Syndicate content

A Lot of Homework and a Bit of Luck: How Some Southeast Asian Countries Snagged GVCs

Swarnim Wagle's picture

Samsung factory in Vietnam. Source - www.emergingfrontiers.com/wp-content/uploads/2012/05/samsungvietnamelectronics.jpgToday, four-fifths of world trade – worth around US$15 trillion – happens along global value chains (GVCs) coordinated by multinational enterprises (MNEs), or corporations that manage production or deliver products across several countries. These enterprises have always played an important role in connecting developing countries to world markets. The issue of what drives their location, and how much countries can do to become part of their value chains is, therefore, of enduring policy interest. We know that fundamentals help – investment climate, infrastructure, and cost of doing business are all important – but they are by no means a guarantee. Rather, serendipity and historical accidents have played major roles in the success or failure of many similar countries in Asia that tried to attract and keep the investment of MNEs. Can the history of global value chains tell us anything about the future? More to the point, is there anything developing countries can do to increase their chances of harnessing this engine of growth?

 
The first US semiconductor producers to move to Asia in the 1960s initially considered territory that was familiar to them: Northeast Asia (Korea and Taiwan) and Hong Kong. But by the 1970s, the focus had shifted south, and Singapore emerged as an electronics hub. Why? Among many reasons, one is particularly intriguing: In the 1960s, China’s Cultural Revolution scared away foreign investors. They strove to locate as far away as possible from the “scene of trouble,” according to the father of the electronics industry in Singapore, Goh Keng Swee, who was also Lee Kuan Yew’s first minister of finance. Goh credits the negative externalities of political instability in China for helping the early semiconductor corporations to prefer Singapore.
 
As factor costs began to rise in Singapore, the electronics assembly functions branched out to cheaper locations in the region, notably Malaysia and Thailand. That process was not automatic, however. Local leadership mattered. The government of Penang in Malaysia, for example, knew its free port status was ending in 1969, and actively courted MNEs to locate non-polluting industries in the new special trade zones that absorbed cheap labor but did not spoil its reputation in tourism.
 
Less known, perhaps, is the story of Indonesia, which in the early 1970s also hosted two major MNEs: Fairchild and National Semiconductor. By 1986, however, both had left the country. To this day, Indonesia’s share of electronic parts and components in total manufacturing exports lags behind Malaysia, the Philippines, Singapore, and Thailand. In 2011, when Blackberry was looking to open a factory in the region, it chose Malaysia over Indonesia, much to the chagrin of Indonesian policymakers. Blackberry made this choice despite Indonesia’s status as its largest market in the region and even though the country was home to one of the fastest growing populations of cell phone and internet users globally.
 
It is clear that industries are sensitive to host country conditions in different ways. In contrast to Indonesia’s relationship with electronics, its engagement in the automobile value chain is deeper, with annual trade in auto parts of about $6.3 billion in 2012. This is because auto value chains behave differently than those in electronics. Auto production involves components that have low-value-to-weight ratios, for one. Auto assemblers also prefer to locate in countries that already have a large domestic market. And, finally, parts suppliers tend to congregate closer to the assembly plants so they don’t have to carry a large inventory and can use a “just-in-time” supply method. Unlike suppliers of electronic parts such as integrated circuits, which have wider use in multiple industries, the auto parts suppliers are also known to have less bargaining power.  
 
In Southeast Asia, Thailand stands out for succeeding in both the auto and electronic value chains. It is now the world’s largest exporter of hard disk drives, and has earned the sobriquet “Detroit of Asia” for becoming a major exporter of cars. Here, too, external developments merged well with domestic conditions. Thailand had no indigenous car program, and that was one reason it attracted Japanese auto investors, especially after the appreciation of the Yen in the 1980s prompted them to seek cheaper locations. Incentives from the Thai Board of Investment and high tariffs on imported vehicles also encouraged the Japanese to avoid tariffs by building factories in Thailand in the early years. 

In contrast, Malaysia’s poorer performance in the auto value chain is attributed to a policy regime that constrains foreign direct investment into the sector and allows it to be dominated by the two national car companies, Proton and Perodua. How national policy choices translate into dramatically different outcomes is illustrated in Figure 1. Thailand’s trade in both auto parts and fully assembled vehicles has grown exponentially over the past decade. Despite starting at comparable levels, Malaysia’s exports and imports of parts and components – one proxy for participation in the global value chain – is sluggish.     



Do the stories above indicate that success in GVCs is partly fated, and that it is too late for poorer countries to prepare to join value chains? The answer is no. Take Vietnam, which was seen as a laggard in attracting MNEs involved in assembly or manufactures of intermediate goods. It earned this reputation because it had a policy of steering FDI towards joint ventures with state-owned enterprises in heavy industries. Only after the late 1990s did reforms nudge Vietnam to play a bigger role in value chains. Most decisive, perhaps, was again an external decision in 2006 by Intel to open a US$1 billion testing and assembly plant (that came into operation in 2011). That vote of confidence by a major MNE led to a cascade of eager followers, and many large MNEs have a base in Vietnam today, including the world’s two largest electronic contract manufacturers – Hon Hai and Compact electronics (both Taiwanese). Samsung, too, is shifting the assembly of smart phones and tablets from China to Vietnam; in 2012, Samsung Vietnam’s production capacity reached 150 million hand-held units, with exports worth US$11 billion. Samsung now accounts for more than ten percent of the country’s merchandise export earnings. Even Cambodia, a least developed country, is beginning to play host to an eclectic mix of global brands, from Sumitomo (auto parts) to Tiffany and Company (diamond polishing).
 
The bottom line is that there is much that countries can do to increase their participation in global value chains. They can invest in their people and infrastructure, reform laws and regulations, and provide incentives for investors. These host country conditions and conscious national policies help attract the investment of multinational enterprises. While some circumstances are beyond the realm of policy and subject to the idiosyncrasies of foreign events and actors, strategic decisions can mitigate the impact of these factors.














 

Comments

Submitted by Salamat Ali on

Well said. Developing countries have moved away from the infant industry protection, opened their markets for trade, but have not benefited from the new phenomenon of global value chain and international production networks. To become a part of these global chains and benefit from foreign investment, host countries have to focus on improving domestic conditions and policy environment.
The first important condition to attract FDI is to invest in world class physical and human infrastructure. Second, they need good regulatory environment and dispute settlement mechanism. No doubt investors need some sort of security before incurring a huge sunk cost. Some countries have chosen international guarantees through ICSD.

Add new comment