accessing international markets for sustained income growth. This is ..... Cisco in IT; Nike in footwear; JC Penny in apparel; IKEA in furniture; Tesco in food.
ISEAS Working Paper: Visiting Researchers Series No. 3(2003)
Challenges of Industrial Restructuring in a Globalizing World: Implications for Small- and Mediumscale Enterprises (SMEs) in Asia George Abonyi
This paper was prepared with support from the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP). An earlier draft was presented at a workshop organized in Singapore by the Asia Strategy Forum (ASF) on “REDUCING DISPARITIES. Rethinking Key Issues in Asian Development: Changing Policies, Institutions and Mind Sets”, August 2002, Singapore; supported by the Asian Development Bank, Japan Bank for International Cooperation (JBIC), and the United Nations Economic and Social Commission for Asia (UNESCAP).
© 2003 Institute of Southeast Asian Studies ISSN 0219-3582
CHALLENGES OF INDUSTRIAL RESTRUCTURING IN A GLOBALIZING WORLD: IMPLICATIONS FOR SMALL- AND MEDIUM-SCALE ENTERPRISES (SMES) IN ASIA Abstract Restructuring of global industries, for example, through the emergence of ‘international production networks’ (IPN), is posing new challenges to developing economies in Asia. Expectations and strategies based on the historically unprecedented East Asian success with industrial development need to be adjusted in light of changing conditions. In particular, the requirements for firms to effectively access global markets and upgrade their position in global industries are becoming increasingly complex and demanding. The capacity to master and upgrade production processes is necessary, but no longer sufficient for accessing international markets for sustained income growth. This is posing significant challenges for firms — and economies — in the region, particularly for SMEs, which face special constraints. Taskoriented cooperation among groups of SMEs in the form of industry cluster and networks can provide an effective response to competitive pressures in global markets. This poses challenges to both firms and governments: to implement effective collaborative strategies and programmes, and to strengthen supporting institutions, particularly at the industry and local community level. I.
Introduction
This paper discusses emerging challenges for Asia related to industrial development in the context of a globalizing world, with particular emphasis on SMEs. The context for the discussion is provided by a brief overview in Section II of the East Asian ‘model’ of industrial development that, anchored in export-led industrialization, has led to unprecedented growth for these economies in recent decades. The success of the East Asian experience has set the ‘benchmark’ for industrial development in Asia. However, the organization of global production and markets is undergoing fundamental changes. As a consequence, the means for accessing global markets for sustained income growth are evolving: this is the focus of Section III. The requirements for firms to access international markets and upgrade their position within them are becoming increasingly complex and demanding. SMEs, the
dominant form of enterprise in Asia, are generally not well positioned to respond to these challenges. Yet, given the importance of SMEs in the region’s economies as a key source of employment and income, it is essential to find ways to improve their performance. There is increasing evidence that SMEs may be able to compete more effectively on global markets through cooperation among firms that addresses shared constraints and opportunities. Section IV therefore discusses forms of cooperation, in particular SME clusters and networks, and means for facilitating such cooperation. Section V shifts the focus from cooperation among firms, to cooperation among economies within the context of the changing organization of international production. It is more exploratory in nature, taking a ‘production based’ perspective on regional cooperation and integration. Section VI presents concluding comments. The Annexes provide cases and illustrations related to selected issues raised in the paper. II.
Context: The Rise of East Asia1
1.
The Measure of Success
East Asia has achieved historically unprecedented sustained growth and development in the past 3 decades. GDP per capita nearly quadrupled in real terms between 1975 and 2000 in East Asia, and tripled in Southeast Asia. Growth has been accompanied by dramatic decline in the incidence of absolute poverty, and by clear improvements in key social indicators for the region in areas such as health, education, and life expectancy. Although the overall record of growth and development hides a diversity of conditions of the countries of the region, it also reflects enormous strides in Asia’s overall development. 2 Industrial development, in particular the ‘East Asian model’ of export-led industrialization, was a critical part of this success story, driving growth rates and development. To put this in context, between 1985 and 1997, total world trade grew from $2.311 billion to $6.735 billion, with manufactures as the largest single component by value (60% of the total in 1997). While total world manufactured exports grew by 242% between 1985 and 1997, developing country manufactured exports increased by 516%. As a result, the share of developing countries in total world manufactured exports increased from 14.6% in 1985 to 26.2% in 1997. By far, the largest share of developing country manufactured exports came from Asia, which grew 2
from 78% in 1985 to 86% in 1997.3 For the interval 1985-1997, 8 of 10 highestranking LDC manufacturing exporters were from Asia (7 from East and Southeast Asia, with India 9th on the list).4 2.
The ‘East Asian Model’ of Industrial Development: An Overview
The East Asian experience with industrial development has been the subject of extensive analysis and debate.5 At the risk of oversimplifying this complex process, key characteristics may be summarized for the purposes of this paper as follows: •
•
• • • •
The process of East Asian industrial development is essentially a story of upgrading: moving up the ladder of “cascading comparative advantage, starting with unskilled labour-intensive activities, progressing through more skilled labour and technology intensive activities”.6 This is often described as the ‘flying geese’ model,7 with industries from different countries following each other up the ladder in the production of final products; evolving into a kind of ‘flying mini-geese’ model, as global and regional production of components and associated intra-industry trade expanded in importance. A critical factor in the export-oriented industrialization model (EOI) was the mastery of productive efficiency that allowed upgrading of firms and economies, in terms of the increasing sophistication (and diversification) of products and production processes. Exports have to be sold. On the demand side, East Asian industrialization was fuelled by the continuous expansion of global markets, in particular the US. Multinational corporations (MNCs) and foreign direct investment (FDI) played a critical role in the process of East Asian industrial development, both in the transfer of technology and in providing access to global markets. East Asian governments also played a critical role in providing an appropriate macro environment for attracting FDI and for industrial development (‘the fundamentals’), and through selective support, e.g. technology acquisition. The East Asian model may therefore be summarized in simple terms as follows: MNC + FDI + expanding global markets Î export growth + upgrading Î industrial development Î sustained income growth Îoverall development By the late 1980s, there were differences emerging among the East Asian
economies’ path to continued industrial development: between the ‘independents’, including Korea, Taiwan, and China; and the ‘integrationists’ such as Singapore, and until recently to some extent Malaysia and Thailand.8 Although in the beginning, all countries ‘bought’ rather than ‘made’ technology, the ‘independents’ began to focus increasingly on ‘making’ technology. That is, while all East Asian countries continued to buy foreign technology and invest in production capabilities, some countries (the
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‘independents’) also began to invest heavily in domestic technology capability, e.g. to create ‘national innovation systems’. By contrast, the ‘integrationists’ continued to link themselves closely to foreign investors, e.g. continuing dominance of the MNC + FDI model. 3.
Selected Issues in the East Asian Experience
A number of issues in the East Asian experience are particularly relevant to the focus of this paper: •
•
•
•
Industrial development as a historical process: Although both the speed and scope of industrial development of the East Asian economies were historically unprecedented, it took time. These countries did not suddenly ‘leapfrog’ from relative backwardness to high technology. They moved slowly up the ladder of industrial development of increasing complexity over decades. Role of globalization and technology transfer: Industrial development in East Asia was closely linked to the forces that drove the globalization of production, as reflected in the extraordinary growth of world trade and investment. Initially this involved flows of final goods and the associated migration of the production of such goods among economies. The movement of industry supply chains from within the boundaries of a nation to supply chains of international scope, expanded the flows of intermediate products and components and associated migration of component production. This migration of production was possible because of the transfer of technology and production capabilities in unprecedented volumes and by innovative means in a variety of industries. Firms were supported in developing technological capabilities through both neoclassical economic policies (e.g. macro ‘fundamentals’), and through selected government interventions fostering rapid technological development (e.g. access for exporters to tariff-free imports of intermediate and capital goods). Relative openness and the role of exports: Relative openness — with regard to the export of goods, and imports of key inputs and technology — was a critical element of the East Asian experience. But relative openness was not the same as ‘free trade’, i.e. low and uniform tariffs on all imports as followed by Singapore and Hong Kong. There were selected protectionist measures in place for example by Korea, Taiwan, Malaysia, Thailand, Indonesia, e.g. providing exporters access to tariff-free imports of intermediate and capital goods for export production, but imposing variable (non-uniform) tariffs on general imports. Exports played a key role in allowing East Asian economies to exploit dynamic comparative advantage, e.g. by providing access to imported technology as a source of product and process upgrading to higher technology and higher value added products and activities.9 Importance of scale: The export-oriented industrialization of East Asia was primarily a game for the ‘big boys’: in general, SMEs were not the agents of industrial development in East Asia. It was ‘mass production’ rather than ‘craft
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production’ that typically characterized the development of industries. Even in the case of Taiwan, where SMEs played an important role, scale was a key factor and the government played an important role in financing the expansion of industrial capacity. For example, well into the 1990s the share of government in total fixed capital formation was the largest in the region, at around 50%; Taiwan ranked high in its share of large enterprises (in terms of assets and sales), with 10 large manufacturing groups, exceeded only by Korea (21), as compared for example with Malaysia (2) and Thailand (3).10 4.
Limits of the East Asian Model: The Future is Different
i.
Limits on Past Success
For all the successes of the East Asian model of industrial development, it had its shortcomings in supporting development in the region. From the perspective of this paper, a number of issues are of particular interest: •
•
•
•
ii.
Participants and bystanders: The export-led model created ‘participants’, i.e. those who benefited significantly from development through manufactured export orientation both within and among the countries of the region; and ‘bystanders’, those who benefited much less — often found in ‘traditional’ sectors such as agriculture. For example, in 1997 agriculture employed about half of the Thai labour forces as compared with manufacturing’s 13.4% share of employment; however, manufacturing accounted for 31.6% of GDP and over 82% of total merchandise exports, as compared with agriculture’s 10.8% of GDP and 10.2% of merchandise exports. Duality in industrial development: The resulting industrial structure of East Asian economies generally reflected a duality in industrial development. This involved the emergence of modern, competitive export-oriented industries often involving larger domestic firms linked to MNCs on one side; and on the other side a large number of domestic firms, generally SMEs, relatively underdeveloped in terms of skills, technology, market access. The links between the two parts of domestic industry were usually limited at best. Neglect of domestic markets and production: Concentration and reliance on export markets and selected industries led to a relative neglect of domestic markets. High savings rates and relatively low consumption rates were the characteristics of East Asian economies. Vulnerability: Reliance of industrial development on a few key markets and selected industries created a vulnerability to volatility in these markets and industries, e.g. as reflected in the recent downturns arising from slowdowns in the US market and the global IT/electronics industry. In addition, expanding market share of Asian manufactured exports in global markets often did not lead to associated ‘pricing power’ for Asian producers in these markets. Selected Factors Shaping the Future
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There are important changes emerging in both the global and regional economic environments that require rethinking key elements of the East Asian model of industrial development.
