Production Networks and Industrial Clusters: Integrating Economies in Southeast Asia

2. The Mechanics of Production Networks in Southeast Asia: The Fragmentation Theory Approach

The Mechanics of Production Networks in Southeast Asia 33 2 The Mechanics of Production Networks in Southeast Asia: The Fragmentation Theory Approach Fukunari Kimura I. WhAT hAPPeNS IN INTerNATIoNAl TrAde ANd INduSTrIAl locATIoN? At this point in time, Southeast Asia is truly an unique area in that it gets involved deeply with sophisticated international production networks extended to the whole East Asia.1,2 The formation of international production networks in East Asia has created an unprecedented pattern of trade and industrial location across countries with different income levels and development stages. In the process of forming production networks, the perception of hosting foreign direct investment (FDI) has totally been renewed, and strategies for industrial promotion have also been critically reviewed. It is now extremely important to analyse the nature and characteristics of international production networks in East Asia and discuss their policy implication for less developed countries (LDCs) such as some Southeast Asian countries. This chapter provides an overview on 34 Fukunari Kimura the current status of economic analysis on this issue, placing its emphasis on the newly developed fragmentation theory approach. Until the 1980s, Southeast Asian countries followed a typical NorthSouth trade pattern; they exported natural-resource-based products and labour-intensive manufactured goods to developed countries while importing a whole range of capital-intensive/human-capital-intensive manufactured goods. Trade with neighbouring countries at similar income level was basically inactive. Such a trade pattern was well explained by the traditional trade theory based on comparative advantage such as the Ricardian and Heckscher-Ohlin models in which international trade occurred due to differences in technologies and/or factor endowments among countries. A major portion of FDI was in import-substitutingtype industries with highly distortive trade protection and a long list of performance requirements, and export-oriented FDI was confined to export-processing zones from which the domestic economy was cautiously insulated. Trade and FDI patterns in SoutheastAsia have drastically changed since the beginning of the 1990s. The North-South trade pattern has steadily subsided, and massive intra-industry trade, particularly in general and electric machineries, has gradually dominated trade in East Asia. The intraindustry trade is actually vertical, in contrast with horizontal intra-industry trade in Europe. The vertical product differentiation model, however, does not seem to explain a large portion of East Asia’s intra-industry trade. Rather, we observe the explosive development of dense transactions in parts and components among East Asian countries accompanied with production-process-wise division of labour.3 Export-oriented or networkforming -type FDI has occupied the center stage, replacing for importsubstituting -type FDI. Figure 2.1 presents shares of machinery exports/imports in total exports/imports in selected countries in the world. Each bar indicates both machinery trade in total and machinery parts and components trade in 2005. Countries are in order from the left-hand side according to the shares of parts and components exports. “Machinery” here includes general machinery, electric machinery, transport equipment, and precision machinery (HS 84–92), which cover major industries extending production networks.4 The positioning of major Southeast Asian countries in the figure tells the whole story. The Philippines, Singapore, Malaysia, and Thailand are The Mechanics of Production Networks in Southeast Asia 35 all on the left-hand side of the figure and actively export and import machinery goods, in particular machinery parts and components. As a counterpart, Northeast Asian countries, namely Japan and Korea, are also conducting massive back-and-forth transactions in these goods. China is about in the middle but is quickly moving leftwards. Indonesia and other Southeast Asian countries (not shown in the figure) are still on the right-hand side, which indicates that these countries do not yet fully participate in production networks as of 2005. However, these countries have recently made efforts to integrate their economies with the Asian dynamic counterparts. The contrast with other parts of the world is notable. In Latin America, only Mexico and Costa Rica work on production sharing with the U.S. while other countries have not establish such networks yet. Central and Eastern European countries such as Hungary, Czech Republic, Poland, and Slovakia have similar relationship with Western European countries, but networks FIgure 2.1 Machinery goods and Parts and components: Shares in Total exports and Imports in 2003 Source: Ando and Kimura (2005). 0 10 20 30 40 50 60 70 80 % Exports: machinery goods Imports: machinery goods Exports: parts...