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International Production and Distribution Networks
in East Asia:
18 Facts, Mechanics, and Policy Implication
Fukunari Kimura
Keio University, Tokyo, Japan
([email protected])
2006.07.04.
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1. Introduction




The nature and characteristics of international
prod./dist. networks must be analyzed more
carefully.
Mainly (but not limited to) machinery
industries.
International prod./dist. networks in East Asia
are distinctive in (i) their significance, (ii) their
extensiveness, and (iii) their sophistication.
Comparison with the US-Mexico nexus and
the WE-CEE corridor would be useful.
2006.07.04.
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2. “18 facts” on prod./dist.
networks in East Asia

“18 Facts”

Facts 1-8: from international trade statistics


Facts 9-11: from microdata of Jap. MNEs


Process-wise international division of labor among
countries at different development stages
Prod./dist. networks; intra-firm vs. arm’s length
Facts 12-18: from case studies/casual obs.

2006.07.04.
Location advantages; agglomeration; service link
cost; outsourcing (disintegration); local firms
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
Facts drawn from international trade statistics

Fact 1: International trade pattern of the East Asian
countries has rapidly shifted from one-way trade to intraindustry trade since the beginning of the 1990s.
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Fact 2: Most of the intra-industry trade of the East Asian
countries is “vertical” rather than “horizontal.


Ando (2005).
Fukao, Ishido, and Ito (2003), Ando (2005).
Fact 3: Vertical intra-industry trade of the East Asian
countries does not necessarily follow the pattern suggested
by vertical product differentiation models.

2006.07.04.
Ando (2005).
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Figure 1 Commodit y composit ion of export s and import s
HS01-24
(d) Thailand
HS25-27
(e) Malaysia
HS01-24
HS28-38
HS25-27
HS39-40
HS28-38
HS41-43
HS39-40
HS44-46
HS41-43
HS44-46
HS47-49
HS47-49
HS50-63
HS50-63
HS64-67
HS64-67
HS68-70
HS68-70
HS71
HS71
HS72-83
HS72-83
HS84
HS84
HS85
HS85
HS86
HS86
HS87
HS87
HS88
HS88
HS89
HS90
HS91
HS91
HS92
HS92
HS93-97
19
90
19 IM
92
19 IM
94
19 IM
96
19 IM
98
20 IM
00
20 IM
02
IM
HS90
19
89
19 EX
91
19 EX
93
19 EX
95
19 EX
97
19 EX
99
20 EX
01
EX
90
19 I M
92
19 I M
94
19 I M
96
19 I M
98
20 I M
00
20 I M
02
IM
19
19
89
19 E X
91
19 E X
93
19 E X
95
19 E X
97
19 E X
99
20 E X
01
EX
HS89
HS93-97
HS99
HS99
Source: Ando (2005).
Not e:2006.07.04.
"EX" and "IM" st and for exports and import s.
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Figure 5 Rapid expansion of vertical IIT in machinery goods and machinery parts
billions of US$ Figure 2
and components for East Asia's trade
1600
1400
On-way trade (parts)
1200
On-way trade
1000
Horizontal IIT (parts)
Horizontal IIT
800
Not classified IIT
(parts)
Not classified IIT
600
Vertical IIT (p arts)
400
Vertical IIT
200
0
1990
Source:
Ando (2005).
2006.07.04.
1996
2000
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Fact 4: Shares of machinery and machinery parts &
components in both total exports and imports have become
notably large in East Asian countries.
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Fast 5: Explosive increases in intra-East-Asia trade,
particularly in machinery parts & components, have been
observed since the 1990s.