This has potentially important implications for both the continued
performance of the East Asian economies, and for the ‘next generation’ of economies in the region that seek to emulate the East Asian industrial development success story. From the perspective of this paper, 3 issues are of particular importance: •
•
•
Accessing global markets: The MNC + FDI model, that played a key role in East Asian economies accessing global markets and technology, is changing. In particular, the structure of global production is changing in important ways, e.g. emergence of ‘production networks’ based on global standards instead of location.11 This changes the context and options for accessing global markets and for upgrading, of firms and economies. In particular, possessing required production capabilities (“mastering production efficiency”) is no longer a sufficient basis for effective participation in the global economy for sustained income growth. It is therefore important to understand the various options for domestic producers to access global markets, and their implications. Evolution in ‘minimum efficient scale’ of firms: As noted, SMEs played a limited role in the success of East Asian industrial development. However, reduction in the ‘minimum efficient scale’ of firms in key industries — through the development of flexible technologies; increasing importance of outsourcing and inter-firm collaboration; combined with the fragmentation of markets and the associated importance of ‘market niches’ — is increasing options for efficient small producers to compete in global markets. This has important implications for the region’s economies dominated by SMEs. Changing relative importance of global markets: The role of ‘external markets’, e.g. US and Europe, anchoring future Asian development is uncertain. Their continued importance for Asia is not in question. However, it is not clear that marginal growth in these markets will be sufficient or sufficiently reliable over the longer term as the basis for continuing industrial development and sustained income growth in Asia. While continuing to focus on global markets, Asia is likely to be looking increasingly closer to home for future growth. Within this context, the emergence of the People’s Republic of China is a critical part of what is a wider transformation of the economic map of the region.
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III.
Accessing Global Markets
1.
Limits to Productive Efficiency as the Means to Growth
In the rise of East Asia, accessing expanding global markets and industries was the critical factor in industrial development both for technology acquisition, and as markets for output. As noted, MNCs played a central role in this process both as a source of technology and as channels to global markets. In this process, mastering productive efficiency was the ‘passport’ for the economies of East Asia to industrial and therefore broader development. This involved, upgrading or ‘moving up the ladder of cascading comparative advantage’ through production — the flying geese model noted earlier. Looking to the future, the organization of global production and markets is undergoing important changes.
The means for accessing these markets and for
upgrading production are evolving, with important implications for firms and economies. For example, production capabilities are diffusing increasingly widely throughout the global economy, as more and more firms in a variety of locations are mastering the capability to meet global standards of manufacturing.
Therefore, a
fundamental change from the past to the emerging future is that the capacity to master and upgrade production processes is necessary, but generally no longer sufficient for successful industrial development and sustained income growth. Other factors, beyond production efficiency, are shaping which producers will be successful in accessing and competing effectively on global markets. Furthermore, although the volume of exports from developing economies has been expanding significantly in global markets, price pressure on exports of manufactured products is becoming intense. As a consequence, the danger is that producers may expand their presence in global markets, and yet be worse off. That is, due to falling terms of trade, a country may generate more output and exports, but still face falling returns. This is a problem well known to exporters of commodities and agricultural products, but it is increasingly also to be found in manufactured exports, especially labour intensive manufactures such as wooden furniture.12
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Example. Wood Furniture Industry: Output Growth but Declining Income13 The wood furniture industry is resource based, labour intensive, and plays an important role in many developing economies. At the same time, leading producers are from high wage developed economies, suggesting possibilities for low-wage economies to move up the ladder of industry specialization and income. However, growing competition and falling prices in the industry are creating conditions for developing country producers where they expand output, yet cannot achieve sustained income growth as they are unable to upgrade. The challenge to developing economies, e.g. including the ‘next generation’ in Asia, is then two-fold: (i) how to access global markets; and (ii) how to do so in a manner that provides for sustainable income growth. This is a particularly serious challenge for producers from lagging economies, and at the firm level for SMEs, many of whom have significant constraints on their capabilities to participate effectively in global markets. 2.
Alternative Paths to Global Markets
It is therefore important to understand the different ways producers from developing economies may be linked to final markets, and their implications. This in turn allows for a better appreciation of the challenges facing SMEs and how they may be met. In general, there are 3 major ways for producers to access global markets:14 i. ii. iii.
Arms-length producer-buyer trading relationship, through markets; Vertically integrated firms, e.g. multinational corporations (MNC), together with affiliates, e.g. subsidiaries, joint ventures; and Network relationships involving non-equity based linkages among firms — which may take the form of collaboration among firms of similar market power with complementary assets, or with a dominant firm acting as a ‘coordinator’, setting network standards.
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i.
Markets: arms length relationships
In principle, one way for independent producers to access markets, is to connect to customers through the market mechanism. In practice, individual producers rarely sell directly to the final customer, e.g. a Thai food producer generally does not sell directly to a Canadian shopper.15 intermediaries.
Producers generally reach their customers through
Intermediary buyers play a role in both the consuming and the
producing country. In the consuming country they include final retailers, independent specialized buyers in final markets, and large international firms sourcing products from many countries as independent buyers or through their own network of buyers. In the producing country intermediaries generally include local buyers and export agents, and large producing firms sourcing products from local suppliers. In general, intermediary buyers can both facilitate and constrain the extent to which individual producers can access markets and upgrade their operations. In this context, in a growing number of industries, markets, especially in high-income countries, are becoming more and more concentrated.
An example of this is the
expansion of supermarkets and their impact on the structure of the fresh vegetable industry, and in particular on the role of SME producers.16 ii.
Vertically Integrated Hierarchies: Multinational Corporations (MNCs)
A second way for developing country producers to access global markets is through MNCs, e.g. as subsidiaries or affiliates: the traditional MNC + FDI model. However, the nature of both MNCs and FDI is undergoing changes, with potentially important implications for producers from developing economies. In the past 20 years, trade barriers have been reduced globally, and this has been a key factor for outward oriented FDI that supported Asian industrial development related to the search for low labour costs.
In the 1990s, this was expanded to a search for production sites whose
characteristics went beyond low labour costs, and included additional factors such as good infrastructure, supporting services, etc. In the 21st century, factors influencing the location of FDI increasingly relate to the organization of production, e.g. reducing time from product design to market. Proximity of suppliers to final manufacturers has grown in importance and clusters of FDI are co-locating to achieve systemic efficiency in production. At the same time, 9
there has been a declining importance of commodities and cheap labour in manufacturing, e.g. increasing importance of ‘components’ as the building blocks of production, and the increasing ‘service intensity’ of products. As a consequence, in some industries — MNCs producing more labourintensive and consumer goods such as apparel, footwear, consumer electronics, toys — there is an increasing trend for large firms to retreat from production and to source products made to close specifications. That is, there is an increasing transformation of ‘hierarchies into networks’ (discussed in the next section). This is increasing the scope for domestically owned producers to link to global markets via such networks. Example: Levi Strauss17 Levi Strauss, the most prominent brand name in jeans, has prided itself on its own global production structure and on its profit sharing schemes with its workforce. This was maintained even in the 1990s, as competitors in the industry increasingly outsourced production capacity. Toward the end of the 1990s, however, significant declines in both profits and market share forced the company to close half its 22 plants in North America. Production capacity was increasingly outsourced to contractors throughout the world, and by the first half of 2004 the US clothing giant will have shifted all of its company-owned North American manufacturing to outside suppliers in Asia and other low-cost areas of the world. In the process, Levi Strauss is retaining key value added functions such as brand management, marketing, and product design, and defining standards for suppliers to participate in and upgrade in its ‘production network’. At the same time, in some capital- and technology-intensive industries such as automobiles, there is a different tendency: firms such as GM, Ford, Nissan-Renault continue to seek to control the production process itself, but in novel ways. Competitive advantage in these industries lies increasingly in the design, branding, and systems integration linking value chain activities.18
However, the design and
increasingly the manufacture of key component subsystems are being subcontracted to global suppliers such as Delphi, Visteon, Magna, leading to a process of global sourcing, requiring suppliers to follow the core firms, and involving a network of subsidiaries and affiliates feeding components into these assembly plants on ‘just-intime’ basis. This is leading to declining local ownership and local technology, and a
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shift to proprietary technology from global ‘first tier’ suppliers, preferably directly linked to the MNC, e.g. as a joint venture. iii.
Networks: Production linkages19
A third and increasingly important way of accessing global markets is through networked, primarily non-equity based relationships among firms. There are generally two forms of networks. One is the semi-hierarchical networks of large firms and their (arms-length) suppliers, with a dominant firm acting as a coordinator and setting network standards, e.g. for product design and quality. The second type of network involves collaboration among firms with complementary assets and similar bargaining power.20 In increasing number of cases, producers sell into final markets via non-equity based production networks coordinated by lead firms who set the standards for participation and upgrading in the network. It is estimated that more than one third of global trade is now through such networks.21 Examples include Dell in computers; Cisco in IT; Nike in footwear; JC Penny in apparel; IKEA in furniture; Tesco in food. Examples22: “Cisco Systems is a leading global supplier of routers, switches and hubs for corporate communication networks. U.S.-based Cisco does none of its own volume manufacturing. Its products are assembled by independent “turnkey” contract manufacturers in California and Asia, with components and services coming from a variety of independent international suppliers from Taiwan, Korea, Japan, Singapore, Thailand, Malaysia and the U.S. within the framework of a well-defined production network. Nike’s “Air Max Penny” basketball shoe is designed in the U.S., developed by technicians in the U.S., Taiwan and South Korea, and manufactured in South Korea and Indonesia from 52 components supplied by companies in Japan, South Korea, Taiwan, Indonesia and the U.S. All of these suppliers are tied together by an advanced information and logistics system. In each case the lead firm plays the critical role in determining: • • • •
which producers are incorporated into the production network; which market segments a producer will serve, including product mix; which functions producers will undertake, e.g. production, design, marketing; in which area a producer will be allowed to upgrade, e.g. move from production to design. 11
3.
Implications for SMEs
Accessing global product markets may then involve SMEs’ direct participation as independent producers; suppliers in MNC hierarchies; or as members in networks. In each case, there are significant but differing challenges to SME producers. For example, to participate effectively in global markets as independent producers requires SMEs to have and maintain significant capabilities in a wide range of areas ranging over the industry value chain, including design, production, marketing, distribution, branding, etc.
Furthermore, continued success is tied to responding
effectively and quickly to market dynamics, including to changing consumer tastes, entry of new competitors, changes in industry structure. Participation as suppliers in MNC hierarchies or members in networks, requires a capacity to meet specifications and standards, e.g. on product quality and production process, in an increasingly competitive global production environment. Example. The Changing Fresh Vegetable Industry and Implications for SMEs23 The fresh vegetable industry is one of the most vibrant industries in international trade. It has also been characterized by increasing concentration through the emergence of large supermarkets in key markets (e.g. Europe, North America) that is potentially marginalizing SME producers in developing economies. As they have grown in size, supermarkets are exercising increasing influence on the industry value chain. While generally not directly involved in production, they are exerting increasing control over product, production, and suppliers, e.g. through strictly enforced standards. In the process, they are increasingly using a smaller number of large volume suppliers, confining SMEs to a narrow market segment of marginally profitable bulk produce to wholesale markets. Experience from a wide range of countries and industries, indicates that SMEs can participate effectively in global production and access global markets. However, generally this requires that they cooperate to achieve collective efficiency and joint action to address shared constraints and opportunities.
IV.
Cooperation Among Firms: SME Clusters and Networks
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1.
Focus on SMEs
In general, SMEs provide the backbone of the private sector in both developing and developed economies. They comprise over 90% of all enterprises in the world, and account for 50-60% of total employment.
SMEs engaged in manufacturing often
account for an even larger share of manufacturing employment, which may rise to as high as 80%. In the lagging economies of Asia, SMEs often offer the most likely prospects for increasing employment and value-added.24 Given their prominence, it is important to find ways to allow SMEs to play an effective role in economic growth and equitable development. They have a potentially important role to play in terms of employment, income generation, poverty reduction, and a wider distribution of wealth in developing economies. However, the potential of SMEs is often not realized because of problems generally related to constraints of size. This is especially the case with respect to SMEs competing effectively on international markets. 2.
