Shift from Vertical Integration to Network Forms of Production

1. Shift from Vertical Integration to Network Forms of Production • Alternative constituting of the ‘value chain’ • Premised on heterogeneous division of labor in Asia

2. Four Tiers of Asian Development • The four tiers: • Japan • NICS • SEAsia, Coastal China, India Regions • Interior China, India, other SEAsia • NICS and High-Growth Asian Economies • World Bank View • In each, growth facilitated by: • Central elite bureaucracy focused on common goal: economic/tech catch-up and with an example: Japan • Insulated, generally stable political regime with elite civil service • Organized elites • Selected allocation of capital and other resources for targeted development and up-skilling • In each, marked differences in • Industrial structures – incl. Mix of state vs. private enterprise • Production profile • Mix of interventionist policies

3. NICS Adjustment • Common problems in 80s but different starting pts • Divergent adjustment strategies • Upgrade • Deepen • Diversify • Move laterally into services • Move off-shore • New markets • FDI • From production network standpoint: Sequential upgrading of foreign affiliates and indigenous firms • By 1990s: An elaborated regional division of labor built on heterogeneous but complementary production capabilities, w/high regional integration

4. Shares of regions/sub-regions as destinations for Asia’s electronics exports • By 1994, the Asia-regional market outside of Japan had become the most significant destination for Asia’s electronics exports • This reflects both emergence of NIC markets AND trade in semi-finished products and components Source: SIE World Trade database (based on UN/OECD trade statistics)

5. Shares of regions/sub-regions as sources of Asia’s electronics imports • Asia, outside of Japan also became the predominant source of imports of electronics products to the rest of Asia • This reflects significant specialization and cross-trade within the Asian electronics sector: One big regional production network Source: Same as previous chart

6. Shares of regions/sub-regions as destinations for Asia’s component exports • Rest of Asia, especially the NICs and increasingly, ASEAN, became the principle consumers of components in Asia • The US and Europe were still significant markets for components produced in Asia, but, typically, Japan was not • These data reflect the increasing significance of the NICs and ASEAN as production nodes for electronics products Source: Same as previous chart

7. Shares of regions/sub-regions as sources of Asia’s component imports • Japan’s position was still quite strong as the leading supplier of high-value components to the rest of Asia • But, NICs and US fdi created a growing base of component production in the rest of Asia Source: Same as previous chart

8. Fab Capacity by Location and Ownership Source: Leachman and Leachman in Macher, Mowery, Simcoe

9. Shares of Regions/sub-regions as destinations for Asia’s Computer System Exports • Not surprisingly, the US and Europe remained the principle export markets for Asia’s computer production • The rise of consumption in Asia, typically excluding Japan, reflected the growing internal regional market for computers Source: Same as previous chart

10. Shares of Regions/sub-regions as sources of Asia’s computer Imports • The rapid growth of PC production in the NICs and ASEAN displaced the US as the primary source of Asia’s computer imports. • Japan was marginalized as a significant production platform for PCs in the region (except by Japanese firms) • China began to emerge as a significant source of imports, which reflected its growth as a hub for components and board assembly in this period. Source: Same as previous chart

11. Composition of Electronics Production (mid-1990s)

12. Shift from Vertical Integration to Network Forms of Production • Alternative constituting of the ‘value chain’ • Premised on heterogeneous division of labor in Asia • Built from sequential upgrading of foreign affiliates and indigenous firms • Elaborated, increasingly complementary division of labor with high regional integration • Under conditions of market uncertainty: advantages of speed and market adjustment • Exploiting increased technical specialization • NOT cheap labor, factor endowments, advantageous policies, market access or economizing on transaction costs!!!

13. Current Account - Trade Balances • Table 1: Current Account (% of GDP) • 1990 1991 1992 1993 1994 1995 1996 • Korea -0.69 -2.82 -1.28 0.31 -1.01 -1.81 -4.76 • Indonesia -2.82 -3.65 -2.17 -1.33 -1.58 -3.47 • Malaysia -2.03 -8.89 -3.76 -4.66 -6.23 -8.43 -5.20 • Philippines -6.08 -2.28 -1.89 -5.55 -4.60 -2.67 • Singapore 8.33 11.29 11.38 7.57 17.21 16.97 15.18 • Thailand -8.50 -7.67 -5.66 -5.09 -5.65 -8.09 -7.98 • Hong Kong • China 3.09 3.27 1.33 -1.93 1.28 0.23 0.89 • Taiwan 6.70 6.70 3.80 3.00 2.60 1.90 5.20 • Table 2: Trade Balance (% of GDP) • 1990 1991 1992 1993 1994 1995 1996 • Korea -0.81 -2.78 -1.37 0.19 -1.01 -1.40 -4.26 • Indonesia 1.68 0.91 1.81 1.48 0.72 -1.03 • Malaysia 2.10 -3.82 1.40 -0.11 -1.59 -3.75 0.58 • Philippines -5.73 -3.00 -4.27 -8.53 -8.95 -8.80 • Singapore 6.76 10.62 9.29 8.12 16.02 16.88 14.45 • Thailand -7.75 -6.84 -4.71 -4.57 -5.23 -7.12 -6.55 • Hong Kong • China 2.75 2.86 1.03 -1.91 1.41 1.71 2.15 • Taiwan Note: BOP Definition Sources: · International Finance Statistics of the International Monetary Fund · Data for Taiwan are from various sources (Economist Intelligence Unit Reports, IMF’s Dec 1997 WEO and Asian Development Bank)