Ando and Kimura (2005b).
Ando and Kimura (2005b).
Fact 6: Active back-and-forth transactions of machinery
parts & components are observed among countries with
different income levels.
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2006.07.04.
cf. core EU
cf. WE-CEE in Ando and Kimura (2005c).
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Figure 3 Machinery goods and machinery parts and components: shares in total exports and imports in 2003
%
80
Philippines
Japan
70
Singapore
Malaysia
Korea
60
Hong Kong
50
China
T hailand
40
Indonesia
30
20
10
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0
Exports: machinery goods
Exports: parts and components in machinery goods
2006.07.04.
Source:
Ando and Kimura (2005b).
Imports: machinery goods
Imports: parts and components in machinery goods
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T able 2 Development of intra-regional exports in East Asia (excerpt)
Factors of growth in intra-East Asian exports
(Millions US$, %)
(i) Growth in intra-East Asian exports (1990-2003)
1990
2003
All products
191%
Value
Share
Value
Share
Machinery goods (total)
322%
Mach in e ry goods: parts an d com pon e n ts
- Machinery final goods
183%
Intra-East Asia
54,336 39.6
300,137 57.5
- Machinery parts and components
452%
Others
82,915 60.4
221,637 42.5
(ii) Contribution to growth in intra-East Asian export
(U.S.)
(39,624) (28.9)
(82,543) (15.8)
Machinery goods (total)
66%
- Machinery final goods
18%
T otal
137,251 100.0
521,774 100.0
- Machinery parts and components
48%
Mach in e ry goods: fin al goods
Intra-East Asia
50,932
Others
168,597
23.2
76.8
144,368 28.8
356,732 71.2
(U.S.)
(70,183)
(32.0)
(143,634) (28.7)
T otal
219,529 100.0
501,100 100.0
Mach in e ry goods: total
Intra-East Asia
105,268
Others
251,512
(U.S.)
T otal
All produ cts
Intra-East Asia
Others
(U.S.)
(109,807)
29.5
70.5
444,505 43.5
578,369 56.5
(30.8)
(226,177) (22.1)
356,780 100.0
1,022,875 100.0
270,465
432,736
38.5
61.5
786,197 44.7
973,074 55.3
(174,978)
(24.9)
(355,643) (20.2)
T otal
703,201 100.0
1,759,271 100.0
Data source: authors' calculation, based on UN COMT RADE
2006.07.04.
Drawn from Ando and Kimura (2005b).
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Factors of growth in inter-regional exports
(i) Growth in inter-regional exports (1990-2003)
All products
125%
Machinery goods (total)
130%
- Machinery final goods
112%
- Machinery parts and components
167%
(ii) Contribution to growth in inter-regional exports
Machinery goods (total)
60%
- Machinery final goods
35%
- Machinery parts and components
26%
Factors of growth in East Asian exports
(i) Growth in East Asian exports (1990-2003)
All products
150%
Machinery goods (total)
187%
- Machinery final goods
128%
- Machinery parts and components
280%
(ii) Contribution to growth in East Asian exports
Machinery goods (total)
63%
- Machinery final goods
27%
- Machinery parts and components
36%
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Fact 7: In the standard gravity equation estimation for
machinery parts & components trade, notably low
coefficients in absolute values for geographical distance
are estimated in the case of intra-East-Asia trade,
compared with intra-Europe trade.
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Kimura, Takahashi, and Hayakawa (2005).
Fact 8: In the gravity equation exercise with a modified
version, positive coefficients are estimated for income gap
between exporting and importing countries in the case of
intra-East-Asia trade.

2006.07.04.
Kimura, Takahashi, and Hayakawa (2005).
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
Facts drawn from micro data of Jap. MNEs
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Fact 9: FDI in East Asia by Japanese firms has
concentrated on manufacturing. In addition, small and
medium enterprises (SMEs) have also been major players
of FDI in East Asia.

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Fact 10: Affiliates of Japanese firms in East Asia have
actively traded with countries in East Asia other than
Japan.


Kimura and Ando (2005).
Cf. AJF in LA and CEE (Ando and Kimura (2005b, 2005c)).
Fact 11: Intra-firm transactions are relatively large in
sales to and purchases from Japan while arm’s-length
(inter-firm) transactions are relatively large in local sales
and purchases.