Constraints on SMEs
Problems facing SMEs are many and varied. Because of their size, individual SMEs are constrained from achieving economies of scale in the purchase of such inputs as equipment, raw materials, finance, and consulting services; are often unable to identify potential markets; and unable to take advantage of market opportunities that require large volumes, homogenous standards, and regular supply.
Small size is also a
constraint on accessing such functions as training, market intelligence, logistics and technology. These constraints make it difficult for SMEs to access global markets; and also limit their performance in increasingly open, competitive domestic markets. Firms compete more and more not only on the basis of prices, but on the basis of their abilities to innovate, or upgrade.25
Improvements in product, process,
technology, and organizational functions such as design, logistics, and marketing have become the critical success factors in firm competitiveness in a globalizing economy. SMEs are thus under pressure to innovate, to upgrade their operations in order to participate in international markets. However, they often lack the resources to do so. In general, small firms are constrained in their access to key services, which large firms either have internally, or can purchase. 13
3.
Loosening Constraints through Cooperation: Clusters and Networks
On their own, small firms find it hard to overcome constraints relating to areas such as finance, technology, market access and input sourcing. However, there is increasing evidence that it is not so much the size of firms that is the critical constraint, rather it is their isolation: the fact that they are small, with limited resources, and operating alone in a competitive environment.26 Focused or targeted cooperation among SMEs, as well as between SMEs and institutions in their surrounding environment (e.g. industry) can provide the basis for an effective response to competitive pressures, including accessing global markets. Cooperation can help by creating opportunities for: •
•
•
Collective efficiency based on scale: Achieving economies of scale beyond the reach of individual firms in the purchase of inputs including technology, creating a pool of skilled workers, use of machinery, and pooling of production capacity to meet large volume orders from global buyers; Collective efficiency based on specialization: Cooperation can enable SMEs to specialize in their core businesses and evolve a division of labour among firms, achieving efficiency in production, and learning from each other about areas such as markets and product and process improvements; and Joint action: Collaboration through producer associations that help open up access to international markets, and increase small firms’ access to government support services.
There is increasing evidence that cooperation among SMEs is more likely when enterprises operate in proximity, and share business interests such as markets, products and infrastructure needs; and respond jointly to common challenges such as external competition. In this context, SME clusters are sectoral and geographic concentrations of enterprises that produce and sell a wide range of related or complementary products, with similar operations in the same industry, and face common constraints or opportunities. Cooperation in clusters can lead to collective efficiency based on scale. SME networks are groups of firms that complement each other, involved in different parts of the same industry, and cooperate to achieve collective efficiency through specialization, e.g. for gaining access to global markets beyond the reach of individual SMEs. 4.
From Informal Groupings to SME Clusters and Networks
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Concentration of enterprises in the same sector is not sufficient for the emergence of an SME cluster or network. Informal groupings of firms are widespread in developing economies, for example they can be found in the outskirts of many cities, often producing similar goods for the domestic market in areas such as woodworking, textiles and metalworking.
They generally contain micro enterprises and SMEs whose
technology level is usually low relative to industry ‘best practice’; with workers that generally have low formal skills. Cooperation among firms in these groupings is limited at best. Instead they are usually characterized by low level of trust, and intense competition; with limited perceptions of growth opportunities either for the firm or the industry. Little learning tends to take place for sustained upgrading of skills, product or production process.
Poor infrastructure, weak inter-firm linkages, and lack of
information on technology and foreign markets tend to reinforce a dynamic of low growth. Although most firms in a cluster or network are also small, what distinguishes an organized cluster or network is the cooperation and focused linkages that have emerged among participating firms. SMEs in a cluster or network evolve together after a realization that in a globally competitive economy they gain advantages if they compete as a group, not as individual, isolated small enterprises.
Examples of
organized clusters producing for global markets cover a wide range of industries, e.g. surgical instruments cluster in Sialkot, Pakistan;27 electronics cluster in Penang, Malaysia; knitwear in Tiruppur, India; software in Bangalore, India; leather shoes in Sinos Valley, Brazil. Example. Surgical instruments production in Sialkot, Pakistan28 The surgical instruments ‘cluster’ in Sialkot, produces scissors, forceps, and other precision instruments using stainless steel. It involves around 350 manufacturers, subcontracting work to over 1500 SMEs, and acquiring inputs from 200 local suppliers and more than 800 service providers. The cluster employs over 30,000 workers. Over 90% of the output is exported, and this cluster accounts for more than 20% of global trade in the industry, making Pakistan the second largest producer after Germany. The firms in this cluster have not only managed to successfully penetrate global markets, but they were able to address effectively, partly through cooperation with central government and local institutions, the critical challenges of new quality assurance standards imposed by the US and European markets in the mid 1990s.
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Example. Shoe cluster in Sinos Valley, Brazil29 In the early 1990s, Brazil was ranked as the world’s third largest exporter of leather shoes. Within Brazil, the state of Rio Grande de Sol, in particular the Sinos Valley in the state, although producing only 30% of Brazil’s total leather shoe production, accounted for 80% of its leather shoe exports. In the 20 years 1970-1990, a cluster of almost 2000 firms in Sinos Valley raised its share of world leather footwear exports from 3% to 12%, specializing in women’s shoes. By 1991, they had exported nearly 100 million pairs of shoes, worth almost $900 million. These firms covered a range of links in the footwear value-chain, and created more than 15,000 jobs. As in Sialkot, a number of key support institutions geared to SMEs and the shoe industry played a key role both in the emergence of the cluster, and in its continued success. The transition from an informal grouping or agglomeration to cooperative clusters and networks such as in Sialkot or the Sinos Valley is difficult. General factors necessary for successful transition include: •
•
•
Proximity which is a key factor for inter-firm cooperation in promoting joint initiatives. It lowers transaction costs, and facilitates learning because of both physical closeness and shared background and experiences. Incentives which are generally necessary for inducing cooperation among often intensely competitive firms. Perhaps the best incentives for the establishment of clusters or networks from informal groupings are crises, e.g. external imposition of standards such as food safety, and new market opportunities. Crises provide visible shared challenges with clear potential payoffs that individual enterprises can recognize as very important, yet cannot address on their own. Trust which is the fundamental requirement for SME clusters and networks. The building and maintenance of trust over time is the foundation for SME cooperation. Since clusters and networks involve independent firms with no formal (e.g. equity-based) linkages, cooperation is fundamentally based on shared expectations and reciprocal obligations. Joint activities and mechanisms for clarifying mutual roles and obligations, and testing firm reliability and performance are part of the process of progressively building and nurturing trust.
The examples cited also reflect the key role of external support through effective industry-specific measures such as training, supplier development, standards development and diffusion. Evidence indicates that various interventions by public or private institutions (e.g. industry associations) can play an important role in helping 16
clusters and networks, once they emerge, to enhance and sustain competitive performance. This has important policy implications for governments in the region. 5.
Policy and Programme Implications
Policies to assist SMEs have generally targeted support to individual enterprises, usually through a combination of initiatives such as credit schemes, grants, technical assistance. The basic problem is that these initiatives are generally not effective in responding to the challenges of global industries and markets. A key problem is that these initiatives often tend to be supply-driven, focusing on inputs to production, and not paying sufficient attention to the critical issue of who will buy the firm’s outputs, i.e. the requirements of accessing international markets for sustained income growth. A further constraint on this approach is that such programmes are rarely sustainable since the cost of reaching a large number of small firms is very high, the likelihood of significant cost recovery is very small, and the capacity of small firms to sustain changes on their own is at best limited. Focusing support on clusters and networks of SMEs provides more effective basis for policy initiatives aimed at building up local competitive industrial capacity. Three broad strategies for this are as follows: •
• •
Implementing programmes targeting inter-firm networks, industry supply chains, and sectoral clusters, with particular focus on facilitating knowledge transfer and inter-firm learning (e.g. on technology, skills, markets); Enhancing the role for intermediary institutions at the local and industry level, with the private sector taking the lead (e.g. the Sialkot Instruments Manufacturers Association; Penang Skills Development Centre); and Stimulating the emergence of horizontal institutional networks through regional alliances and partnerships both within and across countries (e.g. the purpose of the Greater Mekong Subregion Business Forum supported by UNESCAP and ADB).
Based on experience with a wide range of cases, some ‘best practice’ conclusions emerge to guide programmes aimed at SME cluster and network facilitation:30
17
Principles to guide policies and programmes •
•
•
•
•
•
•
Collective: Programmes should target not individual enterprises, but a group of firms, particularly groups with perceived potential to evolve into effective SME clusters and networks. Collective services lower transaction costs, and allow for a ‘wholesale’ as distinct from a ‘retail’ approach to SME support, which may be further ‘leveraged’ through industry and local institutions as intermediaries. A collective approach to SME support helps generate linkages and mutual learning among enterprises, and the emergence of clusters and networks. Customer-oriented and responsive: Support should be demand driven, aimed at serving specific markets, e.g. assisting SMEs to access specific niche markets; strengthen collective operations within the framework of particular ‘production networks’ in specific industries, as a means to access global markets. The support should therefore be responsive to particular cluster or network needs (e.g. addressing new industry standards essential for market access), and not just focused on providing a set of generic services (e.g. credit, general training). Promote inter-firm dialogue: Sharing activities, e.g. training/workshops, quality and certification processes, can stimulate the initial processes of inter-firm dialogue, and begin the building of trust and reciprocity among firms. This is especially important in the early stages of cluster and network development. Clear payoffs: Priority should be given to the direct provision of innovative, value-adding services in a business like manner. Especially in the early stages of cluster and network development, small firms are unlikely to be interested in, let alone pay for shared services that address needs that are not clear and immediate, and where expected payoffs are uncertain or far off in the future. Integrated approach: Isolated support measures (e.g. credit, training, technological assistance) are generally not sufficient or effective in fostering SME development. Services should be integrated or bundled together (e.g. financing support and training for the acquisition and adaptation of particular technologies), and consistent with the absorptive capacity of firms individually and collectively. Participatory: Initiatives should not be primarily top-down or seen as ‘off the shelf’. Cluster and network development activities should be understood as a process of ‘organizational change’ aimed not simply at transferring general skills or information, but at fostering changes in individual and collective attitudes and behaviours over time. Therefore, they need to be designed and implemented with bottom-up involvement of client firms and related institutions. This requires an often long and costly consensus building process on needs assessment, design and implementation. But this is essential if a common strategic vision and stable alliances are to emerge as the basis for operational improvements. Build on what’s there: Clusters and networks are likely to endure and perform better if based on already existing agglomerations of firms.
