Industrial Restructuring in ASEAN and Japan: An Overview 9789814376938

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·I 'he ASEAN Secretariat, based inj akarta, was f(>rmall y established bv an agreement signed hv the ASEA:\' Foreign ~Iinisters during the First 1\lecting oL\SEA:\' Heads ofGmTrnment in Bali in februarv 197G. The Secretariat provides a central administratin~ organ fiJr the coordination of the activities of:\SEA:\' bodies and the imp!cnwntation of:\SE:\:\' projects and acti\·itics. It is headed by a Sccrctary-Gt'IHTaL appointed on a rotational basis among member countries. The Secretariat has three ftmctional bureaus- Economics, Science and Teclmologv. and Social and Cultural ---each headed by a Director. 'I 'he Japan Institute of International Affairs •.J I I:\'. fimndcd in 1959 by f(>rmcr Prime 1\ finister Shigcru Y oshicla. is a non-profit research organization concerned with international afE1irs. The Institute's priority areas of research arc on the .\SEA:\' countries, China, Korea, the Sm·iet Union and.Japan's relations \\ith thest' countries. Research projects arc conducted by the Institute's research staff members in co-operation with uni\Trsitv scholars and researchers from other institutions in the public and pri\·atc sectors. Research output is published in the fimn of either books or articles in anv of the Institute's fin· periodicals, includin?; the monthly A"okusai .\fondai 'fntmwtional A,ijr1in ·.The .J llA currently sern·s as the secretariat in .Japan fiJr the Pacific Co-operation Committee, the ASE:\:\' Regional Studies Promotion Programme, and the japan- Indonesia Conkr"f'!llT.

The Institute of Southeast Asian Studies was established as an autonomous organization in 1\lav 1968. It is a regional research centre fcJr scholars and other specialists concerned with modern Southeast Asia. particularly the rnulti-bceted problems of stability and security, economic dcn·lopment, and political and social change. l"hc Institute is gmTrncd by a twenty-two-member Board of Trustees comprising nominees from the Singapore GonTnmt·nt. the 1\"ational llni\Trsity of Singapore, the \·arious Chambers of Commerce, and prokssional and ci\·ic organizations. ,\ ten-man Exccutivf CommittcT onTSlTS day-to-dav operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The :\SE:\:\ Economic Research Cnit is an integral part of the Institute, coming under the O\Trall supen·ision of the Director who is also the Chairman of its ,\!anagement Committee. The ll nit was kmned in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAl'i. The dav-to-day operations of the Unit arc the responsibility of the Co-ordinator. A Regional Ad\·isorv Committee, consisting of a senior economist fi·om each of the ASE.\:'11 countries, guides the work of the Cnit.

INDUSTRIAL RESTRUCTURING IN ASEAN AND JAPAN An Overview

RESEARCHERS ASEAN

Indonesia Dorodjatun Kuntjoro-Jakti Slamet Senoadji Tirta Hidayat

Malaysia H. Osman-Rani Toh Kin \Voon Anuwar Ali Mustapha Hj Najimudin

Philippznes Alejandro A Reyes Robert Y. Siy, Jr Joel Tanchuco :VIaria Cristina P Almero Singapore Chng Meng Kng Linda Low Toh Mun Heng

Thailand Nathabhol Khanthachai Prasarn Boonserm Nitayaporn Ratanachompoo Wutichai Houtirakul Chongdee Limchuchai Vidhya Bangwatanakul

Institute

rif Southeast

Asian Studies Ng Chee Yuen Narongchai Akrasanec Woo Yuen Pau JAPAN

R yokichi Hirono Mariko Higashi Hajime lmamura Hirohisa Kohama Fukunari Kimura Juichi Inada Tatsumi Okabe

INDUSTRIAL RESTRUCTURING AND ADJUSTMENT FOR ASEAN-JAPAN INVESTMENT AND TRADE EXPANSION An Overview

Institute

Edited by C.Y. Ng of Southeast Asian Studies R. Hirono Seikei University

Narongchai Akrasanee Industrial Afanagement Co. Ltd., Bangkok

The ASEAN Secretariat and

Japan Institute of International Affairs in collaboration with

ASEAN Economic Research Unit Institute of Southeast Asian Studies

Cataloguing in Publication Data Industrial restructuring in ASEAN and Japan: an overview/ editors, Ng Chee Yuen, R. Hirono, Narongchai Akrasanee. I. ASEAN --- Industries- Addresses, essays, lectures. 2. Japan Industries Addresses, essays, lectures. I. Ng, C.Y. I I. Hirono, R. I I I. N arongchai Akrasanee. IV. Institute of Southeast Asian Studies. HD2356 A9142 !987 ISBN 9971-988-57-7

Published by Institute of Southeast Asian Studies Heng ;\1ui Keng Terrace Pasir Panjang Singapore 051 I All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior consent of the Institute of Southeast Asian Studies.

© 1987 Institute of Southeast Asian Studies. First printed 1987. Reprinted 1988. The responsibility for facts and opinions expressed in this publication rests exclusively with the authors and their inurpretations do not necessarily reflect the views or the policy of the Institute or its supporters.

Typeset by Integrated Graphics Pte. Ltd., Singapore Printed hy Kim Hup Lee Printing Co. Pte Ltd -

Singapore

Contents

List of Tables Foreword Preface

Vlll

XI

XIII

PART ONE: ASEAN OVERVIEW 1. ASEAN ECONOMIES IN PERSPECTIVE The Growth Performance of ASEAN in the 60s/70s The Economic Environment of the 1980s Declining Commodity Prices Increasing External Uncertainties Shifts in Comparative Advantage for ASEAN 2. INDUSTRIAL RESTRUCTURING IN ASEAN Declining and Growing Industries Impact on Labour and Community Corporate Behaviour and Responses Japanese Investment in ASEAN Industry

3 3 4 6

8 9 11 22

26 30

32 37 37

3. INDUSTRY-LEVEL STUDIES Background on Selected Industries Research Methods Survey Findings

43 43

4. CONCLUSIONS AND RECOYIMENDATIONS

45

.Notes References

49 49

PART TWO: JAPAN OVERVIEW

51

1. JAPAN'S CHANGING INDUSTRIAL STRUCTURE: GROWTH AND DECLINING INDUSTRIES Structural Changes in Major Economic Sectors Structural Changes in the Manufacturing Sector Changes in Leading Industries

53 53 54 55

Contents

VI

Development of the Electronics Industry An Overview Computer Industry Office Automation Equipment Industry Factory Automation Equipment Industry Consumer Electronics Industry Electronic Parts and the IC Industry 2. CHANGING COMPARATIVE ADVANTAGES Foreign Trade and Economic Development Analysis on the Competitiveness of Manufactured Exports Japan's Changing Trade Structure Competitiveness of Japan's Manufactured Exports ASEAN-Japan Manufactured Trade Japan's Direct Investment Overseas

56 56 58

60 61

63 64

67 67 67 67 69 71 71

3. CORPORATE RESPONSES TO INDUSTRIAL RESTRUCTURING AT HOME AND ABROAD 77 Corporate Responses to Industrial Restructuring at Home and Abroad 77 Positive Responses 79 Defensive Responses 82 Corporate Rationalization Programmes 82 Cartels and Related Arrangements 84 84 Corporate Mergers and Acquisitions 87 Offshore Production 4. INDUSTRIAL RESTRUCTURING POLICY: DOMESTIC DIMENSIONS Changes in Industrial Policy Pre-Energy Crisis Periods Post-Energy Crisis Policies Industrial Restructuring Policies Development of Industrial Restructuring Policies Performance and Assessment 5. RESTRtiCTURING POLICY: INTERNATIONAL DIMENSIONS Changing Japanese Policies on Industrial Restructuring vis-a-vis ASEAi\' Countries The Years l~.l(l"/-73 The Years 1974 · 77 The Years since 1978 Recent Position

91 91 91 93 95 95 98

103

103 103 103 104 104

Contents

Political Constraints on Japanese Industrial Restructuring and Adjustment Policies Economic Insecurity Social Cost of Adjustment

Vll

106 106 107

6. CONCLUSIONS AND RECOM:VfENDATIONS Recommendations Private Sector Corporations Governments

109

JVotes References

114 114

Ill Ill

112

List of Tables

PART ONE ASEAN Growth Rates I.! Share of Industry in GDP 2.1 Annual Growth Rates of Industrial Sector 2.2 ASEAN Industry: Distribution of Manufacturing Value 2.3 Added ( 197 5 prices), 1982 Structure of :Merchandise Exports 2.4 Average Annual Growth Rates of Merchandise, Exports 2.5 and Imports Structure of Employment in ASEAN 2.6 Japanese Direct Investment 2.7 Stock of Foreign Investment in ASEAN 2.8 Japanese Direct Investment in the ASEAN Countries, 2.9 by Industry PART TWO 1.1 Structure ofJapan's GNP and Employment, 1955-85 Value Added ofJapan's :vlanufacturing Sector by 1.2 Subsector, 1965-83 Growth Contribution Ratio of :vlanufacturing Subsectors, 1.3 1975-83 1.4(a) Leading :vlanufacturing lndmtries in Post-war Japan, 1958-81 1.4(b) Shipment of the Selected Manufacturing Industries 1.5 Number of General-Purpose Computers by Scale 1.6 Demand and Supply of Japan's Computer Industry 1.7 Export Destinations and Import Sources ofjapan's Computers ( 1983) 1.8 Export/Production Ratio of Business Machines 1.9 Structural Change in Industrial Robot Production 1..10 Structural Change in Consumer Electronics Production 1. J 1 Export/Production Ratio of Consumer Electronic Products 1.12 Electronic Parts Production

5 ll ll 12 13 14 26 33 33 35

53 54

55 57 58 59 59

60 61 62 63 64 64

List of Tables

2.1 2.2 2.3 2.4 3.1 3.2 3.3 3.4 3.5 3.6 4.1 4.2 5.1

Japan's Foreign Trade Structure, 1965-85 Geographical Distribution of Japan's :Manufacturing Trade, 1965-80 :Manufacturing Trade of ASEAN Countries, 1982 Japan's Direct Overseas Investment by Region and by Industry, end March 1986 Inflow of Foreign Technology by Industry, 1950-84 R & D Activity in Private-Sector Corporations, 1965-83 Authorized Cartels, 1953-82 Corporate :Mngers and Acquisitions by Size of Paid-up Capital, 1950-84 Japanese Direct Investment in ASEAN Countries, 1976-84 Shipment of the Japanese Subsidiaries Overseas by Operation Base and by Market, 1982 Effects of Industrial Adjustment in Specific Industries, 1977-81 Equipment Disposal Under the LSSDI Japanese Official Development Assistance to ASEAN Countries, 1978-85 (On Net Disbursement Basis)

IX

68 70 72 74

80 81 85 86 88 90 99 lOO 105

Foreword

One of the central objectives of the Association of Southeast Asian Nations (ASEAN), as embodied in the Bangkok Declaration under which ASEAN was founded, is the promotion of Southeast Asian Studies. In this context, ASEAN warmly welcomed the offer ofMr Zenko Suzuki, Prime :\iinister ofJapan, in early 1981 to support the launching of an ASEAN Regional Studies Promotion Programme (ARSPP). After extensive consultations among ASEAN member countries and between ASEAN and Japan, it was agreed that the ASEAN Regional Studies Promotion Programme, initially to extend over a period of five years (FY 1982-86), should focus on policv-oriented socio-economic research. Thus far, the co-operative eftort has resulted in the publication of two joint ASEAN-Japan overview papers: ASEA]-i-]apan Industrial Co-operation: An Overview published in September 1984 resulting from the first phase; and Effective lvfechanismsfor the Enhancement of Technology and Skills in ASEAN: An Overview published in :\iarch 1986, from the second phase. This volume is the product of the third phase of the programme on "Industrial Restructuring and Adjustment for .Japan-ASEAN Investment and Trade Exrnnsion". Like the two previous volumes, it is based on the results ofstudies conducted by the Japanese research team and the ASEAN country research teams. The recent history of ASEAN-Japan relations has been marked by a degree of ambivalence. As the first Asian nation to industrialize successfully and to have risen as a phoenix from the ashes of war-time destruction to the leading heights of industrial and technological power, Japan has always been regarded with a degree of awe' and admiration by its southern neighbours. Such awe and admiration have, however, been tinged with a certain amount of anxiety, especially as the impact of Japan's post-war economic expansion becomes increasingly felt in the ASEAN reg10n. On the Japanese side, historical circumstances and the need for economic reconstruction in the early post-war years made it unavoidable that its external relations were initially to a large extent oriented towards the \Vest, especially the United States. However, as Japan rose to global economic prominence with a growing presence in Southeast Asia, it increasingly attached greater importance to its relationship with the ASEAN countries. ASEAN first approached Japan collectively in the early 1970s on the question of Japan's production of synthetic rubber and its adverse impact on the ASEAN economies. From such narrow beginnings, the dialogue has quickly expanded into the prl, machinery, and transport equipment industries. The good performance of the textile industry is attributed to comparative advantage in wage costs, whereas growth in the other two industries can be accounted for by expanding domestic demand. In spite of success in these product lines, the bulk of manufacturing in Thailand continues to be in the processing of primary products. Processed foods (including rice milling, sugar, tapioca pellets, animal feed, beverages, and tobacco) accounted for 29A per cmt of value added, with an additional 3,7 per cent accounted for by mineral, wood, and rubber processing. Intermediate and capital goods are still relatively unimportant in the Thai manufacturing structure, with machinery imports over three times that of domt:>stic output. To this end, the governmt:>nt is taking steps to build up domestic engineering industries such as metal products, transport equipment, and electrical machinery. In Indonesia, import substitution measurt:>s taken in the late 1960s and early 1970s resulted in a spurt of industrial growth, Though impressive growth was recorded throughout tht:> 1970s, it is an insufficient basis to conclude that a sustained period of industrialization has arrived in Indonesia. With industrial growth restricted basically to the needs of the domestic market, the "easy phase" of industrialization petered out in tht:> early 1980s, The expected increase in manufacturing output being translated into increased exports also did not come about, except in the case of a few industries, Industries established under heavy

26 protection were and still are internationally uncompetitive. The few industries that showed potential for further growth are generally based upon natural resource endowment. For those that are non-resource based, they are characterized by relatively high labour-intensity, low skills requirement and a high degree of standardization. The dependence on imported intermediate and capital goods remains high in the I 980s. In I 980, close to 40 per cent of total manufactured imports comprised machinery and equipment. This is estimated to take up a share equivalent to 66 per cent of domestic consumption. Domestic production consisting of simple assembly operations supplied the other 34 per cent, but this type of production also implies high dependence for imported parts and components and other inputs. In an attempt to reduce this dependence and to further promote import-substitution, Indonesia under Repelita IV (Five-Year Plan: 1984/85 to 1988/89) places great emphasis on the promotion of engineering industries both with regard to heavy ami light machinery and equipment. Success in this area is however doubtful, given the serious constraints of 1. inadequacies in industrial, business, and engineering infrastructure; and 2. the lack of skilled manpower and experienced management. ~1eanwhile, the shortage of financial resources resulting from depressed commodity prices (especially declining oil prices) is increasing the need to establish more export industries. But irrespective of the employment of export-oriented or import-substitution strategies or a combination of the two, priority should be given to resource-based industries. Natural resources provide the firmest basis for relatively competitive industrialization at the present stage of development. Impact on Labour and Community

The impact of industrial restructuring on labour and community was variously defined by the different country teams, leading to disparate and non-comparable findings. This was the case since concerns of labour and community are unique to individual country experiences, and the ranking of priority issues differs from country to country. There is marked diversity, for instance, in the structure of employment in the different ASEAN countries, as shown in Table 2.6. Nevertheless TABLE 2.6 Structurt> of Employment in ASEAJ\i (Percentages:: Agriculture ---~-·----

Industry

---·

Services ·-------

1965

1981

1965

1981

1965

1981

71 57 82 60 6

58 46 76 50 2

9 16 5 13 26

12 17 9 16 39

20 27 13 27 68

30 37 15 34 59

----

Indonesia Philippines Thailand Malaysia Singapore

SocRc£: World Bank ( 1985).

