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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The Asian production networks of Japanese electronics firms

Like their American counterparts, Japanese electronics firms have developed

substantial international production networks (IPNs) in Asia.1 This article

examines how far Japanese firms have cloned key features of American IPNs or

developed substantially different international production activities. As we shall

see, there have been substantial differences that mirror important characteristics of

the respective national political economies. Those differences have had significant

competitive effects.

I proceed in four steps. First, I provide an overview of the internationalization

of the Japanese electronics industry up to 1991, i.e. before the bursting of the

bubble economy. I briefly describe two peculiar features of Japanese IPNs that

distinguish them from the networks established by American firms —their closed

and Japan-centered governance structures and their asymmetric trade relations.

Second, I discuss some of the causes for these differences. Although nationality is

only one factor determining the nature of Japan’s IPNs, aspects of domestic

industrial organization do spill over into foreign operations.

In the third section, I describe the factors that are gradually forcing Japanese

firms to open up their Asian production networks. While the “bursting of the

bubble economy” and the yen appreciation have acted as powerful catalysts, more

fundamental forces are also at work. The closed and Japan-centered nature of the

country’s production networks originally was a great strength. It enabled Japanese

electronics firms to rapidly ramp up export platform production in Asia and to

sustain international market share expansion. Yet it also came at a heavy cost. Farreaching

changes in the domestic production system associated with yen

appreciation and recession forced rapid changes in IPNs. Of equal importance,

however, were changes within East Asia. As the region improved its production

and innovation capabilities and became a leading growth market for electronics

products and services, Japanese firms needed to exploit these opportunities.

I conclude with a brief review of some recent changes in the organization of

Japanese production networks in Asia. Overall, the Japanese case suggests that

changes in the organization of international production are path-dependent.

Industry- and product-specific factors, firm-level characteristics and locational

advantages of the host economies matter, but the significance of national

characteristics persists.

The Asian production networks of Japanese electronics firms during the early 1990s

Three distinctive features characterize the Asian production networks of Japanese

electronics firms prior to the early 1990s: (1) heavy geographic concentration; (2)

closed, headquarters-centered governance structures; and (3) asymmetric trade

links with East Asia (Ernst 1994a). While the first feature constitutes an important

similarity with American IPNs in the electronics industry, the other two features

do not.

Locational patterns

As Encarnation (1995) has shown, Japanese investments in general are more

geographically dispersed across Asia than American ones. This was also true for

the electronics industry, because until the mid-1980s Japanese affiliates produced

primarily for protected local markets. Once the focus shifted to export-platform

production, Japanese electronics firms invested heavily in “mega-plants”

concentrated in a handful of industrial sites in Malaysia, Taiwan, Singapore, and

Thailand. In 1993, these four countries together accounted for two-thirds of all

Japanese affiliates in Asia: Malaysia had the highest share (24 percent), followed by

Taiwan (17 percent), Singapore (13 percent), and Thailand (12 percent).2

With regard to location, similarities thus have been stronger than differences; US

electronics firms have also concentrated their Asian production networks in

Singapore, Malaysia, Taiwan, and Thailand. For both Japan and the United

States, Singapore often is the apex, performing critical support and coordination

functions; Taiwan and South Korea are suppliers of precision components and

sources of OEM (original equipment manufacturing) supply; and Malaysia and

Thailand are the preferred locations for volume manufacturing.

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