Friday, September 6, 2013

Cross-border production networks and the industrial integration of the Asia-Pacific region

The economic crisis of 1997 called East Asia’s economic miracle into question and generated widespread criticism of the region’s distinctive developmental models. The startling rapidity with which problems in one Asian economy were transmitted to others in part reflects similar weaknesses across countries: overvalued exchange rates, a run-up of unheeded, short-term, foreign debt, underdeveloped domestic financial intermediaries and weak regulatory oversight. In our view, contagion also reflected a deeper underlying fact about the region’s economic development. Over the last two decades, driven neither by high politics as in the European Union (EU) nor by formal trade agreement as in North-American Free Trade Agreement (NAFTA), the economies in East Asia have become closely integrated at the level of production organization.



The massive literature on Asia’s economic integration, most of it focusing on trade patterns and the investment and trade behavior of multinational corporations, has by and large missed this deeper level of industrial integration. Arm’s-length trade, foreign direct investment, and even intrafirm trade do not fully capture the organizational structure of the region’s major growth industries and markets. In electronics, textiles and apparel, autos, and other sectors, firms in the region are increasingly linked across borders in complex and ongoing relationships that extend beyond the boundary of the firm and span the entire value-chain in the given activity. The architecture of these “cross-border production networks,” the way that technology, know-how, resources and control flow across them, and their implications for competition and cooperation in the region.

By a lead firm’s “cross-border production network” (CPN) we mean the inter and intra-firm relationships through which the firm organizes the entire range of its business activities: from research and development (R&D), product definition and design, to supply of inputs, manufacturing (or production of a service), distribution, and support services. We thus include the entire network of cross border relationships between a lead firm and its own affiliates and subsidiaries, but also its subcontractors, suppliers, service providers, or other firms participating in cooperative arrangements, such as standards-setting or R&D consortia. Choosing the CPN as the unit of analysis captures the cross-border operations of the lead firm itself, but also the proliferation of non-equity, non-arm’s-length, inter-firm relationships in which significant value is added outside the lead-firm.

The value of studying CPNs is that they closely mirror the rapidly changing division of labor in the Asia-Pacific. In the electronics sector, CPNs are not simply constructed to access cheap factor inputs (resources or labor) or to gain access to expanding markets, two of the principle explanations for foreign direct investment. Although those factors may have motivated initial investment, CPNs are increasingly designed to both foster and exploit the region’s highly heterogeneous technological capabilities. Indeed, a central theme of our work is that CPNs are assembled to access locational advantages at each network node associated with the increasingly specialized technology, skills and know-how that are resident there.


The origins of those specialized capabilities are multiple, and include both technology transfers from multinationals and increasing investment in process and product development on the part of firms in the region. However, the development of local technological capabilities has also been a primary objective of government industrial policies. The study of CPNs thus inevitably raises the question of the role of the state in fostering the region’s rapid industrial transformation and its particular pattern of economic integration.

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