Economic Governance and the Challenge of Flexibility in East Asia 0742509443

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Economic Governance Challenge of Flexibility in g n -

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Economic Governance and the Challenge of no je

Flexibility in

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Edited Frederic C. Demo, Richard F. Donor, and Eric; Hershberg

& LITTLEFIELD PUBLISHERS, I N C . Oxford New Lanham • Braulcier

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LITTLEFIELT)

PUBLISHERS, INC.

Published in the United States of America by Row ran SL Littlefield Publishers, Inc. 4?20 Boston Way, Lanham, Maryland 20706 wwwxowmanlittlcficld.com 12 Hid's Copse Road, Cur nor Hill, Oxford OX2 9]/. England Copyright © 2001 by the Social Science Research Council

'his is a project sponsored by the Social Science Research Council with funds provided by the Ford Foundation and the Chiang Ching-kno Foundation for International Scholarly Change. AH rights reserved. No part. of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or be any means, electronic, mechanical, photocopying, recording, or otliewvise, without the prior permission of the publisher.

British Library Cataloguing in Publication Information Available Library of Congress Cataloging-in-Publication Data Economic governance and the challenge of flexibility in East Asia »* edited by Frederic C. D:-:Yo, Richard F. Donor, and Eric Hershberg. p. cm. A collection of 9 papers be the editors and other scholars. Includes bibliographical references and index. ISBN 0-T425-0943-5 (alk. paper) - ISBN 0-T425-0944-3 (pack. : a l . paper) 1. Industrial management-East Asia

Case studies. 2. Industrial policy-East

Asia-Case studies. 3. Decentralization in management

East Asia-Case studies. 4.

Flexible manufacturing systems-East Asia-Case studies. 5. Industries

East Asia-Case

studies. l. Demo, Frederic C. II. Donor, Richard F. III. Herslibcrg, Eric. HD?0.E;2 E34 200I 333.95-L1c21

00-062653

Printed in the United States of America

®

1 2'-i

The paper used in this publication meets the minimum requirements of American National Standard for Information Sciences Permanence of Paper f i r Printed Library Materials,

ANSI/NISO Z39.48-1992.

Contents

Introduction: Economic Governance and Flexible Production in East Asia Frederic C. Deja and Richard H Done? 1 Sources of Success in Uncertain Markets: The Taiwanese Footwear Industry Lu-lin Cheng 2

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33

Flexibility under Unorganized Industrialism? The Experience of Industrial Restructuring in Hong Kong Tai Low Lui and Stephen W K. Chiu

55

Governance and Flexibility: The East Asian Garment Industqf*

79

Richard I? Appelbaum and David A. Smith 4 Dynamic Flexibility and Sectoral Governance in the Thai Auto Industry: The Enclave Problem

107

Frederic C. Demo and Richard E Donor 5

Catching Up and Postcrisis Industrial Upgrading: Searching for New Sources of Growth in Korea's Electronics Industry

137

Dieter Ernst 6

Politics, Institutions, and Flexibility: Microelectronics Transnationals

and Machine Tool Linkages in Malaysia Rajah Rasialt

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165

vi

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Contents

Flexible Production, High»Tech Commodities, and Public Policies:

The Hard Disk Drive Industry in Singapore

191

Pol1»Kam Womb# Conclusion: Network Governance, Flexibility, and Development amid Crisis

217

Frederic C. Demo, Richard E Dozen and Eric Hefrshberg Index

About the Contributors

229 241

Introduction Economic Governance and Flexible Production in East Asia Frederic C. Demo and Richard F Dimer