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These are more likely to be faced with specific shared pressures that are understood by most firms as requiring changes in traditional ways of doing business if they are to survive (e.g. environmental constraints, technological obsolescence, infrastructure needs). Key policy/programme support31 In developing and implementing initiatives to support particular clusters networks, it is essential to be clear on how particular SME groupings actually access global markets. As discussed earlier, this may be directly, i.e. producers selling to final consumers (though generally through intermediaries); through MNC hierarchies by linking to the supply chains of particular large firms; or through networks, e.g. production networks dominated by large firms but with no ownership linkages to most suppliers as in the case of surgical instruments from Sialkot, or fresh vegetables to UK supermarkets. In each case the appropriate support to SME clusters and networks may differ. For example, ‘market research’ aimed at accessing final consumers is not necessarily the same as market research aimed at supplying lead firms in networks, e.g. UK supermarkets. •
•
Understanding markets: Understanding global markets, especially identifying appropriate niches, is both complex and costly. Groups of SMEs with a shared purpose, clusters and networks, can cooperate to undertake activities aimed at understanding markets better. The nature of global markets will differ, depending on whether SME clusters are accessing such markets directly, through hierarchies; or through networks. In the first case of accessing final markets directly, it is essential to understand the needs of final consumers e.g. through market research including jointly hiring specialized consultants; hiring designers with knowledge of buyer tastes in particular market segments; and buying key market-related information such as information on new fashion colours in the clothing industry, on water-based paints and varnishes in the wood furniture industry. In the case of networks, it is important to understand and respond to the needs of leading ‘network buyers’ (e.g. in the case of surgical instruments, buyers associated with leading US or German firms). Whereas in the case of MNC hierarchies, the market is the proprietary supply chain of a particular MNC, e.g. Toyota. Joint selling: Reaching global markets is difficult and costly for SMEs. Joint marketing efforts in various forms is an important means to access global markets. As before, these need to be consistent with the particular way specific SME clusters/networks choose to access global markets, i.e. directly, through hierarchies, or through networks. In each case, linking SME output to buyers may mean something different, requiring differences in supporting initiatives. For example, in the case of the electronics cluster in Penang, the focus of PSDC’s Global Supplier Programme for Malaysian SMEs is to market 19
•
•
•
•
partnerships for SMEs to supply MNC hierarchies through participation in particular firm supply chains; whereas in the case of the surgical instruments cluster in Sialkot (as in the case of selling fresh vegetables to UK supermarkets) selling is to global buyers in the context of international production networks. Selling directly to final customers is likely to mean identifying the most effective intermediaries in terms of both reaching final customers and retaining ‘pricing power’. Joint buying: Cooperation in buying can provide both economies of scale, and a sharing of costs. It can also provide an expanded set of options for SMEs. The cost savings achieved through scale in joint purchasing, or the sharing of costs, as in the case of expensive technology, are clear. Less clear but perhaps even more important is the potential for expanding the range of available options to SMEs through joint buying efforts. For example, an important constraint on productivity in poor countries is the inappropriate choice of technology, especially imported technology. Whereas it is difficult for individual small firms to gain information on available technology options, SME clusters and networks are in a far better position to access such information, e.g. interest sellers of technology to visit, demonstrate, sell, and train. Product development: There may be strong constraints on cooperation in product development in SME clusters, since each firm may see its products as proprietary, and a source of competitive advantage. However, selling under a common brand or standard such as ‘Indonesian Batik’ or ‘Thai silk’, can generate significant benefits. This is especially the case when trying to reach global markets directly or sell into networks and hierarchies that buy in large volumes that are far beyond the capacities of individual small firms. In the case of networks based on a division of labour, where the output of one firm becomes the input of another, joint product development is essential to ensure the required product and process complementarity to maximize efficiency in the network supply chain. Standards and codes: As discussed, an increasingly critical entry requirement to global markets is meeting a variety of standards and codes that relate to products and production processes. For example, ISO 9000 and ISO 14000 require extensive documentation; and meeting health standards may require substantial adjustments in product and process. Sharing costs, for example in training and buying advice, is an important means to meet such standards and codes, especially when they involve a ‘shock to the existing production system’, as in the case of the Sialkot surgical instruments cluster and its response to changes in US quality assurance standards. This is especially important when SMEs are trying to reach final consumers directly, and must identify and meet the standards on their own. Learning networks: There is increasing evidence that ‘learning networks’ provide an important mechanism for strengthening the capacity of SME clusters and networks to compete effectively in global markets. These provide mechanisms for SMEs to come together, and share their experiences as the basis for continuous cluster/network improvements. For example, forming a ‘benchmarking’ or ‘best practice club’ (e.g. Auto Components Benchmarking Club in South Africa) can lead to significant improvements in performance.
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6.
Institutional Implications
The provision of the types of programmes identified above for strengthening SME clusters and networks, e.g. such as training and knowledge diffusion, is characterized by market failures and high levels of complexity. They involve both inter-firm and business-government cooperation, especially at the industry and local levels. Such initiatives are ‘institution intensive’32 requiring the necessary capabilities on the part of government institutions to develop and implement such initiatives. Consider initiatives in areas such as training and supplier development.
This requires government
institutions to:33 • • •
mobilize and draw on the specialized knowledge of firms both to understand specific needs and to design effective programmes; coordinate the activities of a variety of actors and institutions, e.g. different ministries and departments, different levels of government, business and labour; ensure consistency over time with the changing needs of global industries to ensure that programmes remain relevant as industries and markets evolve. Such programmes are ‘demand driven’, and must be based on an up-to-date
understanding of industry needs and dynamics, and require some degree of industry coordination, e.g. different firms; owners and workers. They require ways to induce agreement among these different interests, and to coordinate the actions of diverse groups necessary to implement effectively a programme. Facilitating the development of clusters and networks may also require the establishment of new institutions, or the strengthening of existing institutions. Of particular importance are ‘business development service institutions’. These include non-profit membership organizations such as chambers of commerce and industry associations; and service delivery organizations such as the example of the Penang Skills Development Centre (PSDC) in Malaysia, and the Surgical Instrument Manufacturers Association (SIMA) in Sialkot, Pakistan. Such institutions can help strengthen SME clusters and networks on an on-going basis (example of PSDC), and also help SMEs respond to sudden crises (example of SIMA). Example. Penang Skills Development Centre (PSDC), Malaysia34
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The electronics industry in Penang employs around 90,000 people, and was developed to a large extent because of the Malaysian government’s policies and programmes to attract leading MNCs. To ensure that the necessary skills are in place to allow local firms to upgrade their skills consistent with the evolution of the global industry, government-business collaboration led to the establishment of PSDC in 1989. It is a non-profit institution whose mission is to promote shared learning among SMEs in the Penang electronics cluster. Its services are demand driven, responsive to the needs of MNCs operating in Malaysia, and local firms. The PSDC involves a partnership of the central and local governments, and industry. By the end of September 2000, over 60,000 people have taken part in over 3,000 courses. In March 2000, PSDC launched the Global Supplier Programme for Malaysian SMEs, together with a number of MNCs and the Government, in order to better prepare local firms for partnerships with MNCs . Example: Surgical Instrument Manufacturers Association (SIMA), Sialkot35 The local trade association, SIMA, played a critical role in helping to develop the Sialkot surgical instrument cluster’s effective response to the crisis brought on by the introduction of new stringent quality assurance standards in the US and Europe in the mid 1990s. For example, SIMA mobilized its members quickly to formulate a collective response within 1 month of the announcement of US intention; and organized a delegation of local producers to represent the cluster in negotiations in Washington. It also lobbied the Pakistani Government for financial and technical support to allow cluster members to implement the necessary changes, including bringing in a quality consultant to advise SMEs. In summary, supporting the development of SME clusters and networks makes significant demands on participating firms, on government policy and on institutions that may be summarized as follows: •
•
Challenges to firms: Cluster and network participation requires SMEs to cooperate and develop a capacity for shared learning. This in turn requires a commitment to strengthen performance through cooperation in key areas such improving product quality; upgrading production process; product design and development. Challenges to policy: Generic policies — ‘the fundamentals’ — such as macroeconomic measures and general infrastructure are necessary, but unlikely to be sufficient to strengthen the capabilities of SMEs to access global markets, given the changes in global industries and markets. Measures are needed to promote local/industry awareness of the needs and challenges of upgrading; for the expansion of technical personnel; to facilitate information, knowledge, and technology diffusion; and promote advanced infrastructure. Furthermore, in addition to policies, it
22
•
V. 1.
is essential to ensure that the necessary ‘institutional infrastructure’ is in place, especially as (?) related to business development services. Challenges to institutions: Effective demand-driven policies and programmes must be based on industry- and location-specific knowledge. This requires governments to develop on-going linkages with groups of firms, e.g. through industry associations; as well as effective internal linkages among government departments, in order to formulate and effectively implement industry-related policies and programmes.
Cooperation Among Economies: Regional Production Integration?36 A Brief Note on Domestic Consumption and Markets
Although the emphasis to a large extent has been on accessing global markets, expanding domestic markets in the region can provide an important basis for future growth in Asia. In this context, past focus on export-lead industrialization in East Asia, supported by sustained high savings and investment rates, and constrained consumption, has led to underdeveloped domestic markets in the region. Therefore these markets have significant scope for expansion. Widening emphasis beyond global markets to also focus on domestic consumption in the region’s economies could therefore provide growing consumer markets close to home, to support the restructuring and expansion of production, including SMEs. There are indications that a shift in focus to expand domestic markets is now underway (e.g. in Korea, Thailand, India) as a result of government policy; as a consequence of increasing consumer confidence; and because of increased interest by banks in consumer loans.37 However, with some notable exceptions (e.g. China, India, Indonesia), the home markets of Asian economies tend to be too small to allow firms or groups of firms to fully exploit scale economies in many industries. While the region offers some opportunities for large-scale production, e.g. for large firms and/or clusters and networks of SMEs, similarity of many products marketed by the region’s countries in a range of industries limits the market share any one of them can gain. This is why access to large advanced markets, e.g. the US, is so important. It may be interesting to consider, even if speculatively, the benefits of moving beyond discussions of trade integration, to regional production integration. 2.
The Issue: A Production Perspective on Regional Cooperation 23
In the traditional approach to regional cooperation and integration, the focus in the early stages is on the liberalization of trade in goods. Subsequent initiatives address issues such as trade in services, movements of labour and capital, coordination of regulatory and other policies, and monetary union, ending with the region as a single market. Significant changes in industrial structure typically do not take place until economic integration has reached the deeper stages. For example, the EU’s Single Market (1992) came decades after successive stages of cooperation. An alternative approach to regional integration, taking a ‘production’ perspective, could focus on changing regional industrial structure early in the process. In particular, the focus could be on the creation of regional production linkages (e.g. production networks), and the distribution of production processes across borders. 3.
The Region as a “Production Base”
The discussion in Asia of regional cooperation and integration has generally followed traditional lines, e.g. as reflected in the case of AFTA. The initial focus has been on liberalizing trade in goods, with the hope that increased trade will spur industrial growth, diversification, and development — with industrialization and growth typically considered at the national level. However, the focus on trade liberalization may have limited benefits, especially for groupings of smaller economies. An alternative perspective on regional integration could begin with a focus on regional production linkages. There are significant potential benefits for moving away from strictly national models of industrialization, toward regional collaboration. Regional specialization at the level of parts and components offers significant opportunities, e.g. both static welfare gains and new opportunities to exploit scale economies. The basic concept is to think of the region (or subregion) as the production base, and ‘distribute’ production around the region in accordance with dynamic comparative advantage. The objective is to raise efficiency, reduce production costs, and increase competitiveness of regional firms, e.g. by exploiting scale economies from the huge number of consumers. 4.
A Cautionary Note
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Regional production integration has potentially important benefits to offer to support development in Asia.
However, there are important issues to consider.
The
concomitant requirements for mutual adjustment or ‘deep integration’ among economies may reach into areas previously regarded as domestic — e.g. competition policy, commercial legislation, tax codes, environmental regulations, labour standards, product standards — can pose significant challenges to national autonomy, potentially reducing the flexibility of societies to chart their own development paths. Furthermore, there are dangers of weaker economies being ‘locked in’ to activities and industries that provide limited benefits in a regional division of labour. Given both the potential benefits and the risks of regional production integration, perhaps this is a concept worth exploring, with due attention to protect the interests of all participants. Subregional cooperations of the Greater Mekong Subregion (GMS) type may provide mechanisms to proceed on an exploratory basis,38 with particular emphasis on the role of and opportunities for SMEs, as discussed in this paper. 5.