2006.07.04.
Ando and Kimura (2005b).
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Facts drawn from case studies and casual
observations
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Fact 12: Many other elements of location advantages than
low wages seem to be increasingly important in direct
investment decisions in East Asia.
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Fact 13: We have observed explosive proliferation of
industrial estates in East Asia where substantial investment
facilitation and basic infrastructure services are realized.
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
e.g., WB investment climate study, JETRO, JBIC, JBCTIF.
e.g., intimate services, customs clearance, rental factory/floor.
Fact 14: Agglomeration has begun to be formulated in East
Asia, as a mixture of MNEs and local firms.
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2006.07.04.
e.g. Shanghai-Jiangsu, Guangzhou, Samut Prakan, Eastern
Seaboard, Penang, Shah Alam.
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
Fact 15: “Service link cost” for connecting remotely
located production blocks seems to be lowered, or at least
stable with quantitative increase, over time in East Asia.
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e.g. duty-drawback, AFTA, 40-foot containers, air cargo, customs
clearance.
Fact 16: We have recently observed notable dissemination
of ideas related to efficient production/distribution
networks such as just-in-time (JIT) production system,
supply chain management (SCM) or value chain
management (VCM), lead time, vendor managed inventory
(VMI), milk run, and others in East Asia.
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2006.07.04.
e.g., Toyota production system, Dell model.
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
Fact 17: Disintegration or detachment of activities
beyond the boundary of firm has increasingly been
observed in East Asia.
e.g. OEM, EMS firms, internet auction.
 Modulation versus total integration, fixed cost versus
proximity.
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Fact 18: Particularly in China, Malaysia, and
Thailand, we have recently observed notable
penetration of local firms into production networks.

2006.07.04.
e.g., Automobiles and ink-jet printers in Thailand.
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3. Mechanics of two-dimensional
fragmentation and agglomeration
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Seminal work: Jones and Kierzkowski (1990)
Adding “disintegration” to “geographical distance” as
another dimension of fragmentation (particularly
important in East Asia)
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cf. vertical integration, Grossman and Helpman
Reduction in production cost per se vs. service link
cost in two dimensions
Link with agglomeration at the industry/macro level
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Economies of scale in service link
Importance of proximity in arm’s-length transactions
2006.07.04.
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Figure 4 Fragmentation and service link costs
2006.07.04.
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Japan
T he United States
Consumers
Consumers
T he United States
Korea
Mexico
T aiwan
Consumers
Vietnam
T he Philippines
Malaysia
Internet
auction
Headquarters or affliates
Unrelated firms with same firm nationality
Agglomeration
Unrelated firms with different firm nationality
2006.07.04.
Agglomeration
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2006.07.04.
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T able 1 T radeoffs in two-dimensional fragmentation
Service link cost connecting PBs
Production cost per se in PBs
Fragmentation
Cost due to geographical distance
Cost reduction from location advantages
Elements (examples): transportation, Elements (examples): wage level, access
along the
telecommunications, inefficiency in to resources, infrastructure service inputs
distance axis
distribution, trade impediments,
such as electricit y, water, and industrial
coordination cost
estates, technological capability
Fragmentation T ransaction cost due to losing controllabilitCost
y reduction from (dis)internalization
Elements (examples): availability of
along the
Elements (examples): Information
various types of potential business
disintegration
gathering cost on potential business
partners including foreign and indigenous
axis
partners, monit oring cost, risks on the
firms, development of supporting
stabilit y of contracts, immature dispute
industry, instit utional capacit y for various
settlement mechanism, other deficiency in
types of contracts, degree of incomplete
legal system and economic instit utions
information
Drawn from Ando and Kimura (2005b).
2006.07.04.
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4. Policy environment for int’l prod./dist.
networks

Policy background for network
development
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Policy reform of East Asian countries in the
late 1980s and early 1990s.
Policy agenda for developing EA
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Clean up inefficient import-substituting
industries
Further activate prod./dist. networks
2006.07.04.
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
Possible uneven developments in EA
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Mobility of human capital and technology
Economies of scale in service link
Economies of scale in agglomeration
Possibly generate winners and losers
Also, congestion effect => possibly trickle
down to latecomers; policy matters
Issues for developed countries
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“Hollowing-out”; employment and productivity
Cf. US, EU
2006.07.04.
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