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.

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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

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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.

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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.

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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.

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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

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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

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Management localization and autonomy

In the early 1990s, Japanese subsidiaries in other parts of Asia were far less likely than their US counterparts to employ local managers, to employ local personnel in senior technical roles, or to have nationals of the host country on their boards. Even where firms employed local managers, they were often “shadowed” by Japanese personnel and relegated primarily to the performance of public relations roles for the company. In their study of Japanese subsidiaries in Australia, Nicholas et al. concluded that Japanese nationals dominated the upper echelons of management, and that “there was a systematic bias in favor of Japanese managers holding key management positions, especially those involving the implementation of the technology or human capital critical to the competitive advantage of the firm.” In part, the low levels of representation of local staff in management positions may stem from the replication of the lifetime employment system in overseas affiliates. This has two effects. First, if expatriates initially staff the subsidiary, any replication of the seniority system inevitably delays the transition to locally recruited managers—unless the senior staff are relocated elsewhere within the corporation. Even if such opportunities for transferring senior staff arise, however, many Japanese subsidiaries expect local recruits to complete a lengthy training and socialization period before they receive promotion. These company expectations generate the second effect: frustration on the part of locally recruited managers with their promotion prospects, which often leads to their seeking employment elsewhere. Several surveys of local managers in Trans-National Corporation subsidiaries in Asia report that Japanese employers were viewed far less favorably than their American or European counterparts Interestingly, in their Asian affiliates, Japanese firms seldom practiced the job rotation and quality-control circles for which they have won much admiration. Instead, a crude “Fordism” often prevailed. The replication of the seniority system in Asian subsidiaries constitutes a structural explanation for the low levels of localization of management in Japanese companies. In addition, the lack of familiarity of most locals with the Japanese language, with corporate culture and with the networks within which the company operates are barriers to localization. Undoubtedly, however, corporate preferences were also a powerful factor acting against localization. Companies see the employment of Japanese managers as facilitating central control over essential operations. They also fear that localization of management will increase the risks of leakage of commercial secrets to the local economy.ng of components and capital goods; replication of production networks; and distribution of R&D activities. Not only was the management in Japanese subsidiaries generally less localized than that of other TNC subsidiaries, but the management enjoyed far less autonomy in key areas of decision-making. Several studies have found that decision-making within Japanese TNCs tended to be hierarchical and centralized in the hands of headquarters. Managers of subsidiaries enjoyed little freedom of action on issues such as the sourcing of capital goods and components In Guyton’s  survey of Japanese affiliates in Malaysia, a majority of the Japanese companies reported that their parent companies dictated where machinery should be acquired The lack of autonomy for local management leads to a second significant difference between Japanese and US subsidiaries

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Growth of Singapore’s electronics industry

As described elsewhere in this article, several East Asian countries outside Japan have emerged as major production platforms for the global electronics industry since the 1970s. Driven by global competition, firms from advanced countries in general and US and Japanese firms in particular have increasingly extended their supplier bases and production networks to the various countries in East Asia. In 1993, the four Asian NIEs, ASEAN, and China together already accounted for 13 percent of global electronics production, or about 40 percent of Japanese output With nearly all these countries achieving double-digit growth over the last three years and Japanese production stagnating, the share of non- Japan East Asian output in global production has increased substantially since then. Along with rapid expansion in output, there has also been a significant transformation in the nature of activities being carried in these countries.

This article focuses on one aspect of this changing structure of Asian production networks for the global electronics industry—the emergence and growth of Singapore as a major hub in South East Asia. By examining the dynamics of growth of Singapore’s electronics industry over the last three decades, this article seeks to provide new insights into the shifting patterns of competitive interactions between US and Japanese production networks. In particular, we argue that the rise of Singapore is largely due to its ability to leverage the competing but overlapping production networks of major US and Japanese electronics firms. It is this ability to “ride the waves” of technological and organizational changes emanating from the United States and Japan that enabled Singapore to differentiate itself from other competing locations in East Asia —the North Asian NIEs of Korea, Taiwan and Hong Kong as well as the Southeast Asian “tigers” of Malaysia and Thailand.