Industrial Restructuring in ASEA.Y

27

the findings present a broad picture of some special areas of concern upon which the industrial restructuring process impinges. The Thai team is chiefly concerned with the impact of the unfavourable economic climate as well as measures to restructure on unemployment. The average annual rate ofunemployment in Thailand between 1980 and 1984 was 8.5 per cent, with forecasts that it would rise at a rate of around 7.5 per cent per vear for the next two years. lJ nder the present conditions of economic downturn, the unemployment problem could be particularly severe, with the absolute number ofjoblcss in 1986 expected to hit two million. Whether or not industrial restructuring is able to absorb the growing need for jobs depends on the nature of the restructuring process as well as the concommitant manpower policies. Attempts to upgrade the industrial structure have to coincide with appropriate wage policies as well as programmes of skills development. The manpower and skills development issue is also important for Singapore, particularly since it is attempting to move from low value-added to high valueadded or "knowledge-intensive" industries. The Singapore team is most concerned, in this respect, that despite all efforts to promote Research and Development, Singapore must be realistic about its capacity to generate original research of a quality comparable to that in the industrial centres. A related concern is that hightech and high value-added industries tend to lock the capital structure of the restructured industries into excessively high and consequently inflexible levels. The two most prominent examples are the shipbuilding and the petrochemical industries which, being so capital-intensive, cannot be abandoned in slump times and can only adjust in terms of capacity and cost structure. The manpower issue for Singapore also arises in terms of the role for foreign labour under an industrial restructuring programme. Foreign workers have in the past served as the source of surplus labour for lower-paying jobs in the country, and have in that way contributed to keeping down wages. vVhile the government policy has been to phase out these foreign workers by 1991, there may be an important continuing role for them to play in the short run, in terms of meeting labour shortages and keeping wages low. Two other important concerns of the Singapore team relate to the role of the government and of private entre-preneurship in industrial restructuring. The role of the government in the economy has to date been pervasive, its ratio of budgeted expenditure to GDP for financial year 1986 amounting to 45 per cent. More recently, however, there- has been a widespread feeling that the public sector has "crowded out" many private concerns and needs to be trimmed down. This move is deemed to he particularly important in Singapore's transition from manufacturing to service industries, in which the free flow of information and a minimum of regulations are widely regarded as prerequisites. It is important to recognize, however, that the dimunition of ownership does not necessarily translate into a loss of control for the government. The critical test of Singapore's "privatization" programme is not how fast it divests itself of public companies but how willing the government is to relinquish its control over decision-making and resource allocation in the economy. The question of local capital and entrepreneurship is another contentious issue

28

ASEAX Overview

in industrial restructuring. As it stands, local capital exists chiefly in the form of subcontractors for state and foreign enterprises. These small local firms, however, have been under grat pressure in the last few years as a result of high wage and operating costs. :\1ore recently, with the severe downturn, greater attention has been given to these firms in the form of easier loan conditions, joint venture assistance, and consultancy services. To what extent these are emergency measures to keep firms from going under and to what extent the government is willing to foster a more rapid growth of a domestic entrepreneurial class remains unclear. Certainly, if the latter is to come about, a fundamental change will be needed in the social and economic structure, which to date has emphasized conformity, regulation, risk averseness, and the primacy of the public sector. The Singapore team concludes that there is a need for a more precise national industrial policy fix local firms and their role in the restructuring effort. The overwhelming concern fi1r the Philippines team of the impact on labour and community is employment. Not only has unemployment worsened since 1983, but labour has also been on the receiving end of cost-cutting measures as a response to the economic downturn. Unemployment grew by 63 per cent in 1984 alone to a level ofl,395,000. The outlook for 1985 was just as grim, with a loss ofll4,600jobs in the manufacturing sector between April 1984 and April !98.5. At the same time, there has been an increase in work stoppages and strikes, aflecting mostly the manufacturing sector. There was a total of282 strikes and work lockouts in 1984, an 81.9 per cent increase over the figure for 1983. It is not surprising in this context that many Filipinos have since 1980 found alternatives in the o\·erseas employment sector. Consequntly, fl:1reign exchange remittances have also expanded by about 48 per cent between 1980 and 198'1. Probably more so than in the other ASEAN countries, the success of any industrial restructuring programme in the Philippines will be measured by its ability to solve the unemplovment problem. Like in other developing coun tris, Indonesia's employment statistics arc not very reliable. Therefore, it should be noted that those presented here merely serve as indicators of broad relative magnitudes and should be interpreted cautiously. The labour force in Indonesia is estimated to grow from .54.3 million in 1980 to 73.6 million in 1990, at an average annual rate of 3.04 per cent. The overall unemployment rate is increasing and estimated at 4.1 per cent in 1980. With the estimated high rate of growth of the labour force and the sharp downturn of the economy in the mid- I 980s, open unemployment thrccatens to become a major problem in Indonesia particularly in the urban areas. Between 1965 and 1981, there was a significant drop in the percentage of the labour force engaged in agriculture; but, with 58 per cent of the labour force still engaged in this sector in 1981, agriculture continues to be the largest sector in terms of employment. :Vfeanwhile over the same period, those engaged in industry increased from 9 per cent to only 12 per cent. This slow paced labour absorption in industry, therefore, has failed to contribute substantially to the solution of Indonesia's unemployment problem. For example, while the value added in largeand medium- scale manufacturing grew at an average annual rate of about 12 per cent, employment rose by only 7 per cent - from 487,000 to 963,000. This

Industrial Restructuring in ASEA.Y

29

corresponds to only 20 per cent of the average annual increase in Indonesia's labour force during the 1970s. The bulk of the increase in employment came from smallscale manufacturing and cottage industries such as textiles, food products, wood products, electrical machinery, rubber products, and tobacco-- even though this sector accounts for only one-fifth of manufacturing value added. This situation poses a serious dilemma for Indonesian planners who have to deal with multiple objectives. On the one hand, they have the objectives of reducing unemployment and poverty, and these imply the concentration of effort and resources on small-scale manufacturing and cottage industries; on the other hand, growth objectives would seem to necessitate the concentration of effort and resources on medium- and large-scale manufacturing. However, the urgency of reducing unemployment is well reflected in Repelita IV where the generation of employment opportunities is stated as one of the primary objectives. This is further supplemented by a related objective of improving productivity without reducing labour intensity in Indonesian industries. Other objectives identified in Repclita IV include the dispersion of industries to the outer islands as industrial activity is too heavily concentrated in Java. To accelerate this process, the Indonesian Government has identified industrial growth centres based on natural resource endowments in the outer islands; and implemented a transmigration programme with the objective of transferring close to a million workers from Java, Bali, and Lombok to Sumatra, Sulawesi, Kalimantan, and Irian .Jaya. ~falaysia's unemployment problems arc less serious than those of Jndonesia and the Philippines. \Vith an ample endowment ofland and other natural resources, a literate work-force, a relatively efficient administration, an enterprising business community, and a remarkably open economy based on export-oriented industrialization in the 1970s, impressive growth was recorded throughout the decade. The fast rate of growth in the manufacturing sector brought about not only a significant change in the country's industrial structure, but also provided ample employment opportunities. Between 1974 and 1980, employment in manufacturing in \Vest Malaysia increased twice as fast in the economy as a whole. In the agricultural sector over the same period, there were intermittent reports oflabour shortages, and workers had to be imported from Indonesia. In addition to generating employment, high growth also provided the opportunity for the government to redistribute wealth between foreigners and nationals, and among the different ethnic groups in :\falaysia. A major objective of national policy as exemplified by the New Economic Policy (NEP) since 1971 is to increase the share of participation by bumiputras in the economy. This process is promoted through a variety of measures. For example, foreign companies were restructured by direct intervention from the Foreign Investment Committee and the operations of special institutions such as the ~ational Corporation (PE RN AS). As a result, there has been a significant increase in ownership of shares by and on behalf of bumiputras. However, by the mid-1980s, Malaysia was seriously afl"ected by the sharp decline in prices of nearly all its major export commodities, a situation further aggravated

30

ASEAk Overview

by protectionist policies of its major trading partners. In addition, the narrowly based manufacturing sector is fast losing its comparative advantage in some of the labour-intensive products as a result of rising wages. Liberal spending programmes encouraged by the oil boom and heavy foreign borrowings caused large budget and balance of payments deficits. In response to these imbalances, the Malaysian Government not only implemented a domestic cut-back in spending but also revised downwards the NEP that emphasizes the redistribution of wealth to bumiputras and local ownership. Another area affected was the programme promoting heavy industries such as the national car project, petrochemical plants, sponge iron, steel and other intermediate and capital products. Given the situation, a number of these projects are being reconsidered and may be shelved or deferred. This new development has induced a switch from heavy industries to resourcebased industries. There is also increasing perception that the public sector, partly as a result ofNEP policies, has grown too large, with consequent bureaucratization, excessive financial burden of subsidies, and stifling of private initiative and competition. As a result, there is also a noticeable move towards privatization. In the first half of the 1980s, the growth of employment declined sharply and fell below the rate of growth of the labour force. With an estimated labour force of 5.95 million in 1985 and growing at an estimated high rate of 3.1 per cent-- mainly the result of an increase in the working-age population and in the participation rate of the labour force (particularly women) -unemployment may be an increasing problem in Malaysia. Corporate Behaviour and Responses

Findings on corporate behaviour and responses are again country-specific and, in general, non-comparable. They have to do with ways in which industrial firms respond to the existing economic environment, and to any industrial restructuring measures proposed by the government. These findings may be useful in gauging the private sector sentiment concerning government policies, and in locating trouble spots in particular industries. The Malaysian team surveyed firms in the electronics, rubber products, and machinery industries, and posed questions on performance, impact of the external economic environment, response of the firms, and the role of the government. One interesting finding is that firms surveyed were largely unaffected by protectionism in importing countries. About 70 per cent of respondents in both the rubber products and machinery industries claimed that they were unaffected by protectionism. The figure was even higher (80 per cent) for the electronics industry, which is not surprising since these firms produce components such as integrated circuits and semi-conductors for final processing in the home country. As a response to any worsening external environment, the most popular shortrun measure amongst electronics firms is to increase productivity and thus increase competitiveness. In the rubber products industry, increasing productivity was also the most frequently cited measure along with concentrating on the domestic market. Similar responses were recorded for the machinery industry. It seems that both the rubber products and the machinery industries see great potential for import substitution and exploitation of the domestic market.

Industrial Restructuring in AS1\'AS

31

For the long run, the most popular course of action for the electronics industry is to introduce new products. Other frequently quoted measures include improving product quality and cutting real costs. Rubber-based and machinery firms also chose the introduction of new products as the desired response to long-run worsening external conditions. On the role of the government in recessionary times, electronic firms responded most favourably to the provision of sufficient subsidies. This is followed by the need to increase domestic protection. These two responses were also the most popular with the rubber-based firms, but in addition, a large number of respondents called for Malaysian trade offices to play a more active role in reducing tariff barriers overseas. Not surprisingly in the machinery industry, where the bulk of output is for the domestic market, the most frequently quoted response was for the government to increase domestic protection. \Vith respect to the internal changes which firms felt were necessary to adapt to a changing world environment, favourable responses were recorded for changes in production technology (such as greater automation), product design, marketing strategy, and capacity utilization (for instance, introducing shift work). An interesting finding is that most respondents did rwt choose switching location as a measure to cope with recession. Less than a quarter of the surveyed electronics firms suggested that they would relocate, and an even smaller proportion in the case of the rubber products and machinery firms. As it turned out, the two Japanese electronic component firms surveyed indicated that they did intnd to shift, probably back to Japan where with the use of robotics technology, production costs become competitive with those in Malaysia. Rather than selct measures that chiefly call for government assistance, production cut-backs, or relocation, the firms surveyed opted for measures such as productivity improvement, market diversification, product upgrading, and price reduction. Tht> ~alaysian team concludes that these general findings indicate that the thret> industries continue to enjoy comparative advantage in the country. The Thai team selected leading firms from the industries targetted for restructuring for its survey. These include the food processing, electronicjelectrical appliances, textiles, furniture and wood products, leather, rubber products, metal and metal products, ceramic and non-metal products, automobile, and plastic industries. The survey sought to elicit the response of firms to various policy measures of the government to restructure Thai industry. In almost all cases, the response to proposed government policies was favourable. There were only three areas in which firms registered a strong degree of disagreement with official policy, and these were: !. the abolition of general import controls; 2. the adjustment of businss and excise taxes on imported and locally produced goods to the same level; and 3. government participation in investment projects, particularly at initial stages, with the private sector. The Philippine case study on corporate behaviour and responses did not employ the use of a survey but focused instead on general business trends throughout the period of severe economic decline in the country. Broadly speaking, many firms, faced with higher production costs and low demand, resorted to price rise and cost-cutting measures. These measures resulted

32

ASEA.V Overview

in burdensome inflation for consumers and wage cuts for labour. Many firms had to contend with strikes, to the extent that their very survival was at stake. Firms were also highly strapped for finance, in spite of government efforts to ease credit markets. The major concern of firms in 1985 was the ongoing industrial rationalization and trade liberalization programme of the government. Some were unwilling to go along with the rationalization programme citing problems of underutilized capacity, poor market demand, and the shortage of imported inputs. Likewise the trade liberalization programme was opposed by firms enjoying some domestic protection. They argued that the programme was untimely, since given the adverse domestic conditions, the entry of cheap imports would force many more firms to close down. More recently, following the Aquino victory, however, import restrictions have been reintroduced in order to help struggling firms stay afloat. As a result of these difficulties encountered by firms, aggregate investment in 1985 went down by 38 per cent from the level in 1983. Inventory levels in turn declined 53 per cent owing to the high cost of credit and the lower production levels. Purchases of durable equipment went down by 44 per cent, due mainly to foreign exchange shortages. As with all other aspects of industrial restructuring in the Philippines, the primary task of any restructuring programme will be to get industry back on its feet before serious efforts at rationalization and import liberalization can take effect. Japanese Investment in ASEAN Industry An indication of Japanese involvement in ASEAN industrialization can be discerned from figures ofJapanese investment in the respective countries. Table 2. 7 provides data on Japanese foreign investment in ASEAN and in other regions for 1983, as well as cumulatively between 1951 and 1983. As a region, ASEAN ranks second in importance as a location for Japanese investment after North America. ASEAN accounted for 19.1 per cent of the cumulative value of Japanese investments between 1951 and !983, or nearly 70 per cent of all .Japanese investment in Asia. In comparison, l':orth America's share of all Japanese investment was 29.3 per cent. \Vi thin ASEAN, however, the share of cumulative Japanese investments is very uneven, with Indonesia taking 12.5 per cent of the total and the other countries accounting for only between one and three per cent. For 1983 alone, the ASEAN share of Japanese investment had fallen to 12 per cent. Indonesia and Singapore in that year each accounted for about a third of total Japanese investment in the region. Japan is also one of the more important investors in the various countries compared with other foreign investment. Table 2.8 shows the relative importance of foreign investment from different origins for ASEAN. Japanese investment dominates in Indonesia and Thailand, accounting for about a third of all investment in each country. It is the second most important source of foreign investment in other countries, after the United States in both the Philippines and Singapore, and after Singapore in Malaysia. The share of cumulative Japanese investment in ASEAN until 1980 is smallest in the Philippines at 19.7 per cent.

TABLE 2.7 Japanese Direct Investment 1983 Value (US$ Mill.)

Country/Region

-------~--

Cumulative Total 1951-83 of

Total value

Value (L'S$ l\1ill.)

0 0 of Total Value

19.1 12.5 !.5 !.3 2.8

(~,;)

--------- -

----------- ------------

-----

ASEAN Indonesia Malaysia Philippines Singapore Thailand Other parts of Asia North America Middle & S. America Middle East Europe Africa Australasia

973 374 140 65 322 72 874 2,701 1,878 175 990 364 191

12.0 4.6 1.7 0.8 4.0 0.9 10.7 33.2 23.0 2.1 12.2 4.5 2.3

11,629 7,641 904 786 1,705 593 4,770 17,926 10,730 2,654 7,136 2,871 3,560

7. 7 29.3 17.5 4.3 11.6 4.7 5.8

ToTAL

8,146

100.0

61,276

100.0

l.O

Sm;RcE: l\finistry ofFinancc,Japan, Asian Penpectives (Nomura Research International) 1, no. 5 (October 1984).

