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  • OECD-OERO Meeting “Productivity and Long term Growth: Evidence-Based Economic Policy in the Aftermath

    of the Crisis” (June 21, 2013 @ OECD)

    How to Grow with Developing Countries? Globalizing Corporate Activities and Domestic Economy in Japan

    Fukunari Kimura TCER, Keio University, and ERIA

    1 2013/06/21

  • 1. Further globalization for growth • Manufacturing activities are still important for the Japanese

    economy. • Although the fear of de-industrialization exists, opposition to

    globalizing corporate activities is very weak in Japan. – People intuitively know that outward foreign direct investment is

    beneficial for Japan to introduce the Asian dynamism. • Empirical studies show that production networks have actually

    generated domestic employment and economic activities; have brought in stability and robustness rather than fragility.

    • Although some uncertainty exists in China and others, the dominance of East Asia for manufacturing activities has substantially strengthened in the past decade and will continue.

    • Crucial to improve location advantages of Japan in order to effectively set up division of labor with developing East Asia; essential part to the 3rd arrow of Abenomics, which works with aggressive FTA strategy (TPP, RCEP, Japan-EU FTA, and others).

    2 2013/06/21

  • 3 2013/06/21

  • 2. Production networks in East Asia • East Asia as a factory of the world

    – Production networks in the manufacturing sector, particularly machinery ind. – Fragmentation and agglomeration

    • Conceptual differences from usual trade – Quick and high frequency transactions – Coordination matters – Movements of goods and beyond

    • Theoretical underpinning – The fragmentation theory (Jones and Kierzkowski (1990))

    • Production blocks and service links – Two-dimensional fragmentation (Kimura and Ando (2005))

    • Geographical distance and disintegration, explaining the formation of industrial agglomeration

    • Work with new economic geography (Baldwin, Forslid, Martin, Ottaviano, and Robert- Nicoud (2003))

    – The 2nd unbundling (Baldwin (2011)) • International division of labor in terms of production processes and “tasks” • Movements of goods, ideas, technology, capital, and technicians (cf. the 1st unbundling)

    4 2013/06/21

  • The 2nd Unbundling

    ⇒ Bay B Bay A

    Bay C

    Bay B

    Bay A

    Bay C

    1st 2nd

    ICT⇒

    The 2nd unbundling, i.e., international division of labor in terms of production processes and tasks, has developed since the 1980s. The 2nd unbundling in the manufacturing sector is most advanced in East Asia.

    Source: Baldwin. 5 2013/06/21

  • Source: Ando and Kimura (2013b). 6 2013/06/21

  • Source: Ando and Kimura (2013b). 7 2013/06/21

  • PB

    PB PB

    PB

    PB

    SL

    SL

    SL SL

    SL

    PB: Production block SL: Service link

    Before fragmentation

    After fragmentation

    The fragmentation theory: production blocks and service links

    8 2013/06/21

  • The evolution of the 2nd unbundling

    The United States

    Mexico

    Consumers

    Headquarters or affliates

    Unrelated firms with same firm nationality

    Unrelated firms with different firm nationality

    The United States

    Consumers

    Consumers

    Japan

    Korea

    Vietnam

    Malaysia

    The Philippines

    Taiwan

    Internet auction

    Agglomeration

    Agglomeration

    Cross-border production sharing (back-and-forth; intra-firm)

    Production networks (“networks”; fragmentation and agglomeration;

    intra-firm in short distance, arm’s length in long distance)

    9 Source: Ando and Kimura (2010).

    2013/06/21

  • Two-dimensional fragmentation: An illustration

    Source: Kimura and Ando (2005).