This article is organized as follows. The first section profiles the historical growth of Singapore’s electronics industry, highlighting a number of salient features that distinguish it from other competing locations in East Asia. The second section analyzes in more details the competing yet overlapping contributions of major US and Japanese firms to the development of Singapore’s electronics industry, and the salient differences in organizational characteristics and strategic orientations between US and Japanese operations in Singapore. The third section examines the recent emergence of indigenous electronics firms in Singapore and their changing roles in the US-Japan competitive nexus. Finally, the fourth section examines the contributing role of the state in promoting Singapore as a regional hub for electronics, and provides some concluding observations

concerning future directions of US-Japan competition in electronics, and their implications for Singapore in particular and Asian production networks in general.

The rapid growth of the electronics industry in Singapore

Since the late 1960s, when electronics firms from the United States and Japan first began to redistribute production to Asia, Singapore has been a major node in the production networks of the global electronics industry. Despite the continuous spreading of the US and Japanese production networks to other countries in East Asia in general and Southeast Asia in particular, Singapore has continued to maintain an eminent, though changing, position in Asia. Indeed, successive waves of investments by multinational corporations from the United States, Japan, and Europe have intensified Singapore’s integration into the global production networks of these firms. The aggregate electronics industry output reached S$63 billion in 1996, constituting over 52 percent of the total manufacturing output in Singapore, making it by far the largest industrial sector in Singapore today. Along with quantitative growth, Singapore’s electronics industry has also

undergone tremendous qualitative transformation. Between 1970 and 1995, the industry has moved from simple technology, labor-intensive operations to highly automated, skill-intensive operations, as reflected by an average increase in labor productivity of over 5 percent per year during the 25-year interval. Reflecting the significant rise in capital and technology intensities over the years, fixed asset per worker also increased dramatically  The qualitative transformation of the electronics industry can also be seen in the shifting sectoral composition of the industry over the years    Although consumer electronics and basic electronics component assembly and testing activities dominated in the earlier years, the growth of the industry over the last decade has been fueled mainly by the manufacturing of computer related products  and more advanced electronics component-manufacturing operations.

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Samsung’s network in China

Samsung’s network in China is actually divided into two relatively separate pieces, one of which is located at Tianjin, and the other in Guangdong Province. A new electronics complex has recently been announced for the Singaporesponsored Suzhou Township, located about halfway between Samsung’s southern and northern China plants. In the early 1990s, Samsung selected Tianjin, which is close to Korea, as a strategic FDI location. SEC rapidly set up integrated operations to build first VCRs then CTVs. Samsung Aerospace Industries joined in this location to produce cameras for the local Chinese market. 

Tianjin Samsung Electronics  was SEC’s fourth offshore VCR plant, and its second in Asia. It was established in early 1993 as a 50:50 joint venture with a state-run electronics firm. A total of US$64 million was invested in the vertically integrated project, which produces VCRs, VCR decks, and VCR drums.

In 1995 it produced 400,000 VCR sets. Half of its products are being sold locally,

and the remainder are going to Australia and the former Soviet Union. Just prior to the VCR affiliate, Samsung Corning set up a plant to produce rotary transformers for VCRs, a product it had made in Korea since the late 1980s  In late 1992, after the approval of Samsung-Corning’s US partner, SC-Tianjin started to produce rotary transformers with a capacity of 800,000 units, which was rapidly expanded in the following months. From 1993, it added more sophisticated products such as four-channel rotary transformers, in addition to the two channel type SC-Tianjin planned to expand to a capacity of 5 million units per year by 1995  In December 1993, SEM established Tianjin Samsung Electro-Mechanics, an 80:20 joint venture with one of the state-run electronics corporations, to manufacture a variety of components that could be used in the VCRs produced nearby and in the CTVs that were soon to be produced. The total investment required was US$60 million. Production started in May 1994 with the following capacities: 3.6 million TV and VCR tuners; 2.4 million VCR heads; 3.6 millionprecision motors; 600,000 computer spindle motors This is of course much more than can be absorbed by Samsung’s local affiliates. In 1994, SEC formed Tianjin Tongguang Samsung Electronics, a 50:50 jointventure with the same partner as the VCR plant, to produce color TV sets. 