Rationale for Production Integration
Traditionally, end products played the dominant role in international trade. This has undergone important transformation, with the increasing importance and growth of offshore sourcing of components and offshore production.
This is a function of
technological and organizational innovations in transportation, communication, and information technology — facilitated by liberalization of trade and investment — that allow a ‘slicing up’ of industry and firm value chains across borders to produce goods in a number of stages in different locations, adding value at each stage. Advances in management technology then permit firms to knit together multi-country sourcing, production and distribution networks, simultaneously taking advantage of and shaping shifts in comparative advantage in diverse locations. In this context, analysis indicates that offshore sourcing or production of components can create jobs, expand output, and frequently lead to higher wages.39 The rationale is as follows. If foreign sourcing of a component is cost saving, then it improves the competitiveness of the end product. If the firm, which makes the end product, is a price-taker, then the reduction in production costs increases 25
profitability, creating an incentive to expand output. If the firm is a price-maker in end product markets, the reduction in costs brought about by offshore sourcing enables it to lower price and thus gain market share, leading to higher output. It follows that if countries involved in the regional trading initiative specialize in component production according to comparative advantage, i.e. using intensively factors of production and technologies with which the country is relatively well endowed, it can make everyone better off. In this context, outward investment can lead to increases in output and employment. In this approach, the focus shifts to comparative advantage at the level of the production of parts, components, process/assembly, as distinct from the traditional focus on end products. This can reduce production costs, allow for scale economies, making the region’s producers more competitive in world markets. For this approach to regional integration to work requires the removal of barriers — natural and man-made. For governments, this implies the need to reduce or eliminate constraints on cross-border linkages, such as policy constraints and physical and non-physical obstacles that constrain firms from producing on a regional basis. For example, this could involve the development of cross-border infrastructure, and trade facilitation measures aimed not simply at freeing up the flow of goods and services, but at creating an integrated production area. The implications for private sector include increased investment in services and logistics networks that will permit them to coordinate production activities across borders; and a shift in perspective that views the location of activities from a regional rather than national perspective.
As an example, the
establishment of the principle of national treatment of companies within the region could open up possibilities for firms to integrate their businesses in the region. Example. Implications for Subregional Cooperation in the GMS40 The GMS Programme is aimed at enhancing the economic development of participating countries individually and as a group. The objective is to directly change the economic structure of the GMS through cooperation in a wide range of specific initiatives (e.g. transport, energy, trade facilitation), in order to expand access to resources and markets, and enhance the attractiveness of the subregion to investors, e.g. as a production base. This can also help integrate the GMS more effectively into the global economy, further expanding development options. As progress is made in ‘hardware’, e.g. infrastructure,
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and ‘software’, e.g. trade facilitation, it may be useful to identify potential areas of production integration within the framework of the GMS Programme. For example, this could be done, on a modest scale, within the context of ‘economic corridor’ initiatives, such as the East-West Economic Corridor, in collaboration with the private sector. VI.
Concluding Comments
The restructuring of global industries and markets is posing new challenges to developing economies in Asia. Successful past models of industrial development in East Asia need to be adjusted in light of new realities. In particular, the requirements for firms to access global markets and upgrade their position in global industries are becoming increasingly complex and demanding. This is posing significant challenges for all firms in the region, but particularly for SMEs, which face special constraints due to size. Given the importance of SMEs in the economies of the region, e.g. as source of employment, particular attention should be given to strengthening their capabilities. An effective way to approach this is to focus on facilitating task-oriented cooperation among small firms in the form of industry clusters and networks. This poses challenges for both firms and governments:
to implement collaborative strategies and
programmes, and to strengthen supporting institutions, particularly at the industry and local community levels. In this, although a continuing emphasis on global markets is essential, expanding domestic markets in the region can provide an important basis for future growth. However, given the limits on the size of most domestic markets in Asia, it may be useful to consider a ‘regional perspective’ on industrial development. The challenges of industrial development in Asia in the 21st century are then likely to be the challenges of effective cooperation: among firms and among economies.
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Annexes
Annex 1.
Wood Furniture Industry: Output Growth but Declining Income
Annex 2.
Restructuring of the Fresh Vegetable Industry: Implications for SMEs
Annex 3.
Clusters, Upgrading and Global Standards: The Case of the Surgical Instruments Industry in Sialkot, Pakistan
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Annex 1. Wood Furniture Industry: Output Growth but Declining Income41 1. Introduction The wood furniture industry reflects the key challenges of dynamic integration of developing economies into global markets. It raises issues about competing effectively in industries where the organization of global production may allow the expansion of economic activity and output, and yet not result in sustainable income growth. The case of the wood furniture industry is especially relevant, since it is a resource based, labour intensive sector, that plays an important role in most developing economies. At the same time, leading producers are from high wage economies, indicating possibilities for upgrading, allowing low-wage economies to move up the ladder of specialization, sophistication and income. Furthermore, it is an industry where the industry structure of leading producing countries, e.g. Italy, Denmark, is characterized by SMEs, the dominant form of enterprises in developing countries. In this context, the case of South Africa provides insights into challenges facing developing economies. 2. Overview of the Global Furniture Sector In 1998, the furniture industry was the 19th largest traded goods sector out of 261 groupings,42 with a total value of global trade of $50 billion. It was the largest traditional low-tech sector, exceeding the value of the apparel industry ($45.3 billion), and the footwear sector ($35.7 billion). It was the 17th largest import sector in Europe in the period 1985-1997, with growth rate imports into Europe of 81% during the same period.43 Although it is a resource- and labour-intensive industry, the major furniture exporting countries are industrially advanced economies, e.g. Italy, Canada, Denmark. Of the 15 major exporters (by value), only 6 are developing economies, of which 4 are Asian (China at no. 2; Malaysia no. 7; Thailand no. 9; and Indonesia no. 15). The wooden furniture sector is becoming increasingly competitive, as more and more producers enter global markets, including increasing penetration by developing countries. As a consequence, global prices are declining. Detailed analysis by product sub-groups (4 subsectors) and countries of origin (using the World Bank distinction among low-income, lower middle income, upper middle income, and high income) shows for the period 1995-97 the following: • • • •
In all subsectors there is a tendency for unit prices of imports from the 4 categories of countries to converge. The unit price of EU imports decreased in 3 of 4 subsectors, remaining relatively stable in the fourth. The unit price of imports from high income countries was significantly higher than from other exporting countries. The value of imports from the low-income group of countries was the 2nd highest, suggesting that they entered the low-volume craft market segments.
The above suggests an industry in the midst of intense global competition. The trend toward uniform and falling prices is due to either falling barriers to entry and new
29
entrants; increasing efficiency and falling costs; or both. Given pricing pressures, producers need to develop the capacity to upgrade, e.g. products, processes, functions. 3. Role of Buyers in Accessing Final Markets Buyers play a critical role in connecting producers to final global consumers. In almost all cases these buyers are in major importing countries. The relevant questions with respect to the role of buyers include: to what extent do buyers assist in upgrading of suppliers/producers; and in this context, to what extent do developing economies such as South Africa have the capacity to upgrade their operations as required by buyers. There are 3 broad categories of buyers in the industry: • • •
Large multinational retailers with both retail outlets and suppliers in many countries e.g. IKEA sources from 2000 suppliers in 52 countries, and has more than 300 outlets on 3 continents; Small-scale retailers purchasing directly from a limited number of suppliers in a limited number of countries; and Specialized medium-sized buyers, sourcing from many countries, and reselling to retail outlets, predominantly in a single country or region. Such a buyer may have more than 1500 suppliers located in many countries, and even smaller specialized buyers will typically source from more than 100 suppliers.
All 3 types of buyers are involved with the buying activity itself, e.g. purchasing from suppliers. Global retailers outsource the least; they have strong presence across most activities in the industry value chain, e.g. product design, purchasing, logistics, marketing, retailing and distribution, after sales service, and in IKEA’s case also including owning manufacturing facilities. Specialized buyers outsource the most, retaining buying and marketing functions, and generally also playing a role in design. One-store retailers vary in the range of their activities. None of the buyers are fully integrated; all outsource some activities. No activities are exclusively outsourced to either high- or low-wage economies, a mix of countries are used. Multi-store retailers are least likely to use low-wage economy firms as suppliers for outsourced activities other than production. In the case of the largest of these retailers, the overwhelming proportion of furniture (85%) comes from middleand upper-income countries. However, some of these very large retailers such as IKEA, are in the process of significant change, with sourcing from developing Asian economies including China, Viet Nam and Indonesia expected to grow rapidly in coming years. Design is outsourced primarily in the case of smaller buyers, but it is only the very small independent retailers who depend on their low-income country suppliers for design of their products, which tend to involve low-margin, price-sensitive products such as garden furniture. Increasingly, the large retailers expect to be able to offer low price, high quality, and variety. In general, there are similar demands made on suppliers by buyers. In this, the meeting the requirements of ‘global standards’, e.g. as demanded by large retailers, is becoming increasingly important. These relate primarily to the production process and include quality standards (e.g. ISO 9000, 14,000), labour standards (e.g. SA8000), and environmental standards (e.g. Forestry Stewardship Council) — but with global
30
retailers such as IKEA including standards in other areas such as child labour provisions. Meeting the variety of standards is a minimum requirement for suppliers bidding for contracts with global retailers such as IKEA. 4. Upgrading in the Industry and the Role of Buyers Increasing competitive pressures are leading to significant upgrading efforts in the industry in all dimensions, e.g. product, process, functions. Production process upgrading is widespread, including new machinery and equipment, logistics systems, and continuous quality improvements. Product innovation is of growing importance, partly due to the growing role of flat-pack furniture in reducing transport costs; and design is playing an important role in determining market share. With growing manufacturing capabilities in the global economy, most sustained barriers to entry and upgrading are intangible or service activities, including retail and distribution (e.g. large retailers are squeezing ‘mom and pop’ shops), global transport and logistics, marketing and advertising, branding, and design. These generally also happen to constitute the higher value-added activities in the industry value chain. Buyers expect suppliers to be able to undertake process and product upgrading, as required. In this context, buyers see a key role for themselves as providing clear signals to their suppliers as to the type of upgrading required; with multi-store retailers and specialized buyers providing the greatest support to their suppliers for upgrading, e.g. training. In general, buyers increasingly outsource production, and actively support producers to become more competitive. Functional upgrading is a more complex area. In general, some functions such as logistics, transport and distribution do not seem particularly ‘protected’ by buyers. However, others are seen as ‘proprietary’. For example, the buying function itself is carefully protected, erecting a barrier for suppliers to deal directly with final customers. Similarly, global retailers such as IKEA invest significant resources in design, and protect and control the design function as a key competitive advantage. Therefore there are limits on producers abilities to upgrade within the context of industry structure. 5. The Case of South Africa South Africa is the 14th largest exporting country (by value), just ahead of Indonesia. Domestic sales of wood furniture were essentially static during the period 1990-1999. However, exports grew (by value) tenfold during this period, with the share of exports in total furniture sales increasing from less than 5% in 1992 to over 40% in 1999. It would appear that the South African wood furniture industry has become an increasingly effective participant in global markets, with foreign demand driving domestic production. However, as noted in the main text of this paper, participation in the global economy does not itself guarantee income growth. This is partly a function of how countries’ producers fit into the global industry structure. In this context, there is strong evidence that South Africa’s wood furniture industry may be experiencing significant problems. Unit price of exports as measured in $US, fell by 250% between 1992 and 1999. This is much greater fall than experienced by all furniture imports into EU during the same period (28%) and by all wooden imports into the EU (10%). There are 3 possible reasons for this decline in the price of South African wood furniture exports:
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• • •
Tendency for new exports to be in lower value added segments, reducing the value of average export price; Growing efficiencies in production leading to lower costs and sustained or increasing factor incomes, e.g. wages; Fall in unit prices of existing products without a corresponding increase in productivity, so that factor incomes fall.
