Saturday, October 12, 2013

Does nationality continue to matter?




Our study of the evolution of Japanese and US production networks in theelectronics industry in East Asia in the 1990s has enabled us to identify how various forces that we associate with globalization—technological change, technology transfer, the shortening of product life cycles, trade liberalization, and the development of local centers of expertise—have shaped corporate decision-making. By focusing on change in one sector over a period of time, we were able to illustrate the dynamic process by which corporations of all nationalities have adapted to competitive forces.

Pressures arising from the forces of globalization produced convergence insome firm strategies. Corporations not only learned from their own experiences but also from those of their competitors. In some instances, they attempted to emulate what they perceived as being industry best practice. The areas in which convergence occurred include the mix of products that are now produced in Asia and the increasing variety of value-chain activities that both American and Japanese firms have relocated to the region. Whereas in the past Japanese production in other parts of the region consisted overwhelmingly of consumer electronics, by the mid-1990s Japanese firms had joined their US counterparts in moving a substantial portion of PC production to the region. Japanese firms have also jumped onto the bandwagon of OEM contracts. During the early 1980s, when the US dollar appreciated rapidly, cash-strapped American firms were the first to experiment with new forms of international production that did not necessarily involve equity control. These provided substantial competitive advantages to American computer companies. Similarly, American firms were the first to take advantage of the growing concentrations of expertise in various areas of electronics production in East Asia by transferring increasing responsibility for R&D to subsidiaries. Again, this has proved to be a cost-effective strategy that some Japanese firms are beginning to emulate. The new responsibilities devolved to Japanese subsidiaries have inevitably required changes in management practices that have brought them closer to their American counterparts. Japanese electronics networks have become more open—increasingly outsourcing components—and less centralized in their R&D and management practices. The vintage effect   appears to have been important in the opening up of networks—but so, in addition, have some of the forces of globalization. It is important to emphasize that the effects observed have been in plants that have been predominantly exportoriented. In other countries, where Japanese subsidiaries have produced primarily for the local market, aided by various tariff and non-tariff barriers, the vintage effect and an opening up of networks is far less evident.

Nationality of ownership continues to determine strategies in some areas. One example is in personnel management. Because of an unwillingness to promote local managers to top positions and because of the operation of a seniority system that inhibits rapid promotion, Japanese companies have found it difficult to recruit and retain quality managers and engineers in their Asian subsidiaries. Surveys have shown that most managers consider working conditions and promotion opportunities in US subsidiaries to be far more favorable, placing Japanese subsidiaries at a competitive disadvantage. The rapid expansion of the electronics industry in Southeast Asian has offered high-caliber personnel the opportunity for movement among employers. Extensive “job-hopping” is the

name of the game, a phenomenon that Japanese corporations have found alien. The strategy for the training of engineers that many Japanese firms have adopted addresses this problem. Most of these engineers are hired internally. Based on a careful selection process, each affiliate develops a pool of highly motivated “technicians,” which they then train over a period of five to seven years to become  engineers. In this manner, engineering skills are made firm-specific, reducing the likelihood of job-hopping behavior.

Friday, October 11, 2013

The impact of the Asian financial crises

How have the financial crises that beset East Asia in 1997–8 affected the evolution of IPNs in electronics? It is too soon to discern the longer term effects that the crises may have on the evolution of local industries. Some immediateeffects that may have an impact over the medium term are, however, apparent.



Most worrisome is a significant erosion of the region’s small and medium-sized
suppliers  Global OEM customers such as Compaq  and Seagate  have been quick to respond to the devaluation of local currencies and have requested substantial price reductions from their Asian suppliers. OEM suppliers do not have much choice but to comply. For the stronger ones this may be feasible, yet there is an important risk involved: once devaluation is reversed, Asian OEM suppliers will find themselves being caught in a high-cost production structure, but they will then be unable to back away from the price reductions that they have granted in response to the currency depreciation. There is a real danger that current price reductions may force many of these suppliers out of the market.