    OEM contracts

    Subcontracting

    Internet auction Competitive spot bidding

    Cross-border intra-firm fragmentation

    Disintegration

    (National border) Distance

    (Boundary of firm)

    Origin

    Domestic intra-firm fragmentation

    Domestic arm's length fragmentation

    Cross-border arm’s length fragmentation

    Outsourcing

    EMS

    Industrial agglomeration International fragmentation

    10 2013/06/21

  • Industrial Agglomeration in Bangkok

    Note: The circle of 100km is added by the author (Original source: Board of Investment, Thailand) Source: ERIA (2010). 2013/06/21 11

  • 3. Production networks and international policy environment

    • Policy reform in developing countries to further activate production networks – Three kinds of costs in fragmentation; two-

    dimensional fragmentation – High-level FTAs and development agenda

    12 2013/06/21

  • Bay B

    Bay A

    Bay C

    Bay B

    Bay A

    Bay C

    Bay B

    Bay A

    Bay C

    1) Two-way flows of goods, ideas, technology, capital, and technicians.

    2) Investment and application of technical, managerial and market know-how abroad.

    Connecting factory & doing business abroad: The “trade-investment-services nexus”

    Source: The original is in Baldwin (2011), slightly modified by the author.

    Figure 2 The 1st and the 2nd unbundling

    13 2013/06/21

  • Reduction in network set-up cost

    Reduction in service link cost

    Reduction in production cost per se

    Fragmentation in geographical

    distance (par. For

    International fragmentation)

    • Investment facilitation/promotio n

    • Institutional connectivity (tariff removal, trade facilitation, …)

    • Physical connectivity (hard and soft logistics/ICT infrastructure development)

    • Liberalization of production-supporting services

    • Investment liberalization

    • Upgrading infrastructure services such as electricity supply and EPZs

    Fragmentation in disintegration (linked with the

    formation of industrial

    agglomeration)

    • Business matching between multinationals and local firms

    • Reducing transaction cost in economic activities

    • Convergence/harmoniz ation of economic institutions and legal system

    • Enhancing agglomeration effects through SME development

    • Strengthening innovation

    Policies for a new development strategy

    14 2013/06/21

  • 15

    Reduction in network set-up cost

    Reduction in service link cost

    Reduction in production cost per se

    High-level FTAs

    • Investment liberalization

    • IPR protection • Competition policy

    • Tariff removal • Trade facilitation • Enhancing

    institutional connectivity

    • Liberalization of production- supporting services

    • Investment liberalization

    Development agenda

    • Investment facilitation/promotio n

    • Enhancing physical connectivity (including hard and soft logistics infrastructure development)

    • Reducing transaction cost in economic activities

    • Upgrading infrastructure services such as electricity supply and EPZs

    • Enhancing agglomeration effects through SME development

    • Strengthening innovation

    Policies for enhancing the 2nd unbundling

    2013/06/21

  • 4. Delaying de-industrialization on the developed country side

    • Japanese manufacturing firms that extend operations in East Asia relatively enlarge domestic employment and operations, no matter whether in normal periods or under crises. – Ando and Kimura (2012a, 2013a, 2012c) – Hijzen, Inui, and Todo (2007)

    • After the GFC, some sign of narrowing the scope of domestic manufacturing activities is observed though. – Ando and Kimura (2012b, 2012c)

    16 2013/06/21

  • time

    Foreign

    Domestic

    Decision of international production networking

    Establishment of a foreign

    affiliate Reach full operation

    Domestic adjustments on inputs (K, H, L) domestic establishments domestic affiliates exp./imp. patterns

    Preparation period for FDI (typically 2-3 years)

    Expanding operation (typically 2-3 years)

    Figure Typical sequence in international production networking

    Source: Ando and Kimura (2012c). 17 2013/06/21

  • Source: Ando and Kimura (2012c). 18 2013/06/21

  • Source: Ando and Kimura (2012c). 19 2013/06/21

  • Source: Ando and Kimura (2012c). 20 2013/06/21

  • A permanent change in extensive margins

    Source: Ando and Kimura (2012b). 21 2013/06/21

  • 5. Stability and resiliency against macro shocks

    • Production networks may work as a shock transmission channel.

    • At the same time, transactions in production networks are more stable and more resilient than other transactions. – Trade in machinery parts and c