TABLE 2.8 Stock of Foreign lnvestrnmt in ASEAN (Percentages!

-------------- -

.Japan USA C.K. Singapore Netherlands Others

Malaysia 1979

Indonesia 198! --------

35.7 6.1 !.2 1.5 3.4 52.1

-

---------------

20.9 7.5 !6.3 24.9 1.3 29.1

Philippines 1980 ---

--

---

Singapore 198~1

----

Thailand 1981 ------------

19.7 49.5 3.2

20.1 33.6 !5.8

27.6

13.3 ! 7.2

-

32.8 11.5 6.0 1.6 2.0 46.1

SocRCES: Japan Extctronicsjelectrical industry had been a dynamic sector in the Indonesian economy. Between 1972 and 1982, the electrical equipment sub-sector postt>d a rapidly increasing share of the gross value addt>d of large- and mediumscale firms - from a 1.4 per cent share in 1972 to a 5.6 per cent share in 1980. Likewise, the television asst>mbly industry in Indonesia experienced rapid growth from 1970 to 1981, although recently, output had dropped from 846,931 units in 1981 to 653,498 units in 1982. Nevertheless, in general, one can still infer that the electronics/electrical industry is an early type ofimport-substitution industry. It is under heavy protection and deals mainly with the assembly of parts. In Yfalaysia, according to tht> 1981 Ct>nsus of Manufacturing Industrit>s, this sector comprised 312 establishments; the dominant sub-sector is the semiconductors and other electronic components which contributed 76.5 per cent of the gross output value, 75 per cent of the value added, 75 per cent of the total employt>d, 73 per cent of the total amount of salaries and wages paid, and 57 per ct>nt of the value of fixed asst>ts in the electrical goods industry as at the end of 1981. In terms of Peninsular :\falaysia's gross domestic product, the share of output from the electronic goods industry was 7.9 per cent in 1981. Exports of electronic goods made up 11.1 per cent of the total exports of merchandise and 47 per cent of total manufacturing exports from Malaysia. The importance of the electronics sector is, however, in its labour absorptive capacity. In 1981, it was the largest single employer within the manufacturing industry, employing a total of 81,000 employt>es, or 15.2 per cent of the total employed in the manufacturing sector. vVithin tht> electronic goods sub-sector, semiconductors and otht>r electronic components, which are mostly located in the Fret' Trade Zones, is the largest single absorber of labour. It employs twice the number of workers compared with the next single largest employer, the clothing industry. However, rt>cent devt>lopments indicate how \·ulnerable the dectronics industry can be to the world recession and rapid technological changes. Already, two major C.S. electronics firms, i.e., Mostek and Atlas, have folded up. \Vht>ther the rest can withstand tht> recession and continue to stay ahead in technological advancement remains to be seen. In the Philippines, the electronicsjelt>ctrical industry is made up of three product segments: 1. telecommunications and sound recording and reproducing equipment; 2. electrical machinery apparatus and appliances and their electrical parts; and 3. semiconductors and micro-components. The first two product st>gments are mostly r:onsumer type products which cater primarily to the domestic market. Tht>se segments of the industry may be said to have begun in the late 1930s with the establishment of several foreign-based firms with the sole purpose of providing service, repair, and distribution. With the enactment of protectionist measures in the 1960s and 1970s, these segments started local manufacturing and subassembling activities. Later, in the 1980s, an outward looking industrialization strategy necessitated the gradual dismantling of extensive protectionist measures of the past. However, due to foreign exchange difficulties and a deprt>ssed economy, the

lndustry-Leuel Studin

39

programme proved ineffective. As a result, these segments of the industry still submit themselves to import monitoring by the Board of Investment (BOI). The situation with the semiconductors and micro-components sub-sector, however, proved to be very different. \'\"ith the first offshore assembly plant established in 1970, this sub-sector took off rapidly and in slightly over a decade captured 20 per cent of the merchant sub-contract market. Like :'vfalaysia, this subsector is the most dynamic, both in terms of production capacity and technology. Consequently, it has emerged as the top non-traditional export of the 1980s. In Singapore, the electronics/electrical industry started in 1965 with two locallyowned firms producing black and white television sets under tariff protection and pioneer incentives. Active promotional activities by the Economic Development Board (EDB) resulted in a spurt of investment in 1968 particularly into the semiconductor sub-sector and this industry became the largest employer in the manufacturing sector. In 1978, the government initiated its long-term objective of achieving a fully integrated electronicsjelectrical industry. Again the EDB was given the task of promoting R & D and to bring about full integration. By 1985 there were investment signals that some companies would probably design integrated circuits here. The industry grew very rapidly and by 1984 exports exceeded S$8 billion. It must be noted, however, that Singapore's share of the world market for semiconductors has fallen in the last five years as the local industry's annual growth fell behind that of the world's at 17 per cent. As a result, Singapore's share ofworld output of semiconductor products has fallen sharply from 5.2 per cent in 1982 to 4.5 per cent in 1984. For the first half of 1985, exports of electronicsjelcctrical products grew at 6 per cent, with the industry maintaining its position as having the highest growth in domestic export. This year also noted a great deal of restructuring and upgrading in this industry. Concurrent with heavy investment f(x upgrading, replacemt'nt, and expansion of production facilities so as to achieve high value-added products, high skilled labour usage, and automation, workers were retrenched and labourintensive operations relocated in neighbouring countries such as :'vfalaysia. In Thailand, the electronicsjelectrical industry was launched in the 1960s in the form ofjoint ventures with foreign partners. Products were basically consumer goods such as flashlight, incandescent bulbs, electrical wires, refrigerators, airconditioners, and electric fans. Production was generally based upon the asst'mbly of ready-made parts with very little linkages to other industries. As a result, this relatively smaller sector of the economy contributed an average of only 2. 7 per cent of the total value added in manufacturing, though it experienced a healthy average growth rate between 1975 and 1979 of36.7 per cent, resulting from sharp increases in local demand through higher incomes, expansion of electricity supply to rural areas, and general economic growth. The export of goods from the electronics/electrical industry really started to grow during 1978 with the inclusion of the production of integrated circuits. This trend, however, was dampened by the world economic recession in the early 1980s. In addition to the electronics/electrical industry, case studies were also done on other industries. Indonesia selected the plywood and automobile industries. With 122 million hectares of forest area, Indonesia naturally exploited the export

40

ASEAN Overview

potential of wood products. Prior to 1973, concentration was given to the export of logs. To increase value added through local processing, two plywood mills with a total capacity of28,000m 3 were established in 1973. This industry grew rapidly and by 1982 the number of mills had increased to 61 with a total capacity of 3,292,000m 3 • Among the wood product industries, plywood rose from a low share in employment creation of about 12.9 per cent in 1975 to 57.7 per cent in 1983. The automobile industry has a longer history, with General Motors establishing an assembly plant in Jakarta in 1928. However, this industry really started to grow in 1969 under Repelita I (First Five-Year Plan). The number of trade marks and models grew rapidly and by 1977 there were respectively 56 and 146 in total. Under an active government programme and competition, this number subsequently declined to 28 and 69 respectively in 1983. Most of the automobile assembly firms are joint ventures with Japanese majority ownership, and Japanese makes control 92 per cent of the market share. In general this industry may be described as heavily protected, inefficient, and with low capacity utilization. For Malaysia, case studies on rubber-based and machinery industries were also conducted. Well known as the world's leader in natural rubber production, Malaysia produced about 1.5 million metric tonnes or 36 per cent of world production in 1984. But it was estimated that the rubber-based industry used only 68,000 tonnes ( < 5 per cent) and contributed less than 5 per cent of total domestic manufacturing whether in terms of value added, output, employment, fixed assets, or exports. With the perception that this industry has vast potential for further development, Malaysia plans to increase local consumption of rubber to 308,800 tonnes (fivefold) by 1995. This development strategy envisages Malaysia as a major manufacturer of tyres, with priority also given to latex products such as toys, medical products, and fashion footwear. Given a saturated domestic market for these products, the emphasis is on exports. In the machinery industry, according to the 1981 Census of Manufacturing Industries, there were 269 foundries, 2,066 fabricated metal product establishments, and I ,45 7 non-electrical machinery establishments in Malaysia. The total gross value of output of this industry increased from $506 million in 1973 to $1,162 million in 1981 ( 1970 constant M$), representing a twofold increase in its gross value of output during the period. The average annual growth rate over the period 1973-81 was !I per cent. In 1980, imports of this industry amounted to M$3,818 million, representing 16.2 per cent of the total imports into the country. On the other hand, exports of the industry amounted to only M$326 million, representing 1.2 per cent of the total exports and 0.9 per cent of manufacturing output. In 1981, the output of the machinery industry accounted for only about 4.2 per cent of gross domestic product (GDP) and its contribution to the value-added was only 1.4 per cent of the total value added of the economy. In terms of employment creation, the industry engaged a total of 59,882 persons in 1981, representing about 1.1 per cent of the total labour force and 7.7 per cent of the total number of persons engaged in the manufacturing sector. In view of the heavy dependence on the import of machinery products, there is an urgent need to develop and upgrade the machinery fabrication industry in Malaysia, not only to save on foreign exchange but also to develop and make

!ndustry-Lael Studies

41

available machinery equipment which are more suited to the needs of local industries. Hence, the potential of the machinery industry in the future industrialization strategy of Malaysia is vast and offers tremendous opportunities for further expansion. The two other industries surveyed by the Philippines were the garment and textile, and fruit processing industries. The garment sub-sector has a long history. :Mass production for the re-export of embroidered infant wear only came about in the 1940s. The 1950s noted the introduction of sewing machines and with it foreign fashion from magazines and movies which stimulated the mass-production of readyto-wear apparel. However, the heavy dependence of garment manufacturers on trading partners for their raw material requirements led to the slow growth of the industry due to the heavy importations and low returns. Subsequently, the government intervened with incentives and financial aid which encouraged local producers to manufacture clothing in commercial quantities. As a result, the 1960s noted the flourishing of the industry which continued well into the 1970s. By the 1980s, the industry had become one of the top foreign exchange earners for the Philippines. Most garment manufacturers are located in Metro Manila with a few dispersed in the Export Processing Zone in Mariveles, Bataan. The MTI estimates that there are around 30,000 establishments, the bulk of which are made up of small cottagetype firms and medium-scale firms. The big-scale firms are mostly export-oriented giants which have foreign backing. Unlike the garment industry, the Philippine textile industry was a product of the import substitution era of the 1950s. Classified as an "essential infant", heavy protection and liberal incentives were given to this industry. The resulting high returns on investment attracted numerous investors into the industry. However, the 1960~ saw the lifting of protectionism and with it came increasing costs that lead to the rampant incidence of smuggling and increased financial borrowings that continued into the 1970s. This was further aggravated by the weak export and domestic demand as well as the poor technical performance of most textile manufacturers. The decade of the 1980s looks toward a more optimistic scenario with the implementation of the Textile Modernization Programme that is aimed at improving the industry's productive capacity in five years. The MTI estimates that there are presently about 170 companies engaged in the production of yarns from natural and man-made fibres like cotton, rayon, polyester, nylon, and acrylic, with weaving or knitting machines which are capable of producing 120,000 metric tons of textile products, inclusive of about 670,000,000 square metres of fabrics. Recently, fruits have also become an important commercial crop both in the domestic and export markets. The major fruits are banana, coconut, mango, papaya, and pineapple. However, despite improvements in infrastructure, transportation, farming methods, and marketing facilities, the supply of fruits is characteristically erratic because of their seasonal nature, high perishability, and inadequate storage facilities. These circumstances indicate the great potential for fruit processing which ensures reliable supply of fruits even during off-seasons, longer shelf-life, and trouble-free storage for a longer period of time. In the Philippines, there are presently about 80 firms engaged in the preserving

42

,1SEA,Y Overviru'

and canning of fruits. Most of them have investment tie-ups with foreign firms whilst a few receive financial assistance from government institutions and private commercial banks. Nevertheless, the industry is dominated by two multinational subsidiaries, Philippine Packing Corporation (a subsidiary of Del :\lonte Corporation of San Francisco, CSA) and Dole Philippines Inc. (a subsidiary of Castle and Cooke, Inc. of Hawaii). Both these companies grow, process, and pack pineapple products in the Philippines. Although initially concerned with pineapples, both have expanded their operations to include bananas and mangoes. Case studies conducted in Singapore include petrochemicals, aerospace, electrical) electronics, machine tools, and transportation. Of these the oil refining industry is the most mature among this group of selected industries although the petrochemical complex only started in February 1984 and is not performing very well currently. \Vi thin the transportation sector, shipbuilding and repairing, like oil refining, petrochemicals and electronics, are facing world-wide recession and excess capacity. Currently, Singapore is the third largest oil rdi.ning centre after Houston and Rotterdam. Its emergence has been due not only to domestic infrastructural and environmental factors but more importantly to factors such as Singapore's strategic geographical location between the major crude supply points in the Middle East and a number of refined product markets in Southeast Asia, as well as the growing differential between the transport cost of crude oil and refined products. Presently, the structure of the refining industry is dependent on contracts for term processing from Indonesia (MINDO), :\1alaysia (Petronas), China (SINOCHE~1), and the United Arab Emirates, (AD!\'OC) and spot processing from other Indonesian traders (NIOC/Agents) and others. Given the strong symbiotic relationship between petroleum refining and petrochemicals, it is not difficult to understand the rationale behind Singapore':; attempt to make petrochemicals the centre-piece of its strategy to involve Japan in Singapore's economic development especially during the ebb offoreign investment in the mid-1980s. There are, however, a number of obstacles to the successful development of a petrochemical complex in Singapore. Currently, there is a world-wide surplus in petrochemicals and excess capacity in its major partner Japan and other Japanese joint ventures in Indonesia, Iran, Iraq, and Saudi Arabia. All these countries have roughly the same price tag. In addition, Singapore has to face a potential threat from the neighbouring ASEAN countries which are bidding for petrochemical production. These countries have temporarily shelved their projects until such time when the market and prices are more conducive. \\'hen they resume, they have the added advantage ofbeing oil producers and all that it entails-- a secure and steady source of crude oil with minimal transport costs. \Vith respect to the aerospace industry, case studies of two major companies were done. These studies indicate that in terms of production and sales, this industry does not appear to be affected by the current recession. 10 Finally, the Thai team chose the seafood industry as the other industry for case study. This industry has been growing consistently for more than a decade. The volume of export during the period 1973 to 1983 increased at an average rate of

Industry-Level Studres

43

10 per cent per annum. In 1983, 85 per cent of the total production of seafood was exported. As a result, the export of frozen seafood has become one of Thailand's most important foreign exchange earners. Currently, Thailand has over 50 factories with dc-ep freeze and cold storage rooms with a production capacity of over 400,000 tons per year. The main regular importers offrozen shrimp from Thailand are japan which accounts fiJr 60 per cent of total exports and the United States with 10 per cent; with respect to squid, Japan together with Italy, take about 80 per cent of the total exports. Export has also increasc-cl considerably in new markets such as Singapore, Australia, and France, and the potential of this industry is perceiwd to be bright.

Research Methods The country reviews of selected industries were based widely, depending on data availability and project time constraints. In brief, it was a mixture based primarily on questionnaires, existing reports and publications. and on interviews with key informants from public and private sector institutions -- with the bulk of the information drawn fi·om official sources. The industries selected were those perceived to hold the greatest potential f(Jr mutually beneficial relocation of technology and investment from Japan to ASEAl\; and analyses of these selected industries were in the form of case studies. The contents of the questionnaires and survey methods \·aried significantly in detail and c-mphasis. However, several common aspects were measured and investigated in each of the country studies. All five studies devoted attention to the following issuc-s: ownership structure of the firms, the degree of forward and backward integration in the industry, evaluation of comparativc- advantage, government incentives and policies, impact on labour and the community, employment generation, export orientation and performance, the role of foreign investment, the rok of government, and underutilized capacity. The purpose of the surveys was to highlight the areas of concern. More specifically, they attempted to illustrate how the major issues in industrial restructuring were refiected in the situations and conditions in the selected industries. Subsequently, findings from these survcvs are nsed to generate recommendations and specify roles for institutions and groups both in ASEAN and Japan that will speed up the rate of relocation of industries from Japan to the ASEAN countries. Recommendations are also meant to serve as a guide to policymakers and practitioners in formulating plans and projects for mutually beneficial economic co-operation and to promote the expansion of industrial investment and trade between Japan and the ASEAN countries.