At the same time, however, Asian suppliers are under tremendous pressure to recapitalize in order to maintain their links with global OEM customers: survival requires that these suppliers upgrade their product mix and their efficiency; they also need to proceed with a regionalization of their production base. This dual pressure has resulted in severe cash-flow problems, especially for smaller local suppliers.

The crisis also has very negative implications for the region’s innovation systems. It has led to a substantial cutting back in the R&D efforts of some local firms, especially those in Korea. R&D expenditures fell in 1998 by 12.3 percent overall from the previous year. In some sectors, the fall was much more precipitous: in automobiles, chemicals, and medical research it was estimated to be closer to 50 percent. In semiconductors, Korea’s largest single export earner, R&D fell by 20 percent. The Korea Industrial Technology Association suggests that 5,000 of a total of 75,000 jobs in R&D were lost in 1998. The number of patent applications in 1998 fell by close to 20 percent. Investment in plant also declined because of the economic crisis. Although R&D expenditures were expected to rebound somewhat in 1999, the economic crisis may have a longer lasting impact on research capabilities. Several thousand researchers were reported to have been lured abroad in 1998 by more attractive employment opportunities. The Korean press noted with particular alarm that a number of chip designers had been recruited by Taiwanese companies that were competing with Korean firms. The loss of the tacit technology embodied in skilled personnel may be far more difficult to replace than an aging plant. One effect of the crisis might therefore be to redistribute capabilities away from the most severely affected economies to those that escaped relatively unscathed. The financial crisis also had a profound effect on the capacity of Korean companies to invest abroad. According to UNCTAD data, foreign investment by Korean corporations had already declined in 1997 by nearly 10 percent compared with the previous year. In the first nine months of 1998, the foreign investments of Korean companies declined by a further 8 percent compared with the equivalent period in the previous year. Moreover, new investments of US$ 1.4 billion were partly offset by foreign divestments of US$ 900 millions. These divestments, forced by capital shortages, are of particular importance in the development of technological capabilities. In the first half of the 1990s, Korean companies used foreign investment as an instrument to attempt to gain access to technology. Korean companies purchased chip manufacturers in the United States, and they purchased automobile design companies in the UK and Germany. How successful in the long term such investments would have been had yet to be demonstrated by the time of the crisis. Technology is in many instances “tacit,” residing in the personnel employed by the companies. Whether skilled personnel would have remained with the companies under Korean ownership is uncertain. With the onset of the financial crisis, however, Korean companies were forced to liquidate some of these investments. Most notable is Hyundai’s sale of Symbios Logic in the United States for US$775 millions. Symbios, which Hyundai had acquired in 1995 from ATT, had been profitable throughout the period of Korean ownership, returning a net profit of US$69 millions in 1997. The longer term significance of the Symbios divestment lies in its role in Hyundai’s efforts to move beyond DRAM production to non-memory chips, which generally enjoy higher profit margins. threaten their efforts at internationalization and at constructing their own


