Rising Asia and American Hegemony: Case of Competitive Firms from Japan, Korea, China and India 9811376344, 9789811376344

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Paul Hong Young Won Park

Rising Asia and American Hegemony Case of Competitive Firms from Japan, Korea, China and India

Rising Asia and American Hegemony

Paul Hong Young Won Park •

Rising Asia and American Hegemony Case of Competitive Firms from Japan, Korea, China and India

123

Paul Hong College of Business Innovation University of Toledo Toledo, OH, USA

Young Won Park Faculty of Economics, Graduate School of Humanities and Social Sciences Saitama University Saitama, Japan

ISBN 978-981-13-7634-4 ISBN 978-981-13-7635-1 https://doi.org/10.1007/978-981-13-7635-1

(eBook)

© Springer Nature Singapore Pte Ltd. 2020 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Preface

This book traces the evolution of our research over the years. Since 2004, both Park and I have been studying the global practices of Asian firms in general and Korean and Japanese firms in particular. Under the theme of global supply chain management, numerous articles have been published in the area of new product development, innovation, information system design, strategic initiatives, and global firm practices in emerging economies. Thriving under the rules of engagements is as important to a firm as developing internal and external capabilities. Since firms increasingly compete based on their global network capabilities, it is crucial to sense the changing dynamics of the macro-level world that influence how successful business models are developed and implemented for sustainable competitive advantage. This book examines the relationships between the macro-level context (i.e., international order) and micro-level practices (i.e., strategic responses of competitive firms) with the following observations. First, global firms rise and fall with the changing nature of the international order. The global Fortune 500 firms are mostly from ten countries—USA, China, Japan, Germany, UK, France, South Korea, Switzerland, Canada, and Italy. These ten leading nations along with ten countries (India, Brazil, Russia, Taiwan, Australia, Mexico, Spain, Sweden, Finland, and Ireland) generate most of the Forbes 2,000 firms. They thrive on the rules of engagement for global markets supported by their national political strengths and innovation ecosystem. These countries build their global supply chain infrastructure through actively collaborating with both advanced and emerging economies. The firms achieve competitive advantages through scale of production and scope of innovation for global market needs. The political and economic conditions of their home nations provide necessary conditions for them to thrive and prosper in global markets. With this in mind, our attention turned to the international order that sets the rule for trade, innovation, and market practices. Second, the international liberal order has contributed to the rise of Asia. This order is an US-initiated rules-based system of governance. The essential aspects are American hegemonic leadership, trade flows, and coordinating mechanisms by international organizations. The rise of the former Soviet Union after the Second v

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World War facilitated the USA and its allies to accept and welcome Germany, Japan, and Italy into the new liberal international order. It helped them to attain legitimacy and normalcy beyond the mark of “defeated aggressor states” and gain access to growing market opportunities. Certainly, their national resolve for reconstruction bore fruit only due to the size and scope of the postwar liberal international order. The contemporary factors associated with a rising Asia are complex. These rapidly growing nations from Asia (e.g., Japan, Taiwan, South Korea, Singapore, China, India, Indonesia, Vietnam, Malaysia, and Thailand) all benefited through their engagements in the US-led global market. The rising of Asia is more than about China’s rise. Asia is much larger than China. Its growth potential also includes India, Vietnam, Indonesia, Japan, South Korea and a unified Korea, and the Middle East. Therefore, rising Asia includes China but much more than that. Because of the rapid growth of China since 1970, the focus of attention has been on China—its implications to the world and its competitive position with the USA. Since 2017, China’s annual growth rate is slowing down. Its path toward autocratic governance in the midst of increasing internal conflicts suggests that its dominant global leadership is not necessarily assured. In a sense, China is going through multiple tests to establish “its respectful position of leadership in the world” in terms of politics, economy, culture, innovation of ideas, and quality of life. Third, the rise of Asia challenges the nature of the international liberal order. After the Second World War, the United States coordinated the establishment of this new order through which its key allies (e.g., Germany, Japan, South Korea, Canada, Mexico, UK, and France) had access to US markets and form international coalition to contain the Soviet Union and China. With the breakup of the former Soviet Union, the US remained a dominant position until China’s rise challenged it on multiple fronts. However, the international order is dynamic. Serious transitions are occurring in the USA, Europe, and Japan. Leading groups are more or less divided, not united. A new form of international order is emerging. Chinese efforts of redefining the world order include regular meetings of the BRIC nations (Brazil, Russia, India, and China) and the Belt and Road Initiative (BRI). The world looks for more than what the United Nations General Assembly does or the World Economic Forum in Davos, Switzerland could offer—“endless discussions without effective actions”. Some might argue that to the extent that as the USA withdraws from its “rightful” place of international leadership, the Chinese are more likely to step in with its plans. Then, the question is, “Will the China-led world order replace the liberal international order?” The rivalry between the US and China are taking steps toward a collision course. Trade issues reflect a symptom of deeper geopolitical issues. The outcome of rivalries requires the capabilities of national and international alliances. While China’s achievements over the past 30 years are noteworthy, its real strengths and weaknesses deserve careful analysis. This book assesses China’s capabilities in terms of prospects for the education for next generation, wealth creation and preservation, and innovation, and quality of life—beyond GDP and military budget growth.

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The central thesis of this book is that prominent firms in global markets are mostly from countries that either set the rules of international engagements or stay in close proximity to a hegemonic power center. The growing challenges within the international order make the global market environment turbulent. Asia is rising in terms of economic wealth, political prowess, and social impact. At the same time, American hegemony is not likely to decline because it shows great resilience. Competitive firms are required to “keep things working” (i.e., maintain timeless business fundamentals) and “keep things intact” (i.e., implement timely strategy). This book examines the changing macro-dynamics of the international order and discusses prudent responses of competitive firms from Japan, South Korea, China, and India. We argue for building and using network capabilities at different levels. Individuals, organizations, communities, and nations create and deliver value through their own competencies and their network capabilities. For a historical perspective, we examine evolving patterns of trade partnership since World War II. It presents the changing requirements of an industry’s market and explains the vital relationships between trade partnerships and industry competitiveness. In recent years, industrial competitiveness is becoming a serious strategic priority of nations —both advanced and emerging economies. The theoretical discussion in this book focuses on the characteristics of global networks for firms operating in the top of the pyramid (ToP) and base of the pyramid (BoP) environments. Special focus is on trade partnerships and industry competitiveness in the Asian economies (Japan, South Korea, China, and India), three ASEAN nations (Vietnam, Thailand, and Malaysia), and Mexico. Extensive industry and firm-level case studies discuss ToP and BoP interface capabilities in the form of manufacturing and services life-cycle management, which extends value creation and delivery of manufacturing and services. This extension integrates the cloud ecosystem, such as timely data/information/knowledge flows via the virtual world; and ground value chains, such as the flow of complex real goods and services in the visible world. The book has 3 sections with 16 chapters. A brief summary of each section and individual chapter is provided. Each chapter also includes at least one or two figures that summarizes the main idea. Different tables provide numerical data that are relevant for discussion. Textual explanations, descriptive statistical details, and visible presentations are combined. The emphasis is not to be comprehensive and thorough but relevant and clear. A modest goal of this book is to provide valuable insight into macro-events from a historical and business perspective. The two of us divided the work of creating this book according to our expertise. Paul Hong has contributed to most of the macro-level discussions, industry competitiveness, changing business models, and growth model of global firms, while Young Won Park has provided rich details in case studies of business firms from Japan, Korea, China, and India. We appreciate timely reviews of colleagues who have read the manuscript and contributed to improving the content with their valuable comments. We appreciate Yue Zhang, Fred Ahrens, Euisung Jung, Blaine Stout Zhezhu Wen, and Seyedeh Golnoush of University of Toledo, USA, of University of Toledo, Erika Marsillac

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of Old Dominion University, USA, Vincent Whitelock, Central Michigan University, USA, Sandeep Jagani of Indiana State University, USA, Nehemiah Scott of University of Illinois of Urbana Champaign, USA, Joseph Cho of Portland State University, Shubham Singh of Cleveland State University, Yejin Park of INSEAD, Seungchul Kim of Hanyang University, Korea, Fr. Joseph Chacko Chennattuserry, Fr. Joseph Varghese Kureethara, Madhumati Deshpande, Stefy V. Joseph of Christ DTB University, India. Besides, Mark Vucekovich, Lincoln Park UBF, Augustine Hong, University Hospital, USA, Albert Hong, Kaiser, USA, Sarah Trujillo, Attorney, USA, Faith Choi, Highland, USA, also graciously offered their time to review selected chapters. Many thanks to other many anonymous reviewers who have taken time to review chapter by chapter of this book and provided valuable suggestions. We are indebted to Arul Murugan. Venkatasalam and Yutaka Hirach of Springer, who provided editorial support and completed the publication of this book. We have changed deadlines several times in the course of receiving adequate reviews of scholars around the world. Both Arul Murugan. Venkatasalam and Yutaka Hirach have been enormously patient with us and we appreciate their professionalism and dedication. Finally, many thanks to colleagues and students at the University of Toledo and the University of Tokyo who have shown a great deal of interest in this book. We dedicate this book to the bright future of young people around the world of which we visited for our research for more than 40 countries over the past decades. We appreciated friends, colleagues, and business leaders who have shown great deal of hospitality. Regrettably, we have not yet visited North Korea. Someday we hope to have presentation opportunities to aspiring young people in North Korea as well. We dedicate this book to these friends at large. This book is organized in two sections and each section has 6–7 chapters. A brief summary of each section with the associated chapters is provided. Toledo, OH, USA Saitama, Japan

Paul Hong Young Won Park

Contents

Part I

Liberal International Order, Global Trade and Industry Competitiveness

1

Rising Asia and American Hegemony . . . . . . . . . . . . . . . 1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Historical Process of Establishing International Order 1.3 International Order and Destiny of Nations . . . . . . . . 1.4 Competing Visions of International Order . . . . . . . . 1.5 US-Led International Order . . . . . . . . . . . . . . . . . . . 1.6 Nationalism and International Order . . . . . . . . . . . . . 1.7 Cost of Power Transition . . . . . . . . . . . . . . . . . . . . . 1.8 Power Shift to Asia . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 American Hegemony . . . . . . . . . . . . . . . . . . . . . . . 1.10 Testing Grounds of Evolving International Order . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Liberal International Order and Global Trade Growth . 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Liberal International Order and Trade Sector . . . . . . 2.3 Liberal International Order and Flows of Capital and Innovative Technologies . . . . . . . . . . . . . . . . . . . . . 2.4 Role of Trade Sector . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Trade Sector and Economic Growth . . . . . . . . . . . . . 2.6 International Institutions for Trade Sector Growth . . . 2.7 Top Ten Nations with Trade Sector Performance . . . 2.8 US Trade Deficits: Source of Tensions . . . . . . . . . . . 2.9 Global Trade and Global Firms . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Rising Asia: Case of Japan, South Korea, China and India 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 An Overview of Four Countries . . . . . . . . . . . . . . . . . . 3.3 Impact of Demography on Growth Prospects . . . . . . . . 3.4 Asia’s Rise and International Order . . . . . . . . . . . . . . . 3.5 Focus on the Rise of China . . . . . . . . . . . . . . . . . . . . . 3.6 Dynamic Complexity of Rising Asia . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Growing Rivalry: China’s Rise and American Hegemony . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Evolving Patterns of American Hegemony . . . . . . . . . . . . 4.3 Growing Rivalry Between the US and China . . . . . . . . . . 4.4 China’s Responses to Evolving Liberal International Order 4.5 China’s Progress Challenges . . . . . . . . . . . . . . . . . . . . . . 4.6 America’s Shifting Priorities Toward Asia . . . . . . . . . . . . 4.7 Design Efforts of China-Led International Order . . . . . . . . 4.8 Five Factors of Hegemony . . . . . . . . . . . . . . . . . . . . . . . 4.9 Unpredictability of Trump Administration . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Part II

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ToP and BoP Interface Capabilities (TBIC): Cases for Competitiveness

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Evolution of Business Models . 5.1 Introduction . . . . . . . . . . 5.2 Productivity Era . . . . . . . 5.3 Quality Era . . . . . . . . . . . 5.4 Value Chain Era . . . . . . . 5.5 Sustainability Era . . . . . . 5.6 TOP and BOP Interfaces . References . . . . . . . . . . . . . . . .

