how to grow with developing countries? globalizing ...kimura).pdf · 2) investment and application...

OECD-OERO Meeting “Productivity and Long term Growth: Evidence-Based Economic Policy in the Aftermath

of the Crisis” (June 21, 2013 @ OECD)

How to Grow with Developing Countries? Globalizing Corporate Activities and Domestic Economy in Japan

Fukunari Kimura TCER, Keio University, and ERIA

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1. Further globalization for growth • Manufacturing activities are still important for the Japanese

economy. • Although the fear of de-industrialization exists, opposition to

globalizing corporate activities is very weak in Japan. – People intuitively know that outward foreign direct investment is

beneficial for Japan to introduce the Asian dynamism. • Empirical studies show that production networks have actually

generated domestic employment and economic activities; have brought in stability and robustness rather than fragility.

• Although some uncertainty exists in China and others, the dominance of East Asia for manufacturing activities has substantially strengthened in the past decade and will continue.

• Crucial to improve location advantages of Japan in order to effectively set up division of labor with developing East Asia; essential part to the 3rd arrow of Abenomics, which works with aggressive FTA strategy (TPP, RCEP, Japan-EU FTA, and others).

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2. Production networks in East Asia • East Asia as a factory of the world

– Production networks in the manufacturing sector, particularly machinery ind. – Fragmentation and agglomeration

• Conceptual differences from usual trade – Quick and high frequency transactions – Coordination matters – Movements of goods and beyond

• Theoretical underpinning – The fragmentation theory (Jones and Kierzkowski (1990))

• Production blocks and service links – Two-dimensional fragmentation (Kimura and Ando (2005))

• Geographical distance and disintegration, explaining the formation of industrial agglomeration

• Work with new economic geography (Baldwin, Forslid, Martin, Ottaviano, and Robert-Nicoud (2003))

– The 2nd unbundling (Baldwin (2011)) • International division of labor in terms of production processes and “tasks” • Movements of goods, ideas, technology, capital, and technicians (cf. the 1st unbundling)

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The 2nd Unbundling

⇒ Bay B Bay A

Bay C

Bay B

Bay A

Bay C

1st 2nd

ICT⇒

The 2nd unbundling, i.e., international division of labor in terms of production processes and tasks, has developed since the 1980s. The 2nd unbundling in the manufacturing sector is most advanced in East Asia.

Source: Baldwin. 5 2013/06/21

Source: Ando and Kimura (2013b). 6 2013/06/21

PB

PB PB

PB

PB

SL

SL

SL SL

SL

PB: Production block SL: Service link

Before fragmentation

After fragmentation

The fragmentation theory: production blocks and service links

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The evolution of the 2nd unbundling

The United States

Mexico

Consumers

Headquarters or affliates

Unrelated firms with same firm nationality

Unrelated firms with different firm nationality

The United States

Consumers

Consumers

Japan

Korea

Vietnam

Malaysia

The Philippines

Taiwan

Internet auction

Agglomeration

Agglomeration

Cross-border production sharing (back-and-forth; intra-firm)

Production networks (“networks”; fragmentation and agglomeration;

intra-firm in short distance, arm’s length in long distance)

9 Source: Ando and Kimura (2010).

2013/06/21

Two-dimensional fragmentation: An illustration

Source: Kimura and Ando (2005).

OEM contracts

Subcontracting

Internet auction Competitive spot bidding

Cross-border intra-firm fragmentation

Disintegration

(National border) Distance

(Boundary of firm)

Origin

Domestic intra-firm fragmentation

Domestic arm's length fragmentation

Cross-border arm’s length fragmentation

Outsourcing

EMS

Industrial agglomeration International fragmentation

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Industrial Agglomeration in Bangkok

Note: The circle of 100km is added by the author (Original source: Board of Investment, Thailand) Source: ERIA (2010). 2013/06/21 11

3. Production networks and international policy environment

• Policy reform in developing countries to further activate production networks – Three kinds of costs in fragmentation; two-

dimensional fragmentation – High-level FTAs and development agenda

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Bay B

Bay A

Bay C

Bay B

Bay A

Bay C

Bay B

Bay A

Bay C

1) Two-way flows of goods, ideas, technology, capital, and technicians.

2) Investment and application of technical, managerial and market know-how abroad.

Connecting factory & doing business abroad: The “trade-investment-services nexus”

Source: The original is in Baldwin (2011), slightly modified by the author.

Figure 2 The 1st and the 2nd unbundling

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Reduction in network set-up cost

Reduction in service link cost

Reduction in production cost per se

Fragmentation in geographical

distance (par. For

International fragmentation)

• Investment facilitation/promotion

• Institutional connectivity (tariff removal, trade facilitation, …)

• Physical connectivity (hard and soft logistics/ICT infrastructure development)

• Liberalization of production-supporting services

• Investment liberalization

• Upgrading infrastructure services such as electricity supply and EPZs

Fragmentation in disintegration (linked with the

formation of industrial

agglomeration)

• Business matching between multinationals and local firms

• Reducing transaction cost in economic activities

• Convergence/harmonization of economic institutions and legal system

• Enhancing agglomeration effects through SME development

• Strengthening innovation

Policies for a new development strategy

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15

Reduction in network set-up cost

Reduction in service link cost

Reduction in production cost per se

High-level FTAs


• IPR protection • Competition policy

• Tariff removal • Trade facilitation • Enhancing

institutional connectivity

• Liberalization of production-supporting services


Development agenda

• Investment facilitation/promotion

• Enhancing physical connectivity (including hard and soft logistics infrastructure development)

• Reducing transaction cost in economic activities

• Upgrading infrastructure services such as electricity supply and EPZs

• Enhancing agglomeration effects through SME development

• Strengthening innovation

Policies for enhancing the 2nd unbundling

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4. Delaying de-industrialization on the developed country side