Thursday, October 10, 2013

Imitation and convergence



A final reason for the gradual opening-up of Japanese production networks is that some Japanese firms have consciously set out to imitate what they perceive to be successful strategies by their American counterparts. This desire for emulation not only characterizes the large, diversified business groups like Matsushita, Hitachi, Toshiba, NEC and Fujitsu but also medium-sized companies that have become global competitors like Kyocera, Canon, and Sharp, and many others whose names are less familiar to Western observers. As American computer and semiconductor firms have been able to consolidate their competitive position during the early 1990s, learning from the American experience has become a top priority for their Japanese counterparts. This is hardly surprising, in that US subsidiaries in Southeast Asia and the NICs have been even more profitable than their Japanese counterparts  Japanese managers frequently mentioned Hewlett-Packard  which conducts much of its R&D for its printers in Singapore, as a model they would like to emulate.22 Other American role models frequently mentioned are GE, Compaq, and the successfully restructured IBM. Imitation generates a complex process of hybridization where partial convergence coexists with persistent diversity. The fact that NEC has learned from Compaq’s new strategy to combine price leadership with differentiation through a systematic rationalization of its IPNs, does not imply that NEC will develop in an identical manner. Although it has absorbed some elements of Compaq’s approach, NEC has preserved some of its idiosyncratic features. For instance, Compaq has moved to an extreme form of outsourcing: in a contract with Taiwan’s Mitac International, Compaq outsourced all stages of the value chain except marketing for which it retains sole responsibility.23 NEC, however, prefers a much more gradual approach that enables it to balance some dispersion of value-chain stages with what it perceives to be necessary to maintain corporate coherence. To achieve this balance, at home NEC maintains an integrated set of high value-added manufacturing and knowledge-intensive support services that it considers necessary to exercise systemic control. At the same time, NEC supports a substantial two-way flow of personnel between its three major product units in Japan  and its overseas affiliates. Such systematic rotation is regarded as essential to establish a two-way learning process: (1) a transfer of NEC routines from Japan to overseas affiliates and suppliers, and (2) a continuous flow of feedback information on the functioning of these different nodes of its IPNs, including information on new trends in local capabilities and market requirements. In short, NEC remains distinctively different from Compaq with its focus on the generation and groupwide distribution of tacit knowledge.24 We could cite many other examples to support the argument that learning from the American experience is consistent with persistent diversity. Practically all the leading Japanese electronics firms over the last few years have attempted to learn from the American experience. The following example of Yokogawa Electronic shows that this is also true for second-tier, medium-sized companies 25 Yogokawa has long-standing links with two American companies, each of which in its own field is widely regarded as a pacesetter for organizational innovations. Since 1963, Yogokawa has had a joint venture with HP, originally for measurement equipment and control devices, and now for PCs and workstations. Since 1982, it has also had a joint venture with General Electric  which has become a worldwide market leader for small-scale computed tomography equipment. Yogokawa’s management has stressed the crucial importance of learning from US management practices.26 How did this emulation develop in practice? Does this desire to learn from American partners imply that Yogokawa is simply transforming itself into a clone of HP or GE? And, furthermore, has such learning been a one-sided affair where Yogokawa adopts features of its American partners, while the American partners  unchanged? Clearly, not so. Yogokawa continues to differ from American firms in essential features of its organization. For instance, one important objective of the company’s “global corporate management” doctrine is to balance increasing empowerment at every node of its IPN with corporate coherence. This brings us back to our earlier example of NEC: the key mechanism for providing such coherence is an elaborate scheme of information-sharing through constant rotation of human resources. The focus is on the exchange of tacit knowledge embodied in skilled operators, technicians, engineers, and managers. This peculiar approach to human resource management continues to distinguish Japanese firms from most of their American competitors.

Wednesday, October 9, 2013

MNC affiliate behavior in Malaysia

In this section, we will review the available data on affiliate behaviors on five dimensions: linkages to local firms, human resources development, higher valueadded activities, capital deepening, and management autonomy. Each subsection will provide background on relevant Malaysian policies, after which the available evidence will be used to provide a preliminary evaluation of the hypothesis of national differences between investors.



Capital deepening
Although one of the primary goals of the export-oriented policies introduced in 1968 was increased employment, capital investment also received favorable treatment. For example, after the expiration of a firm’s “pioneer” tax-free status, all fixed assets could “be depreciated as if they were new” over five years 21 In 1986, the government created the Investment Tax Allowance, which grants allowances up to 100 percent of capital expenditure on approved projects. Accelerated depreciation was still permitted for other “qualifying” capital expenditures  These allowances were alternatives to pioneer status, and did not distinguish between simple expansion and labor-saving investment. A push toward greater automation came with the 1996 budget, which doubled the fee imposed on firms for the use of foreign workers, from RM 600 to RM 1, 200 per year in the case of semi-skilled employees  Given that the 1994 average annual wages in the consumer electronics sector were RM 10,260 this tax was non-trivial. American IC firms are generally considered to be the most highly automated in the electronics sector. The percentage of production machinery that was automated at AMD rose from nil in 1978 to over 80 percent by 1990  Intel assembles three times as many chips as it did ten years ago with the same number of workers  By contrast, the consumer electronics sector is less automated. Rasiah reports that worker-machine ratios in European consumer electronics firms in Penang are