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Network Capabilities: National Innovation Ecosystem . . . . . 6.1 Network Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Global Fortune 500 Firms and Forbes 2000 Firms . . . . . 6.3 National Innovation Ecosystem Output . . . . . . . . . . . . . . 6.4 Extension of Customer-Technology-Linkage Competence Model (CTL Competence Model) . . . . . . . . . . . . . . . . . 6.5 One World: Two Domain Dividing Firewalls . . . . . . . . . 6.6 Implementing 5G Infrastructure for Innovations and Wealth Creation . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 Free Market Capitalism Versus Authoritarian Capitalism . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chinese Global Firms: Challenges and Opportunities . 7.1 Strategic Process of Rapid Catch-up and Global Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Rise of Chinese Global Firms . . . . . . . . . . . . . . . 7.3 Rise of Huawei: Opportunities for Global Market Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 Challenges of Huawei . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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The Self-contained Localization Strategy: Case studies of Japanese firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Localization Strategy and Organizational Capability . 8.3 Case Analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.1 Case Firms and Scope of Interviews . . . . . . 8.3.2 Analysis Results . . . . . . . . . . . . . . . . . . . . . 8.4 Emerging Market Strategy of Japanese Global Firms and their Prospects . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changing Industry Competitiveness: Case of Asian Automotive Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 Emerging Structure of Global Automotive Markets . 9.2.1 Market Structure: Growing Middle Class . . 9.2.2 Urbanization and Transportation Structure: Infrastructure Development . . . . . . . . . . . . 9.3 Conduct of Global Automotive Firms . . . . . . . . . . 9.4 Global Market Positioning . . . . . . . . . . . . . . . . . . . 9.5 Performance of Global Automotive Firms . . . . . . . 9.6 Chinese Market Performance . . . . . . . . . . . . . . . . . 9.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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10 The United States-Mexico-Canada Agreement (USMCA) and Japanese Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 Nippon Motor Company After NAFTA’s Re-negotiation . 10.2 The Impact of NAFTA’s New Agreement, the USMCA, on Automobile Companies . . . . . . . . . . . . . . . . . . . . . . 10.3 USMCA in Manufacturing . . . . . . . . . . . . . . . . . . . . . . 10.3.1 Rules of Origin and Origin Procedures . . . . . . . 10.3.2 Goods Market Access . . . . . . . . . . . . . . . . . . . . 10.3.3 Textiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3.4 The Impact of the USMCA on Companies with Manufacturing Plants in Mexico . . . . . . . .

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10.4 Trends of Japanese Automobile Companies in Mexico 10.5 Nissan Cars in Mexico . . . . . . . . . . . . . . . . . . . . . . . 10.6 Mexico Mazda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.7 Mexico Honda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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11 BREXIT: Case of Japanese Firms . . . . . . . . . . . . . . . . . . . . 11.1 Brexit: Causes and Development . . . . . . . . . . . . . . . . . . 11.2 Brexit’s Shock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3 Brexit Impact on Japanese Automobile Companies . . . . . 11.3.1 The Impact of Brexit on Nissan and Honda Cars 11.3.2 Brexit and Japanese Companies’ Response Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4 Influence of Brexit on Japanese Railway Companies . . . . 11.5 Prospect of Brexit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Part III

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ToP and BoP Interface Capabilities (TBIC): Network Interactions

12 Free Trade Agreements (FTAs) and Korean Firms . . . . . 12.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2 Previous Studies About Free Trade Agreement (FTA) Policy of South Korea . . . . . . . . . . . . . . . . . . . . . . . . 12.3 FTA Policy and Global Supply Chain Network . . . . . 12.4 Research Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5 South Korean FTA and GSC Management . . . . . . . . . 12.5.1 The Trends of FTA . . . . . . . . . . . . . . . . . . . 12.5.2 Trade Structure of South Korea . . . . . . . . . . . 12.5.3 South Korean FTA Policy . . . . . . . . . . . . . . . 12.6 GSC Management and Korean Firms . . . . . . . . . . . . . 12.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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13 Competitiveness of Korean Small and Medium Enterprise (SMEs) in ASEAN Region . . . . . . . . . . . . . . . . . . . . . . . . . 13.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.2 Roles of SMEs in ASEAN Market . . . . . . . . . . . . . . . . 13.3 Southeast Asian Market Contexts . . . . . . . . . . . . . . . . . 13.4 Research Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.5 Case of Korean SMEs: An Overview . . . . . . . . . . . . . . 13.5.1 Simone . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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13.5.2 EO Technics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 13.6 Implications and Future Research Issues . . . . . . . . . . . . . . . . . . 207 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 14 Supply Chain Integration in China: Case Study . 14.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . 14.2 Literature Review . . . . . . . . . . . . . . . . . . . . 14.3 Research Model . . . . . . . . . . . . . . . . . . . . . 14.4 Case Study . . . . . . . . . . . . . . . . . . . . . . . . . 14.5 Discussion and Conclusion . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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15 TBIC (ToP and BoP Interfaces Capabilities): Case for SMEs 15.1 Roles of Business for ToP and BoP Interfaces . . . . . . . . . 15.2 Startup Background of Ace Technology: Technology Merchant Exploring the World . . . . . . . . . . . . . . . . . . . . 15.3 Growth and Success Factors . . . . . . . . . . . . . . . . . . . . . . 15.4 Source of Competitiveness and Core Competencies . . . . . 15.5 Recent Strategic Task . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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16 Beyond Rising Asia and American Hegemony: Prospect . . . . . . . 16.1 Beyond Rising Asia and American Hegemony: International Order Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.1.1 Evolving International Order: Security, Rivalry and Hegemony . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.1.2 New Type of Capitalism: Autocratic Practices . . . . . 16.1.3 Africa: New Value Frontiers . . . . . . . . . . . . . . . . . . 16.1.4 Interactions of the ToP and Bop Interface Capabilities (TBIC) in the Digital Age . . . . . . . . . . . . . . . . . . . . 16.2 Global Supply Chain and Business Model Issues . . . . . . . . . 16.2.1 Changing Landscape of Global Firms . . . . . . . . . . . 16.2.2 Disruptive Technologies and Changing Business Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.2.3 Restructuring Global Supply Chains . . . . . . . . . . . . 16.2.4 Challenges of ToP and Bop Interface Capabilities (TBIC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.2.5 Measurement Issues of Global Supply Chain Interfaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.2.6 Challenges of Market Leadership of Firms in ToP and BoP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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About the Authors

Paul Hong is a Distinguished University Professor of Global Supply Chain Management at the University Of Toledo, USA. He is a graduate of Yonsei University, Korea, with a B.A. in Economics. He also has an M.B.A. and an M.A. from Bowling Green State University and a Ph.D. in Manufacturing Management and Engineering from the University of Toledo, USA. He is a certified management accountant (CMA). He has received numerous research and teaching awards, including an appointment to the rank of Distinguished University Professor (2018), 16th Korea SCM Industry-wide Award for Research and Service Excellence (2017), J. William Fulbright-Nehru Teaching and Research Excellence Award (2016), University of Toledo Innovative Teaching Excellence Award (2016), University of Toledo Research and Scholarship Award (2015), Harold E Pearson Best Paper Finalist Award of Journal of Supply Chain Management (2015), Emerald Literati Network Awards for Excellence (2011), and Journal of Operations Management Finalist Paper Award (2006). He has published in numerous reputable journals including Journal of Operations Management, Journal of Supply Chain Management, Journal of Business Logistics, International Journal of Production Research, Corporate Governance: An International Review, Journal of Business Research, International Journal of Operations and Production Management, International Journal of Production Economics, Journal of Service Management, Journal of Engineering Technology Management, Business Horizons, and Journal of Cleaner Production. He has also received research and teaching grants from the US Department of Education, US Department of Transportation, and Society of Automotive Engineers. He has been a frequent keynote speaker for major international global supply chain and technology conferences and global executive training workshops. He has also conducted research workshops for faculty/Ph.D. students in the areas of building research agendas for cross-disciplinary research and conducting research on impact in the USA, Canada, Germany, Korea, Japan, China, India, Lebanon, and many other countries.

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About the Authors

Young Won Park is a Professor of the Faculty of Economics, Graduate School of Humanities and Social Sciences at Saitama University, and an Associate Professor of the Project of the Manufacturing Management Research Center at the University of Tokyo, Japan. He holds a Ph.D. degree from the Department of Advanced Social and International Studies at the University of Tokyo, Japan. His articles have been published in journals including Management Decision, International Journal of Production Economics, International Journal of Technology Management, International Journal of Information Management, Business Horizons, Journal of Business Research, Journal of Purchasing and Supply Management, Benchmarking: An International Journal, International Journal of Services and Operations Management, International Journal of Logistics Systems and Management, International Journal of Business Excellence, International Journal of Procurement Management, Akamon Management Review, Japan Academy of International Business Studies, Japanese Society for Science and Technology Studies, and the Japan Society of Information and Communication Research. He has received research awards, including a Certificate for Highly Cited Research in Business Horizons, Dissertation Paper Awards from the Japan Association for Social Informatics (JASI), Best Paper Awards from The Japan Society of Information and Communication Research (JSICR), Research Awards in the Social Sciences Field from The Telecommunications Advancement Foundation (TAF), and Research Students Awards in the Social Sciences Field from The Telecommunications Advancement Foundation (TAF). His research interests are in technology management, global strategy and IT strategy, and global supply chain management.

