Financial Review: East Asia’s Production and Economic (November 2018 No.135)

Production Networks and Unbundling
―Review of a Conceptual Framework, and Theories, Empirical Research and Policy―

By Fukunari Kimura	(Professor, Faculty of Economics, Keio University)

(Abstract)

This paper outlines changes in the international division of work in East Asia from three viewpoints -theory, empirical research and policy-based on the concept of unbundling presented by Baldwin (2016). Over the past three decades, East Asia has led the world in the development of international production networks centering on the machinery industry, namely the 'second unbundling.' There is much room left for expanding and deepening those networks. On the other hand, as the digital economy wave has reached East Asia, the region needs to make active use of new information and communication technology (ICT) and to incorporate a new form of international division, namely the third unbundling, into development strategy. This paper outlines a conceptual framework intended to facilitate understanding of the second and third unbundling in particular and presents theories concerning what empirical challenges remain, how the digital economy should be incorporated into development strategy, and what kind of policy system is necessary for each type of unbundling.

Keywords: international division of work, connectivity, digital economy, information and communication technology (ICT), development strategy
JEL Classification: F10, F20, O20

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Expansion and Deepening of Production Networks

By Ayako Obashi	(Assistant Professor, School of International Politics, Economics and Communication, Aoyama Gakuin University)

(Abstract)

This paper examines the actual state of the expansion and deepening of international production networks in East Asia through the use of trade statistics. In East Asia, trade in parts within the international production networks of the machinery and other industries has been expanding over the past several decades. In recent years, such trade in parts has continued to steadily grow despite the sluggishness of overall global trade. At least, trade in parts through East Asia's production networks has not ceased to expand. The robustness of trade in parts within East Asia's production networks is supported mainly by an increase in the value of trade based on trade relationships already established. On the other hand, for ASEAN countries, there is room for developing trade relationships concerning a more diverse range of parts with a greater variety of trade partner countries by expanding and deepening their involvement in East Asia's production networks.

Keywords: East Asia's production networks, trade by production stage, extensive and intensive margins of trade, diversification of export items and export destination countries
JEL Classification; F14, F23

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Production Networks and Less Developed ASEAN Countries' Export Growth

By Misa Okabe	(Associate Professor, Faculty of Economics, Wakayama University)

(Abstract)

For developing countries, it is an important challenge to maximize profits and minimize risks through participation in global value chains (GVCs). This paper focused on the impact of participation in GVCs through trade in intermediate goods on developing countries' export growth. In particular, it examined the impact of GVC participation on the number, scale and distribution of exporting firms in Cambodia and Laos, based on exporting firms' dynamics data and international input-output tables that were aggregated by type of export goods of those two countries. As a result of the analysis, it was found that in Cambodia and Laos, the degree of participation in GVCs affects individual exporting firms' behavior and leads to changes in in the number, scale and distribution of exporting firms, thereby affecting the countries' export growth. The analysis results indicate that if developing countries are to increase the number and scale of exporting firms and to achieve export growth by promoting the growth of exporting firms with high productivity through efficient resource allocation, they need to implement trade and industrial policies while taking into consideration the impact of participation in GVCs on exporting firms' behavior.

Keywords: less developed ASEAN countries, distribution of exporting firms, GVC participation index, international input-output table
JEL Classification: F14, F61, F63, O53

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Production Networks and the 'Great Convergence'

By Tadashi Ito	(Professor, Faculty of International Social Sciences, Gakushuin University)

(Abstract)

This paper first showed that the international division of production processes that is emblematic of economic globalization has created a gap between the value of production and the value of domestic value added. Thereafter, the paper analyzed a matter of greatest interest, namely how the domestic value added ratio is related to the total value of production, the total number of employees, per-capita value of production, and per-capita labor remuneration, based on international input-output tables. The analyses show that a decline in the domestic value added ratio leads to increases in the total value of production, the total number of employees, and per-capita value of production. The analyses also obtained empirical results that support, to some degree, the theoretical basis of thenarrowing gap between developed and developing countries in terms of per-capita labor remuneration, which is one element of the 'Great Convergence,' an idea theoretically expounded by Baldwin (2016).