We used evidence from a Malaysian case study to explore the extent to which nationality might determine affiliate behavior. The summarizes the findings and lists the probable causes of observed national differences. It shows that nationality mattered for linkages with local suppliers, for management practices, and, possibly, for capital deepening. In each case, the Japanese practice may be less conducive to Malaysian growth than if a more American-style practice were substituted. The implication for Malaysian policy-makers is not, of course, that one nationality of investor should be favored over another. Rather, the findings should be used to direct efforts where they will do the most good. It may be hard to convince a Japanese subsidiary to install a local employee as managing director, but Japanese firms are likely to respond well to exhortations to work.

Nationality and production networks

The debate about whether there are differences between Japanese and US FDI has a long if not altogether distinguished history. Many of the arguments made by early commentators, such as Kojima’s distinction between the tradeenhancing nature of Japanese FDI and the trade-undermining characteristic of US FDI, and Ozawa’s emphasis on the importance of relative factor endowments in driving Japanese FDI, have not withstood the test of time and empirical examination The question posed by Mason and Encarnation  “Does Ownership Matter?” continues to be a popular question in examining foreign investment and production networks. By the mid-1990s, a large literature pointed to significant differences in the way in which Japanese and American firms had organized their production networks in East Asia in the previous decade  For convenience, we group these differences under four headings: the localization of management; sourcing of components and capital goods; replication of production networks; and distribution of R&D activities.

Explaining national differences in production networks



Why did such significant differences exist between Japanese and US production networks in the first half of the 1990s? Social scientists naturally assume that organizations, including firms, adopt policies that enable them to pursue their goals in an efficient manner. A large literature, however, warns us against such assumptions Historical accidents and path dependency are pervasive. Such factors certainly played a role in the differences that we have observed between the production networks. But rational choices also explain the relatively closed nature of Japanese networks. We suggest five principal reasons for the differences in approach: the perceived advantages of the keiretsu networks of Japanese companies; the relatively late start of Japanese companies in export-oriented manufacture in electronics in Asian subsidiaries; corporate governance issues especially financial control; differences in the product mix; and the geographical proximity of Japan to Southeast Asia and China.

Perceived advantages of Japanese corporate networks
A large literature exists on the potential efficiencies that come from Japan’scorporate networks In a period when companies faced new challenges in establishing export-oriented subsidiaries in other parts of Asia, it was natural that they should rely on familiar methods and linkages. Intra-firm trade enables corporations to exercise tight control over their subsidiaries, supply sources, and markets. By encouraging their traditional keiretsu
suppliers to re-locate close to the new plants, the assemblers maintained linkages of proven worth. They also avoided the potential domestic embarrassment that may have arisen had they been perceived to be abandoning their long-standing commercial allies.

Japanese networks as latecomers
The importance of existing network ties was magnified by the urgency with which Japanese companies had to re-orient their production in the mid-1980s faced, as they were, by rapidly escalating costs and by an increase in non-tariff barriers in the United States and Western Europe. Although Japanese electronics companies began overseas production in East Asia much earlier than their US counterparts, domestic market-oriented, rent-seeking production rather than export platform production remained the dominant focus until the mid-1980s. A quick response on a massive scale then became necessary to meet the challenge not only of the rapidly appreciating yen, but also of new competitors from Korea and Taiwan. We know from innovation theory that firms need time to develop
their capabilities.15 Time is of even greater importance for developing a firm’s capacity to manage international production, hence the importance of the “vintage factor.” Stopford for instance, argues that firms progress over time from the simplest to more complex forms of international production networks as they learn how to manage them. Such learning also takes place in the foreign affiliates: as skills and resources accumulate within the various foreign units, new options and more complex projects can be undertaken without relying