Part I

Liberal International Order, Global Trade and Industry Competitiveness

“You must never forget that the unification of Germany is more important than the development of the European Union, that the fall of the Soviet Union is more important than the unification of Germany, and that the rise of India and China is more important than the fall of the Soviet Union.” (Henry Kissinger) With prolonged slow growth rates of advanced nations, the perception of long-term “Decline of the West” is widespread. Recent Trump Administration’s “America First” policies, Brexit debate, and a hint of disunity among G7 nations raise questions about the role of liberal international order. In this context, it is timely to examine the historical progress of nations and discuss how four Asian countries—Japan, Korea, China, and India—have achieved enormous level of growth. This section lays a groundwork for examining the role of international liberal order for “Rising Asia and American Hegemony”. It covers national level issues in relation to trade partnership and industry competitiveness. The size of economies (e.g., GDP) of China and India exceeded both Japan and Korea in recent years. Their standard of living (e.g., GDP per capita) is in the order of Japan, Korea, China, and India. This book highlights the growth patterns and the role of trade sectors. An increasing rivalry between US and China requires careful examination in historical perspective and realistic prospect. This section includes: • Chapter 1: Rising Asia and American Hegemony. This chapter defines liberal international order (LIO) in terms of three crucial elements: liberal with free and independent nations, international with effective flows of capital and goods through international markets, and order with shared governance rules in pursuing national interests. It also discusses how America’s transition from absolute advantage to relative advantage impacts the nature of international order after 1991. • Chapter 2: Liberal International Order and Global Trade Growth. Relationship between liberal international order and global trade has evolved over the years. This chapter examines the relationship between liberal international order and

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Part I: Liberal International Order, Global Trade and Industry Competitiveness

global trade growth. Liberal international order facilitates the rise of Asian nations, Japan, South Korea, and China, through the growth of their trade sector performance. America First policies, Japan’s initiatives of TPP renewal, and Chinese One Belt One Road (OBOR) efforts may redefine the patterns of global trade and international engagements. • Chapter 3: Rise of Four Nations: Case of Japan, South Korea, China and India. An overview of the background of the rise of four leading nations in Asia— Japan, South, Korea, China, and India—is presented. Special focus is on the economic growth of four countries: Japan, South Korea, China, and India. These high growth economies (e.g., Japan, South Korea, China, and India) suggest different patterns of growth, challenges, and transitions. Economic growth movement in Asia suggests national leadership roles, unified efforts of public and private capabilities, and enabling mechanism of international liberal order. • Chapter 4: Growing Rivalry: China’s Rise and American Hegemony. This chapter examines China’s Rise and Trump Administration’s policy priorities. Special attention is on the impact of liberal international order. Key factors that support American Hegemony and achieve China’s Rise are mentioned, and their impacts on liberal international order are further discussed.

Chapter 1

Rising Asia and American Hegemony

Rome’s fate seems to act as a warning that strength and success will always prove transitory in the end, and that civilisation will not automatically triumph. (Adriand Goldsworthy on How Rome Fell).

Abstract This chapter defines liberal international order (LIO) in terms of three crucial elements: liberal with free and independent nations, international with effective flows of capital and goods through international markets, and order with shared governance rules in pursuing national interests. It also discusses how America’s transition from absolute advantage to relative advantage impacted the nature of international order after 1991.

1.1 Introduction World events are like diverse movements in the wide sea. On the surface, it shows a wide level of fluctuations—stormy sea, still water, raindrops, and violent nightly wind. In the depths of the ocean, there are slow and steady flows of movement. Ocean science can assess and predict enormous variety of flows. However, mega flows of political-social-economic phenomena are observable but not necessarily understandable. Samuel Huntington’s “Clash of Civilizations” (1996) predicted the prolonged rivalry between different civilizations. Differences among civilizations in terms of history, language, culture, tradition, and religion remain. The more people experience interactions across the world, the awareness of differences between civilizations becomes greater than shared understanding and acceptance. As selfinterests of nations collide, these differences may take the extreme form of defense and radical elements may fuel the flames in a larger scale. The attacks on Twin Towers (2001) and subsequent US invasion in Iraq and military engagements in Afghanistan highlighted this “clash” of civilizations between the West and the radical Moslem elements. Recently, the rise of Asia in general and China in particular turns the broad attention to potential conflicts in different patterns. The initial trade tension may © Springer Nature Singapore Pte Ltd. 2020 P. Hong and Y. W. Park, Rising Asia and American Hegemony, https://doi.org/10.1007/978-981-13-7635-1_1

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move toward its bigger “rivalry clash” in the years ahead. These mega themes are embedded in complexity of events before they come to surface in definite form. In the meantime, the ordinary flows of history entail quiet and routine events and incidents at the micro-level. A brief review of modern history notes diverse patterns of quality of life among nations. Countries with rich resources are not necessarily prosperous. Size is not the real differentiator. Small countries like Switzerland, Singapore, and Arab Emirates enjoy prosperity. Nations rise and fall because each nation utilizes its unique capabilities in terms of natural (e.g., geographical and demographic) advantages and political-social-cultural infrastructural strengths (Bremmer 2006). Just as an individual’s success does not depend on their ingenuity and hard work alone, nations thrive within their network contexts, which provide stable and reliable order and allow them to pursue their national opportunities and individual possibilities. This is the power of international order. Some of mid-sized countries—Germany, Japan, and South Korea, for example—overcame the damages of war, regrouped and actively engaged in various forms of international order. On the other hand, other countries remained obscure and inactive apart from prevailing international order. This chapter discusses the historical process and the role of international order for development, growth and impact of nations in general and the rise of Asian nations.

1.2 Historical Process of Establishing International Order A review of past two hundred years of world history includes amazing stories of progress and unbelievable sufferings among nations. Massive human sufferings include prolonged religious wars in Europe, destruction of Indians in new world (1700–1800s), Nazi’s final solution deaths of millions of Jews (1940s), atrocities of the imperial Japan against Korea and China (1910–1940s), disappearance of Armenians (1910s) and many more. Reckless ambition of kings and political leaders also resulted in heavy casualties of innumerous people. Lawless jungles of the world have such devastating effects on humanity. Although regional conflicts continued, important parts of the world experienced restoration, development and growth. Over time, the vision of liberal order, supported by international institutions, has expanded to create a world with enforceable and applicable rules. International order is “a cohesive entity …in the form of an aggregation of various rules and institutions” (Ikenberry 2018). Fioretos (2018) notes that “great powers” thrive through stable institutions in liberal international order than “exercising economic and military power at will”. Such “gradually transformed great power behavior” commits to “economic integration, collective security, and universal human rights”. Nations accept the rule of an international order tested through historical processes rather than any dominant mechanism by selected powers.

1.2 Historical Process of Establishing International Order

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Table 1.1 is a summary of various modern conferences, settlements, and impacts. For example, the Peace of Westphalia (1648) ended the European wars of religion. The Peace of Utrecht (1713–1715) resolved the War of the Spanish Succession. It established the maritime, commercial, and financial supremacy of Great Britain. However, the collective experiences of these treaties also enabled to forward movement with more proactive measures for rule-based international order. Treaties of Paris (1814–1815) focused on the new order of Europe after Napoleonic War. This reframed the order in Europe by reducing France to her 1792 borders. Britain acquired Guadeloupe, Tobago, St. Lucia, Seychelles and Mauritius and the island of Malta. The independence of Switzerland was formally recognized Table 1.1 Various modern conferences, settlements and impacts Treaty (Year)

Participants

Goals

Impact

The Peace of Westphalia (1648)

Sweden and France

Ending the European wars of religion. Catholics and Protestants accepted each other

A milestone in the development toward tolerance and secularization and the imperial Estates The legal independence of the Swiss Confederation

The Peace of Utrecht (1713–1715)

France versus Great Britain, Sardinia, Portugal and the Netherlands

Resolving the War of the Spanish Succession

The maritime, commercial, and financial supremacy of Great Britain

Treaties of Paris (1814–15)

France versus the Allies (Austria, Great Britain, Prussia, Russia, Sweden, and Portugal)

Ending the Napoleonic Wars. France had to pay 700 million francs in indemnities, and the country’s borders reduced to their 1790 level

Peace between France and Great Britain, Austria, Prussia, and Russia. Confirmation of the neutrality of Switzerland

Paris Peace Conference (1919)

Primarily Five major powers (France, Britain, Italy, Japan and the United States) and 32 countries and Germany

Resolution of World War I Expensive reparations imposed on Germany

The creation of the League of Nations; Drawing of new national boundaries; Too humiliating for Germany and set the stage of the rise of Nazis

San Francisco Conference (1945)

The United States, the United Kingdom and the Soviet Union. France joined later

Postwar reorganization of Europe and Asia

Re-establishment of the nations of war-torn Europe Creation of the United Nations Charter

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as well. After World War I, Paris Peace Conference (1919) officially ended Word War I and redefined the national boundaries in Europe. In addition to the creation of the League of Nations, the multiple peace treaties are mostly remembered for imposing costly reparations primarily on Germany. The national humiliation that German people felt might have triggered subsequent Nazi’s electoral victories, which was likely to a major cause of World War II. Numerous other nations including Korea sent delegations to call attention to their dire needs. However, the four major powers (France, Britain, Italy, and the U.S.) were too preoccupied with their national interests to address broad issues from groups of nations with “minor importance”. In all these conferences, the “lost” nations gave up substantial territories and their competitive position. The leading major powers claimed their leadership in the new order. By 1940s, Germany and Japan both reached more than 60–70% of U.S. GDP. Since both countries expanded their national boundaries beyond their traditional borders—Germany into Eastern Europe and Japan to Korea and China, these two countries needed to secure their free flows of natural resources from larger parts of the world—Japan from Northeast Asia and Southeast Asia and Germany from Europe except England. After World War II, USA initiated efforts to establish rulebased international order. As the single most influential major power, USA hosted both the Bretton Woods Conference (July 1–22, 1944) and San Francisco Conference (April 25–June 26, 1945). In redefining, the world order after World War II, USA aimed to offer three vital global international order mechanisms. They were the International Monetary Fund (IMF) for emergency finance of nations, the World Bank for long-lending needs, and the General Agreement on Tariffs and Trade (GATT) for promoting international trade. In 1995, the World Trade Organization (WTO) adopted the GATT principles and agreements. San Francisco (1945) Conference resulted in the creation of the United Nations Charter. However, a series of negative economic trends of slower growth, rising trade imbalance between huge trade surplus nations, trade deficit ones, and declining upward economic mobility among shrinking middle class have called for reexamination of the very foundation of international order.

1.3 International Order and Destiny of Nations Throughout history, small nations experienced that stronger neighboring powers determined their destiny. For example, after 36 years of Japanese Imperial rule, Yalta Conference dictated the destiny of Korean people. It divided Korea into two nations, North and South Korea, which engaged in an ideological war for years. While Japan achieved rapid economic progress from 1945–1955, Korea, at the forefront of Cold War, went through Korean War that cost millions of innocent lives. Japan’s prominence after it started engaging with the outside world in Meiji Era is mostly due to its understanding of international order. After its consecutive victories in the Sino-Japanese War of 1894–95 and the Russo-Japanese War of 1904–1905, Japan participated in international order as a sole power in Northeast Asia. In 1919

1.3 International Order and Destiny of Nations

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Paris Peace Conference, Japan was one of five major powers that involved in the League of Nations. On the other hand, most of Asian countries—including China, Korea, and Vietnam, India—were actively involved in the formation of international order after World War I and World War II. Prior to Japan’s surrender, hundreds of thousands of Japanese and Korean people in two cities—Nagasaki and Hiroshima— died due to atomic bombs. In a sense, Japanese people paid the terrible cost for its imperial policies against its Asian neighbors and US. Fortunately, with the looming threats of communist China and Russia, Japan was spared from division. Unlike Germany and Korea, Japan was able to maintain most of its domestic territorial integrity. Besides, the Korean War turned out to be a bonanza for Japan to rebuild its manufacturing base. Japanese’s ingenuity, hard work, and access to US markets and technological innovation have facilitated its export-driven economy to achieve rapid reconstruction. Understanding the dynamics of international order is essential for small nations to chart their course of security and prosperity. It is crucial for nations to maintain their desirable destiny within international order and develop effective network capabilities. Small countries achieve survival and independence with the threats of “hostile neighbors’ and their “strategy of interference” (Lee 2018). However, with international alliance arrangement, smaller states maintain peace and security. Israel, with a small population size, surrounded by unwelcoming neighbors, has survived through “diasporic influences”, national defense capabilities and the support of international order (Shain and Barth 2003; Herrmann 2017). South Korea’s security and prosperity is unthinkable apart from its strategic alliance with the US and “a global security network” (Kinne 2018).

