Can Africa Learn from East Asian Production Networks?

Old and new global value chains

It is a good thing that people start talking about global value chains (GVCs) as an engine of economic growth. International industrial linkages can certainly enhance possibilities to introduce economic dynamism in the globalisation era. However, we must be aware that both old and new GVCs exist. By exploring new GVCs, Africa can benefit from globalisation more than just working with old GVCs. 

The concept of GVCs includes old GVCs. For example, a garment factory in Cambodia imports textile materials from China every two weeks, makes baby clothes, and exports the products to the US market every two weeks. Another example of a GVC would be an oil refinery plant in Singapore that imports petroleum from a huge tanker from the Middle East and exports naphtha and gasoline to neighboring countries. However, these are relatively simplistic international industrial linkages and should not be called “production networks” because transactions in such GVCs are slow, of low-frequency, and not very sensitive to time and coordination.

The concept of international production networks [1] and the 2nd unbundling [2] presents key features of a new type of GVC. Differences between old and new GVCs are sometimes explained as the industry-wise international division of labour versus production process or task-wise international division of labour. Actually, more fundamental distinction comes from the speed, frequency, and synchronisation of transactions and tight coordination along value chains. Production networks are typically observed in machinery industries where long and sophisticated value chains are extended across national borders. We also observe production networks in other industries. For example, even if the garment industry squeezes inventory stock by POS (point of sales) system and shortens lead-time from making order to delivery, such as Uniqlo and H&M are doing, it is still called a production network. Other examples of production networks are cut flower operation by air transportation and software outsourcing between the Silicon Valley and Bangalore. Typically, once a country participates in production networks in machinery industries, it can extend such business models to other industries.

Required policy environment

Not all countries can immediately participate in production networks. If we assess the degree of participation in production networks by looking at machinery industries, only a number of East Asian countries, several Central and Eastern European countries, and Mexico and Costa Rica are working in production networks, while the other developing countries are not [3]. Even if development stages are about the same and wage levels are similar, some countries can enter into a production network, and some cannot. The differences are due to whether a policy environment compatible with production networks is established or not.

The fragmentation theory [4] suggests that two conditions must be met in order to participate in production networks. First, the saving of production costs in fragmented production blocks must be large. Second, the costs of service link that connects remotely placed production blocks must be low. Development gaps may work as a factor to meet the first condition and the second condition can then become crucial. Logistics links that take care of not only monetary transport costs but also time costs and reliability are one of the essential elements.

Jump-starting industrialisation and the formation of industrial agglomeration

As Kimura (2013) [5] describes, ASEAN and China have drastically renewed a development strategy so as to take advantage of production networks and accelerate industrialisation. Now they know how to jump-start industrialiation by participating in production networks. Rather than raising an entire industry by improving overall investment climate in a country as a whole, better investment climate local to specific industrial estates would suffice to start inviting production blocks. This makes the initiation of industrialisation much easier. Malaysia, Thailand, China, and others established such a model, and now Cambodia and Laos have started attracting machinery parts producers. 

By attracting more and more production blocks, countries can reach the middle-income level and start forming industrial agglomeration. As discussed in Kimura and Ando (2005) [6], inter-firm (arm’s length) transactions typically occur over a short distance, which works as a force of generating industrial agglomeration. Malaysia, Thailand, and China, as well as Indonesia, the Philippines, and Vietnam to a lesser extent, are at the stage of constructing efficient industrial agglomeration. In industrial agglomeration, local firms and small medium enterprises (SMEs) have ample opportunities to link with multinationals and upgrade innovation. How to step up from the middle-income level to a fully developed economy is the challenge that they now face.

Taking advantage of uneven compression of space and time

Consequences of globalisation are the compression of space and time. Such compression, however, occurs unevenly. Production networks actually take advantage of such unevenness, and production activities move from forerunners to latecomers, which may narrow geographical development gaps. Forming industrial agglomeration with production networks is another dimension of the compression of space. In industrial agglomeration, industrial development gaps between multinationals and local firms, between large firms and SMEs, and between manufacturing and non-manufacturing stand side by side. It is thus natural to think of the effective utilisation of such gaps in upgrading innovation and industrial structure.

Africa must participate in this new game. The compression of time means that the economy and society, as well as human beings themselves, can change quickly by learning from experiences in other countries. Advantages of latecomers should be explored. 

Fukunari Kimura is Professor at the Faculty of Economics, Keio University, Tokyo and Chief Economist at the Economic Research Institute for ASEAN and East Asia.

This article was published in GREAT Insights Volume 3, Issue 5 (May 2014). 

Footnotes

1. Ando, Mitsuyo and Kimura, Fukunari. 2005. The Formation of International Production and Distribution Networks in East Asia. In Takatoshi Ito and Andrew K. Rose, eds., International Trade in East Asia (NBER-East Asia Seminar on Economics, Volume 14), Chicago: The University of Chicago Press, 2005: 177-213.

2. Baldwin, R. 2011. 21st Century Regionalism: Filling the Gap between the 21st Century Trade and and the 20th Century Trade Rules. Centre for Economic Policy Research, Policy Insight No. 56 (May) (http://www.cepr.org).

3. Ando, Mitsuyo and Kimura, Fukunari. 2013a. Production Linkage of Asia and Europe via Central and Eastern Europe. Journal of Economic Integration, Vol. 28, No. 2 (June): 204-240; Ando, Mitsuyo and Kimura, Fukunari. 2013b. From Regional to Global Production Networks: Linkage of North America with East Asia. Forthcoming in Asian Economic Papers.

4. Jones, Ronald W. and Kierzkowski, Henryk. 1990. The Role of Services in Production and International Trade: A Theoretical Framework. In Ronald W. Jones and Anne O. Krueger, eds., The Political Economy of International Trade: Essays in Honor of Robert E. Baldwin, Oxford: Basil Blackwell: 31-48.

5. Kimura, Fukunari. 2013. How Have Production Networks Changed Development Strategies in East Asia? In Deborah K. Elms and Patrick Low, eds., Global Value Chains in a Changing World. Geneva: The World Trade Organisation: 361-383.

6. Kimura, Fukunari and Ando, Mitsuyo. 2005. Two-dimensional Fragmentation in East Asia: Conceptual Framework and Empirics. International Review of Economics and Finance (special issue on “Outsourcing and Fragmentation: Blessing or Threat” edited by Henryk Kierzkowski), 14, Issue 3: 317-348.