Academic journal article Current Politics and Economics of Northern and Western Asia

Global-Value-Chains Participation and Industrial Upgrading in Asian Developing Economies

Academic journal article Current Politics and Economics of Northern and Western Asia

Global-Value-Chains Participation and Industrial Upgrading in Asian Developing Economies

Article excerpt

1. Introduction

Asian economies have been and will be a growth center in the world. For its future, the Asian Development Bank (ADB) presented the scenario called the "Asian century", in which Asian share of global GDP will nearly double from 27 percent in 2010 to 51 percent by 2050 (see ADB, 2011). One of the driving forces for Asian economic growth has been and will be de facto economic integration through forming global value chains (hereafter GVCs) especially in manufacturing sectors. In contrast with Europe, Asia includes countries with quite different historical, cultural, and political background and at different development stages. In addition, there is no top-level management to substitute for WTO discipline, as pointed out by Baldwin (2006). However, the economic integration in Asia has voluntarily developed through creating and enlarging GVCs by effectively utilizing different location advantages with diversified development stages.

The fragmentation of production processes and the international dispersion of tasks and activities within them have led to the emergence of borderless production systems, which may be sequential chains or complex networks, and which may be global, regional, or span only two countries.

These systems are commonly referred to as GVCs1. GVCs are a concept taken up by different schools: economic theory, development studies and international business disciplines. Kimura (2006) described these systems in East Asia by using the terminology of "International Production and Distribution Network", in such ways as active foreign direct investment, development of cross-border production sharing or fragmentation, sophisticated disintegration of production activities, and the formation of industrial agglomeration, particularly in machinery industries.

In his paper, the "18 facts" on "International Production and Distribution Network" in East Asia were identified based on a number of studies using international trade data, micro-data of Japanese multinational-enterprises, and casual observations. One of the important messages in his paper is that the mechanics of such networks in East Asia must basically follow "fragmentation theory," which was first proposed in Jones and Kierzkowski (1990 and 2005). It states that a firm's decision on whether to fragment or not depends on the differences in location advantages (including the differences in factor prices like wages) and the levels of the "service-link costs", which are costs to link remotely-located production blocks. The large differences in location advantages and the lower the service-link costs encourage firms to facilitate the fragmentation. In this context, it can be said that Asia could be the area which has the greatest potential for GVCs to spread all over the area with its large differences in location advantages within the area, so long as the issues on the service-link costs were cleared by policy-initiatives.

The question then arises as to whether a developing economy, especially a latecomer's economy in Asia, can really enjoy the improvement of its economic performance in case that the economy accepts and participates in GVCs, in other words, whether GVCs can accelerate the catch-up of latecomers' economies and can lead to greater convergence between economies in Asia. To answer this question, there might be several analytical approaches in macroeconomic frameworks, and we herein focus on the two economic variables: foreign direct investment (FDI) and value added trade to address the issue on economic impacts of GVCs participation. The FDI may be an important avenue for an economy to gain access to GVCs and increase their participation. In fact, the creation of GVCs has usually involved the prevailing FDI undertaken by transnational corporations. For instance, UNCTAD (2013) identified the statistical relationship between FDI stock in countries and their participation in GVCs.

Under this context, we first examine whether the FDI has really led to the growth of GDP and exports focusing on ASEAN economies including latecomers and forerunners in their economic developments. …

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