1.4 Competing Visions of International Order After World War II, the United States created an international liberal order within the framework of rules of law among competing national interests. The goal was to establish “orderly gardens” among “lawless jungles” out of this world. Eichengreen (2006) states, “…licensing American technology, capitalizing on American producers’ knowledge of mass-production methods, and adopting American personnelmanagement practices, Europe could achieve rapid catch-up and pursued economic opportunities.” Undoubtedly, US-led liberal international order allows free flows of capital from those investor nations to investee countries. The rebuilding of Europe and economic growth of many nations have been the fruit of a liberal international order. After defeating Nazi Germany and Imperial Japan, US allies (and Russia joined) led the formation of a new world order. Under macro-contexts for stability and predictability, responsible units operate for greater achievements. No individuals, organizations, and nations achieve growth outcomes without a sense of destiny exercised by responsible actions. The growth of nations requires the right definition of a nation state for independence, accountability, and collective efforts for striving for

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Individual Member Nations

Hegemonic Power (US)

Economic and Security Alliances Arragnements

Individual Member Nations

Hegemonic Power (SOVIET)

Economic and Security Alliances Arrangements (WARSO Pact,

(NATO IMF World Bank)

Fig. 1.1 Post-war: two opposing visions of international order

larger unified goals. The concept of a nation state is crucial for development and growth of national economies. Since 1950, many of European countries experienced rapid reconstruction and subsequent economic growth. It has much to do what Europeans did for themselves. At the same time, it was massively aided by the Marshall Plan and the establishment of North Atlantic Treaty Organizations (NATO), a well-coordinated security arrangement. Figure 1.1 shows two visions of international order by the USA and Russia. Competing visions of political worldviews influenced different paths for nations. Two hegemons (US and SOVIET) interacted with individual nations and provided various economic and security alliances. The United States after World War II pursued the policy to contain the influence of SOVIET hegemony. United Nations, a global institution, functions as a stage for membership nations of these two orders interact. The US alliance arrangements (NATO, IMF, and World Bank) include both military and economic aspects. In response, SOVIET mobilized Warsaw Pact nations for similar purposes. The number of countries that are associated with NATO and WARSAW are 16 (as of 1982) and 8 respectively. US also formed numerous other allies in Asia, Middle East and Africa whereas SOVIET also extended its alliance structure to Central America, Asia and Africa including Cuba, Congo, Angola, Mongolia and North Korea. Table 1.2 compares US-led liberal international order and Russia-led Soviet International Order. With post-World II American involvement in Europe, Europe’s rebuilding efforts have revived the leading European countries of United Kingdom, France, Germany, and Italy. Relatively undamaged Scandinavian countries, Switzerland, Netherlands, and Spain also reaped the benefits of redevelopment and rapid growth. Russia-led international order also had a large following of most of Eastern European countries (e.g., Hungary, Poland, Czechoslovakia, Romania, Bulgaria, and Ukraine). Multiple central Asian countries were added to Russia and became Soviet Union. Although economic development and growth of these SOVIET blocs were

1.4 Competing Visions of International Order

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Table 1.2 US-led liberal international order versus Russia-led SOVIET international order NATO countries (As of 1982)

WARSAW countries

16 Countries (Belgium, Canada, Denmark, France, Iceland, Italy, Luxemburg, Netherlands, Norway, Portugal, United Kingdom, United States, Greece, Turkey, West Germany and Czechoslovakia, Spain)

8 Countries (Albania, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania, Soviet Union)

Other Allies Japan, South Korea, Australia and numerous friendly nations that allow US military operational units in their soil

Other Allies Yugoslavia (taking non-alliance position after 1948), Cuba, Grenada, Benin, Congo, Angola, Mozambique, Ethiopia, Somali, Yemen, Mongolia, North Korea, Vietnam, Kampuchea

also impressive for the next 30 years, overall countries that held memberships in US-led international order did better in terms of economic performance and overall quality of life. International order is inherently hierarchical in that not all participants have same level of power and influence. Mattern and Zarakol (2016) identify hierarchy as “a logic of trade-offs”, “a logic of positionality” and “a logic of productivity”. Hegemons of international order use their strategic trade-offs in the form of shifting geographical priorities according to its resource allocations criteria, strengthen its overall positional advantage and effectively creating, delivering and capturing wealth. Enduring hegemon depends not merely its sole economic, political and military power but by its network capabilities that foster long-term reliable alliances (Hafner-Burton et al. 2009). Goddard (2018) also regards “institutions as networks—as patterns of ongoing social transactions” in which a state’s position significantly influences the material and cultural resources the state can deploy in pursuit of its aims…” The four patterns of strategy are: (1) “integrated revisionists, who are likely to pursue institutional engagement”; (2) “bridging revisionists, who will seek rule-based revolution”; (3) “isolated revisionists, who prefer to exit the institutional system” and (4) “rogue revisionists, who have few resources at hand, and thus ultimately must resort to hegemonic violence.” Different network examples include “Russia in the 1820s”; Prussia in the 1860s; the Soviet Union in the early Cold War; and Japan in the 1920s and 1930s”. In contrast to Francis Fukuyama’s optimistic assertion (1992) that “Western liberal democracy may signal the endpoint of humanity’s sociocultural evolution and the final form of human government”, recently there is an increasing skepticism of the role of liberal international order. This has become evident with Trump’s America First policy, which assumes “no permanent friends and no permanent enemies”. Its policy of great power rivalry—particularly with China—is likely to “destabilize international order”. His policy reflects both a popular sentiment that elected him to the presidency and a large segment of academic realism.

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Mearsheimer (2018) argues, “Liberal hegemony, the foreign policy pursued by the United States since the Cold War ended, is doomed to fail. … liberal democracy across the world should foster an open international economy, and build institutions…make the world safe for democracy. But this is not what has happened”. As a realist that recognize the impact of nationalism, his comments about globalism and liberalism are forthright and critical. Changes occurring in international order are in essence political and yet its implications are largely economic and thus not dictated by liberal value orientation. However, the enduring legacy of liberal international order is not likely to disappear soon for several obvious reasons. Liberal international order has a very good chance to survive. First, Ikenberry (2018) argues strongly for the survival of the liberal international order because it is deeply rooted within the multiple levels of global network of relationships—political, cultural and economic. Second, the elements of liberal international order, including open engagement, shared governance rules, cross-national cooperation, have been formulated and settled through the initiatives of leaders from hegemonic powers through international conferences and complex organizational processes. These elements are rooted in long historical processes. Third, the basic elements of liberal international order, namely “openness, rules and multinationalism” are more likely to continue and evolve. From the standpoint of the Rest, it is worthy to consider the role of liberal international order in its development, growth and prominence. The rise of Asian countries requires a historical perspective from the positive role of liberal international order in the past and its evolutionary nature in the future.

1.5 US-Led International Order US-led liberal international order applies multiple institutional mechanisms. One is security alliance (e.g., NATO, Japan, South Korea and Australia and other military presence in over 35 nations). Another one is through financial instruments (e.g., IMF, WTO, World Bank). US dollar (USD) is widely distributed to almost all over the world as key value determining financial instrument. Another one is the United Nations that is located in New York, USA. Rising states, including China, operate within the existing world order until they are proven to offer realistic alternatives. Ikenberry (2018) argues that liberal international order is “complex, multilayered, multifaceted” and the core global rules and institutions, such as the United Nations, International Monetary Fund (IMF), World Bank, and World Trade Organization “cut across diverse realms, including security and arms control, the world economy” and thus deeply settled in the form of “a much broader set of interests”. The sustainable prosperity of China and other emerging economies count on liberal international order. Although world order might move away from a bipolar model to a multi-polar model, the long-term impact of liberal international may not quickly diminish.

1.5 US-Led International Order

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The US is not a sole global hegemon, but it is a regional hegemon in that it cannot engage in multiple large-scale wars in this world. Thus, its global hegemony requires strong regional alliances in Europe (NATO), Asia (Japan-South Korea-Australia) and then it extends to friendly states including India, Philippine, and Singapore. Since majority of economic activities occur in European Union, Asia and North America, an international liberal order focuses on these three regions. Latin America and Africa mostly participate in modest sense except Mexico.

1.6 Nationalism and International Order Hazony (2018) discusses “two antithetical visions of world order: an order of free and independent nations, … and an order of people united under a single regime of law, …” (pp. 16). After World War II, two visible realities are the amazing comeback of Germany, Japan, and Italy out of their devastating ruins and rapid reconstruction of widely damaged infrastructure of United Kingdom and France. Liberal international liberal order in Europe also provided predictable and stable rules for continuous engagements among free and independent nations. In particular, the post-war growth of Germany, Japan and South Korea suggests the positive effect of liberal international order. Rose (2019) argues from American standpoint, international liberal order was to “resolve the tension between American interests and American ideals by achieving them simultaneously…nurturing an ever-growing community of independent countries that …Cooperation would lead to integration and prosperity.” American independence from England was economic and nationalistic. Its independence was all the more sensible because more people from non-English origin joined the nation and built a “new world” with distinct sense of purpose. By 1940s, the size of US economy surpassed that of England and even the combined wealth of Commonwealth nations. Niall Ferguson notes in his book, Empire (2002), that the transfer of international leadership was peaceful because England and USA shared cultural foundations of liberal democracy. In recent years, nationalism has been on the rise throughout the West. In the United States, nationalism has arisen in the form of populism in response to the stagnation of real wages and declining quality of life. Across Europe, including Britain, people have been against the main political parties that have not been straightforward about the costs of EU membership. There has been a deep mistrust against political elites that insist monetary union and have taken administrate actions of integration apart from national sovereignty. In the course of doing so, the majority views of voters have been discarded. In this environment, international order needs redefinition.

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1.7 Cost of Power Transition Both British Empire and the US played an indispensable role in the formation of the modern era. Major power transitions included usually bloody wars. British Empire was somewhat different. According to Ferguson (2002), the memorable achievement of British Empire, despite of its self-serving imperial policies in India, is the peaceful transition of power to US for the goals of defeating larger enemies such as Nazi Germany and Imperial Japan. Great power politics have not always peaceful. During Cold War period (1945– 1991), the US and Soviet Union engaged in various frontline countries. Among these countries are East and West Germany, Japan and China, and South and North Korea. The benefits of liberal international order have been evident in Europe and Asia. In particular, the post-war growth of Germany, Japan and South Korea have been evidence of positive impact of liberal international order. GDP, GDP per capital and GDP growth rate are markedly different. It shows consistent differences between these two types of international orders. Countries that operate in liberal international order are reportedly perform better in terms of GDP per capita and average GDP growth rates. Four Asian countries—China, India, Japan and South Korea, all have benefited from liberal international order. Japan achieved the dominant regional power position by 1940 after rapid industrialization in less than 100 years. Despite its defeat in World War II, Japan benefited from Mao’s rule in China and the Korean War as Japan maintained its territorial integrity without experiencing division like Germany and Korea. Moyo (2011) examines how “The West Was Lost: Fifty Years of Economic Folly— and the Stark Choices Ahead”. The main argument is that the West itself does not maintain its technological, moral and cultural superiority over ‘the Rest’—the rising Asia in general and China in particular. The underlying assumption is that the existing international order that encourages global political and economic engagements have not benefited the West as much as the Rest. Such views take seriously of the impact of relative decline of Western economies and the rise of East. Great powers, knowingly and unknowingly, must make decision choices that often turn out to become “the tragedy of great power politics” because of the very nature of power politics “the tragedy of great power politics” (Mearsheimer 2001). Great powers, with adequate resources in their own land, may like to live alone. By virtue of being a great power, a hegemonic power has to engage and wrestle issues to keep their level of influence that fits to their power position. For example, the US has engaged in wars that resulted in an extraordinary level of human casualties and resources in most of major wars. Including World War I & II, Korean War, Vietnam War, 9–11 Terrorist Attack, Iraq War, and Afghanistan War. Besides, the US has also been involved in many small and medium levels of conflicts and aggressions that undermine the very ideal of liberal international order.