Some years ago, Charles Sabel explored the possibility that developing countries would move toward "changing models of economic efficiency," Sabel speculated that a shift from mass to more flexible forms of production could result from the internal decentralization of large firms and from the evolution of firms in the informal sector to some variant of what came to be known as the Third Italy (Sabel $986: 41-50). This volume explores the issues first raised by Sahel, albeit in much changed economic conditions, through a more explicit institutional and political theoretical lens and with a focus on a variety of sectors in what, until its widespread late 1990s economic crisis, was the most successful developing region in the world-East and Southeast Asia.1 Recent years have witnessed profound transformations in the nature of the challenges facing developing countries seeking to promote economic growth and equity. A combination of technological advances, external market liberalization, and transformations in the nature of product markets has imposed powerful constraints on firms in developed and developing countries alike, while creating new opportunities for firms and entire sectors to enter markets from which they had previously been excluded. The Asian economic crisis intensified these pressures and opportunities in part by increasing pressure for liberalization in both factor and product markets. But it also complicated responses to these conditions by destabilizing macroeconomic conditions and financial flows and stimulating major changes in corporate governance. This volume seeks to enhance our understanding of the factors that account for the success or failure of economic actors seeking to achieve competitiveness in these new circumstances. More specifically, the volume analyzes the role of economic governance institutions in facilitating competitive performance in the

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Introduction

developing market economies of East and Southeast Asia. Drawing on case studies of a variety of industries, the authors demonstrate the significance of p1°odue» five flexibility for achieving success across a wide range of economic sectors. Equally important, they highlight the critical role of institutional factors-especially networks in shaping actors' capacities to adapt to rapid changes in markets, technologies, and consumer demand. V/hile "getting governance institutions right" may not be sufficient to sustain competitiveness or to ensure economic development, these elusive outcomes appear implausible absent such institutional underpinnings. But if coordinating

mechanisms are necessary, there is neither one magic institutional formula for success nor any functionalist guarantee that an economic need will lead to supportive mechanisms. We instead Find different institutional configurations within

and across different industries. And we find that sociopolitical factors weigh heat fly on the kinds of arrangements that do emerge. This introductory chapter begins be outlining the challenges confronting developing countries and the utility of East Asian cases for understanding both the challenges and the institutional and political responses to them.

FLEXIBILITY PRESSURES Firms in the Industrializing as well as industrially advanced countries are now confronting a combination of exogenous pressures-transformed markets, external market liberalization, and accelerating technological change. Global oversupply in many industries has resulted in buyers' markets where customers enjoy expanded choices. Today, global buyers stress competitive price, good quality, quick delivery time, and heightened responsiveness to changing demand requirements. Fleury noted this pattern in his study of industrial change in Brazil during the 1990s, when unlike the earlier period in which firms were "[a]ccustomed to a restricted product variety and relatively high prices, the opening to the global market had a different impact: markets became seg» rented, and a confusing pattern of price, quality and diversity emerged as req»

uisites of demand" (Fleury 1995). In addition, firms throughout the developing world are forced to contend with more liberalized external markets. This process has been especially extensive in East Asia. The economic crisis there was in part the result of liberalized capital markets, and the region's product markets had already been relatively open by the

early 1990s. Many of the region's countries are now facing further tariff reductions as part of imminent \world Trade Organization membership, as well as tariff reforms through the Asia Pacific Economic Cooperation process and under the ASEAN Free Trade Area (AFTA) agreements Combined with significant fcvels of foreign investment, these reforms collectively transmit cost and quality pres» sures with ever greater force to local firms.3

Introduction

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What will be the impact of market liberalization on production? There is of course the possibility that liberalization will encourage mass, as opposed to more flexible, production. As McKeown has argued with regard to developed-country firms, increased *access to large export markers for firms with small domestic mar» bets means greater opportunities for longer production runs (McKeown 1999) . This point was certainly borne out by South Korean success prior to the crisis, as suggested by Ernst's contribution to this volume. But even where liberalization promotes longer production runs of standardized goods, successful firms will have to enhance their operational capabilities with regard to product diversification

(Kotha 1995) and change, continual process improvements (kaizen),"' enhanced quality and timeliness of delivery of products, and, in some cases, product development and innovation. In this volume, we refer to these various performance can

pabilities as instances of the more general concept of production flexibility The range of industry cases covered in this volume suggest several specific pat-

terns of tlexibilityhinducing market pressures in East and Southeast Asia. For firms in export»oriented textile/garment and athletic footwear industries (Lui and Chiu, Appelbauin and Smith, and Cheng, this volume), pressures are for quick-response and supply-chain management to meet volatile demand for E-1 wide range of products and relatively short production runs, a pattern described by Boyer and