14. Current Account and Capital Flows • (In billions of U.S. dollars) • 1994 1995 1996 1997* 1998** • Current account balance -24.6-41.3 -54.9 -26.0 17.6 • External financing, net 47.4 80.9 92.8 15.2 15.2 • Private Flow, net 40.5 77.4 93.0 -12.1 -9.4 • Equity investment 12.2 15.5 19.1 -4.5 7.9 • Direct equity 4.7 4.9 7.0 7.2 9.8 • Portfolio equity 7.6 10.6 12.1 -11.6 -1.9 • Private creditors 28.2 61.8 74.0 -7.6 -17.3 • Commercial banks 24.0 49.5 55.5 -21.3 -14.1 • Nonbank private creditors 4.2 12.4 18.4 13.7 -3.2 • Official flows, net 7.0 3.6 -0.2 27.2 24.6 • Int’l financial institutions -0.4 -0.6 -1.0 23.0 18.5 • Bilateral creditors 7.4 4.2 0.7 4.3 6.1 • Resident lending/other, net1-17.5 -25.9 -19.6 -11.9 -5.7 • Reserves excl. gold (-= increase) -5.4 -13.7 -18.322.7 -27.1 Note: The five economies consist of Indonesia, Korea, Malaysia, the Philippines, and Thailand *Estimate **IIF Forecast 1Including resident net lending, monetary gold, and errors and omissions. Data: Institute of International Finance

15. European Total • U.S. Japanese Union International • Banks Banks Banks Lending • China2.7 17.8 26.0 55.0 • Hong Kong SAR2 8.7 87.5 86.2 207.2 • Indonesia 5.3 22.0 21.0 55.5 • Korea 9.4 24.3 33.8 100.0 • Malaysia 2.3 8.2 9.2 22.2 • Philippines 3.9 1.6 6.3 13.3 • Singapore2 5.7 58.8 102.9 189.3 • Taiwan Province 3.2 2.7 12.7 22.4 • of China [Sic] • Thailand 5.0 37.5 19.2 70.2 • Vietnam 0.2 0.2 1.0 1.5 • East Asia total 46.4 260.6 318.3 736.6 International Bank Lending to East Asia1(In billions of U.S. dollars) (As % Bank Capital – emerging markets) 34% 117.8% 78.5% Source: Bank for International Settlements 1Outstanding at end-1996. 2The data for Hong Kong SAR and Singapore reflect their roles as international financial centers.

16. Non-Performing Loans of Banks(Post-Crisis) as % of GDP Non-performing Loans as a % of Shareholders’ Equity Japanese Bank

17. Asia GDP, Pre and Post Crisis • Most Asian economies still have not recovered fully recovered from Crisis • Only China is in a better position than pre-Crisis • EAsian GDP : 2002: 5%, 2001: 3%, 2000: 7% (last tech boom year!) • Financial System Reform is key to future prospects! Source: Economist Intelligence Unit

18. Capital Structure as a % of GDP, 2001 Source: FIBV; CEIC; Bloomberg; government stats; Economist

19. Non-Performing Loans, 2001 • Only a few countries have made progress in cleaning up the banking system mess • Only China and South Korea (and India, maybe Taiwan) even acknowledge the real extent of the problem • South Korea may be furthest along in resolving the problem Source: Ernst & Young; Economist

20. Structural Reforms and Recovery • Structural Reform of the Banking Systems most advanced in Korea among affected economies, least in Indonesia and Thailand • Korea experience: • Re-capitalize and rationalize banking sector Rationalized industrial sector (reinforcing better run Chaebol dominance) • Incentivize consumer spending and fdi • Japan experience: • Negative impact of delaying reforms • Estimated $1.2 trillion of Asia’s $2 trillion in non-performing loans resides in Japan • Only half-steps to reform – incomplete rationalization and re-capitalization – despite removing $300 billion in bad loans since 1997, aggregate figure has not fallen!