Survey Findings Japan has strong economic links with the ASEAN countries. It is observed that considerable redeployment of industries to the ASEAN countries has actually taken place, but liberalization of manufactured imports into Japan has been slow. In the

44

ASEAN Overview

export-oriented industries like electrical components and electrical consumer goods, the share of output exported to Japan is smaller than the share of Japanese investment and Japanese raw material sourcing. The small share of manufactured imports into Japan is not due entirely to the inability of local majority-owned and other foreign majority-owned companies in gaining access to the Japancsc market; even firms which are subsidiaries of parent Japanese companies do not export as extensively back to their home country when compared with American subsidiaries. It thus appears that the deployment of Japanese industries to ASEAN countries has been more geared towards domestic markets of ASEAN countries, or using these countries as bases (due either to their comparative advantage of lower labour cost or resource-base availability) for launching exports to other countries, rather than to produce for export back to their home country. Foreign equity participation in the manufacturing firms especially those in electronics appears to have positive effects on their export performance. Japancsc-owned or controlled firms arc noted for their utilization ofJapanesemanufactured equipment/machinery, parts/components and even raw materials. Japanese firms operating in ASEAN countries tend to use input sources from their home country. There are also indications that other foreign firms source inputs from their home country though to a lesser extent. In the electrical component industry which is dependent on the level of technology, a strategy of product leadership and price leadership is strongly suggested by the survey findings. In order to remain competitive, firms have to introduce new products and exercise drastic cost reduction (hence price-reduction). For electrical consumer products the strategy of price reduction though important is less so compared with other factors such as market development, product quality improvement and diversification. For a domestic-market oriented capital goods industry with little comparative advantage in terms of factor costs, findings indicate the need for some domestic protection. This is specifically designed to allow indigenous firms to develop their competitiveness by moving up the technological learning curve over a period of time. Political stability appears to be an important motivation especially among industrial machinery and electronics firms. Other factors include investment incentives, good infrastructures and low wages. In terms ofR & D promotion, survey findings indicate that development rather than research is more likely to come about. In most countries the main concern in R & D is quality control through standard testing. It has also revealed the reluctance of ~NCs to de-package their R & D facilities from their headquarters given the cost, technical difficulties, and shortage of good R & D manpower.

4

Conclusions and Recommendations

The pattern of ASEAN dependence on industrial market economies has changed in many respects. Nevertheless, the growth prospects of ASEAN countries are still very much dependent on the economic performance of the industrial market countries. At the present stage of development in ASEAN countries, there is an evident need to export higher value-added manufacturing products or at least primary products with further processing from members with a lower level of industrialization. Trade among ASEAN countries, though increasing, is minimal when compared with export potentials to markets of industrial countries. The success of the present export-oriented industrialization strategy practised by all ASEAN cmmtries is therefore highly dependent on the level of demand for their exports in the industrial countries and the access they have to these markets. Recovery in the industrial countries may benefit the different ASEAN countries to different degrees depending on their structure of merchandise exports. Generally, countries that are less protected should begin to increase national output before those that are heavily protected. The prospects for ASEAN countries' exports in this decade, however, are uncertain and present indications are not encouraging. The same can be said about flows of external financial resources from both official and private sources. :vforeover, a slower rate of increase in these countries' exports would reduce their ability to repay commercial loans, and hence their ability to borrow. This is particularly the case for the Philippines, Indonesia, and Malaysia. A conducive external environment no doubt helps and is an important factor, but domestic efforts are the ultimate determinants of the pace of industrial development in ASEAN countries. A much quoted remedy is industrial restructuring and adjustment in these economies. Industrial structures in ASEAN countries have undergone fundamental changes during the last two decades partly as a result of deliberate government actions in response to both internal and external factors. However, the programmes for current industrial restructuring for the respective ASEAN countries are at different levels with varying levels of government involvement. The range is from the simple broadening of the industrial base through import-substitution in Indonesia to export-substitution of capital-intensive, high-technology, and high value-added industries in Singapore. For the other three countries, industrial restructuring is expected to shift towards industrial deepening, with the growing importance of heavy industries, while enhancing downstream activities within the resource-based industries.

46

JSEAS Overview

An important issue to be noted in the above development is that industrial restructuring and adjustment has often been prescribed without its full implications and requirements being spelt out. The related export promotion policies have in some cases been simply superimposed over import-substitution policies without resolving the resultant inconsistencies. As a result, serious resource misallocation has been identified in many of these countries attributable to the transition from importsubstitution to export-oriented industrialization and the fact that policy instruments sometimes have been designed to serve multiple and inconsistent objectives. The process is extremely complex and involves more than merely increasing investment in some areas. It entails the revision, adjustment, and co-ordination of a wide range of policies, including the facilitation of the movement of labour and investment between industries. The authorities concerned must be willing and able to remove disincentives in its existing policies and to introduce necessary new incentives in a co-ordinated way. For example, the incentive system has to be consistent with resource allocation within and between economic sectors. In many countries the level of protection afforded to some industries is rather excessive and often discriminates against more efficient industries. Industrial sectors have to be brought into line with their respective comparative advantage in the new exportorientation. At the other extreme, indiscriminate liberalization programmes are liable to destroy industries already suffering from recession. Drastic measures or policies to accelerate the pace of change are also likely to be damaging and costly. For example, the implementation of a high-wage policy to accelerate automation, increase capital-intensive investment, and achieve high productivity contributed to severe recession resulting in negative growth in Singapore in 1985. Thus, while the fundamentals of restructuring remain, exercising moderation in the speed and intensity is prudent. Another important issue to be noted is the role ofJapan in facilitating industrial restructuring in these economies. As the largest foreign investor in the region, it is not difficult to appreciate the importance of Japanese involvement. However, data on the sect oral allocation of Japanese investment, distribution of Japanese investment "'ithin manufacturing, and impact on ASEAN export industries are incomplete. The available data, however, do permit a number of general inferences. It appears that for the region as a whole, non-manufacturing investments dominate slightly over manufacturing investments. This is mainly the result of massive Japanese investment in the Indonesian mining sector (overwhelmingly in oil). In addition, about 40 per cent of total Japanese investment in the Philippines also went to the mining sector. On a country basis, Japanese manufacturing investment dominates over nonmanufacturing investment in Singapore, :\falaysia, and Thailand. \\'ithin the manufacturing sector, the most important areas of Japanese investment in ;\1alaysia, Thailand, and the Philippines are electronics (mainly semiconductors), textile and clothing, and wood products. Although food processing accounts for a sizeable but declining proportion of manufacturing activities, Japanese

Conclusions and Rewmmendations

47

investment in this area is minimal. As a whole, the concentration on labourintensive and certain resource-based products is consistent with the respective countries' comparative advantage. The rapid growth of such exports in the 1970s and the first half of the 1980s is a good indication of the prominent role played by Japanese investors. \Vith regard to Indonesia, consistent with its limited promotion of manufactured exports, Japanese investment is concentrated in refined petroleum products. Indonesian exports are therefore inflated by such products. Only in Singaport' is there any significantJapanese investment in both technology and capital-intensive activities. The industries that accounted for a larger share of.Japanese investments are in petroleum refining, equipment, and machines. In this regard, Singapore seems to be better placed to take advantage of industrial restructuring in Japan. The greater part of the increase in manufactured exports from ASEA~ during the past one and a half decades consisted mainly oflabour-intensive products with limited processing of imported inputs. The stage is now set for higher value-added products and a more prominent role for Japan. However, at the micro-levd, this stage is beset with a number of problems. For example, as a result of the underdevelopment of entrepreneurial and innovative skills in local subcontracting, poor back-up from local supporting industries has been a serious problem. Citing that product quality and reliability are more important considerations than the mere cost advantages local subcontractors may be able to provide, Japanese firms have generally resorted to bringing over their own subcontractors from Japan. This practice pre-empts potential opportunities of local subcontractors breaking in. Governments should encourage Japanese MNCs through incentives to give more subcontracts to local firms or to resort to backward integration. Some joint ventures between the J apanee and local subcontractors would be a logical start. Such joint ventures may be targetted to supply components for the whole industry instead of being firm specific Governments should also actively encourage fragmentation of the production process, as this will enhance domestic linkages and lilcilitate restructuring. There is .lll urgent need to match skills level and manpovver resource base with labour demands arising from the restructuring process. Serious shortages of certain types of skilled labour have occurred in the midst of rising unemployment. ::Vfismatch in this area has been a central problem of many restructuring exercises. Therefore, the labour force should be sufficiently developed to service the kind of industries promoted by the government. In this respect, it is heartening to note that Japan has already committed itself at both government and private firm levels to offer technical assistance in some ASEAN countries. Intensification of this co-operation is highly recommended. In addition to this, it is also recommended that some institutional arrangement also be made to give financial support, directly in the form of grants and allowances or indirectly through fiscal concessions or concessionary loans, to Japanese firms offering technical assistance and training to ASEAN firms. The R & D capacity oflocal firms should be enhanced in order to improve their

48

ASEA}i Overview

competitive position. The Japanese Government can play an important role here through training grants and other skill development schemes similar to those enumerated above. Japanese investment in the ASEAN region slowed down dramatically in 1985. In the past, investments were generally from Japanese MNCs; small and medium Japanese firms' relocation/investments in Taiwan and Korea have been proved beneficial to these economies. This indicates the potential of such relocation/ investment in ASEAN. However, there exists information gaps- both Japan and ASEAN should provide not only encouragement through financial incentives but also adequate information to these Japanese firms. For example, declining Japanese industries may understand the economic logic in relocating in the ASEAN region, but may lack the information to do so. A programme to promote redeployment would provide interested firms with information regarding potential relocation sites and foreign partners. The problem of low investment in ASEAN countries is often a result of overlycomplex bureaucratic procedures and unattractive investment conditions. A restructuring exercise should be careful not to add to this complexity and in this way discourage yet more foreign investment. This problem is particularly serious considering that in the last few years foreign investment (including Japanese investment) has drastically fallen. There is thus a need to simplify bureaucratic procedures and improve investment conditions that are conducive to foreign investment. ASEAN as a region is not only economically important to Japan, but has been a historic trading partner with vital political and cultural links. The Japanese Government, therefore, has an interest in the continued economic development of the region to ensure a continuation of these historic links. While Japanese firms are important investors in the region as a whole, there is much room for increased investment especially in the Philippines and Malaysia where the Japanese share is relatively smaller. There is also room for increased investment in higher-valued industries. Although it is quite natural for a country to protect its domestic industries from the flooding of cheap imports from developing nations, protectionist measures can also act as an obstacle to harmonious trade relationships with other countries. The gradual liberalization of protectionist structures in Japanese markets can help to improve the quality and competitiveness oflocal industries by subjecting them to healthy competition. Furthermore, trade liberalization can also help to upgrade the efficiency of local manufacturing processes. This would be beneficial for the international economy since it would promote an efficient use of resources. Japanese protectionist structures that need to be liberalized include such Non-Tariff Barriers as strict sanitation requirements, expensive packaging regulations, and burdensome trade documentation procedures. Only if these are done away with would firms and industries that are inefficient in Japan find it profitable to pursue the relocation of their facilities and investments to countries that would possess the comparative advantage in producing these goods. ASEAN industrial co-operation has to date been minimaL It is important that progress be made in this area so that individual country's restructuring programmes

Conclusions and Recommendations

49

do not conflict with each other. Complementary schemes, on the other hand, not only promote the viability of industries, but also provide greater incentives for Japanese participation. On the part of japan, initiative to undertake a more active role in interfacing its investment and trade activities with ASEAN's effort in promoting ASEAN joint industrial ventures (AJIV) is a step in the right direction. Collaborative efforts in promoting the AJIV mechanism may just be the catalyst needed to promote joint ventures between the private sectors in ASEAN and japan. In this manner the complementary rather than the competitive aspect of ASEAN-Japan trade and investment relations is stressed. This process not only expands the scope of ASEAN industrial and trade co-operation but also enhances and strengthens trade and investment links between ASEAN and japan.

NOTES 1. For a more detailed discussion on the causes and eflects of the two recessions, see I:V1F (1986). 2. Ibid., p. 19.

3. For a more detailed account of depressed commodity prices and their impact on ASEAN economies, see Rieger ( 1986). 4. See IMF, op. cit., Chapter I!. 5. Ibid .. p ..'i. 6. For a more detailed account of the revitalization programme in the Philippines. sec Bautista (1984). 7. See UNIDO (1981). 8. Sec Economic Committee (1986), p. 164. 9. See Chng and Hirono, cds. (1984), p. 91. 10. For details, see Chng et al. (1986).

REFERENCES Asian Development Bank. Annual Report 1985. :vtanila: ADB. 1986. Ballance, R. and S. Sinclair. Industrial Strategy in a Changing li"orld. London: All en and C nwin, 1983. Bautista, Romeo M. "Recent Shifts in Industrialization Strategies and Trade Patterns of ASEAN Countries". ASEAX ~·conomic Bulletin, July 1984. Chng Meng Kng et al. "Singapore Country Report -Industrial Restructuring and Adjustments for japan-ASEAN ImTstmcnts and Trade Expansion". :vlimeographed, 1986. Chng, M.K. and R. Hirono, cds. ASEA ..V-]apan Industrial Co-operation: An Overview. Singapore: Institute of Southeast Asian Studies, 1984. Economic Committee. The Sin.~apore Economy: .Vew Directions. Singapore: :V1inistry of Trade and Industry, 1986. Economic Development Board. Annual Report 1984/85. Singapore, 1985. IMF. World ~·conomic Outlook: A Survey by the Staff of the International lvfonetary Fund. \\lashington, D. C.: Oxford University Press, 1986. Kuntjoro-Jakti, Dorodjatun et al. "Indonesian Country Report Industrial Restructuring and Adjustments f Apparel \\'ood products Furniture Paper and pulp Printing Clwmicals Petroleum and coal products Rubber Leather Ccrarnics Iron and steel ~on-kr!·ous metal .\Ictal products (~cncral machinery Electrical machinery Transport equipment Precision instruments Others All manubcturing i¥ billion:

1965 9.6 3.0 Ui 3.3 Ui :L1 4.9 10.9 1.2 1.5 O.G 4.8 6.6 2.'i 5.8 11.0 9.B 9.3 1.7 3.7 9.665.0

SlHIRlT: i\llTl. C:em11.1 of Jlmmfactures.

1970 8.0 G. I 1.6 2.9 1.6 3.0 4.:1 10.1 1.1 1.3 0.5 4.8 (i.9

2.7 G.S l:l.:l 11.9 9.5 1.6 3.3.5

130.7 214.4 20.5.4 230.2 228.6

619.8 1.224.0 1,291..1 I ,395.0 1,33U.4

21.1 17 ..1 1.'>.9 16.5 17.2

:'-;ote: Figures in parentheses are a percentagr share of the manufacturing total. Sm!Rc:~c::

Yearbook

~/the

Flectronics lndUitr_;· in .Japan, 1985.

6.2 1•-l-.3 19.6 28.3 43.7

60

Japan Overview

TABLE 1.7 Export Destinations and Import Sources of Japan's Computers ( 1983) (In million yen) Export Asia Korea Taiwan Hong Kong Singapore

Import

70,984 19,131 12,509 12,532 8,846

( ( ( ( (

8.3) 2.2) 1.5) 1.5) 1.0)

6,316 1,302 1,426 1,474

( 2.8) ( 0.6) ( 0.6) ( 0.6)

Europe (EC) UK West Germany

210,777 190,810 56,908 77,700

( ( ( (

24.7) 22.4) 6.7) 9.1)

15,775 13,858 3,783 3,114

( 6.9) ( 6.1) ( 1.7) ( 1.4)

North America USA

504,644 ( 59.1) 486,554 ( 57.0)

191,218 ( 83.6) 186,920 ( 81.8)

South America Brazil

6,707 ( 4,756 (

0.8) 0.6)

Africa

7,290 (

0.9)

3 (-)

Oceania

4\,847 ( 4.9)

121 ( 0.1)

Socialist Countries

11,229 (

WoRLD ToTAL

15,168 ( 13,411 (

6.6) 5.9)

1.3)

6(-)

853,478 (100.0)

228,607 (I 00.0)

Note: Figures in parentheses are percentages. SouRcE: MITI, Census of Manufactures.