It is the third of the above reasons that presents a potentially major problem. It would suggest that the only way that South African producers can expand their exports into global markets is through a fall in factor incomes, e.g. wages. Looking at the firm level, there is strong evidence to suggest that this is indeed the case. That is, a survey of buyers that source globally from a wide variety of firms, and who incidentally exert significant downward pressure on prices, indicates that South African suppliers are seen as significantly lagging suppliers from other countries in quality and delivery reliability. It would seem that South African suppliers are hanging on to their market share by virtue of their price competitiveness — which in this case seems to have been created largely by a continuously depreciating exchange rate. Attempts at functional upgrading through design modifications have not been successful, due to a large extent to a lack of indigenous design capability, e.g. attempts generally involved minor modifications, as contrasted with Mexico’s success in developing an ‘indigenous’ style of its own. 6. Conclusions The global wood furniture industry is characterized by a combination of converging and falling prices. Production capabilities are becoming increasingly widespread, and hence buyers are increasingly outsourcing production. In this context, buyers support producers to become even more competitive, e.g. through process upgrading, but place limits on possible functional upgrading by producers. Evidence suggests that South Africa is experiencing difficulties in coping with the increasingly competitive global wood furniture industry. This is an economy with a vigorous private sector, and abundant relatively cheap labour, especially in skills needed for key functions in the industry, i.e. that could support functional upgrading. Yet, success in global markets in terms of growth in output and exports is sustained primarily by currency depreciation, eroding the international purchasing power of domestic income growth. If this is the case for a relatively advanced developing economy like South Africa, what are the prospects for lagging economies? The case of Mexico, the 6th largest exporting country, is instructive. It was able to develop an ‘indigenous’ style in wooden furniture that met market success. Given design and craft skills throughout Asia, the development of uniquely ‘Asian brands’ would therefore also seem to hold promise.
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Annex 2. Restructuring of Fresh Vegetable Industry: Implications for SMEs44 1. Introduction: Consolidation in Developed Markets The fresh vegetable industry presents an interesting case study given its importance for developing economies, and its growth as one of the most vibrant sectors in international trade. For example, during the 1990s, imports of fruits and vegetables by EU countries surpassed all other categories of agricultural products; with the sales of specialty vegetables in EU countries increasing by 21% in volume between 1993-96. Much of this was sourced from developing economies. The increasing restructuring of global production in this industry is leading to the integration of developing country producers into global markets via production networks increasingly dominated by large retailers (supermarkets), posing potentially significant constraints for local SMEs. A key development in global retailing has involved increasing concentration in developed markets. In the period 1980-1996, the number of retailers accounting for 20% of US retail sales has decreased from 33 to 24; while those accounting for an overwhelming 75% of Europe’s primary market sales have decreased from 132 to 43 during the same period.45 In particular, in the UK, as a proxy for the global industry, the emergence of the large supermarket chains has been one of the most dramatic examples of concentration in retailing. In 1999 the top 4 retailers — Tesco, Sainsbury, Asda, and Safeway — accounted for nearly 75% of all food sales. The share of the UK market of specialist greengrocers and fruiterers fell from 46% in 1980 to 24% by 1997. As supermarkets have grown in size, they have exercised increasing influence on the industry value chain across a wide range of products. They have developed their own brands in competition with industry leaders such as Heinz, Kellogg, and Schweppes; developed sophisticated logistics systems; and have played increasingly dominant role in developing suppliers. Generally, supermarkets have focused on retailing and control of the supply chain, rather than direct involvement in production. Whereas imported horticultural products were primarily channelled through wholesale markets, the largest UK retailers now control 70-90% of fresh produce imports from developing economies. Fresh fruit and vegetables are core competitive areas for retailers. Fresh produce represents a ‘destination category’ for shoppers: it is one of the few product categories, along with fresh meat and wine, for which shoppers will switch stores. It is also one of only 2 remaining categories (along with meat), which is virtually all ‘own label’, and thus over which they can exercise control. Although price continues to be important — margins of suppliers are under constant pressure — competition has moved well beyond price. Supermarkets now compete on attributes such as quality, year-round availability, presentation, product range, packaging, and product innovation. As a consequence, retail buyers emphasize the following in sourcing products: • • •
Quality and consistency: This requires sophisticated quality control and logistics systems to ensure that products are grown and preserved in the best possible state. Reliability of supply: This places emphasis on logistics and security of supply. Cost: Price continues to matter, and a key element in cost reduction is scale. Supermarkets feel that they can reduce transaction costs by
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•
• •
dealing with fewer, larger suppliers; and that such suppliers can more easily reduce their own costs, increasing the price competitiveness of final products. Variety, value-added, innovation: Processing, packaging, and development of new varieties of products create significant premiums. For exampe, in April 1999, high-end loose carrots were selling for 39.4 p/kg in a typical UK supermarket location. Carrots already packed in plastic bags sold for 87 p/kg. Peeling and slicing carrots increased the price to 2.83 pound/kg; while mini-carrots sold for up to 6 pounds/kg, or 15 times the price of loose, full-sized carrots. Food safety: The UK has very strict food safety and pesticide requirements, and supermarkets have developed systems that allow products to be traced from the field to the supermarket. Ethical trade: Social issues, such as labour and environment standards, are emerging in importance as key industry standards that must be met as a minimum requirement by suppliers.
2. Restructuring the Industry Supply Chain Supermarkets are increasingly bypassing wholesale markets and going directly to producers. And as noted, they are using a smaller number of larger producers or packers. In the process, they are exerting increasing control over the product (e.g. quality), and information (e.g. ‘traceability’), in effect extending ‘just-in-time’ and ‘total quality’ systems to the agriculture sector. The restructuring of the industry supply chain is providing increasing direct access to customers for suppliers. However, suppliers are obliged to make greater investments to meet retailer requirements and are increasingly dependent on a small number of buyers. In effect, there is growing control exercised by a small number of retailers over a much more fragmented (global) producer group. The key decisions in the industry supply-chain include the following: • •
•
Product mix: Products required are determined by the retailers, e.g. in terms of both product mix and presentation. Access to market: By the late 1990s, supermarkets were in a key position to determine which producers and exporters were to be included in the industry supply chain, e.g. by UK importers. Before particular suppliers are included, they are subject to an audit of their facilities, and must satisfy supermarkets that they can meet the range of requirements, e.g. with respect to both product and process. Distribution of activities among enterprises in the supply-chain: Key activities in the industry supply-chain include growing, post-harvest processing, transport and logistics, marketing, and innovation (product, process, function). UK supermarkets are in a key position in defining which activities are carried out by which enterprises in the chain, including possibilities for upgrading. A key development has involved increasing transfer of processing activities from UK importers to developing country exporters, including technically more complex tasks such as bar-coding and labelling.
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•
Monitoring the supply-chain: Supermarkets require exporters to ensure that producers are continually meeting an increasing range of standards, e.g. in health, human right, environment. In effect, they monitor the monitors. An example of the priority given to this task is Tesco’s ‘hit squad’, which is prepared to inspect any supplier without prior notice to ensure compliance. Similarly, there is an increasing use of third party monitors of supplier performance.
3. Decline of the Small Suppliers (SMEs) As noted, the rise of supermarkets in the 1990s is reducing the number of suppliers, and increasing the quantity bought per supplier. Furthermore, given the increasing range of demands on suppliers, firms without sufficient financial and managerial resources to meet these requirements (e.g. sophisticated logistics, post-harvest facilities, capacity for delivering large volumes of product, etc.) will be excluded from access to the supply chain. In this context, SME producers remain largely dependent on arms-length marketing relationships, limiting their ability to respond to customer demands and innovate (upgrade); and vulnerable to opportunistic behaviour of importers. As a result, SMEs are confined generally to a narrow market segment of bulk produce to wholesale markets, which is now only marginally profitable. In practice, exporters that are interested in sourcing part of their output from SMEs face a number of well-known problems, e.g. logistical constraints, side-selling, financing needs. However, these constraints on utilizing SMEs suppliers are made even more complex by supermarket requirements, including the need for: • • • •
Consistency across producers and through the season; Maintaining post-harvest quality and preventing product deterioration, e.g. need for cold storage facilities; Ensuring compliance with a wide range of standards, e.g. health, safety, ethical trade such as child labour; Communicating changes in requirements to a large number of individual small producers, e.g. on product and process standards and innovations.
4. Conclusions Success in the fresh vegetables industry in global markets increasingly depends on meeting the exacting and varied requirements of large retailers in major markets, e.g. UK supermarkets. These are non-negotiable conditions for market entry. The restructuring of the industry through the rise of the large retailers is leading to concentration of the supply base in favour of ‘dedicated’ suppliers that can deliver consistently high-quality reliable products, and is restricting market access, e.g. in the UK, to the largest exporters. This has increasingly excluded SMEs producers and exporters who lack the scale to meet key supermarket requirements such as quality control, volume, logistics, etc. Furthermore, difficulties of entering key markets such as the UK have been increased by stringent social, health, and environmental standards. At the same time, the outsourcing of technically sophisticated activities such as barcoding, labelling, and the preparation of ready-to-eat food provides important opportunities for upgrading — but require large investment in machinery, facilities, organization.
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The fundamental challenge is convincing large retailers in global markets, e.g. UK supermarkets, that SME producers can be reliable suppliers. It is here that the development and strengthening of SME clusters and networks could provide a means to respond to the challenge.
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Annex 3.