1.8 Power Shift to Asia

13

1.8 Power Shift to Asia Several factors explain the power shift to Asia. First, USA is not constrained on focusing on European issues as first of importance. Its priorities are shifting in view of rising Asia and its “America first” national mood. The strategic importance of Europe has been fading. Europe’s “grand unity efforts are failing and its global influence is fading”. Polyakova and Haddad (2019) portray the changing nature of US-Europe relationships in this way: “The transatlantic alliance is unlikely to look like it once did. There may be more distance and distrust. Siblings often grow apart when they come of age; they make choices, choose partners, and embrace careers that the other does not necessarily approve of. But in the end, the ties that bind are stronger than the individual choices that divide.” In other words, Europe and USA are becoming mature partners that address both their diverging and shared interests. Second, the US is also less preoccupied with the Middle East as it is becoming more energy independent from the Middle East. In the past, the Middle East has been the main source of energy for the world. Saudi Arabia, Iraq and Iran have been major oil producing nations. OPEC (Organization of Petroleum Exporting Countries) has regulated the amount of oil each country is able to produce and thus exert enormous power over the world energy supply. To overcome energy dependence, the US has pursued alternative energy sources. With the shale gas revolution, the US is becoming energy independent. It has reexamined the strategic value of the Middle East. Third, Russia is a decreasing threat economically. Russia is still a dominant nation in its military capabilities. However, its economic power, with an aging population, dims its prospect of a regional hegemon. Russia, without its eastern bloc nations (e.g., Poland, Hungary, Ukraine, Bulgaria, Romania and Albania), is no longer a serious threat to Western Europe as it was during the Cold War period. Western powers, such as Germany, France and Poland in particular, are capable of defending themselves. Naturally, the US expects European nations to assume bigger share of responsibilities for NATO’s operations. After the breakup of Soviet Union, key Warsaw Pact Eastern European countries such as East Germany, Czechoslovakia, Poland, Hungary, Yugoslavia, Ukraine, and Bulgaria moved into the sphere of European Union. Mearsheimer (2018) and Walt (2018) suggest that liberal hegemony, the foreign policy that the United States pursued since the end of the Cold War was not mostly successful. Instead, the US ended up fighting wars in Iraq and Afghanistan that undermine regional peace and threaten liberal values. In response to “End of History” (Fukuyama 1992) and “the victory of the West”; (Sestanovich 2014). Russia was trying to hold up its rightful claim, dues influence on Commonwealth of Independent States (CIS), and it was increasingly aggressive toward its neighbors—in the cases of Russia’s aggressive actions against Chechen, Georgia, Crimean Peninsula and Ukraine (Mearsheimer 2014). Since then, regional conflicts intensified in Africa, a part of Eastern Europe (e.g., former Yugoslavia) and Middle East. In view of Russia’s assertion of its influence over its immediate neighbors (e.g., Ukraine and Georgia), the shale gas revolution in US, and rising nationalistic elements in Europe, the strategic importance of Europe and Middle East to the US

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1 Rising Asia and American Hegemony

have being reexamined. Instead, the US pursues a more realistic strategy with strong national interest theme and demands “responsible share” from its traditional partners in Europe and Japan, while aggressively confronting China. Moving away from its preoccupation of Europe and Middle East, the changing shift is to focus on building Asian coalitions in Indo-Pacific region. In this context, power shift to Asia impact liberal international order. According to Henry Kissinger, the rise of China and India is more important than the idea of European Union, dissolution of Soviet Union, and German Unification. China has reaped huge benefits through liberal international order with open US market access that is an engine for its continuous economic development and growth.

1.9 American Hegemony Despite the prediction of America’s declining influence, the reality of American hegemony is as strong as ever. Multiple factors are accounted for this prospect. One of the main theme of this book is about the prospect of American hegemony in the context of rising Asian nations. Rising nations—Japan, Germany, Korea, China and India— have all benefitted by American hegemony. America, either by “deliberate” or “accidental” design has empowered the past (e.g., Japan and Germany) rivals or emerging “power” nations (e.g., Korea, China and India) to the extent it is enriched. The rise of Germany, Japan, South Korea, China, and India has much to do with the international order that facilitated trade flows among nations in general and opening US markets in particular. The vision of international liberal order after the Second World War was to strengthen enough nations to stand firm to the Cold War challenges. In the following chapters, liberal international order needs to consider its impact on expanding global trade, promoting economic growth and facilitating the rise of Asia. Figure 1.2 shows that majority of regional conflicts occurred after 1991–2001, are

Fig. 1.2 Shifting regional conflicts. Red spot areas refer to conflict regions (1991–2016) and pink circles present potential conflict regions (2017–2030 and beyond)

1.9 American Hegemony

15

mostly in Middle East, Eastern Europe, and Africa. These armed conflicts involved serious casualties ranging from 1,000s to 40,000s and more. Power shift is slowly moving from Europe and Middle East to Indo-Pacific Region. This does not minimize the strategic importance of Europe and Middle East. Rather, it examines the relative priority of Indo-Pacific Region (i.e., Northeast Asia, India and Southeast Asia), which is becoming greater than the regions that cover Atlantic Ocean and Mediterranean Sea. This power shift reflects the reality of rising Asia in general and China in particular. It is also reflected of the relatively waning influence of Russia, in terms of relative decline in demographic strengths and economic growth factors despite its strong nuclear capabilities. Besides, the US is becoming energy independent and thus less dependent on the supply of oil from Middle East regions. Power shift is not merely demographic and political. It also reflects the huge stream of underlying economic reality that is changing rapidly. In Indo-Pacific Strategy Report: Preparedness, Partnerships and Promoting a Networked Region by the US Department of Defense (2019), the containment strategy is clearly specified with the US alignment network that connects Japan, Republic of Korea, Australia, New Zealand and India. The broad strategic alliance also includes Philippines, Thailand, Singapore, Sri Lanka, and the Maldives. Bangladesh, Nepal, Indonesia, Brunei, Malaysia, Laos, Cambodia and Vietnam. The foundational principle is to “continue to ensure that the rule of law – not coercion and force” and to “ensure that this region remains peaceful, prosperous, and secure for decades to come”. No other country has yet established such formidable regional alliances. China has also increased its naval presence. Lintner (2019) discusses “China’s Struggle for India’s Ocean”. China’s strategic initiatives include building military base in Djibouti on the Horn of Africa, securing a port and 15,000 acres of land in Sri Lanka for 99 years in 2018, integrating Myanmar with southern China through the Myanmar Corridor and linking Kashgar in Xinjiang with Gwadar port on Pakistan’s Baluch coast with the China-Pakistan Economic corridor projects. Gaining free access to the Indian Ocean is certainly “the pearl” for China’s long-term interests. China is certainly willing to invest to establish strategic maritime bases stretching from the South China Sea islands and the east coast of Africa. Note: Chapter 4 features more discussion on China’s Belt and Road Initiatives (BRIs). The “new nationalist” elements trending in the US and Europe are at odds with “globalist approaches”. An increasing number of countries including China, Russia, India, Nigeria, Indonesia, Turkey, Brazil, and South Africa are considered better alternatives to the liberal values of “rule of the law, justice, equality and tolerance”. These take in the form of authoritarian state capitalism, selective and regional alliances, and national interest first movements, although not widely accepted, are being presented and tested. The final judgment is to demonstrate success and prosperity. The new or revised international order is to present an economically dynamic and culturally vibrant nations—assuming the fair share of responsibilities and yet achieving strategic interests in credible way. In the next chapter we review what international order has accomplished in the world through global trade–the role of trade for economic growth.

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1 Rising Asia and American Hegemony

In summary, the American hegemony is in place. International order is in transition but the steady nature of international legal order that supports it remains the same because “Despite repeated claims during the past century that the international legal order has been radically transformed, the contours of that order are in many ways the same in 2019 as they were in 1919” (Booth et al. 2019). That’s because “International relations is still fundamentally about order and security, power and restraint, and freedom and equality” (Booth and Bain 2019). The patterns of international order are quite stable as sea’s deep undercurrent despite of the appearance of continuous change and innovation. Here our subsequent discussion focuses on the changing aspects and steady nature of international order.

1.10 Testing Grounds of Evolving International Order Three nations—Vietnam, Germany, and Korea—were divided after World War II. Vietnam and Germany were united in 1975 and 1991 respectively. Korea is still noted for its crucial role of hegemonic struggles between the US and Soviet after World War II. Its independence came after the defeat of Japan. North Korea (supported by Soviet) and South Korea (engaged with the USA) fought a bitter war that cost more than 3 million lives. The impact of these two opposing international orders have been tried and tested. The results signify the turn of new world history. As of 2019, Korea is a still country that displays the effects of international order dynamics. The two Koreas—North and South—cannot be unified alone. It is the major players—USA, China, Russia and Japan—that still hold the key to Korea’s unification. Increasingly, no particular international forum—UN, G7 or the G20 summit—is likely to be an effective mechanism in dealing with the global issues that require shared understanding and collective efforts. Although rule-based international order is challenged, there is no other better alternative is in sight. The world does not look for pure and perfect form of rule-based international order but rule-based order that is realistic and predictable in the context of global power. For this reason, American hegemony still matters.

References Booth, K., & Bain, W. (2019). Continuity and change in international relations 1919–2019. 33(2), 132–141. Booth, K., Bain, W., & Nardin, T. (2019). The international legal order 1919–2019. International Relations, 33(2), 157–171. Bremmer, I. A. (2006). The J curve: A new way to understand why nations rise and fall. USA: Simon & Schuster. Eichengreen, B. (2006). The European economy since 1945. Princeton University Press. Ferguson, N. (2002). Empire: The rise and demise of the British world order and the lessons for global power. New York, USA: Basic Books.