Office Automation Equipment Industry With regard to the development of the production of business machines in Japan, the share of calculator production has been declining, from 28 per cent in 1980 to 15.5 per cent in the first half of 1984. Copying machines were the single largest item of production, comprising about 50 per cent of all business machines produced. The share of typewriter production has been increasing from as low as 4 per cent in 1975 to more than 13 per cent in the first half of 1984. Statistics on Japanese word processor production have been available only since 1982, and its share has risen to about 7 per cent in recent years. As presented in Table 1.8, the export/production ratio of Japan's business machine industry has been very high. The average export/production ratio has ranged from 68.1 to 75.6 per cent in the 1980s. Export/production ratios of electronic calculators and typewriters have been even higher. Office automation has been geared to improving the efficiency of business operations, utilizing computers and telecommunication equipment. Major office automation equipment includes general-purpose computers and terminals, office

61

Japan's Changing Industrial Structure

TABLE 1.8 Export/Production Ratio of Business Machines (Percentages)

Year

Total

Electronic Calculators

Copying Machines

Typewriters

Cash Registers

1975 1980 1981 1982 1983 1984 (Jan-Jun)

59.1 72.2 74.2 75.6 70.1 68.1

79.7 88.0 91.8 93.0 90.3 87.9

44.8 66.2 73.9 76.9 72.3 70.3

108.4 94.3 93.0 109.1 107.2 90.0

39.4 78.3 73.0 80.4 74.3 73.9

SouRcE: Yearbook

rif the Electronics

Industry in Japan, 1985, pp. 315-16.

computers, personal computers, word processors, facsimile and photocopying machines. The shipment of office computers totalled fewer than 10 thousand systems in 1977, but increased sharply to 32,831 in 1980 and 73,280 in 1983. The sales value amounted to 382.8 billion yen in FY1983. At the end of March in 1984, 227 thousand office computers were in operation. Shipment of personal computers exceeded I million sets in 1983. It is estimated that the total shipment of personal computers reached 1.4 million sets, with sales amounting to about 310 billion yen in 1984. About a quarter of the total production was exported in I 983. Almost all word processors produced in Japan are Japanese-language word processors. The total production of Japanese word processors was only 1,000 units in 1979, but increased to more than I 0,000 in I 981, reaching an estimated 170,000 units in 1984. It is also estimated that more than 300 thousand facsimiles are in operation in Japan. In FY1978 the production of facsimiles totalled only 18,012 units valued at 6,977 million yen. But these figures increased to 354, I 27 units and I 92 billion yen in FY 1983. Export of facsimiles has also been increasing rapidly: in FY I 977 exports totalled 2.8 billion yen, and reached 52.9 billion yen in FYI983. Major export markets are North America and Europe, each constituting 61 and 24 per cent, respectively, of Japan's total facsimile exports.

Factory Automation Equipment lndustr_y Factory automation refers to automatic manufacturing systems utilizing CAD/CAM systems, numerical control (NC) machines, industrial robots, and so forth. FANUC is famous for having established an automated factory at their Fuji plant in January 1981, utilizing robots they themselves produced. There has been a sharp increase in the production ofNC machines and the NC ratio, calculated as the ratio of NC machine production to total machine tool production. In 1970 only 1,451 units ofNC machines were produced, and the NC

62

ratio was as low as 7.8 per cent. B\ 1975, the production of:'-IC machinl's increased to 2,188, with the :'-!C ratio rising to 17.3 per ct>nt. NC machint' production cxct>edt>d 10 thousand in 1979, and mort' than 26 thousand :'-!C machines were produced in 19Wl. The NC ratio was higher than GO per cent in 19WL About 30 per ct'nt of NC mac hint' production has bt>en exported. An industrial robot is a machine with an arm called a manipulator. Industrial robots are general!\ classifit>d into manual manipulators, fixed sequence robots, \"ariahk scquenct' robots, playback robots, :'-!C robots, and intelligent robots. In 1976 industrial robot production was only 7,200 units, but increased to mort' than 10 thousand units in 1978, reaching an estimated 38 thousand units in 1984. Reflecting this, the salt's of industrial robots in Japan also rose sharply ti·om 42. t billion yen in 1970 to 18\.B billion yen in 1983. It is estimated that the sales of imlustrial robots will reach 520 billion yen in 1990 . .Japan's export ofindustrial robots has been increasing steadily. In 1980 industrial robot exports totalled 2 billion yen, increasing to 20 billion yen in 1982, and 45 billion yen in 1984. About :20 per cent ofthl' total production ofindustrial robots were exported. The structure of industrial robot production is changing (sec Tablt> 1.9). In 1980 about two thirds of robot production in .Japan were fixed sequencc robots. Though still the largest share in 1983, it dcclined by morc than 30 per cent. On the other hand, the number of playback robots has bet>n rapidly increasing. In value terms, playback and intelligent robots are rapidly rising. OECD conducted research on industrial robots in selected member countries and published the report, Industrial Robots: Their Role in the jfarmj{IC!uring lndust~y. In the report, OECD estimated that the total numbt>r of industrial robots in the world in 1980, 1981, and 1982 were 13,700, 22,000, and 31,000 rcspcctiw\y. Their definition of industrial robots, howeYer, is narrower than that ofJapan. According to their estimate, 13,000 industrial robots were working in.Japan in 19B2, twice as many as those in the United States.

TABLE 1.9 Structural Change in Industrial Robot Production (Percentages)

1980 ----------

----·

l'vfanual manipulators Fixed sequence robots Variable sequence robots Playback robots NC robots lntt>lligent robots

10 67 7 10

( 4) (31) ( 12) (21)

5 (29) I ( 3)

1981

1982

---------

4 ( 3) 59 (24) 11 {14) 18 (33) 5 (16) 3 110)

1983

-----

5 ( 2) 35 17 27 8 8

( 13) (14) (39) ( 18) (14)

3 36 15 26 13 7

( 2) ( 11) (12) (35) (29! (I!)

Note: Figures in terms of the physical units, while those in parentheses are in terms of the value of output. Sot:RC:E:

Yearbook

r!f

the Electronics Industry in Japan, 1985, p. 438.

TABLE 1.11 Export/Production Ratio of Consumer Electronic Products ( Pcrcm tages)

-

1975

1980

1981

1982

1983

24.5 78.2 97.7 39.8 23.7 116.1 41.3 55.2

78.8 40.0 112.9 86.2 66.8 67.8 66.6 59.0 69.7

78.5 48.3 116.5 80.7 67.9 66.6 69.6 40.1 70.8

84.0 48.8 108.9 83.7 67.8 65.1 60.1 13.4 71.5

83.3 47.5 115.3 85.9 70.2 58.7 47.0 12.0 70.5

----~~-------------------

VTRs Colour TVs Monochrome TVs Tapcrecorders Stereo sets Stereo components Radios Others ToTAL

SOl1RCE: Yearbook of the Electronics Industry in Japan, 1985.

TABLE 1.12 Electronic Parts Production (In million yen) 1975

General Parts

1980

1981

1982

1983

1984

1,413,696 (53.5)

1,751,063

l ,855,124

2,189,118

(53.2)

(53.2)

(51.6)

2, 723,033 (45.9)

77,246

170,191

(6.8)

(6.4)

203,193 (6.2)

192,133 (5.5)

230,4 77 (5.4)

286,163 (4.8)

125,373

1ll.O)

271,020 ( 10.3)

307,665 (9.4)

296,883 (8.5)

355,883 (8.4)

469,959 (7.9)

115,979 (10.2)

195,892 (7.4)

236,663 (7.2)

295,216 (8.5)

268,747 (6.3)

332,661

52,037 (4.6)

209,771 (7.9)

309,316 (9.4)

424,186 (12.2)

466,772 ( 11.0)

473,955 (8.0)

280,708 (24.7)

566,798

694,203

646,684

(21.1 I

(18.5)

867,219 (20.4)

1,160,277

(21.5)

485.038 (42.7i

I ,226,939

l ,502,640

(46.5)

(45.7)

I .592.274 (45.6)

2,013,031 (47.4)

3,169,362 (53.4)

208,602 (18.4)

362,906

435,331

( 13. 7)

I 13.21

396,553 ( 11.41

452,857 (10.7)

585,123 (9.9)

158,787 (14.0)

293,788

3 78,555 I 11.5)

360,474 (10.3!

420,651 (9.9)

610,389

(ll.l)

117,649

570,245

688,754

835,237

I, 139,523

1,973,850

(10.4)

121.6 I

120.9)

123.9)

!26.8)

133.3)

34,317

42,921 (1.2)

4-3,532

43,661 (0.7)

3,490,319

4,245,681 (100.0)

651,371 (57.3)

Register Electric condenser · l"ransformer Magnetic tape Others

Active Parts Electron tube Semiconductor IC

Liquid Crystal

p.Oi

TOTAL

l ,136,409 (100.0)

2,640,635 (100.0)

3,288,620 (100.0)

( 100.0)

;'liotc: Figures in parentheses arc the percentage share of the total. SOURCE: :\IITI, An11ua/ Report of J1adzincry Statistics.

11.0;

(5.6)

( 19.5)

(10.3)

5,936,056

\ 100.0)

Japan's Changing Industrial Structure

65

2,702 billion yen in 1983. Of this total, VTR exports constituted 47 per cent and tape recorders 27 per cent. All of the major consumer electronics products had high export/production ratios, as shown in Table 1.11. In 197 5 the average export/production ratio of consumer electronics was already as high as 55 per cent, increasing to more than 70 per cent in 1983. The export/production ratio of monochrome TV has been higher than I 00 per cent since 1980, due mainly to the need for reducing a large existing stock. Unlike the case of monochrome TV, high export/production ratio of VTRs basically reflects the high export orientation of the industry.

Electronic Parts and the IC Industry Total production of electronic parts and the integrated circuits (IC) industry, amounting to l, 136 billion yen in 1975, rose to 5,936 billion yen in 1984. As shown in Table 1.12, the production of active electronic parts such as semiconductors and ICs increase from 43 per cent in !975 to 53 per cent in 1984. Particularly conspicuous was the increase of IC production whose share in the total production of electronic parts climbed from 10.4 per cent in 1975 to 33.3 per cent in 1984. Generally speaking, the export/production ratio of electronic parts has also been increasing, as they are becoming more competitive on the world market. Roughly 40 per cent of IC production was exported in 1984, constituting 24.4 per cent of the total electronic parts exported by Japan in the same year.

2

Changing Comparative Advantages

Foreign Trade and Economic Development

.Japan's economy is often rt>ferred to as an "export-led economy". The merchandise exports as a percentage of .Japan's GDP, howevt>r, paint a different picture. According to the ~Vorld Development Report 1986, tht' ratio for japan was L'i per cent as of 1984, much lower than that for the Cnited Kingdom, France, and \Yest Germany, that is, 29 per cent, 25 per cent, and 31 per ct'nt respectively. As (()r ASEAN member countries, the 1984 figure for Indonesia was 23 per cent, the Philippines 21 per cent, Thailand 24 per cent, :V1alaysia 56 per cent, and Singapore over 100 per cent. 2 The fact that Japan's ratio has been relatively low may derive partly from its geographical and historical isolation. :\Joreover, since .Japan's domestic market is so large with a sizeable population and a high per capita incomt>, its dt:pendcnce on the foreign markets to generate GDP is correspondingly lower. Perhaps for the same reason, the ratio for the Cnited States has been low, registering only 8 per cent in 1983. In the rapid growth period after\\' or! cl \Var II, the annual growth rate ofj a pan's export in real terms averaged 14.7 pt>r cmt during the 1965--73 period- slightly higher than the annual average growth rate of manufacturing production at 14.4 per cent, and much higher than that of GDP at 9.8 per cent. HowenT, the contribution of the domt>stic demand to economic growth has consistently bet'n larger than that of the export, as confirmed by several empirical studies. Analysis on the Competitiveness of Manufactured Exports .Japan's Changing Trade Structure The structure of Japan's fcJreign trade is dominated by the import of primary commodities and by the export of manufactured products. (See Table 2.1.) :V'fanufacturt'd exports as a percentagt' of the total merchandise exports havt' constituted more than 90 per cent during tht' last two decades. On the other hand, manufactured imports as a percentage of the total merchandise imports have been between 23 and 29 per cent. Looking at the structural change in the primary commodity imports, it is important to note that between 1965 and 1982 the pncentage of crudt> materials (SITC 2) rapidly went down from 39.1 to 14.2 per cent, while the share of mineral fuels (SITC 3) rose drastically from 18.8 to 49.7 per cent, though declining to 44.4

TABLE 2.1 Japan's Foreign Trade Structure,

1965-R~

Exports

SITC SITC SITC SITC

0-4 0 I 2

SITC:3

196'>

1970

I'l75

]l)fl()

1982

l'lW>

1965

1970

1975

lmporb 1980

1982

1985

7.3 .f. I 0 I

5.1 29 O.I

:u u

2.5

1.9

0 I

75.4 16.2 0. 7

70.8 1-t.O 0.6

77.2 13.8 0.7

76.0 11.2 0.6

75.6 10.8 0.6

71..1

0.1

2.2 0.9 0.1

Crude materials, inedible :-.Iincrals luck

2.~

I 7

!.:-,

1.0

0.9

0.8*

:l9.1

:n.s

22.!

16.5

14.2

14.7*

lubricants. etc.

(J.:l

(J.:)

0.3

0.3

03

0.3

IB.8

22.3

40.4

47.5

49.7

44.4

03 92.:2 6.4 :lH.7

IJ.I 'l4.2

0.1

0.1

'l~.b

9b.b

32.1

6.1 29.2

:J.l 235

0.1 ')6.8 +.7 21.5

98.1 4.3 25.2*

O.li 2-+.4 5.3 7.8

0.4 28.7 .'i.l 9.4

0.4 22.4 4.2 7.6

0.3 23.2 4.7 7.8

0.2 23.6 5.2 7.fi

28.4 6.3 !3. 7*

:n.J.

+2.8

51.2

jj_"j

'>9.9

68.6

9.2

10.5

(j

7

(i5

6.8

8.4

1+.7

1:Jo

2'

'ilJ.l "i9

'123,7[)1

145355)

:'\otes: The figures arc f(>r a fiyc-year cades. Its index, measured by net export ratio as its proxy, declint>d throughout the last two decades to rt>ach as low as -0.2 in 1983. Tht> wt>akening in this sector's export competitiveness was reflected in a radical increase of such imports from Asian thrt>shold countries. The share of these countries in Japan's total consumer nondurable imports rose steadily fi·om 3.5 per cent in 1965 to 8. 7 per cent in 1975 and 13.5 per cent in 1980. This sector's export competitivt>ness vi1-ii-l'l·s ASEAT\ countries has also shown a downward trt>nd.