heavily on the parent organization for help and guidance 16 Developing local capabilities and linkages through “trial-and-error” is a timeconsuming process. Latecomers to international production are likely to differ in their organizational approaches from firms that have had a much longer learning experience. As latecomers to international production for export, Japanese firms minimized risks by centralizing management control in the parent company, and by relying heavily on the parent and other long-standing partners for the supply of capital goods and components. They did not have the luxury of engaging in the timeconsumingprocess of developing local capabilities and linkages through “trial and error” procedures. The then relatively low levels of technological and productive capabilities of most Southeast Asian economies magnified the risks of doing so. As production was to be for the global market, quality-control considerations were paramount. With the switch to export-oriented production in the late 1980s, Japanese networks became more closed than previously. As noted, the share of components sourced from Japan increased. On one dimension, however, the move to export-oriented production brought Japanese networks closer to their US counterparts: Japanese companies increasingly insisted on majority control of their ventures. Previously, pioneering Japanese investors in the region, such as Matsushita, had been willing to enter minority joint ventures.

Tuesday, October 8, 2013

The opening up of Japanese production networks

Some of the observed differences in organization of production networks are explained by the very different product mix that Japanese and American electronics firms  shifted to Asia. From the late 1960s, American firms in Asia concentrated on ICs and PC-related products, whereas Japanese firms, almost without exception, focused on lower end consumer electronics and related components. Microprocessors and PCrelated products are highly differentiated products that require close and fast interaction with sophisticated customers. TV sets and household appliances, on the other hand, are homogeneous products.



Specific features of consumer electronics are important for the organization of Japanese production networks. Lower end consumer devices have a variety of characteristics that are conducive for the establishment of global export platform mega-plants. Their homogeneous character permits the realization of large economies of scale in which close interaction with customers is not required. They are characterized by a high divisibility. Different stages in the value chain can be easily separated, and fundamental changes in design methodology has facilitated offshore production, even for relatively complex components such as drums, video heads, and small motors. With but few exceptions  most components and subassemblies are also characterized by low transportation costs, and can be easily moved between different locations.

By the end of 1992, many of the major Japanese companies showed signs of reconsidering their approach to the management of their Asian production networks. In particular, they displayed a new willingness to give more autonomy to local managers, to delegate to subsidiaries greater responsibility for higher end, more knowledge-intensive support services, such as product and process customization and software engineering, and to increase their sourcing from local suppliers. By the mid-1990s, some Japanese networks had become substantially more embedded in the local economies. To what extent do the forces of globalization explain these changes in the management of Japanese networks?

A combination of factors exerted pressure on Japanese corporations to change the governance of their production networks. Some of these relate directly to the
increasing internationalization of the Japanese economy. The Japanese government’s loss of control over the exchange rate, symbolized by the dramatic appreciation of the yen after the Plaza Accord in 1985, not only launched the new wave of IPNs but continued to shape them profoundly. By the early 1990s, the cost of imported components from Japan was undermining the international competitiveness of the newly established subsidiaries in Southeast Asia. Such competitiveness was already under threat by the rapid advance of electronics producers in Korea and Taiwan, itself a reflection of the increasing globalization of production capabilities.

To increase local linkages necessitated granting greater autonomy to local managers. Before some firms changed their policies, Japanese procurement decisions were made by individual product divisions and profit centers in the parent through procurement offices that had strong ties with domestic suppliers. Procurement engineers were trained to handle the multilayered networks of Japanese suppliers, but had neither the incentive nor the expertise to search for, certify, and upgrade foreign suppliers. Under this system, it was difficult for managers of affiliates to override decisions made by the procurement offices in Japan. The system inevitably produced delays that were unacceptable in an era of shorter product life cycles. For example, once an affiliate located and certified a local supplier, it could take up to nine months for the parent company to approve the component.

In response to the need both to locate alternative sources of supply and to make more rapid decisions on procurement, Japanese companies began to establish regional procurement offices. One example is Hitachi, which in August 1993 established in Singapore a Center for the Promotion of Procurement in Asia. Other companies soon followed as Hong Kong and Singapore competed to establish themselves as the principal locus for regional headquarters of Japanese networks.