SEC invested US$30 million for a production capacity of 1 million sets. It is the largest of Samsung’s overseas CTV plants, and recent annual output was 800,000 units, absorbing about one-third the tuner capacity of the nearby components plant. Samsung Aerospace Industries appears to have made an unrelated opportunistic investment by setting up a 50:50 joint venture to produce cameras with a large local camera manufacturer, Tianjin Camera. The total investment was a relatively small US$10 million. The target markets are China, Hong Kong, Thailand, and Singapore. Its future expansion will be mostly dependent on the marketing efforts of the Chinese partner. In southern China, Samsung established a smaller network for audio products. First came components, with Dongguan Samsung Electro-Mechanics, a wholly owned subsidiary in Guangdong Province. It was technically the first offshore plant of Samsung’s SEM branch, having been established in mid-1990, at the same time as several other Korean companies invested there, but production did not begin until 1992. An expansion in 1994 raised production capacity: from 400,000 audio decks to 800,000; from 1.8 million audio speakers to 4 million; and from 100,000 computer keyboards to 300,000. Most of the output is shipped to Southeast Asia, China, America, and Korea Starting in late 1992, SEM’s Dongguan affiliate began supplying audio components to Huizhou Samsung Electronics, another Guangdong affiliate. SEC owns 90 percent of the shares in this company, and its Chinese and Hong Kong partners hold 5 percent each. In November 1992, Huizhou SEC started production of audio products. Its capacity in 1994 was 540,000 units, and 15 percent of its production is sold on the local market. Samsung is also involved in the Chinese telecommunications market. 

Samsung Sandong Telecommunications was set up in 1994 to assemble time division exchange central office switches for local use, which had been developed by Samsung in cooperation with the Korean government. The joint venture with two local partners, one of which is a state-run telecommunications corporation in Sandong, represents an investment of US$20 million. It is currently producing 370,000 TDX switches.

This case study of Samsung reveals a dynamic interaction between firm capabilities and IPNs. In the early stage, when Samsung was building capabilities, foreign linkages were needed for technology and marketing. As the group’s capabilities grew, it ventured into international production. However, its capabilities in mass production were inadequate for ensuring the success of its initial efforts to bypass trade barriers in its major markets by building offshore production bases there. It was only following a reorientation of its international production to low-cost operation in peripheral areas that it was able to correctly match its current capabilities with its network structure. Meanwhile, it has reoriented the nature of its non-production linkages with foreign firms to help foster the development of the design and marketing capabilities it has lacked in the past, frequently through acquisition. Internally, the Samsung Group’s electronics activities have suffered from an almost complete de-linkage between production marketing and design and development  since the 1970s.

This is a tends to confirm the argument by Kogut and Zander   that the key to successful international production is “…to recombine the knowledge acquired at home with the gradual accumulation of learning in the foreign market.” Thus Samsung’s affiliates in Southeast Asia were gradually able to increase the percentage of output sold in the local market, relying at first mostly on exports. Yet the continued centralization of product development has slowed the learning process in offshore affiliates.

Given the weakness of product development in the Korean electronics sector, it is possible that centralization is necessary during the period in which major innovation capabilities are acquired. But we have already seen that this leaves offshore production centers vulnerable as they try to penetrate local markets in competition with rivals who use minor change capability to tailor products for local customers.

The different technology management pattern established by Samsung’s Japanese rivals seems to be relevant. The major Japanese consumer electronics firms have decentralized minor product change capabilities at many of their production affiliates in Southeast Asia, increasing the flexibility of their production networks and freeing up engineering resources in Japan for more valuable work.