2. Durable C:omumer (;oods. Japan's export compctitivcJH'SS of durable consumer goods has bet>n consistently high during the last two decades. The share of this sector's exports to the United States has been 40 to 50 per celll, indicating the importance uf the L' .S. market f(>r such exports. As k>r imports, an increase in the shart' of imports /i·om the Asian threshold countries has bet'n conspicuous since the early 1970s. 3. Lahour-lntensia Intermediate Good.1. There has been a downward trend in the n:port competitiYCIH'SS of labour-intt'nsiYt' intnmediate goods, though not so striking as that of non-clurablt> consumer goods. Both export to and import fi·om industrial countries as a percentage of the total ban· ht>en declining sinct' tht' mid-60s. \\'hilc the sector's competiti\·encss in markets of Asian threshold countrit's seems to han' still remained high, the shart' of imports from these and .\SEAi\ countries rost' considerably to reach somewhere between '27 and '28 per cent. I Capitaf-IntnHn·e Intermediate Goods. The t>xport compctiti\i'llt'SS indt>x proxy fr>r capital-intensi\t' interml'diate goods rt"achcd 0.5 to 0.6 in the middle of the 1970s, but dt>dinccl to 0.3 in 1983. This rn-erst' L-shapccl change has parallelled the rno\·t'ment of the corrcsponcling index JiJr the Cnited States and the EC-10 '.countries of the European Community'. Japan's export cornpt'titin·ness in this sector. howe\Tr, has not been as strong as that of other cit'Yt'lopt>d countries, as cxnnplifit>d by that of chemical products. \\"hilc the index z•i.1-d-n. 1 Asian threshold

70

Japan Or'm'iew

TABLE 2.2 Geographical Distribution of.J a pan's .'vfanuLlcturing Trade, 1965-80

\\"oriel Total M X

EC-10

USA

X

M

-------------

X

M

1\sian Thresholcl-3 X M

---------

---

:\SE:\:'-;-5

X -

1\1

--

i "") 47.2 50.4 ::n.9 26.9

39.8 23.5 11.0 10.3

10.2 11.3 18.0 17.2

28.4 26.7 22 ..1 22.8

3.:) 4.1 8.7 13 . .1

11.4 28.9 49.44-7.6

4.3 3.6 :).3 7.8

1.2 1.8 2.2 2.0

Durable Consumer Goods 1965 100.0 100.0 1970 100.0 100.0 1975 100.0 100.0 1980 100.0 100.0

46.1 51.2 40.7 38.2

11.9 47.2 33.3 30.3

7.-t 9.1 13.9 16.4

40.6 33.G 32.1 32.G

5.1 5.2 +.8 .'i.O

1.2 4-.3 !G. 7 22.0

8.9 .1.6 6.-1 6 ..1

0 I 0.2 1.7 :1.9

Labour-! ntcnsi\T I ntcrmcdiate 100.0 100.0 1965 1970 100.0 100.0 1975 100.0 100.0 1980 100.0 100.0

Goods 26.2 25.1 19.3 l.'i. 1

23.4 2G.8 21.9 19.1

6.3 6.0 5.3 5.G

38.G 25.3 19.1 18.4-

11.3 18 ..'i 18.5 20 . .1

9.5 15.8 23.2 21.2

12.6 12.5 10.8 11.2

0. 7 4.7 5.2

Capitai-Tntcnsin- Intermediate Goods 1965 100.0 100.0 27.7 100.0 1970 100.0 2.1.8 197.'"1 100.0 100.0 17.4 100.0 1980 100.0 18.2

28.3 24.9 27.7 31.4

G..'i 9.3 7.8 G.2

2Ul 20.0 20.1 18.1

12.0 12.1 13.G !G.O

0.5 1.0 3.4 7.0

13.6 12.1 12.1 13.8

5.8 5.1 6.3 5.8

Capital Goods 100.0 196.1 1970 100.0 !UO.O 1975 1980 100.0

.'i6.0 GO. I .'i3.2 56.+

9. 7 13.0 13.0 13.6

30.5 27 .1) 27.6

9.8 12.1 lOA 13.2

0.2 1.3 6.1 5.9

9.3

9.8 9.7 10.8

0.0 0.2 1.8

~on- Durable

196.1 1970 1975 1980

Consumcr Goods 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

0.'otc: X stands

f()]'

ll'O.O 100.0 100.0 100.0

L1.3 17.4 13.7 19.3

24 g

:u

2l

exports, while M for imports.

SouRcE: Computed from IMF, Direction of Trade Statistics, 1985.

countries was as high as 0.8 to 0.9, it has bet>n declining to O.ti to 0.7 in the 1980s. Tht>re has been a steady increase in the import of these goods from Asian threshold countries, though the absolute quantity has still remained small. 5. Capital Goods. i\s for capital goods, Japan's competitiYeness on the world market has had an upward trend, with the net export ratio rising from -0.5 in 1962 to zero in the middle of the 1970s and still further to 0.3 in 1983. Japan's import substitution of capital goods started in the 1950s, and the process of catching up with other industrial countries has apparently been nearly completed for many items.

Changing Comparative Advantages

7l

ASEAN-Japan Manufactured Trade

As shown in Table 2.3, ASEAN countries have been importing from Japan a substantial part of their requirements for durable consumer goods, labour-intensive intermediate goods, and capital-intensive intermediate goods. For capital goods, ASEAN countries have been relying on the United States and the EC as much as Japan as the source ofsupply. For non-durable consumer goods, Japan, the United States, and the EC share the ASEAN market rather evenly, while ASEAN countries themselves have been increasing their market shares especially in Indonesia, Malaysia, and Singapore. As for the manufactured exports of ASEAN, theJ apanese market has been very small, compared with that of the United States and Europe. This has been one of the major sources of criticism among ASEAN member countries. \Vith an abrupt revaluation of the Japanese yen vis-a-vis ASEAN currencies since 1985, however, there has been a steady expansion of ASEAN's manufactured exports toJ a pan and this trend is likely to continue in the near future.

Japan's Direct Investment Overseas

Japan's direct investment overseas has grown rapidly since the early 1970s for various reasons, reaching US$89. 7 billion as of March I 986 or I 0 per cent of the world's total. (See Table 2.4.) Region-wise, direct investment in North America has been rathtT conspicuous at US$30.0 billion or 28.7 per cent of its total as of March 1986. It is interesting to observe thatJapan's direct investment in the United States has been rapidly increasing in recent years partly to avoid further bilateral trade disputes. Sector-wise, manufacturing investment has been the largest at US$24.4 billion, followed by commercial investment ofUS$12.7 billion, mining investment of US$ I J .8 billion, and financial investment of US$! 0.9 billion. In the manufacturing sector, iron and steel, non-ferrous metals, chemicals, electrical machinery, and transport equipment have each taken up the largest share. Given a growing trade surplus and the rise oftheJ apanese yen vis-a-vis major currencies of the world, Japan's direct investment particularly in the manufacturing sector will most likely rise sharply in the coming few years, accelerating the process of industrial restructuring in Japan, with its multifarious problems. Asia has been the second largest region for Japanese direct investment, with US$19.5 billion as of~1arch I986 (27.4 per cent). ~Iany factors have contributed to this. \Vith investment in the mining sector constituting as high as 37.0 per cent of the total in Asia, the major attraction has been the region's geographical proximity to Japan, as approximately two-thirds of their products are exported to Japan. With regard to investment in iron and steel, non-ferrous, and chemical products, a major portion has been sold in host countries, although due to the appreciation of the Japanese yen and a few other major currencies, an increasing portion of such intermediate goods has been exported to industrial countries including Japan. Textile and electrical machinery investments in ASEAN countries, however, have always exhibited export orientation. A high percentage of the products has been exported in these sectors, although much is desired for improving their exports to Japan, a bone of ASEAN's contention for many years.

TABLE 2.3 Manufacturing Trade of ASEAN Countries, 1982 (In USl) thousands)

l\on-Durable Consumer Goods Export Import Partner

Country ..

Country

----------

-----------

Value

""

\'alue

Durable Consumer Goods Import Export ------

0

"

\' aluc

Value

n 0

\Vorld TTL Japan USA EC-10 ASEAN

1%,748 100.0 11,192 8.2 61.027 44.6 23,821 17.4 20,175 14.8

119.030 100.0 22,68.') 19.1 13,798 11.6 29,904 25.1 12,649 10.6

18,980 100.0 860 4 ..1 2.8 535 6,972 36.7 6,770 35.7

I ,293,210 100.0 828.680 64.1 9.5 122.447 201,247 15.6 2.9 37,131

Philippines World TTL I 1982) Japan USA EC:-10 ASEAN

482,197 100.0 24,5 79 5.1 195.538 40.6 138.483 28.7 '>.438 l.l

70.629 100.0 13.130 18.6 20.762 29.4 14.251 20.2 1,449 2.1

180,294 100.0 13,921 7. 7 7.1.499 41.9 :>0,415 16.9 2.4 4.275

409,766 100.0 227.471 55.5 83,605 20.4 61,394 15.0 0.9 3,839

Thailand :, 1982)

World TTL Japan LSA EC-10 ASEA;\1

526.805 100.0 10,698 2.0 137,775 26.2 146,777 27.9 7.7 40,537

83,599 100.0 18,616 22.3 14,682 17.6 14,321 17.1 2.924 3.5

161,659 1000 14,322 8.9 28,97+ 17.9 4 7,2CJ3 29.3 19,889 12.3

621.048 100.0 430.739 69.4 36,663 5.9 66,140 10.6 2.'> 15.324

Malaysia (1982)

World TTL Japan LSA EC-10 ASEAl\

232.986 100.0 7,790 3.3 59,616 2.1.6 82,384 35.4 33,.196 14.4

241.953 100.0 28,508 11.8 22,060 9.1 44,141 18.2 48,363 20.0

244,314 100.0 ll,l47 4.6 78.341 32.1 55,608 22.8 64.438 26.4

1,257,396 100.0 780,403 62.1 ()2 78.000 170,2.12 13.5 5.2 65,622

Singapore (1983'·

World fTL Japan LSA EC-10 ASEAN

706.120 100.0 .'i,562 0.8 244.714 34.7 140,649 19.9 98,369 13.9

890,621 100.0 144,224 16.2 78,942 8.9 180.664 20.3 137,825 15.5

2,252.276 100.0 45,094 2.0 706,.124 31.4 416,377 18.5 409,007 18.2

2,517 ,'161 100.0 1,448,370 57.5 7.6 190,283 274,289 10.9 136,656 5.4

Indonesia

119821

SOURCE: Same as Table 2.1.

TABLE 2.3 -Continued Labour-Intensin· lnterm. Goods Export Import --------

Yalue

··-----

--

\'alue -----

C:apital-lntensin' lntcrm. Goods Export Import

Capital Goods Export Import ------

-

\'alur

Value

-----

\'alue

"

0

Value -----

100.0 8.2 14.9 14.2 23.6

717,221 100.0 319,438 H.5 86,335 12.0 103,347 14.4 'J0,090 7.0

470,71 I 100.0 6 ,, 29,812 11,622 2.5 164,177 34.9 228.560 48.6

3, 719.052 100.0 1,361,207 36.6 .131,565 14.3 6fi4,204 17.9 219,944 5.9

178,181 100.0 897 0.5 9,429 5.3 31.321 17.6 129.773 72.8

.1.336.392 100.0 1,627,911 30.5 I ,296,988 24.3 1.515,073 28.4 7.9 423.523

201.763 100.0 8.7 17,5B5 58,568 29.0 42,149 20.9 7.699 3.B

362,898 100.0 139,439 38.4 36,684 10.1 39,589 10.9 9,959 2.7

223.27+ 100.0 94,1~7 42.2 26,082 11.7 26,65 7 11.9 32,712 14.7

1.5 73,512 100.0 516,375 32.8 318.143 20.2 211,220 13.4 63.4B2 4.0

143,483 100.0 2,354 l.fi 58.811 41.0 15,856 11.1 25,504 17.8

1,520,6fi7 100.0 521,330 :14.3 399,.191 26.3 394,840 26.0 38,613 2.5

625,287 100.0 %,410 l'l.3 71.4 71 11.4 164,952 2fi.4 67.510 lOS

412,487 100.0 115,958 28.1 34,765 8.4 49,957 12.1 20,192 4.9

497,B94 100.0 72,14'l 14.5 144,321 29.0 164,626 33.1 48.006 9.G

I ,907 ,B35 100.0 686.211 36.0 21'J,005 11.3 380,498 19.9 2S,H3 1.5

425.485 100.0 8,499 2.0 137.780 32.4 18,434 4.3 164.183 38.6

1,619,480 100.0 631,688 39.0 430,610 26 6 :106,777 18.9 46,177 2.9

:JCJO.ti69 100.0 2H. 750 7.4 27,900 7.1 fi9.842 17.CJ 130.944 33.5

725,407 100.0 239.492 33.0 32,408 4.5 116,007 16.0 67,408 9.3

B06,672 100.0 181,379 22.5 28,273 3.5 364.478 45.2 82,361 10.2

2,203.010 100.0 819.202 37.2 240,379 10.9 351,116 L'i.9 173,742 7.9

I ,723,058 100 0 92,784 5.4 827,818 48.0 312,221 18.1 301,645 I 7..1

4,127,156 100.0 1,162,150 28.2 I ,557,819 37.7 687,091 16.6 370,726 9.0

880,385 100.0 17,339 2.0 31,2H9 3.6 108.545 12.3 233,692 2fi.5

I ,723,.171 100.0 416,904 24.2 114.48.1 6.6 213,201 12.4 260,117 15.1

1,679.171 100.0 185,576 1 1.1 112,492 6.7 113,456 6.8 706.155 42.1

3.143,628 100.0 1,055,806 33.6 469.608 14.9 643,908 20.5 4.3 13fi,543

5.570.713 100.0 I 83,972 3.3 2,26.1,443 40.7 512,559 9.2 I ,292.55H 23.2

7,375,198 100.0 I ,851,939 25.1 2.70S,56B 36.7 1,320,2B9 17.9 8.7 644.183

395, !52 32,312 58.819 56,148 93.227

TABLE 2.4 japan's Direct 0\Trseds Investment by Region and by Industry, md March 1936 (In US$ millions)

1\orth A.merica 198~ I'JB6 -------------------

--

1982

Asia 1986

l\1 iddk East 1982 1986

Latin America

1982

1986

Europe 1982 1986

Oceania/Africa 1982 1986

'J,,,,d 1982

1986

3,608 3,176 2,322

5,190 3,982 3,747

--------------

Iron and steel and non-ftTrous metals

Chemicals Electrical machinery

435 384 !,141

1.038 669 2,155

I ,037 521 273

1.652 557 307

1.487 990 643

1.697 1.292 833

59 1,009 12

59 2,124 13

171 158 226

261 216 400

420 115 26

483 123 40

614 217 417 426 4.250 776 5,332 1.546 25

1,216 244 775 606 7,707 1.140 7,420 4,194 70

488 372 296 189 3,435 1.404 651 470 !,140

780 417 354 197 4,.160 1,431 1.101 1,756 4,511

350 1,002 367 162 5,800 5,383 652 360 78

692 1,182 5HO 190 7,517 6,200 1,058 781 249

4 4 10

4 4 11

I L'i 156 145

!,137 39 12 50 2

1,259 191 18 91 2

!,181 859 1,455 1.288 I

419 193 214 0 2,08H 863 2,486 3.695 29

250 45 30 122 1,149 1,830 381 88 402

262 45 37 0 1,270 1,930 593 343 1,037

1,sn 3,373 1,795 2,083 1,265 1,971 127 899 16,9.12 24,400 10,291 11,756 8,482 12,677 3,802 10,859 1.649 5,900

15.225

26,965

8,852

15,636

14,552

19,463

2.479

2.972

6,146

1!.002

5,877

7,611

53, I:ll 83,649

·rransportation

equipment Textiles Gerwral n1achinery

Lumber and pulp All manufacturing Mining Commerce Finance and insurance

Transportation TOTAL

SocRCE: Ministry of Finance, Zaisei Kinyu Tokei Geppo [Monthly bulletin on finance J, December 1933 and October 1936.

Changing Comparative Advantages

75

Once again the sharp revaluation of the Japanese yen in recent months seems to have been able to increase i\SEAN's manufactured exports to Japan rather perceptibly. It would be desirable f(Jr this reason thatJapanese industries continue to expand their direct investment and offshore manufacturing production in ASEAN countries with comparative advantage viJ-a-11i.1.]apan in both natural and manpower resources.