Data on the procurement activities of Japanese subsidiaries in ASEAN reflect the pressures for the opening up of production networks. These changed markedly between 1990 and 1995. Whereas, in 1990, Japanese subsidiaries in ASEAN engaged in manufacturing sourced 38 percent of their components from the local market and 44 percent from Japan, by 1994–5 the proportions had been almost exactly reversed 18

Competitive performance of US versus Japanese electronics firms




As argued by Michael Borrus in older article, the different production network strategies of US and Japanese electronics firms in East Asia are likely to have had a causal impact on their global competitive performance. Although it is not possible to make causal inferences about competitive performance at the global level from financial performance at the level of subsidiary operations in Singapore, it is interesting to note that US electronics firms appear to have reported higher profitability performance than Japanese firms, at least in the most recent years for which data are available. As can be seen from Table 7.6, of the seventeen large US and forty-four large Japanese electronics manufacturing firms in Singapore for
which data are available, the US firms registered significantly higher return on sales  and return on assets  performance than Japanese firms did over the three-year period from 1992/3 to 1994/5. Although it is possible that part of this difference may be due to differences in transfer pricing and other international accounting practices of US and Japanese firms, the data are at least not inconsistent with the argument of Borrus at the global level.

The emergence of indigenous electronics firms
As mentioned in the first section, the role of indigenous firms in Singapore’s electronics industry had been negligible until the 1980s. Unlike Taiwan and Hong Kong, Singapore lacked an initial injection of experienced manufacturing entrepreneurs from mainland China during the early years of political independence. Neither did Singapore send large numbers of students to the United States for training in electronics technology as did Taiwan, Hong Kong, and South Korea. The influx of foreign manufacturing investments did provide training and exposure to a large number of Singaporean engineers and technicians, but much of this was in manufacturing process technology, not in product technology know-how, which, by and large, still resided in the corporate headquarters in the United States, Japan, and Europe. It is thus not surprising that the transfer of technological know-how through these manufacturing investments translated first into the development of indigenous firms in the electronics contract manufacturing   and supporting industries, rather than

Foreign investment

Malaysia opened itself to foreign investment soon after gaining independence from Britain in 1957. Under an import substitution policy, tariffs were raised and tax benefits granted to selected industries. Because of the limited domestic market and requirements for taking on local partners, the response of foreign investors was disappointing. With the Investment Incentives Act of 1968 and the Free Trade Zones Act of 1971, Malaysia adopted a formula that had been used elsewhere in the region: to make itself an attractive platform for export-oriented investment through exemptions from various taxes and duties. Electronics was made a “pioneer industry” in 1971. Exporting manufacturers were offered up to ten years of tax exemption, freedom from joint venture requirements, subsidized industrial estates, free trade zones  investment guarantees, and unhindered profit repatriation. FTZ firms were also kept union-free for many years 3 In 1981, government leadership was taken over by the current Prime Minister Mahathir Mohamad. He installed a Japan-style technocracy, emphasizing the development of heavy industry as part of a “Look East” policy aimed at assimilating the lessons of Japan and Korea . In the mid-1980s, a downturn in world prices for the country’s commodity exports, coinciding with a drop in foreign and domestic investment, seriously undermined the new policy. The government responded by easing the restrictions and strengthening the incentives for both foreign and domestic investors. Japanese electronics firms were at the forefront of the subsequent wave of FDI. After approximately ten years of expansion by the Malaysian electronics sector, Asian financial crisis has posed a new challenge to the country’s policymakers. The trading value of the Malaysian Ringgit  was caught in the wake of Thailand’s July 1997 decision to stop defending its currency. From the level of roughly RM 2.5 to the dollar, which had held since 1992, the currency’s value slid steadily to as low as RM 4.7 to the dollar in early 1998. Malaysia’s leadership responded in September 1998 with the unorthodox imposition of capital controls and a fixed exchange rate of RM 3.8 to the dollar. Whereas the capital controls affected the country’s access to loans and portfolio