unable to reply on traditional Asian
  markets for export opportunities as local demand
  for fished products

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Unit 3

• The End