3

Corporate Responses to Industrial Restructuring at Home and Abroad

Corporate Responses to Industrial Restructuring at Home and Abroad

All business corporations, in order to survive and expand in competitive markets, have to adjust their strategies and policies constantly to changes, both internal and extnnal to themselves. Among the major internal factors changing perceptibly in recent years in Japanese corporations are the composition, mentality, attitude, and work ethics of the work-force; labour-management relations; and the composition and business concerns/priorities of major shareholders. Concrete examples of thest> are found in the ageing and an increasing female participation, particularly married women, in the labour force; a weakening in the bargaining power; and an increasingly defensive posture oflabour unions vis-a-vis corporate management. There has also been a growing dominance of institutional and corporate ownership of equity shares that has had a significant impact on the priorities of top management in running corporations. A:nong the major external factors that have confronted Japanese busint>ss corporations with conspicuous changt>s in recent \Tars arc the leveL di\ ersity, and cost of new technologies available; the level of per capita income and the patterns of income distribution; the consumer preferences and spending patterns; the intensity of factor and product market competition at home and abroad; the range and direction of foreign exchange rate fluctuations; and government economic policies affecting the domestic and ovfTseas markets. Since nt>arly all the internal changes can be managed within the guidelines of corporate policies on personnel management, industrial relations, and financing, it is those changes due to major external factors to which business corporations would have to respond most effectively, in order to survive and expand in competitive markets. Particularly relevant among such xternal f~1ctors arc product market competition and governmental competition policies, since these determine the rates of economic growth, technological innovation, and productivity improvement as well as income distribution, which in turn affect most significantly the process of industrial restructuring. vVhen vVorld vVar II ended, government controls restricting business activity in Japan were lifted one by one and in their place incentive measures introduced. This allowed a greater degree of private sector initiative in improving the supply of goods and services in keeping with the changing patterns of consumer and

78 producer demand. Ever since market forces were given a freer rein with the successful instalment of Dodge's economic stabilization programmes in 1949, business corporations in nearly every field of industrial activity have had to compete fiercely to stay in the market. The Japanese Government committed themselves under the direction of the Allied Occupation Forces to its anti-monopoly policies, ensuring and encouraging in every sector of the national economy the effective implementation of competition policies administered by the Fair Trade Commission. To date, this is the only existing independent administrative organ of the Japanese government machinery equivalent to the level of a ministry. It has in fact been repeatedly pointed out by scholars in Japan and abroad that the structural foundations for the rapid economic growth observed in Japan since the early 1950s onward had been laid down by the Allied Occupation Forces dissolving the pre-war Zaibatsu industrial system, distributing the farmland to the landless, encouraging the formation and strengthening of a trade union movement, and providing the masses of the population with equal opportunities for secondary and higher education. All these structural policies of the government, by reinforcing and jealously guarding effective competition in major economic sectors, have contributed enormously to the efficient performance of industrial restructuring in post-war Japan. While industrial restructuring has affected corporate behaviour, regardless of the size of the firm and the sector, corporate strategies and policies in turn have affected the process of industrial restructuring and government policies toward it. \Vith higher rates of corporate profit and expansion in mind, Japanese business corporations have been extremely keen to seek out industries with high growth potential, and slowly redirect their capital and human resources out of those industries with less growth potential. In so doing, Japanese business corporations have resorted most often to the internal growth strategy, that is, growth through corporate rationalization, technological innovation, and product and/or market diversification. Such strategy is preferred to the external growth strategy, which involves corporate mergers and acquisitions, as is often observed in the United States. Unlike the internal growth strategy which tends to promote market competition, the corporate strategy for external growth is inclined to lead to a greater degree of restrictive business practices and production/market concentration in fewer hands, thus stifling competition and slowing down the process of industrial restructuring. Corporations in growing industries have in practice tended to take more positive measures such as increased R & D efforts for developing new products, new markets, and new production technologies and processes, as well as enhanced efforts for manpower development, with a view to growing together or even ahead of the growing market. Their efforts have contributed further to improvement in physical and value-added productivity, and, under the climate of competition often associated with growing industries, to price reduction, quality improvement, and better after-sales services leading to greater consumer welfare. Corporations in declining industries, however, have tended to take more defensive measures to protect their already stagnant or declining markets. Business corporations have organized themselves into a number of depression cartels to

Industrial Restrurturing at Home and Abroad

79

regulate the level of production and/or prices hy type of product. They have attempted to prevent outsiders, including foreign exporters, from coming into their shrinking markets through various protectionist measures. These defensive corporate measures have been observed in those industries that arc more oligopolistic than competitive. In stagnant or declining industries, business corporations ha\T also been trving their best to reduce their operating cost. They have attempted to lower their labour cost either by introducing labour-saving production technologies and equipment or by reorganizing their production floors. They have also given greatt'r attention to value engineering in materials, parts, and components to reduce the unit/value of input required per output. The establishment of common supply depots, wart'houses, offices, and even factory sites has been more frequt'ntly obst'rved in recent years among small- and medium-sized manufacturing firms. By and large smaller industries have been successful in pressuring the Japanese Government into providing some low-interest loans, subsidies, and grants-in-aid to rationalize their production and distribution activities. An increasing number of corporate mt'rgns and acquisitions have been observed in recent years, involving corporations both in growth and declining industries. In those industries where .Japan's comparatin· ad\·antage is being lost to those abroad due to increases in materials and labour costs and the sustained appreciation of the .Japanese yen, corporations have been expanding their overseas direct investment f()r increasing oflshore production and exports to japan and third-country markets. Positive Responses

.1\iothing has contributed more to the dynamic process of industrial restructuring in post-war Japan than the positive responses of business corporations, large and small, under the sustained pressure of competition at home and abroad. Preoccupied with an increased market shart' and a rapid expansion ofoutput and sales, Japanese business corporations have concentrated their efi(Jrt on enhancing the productivity of their manpower and capital resources by way of introducing new technologies, new products, new materials, and new organizational set-ups on factory floors and in administrative offices. In the introduction of innovations ranging from assembly technologies and fabricating to design technologit's as well as new products and materials, Japanese business corporations have for decades dept'nded mainly on imports from abroad. ,\s usual, in fiscall9B4.Japanese corporations imported fi·orn the l'nited States 57.0 per cent of the total number of technologies imported, 10.1 per cent fi·om France. 9.6 per cent from the Federal Republic of Germany, and 6.5 per cent fi·om the U.K" Between 1950 and 1984, a total of 35,699 separate technologies were imported from abroad, as shown in Table 3. I, In recent years the electrical machinery, general machinery, and chemical products manufacturing industries were spearheading the race for foreign technology imports, accounting in fiscal 1984 for 34.4 per cent, 17.8 per cent, and 12.3 per cent respectively. It is claimed that as high as 40.7 per cent of all technologies in current use in theJapanese computer industry has been imported under licensing

80

.Japan Ovemieu·

TABLE 3.1 Inflow of Foreign Tf'chnology by Industry, 1950-84

1950 77

Industn· . . . . .-

Textiles Chemical products C:oal & petroleum C:namics & clay products Basic metals :\Ictal prod uch General machinery Elcnncal machinery Transport equipment Precision instruments :\I is cc\ Lu "''HIS .\11 manuE\Cturirw;

1973 33

1984

------------ - - - - -

1,671 3.+33 376

1,8+0 1,.13()

300

')()

+17

227 136

11 t6 53

633 593 5,031 3,381

179

293

52

2.743

371

2.93·1 632

()12

++3

2,336 19,680

1.930

317 87 63 329

12,914

2.313

1,036

Sr>IIKCI.: Scir·mT and Tcchnolog\· Agcnn. (,'aikoku L'iju/.111 Don)'// \'l'llji Hokoku lAnnual report

on f(xcign technology imports], 1934.

arrangements with f()rcign manufacturers. The corresponding figures for polyethylene, synthetic rubber, and synthetic/chemical textiles manufacturing industries are estimated to be 92.0 per ct'nt, 87.0 per cent, and 78.7 per cent respectively. Nearly all the imported technologies have been adapted to suit the requirements of Japanese industry and the needs of the Japanese consumers. In particular, product dn·dopment including design and packaging has been tailored, wherever possible, to local needs and preferences, as have advertising, sales promotion, and customer services. Imported technologies have often been improved on by Japanese licensees and exported with mutual agreement betwt'en the parties concerned to third-country markets as well as to licensor countries. \\'hilt' technology imports have SC'Cll a steady increase during the last tl1re'::' decadt>s, .Japanese maPufacturing corporations havt' begun to expand their investment in research and development ( R & D) particularly since the mid-l970s. Aft , kagaku Gljul\11 Haku.1/w l\\'hitc paper dnd l 668 business corporations surveyed i 432 large-scale and 236 small- and mt"dium-scale companies I, top prioritv of all the corporate strategic goals went to new product development, f()llowed by higher market shares, human resources development, and higher returns on investment." Also, as high as 40.0 per cent of the Japanest' business corporations surveyed were giving priority in their R & D eflorts to new product dn·elopment, 26.H per cent to improvement on products currently produced, 16.8 per cent to new production processes, and 16.4 per ct"nt to basi< research. According to the same survey, the priority areas for R & D f(Jr new technologies identified, with each corporation Sllrvcyed ,giving more than one priority area, were in accordance with a decreasing importance: infrJrmation and communications r_46.5 per cent), software (37.8 per cent), office automation (37.7 per cent1, mechatronics (3.'i.9 per cent), new ceramics !31.6 per cent), new types ofsen·ices (23.8 per ct"nl;, opto-clectronics (2 1.5 per cent), pharmaceutical biotechnologv i 18.8 per cent), and alternative sourct"s of energy ( 18.2 per cent).

82

Japan Ovemeu·

Some of the most important barriers facing Japanese business corporations in promoting R & Din new product development and thus diversifying into new lines of business or industries, have been, as identified by the same survey: weak marketing and sales network, uncertainties of new product market risk-aversion mentality, absence of project leaders, inadequate manpower training, rigidity in personnel practices, rigid organization structures, difficulty in project membership selection, and ambiguity in organizational lines of responsibility and authority. It is interesting to observe, however, that inadequate financing and technological capabilities have never been considered so important in the minds of those concerned with R & Din Japanese business corporations. In spite oLd! these barriers toR & D, the successive input ofR & D expenditure, personnel, and time bv Japanese business corporations has been producing rather favourable results in many areas. Assisted by the government's fiscal and financial incentives, by public research institutes, and by university research laboratories, private sector corporations in Japan have been in the forefront in several areas of technological innovation such as micro-electronics, optical fibres, new ceramics, robotics, and artificial intelligence. All these new technologies will be able to produce multiplier cfl{>cts not only in rationalizing the existing individual industries but also in generating a new set of growth industries, thus accelerating the process of industrial restructuring in the coming decades. Defensive Responses

Corporate rationalization, cartels, mergers and aCCJUlSltlons, and off~hore in\·estment and production have been the f(mr major types of defensive responses to industrial restructuring taken by Japanese business corporations in the post-war period. These defensive responses have been more conspicuous in the face of deepening recessions and depressions when the supply of goods and services far exceeded demand.

Corporate Rationalization Programmes One of the defensive responses nearly always observed in Japanese corporations has been the top management directives for the economizations of all corporate expenditure on production floors and in administrative offices. Most companies in Japan today practice the slimming exercise in every department and division, ranging from expenses on stationery to representation or entertainment. They have also been mechanizing their production process so that not only the labour cost but the total cost per unit of output might be reduced. The Zero Defects (ZD} movement has long been launched by both large and small manufacturing corporations to minimize their defect or reject ratios. Quality control (QC) circles have been introduced in thousands of manufacturing and non-manufacturing corporations to improve not only the quality of products and services produced but also the cost/ performance ratios by industrial and locational redesigning. QC circles have also been C]Uite effective in improving the intensity of communications not only among employees but also between workers and front-line supervisors and managers, thus contributing to the stability of industrial relations.

Industrial

Restructurin,~

at Home and Abroad

83

The impact of corporate rationalization programmes has been felt most severely by those employees adversely affected by the continuing process of industrial restructuring. Faced with declining demand for their products and services, Japanese corporations have adjusted their employment in several ways. Under the traditional practices oflifetime employment, it has always been vital for the purpose of maintaining harmonious industrial relations and a high morale among workers that corporate management minimize the displacement offull-time employees and the loss of their earnings. According to several surveys taken by the "'finistry of Labour in recent years, the most popular means of employment adjustment listed in sequence, have been: a reduction in overtime work; no new recruits; a broader range of intraand inter-divisional worker transfer; more secondment of full-time employees to subsidiaries, affiliates, andjor related companies; early retirement plans; a partial or total plant shutdown and temporary layoffs; and finally a step-by-step reduction in the number of workers on the payroll as agreed upon between union and management, In those structurally depressed industries such as textiles and shipbuilding, corporate efforts have been exhausted to retain full-time workers and announcements have been increasingly made in recent months by some of the largest and best known corporations on the proposed -and at times the mutually agreed -- reduction of full-time employees totalling two or three thousands each. The recent abrupt appreciation ofthej apanese yen has hard hitj apanese exportoriented industries. According to a survey taken by MITI in November 1986, roughly 30,000 full-time workers had already been displaced by large-scale exportoriented firms since the fall of 1985. 7 For example, during the first nine months of 1986 the major six iron and steel manufacturing firms reduced their full-time workers by 5,800. During the next 18 months about 2,800 full-time workers were laid off by major non-ferrous metal processing firms, roughly 2,000 by major textile manufacturing firms, approximately 1,600 in the coal-mining, and about 1,200 each in major plant engineering and audio-visual equipment manufacturing firms. In addition, over 9,000 temporary workers were laid off by seven major automobile assemblers during the first eight months of 1986. It is estimated by the same survey that during the coming three to five years another 70,000 to 80,000 full-time workers could be laid off by those large-scale firms in the twenty major export-oriented industries surveyed. When the impact on their subsidiaries is taken into account, the total number of full-time workers losing theirjobs during the coming three to five years due to the sharp appreciation of the yen in 1985-86 is predicted to go beyond 200,000. Although in the past employees displaced in depressed or declining industries have often been assisted by their corporations to find new jobs, the large-scale worker displacement expected in the future might make it more difficult for this corporate practice to continue. It is also likely that those jobs located by corporate assistance might not be completely satisfactory to the expectations of those displaced. In spite of this emerging tendency, a view is generally shared that those displaced workers in large-scale corporations, particularly group corporations such as Mitsui, Mitsubishi, and Sumitomo would probably continue, as in the past, to

84

}apan ONmiew

be assisted by their corporations to find new jobs either with their subsidiaries, affiliates, and/or related companies of one sort or another.