Clusters, Upgrading and Global Standards: The Case of Surgical Instruments in Sialkot, Pakistan46
1. Introduction Development centered around the town of Sialkot, Pakistan, provides an interesting example of successful clustering, value-chain upgrading and the role of global standards. Many of the small-firm clusters from this area evolved to where they now hold significant shares of the global market in their particular niches. The industries generally involve buyer-driven production networks (BPNs), where local firms supply brand-name global lead firms. Sialkot’s clusters produce a range of labour-intensive yet niche products, including: stainless steel surgical instruments; sports goods, especially hand-stitched soccer balls; and leather garments. As a measure of success of the local clusters by global standards, around 70% of global production of high quality soccer balls comes from this cluster. Similarly, in basic stainless surgical instruments, Sialkot is second only to the market leader, Germany. In both these industries, local clusters participate in international production networks (IPN),47 linked directly to global buyers. In the case of the sports goods cluster, these include leading global brands such as Reebok, Nike, Adidas. In surgical instrument cluster, the leading manufacturers in Germany are involved. 2. Surgical-Instruments Cluster i. Overview The surgical instruments (SI) industry produces scissors, forceps, and a wide range of specialist precision instruments. These instruments are made from high-grade stainless steel; by around 350 manufacturers, who subcontract to over 1,500 small enterprises specializing in particular stages of the production process. Alongside these firms are an estimated 200 suppliers of inputs and over 800 enterprises providing various types of services. The cluster employs around 30,000 workers. In the mid-1990s there were around 30 large firms employing over 100 persons; around 80-100 firms were mediumsized, employing between 20-100 workers; and the rest were small enterprises. There are also a range of local institutions, including the local chamber of commerce and industry (SCCI); the Surgical Instruments Manufacturers Association (SIMA); the government-run technology institute, the Metal Industries Development Centre; branches of the government’s Export Promotion Bureau; and various development finance institutions and banks. Wages are often low, and working conditions in the smaller enterprises often poor. However, cheap labour is not sufficient to explain the competitive success of the cluster on global markets. Over 90% of Sialkot’s surgical instrument cluster is exported, primarily to European and North American markets, accounting for around 20% of world exports, placing Pakistan second only to Germany in this industry. Local production networks involving sub-contracting are the key to the organization of production in the SI cluster. Firms deal with a wide range of specialized, local, process and product-subcontractors and inputs suppliers. The SI cluster is differentiated by quality, including low quality disposable clinical instruments primarily for the US market, which makes up about 60% of the total exports. Higher
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quality reusable instruments are primarily for the European market, which makes up around 33% of total exports, and where they are often re-exported by European buyers. ii. Upgrading and the Role of Global Standards Global standards have emerged as a key competitive constraint on Sialkot’s SI cluster within the framework of IPNs, including both quality assurance and child labour standards. Since the mid-1990s the SI cluster has faced demands from its two leading markets to conform to global standards. In 1994 the US Food and Drug Administration (FDA) suddenly required all medical instrument imports to be certified as conforming with US standards of Good Manufacturing Practices (GMP) on quality assurance. After an initial lag, during which sales to the US market plummeted, the local trade association facilitated learning and upgrading by local producers that allowed these SMEs to comply quickly with global standards. Similarly, EC Directive 93/42/EEC required that all medical devices sold in the European Community had to comply with global quality assurance standards by 1998. This implied compliance with either ISO 9000 quality assurance standards, or EN46000 standards, and the display of CE marking (the European safety marking). To support the process of upgrading through compliance with global standards, the Pakistan government provided a subsidy of Rs 200,000 (about US$ 4,000) to support local firms’ to adapt ISO 9000 standards. Although covering only a part of the total costs, this was seen as an important incentive to upgrade. The market pressures to adopt global quality standards, in turn, have led to significant upgrading by local producers of all sizes, strengthening the competitive position of the Sialkot SI cluster. This cluster is now second only to the textiles industry in terms of the total number of ISO 9000 certified firms — even though it is a much smaller industry in Pakistan, only 4.1% of the textile sector exports. The Sialkot upgrading example challenges the conventional wisdom that meeting global standards such as ISO 9000 certification is beyond the reach of small producers. In this, clustering, especially where local institutions play an important role, can be effective in promoting upgrading through compliance with global process standards. The key elements of successful upgrading seem to have included: (i) the catalytic role of the SI cluster’s business association in mobilizing channeling specialist knowledge to local producers, facilitating learning on quality practices related to specific global standards (e.g. GMP); (ii) financial support from government; and (iii) there was some assistance from foreign buyers and producers to local suppliers in the IPN in developing quality management systems, but that this was not a determining factor in successful upgrading for most firms.
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NOTES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.
26. 27. 28. 29. 30. 31. 32. 33.
Used here to include the first wave of Hong Kong, Korea, Singapore, Taiwan, and the ‘late comers’ namely Indonesia, Malaysia, and Thailand; Japan set the benchmark for the others in this process. See ADB (2001). See for example Abonyi and Thant (1998). for example, see UNIDO (2001). This section draws on Amsden (2001) and Westphal (2000). Westphal (2000). First developed by Akamatsu (1962). Amsden (2001). It should be noted that ‘high technology’ and ‘high value added’ are not the same thing. For example, jewellery may be ‘higher value added’ than for example commodity-like IT products involving far ‘higher technology’. See Amsden (2001). See for example Doner and Haggard (2001), also Abonyi (2001). This general issue predates the recent focus on the potential impact of the People's Republic of China on the prices of global manufactures, which is seen by some as emerging as the critical factor in this process. Based on Kaplinsky et al (June 2001), and Kaplinsky et al (April 2001); see Annex 1 for a more detailed discussion of this case. See Kaplinksky and Readman (2001). This is changing in an internet world of increasing ‘business-to-customer’ linkages, but still limited. See Annex 2 for a case study of the fresh vegetable industry, especially implications for SME producers. See UNIDO (2001) and The Ottawa Citizen, “Levi Strauss to close three Canadian plants”, Friday, September 26, 2003. The firm or industry ‘value chain’ refers to the full range of activities involved with conceiving, producing, marketing and servicing a product. see, eg, Abonyi et al (2002) on international production networks and their implications for development. This will be discussed further in the next section (IV). World Bank (2000). From Abonyi (2000). Based on Dolan et al (2000); see Annex 2 for a more detailed discussion. UNIDO (2001). Upgrading may be achieved through innovation in production process through more efficient organization or improved technology. It can involve product upgrading, moving into more sophisticated product lines in terms of unit value. It can also involve functional upgrading, moving into new types of activities, e.g. from manufacturing into design and marketing. See Abonyi (2002). see for example ILO (1997, 1998); UNIDO (2001); UNCTAD (1999). see Annex 3. From Abonyi (2002) based on Nadvi and Kazmi (2001); see Annex 3 for a more detailed discussion. From Abonyi (2002) based on Bazan, L, and L. Navas-Aleman (2001). See for example UNCTAD (1999); ILO (1997, 1998); UNIDO (2001). see UNIDO (2001). see Doner and Haggard (2002). ibid.
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34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47.
Based on Abonyi (2002) from Rasiah (1999), and UNIDO (2001). based on UNCTAD (1999), see also Annex 3. This section draws on Arndt (2001), Abonyi (2001), and Abonyi and Thant (1998). A key cautionary note is the need to ensure that income growth keeps pace with consumption in order to avoid a ‘consumption bubble’, e.g. such as concerns in S. Korea. See Abonyi and Pante (1998), and Than and Abonyi (2001). See Arndt (2001; 1998), Deardoff (2001), Jones et al (2000). See Abonyi and Pante (1998), and Than and Abonyi (2001). Based on Kaplinsky et al (June 2001), and Kaplinsky et al (April 2001). At the 3-digit SITC level. Europe is used as a proxy for global furniture trade because of data availability. Based on Dolan et al (2000). From The McKinsey Quarterly (1999). From Abonyi (2002), based on Nadvi and Kazmi (2001). See Doner and Haggard (2001) on IPNs, also Abonyi, (2001).
SELECTED BIBLIOGRAPHY Abonyi, G., “International Production Networks and Local Clusters: The Changing Context of Development in Asia”, Prepared for workshop organized by Asia Strategy Forum: ASIA INTO THE 21st CENTURY: The Emerging Economic Map of Asia: Regional Production Restructuring, Asian Integration, and Sustainable Development”, Bangkok 2001. Abonyi, G., “Development Through Cooperation: Facilitating Regional Cooperation in Asia”, Asian Development Bank (Strategy and Policy Dept.), 2002. Abonyi, G., “Linking Asia Together”, Asian Wall Street Journal, December 5, 2000. Abonyi G, with M. Than, “The Greater Mekong Subregion: Cooperation in Infrastructure and Finance”, in M. Than and Carolyn L. Gates, (eds.) ASEAN Enlargement: Impacts and Implications, Institute of Southeast Asian Studies (ISEAS), Singapore, 2001. Abonyi, G. and M. Thant, Globalization and Regional Integration in Asia, Theme Paper Series, No. 6, Asian Development Bank, 1998. Abonyi, G. and F. Pante, “Economic Cooperation in the Greater Mekong Subregion: The Challenges of Resource Mobilization”, in M.Thant, M.Tang, and H.Kakazu (eds.), Growth Triangles in Asia: A New Approach to Regional Economic Cooperation, (2nd ed.), Oxford University Press, 1998. Akamatsu, K., “A Historical Pattern of Economic Growth in Developing Countries”, The Developing Economies, Tokyo, Preliminary Issue No.1, 1962. Amsden, A. H., The Rise of the Rest, Oxford University Press, 2001. Arndt, S.W., “Production Networks in and Economically Integrated Region”, Lowe Institute of Political Economy, Claremont McKenna College, 2001. Arndt, S.W., “Super-Specialization and the Gains from Trade”, Contemporary Economic Policy, XVI, October 1998. Asian Development Bank, Moving the Poverty Reduction Agenda Forward in Asia and the Pacific, Office of the President, ADB, 2001. Bazan, L, and L. Navas-Aleman, “The Underground Revolution: A comparison of upgrading in global and national value chains”, Institute of Development Studies (IDS), Sussex, February, 2001.
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Deardoff, A.V., “Fragmentation Across Cones”, in S.W. Arndt and H.Kierzkowski, (eds.) Fragmentation: New Production Patterns in the World Economy, Oxford University Press, 2001. Dolan, C., J. Humphrey, and C. Harris-Pascal, “Horticulture Commodity Chains” The Impact of the UK Market on the African Fresh Vegetable Industry”, IDS Working Paper 96. Doner, R., and S. Haggard, “International Production Networks: Implications for Asia”, Prepared for workshop organized by Asia Strategy Forum: ASIA INTO THE 21st CENTURY: The Emerging Economic Map of Asia: Regional Production Restructuring, Asian Integration, and Sustainable Development”, Bangkok 2001. Jones, R. W. and H. Kierzkowski, “Globalization and the Consequences of International Fragmentation”, in R. Dornbusch, G. Calvo, and M. Obsfeld (eds.) Money, Factor Mobility, and Trade, MIT Press, 2000. Kaplinsky, R., M. Morris, and J. Readman, “The Globalisation of Product Markets and Immiserising Growth: Lessons From the South African Furniture Industry”, Institute of Development Studies, Sussex, 2001. Kaplinsky, R. and J. Readman, “How Can SME Producers Serve Global Markets and Sustain Income Growth?”, Institute of Development Studies, Sussex, 2001. Kaplinsky, R. and J. Readman, “Globalisation and Upgrading: What can (and cannot) be Learnt from International Trade Statistics in the Wood Furniture Sector?”, Institute of Development Studies, Sussex, 2000. McKinsey & Co., “Retailers to the World”, The McKinsey Quarterly, No. 3, 1999. Nadvi, K., and S. Kazmi, “Global Standards and Local Responses”, Paper for Workshop on “The Impact of Global and Local Governance on Industrial Upgrading”, Brighton, February, 2001, Draft. Rasiah, R., “Regional Dynamics and Production Networks: The Development of Electronics Clusters in Malaysia”, Draft, 1999. Tybout, J., “Manufacturing Firms in Developing Countries: How Well do they do and Why”, Georgetown University, 1999. UNCTAD, Promoting and Sustaining SME Clusters and Networks for Development, June 1998. UNIDO, Integrating SMEs in Global Value Chains, Vienna, 2001. UNIDO, Development of Clusters and Networks of SMEs, Vienna, 2001. Westphal, L.E., “Industrialization Meets Globalization: Uncertain Reflections on East Asian Experience”, Swarthmore College, 2000. World Bank, Global Development Finance 2000, Washington D.C., The World Bank, 2000.