Hollingsworth (1997: 45?-458) as "customized production." A similar pattern might obtain for firms that cannot compete in mass exports and opt to become domestic "niche" players. Firms in industries such as autos and semiconductors (Demo and Doner, Rasiah, and Ernst, this volume) are pushed toward strategies of "diversified quality mass production," in which increasing returns to scale obtain but in which high-volume goods also undergo constant modifica-ition.6 Still another related pattern, "adaptive production," is seen in the hard disk drive industry, where firms must shift rapidly from one mass-produced "high-technology commodity" to another (Wong, this volume).v Although differing in some important ways, each of these strategies requires continually improving production processes in order to meet cost and quality pressures imposed by others trying similar strategies

PERFORMANCE DEMANDS AND THE COMPETITIVE STRATEGIES OF FIRMS Are heightened demands for flexibility actually reflected in the strategies of lessdeveloped country (LDC) firms, and are these firms successful in pursuing new strategies of flexibility? Here we find much variability, since firms compete in part be selecting and continually redefining the market niches in which they operate. The possibility of strategic choice implies as well diversity in the performance re» quirements to which firms attend, although it is also clear that firms may simultaneously compete in multiple ways. Attention to a ser of interrelated performance

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Introduction

demands suggests the usefulness of attending to performance profiles, as firms seek to establish an effective balance among various complementary and/or competing objectives (including, inter alia, cost containment and achievement of scale economies).

We can, nevertheless, identify clear tendencies in the responses of firms to eX' terra pressures. At one extreme, Floury (1995) shows that, in response to the new demands of global markets, some Brazilian firms have in fact regressed to a predominant emphasis on price, having found that previously competitive cost structures were no longer adequate in the face of foreign competition. And, indeed, a ease can be made that very high levels of competition may have the effect

of discouraging the sorts of long-terrn investments necessary for high degrees of flexibility, diverting attention to more immediate concerns for price-cutting and

survival (see Crouch and Streeck 1997: 8). Similarly, in the face of increasing demands for flexibility, companies can move down to more standard-technology market niches, or, alternatively, into other product markets (Hollingsworth and Streeck $994: 284). The chapter by Lui and Chiu notes the tendency for Hong Kong clothing manufacturers to respond to growing competitive pressures through relocation of production to lower-cost mainland Chinese production sites, on the one hand, and a shift into nonmanufacturing activities, on the other. More common are the mixed cases of firms which have successfully improved their performance capabilities relating to quality improvement and shortened/cusf tomized production runs, but which still largely react to existing market opportunities rather than seek to create new ones. Clleng's discussion (this volume) of "design»sensitive" and "cost-sensitive" footwear market segments further suggests diversity in the strategic responses of firms even within a single country and industry to these external pressures. In response to new competitive pressures, a smaller number of developing; country firms have upgraded into process engineering and moderate product development. In this volume, Rasiah's analysis of Penang's machine tool firms describes significant process innovations undertaken in coordination with foreign

semiconductor firms. Wonts discussion of the disk drive industry in Singapore suggests that process engineering among local subsidiaries there may indeed be more advanced than in the home country plants of these multinational firms. Similarly, Deva and Doner's study of a Thai auto supplier firm reveals a combine» son of process and product innovation in automotive jigs.

Far fewer are cases where LDC firms have engaged in significant product inno» nation. There are exceptions to be sure. Wong, for example, notes the recent de-

velopment of a new disk drive product by a transnational corporation (TNC) suh» sidiary in Singapore, albeit in consultation with the TNC's U.S.»based design team. But more representative is Fleur's observation that Brazilian manufacturers have in some cases moved successfully into market niches demanding high levels of quality and dependability, but not of product innovation (Floury 1995), This general absence of strategies of innovation may be explained in several ways.

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