Cartels and Related "lrrangnnerzls AnothtT dcfcnsi\·e response most often obsen·ed during recessions and depressions has been the fcm11ation of cartels under the guidance ami protection of ~IITI and other go\Trnmcnt ministries pnwiding exemption from the anti-monopoly legislation. "\s the process of industrial restructuring advanced, causing certain industries to decline in output, value added, and employment, relatin· to others, the incidence of establishing production. export, import, and price cartels has become more frequent and tended to stay longer. These difl'crent types of cartels have been assisted partly by various fiscal and financial measures endorsed by .'VfiTI and other government agencies to give temporary relief both to the corporation and the workers adversely affected by the restructuring process. Empirical observations indicate that the number of authorized cartels changed significantly according to business Auctuations on the one hand and the fitster tempo of industrial restructuring on the other. .\s shown in Table 3.3, in 195:) there were only 53 cartels authorized by ~IITI and other gm·ernment ministries. The number of cartels reached a peak of I ,079 in 1966. The incidence of recession. rationalization, and import/export cartels, widely used in the 1960s and 1970s, has been declining onT the years as they arc being replaced by depression cartels under the Depressed Industry Legislations \\hich began in 1978. Subsequently the number of cartels declined to 50.1 in 1982. Small- and medium-sized firms are still heavily protected by the authorized cartels exempting them fi·om the application of the "\nti-~Ionpoly Law, so too with those cartels authorized under the Sanitation Industry Law of 195 7. \Vhatever the raisons-d'elre, these cartels have acted to decelerate the process of industrial restructuring, thus contributing negatively to across-the-board productivity improvemcm and increased consumer \\elbre, \\·hile in f~tct protecting the interests of those segments of the population and industries cmcred bv such lcgislation. Corporate Jln;gas and clcquisitions Corporate mergers and acquisitions ha\T been on a stead\ increase in recent vcars (see Table 3.41. ~fost conspicuous among them in the recent past have been those in banking and other non-manuli!cturing sectors. As shown in the earlier sun·ey done by Keizai Doyukai in 1984, corporate mergers and acquisitions ha\·e not been a popular instrument of corporate rationalization and growth in today'sjapan, in spite of the obvious advantage of their quick and less expensive access to new markets. This could be partly a reflection of the Japanese corporate philosophy to nurture long-term unity among colleagues rather than to grow bst by bringing in outsiders unknown to their employees, causing possible disruptions to group solidarity and loyalty to the firm. Employees in a company to be acquired have also usually opposed such a corporate attempt because of the second-class citizenship treatment they might receive from the management and t"mployees in the acquiring company. Since company is often acquired because of its declining profitability or lack of

L\BLE 3.3 .\uthorizcd Cartels. 1~J:i3- 82

Ir indus-

}ajHm Ornriru

trial restnwturing undtT the La\\' f(Jr Temporar\ :\lt'asures f(Jr tht' Stahilization of' Specific Depressed Industries :lwreafter LSSDI '·.\ne! the third is the one since the amendment of LSSDI in 19WL En·n though the gonTnrnent f(Jn·sa\\' the need f(Jr industrial restrllcturin,g in the earl\ 1970.s, it \\ac; not until long af'tn the first enngy crisis of Jrmulated. In addition tP equipment disposal schemes. both efrorts f(Jr co-operation among enterprises including merg-er and im-cstnH·nt f(Jr the modernization of c·quipment and tcchnolog\ developmt·nt \\TtT encouraged. Finns engaged in the.-;c acti\·ities could ;l\·ail thcmsd\'es of the !inancing prm·idnl by an I nclustrv Credit Fund

98 replacing the Dpressed Industry Fund. In addition to the credit guarantee, a variety of subsidies and tax exemptions were provided, with the subsidies given mainly to technology development. Other laws wr revised, too. New LUSDI and LUSDA wer enacted to reduce the incidence' of unemployment among workers through subsidizing a part of their wages if the employer provided necessary training prior to their dismissal. Also, the new employer hiring those displaced became eligible for a partial subsidization of wage. L~ISESDA was renewed to encourage enterprises to develop new, attractive fields of industrial activity. Subsidies and financing for the development of new markt>ts, new technologies, and essential human resources were provided. A maximum amount of 10 million yen was provided for a locality which had plans authorized by their municipal office. Half these funds were provided by the municipality (prefecture) and half by the state. Also, certain companies could raise tlwir ceiling f(>r low interest rate financing. All of these new measures hav been implemented only in the the last f't-w years and it is too early to assess their outcome. Performance and Assessment

As far as concrete measures under LSSDI (now LSISI) were concerned, Basic Plans for StabiliLation (BPS) were drafted by the :Vfinistrics concerned, for example, mainly :VIITI and, in case of shipbuilding, the ~1inistry ofTransportation (:VIOT) under the guidance of advisory councils. They set the total value and amount of equipment to be decapacitatcd, together with the terms and conditions for it. The Fund for Depressed Industries guaranteed the credit extt>nded for the decapacitation of equipment. As soon as a BPS was agred upon, each entrrprise or industrial organization would br able to make use of this Fund. However, the Fund was not actually utilized in several crucial industries such as aluminium smelting and steel. Joint activities were limited to the areas which the ~1inistry judged as being unable to rralizc the BPS by individual corporate action alone. Cartels were ad\·ised under the supervision of the ~finistry and the Fair Trade Commission to be exempted from th Anti-~fonopoly Law. The most important measur under LSSDljLSISI was the freezing or decapacitation of equipment in specified industries. As can be seen from Table 4.1, there was an upward trend of capacity utilization during the years 1977-81, except f()l" aluminium smelting, partly because of the policy enforcement. The goal set by th ~finistry for equipment disposal for 14 sectors was nearly accomplished. (Sec Table 4.2.) However, use of tht> Fund f{Jr Depressed Industries varied from sector to sector. For instance, in 1979 no use was made of th Fund in aluminium smelting, even though the quantity of disposed equipment exceeded that projected. The amount used for the credit guarantee in the Fund was 23.2 billion yrn as of July 1983, while the capacity of the Fund was more than I 00 billion yen. Out of these 23.2 billion yen, 14.8 billion yen was used f(Jr the financin?; of discharge allowances for those displaced as a result of equipment disposal. Both LUSDI and LUSDA were applied to those workrs and industries which

TABLE 4.! Effects of Industrial Adjustment in Specific Industries, !977 ill Industries/Products

1977

-----------~-··

}Jettrir .furnares Output (A) Operating rate ( 0 0 ) (BJ Employment (C) Establishments (D) Aluminium smelting A

B

c

D Nylon longfibre A B

c

D

Acryl shortfibre A B

c

D Polyester longf1bre A

B

c

D

1978

- - - -

1979

~-----

1980

------

1981

----~-

9,633 62.7 36.900 69

!1,49! 84.5 33,900 65

!4,743 89.8 32.600 62

12,383 81.0 32.000 61

I! ,283 80.0 31,300 59

1,188 73.0 7,642 7

1,023 64.4 6,535 7

1,043 89.9 6,038 7

1,038 89.9 5,503 7

665 58.5 4,344 5

287.6 78.9 71,021 6

284.0 95.7 62,095 6

292.6 98.6 60,212 6

286.8 92.9 57,576 6

270.0 88.5 .19,464 6

341.4 80.2 45.270 6

351.3 96.5 39,607 6

334.6 91.9 38,793 6

:'125.7 87.3 38,475 6

327.1 92.9

27Ul 76.9 81.330 8

301.3 96.0 70,690 8

2R7.4 B9.0 68,899 9

274.1 Bl.7 6fi,69.'i 9

287.9 B6.2 69,317 9

1,972 50.1 417 12

2.131 53.6 35.) 1:2

2.033 77.4 332

1,555 67.1 299 g

1,311 56.5 300 8

2,810 61.7 1,057 18

2.809 62.9 1.002 18

2,832 76.5 865 15

2,306 68.4 793 14

2.102 62.4 790 14

883.9 70.1 71,996 7.9

982.0 83.8 67.474 :258

1.071.7 94.1 65,6.16 199

1,030.0 91.0 61,132 195

946.4~

39.4~08

6

Urea

A B

c

D Ammonia A

B

c

D Cotton spinning A

B

c

D

+2 9,770 1B7

1.201

i\iotc: All figures arc in thousand tons per year. Sot 'Rct:: Same as Table 4.1.

Total r·q 11ipment disposed uL to 1-'Y I 98 I

71J. 7

2.720

H9'J :LiBO IIJO 52.:1

lndwtrial Restructurinx Policy

101

were dctermined by the LSSDijLSISI. But more areas and industries were latcr added for the purpose of unemployment relief Financial support under these laws was to prolong the unemployment benefit period and provide wage subsidies. As much as 10.4 billion yen was providcd kJr workers in fiscal 1982, but the amount actually contributed in support of the depressed industries was greater than what LSSDI/LSISI prm·ided. Thf' gm ernment issued special types of certificates for those displaced in large numbers so that thf'y could have a better opportunity to take up new jobs. As much as 40 per cf'nt of those certificates wcnt to the shipbuilding and another 30 per Ct'nt to the textile industries. Both LUSDI and LUSDA promoted the rehiring of those displaced through concerted dlixts ofjob Sf'arch and training by public employment offices . .\foreover, in depressed areas public works programmes were encouraged to hire at least 40 per cent of the total number of\nJrkers required from among those who had lost their jobs in the process of restructuring. The total number oh\orkers emploved in public works programmes rose to 2.H.'i million by 1\'owmber 1982. L.\ISESDA aimed at pnJ\iding relief to medium- and small-scale enterprises in Spt'cific Depressed Areas i SDA). SDA are the areas selt'cted on the basis of the recommendation of the governments of local communities, where designated depressed industries constitutc 40 pn ct'nt of the total \·alue of shipment or the total employment in the community. In cast's where many medium- and small-scale enterprises were dependent on a f(>w large companies in a given area, the impact on the cornmunity \\as enormous when the big companies were hit by serious economic deprt'ssion. Those medium- and small-scalt' companies fimnd to bt' eligible f(Jr benefits could acquire t·mergency financing oflow-interest loans f(x the purpose of diversification of their operation. Such emergency financing amounted to 42.7 billion yen at tht' end of fiscal 1CJSl, \\ hich was again larger than the amount projt'cted b\ LSSDijLSISI. Lnder the L.\fSESDA, as many as 43 areas were designated as Specific Depresst'd ,\rt'as as of Decembt'r l CJB6. The restructuring policy during this period can bt' gt'nerally characterizt'd as promoting the rernoya[ of both capital and workers from the depressed industries and yet r.laintr any e",nFial materials, in spite of an increasing recognition of the E1ct that Japan must rdy I(Jr its supply on the world market. \\'hatnTr measurrs there arc, they are costly and would ha\T to be weighed against the cost inn>ln:d. Some could argue f(Jr the protection of any industries on account of"economic security". ;\ concern f(Jr national security, howenT, should not be used as a justification f(>r si m ply protecting any i neflicien t and in corn peti tivc industries. The Japanese GmTrnmcnt has been resisting the political logic of economic security when extended beyond a reasonable level. The only rxception to this has btTn the question of the import of rice, the main staple of the Japanese diet. However, there has been growing pressure abroad, mainly from the rice producers' a,sociations and gm·ernments of major rice exporters such as Thailand and the l 1 nitcd States, toward the liberalization of rice imports. Since these pressures have been mounted partly due to the growing trade deficits of those countries l'lS-rL-l'i.l .Japan, import liberalization measures ha\·e been taken by Japan f(Jr other sensitin' commodities and manul~lcturcd products to avoid a head-on clash with these

Rrstrurturing Po/icv: htrrnational J)immsiom

107

countries. The import liberalization of bondess chicken from Thailand, plywoc)d from Indonesia and other ASEA~ countrit's, and beef from Australia as well as many electronic parts and components fi·om the United States and the EC is a case in point. In planning the desirable international division of labour between Japan and ASEAJ';, however, the economic relations with other countries, especially the United States, cannot be ignored. \Vhile ASEA~ exported to japan 24 per cent of its total merchandise exports and 19 per cent to the Cnitcd States in 1983, a large proportion of their exports to the C nited States consisted of manufactured goods, against a minor share to Japan. On this ground Japan has often been criticised by both i\SEA:\1 and the C nited States kJr protecting its mn1 market from manufilctured products from de\-eloping countries. Some have even argued that .Japanese protectionism has constituted one major reason fl>r large U .S. trade deficits z·is-izvis the ASEAl\ countries. japan must ensure, regardless of the mt'rit of such arguments, that .Japanese trade and investment z:is-rl-z·i.1 ASEAN promote furthn industrialization of these countries toward tlw horizontal division of labour between Japan and the ASEA~ countrit's, and lead to an accelerated increase of ASEAN manufactured exports to Japan.

Social Cos/ of Adjustment Industrial restructuring and adjustment arc necessarily accompanied by a nse in the unemployment of both capital and labour or changes in the occupations of workers in those industries adversely affected. Those employers, workers, and local governments adnTsely affected could resist the implementation ofindustrial adjustment policy measures and exert political pressure on the central government to protect them. :\IITI, however, has resisted such political pressures rather effectively, whether in tt'xtilt's, shipbuilding, alumina or any other manubcturing sectors losing comparative ad\'antagcs, whereas the :\linistry of Agricultures has not done so in tlw agriculture and timber processing sector, because bnners ha\ e t'njoyed relatively greater political power in Japan. Domestic politics contributed significantly to delays in the liberalization of oranges and beef imports in the late 1970s and tht' early 1980s. Recently differential tariff rates on the imports of boneless chickt'n and plvwoocl became a political issue. 1\'ot only f(Jr reasons of increased economic well-being through a mm-e cfficit'nt allocation of resources but f(Jr reasons of assuming a greater political responsibility f(Jr sustaining a reasonably open international trading regime, japan has adopted positive adjustment assistance measures to minimize the ln·el of social costs to employers, workns, and local communities adversely affected. \\'ith lower grm\ th rate in GDP and rising unnnploymcnt expected in the future, resistance will tend to increase toward the liberalization of imports, in spitc of their economic and f(Jreign policy considerations. Thert' is also a question of how much a gmTrnmcnt can and should intervene positi\·ely in the process of industrial restructuring and adjust111ent. It might also he said that .Japan's industrial restructuring l'is-iz-l'is ASEA~ countries might not proceed smoothly, not so much because the .Japanese Go\'ernment would protect its inefficient industries at home, but because Japanese industries might maintain

108

Japan

Ocm·inr

or even regam their international competitiveness through automation and computerization. \\'bile continued import liberalization by .Japan should contribute to further industrialization of the ASEAl\' countries, .Japanese direct investment and technology transficr in ASEAN could be increasingh directed toward the expansion ofASEA:\T's manufactured exports and the upgrading of their industrial structures. In market economies such as Japan, however, it is nearly impossible either to increase manufactured imports from, or to accelerate technology transfer to, ASEAJ\: countries by gm-crnment decree. However, what the Japanese Government can do to assist its industries to promote ASEA:'>I's industrial restructuring is to prO\icle them with not only some fiscal inccnti\·es but with as much information as possible on investment incentives and market potential in ASEAi'\ as well as else\\·herc. Smaller firms arl' not as well-prepared as larger firms in this sort of inf(mnation gathering. This is where the .Japan External Trade Organization (.Jetro) can he beefed up further to assistJapan's small and medium industries to inn·st in parts and component manufitcturing together with local partners as suppliers to larger assembly manubcturers in ASEAJ\. It is the rcsponsibilit y of the J apanesc Gmcrnment to continue to imprm-c the process of industrial restructuring ;me! adjustment at home, so that Japanese industries, small and large, might further contribute to the second-stage of industrialization in the J\SEA~ countries by increasing manufactured imports from them, by direct investment o\·erseas, and by technology transfer, while continuing their own path toward global manufacturing operations through an enhanced horizontal di\·ision of labour among the countries concerned. This will not only promotr Japan's industrial restructuring Z'is-0.-ri.l ;\SEAl\ countries, but also rcinf(m·e the Japan-ASE:\I\ partnership in building a more dynamic Asian and Pacific -cgi•m on \vhich the prosperity of the world will increasingly depend in the future

6

Conclusions and Recommendations

EnT since the end of the economic reconstruction of post-war Japan in 19:12 or so. thnc has been a steady process of unidirectional indu.strial restructuring, tno\'ing from a composite of the lahour-intensi\'e light industries to what the Japanese llO\\adays call the hea\'y. thick, long, and largT :IIETHILL! industries and on to the so-called light, thin, shorL and small r LITH !SS' industries. The prima dmmas in the leading industries ha\·e shifted fi·orn textiles, low-cost appareL toys, and ph wood manubcturing industries through petro-chemicals, iron and steel, non1(-rrous metals, and hca\·} general and electrical rnachinen, and shipbuilding to cotJ.sumer and industrial electronics including \'TRs and semiconductors, prcci.sion equipment, biotechnology. and new matnials such as optical fii>tT:i and Ill'\\ cerrent :.ectors of the national economy. 2. In the bee of a rapidly rising· trade surplus, a steady appreciation of the .Japarwse yen, and mounting pressure at home and abroad f(Jr an imnH·diate expansion of aggregate domestic demand. the Japanese Go\crnment must lir:.th accelerate the pace, width, and depth of its import liberalization. This it can do bv a reduction in tarifF; and non-tarifr barrins particularlv on agricultural import:.. Secondly, it must decelerate the pace, \\idth, and depth of its ck[i:nsive measures bv \\ay of restraining the lrJrmation ofreccssion and depression cartels among those industries adnT:.clv afkctcd by industrial restructuring and b) dercgulating the numerous controls over pri\'ate sector activities that ha\T in the past tended in turn to enhance protective and re:.trictivc business practices. \\'hen all these measures arc taken. manubcturcd imports are expected to grow much bc,ter, particular!\· fi·orn .\SL\;'\1 and :\sian threshold economics. 3. On the :\SE.\:\ govermnents' side. it would be arh·isablc that together with a steady impron·nwnt in the economic and :.ocial in[i·astructutT, the current emphasis on the rlcrcgtdation of govcrmncnt controls m·er pri\'atc :.ectrJr activities and the privatization of public enterprises be pursued with greater rigouL This would then reinf(Jrce the compeliti\·e climate so essential to an efficient process of industr-President of the Industrial Finance Corporation of Thailand. Since rt'ceiving his doctorate from Johns Hopkins Cniversity in 1973, he has sened extensiveh in Thai and intnnational organizations. His wide-ranging interests and experience are well reflected by his publications on a broad range of economic subjects, particularly industrv and international trade.