Samsung’s IPNs are also different from those of Taiwanese firms. While Samsung tends to focus on economies of scale, largely in consumer electronics products manufactured in a vertically integrated system, Taiwanese firms focus on economies of networking in the region that permit a large degree of flexibility for adapting to the rapidly changing information technology market. Thus, we can note in passing that this research supports the idea that IPNs have developed in divergent, rather than convergent ways.38

Korean industrial policies have been important for facilitating, and even inciting, the firms’ international competitiveness by requiring foreign firms to transfer technology in exchange for market access, supporting exports, protecting the home market, and supporting research. However, policy errors have also occurred. The first was nearsightedness in creating a top-heavy industrial structure mimicking that of Japan but without that economy’s underlying dynamic of continuous upgrading of product design. The second involved the creation of a Korean innovation system with a relative weakness in basic research, which may prove a major problem as Korea nears the technology frontier and can no longer license or buy all it needs from more advanced countries.39

FDI has helped Korean firms maintain their competitiveness in low-end goods, but they have not completely succeeded the transition in to higher value production at home that is required after a massive relocation of productive resources. They have partly responded by finding new, more complex products to mass-produce, such as advanced flat-panel displays. But this merely postpones the transition to market-driven product development that will be necessary for continued competitiveness.

The recommendations of Ernst that the Korean government should shift from “export-led market expansion” to “FDI-led market expansion,” and national innovation policies from “sectoral targeting” to “diffusion oriented policies” appear sound. At the same time, the government must fundamentally change its traditional education system, which is extremely uniform and no longer relevant under the new competitive requirements in order to build up the creative capability of human resources as suggested by Kim

The challenge for Samsung in the

context of its IPN is to successfully develop and transfer adaptive product design know-how to its offshore affiliates. Improvement in the competitive advantage of overseas affiliates is directly dependent on how quickly a firm can create and diffuse required capabilities that properly adapt to changing conditions. Deeper linkages within Samsung’s organizational network both in Asia and around the world will be needed to face the next round of competition in the electronics sector.

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Samsung’s production networks in Asia

Asia has been an important destination for Samsung’s direct investment for a number of reasons. In addition to the company’s interest in recovering cost competitiveness by utilizing the low-cost resources available in Southeast Asia, it was also pursuing some of the major customers for its components as well as some of the world’s most dynamic markets.

A Singapore based purchasing office was established in 1991 to speed up the internationalization of production, in part by being a supplier of low-cost parts for Korea-based production sites. Ironically, the purchasing office has directly bought components from Korea-based components suppliers because it is cheaper than going through SEC headquarters in Korea. The office has grown dramatically since its creation and was eventually able to satisfy Singapore’s requirements for the preferential tax treatment granted to regional headquarters. The vertically integrated operations in China were set up more quickly than those in Southeast Asia, possibly reflecting the firm’s increased confidence in overseas production. Since 1994, Samsung has announced the creation of other integrated production complexes in its strategic markets.

To date, interaction between Samsung’s two Asian subnetworks has been mostly limited to CRTs sent from Malaysia to a China CTV affiliate and Chinesemade VCR components sent to a Thai affiliate. This is because the two subnetworks were originally designed to serve two largely separate Asian markets. The key intermediary is the Singapore-based purchasing office, which purchases and distributes a huge amount of components among the Samsung affiliates and those of their Japanese counterparts in the regions.33 However, the most important intra-firm transactions are still highly centralized, occurring between the affiliates and the Korea-based product division, or between the affiliates and the Korea-based global marketing division

The separateness of the two subnetworks may prove a competitive disadvantage. Japanese producers in the region usually divide their product mix geographically according to the subsidiary’s technological capability, facilitating the achievement of scale economies. By comparison, Samsung’s production networks in Asia are still at a primitive stage, incorporating certain redundancies.

The weakness of Samsung’s performance in the consumer goods sector meant that it found itself with excess capacity in its overseas plants. In practice, this has meant that the offshore plants are underutilized—in spite of their vocation to improve cost-competitiveness—because Samsung’s employee evaluation system is oriented to performance at the plant level, making employees resistant to transferring production overseas when no activity would fill the void at the Korean plant.

This has been much less of a concern in the case of plants producing components, which have been able to sell the majority of their output to other firms operating in the region, particularly Japanese affiliates. Samsung’s Asian networks have thus been able to build on the company’s past history of OEM relationships with Japanese companies. For example, two component-producing.

In fact, Samsung’s Asian television production network has been deeply enmeshed virtually from its inception with those established earlier by Japanese firms. For example, not only does the CRT producer SED-Malaysia sell the bulk of its output to nearby Japanese affiliates of Sanyo, Matsushita, Sharp, and Funai, it also sources about a third of its total components from mostly Japanese suppliers such as NEG and Asahi.34 Clearly, the establishment of offshore production has led to complex interdependence between Samsung and its Japanese competitors.