References

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Fioretos, O. (2018). The syncopated history of the liberal international order. The British Journal of Politics and International Relations, 21(1), 20–28. Fukuyama, F. (1992). The end of history and the last man. Free Press. ISBN 978-0-02-910975-5. Goddard, S. E. (2018). Embedded revisionism: Networks, institutions, and challenges to world order. International Organization, 72(4), 763–797. Hafner-Burton, E. M., Kahler, M., & Montgomery, A. H. (2009). Network analysis for international relations. International Organization, 63(3), 559–592. Hazony, Y. (2018). The virtue of nationalism. New York: Basic Books. Herrmann, R. K. (2017). How attachments to the nation shape beliefs about the world: A theory of motivated reasoning. International Organization, 71(S1), S61–S84. Huntington, S. P. (1996). The clash of civilizations and the remaking of world order. New York: Simon & Schuster. ISBN 0-684-84441-9. Ikenberry, G. J. (2018). Why the liberal world order will survive. Ethics & International Affairs, 32(1), 17–29. Kinne, B. J. (2018). Defense cooperation agreements and the emergence of a global security network. International Organization, 72(4), 799–837. Lee, M. M. (2018). The international politics of incomplete sovereignty: How hostile neighbors weaken the state. International Organization, 72(2), 283–315. Lintner, B. (2019). The costliest peral: China’s struggle for India’s ocean. London: Hurst & Company. Mattern, J. B., & Zarakol, A. (2016). Hierarchies in world politics. International Organization, 70(3), 623–654. Mearsheimer, J. J. (2001). The tragedy of great power politics. New York: W.W. Norton & Company. Mearsheimer, J. J. (2014). Why the Ukraine crisis is the West’s fault. Foreign Affairs, 93(5), 77–89. Mearsheimer, J. J. (2018). The great delusion: Liberal dreams and international realities. Yale University Press. Moyo, D. (2011). How the West was lost: Fifty years of economic folly—And the Stark choices ahead. USA: Farrar, Straus and Giroux. Polyakova, A., & Haddad, B. (2019). Europe alone: What comes after the transatlantic alliance. Foreign Affairs, 98(4), 109–120. Rose, G. (2019, January/February). The fourth founding: The United States and the liberal order. Foreign Affairs, 10–21. Sestanovich, S. (2014). How the West has won. Foreign Affairs, 93(6), 171–175. Shain, Y., & Barth, A. (2003). Diasporas and international relations theory. International Organization, 57(3), 449–479. The Department of Defense. (2019, June 1). Indo-Pacific strategy report: Preparedness, partnerships and promoting a networked region. Ref ID: 0-1C9F36A. Walt. (2018). US grand strategy after the Cold War: Can realism explain it? Should realism guide it? International Relations, 32(1), 3–22.

Chapter 2

Liberal International Order and Global Trade Growth

China and other rising states have growing opportunities to shape the rules and institutions of the existing system. But it is very unlikely that they will do so as part of a “power transition” moment, that is, a dramatic moment when the old order is overturned and rising states step forward to build a new one. ….the rising states are already deeply embedded in the existing modern international order. Their “rise” has been made possible by the openness and loosely rule-based character of the post-war system. (G. John Ikenberry on “Why the Liberal World Order Will Survive”).

Abstract The relationship between liberal international order and global trade has evolved over the years. International trade sectors that emerged in both the 19th and the 20th centuries reflect the interest of the hegemony. The agreements that lowered tariff barriers between nations established global orders that contain strong mercantilist and protectionist practices. Even so, the international order after World War II have been much more liberal than is usually assumed and provided the basis of expanding global trade in 20th century. Although the rise of Asian nations, Japan and China in particular, has contributed to the growth of the global trade, they have not yet made real drastic changes in liberal international order. It is to be seen how Japan’s initiatives of TPP renewal and Chinese OBOR efforts play out in establishing new international order that defines the patterns of global trade.

2.1 Introduction Multilateral institutions among nations require coordination of divergent and often conflicting national interests. Although all international institutions are flawed and far from perfect, liberal international order provides a basis of legitimate social purposes. There has been gradual hegemonic transition without serious disruption of stability in international order. The postwar liberal order has provided international growth opportunities that thrive on free flows of capital, market openness and © Springer Nature Singapore Pte Ltd. 2020 P. Hong and Y. W. Park, Rising Asia and American Hegemony, https://doi.org/10.1007/978-981-13-7635-1_2

19

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widely accepted rules and standards. Within such international governance mechanism, Asian nations (Japan, Korea, China and India) have steadily risen without visibly disrupting the liberal international order. This chapter examines how this liberal international order protected the interests of great powers and at the same time facilitated the rise of Asian nations. Stein (1984) notes that “free trade agreements and disputes” are “inherently international political underpinnings” and therefore reflect the evolution of the international trading order over 150 years. In particular, Pitruzzello (2004) discusses “the long-term coevolution of economic performance and social protection” through “British laissez-faire liberalism and U.S.-embedded liberalism” (i.e. liberal international order). One of the key findings is that “the complementarity of market and state in embedded liberalism is associated with better long-term economic performance and social protection.” Many developing countries, with a relatively short history of democratic traditions, also achieve increase in trade flows through free trade agreements. This requires adherence to the key elements of liberal international order (e.g. rule of law, reliable financial governance, and private property rights) and thus promotes implementation of democracy in their respective countries (Milner and Kubota 2005).

2.2 Liberal International Order and Trade Sector Figure 2.1 shows a linkage process between emerging economies and advanced economies. By nature, the level of interactions between emerging economies and advanced economies is limited because of geographical distance, institutional differences, and divergence of interests. Greater degree of interactions with any emerging economy and advanced economies requires Liberal international order facilitates continuous and free flow capital flow from advanced economies to emerging economies based on mutually and generally accepted rules of law. Pitruzzello (2004) suggests that “the long-term stability and viability of post– World War II” is related to “long-term economic performance and social protection.” Both emerging economies and advanced economies find reasons for their Foreign Direct Investment

Emerging Economies

Liberal International Order

Advanced Economies

Global Sourcing Outcomes

Fig. 2.1 Liberal international order: linkage mechanism between emerging and advanced economies

2.2 Liberal International Order and Trade Sector

21

interactions to achieve their long-term interests. Emerging economies need growth enablers (e.g., capital) and advanced economies need expanding opportunities (e.g., supply base and new markets). Advanced economies offer the long-term stability of institutions, productivity and quality of life whereas emerging economies provide viability for investment and growth opportunities. Mousseau et al. (2003) also concur that “trade has an independent, substantively important effect for peace” along with institutionalizing “democratic institutions” fit for liberal international order. After World War II, both Japan and Germany were invited to participate in liberal international order for rapid reconstruction process. Fortunately, the imminent threats of Soviet Union and political development in Mainland China dictated the US-led international coalition to invite Germany and Japan to become a full-fledged member of liberal international order. Liberal international order does not mean that flow of goods and services is free with little restrictions. Rather, liberal international order allows nations to engage in trade based on rules that are mutually agreed upon in view of their national interest, priorities, and constraints. For example, emerging economies need to protect their basic industries (e.g., agricultural sector for vast numbers of farmers) and develop crucial strategic industries (e.g., steel production capabilities) to achieve “rapid technological change, sufficient capital accumulation” (Lawrence 1993; Wolff 1995; Singh 2006). Other emerging economies (e.g., South Korea, India and later China), in contrast to advanced economies (e.g., Western economies), have maintained a somewhat narrow scope of trade relationships-especially in the modern times. South Korea, for example, was one of the poorest nations of the world—no more than 100$ of GDP per capita until 1960. Its economy, with the devastating effects of the Korean War from 1950–1954 and a 36-year occupation by imperial Japan, was in pitiful condition. When President Park Chunghee of South Korea visited West Germany in the early 1960s, the leaders of West Germany were quite skeptical of the investment viability of this “unknown” nation. There was little credible guarantee for the payment of the sizable long-term capital loans. Park reminded these suspicious leaders of West Germany with this appeal: “Our 20,000+ miners and nurses from Korea are the evidence of our commitment to keep our promise to pay back all the loan amounts”. Deeply touched, they decided to support Korea’s efforts for economic development. Japan, enormously benefited by 36 years of an imperial policy of occupation in Korea and war period atrocities (including using forced labor of Koreans in mines and battlefields and taking hundreds of thousands of women for the “comfort” of soldiers in the battle lines) offered a series of sizable capital grants to Korea. With its involvement in Vietnam, South Korea could get access to the US market. Broad technology assistance, education, and training programs at US institutions made its economic take-off possible. Undoubtedly, their massive capital inflows and trade sector growth secured vast employment opportunities (Nam 2008). Direct foreign investment from advanced economies looks for opportunities for bigger growth yield. Economies that have fast growth potential are the desirable destination of FDI. FDI also flows into emerging economies where rules and regulations are less stringent

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in the case of production factors (e.g., cheap labor, less environmental regulation) (Chung 2014). In the case of other emerging economies such as Brazil, Russia, India and China (the BIRCs), Stephen (2014) reports that these countries do not necessarily subscribe to liberal aspects of international order while appreciating international engagement and market integration. With the humiliating defeat to Japan (i.e., Sino-Japanese War) and the Opium War, China went through internal divisions and the communist takeover. From 1945 to 1970, China was not a part of liberal international order at all. However, after diplomatic the normalization with the U.S., it could achieve tremendous growth and changes through global trade. Economic benefits of trade include massive economies of scale with the increasing size of target market boundaries that provide productivity improvement and higher income opportunities. At the same time, the nation needs to conform to the standards of international laws that have changing impact on their domestic governance rules.

2.3 Liberal International Order and Flows of Capital and Innovative Technologies Liberal international order facilitates the flows of capital and technologies. With the rise of The Soviet Union and Mao’s China in the 1950s–1960s, the US supported a rebuilding Europe in general and Germany in particular through The Marshall Plan. NATO (The North Atlantic Treaty Organization) was established on 4 April 1949 with 29 member states from North America and Europe. Because of circumstances in Mainland China and The Soviet Union, it was a strategic necessity for The US to keep Japan a peaceful ally. Mao’s China remained isolated for more than 25 years until it opened the door to liberal international order. Nixon’s visit to China in 1972 and Deng’s reform agenda thrived in the contexts of liberal international order. As foreign direct capital flew in, China and global firms built their production base in China for domestic conception and exports to international markets. China’s economy started transforming itself into a giant manufacturing factory of the world and the engine of economic growths continued running. However, China has thrived not only with the massive flows of the investment of global corporations, but on the U.S.-led liberal international order to achieve rapid economic growth and secure its own interests in global markets. Jensen (2003) reports that “Foreign direct investment (FDI) is an important element of the global economy and a central component of economic development strategies of both developed and developing countries.” An interesting finding is that “democratic political systems” under liberal international order “attract higher levels of FDI inflows both across countries and within countries over time. Democratic countries are predicted to attract as much as 70 percent more FDI than their authoritarian counterparts.” As an economy experiences a greater level of foreign

2.3 Liberal International Order and Flows of Capital …

23

direct investment, the growth of the trade sector goes hand in hand with the rapid economic growth of such an economy. Kosack and Tobin (2006) state, “Aid contributes powerfully to both economic growth and human development, and the higher the level of human capital in a country, the more aid contributes. By contrast, FDI, at best, has no effect on economic growth and actually slows the rate of human development in less-developed countries.” In the case of four Asian countries (Japan, Korea, China, and India) their economic growth has been somewhat different from other developing countries. It was the flows of foreign direct investment and strong political governance structure (e.g., long-term economic planning, reform efforts), rather than foreign aid, that had positive impact on their long term economic growth (Tong et al. 2018). According to World Bank data (2008) (Fig. 2.2), the ratio between per capita growth and capital flows/GDP (percent) has shown stable patterns of correlation for 30-year periods (1970s, 1980s, and 1990s). In 1970, the estimated correlation line was between −3 to +4.8 (Capital Flows/GDP percent) and Per GDP growth averaged 0% (with + and – GDP growth fluctuations). The correlation slope was slightly negative. As it moved from the 1970s to 1990s, the range of per capita GDP growth/GDP (percent) extended to −10 to +6, while correlation slope was slightly more positive. This suggests that when compared to the 1970s and 1980s, the 1990s had wider fluctuations of capital flows and GDP growth differences by nations. Figure 2.3 suggests stronger correlation between domestic credit/GDP and capital flows/GDP (percent) for emerging economies compared to advanced economies. In other words, domestic credit/GDP growth is crucial for capital flows/GDP. The correlation coefficient between domestic credit/GDP and capital flows/GDP (percent)

Fig. 2.2 Per capita GDP and capital flows/GDP (Percent) in 1970s, 1980s and 1990s. Source World Bank. Global Development Finance: Country Tables …

Fig. 2.3 Per capita GDP and capital flows/GDP (Percent) by countries. Source World Bank. Global Development Finance: Country Tables …

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2 Liberal International Order and Global Trade Growth

of the top 10 emerging markets are distinctively positive compared to low-income or middle-income countries. This suggests that growth of capital flows is important to domestic financial market growth.