• Japanese manufacturing firms that extend operations in East Asia relatively enlarge domestic employment and operations, no matter whether in normal periods or under crises. – Ando and Kimura (2012a, 2013a, 2012c) – Hijzen, Inui, and Todo (2007)

• After the GFC, some sign of narrowing the scope of domestic manufacturing activities is observed though. – Ando and Kimura (2012b, 2012c)

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time

Foreign

Domestic

Decision of international production networking

Establishment of a foreign

affiliate Reach full operation

Domestic adjustments on inputs (K, H, L) domestic establishments domestic affiliates exp./imp. patterns

Preparation period for FDI （typically 2-3 years)

Expanding operation (typically 2-3 years)

Figure Typical sequence in international production networking

Source: Ando and Kimura (2012c). 17 2013/06/21

A permanent change in extensive margins


5. Stability and resiliency against macro shocks

• Production networks may work as a shock transmission channel.

• At the same time, transactions in production networks are more stable and more resilient than other transactions. – Trade in machinery parts and components within

East Asia is less likely to be interrupted and more likely to recover (Ando and Kimura (2012b, 2012c)).

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Decomposition Analysis: GFC

<Fall>

<Recovery>


6. Conclusion • Further activating international production networks as

an essential part of growth strategy. – Expand and deepen production networks in East Asia – Improve location advantages of Japan to cater some

economic activities in the 2nd unbundling • R&D, pilot/mother plants, big plants with huge investment,

production supported by industrial agglomeration, processes with patents and black-boxed technologies

• Aggressive FTA strategy (TPP, RCEP, Japan-EU FTA, …) – Trigger for structural reform in Japan – International rule making for further activating

international production networks, together with improving location advantages of Japan

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References • Ando, Mitsuyo. (2012) “Restructuring Production/distribution Networks in East Asia.” Presented at the ERIA Workshop on “Moving

toward a New Development Model for East Asia” held in Beijing, China on June 25-26, 2012. Forthcoming in the ERIA Research Project Report and ERIA Discussion Paper Series (http://www.eria.org).

• Ando, Mitsuyo and Kimura, Fukunari. (2010) “The Spatial Pattern of Production and Distribution Networks in East Asia.” In Prema-chandra Athukorala, ed., The Rise of Asia: Trade and Investment in Global Perspective, London and New York: Routledge: 61-88.

• Ando, Mitsuyo Ando Fukunari Kimura (2012a) “International Production/Distribution Networks in East Asia and Domestic Operations: Evidences from Japanese Firms” In Robert M. Stern ed. Quantitative Analysis of Newly Evolving Patterns of International Trade: Fragmentation; Offshoring of Activities; and Vertical Intra-Industry Trade. World Scientific Studies in International Economics.

• Ando, Mitsuyo Ando Fukunari Kimura (2012b) “How Did the Japanese Exports Respond to Two Crises in the International Production Networks? The Global Financial Crisis and the East Japan Earthquake.” Asian Economic Journal, 26, No. 3: 261-287.

• Ando, Mitsuyo and Kimura, Fukunari. (2012c) “International Production Networks and Domestic Operations by Japanese Manufacturing Firms: Normal Periods and the Global Financial Crisis.” July. RIETI Discussion Paper Series 12-E-047 (http://www.rieti.go.jp/jp/publications/act_dp.html).

• Ando, Mitsuyo Ando Fukunari Kimura (2013a) “Expanding Fragmentation of Production in East Asia and Domestic Operations: Further Evidence from Japanese Manufacturing Firms,” Journal of International Commerce, Economics and Policy, 4, No. 1: 13500001 (43 pages).

• Ando, Mitsuyo and Kimura, Fukunari. (2013b) “Production Linkage of Asia and Europe via Central and Eastern Europe.” Journal of Economic Integration, Vol.28, No. 2 (June): 204-240.

• Baldwin, Richard. (2011) “21st Century Regionalism: Filling the Gap between 21st Century Trade and 20th Century Trade Rules.” Centre for Economic Policy Research Policy Insight No. 56 (May) (http://www.cepr.org).

• Baldwin, Richard; Forslid, Rikard; Martin, Philippe; Ottaviano, Gianmarco; and Robert-Nicoud, Frederic. (2003) Economic Geography and Public Policy, Princeton: Princeton University Press.

• ERIA. (2010) Comprehensive Asia Development Plan (http://www.eria.org/projects/CADP.html). • Hijzen, Alexander, Tomohiko Inui, and Yasuyuki Todo (2007) “The Effects of Multinational Production on Domestic Performance:

Evidence from Japanese Firms” RIETI Discussion Paper Series No,07-E-0006 047 (http://www.rieti.go.jp/jp/publications/act_dp.html). • Jones, Ronald W. and Kierzkowski, Henryk. (1990) “The Role of Services in Production and International Trade: A Theoretical

Framework.” In Ronald W. Jones and Anne O. Krueger, eds., The Political Economy of International Trade: Essays in Honor of Robert E. Baldwin, Oxford: Basil Blackwell: 31-48.

• Kimura, Fukunari and Ando, Mitsuyo. (2005) “Two-dimensional Fragmentation in East Asia: Conceptual Framework and Empirics.” International Review of Economics and Finance (special issue on “Outsourcing and Fragmentation: Blessing or Threat” edited by Henryk Kierzkowski), 14, Issue 3: 317-348.

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http://www.eria.org

http://www.rieti.go.jp/jp/publications/act_dp.html

http://www.cepr.org

http://www.eria.org/projects/CADP.html

http://www.rieti.go.jp/jp/publications/act_dp.html

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