It was the presence of its Japanese customers that permitted Samsung to reduce the risk inherent in starting capital-intensive production overseas. For example, having already become a successful supplier of CRTs to Japanese CTV producers, SED could be reasonably certain that its Malaysian affiliate could meet demanding Japanese quality assurance requirements SED-Malaysia fills a specific role in the regional division of labor of Japanese firms; by providing 14- inch CRTs, it permits the component subsidiaries of Japanese producers to specialize in larger, more higher value-added picture tubes.

Samsung’s production presence in Asia is increasingly connected to marketing objectives. To that end, the firm has established ties with mainland and overseas Chinese partners, typically as a prerequisite for market entry, in addition to establishing its own distribution channels. Its local joint ventures are thus the mirror of those it established in Korea in the 1970s with Japanese partners, trading production know-how for market access—only now the know-how is Samsung’s.

In at least one case, an affiliate established for the local market  was forced by poor performance to shift to exports. But more generally sales were able to shift from export to local markets.

So far these locally oriented operations have achieved local and even regional linkage between production and marketing activities, but design and product development activities still belong to organizations in Korea: “…we continue to move Korea-based manufacturing sites overseas. Instead, leave the concept of design, development, research institutes at home” But this has left a void in affiliates for which the local market is important. For instance, the Indonesian affiliate distributing CTVs to the local market is searching for locally marketable products that differ from the products designed in Korea for global markets.

In early 1995 SEC formed a new product planning post at its Singapore-based regional headquarters. The team was to concentrate on supporting product design and development activities targeted to the Asian regional market. Yet, there is no sign that this team has actively interacted with the group affiliates  Yet SEC is under pressure to carry out product design closer to individual markets as Japanese and European rivals have increasingly done, frequently co-locating product design with offshore production. Recently, a new executive officer who had worked for the department in charge of product

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Internationalization of production

Although Samsung’s organizational strategy for the 1990s revolves around consolidation, the strategy for its physical production facilities involves increasing movement offshore

Samsung’s earliest overseas production efforts were a Portuguese joint venture  operation started in 1982, a US subsidiary established in 1984, and a subsidiary set up in Mexico in 1988. They had competencies in the production of CTV sets and many core components. By the end of 1988 it also had twelve sales subsidiaries outside Korea.

After unsatisfactory results with US production, Samsung focused more intensely on establishing low-cost manufacturing plants in Mexico, peripheral Europe, and Southeast Asia. Several factors stimulated this move. We have already discussed above the various factors eroding Samsung’s competitiveness, including market saturation, loss of preferential tariff status, and appreciation of the won. But an important motivation may have come from the strategies of its rivals.

Moves by Japanese and other Korean electronics firms seem to have induced Samsung to adopt a “follow-the-leader” strategy.29 In the mid-1980s, Japanese companies such as Matsushita, Toshiba, Sony, and Sanyo started to move into Southeast Asia to establish production subsidiaries. For instance, Matsushita’s foreign investment projects in Southeast Asia and China numbered five in 1987,four in 1988, three in 1990, four in 1991, three in 1992, and eight  in 1993

The consumer electronics goods produced by Japanese overseas affiliates started to penetrate into the low-end global market where Korean firms had predominated  until the late 1980s. Here was a strong challenge for Samsung. The Japanese brand products made in the ASEAN region were cheaper than the products made in Korea. In the case of microwave ovens, the cost of the Sanyo product, manufactured in Southeast Asia for the OEM market, was 13 percent cheaper than that made in Korea.

The same is true for the components. Matsushita started to produce CRTs and tuners in Southeast Asia, and expanded into China

Sony built a color CRT plant in Singapore  Toshiba, Matsushita, and Hitachi also established CRT production in the United States. Similarly, Asahi Glass and Nippon Electric Glass set up overseas operations.