About the Author: George Abonyi is currently Associate Senior Fellow at the Institute of Southeast Asian Studies. E-mail:
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ISEAS WORKING PAPERS ISEAS Working Papers on Economics and Finance I. (ISSN 0218-8937) 1(96): Nick J. Freeman, Portfolio Investment in Vietnam: Coping Without a Bourse, February 1996. 2(96): Reza Y. Siregar, Inflows of Portfolio Investment to Indonesia: Anticipating the Challenges Facing the Management of Macroeconomy, March 1996. 3(96): Helen Hughes, Perspectives for an Integrating World Economy: Implications for Reform and Development, May 1996. 4(96): Carolyn L. Gates, Enterprise Adjustment and Economic Transformation: Industrial Enterprise Behaviour and Performance in Vietnam during Stabilization and Liberalization, June 1996. 5(96): Mya Than, The Golden Quadrangle of Mainland Southeast Asia: A Myanmar Perspective, July 1996. 1(99): Myat Thein, Improving Resource Mobilization in Myanmar, January 1999. 2(99): Anita G. Doraisami, The Malaysian Currency Crisis: Response and Future Implications, February 1999.
Causes, Policy
3(99): George Abonyi, Thailand: From Financial Crisis to Economic Renewal, March 1999. 4(99): Carolyn L. Gates, The East Asian Crisis and Global Integration: Mismanagement and Panic Revisited or a New Beast?, March 1999. 5(99): Tin Maung Maung Than, The Political Economy of Burma’s (Myanmar’s) Development Failure 1948-1988, March 1999. 6(99): Kim Ong-Giger, Southeast Asian Economies in Crisis: The Emergence of Pax Capitalia, April 1999. 7(99): Carolyn L. Gates, ASEAN’s Foreign Economic Relations: An Evolutionary and Neo-Institutional Analysis, May 1999. 8(99): Kim Ong-Giger, Japanese IT Development: Implications for FDI in Southeast Asia, September 1999.
9(99): Frank L. Bartels and Nick J. Freeman, Multinational Firms and FDI in Southeast Asia: Post-Crisis Perception Changes in the Retail-Oriented Manufacturing Sector, December 1999. 1(2000): Nick J. Freeman, Constraints on Thailand’s Equity Market as an Allocator of Foreign Investment Capital: Some Implications for Post-Crisis Southeast Asia, January 2000. 2(2000): Nick J. Freeman, Foreign Portfolio Investors’ Approaches to Thailand’s Equity Market: Survey Findings and Preliminary Analysis, March 2000. 3(2000): Nick J. Freeman and Frank L. Bartels, Portfolio Investment in Southeast Asia’s Stock Markets: A Survey of Institutional Investors’ Current Perceptions and Practices, April 2000. 4(2000): Nick J. Freeman, A Regional Platform for Trading Southeast Asian Equities: Viable Option or Lofty ‘Red Herring’?, July 2000. 5(2000): Sakulrat Montreevat, Impact of Foreign Entry on the Thai Banking Sector: Initial Stage of Bank Restructuring, August 2000. 6(2000): Ramkishen S. Rajan and Tracy Yang, Devaluation of the Baht and Economic Contraction in Thailand, December 2000. 7(2000): Tracy Yang and Paul Vandenberg, Selected East Asian Stock Markets in the Context of Financial Liberalization: Prior to the Crisis, December 2000. 1(2001): Tracy Yang and Reza Siregar, An Empirical Examination of the Stock Market Returns in Selected Asia-Pacific Economies in the Pre- and Post-Financial Reform Period, February 2001. 1(2002): Tracy Yang, Crisis, Contagion, and East Asian Stock Markets, February 2002. 2(2002): Ngiam Kee Jin and Lixia Loh, Developing a Viable Corporate Bond Market: The Singapore Experience, June 2002. 3(2002): Ramkishen S. Rajan and Rahul Sen, International Trade in Services in Selected ASEAN Countries: Telecommunications and Finance, August 2002. 4(2002): Arumugam Rajenthran, Indonesia: An Overview of the Legal Framework for Foreign Direct Investment, October 2002. 5(2002): Arumugam Rajenthran, Malaysia: An Overview of the Legal Framework for Foreign Direct Investment, October 2002. 1(2003): Lee Poh Onn, The Water Issue Between Singapore and Malaysia: Solution In Sight?, January 2003.
No
ISEAS Working Papers on International Politics and Security Issues II. (ISSN 0218-8953) 1(96): Derek da Cunha, The Need for Weapons Upgrading in Southeast Asia: Present and Future, March 1996. 1(97): Simon J. Hay, ASEAN’s Regional Security Dialogue Process: From Expectation to Reality?, March 1997. 1(99): Sorpong Peou, The ASEAN Regional Forum and Post-Cold War IR Theories: A Case for Constructive Realism?, January 1999. 2(99): Sheng Li Jun, China and the United States as Strategic Partners into the Next Century, February 1999. 3(99): Jürgen Haacke, ‘Flexible Engagement’: On the Significance, Origins and Prospects of a Spurned Policy Proposal, February 1999. 4(99): Derek da Cunha, Southeast Asia’s Security Dynamics: A Multiplicity of Approaches Amidst Changing Geopolitical Circumstances, July 1999. 1(2001): Anthony L. Smith, Indonesia: One State, Many States, Chaotic State?, September 2001. 2(2001): Sheng Lijun, One Year of the Chen Shui-Bian Government: Ice Across the Taiwan Strait, September 2001. 3(2001): Derek da Cunha, Renewed Military Buildups Post-Asian Crisis: The Effect on Two Key Southeast Asian Bilateral Military Balances, December 2001. 1(2003): Sheng Lijun, China-ASEAN Free Trade Area: Origins, Developments and Strategic Motivations, July 2003. III. ISEAS Working Papers on Social and Cultural Issues (ISSN 0218-8961) 1(96): Federico V. Magdalena, Ethnicity, Identity and Conflict: The Case of the Philippine Moros, April 1996. 1(98): Patricia Lim, Myth and Reality: Researching the Huang Genealogies, June 1998. 2(98): M. Thien Do, Charity and Charisma: The Dual Path of the Tinh Dô Cu Si, a Popular Buddhist Group in Southern Vietnam, September 1998. 1(99): JoAnn Aviel, Social and Environmental NGOs in ASEAN, August 1999. 1(2000): Lee Hock Guan, Ethnic Relations in Peninsular Malaysia: The Cultural and Economic Dimensions, August 2000.
1(2001): Aris Ananta, The Impact of Migration Status on Household Financial Resilience During the Indonesian Crisis: A Case Study, May 2001. 2(2001): Lee Hock Guan, Political Parties and the Politics of Citizenship and Ethnicity in Peninsular Malay(si)a, 1957-1968, September 2001. IV. ISEAS Working Papers by Visiting Researchers (ISSN 0219-3582) 1(2000): Ramkishen S Rajan, Examining the Case for Currency Basket Regimes for Southeast Asia, January 2000. 2(2000): P Lim Pui Huen, Continuity and Connectedness: The Ngee Heng Kongsi of Johor, 1844-1916, January 2000. 3(2000): Ramkishen S Rajan, Examining the Case for an Asian Monetary Fund, February 2000. 4(2000): Thawatchai Jittrapanun, The SIMEX Experience: Implications for Thailand’s Futures Exchange, February 2000. [Also published as EADN Working Paper, No 1, November 2001.] 5(2000): Le Minh Tam, Reforming Vietnam’s Banking System: Singapore’s Model, February 2000. [Also published as EADN Working Paper, No 2, November 2001.]
Learning from
6(2000): Gao Haihong, Liberalising China’s Capital Account: Lessons Drawn From Thailand’s Experience, February 2000. [Also published as EADN Working Paper, No 3, November 2001.] 7(2000): Liliana Halim, Reviving the Indonesian Banking Sector? Indonesia’s Economic Crisis: Impact on Financial and Corporate Sectors 1997-1999, February 2000. [Also published as EADN Working Paper, No 4, November 2001.] 8(2000): Ngiam Kee Jin, Coping with the Asian Financial Crisis: The Singapore Experience, March 2000. 9(2000): Ramkishen S. Rajan and Iman Sugema, Capital Flows, Credit Transmission and the Currency Crisis in Southeast Asia, March 2000. 10(2000): Wang Xiaomin, Zhongguancun Science Park: A SWOT Analysis, May 2000. [Also published as EADN Working Paper, No 5, November 2001.] 11(2000): Doan Phuong Lan, The Asian Financial Crisis and its Implication for Vietnam’s Financial System, May 2000. [Also published as EADN Working Paper, No 6, November 2001.]
12(2000): Tracy Yang Su-Chin, Regulatory Reforms in the Asia-Pacific Region: A Preliminary Study, May 2000. [Also published as EADN Working Paper, No 7, November 2001.] 13(2000): Akhmad Bayhaqi, Education and Macroeconomic Performance in Indonesia: A Comparison with Other ASEAN Economies, May 2000. [Also published as EADN Working Paper, No 8, November 2001.] 14(2000): Ai-Gek Beh and George Abonyi, Structure of the Asset Management Industry: Organizational Factors in Portfolio Investment Decisions, June 2000. 15(2000): Paul Vandenberg, The Evolution of SMI Policy in Malaysia, December 2000. 1(2001): Anis Chowdhury and Iyanatul Islam, The East Asian Crisis — A Political Economy Explanation, March 2001. 2(2001): Irman G. Lanti, Back to the (Slightly Different) Future: Continuity and Change in Indonesian Politics, April 2001. 3(2001): Bruce Matthews, Ethnic and Religious Diversity: Myanmar’s Unfolding Nemesis, May 2001. 4(2001): Porametee Vimolsiri, Role of Foreign Investors in the Thai Currency Crisis of 1997, October 2001. 5(2001): Ramkishen S. Rajan and Chung-Hua Shen, Are Crisis-Induced Devaluations Contractionary? November 2001. 6(2001): Graham Bird and Ramkishen S. Rajan, Financial Crises and the Composition of International Capital Flows: Does FDI Guarantee Stability?, November 2001. 1(2002): Ramkishen S. Rajan and Rahul Sen, Trade Reforms In India Ten Years On: How Has It Fared Compared To Its East Asian Neighbours?, March 2002. 2(2002): Muhammad Chatib Basri, Why Trends of Protection Changed Over Time in Indonesia?, March 2002. 3(2002): P.J. Lloyd, New Regionalism and New Bilateralism in the Asia-Pacific, May 2002. 4(2002): Vu Quoc Ngu, The State-Owned Enterprise Reform in Vietnam: Process and Achievements, October 2002. 5(2002): Graham Bird and Ramkishen S. Rajan, The Political Economy of a TradeFirst Approach to Regionalism, November 2002.
1(2003): Yupana Wiwattanakantang, Raja Kali, Chutatong Chrumilind, Crony Capital? Corporate Debt Maturity in Thailand Before the Financial Crisis, February 2003. 2(2003): Martin P. H. Panggabean, Integration of Indonesian Provinces: Alienated Neighbours?, August 2003. 3(2003): George Abonyi, Challenges of Industrial Restructuring in a Globalizing World: Implications for Small- and Medium-scale Enterprises (SMEs) in Asia, November 2003.
Series Editor Tin Maung Maung Than Assistant Editor Maghaisvarei Sellakumaran Editorial Committee Derek da Cunha Lee Hock Guan Lee Poh Onn Sakulrat Montreevat
Papers in this series are preliminary in nature and are intended to stimulate discussion and critical comment. The Editorial Committee accepts no responsibility for facts presented and views expressed, which rests exclusively with the individual author. No part of this publication may be produced in any form without permission. Comments are welcomed and may be sent to the author.