Keywords: globalization, international division of production processes, value added, international input-output table
JEL Classification: F14

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Production Networks and Technology Transfer
―Empirical Analysis Based on Survey Data for Companies in Southeast Asia―

By Yasushi Ueki	(Senior Research Fellow, Institute of Developing Economies)

(Abstract)

Southeast Asian countries are active in infrastructure development and introduction of preferential tax measures for trade and investment. Such policy measures have been implemented in anticipation of the development of new industries and industrial sophistication and the growth of local companies through the introduction of foreign technologies. Consequently, Southeast Asian countries have achieved high economic growth, although the development of local companies has not necessarily been sufficient. There is a gap between the macroeconomic and microeconomic situations in terms of policy achievement presumably because technologies transferred through trade and investment go mainly to multinational companies' South Asian subsidiaries, rather than to local companies. If local companies cannot be expected to improve their capabilities for lack of learning ability, multinational companies will not make efforts to transfer technologies to them. In consideration of this problem, this paper first analyzed correlation between inter-company technology transfer and innovation. As a result, it was confirmed that technical assistances bring beneficial effects mainly to process innovation, while developing cooperative inter-company relationships is essential for promoting product innovation. Next, the paper analyzed correlation between continuous improvement (i.e., Kaizen) activities and technology transfer and made clear the effectiveness of continuous improvement activities in the development of companies' basic learning ability and cooperation ability.

Keywords: technology transfer, continuous improvement activity, Kaizen, innovation, ASEAN
JEL Classification: M11, O15, O33, O53

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Production Networks and Utilization of FTAs by Japanese Companies' Local Subsidiaries

By Kazunobu Hayakawa	(Researcher, Research Planning Department, Institute of Developing Economies)

(Abstract)

This paper examines the impact of the utilization of free trade agreements on international production networks. In order to utilize an FTA, it is necessary to comply with the rules of origin. To that end, companies need to limit, to some degree, procurement sources to suppliers located in the signatory countries of the FTA. In other words, companies may need to replace existing procurement sources located outside the FTA signatory countries with those located inside them, including the countries where the companies are located. This situation could result in the localization of companies' international production networks. Therefore, this paper conducts an empirical analysis as to whether the utilization of an FTA leads to a significant increase in the local procurement ratio, with Japanese companies' subsidiaries located within the ASEAN area used as subjects of the analysis. If the subsidiaries are found to be increasing local procurement excessively, it means that the utilization of an FTA has a negative impact on international production networks.

Keywords: free trade agreement, rules of origin, accumulation
JEL Classification: F15, F53

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Development of Production Networks and Job Reallocation in Japan

By Mitsuyo Ando	(Professor, Faculty of Business and Commerce, Keio University)

(Abstract)

Japan has been one of the major players of production networks in East Asia with active foreign direct investment (FDI) in the manufacturing industry. How have industrial and employment adjustments proceeded domestically? To investigate further development of production networks due to globalizing corporate activities and job reallocation in Japan, this paper analyzes the relationship between the enhancement of expanding foreign operations and domestic employment, mainly using the method of job creation and job destruction. In addition, the paper examines the relationship between import competition and domestic employment. Our results demonstrate that Japan can retain domestic employment elastically because of the division of labor on a production process/task basis, not on an industry basis. While imports increase according to the development of production networks, their effective use rather activates domestic employment. Even in the manufacturing industry with active FDI, employment adjustments are relatively flexible particularly at the firm level (among firms in the same manufacturing sector) and at the intra-firm section level (among intra-firm sections of the same firm), for instance by strengthening headquarters services, which contributes to maintaining or expanding domestic employment.

Keywords: production network, foreign direct investment, multinational enterprise, domestic employment, manufacturing industry
JEL Classification: F23, F61, F66

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