2.4 Role of Trade Sector The key to economic growth of any emerging economy is to prepare an open system by which other foreign capital inflows become possible. With the influx of foreign capital and technology, entrepreneurial business founders in Korea, Japan and China targeted overseas market. The trade sector became crucial in providing the sustainable engine of growth. Local trade was a part of life even in ancient days. Based on comparative competitive advantage, tribes of small villages engaged in exchanges of goods and services: In times of peace by peaceful means; in desperate times by resorting to war. With the establishment of nation states, the issues of trade became serious among nations. A major idea of Adam Smith is that trade between nations is likely to result in specialization of goods and services with a comparative advantage. While free trade increases the total quantity of goods and services available to each country, there are both winners and losers in the short run. Table 2.1 shows the comparison of four countries by percentage of trade sector compared to GDP. In all four countries, the trade sector becomes noticeably important as its economy grows from the early stage to rapid expansion. Compared to the US, all four countries have a much higher percentage of trade sector/GDP. In some years, the size of the trade sector exceeded more than 90% of the GDP in Japan and Korea. China and India have a somewhat lower percentage of trade sector/GDP ratio compared to Japan and Korea. The highest percentage is 64.47 and 49.69%. Even so, all these countries show a relatively high percentage of trade sector/GDP when compared to that of the US. National competitiveness measured by export shares and export intensity is closely associated with productivity performance. For maximization of the ratio between output and input, a country strives to produce a combination of goods and services according to its production possibilities curve. Trade allows countries to acquire goods and services with favorable terms of transactions.

2.5 Trade Sector and Economic Growth There have been mixed reviews on the trade sector and economic growth. “It is trade barriers, not trade openness, that are positively and…significantly associated with growth, especially for developing countries” (Yanikkaya 2003). Trade openness (in both export and import) is positively related to aggregate factor (e.g., labor or capital) productivity (Wolff 1995). In particular, research evidence is rich regarding the rapid and sustained growth of Japan, Taiwan, and South Korea. In discussing the East

21,482.41 (322.2)

5,220.57 (127.7)

1,699.68 (50.8)

14,172.20 (1,403.5)

2,957.72 (1,324.2)

USA

Japan

South Korea

China

India

11.42

8.73

14.60

21.01

9.17

1960

7.74

4.95

32.58

19.57

10.73

1970

Trade sector/GDP (%)

Note GDP is in billion (USD) and Population is in million. India (2001*) Source National Accounts (2017). United Nations Statistics Division. IMF

GDP (2019 in billion) Population (2016: in million)

Country (Year)

Table 2.1 Comparisons of four countries: trade sector/GDP (%)

15.55

12.42

65.58

27.23

20.07

1980

15.67

24.27

51.26

19.66

19.76

1990

26.27*

39.41

94.91

110.33

24.98

2000

46.59

64.47

73.55

30.33

26.87

2006

49.69

48.89

95.65

28.61

28.18

2010

40.35

37.03

77.71

31.27

26.58

2016

2.5 Trade Sector and Economic Growth 25

26

2 Liberal International Order and Global Trade Growth

Asian model of the economic development in Japan, Taiwan, and Korea, Kuznets (1988) concludes, “The East Asian model of economic development set forth here has focused on five shared characteristics that seem significant in the contemporary economic development of Japan, Taiwan, and Korea. They are economic characteristics and include high investment ratios, small public sectors, competitive labor markets, export expansion, and government in the economy. Government intervention, though restricted by the need to keep exports competitive, has been pervasive.” In the case of China, The CRS Report (2019) clearly states, “Since opening up to foreign trade and investment and implementing free-market reforms in 1979, China has been among the world’s fastest-growing economies, with real annual gross domestic product (GDP) growth averaging 9.5% through 2018…. China is the largest U.S. merchandise trading partner, biggest source of imports, and third-largest U.S. export market”. China’s access to the US market and global trade is certainly the major reason for its rapid and sustained growth. On 12-19-2018, The Wall Street Journal featured an article about trade’s growing role in global economies with this summary: “The global economy is increasingly dependent on cross-border trade. Trade In goods and services today accounts for well over half of global economies activity, up from roughly 20% in the 1960s.” Table 2.2 indicates the trend of trade as a percentage of gross domestic product of world. From 1960 to 2018, there has been a consistent increase of trade as a percentage of the world GDP from 20 to 38% in the 1970s to more than 50–60% in the 2010s and beyond. For each period, various international order initiatives, including the Tokyo Round of trade, NAFTA, The Plaza Accord, and WTO’s admission of China for full membership, have facilitated a greater level of international trade among nations. The overall impact was to reduce tariffs, promoting free trade among regional economic blocs—North America and Asia. Without a doubt, economic growth (in terms of GDP) of Asian countries—Japan, South Korea, China and India—is closely associated with expanding trade through the liberal international order. The impact on individual countries is mostly positive. It is noteworthy that Canada, Mexico and China all increased trade surplus with other nations generally and The US in particular. The US, by maintaining a significantly lower than world average trade percentage of its GDP, consistently expanded the role of the trade sector for its economic activities. Thus, trade percentage of GDP also achieved a modest increase from 8% in 1960 to 25% in 2015 (Table 2.3). Compared to its major trading partners such as Canada, Mexico, and China, USA has maintained relatively low percentage 8–25% whereas world average is more than 40–60%. Although the trade volume of USA is still very large (Note: in 2018 US is the second largest exporter next to China and USA is the largest importer of the world and China 2nd), its economy provides growth incentives to other nations through opening its market to the nations of the world. Table 2.4 shows the comparison of four countries by percentage of trade sector compared to GDP. In all four countries, trade sector becomes noticeably important as its economy grows from early stage to the rapid expansion. Compared to US, all four countries have much higher percentage of trade sector/GDP. In some years Japan and Korea, the size of trade sector exceeded more than 90% of GDP. Although China and

Normalization of US-China Relationship

China’s access to the U.S. market and massive inflows of foreign direct investment into China

Key international order initiative

Immediate impact

Lower tariffs over several years

The Tokyo Round of trade

37.5–37%

1980–1984

Reduce the dollar’s exchange rate but does not success in balancing trade deficit with Japan

The Plaza Accord among major economies

37–38%

1985–1993

Source Adapted from Wall Street Journal (12-19-2018)

20–38%

Trade as a percentage of world GDP

1960–1979

Table 2.2 Trade’s growing role for economic growth

Free trade agreement between the US, Mexico and Canada

NAFTA

42%

1994

Expanding global trade flows

WTO A postwar tariffs agreements

43–50%

1995–2000

Increasing manufacturing investment and exports

China enters WTO

50–61%

2001–2008

Global Financial market Restructuring

The 2008 Financial Crisis And Afterward

51–60%

2009–2014

Trade growth slows as nations implement protectionist measures and corporations rely on reshoring

Protectionist Movement (USA America First and Brexit)

50–54%

2015–2018

2.5 Trade Sector and Economic Growth 27

28

2 Liberal International Order and Global Trade Growth

Table 2.3 Comparison of impact of trade of selected countries Country

Canada

Mexico

US

China

Time period

1960–2018

1960–2018

1960–2018

1960–2018

Trade as a percentage of gross domestic product

38–82%. Starting about 38% in 1960s and peaked in 1005 for more than 82% and then stable above 60% from 2010

Somewhat lower than world average until 1994 NAFTA Agreement. After NAFTA, trade as a percentage of GRP exceeded 78% as of 2015

Maintained significantly lower than world average but modest increase from 8% in 1960 to 25% in 2015 (World average is more than 40–60%)

Started lower than world average in 1960 (6% in 1960). Steadily increase from 1972–1980 reached 20% and then rapidly increased after China’s WTO membership with more than 60% GDP from trade sector

Trade as a percentage of world gross domestic product

Trade as a percentage of world GDP has consistently moved upward from 1960–2018 from 25% to 60% range except modest fluctuations during 2008 Financial Crisis and protectionist measures after 2016

Source Adapted from Wall Street Journal (12-19-2018)

India have somewhat lower percentage of trade/GDP ratio compared to Japan and Korea. The highest percentage is 64.47 and 49.69%. Even so, all these countries show relatively high percentage of trade sector/GDP compared to that of US. Economic livelihood of high growth nations (e.g., Japan, Germany, Korea, China, India, Canada, and Mexico) suggests positive correlation between trade volume (total export and import) and aggregate factor productivity (e.g., labor, capital). The trade sector of U.S. is relatively small compared to these high growth nations because its domestic economic activity relies on its vast national market. Comparisons with other Asian countries are more striking. All four countriesJapan, South Korea, China and India-show the undisputable contribution of the trade sector to their economic growth. Its trade sector volume is consistently more than 50%. In 2010, it was more than 95%. Japan, China and India also showed consistent growth of trade sector in the range of 20–65%. A Fig. 2.4 show that while The USA maintains a relatively stable percentage, the trade sector percentage (trade sector divided by GDP) has been increasing until 2006 and afterward it has come down. It shows that China’s domestic economy also grows rapidly and thus stabilize trade percentage.

127.7

Japan

1324.2

India

11.42

8.73

14.60

21.01

9.17

1960

7.74

4.95

32.58

19.57

10.73

1970

Trade sector/GDP (%)

Note GDP is in billion (USD) and Population is in million. India (2001*) Source National Accounts (2017). United Nations Statistics Division

1403.5

China

50.8

322.2

USA

South Korea

GDP (2018) Population (2016)

Country (Year)

Table 2.4 Comparisons of four countries: trade sector/GDP (%) 1980

1990

24.27 15.67

15.55

51.26

19.66

19.76

12.42

65.58

27.23

20.07

26.27*

39.41

94.91

110.33

24.98

2000

2006

46.59

64.47

73.55

30.33

26.87

2010

49.69

48.89

95.65

28.61

28.18

2016

40.35

37.03

77.71

31.27

26.58

2.5 Trade Sector and Economic Growth 29

30

2 Liberal International Order and Global Trade Growth

Fig. 2.4 USA-China comparison: percentage of trade sector/GDP

In the case of Korea, Kang et al. (2017) reported “…the positive effects of international trade on inclusive growth driven by strong output growth effect”. Certainly, trade-based economic growth has contributed significantly to the growth of its economics, and while GDP growth does not necessarily remove income equality, it has not contributed to it, either. National competitiveness measured by export shares and export intensity is closely associated with productivity performance. For maximization of the ratio between output and input, a country strives to produce a combination of goods and services according to its production possibilities curve. Trade allows countries to acquire goods and services with favorable terms of transactions.