Strategies based on international production were also adopted by Samsung’s Korean rivals. In 1988, Goldstar signed a contract with the Chinese government to acquire 165,000 square meters of land in the Zhuhai Economic Zone for the construction of a manufacturing plant to produce CTV sets and audio equipment to be sold on the Chinese market Around the same time, Goldstar moved into Thailand with Samsung right behind.

Finally, it should not be overlooked that Samsung’s recent thrust into offshore production was enabled by its successful accumulation of technological capabilities which could now be transferred. Nearly all of Samsung’s foreign affiliates are engaged in the production of standardized products, utilizing mass production capability transferred from Korea. It has been able to build on its initial forays into foreign production. Recently SEC transferred Park Byung Moon, who had been a head of an Indonesian affiliate for a couple of years, to India, where it is setting up a new CTV plant.

Samsung’s highly centralized structure has limited the transfer of technological capabilities to overseas affiliates, even as they face new competitive requirements. Samsung’s affiliates have been forced to interact with a growing variety of economic actors, including those within the group. Hence, each organization in the network requires greater autonomy to avoid bureaucratic paralysis in the network as a whole. In early 1995, shortly after a wave of administrative consolidation had swept over its Korea-based operations, Samsung extended the concept to its offshore production networks by designating five regional headquarters around the world.30 Of the five, two were in Asia. Their locations— Singapore and Beijing—reflected the relative separateness of the two offshore production networks that had been created by Samsung in the region.

In particular, SEC’s in-house R&D operations have continued to be highly centralized. The hierarchical integration has failed to provide researchers and engineers with satisfactory R&D circumstances. According to company surveys Samsung engineers complained most about an unsatisfactory R&D working environment being overloaded with projects insufficient time for the feasibility study of future projects and being overwhelmed with documentation and paperwork requirements

Many of the organizational problems that hindered the development of effective product innovation in the past continue to plague SEC.  reported that production departments are seldom involved in the early stages of new projects, that projects were chosen by the corporation on the basis of their expected short-term impact on individual strategic business units, that projects reflecting a longer term outlook were likely to be suppressed by marketers

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Samsung in the 1990s: challenge and response

The 1990s have presented Samsung with a number of challenges requiring adaptive strategies. The key strategic shift is from “quantitative” to” ‘qualitative” growth. This has been manifested in a series of organizational reforms and in new approaches to technology management. Another major thrust of recent years has been an increasingly aggressive globalization of production.

Declining competitive advantage leads to organizational Restructuring

In recent years, Samsung has had to cope with a very changed environment from the world it faced twenty years earlier as it entered the electronics business. On the one hand, its investments in semiconductors paid off handsomely. But on the other hand, its traditional cash-generating product lines—in which it has considerable sunk investments—began to face serious challenges in both foreign and domestic markets. In 1993 Samsung Chairman Lee Kun-Hee described the electronics business as suffering from cancer. One aspect of this decline is a series of changes that have occurred in the markets which Samsung serves. First, Samsung’s major export markets for consumer electronics in the United States and Europe have become saturated. The reduced growth in demand has severely increased price competition, and has increased the importance of smaller markets with specialized demand —turning Samsung’s marketing weakness into a major problem  Second, Korea’s domestic electronics market, which had long been protected from foreign competition, has been liberalized as Korea prepares to join the ranks of industrialized nations, eroding an important source of profits. Liberalization of imports by the Korean government has led global players to enter the Korean domestic market, which had long been protected from foreign electronics products. In 1989, import quotas on consumer electronics goods were removed. From July 1991, foreign retail distribution outlets were allowed to possess up to ten stores with less than 1,000 square feet in size —far bigger than the 100–130 square feet that local Korean outlets usually occupied By 1993 there was a plan to cut the average tariff computer products was much higher than that of Taiwanese firms.27 Its position in computer systems outside of Korea was particularly weak. The recent major investment in AST Research provides Samsung an alternative means of overcoming its internal weakness in the computer business.28 The agreement enables Samsung to share the AST brand name and to sell memory chips to AST. SEC is actually not entitled to be directly engaged in AST’s management for the first four years of acquisition However, Samsung’s acquisition of foreign firms   was not aimed at ameliorating Samsung’s internal weakness in product design and development, but at acquiring frontier technologies seen as essential to the production of next generation products.

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