Production Networks and Industrial Clusters: Integrating Economies in Southeast Asia

1. Introduction

Introduction  1 Introduction Ikuo Kuroiwa and Toh Mun Heng I. OvervIew Of GlObal and reGIOnal Trends Globalization Over the past few decades, the world economy has undergone many changes. Central to these changes is the globalization of the world economy. Globalization refers to the increasing integration of economies around the world, particularly through trade and financial flows (International Monetary Fund 2001). The globalization of the world economy allows economies to focus on what they do best and enables them to have easier reach to markets around the world, increasing their access to more capital flows, technology, cheaper imports, and larger export markets. There are two main driving forces behind the globalization of the world economy. The first is the advancement in technology especially in the area of information and communication technology (ICT). Technological advances have made communication much cheaper and faster, resulting in enormous decrease in the transaction costs of transferring ideas and information. The arrival of the Internet has further accelerated this trend  Ikuo Kuroiwa and Toh Mun Heng by providing a common platform upon which countries from all corners on the Earth are able to communicate and share information. Technological advances have also significantly lowered the costs of transportation and hence, that of logistics. With the lowering of both communication and transportation costs, firms which had previously focused on a local market, have now extended their range in terms of markets and production facilities to increase their profits. All these enable firms to operate in global markets and hence, providing them with access to more capital flows, technology, cheaper imports, and larger export markets. The second driving force behind the globalization of world economy has been trade liberalization. This took part in many forms: 1. Reduction of tariffs and non-tariff barriers. Trade barriers have declined substantially as a result of successive trade negotiation rounds under the auspices of the General Agreement on Tariffs and Trade/World Trade Organization (GATT/WTO), unilateral trade liberalization and regional trade agreements. Since the early 1960s, the average worldwide most favoured nation tariffs on manufactured products have declined by 11 percentage points (World Trade Organization 2005). On the other hand, total world trade (exports plus imports) as a percentage of global GDP had increased from 24.3 per cent in 1960 to over 55 per cent in 2005 (World Bank 2007). 2. Liberalization of domestic regulatory measures such as removal of local content requirement for foreign companies producing in the economy, and increasing the number and types of industries in which foreign participation are allowed will foster cross-border capital flows. Indeed, this is amply reflected by the increase in the flow of global foreign direct investment shown in Figure 1.1. 3. Trade facilitation measures. Trade facilitation measures such as special export processing zones and bonded industrial warehouses, as well as duty drawback schemes, contribute towards trade liberalization. Globalization has led to growing competition on a global basis. With competition and the widening of markets, this led to specialization and the division of labour. Other beneficial effects include the economies of scale and scope that can potentially lead to reductions in costs and prices and are conducive to continuing economic growth. Globalization can also result in increased productivity as a result of the rationalization of production Introduction  on a global scale and the spread of technology and competitive pressures for continual innovation on a worldwide basis. In the new globalized economy, there has been a surge in trade volume and value. In 2004, the value of world merchandise trade rose by nearly 21 per cent to reach US$8.9 trillion, the highest growth rate in 25 years (World Trade Organization 2005). Real world merchandise trade grew more rapidly than the global Gross Domestic Product (GDP) i.e. world trade grew at nearly 6 per cent on average in 1994–2004, while global GDP at market exchange rates grew less than 3 per cent in the same period. Share of manufactured goods within world merchandise trade also grew significantly throughout the world, in tandem with the share of parts and components exports of total merchandise exports. The growing complexity of a globalized economy has posed new challenges for economies striving for better economic growth and development. Indulging in despair and acting despondently will be fIGure 1.1 Global net Inflows of foreign direct Investment Source: UNCTAD (006). 0 200 400 600 800 1,000 1,200 1,400 1...