Michael Borrus, Dieter Ernst, and Stephan Haggard
The economic crisis of 1997 called East Asia's economic miracle into question and generated widespread criticism of the region's distinctive developmental models. The startling rapidity with which problems in one Asian economy were transmitted to others in part reflects similar weaknesses across countries: overvalued exchange rates, a run-up of unhedged, short-term, foreign debt, underdeveloped domestic financial intermediaries and weak regulatory oversight. In our view, contagion also reflected a deeper underlying fact about the region's economic development. Over the last two decades, driven neither by high politics as in the European Union (EU) nor by formal trade agreement as in North-American Free Trade Agreement (NAFTA), the economies in East Asia have become closely integrated at the level of production organization.
The massive literature on Asia's economic integration, most of it focusing on trade patterns and the investment and trade behavior of multinational corporations, has by and large missed this deeper level of industrial integration. Arm's-length trade, foreign direct investment, and even intrafirm trade do not fully capture the organizational structure of the region's major growth industries and markets. In electronics, textiles and apparel, autos, and other sectors, firms in the region are increasingly linked across borders in complex and ongoing relationships that extend beyond the boundary of the firm and span the entire value-chain in the given activity. The architecture of these "cross-border production networks," the way that technology, know-how, resources and control flow across them, and their implications for competition and cooperation in the region, are the subject of this book. 1
By a lead firm's "cross-border production network" (CPN) we mean the inter- and intra-firm relationships through which the firm organizes the entire range of its business activities: from research and development (R&D), product definition and design, to supply of inputs, manufacturing (or production of a service), distribution, and support services. We thus include the entire network of cross-border relationships between a lead firm and its own affiliates and subsidiaries, but also its subcontractors, suppliers, service providers, or other firms participating in cooperative arrangements, such as