2.6 International Institutions for Trade Sector Growth International institutions promote global trade sector growth by ensuring fairness of rules and productivity enhancements of its member nations. Emerging economies have two critical obstacles for their growth: a lack of experience in applying fair and transparent rules in domestic sectors and removing obstacles for productivity growth. Not all emerging economies can join in liberal international order as they hope. Hanson (2012) examines “changes in international trade associated with the integration of low- and middle-income countries into the global economy”. Both China and India have increased importing raw materials to build an infrastructure network for production facilities and logistical infrastructures. By specializing production for specific export items for comparative advantage, these two countries have sustained high economic growth rates. What is noteworthy is their access to global markets beyond domestic demand. Rule-based international order provided their venues for growth for an extended period—longer than 20 and 30 years. Nations that are willing and able to comply with three conditions of joining liberal international order—reliable political leadership, rule of law establishment and a disciplined workforce—have a much better chance to move forward with ambitious economic development and growth goals. Several nations position as net trade surplus nations (e.g., China, Germany, Japan,

2.6 International Institutions for Trade Sector Growth

31

South Korea, Netherlands, Taiwan, Saudi Arabia, Switzerland) and other nations report net trade deficit nations (e.g., USA, UK, India, Canada, Turkey, France, Australia, Argentina, Mexico) (CIA World Factbook data, 2018). Even so, increasing global trade has a net positive impact on economic growth of the world but that does not necessarily mean that most nations are equally benefited. In this context, global firms that operate beyond domestic boundaries focus on their total performance outcomes, not on the performance results of particular nations. Global firms aspire to thrive in international markets with their advantage in domestic markets. Medlen (2018) reports that “…the recent globalization wave has expanded U.S. exports in general, or that some portion of U.S. exports supports multinational sales abroad….The relatively high correlations of multinational export deficits to….the U.S. deficit” suggests that multinational firms do not benefit themselves by merely contributing to the national trade deficits. To participate in liberal international order, nations need to become organized in terms of establishing rules of law and transparent systems of governance. Institutional corruption and inadequate political leadership is a huge issue for implementing initial development efforts on a nation-wide scale. Lack of education and training of workforce is another huge human capital issue for productivity performance.

2.7 Top Ten Nations with Trade Sector Performance Table 2.5 shows the top ten nations in trade sector performance. For three years, the top ten countries remained the same with a modest increase in their export sales value. Russia was added to the top ten rank in 2018. Export volume is an important indicator of international flows of goods and services from one country to the world. In general, export volume and GDP are highly correlated. This suggests that strong performance in total domestic economic activities requires extensive engagement with other nations in the form of trade. Overall ranking of export performance shows steady performance by the top ten countries— China, Germany, USA, Japan, France, South Korea, Netherlands, Italy, Russia and United Kingdom. From 2013–2017, there is little change in the ranking of these nations. Import volume also shows how international flows of goods and services from the world to particular country (Table 2.6). In general, import volume and export volume are highly correlated. This suggests that strong export performance allows countries to import from the world in the form of trade. Overall ranking of import performance suggests reliable patterns by the top ten countries—USA, China, Germany, Japan, France United Kingdom, Netherlands, South Korea, Hong Kong and Italy. The list of the top ten exporting and importing nations suggests that major economic powers of the world dominate the global trade flows with stable patterns. These trade volumes are also indicators of the economic and political positions in the world. The export and important volume of top ten nations accounts for more than 50% of all the global export in 2017.

32

2 Liberal International Order and Global Trade Growth

Table 2.5 Top ten export nations Rank

Country

2018 export

Country

2017 export

Country

2016 export

1

China

$1.904 trillion

China

$2.263 trillion

China

$1.990 trillion

2

Germany

$1.547 trillion

United States

$1.546 trillion

United States

$1.456 trillion

3

USA

$1.497 trillion

Germany

$1.450 trillion

Germany

$1.322 trillion

4

Japan

$787.0 billion

Japan

$698.1 billion

Japan

$634.9 billion

5

France

$589.7 billion

South Korea

$573.7 billion

South Korea

$511.8 billion

6

South Korea

$552.8 billion

Hong Kong

$550.2 billion

France

$507.0 billion

7

Netherlands

$550.2 billion

France

$523.4 billion

Hong Kong

$502.5 billion

8

Italy

$524.9 billion

Netherlands

$505.9 billion

Netherlands

$495.4 billion

9

Russia

$520.3 billion

Italy

$503.1 billion

Italy

$454.1 billion

10

United Kingdom

$479.2 billion

United Kingdom

$442.1 billion

United Kingdom

$407.3 billion

Source WTO (https://www.wto.org) Table 2.6 Top ten import nations (in billion USD) Rank

Country

2017 import sales

Country

2015 import sales

Country

2013 import

1

USA

$2,409

USA

$2,308

USA

$2,314

2

China

$1,842

China

$1,682

China

$1,743

3

Germany

$1,167

Germany

$1,050

Germany

$1,339

4

Japan

$672

Japan

$648

Japan

$794.7

5

United Kingdom

$644

United Kingdom

$625

France

$684.6

6

France

$625

France

$573

United Kingdom

$654.9

7

Hong Kong

$590

Hong Kong

$560

Italy

$541.2

8

Netherlands

$574

Netherlands

$506

South Korea

$525.2

9

South Korea

$478

South Korea

$436

Netherlands

$514.1

10

Italy

$453

Canada

$436

India

$488.6

Source WTO: https://www.wto.org

2.8 US Trade Deficits: Source of Tensions

33

2.8 US Trade Deficits: Source of Tensions Trade sector shows a changing nature of liberal international order. Factors of trade deficits are much deeper than currency valuation. Medlen (2018) notes that “…the forty-year secular decline in the dollar has been one with a secular expansion of U.S. trade deficits.” In fact, there is “weak statistical association between the US trade deficit and the exchange rate”. Since 2018, increasing level of US and China trade tensions reflect two important factors: (1) China’s rapid GDP growth and increasing contribution to global trade; (2) comparable decline of US leadership in world economy. What is obvious is that the growth rates of China have been consistently higher than that of the US—by mostly three to four times per year. The US has maintained no more than a 3% per year GDP growth whereas China has maintained more than a 9% per year growth since 1978. Meanwhile, Japan had maintained a large trade surplus with the US from 1985–1999—for almost 15 years. Starting from 2000, China’s trade surplus with the US continued to grow in size and scope. Table 2.7 shows that US trade deficit with China is nearly as large as the other top nine country trade deficits combined. The rate of increase of export is much lower than that of import. As a result, the trade deficits with China have been consistently increasing since 2002. As Table 2.8 shows, economic theories in general affirm the positive net aggregate effect of liberal trade policies for participating nations even in the case of The US and other advanced economies with massive trade deficits (Dunn and Litzinger 2017; Costinot and Rodríguez-Clare 2018). The trouble lies in the political domain. If the positive effects of trade are aggregated and thus not so visible, the losers by international trade are segmented and thus visible and vocal. Jensen et al. (2017) reports how “international trade directly influences US presidential elections”. In spite of “the large US surplus in services trade”, “large numbers of workers in lowskilled manufacturing” are politically vocal, making a difference in the US Electoral College system and are more likely to oppose any liberal trade agreements. Trade deficits are an easy tool to motivate a large number of people by planting a notion of imminent threat to the US and a need for a call to action. The issues of trade deficits are a legitimate negotiation scheme to reclaim international order as needed. There has been growing perception about China’s alleged theft of intellectual property and forced technology transfer. Trade sector is the initial point of vigorous dispute. President Donald Trump imposed tariffs on Chinese imports, first targeting $50 billion in goods, and then $200 billion more. On the second set, Mr. Trump initially affixed a 10% rate, but said he would boost it to 25% on Jan 1 should China not meet some of the U.S. demands. If talks with Beijing fail, the president said he would put tariffs on the rest of the more than $500 billion in items the U.S. imports from China each year. That provided incentive for China to negotiate. The two sides have until March to find a solution, without which the U.S. says it would pursue measures that are more punitive.

125192.60

(103064.90)

Import

Deficits

(273041.50)

364952.60

91911.10

2010

(359544.50)

483201.70

123657.20

2014

Source U.S. Census Bureau and Congressional Research Service 2018

22127.70

Export

2002

(367328.30)

483201.70

115873.40

2015

Table 2.7 U.S. trade with China and trade deficits in 2002–2018 (selected years)

(346996.50)

462542.00

115545.50

2016

(375576.40)

505470.00

129893.60

2017

(382331.50)

493489.90

111158.40

2018

34 2 Liberal International Order and Global Trade Growth

2.8 US Trade Deficits: Source of Tensions

35

Table 2.8 U.S. trade deficits with China in 2017 $375.2 (Deficit with China) (in billion) (Ten country trade deficit total) Mexico

Japan

Germany

Vietnam

Ireland

Italy

Malaysia

India

South Korea

71.1

68.8

64.3

38.3

38.1

31.6

24.6

22.9

22.9

Source U.S. Census Bureau and Congressional Research Service 2018

What is the real impact of trade deficits in the context where US has power to issue any amount of US as it sees fit? Since US dollars are the dominant key currency in the world, it is more beneficial for the US to spread the US dollar. In exchange for the US dollar, it can acquire any goods and services as needed. The issue of trade deficit can be a political bargaining tool against any nations that have a major trade surplus—such as Germany, Japan, China and South Korea. China’s rise in economic wealth makes its worldview known to the world. Its long-term goal is not merely becoming a full, responsible member of the international economic system that the US has created after the Second World War. According to Seib (2019), China’s position is more as a “creator and shaper of a new system” in view of an “unappealing and unconvincing model of the liberal democratic model” which is “in the process of breaking down”. However, since 2017, China’s economic growth rate has noticeably slowed down. The trade tensions with the US have not brought out the strengths of China’s economic muscle and its financial system capabilities. The impact of China’s expansion policy is on the export volumes, and mega investment and acquisitions in the world. Even so, China has not yet demonstrated its global leadership in terms of politics, economy, culture, innovation of ideas and quality of life. Trade deficit is another important issue. Trade deficit itself is not necessarily an indicator of weakness. Advanced nations may report net trade deficit as not merely the difference between total import and total export volume. If advanced nations invite more capital flows than capital outflows because of favorable investment conditions and a positive outlook of long-term investment return, then trade deficit is not necessarily the evidence of policy failures. In the case of the USA, its global currency position steadily increased dollar flows into the global financial system. Even the burdens of the financial crisis in 2009 were spread out widely to the world because of the dollar’s key currency position. In 2019, trade tensions between the USA and China are not merely about trade deficits. The real source of accelerating conflicts is associated with hegemonic control of international order. Even as the world moves forward to an information-based innovation economy, economic fundamentals—food, energy, and resources–still matter. An additional focus is to sustain the very source of tomorrow’s wealth—information highways (5G), money flows (key currency), and innovation capabilities. The next chapter examines the process of Asia’s Rise in general and China’s Rise in particular and its implications to international order.

36

2 Liberal International Order and Global Trade Growth

2.9 Global Trade and Global Firms Global trade takes place through global firms. China’s exports and imports increase because global firms take deep roots in China. The growth of China’s global trade is highly correlated with global firms from China. Dominant power nations are more likely to provide favorable environments for their global firms to do business anywhere in the world. Global firms go in and out of countries based on their assessment about the country’s ability to offer better business opportunities. The flows of foreign direct investment (FDI) are also mostly through global firms. Therefore, countries that invite global firms to operate require competitive low tax rates, fair play by the rules of law, and a reliable market based economic policies. Liberal international order provides the necessary framework for any country to create a favorable investment environment within them. Thus, countries that actively participate in liberal international order have a greater chance of rapid development and growth through global trade. It is no wonder why Germany, Japan, South Korea, Taiwan, Singapore, Hong Kong, and China report high rates of economic growth and activities of global firms. In the next chapter, more discussion will focus on how four Asian countries have achieved rapid economic development and growth.

References Chung, S. (2014). Environmental regulation and foreign direct investment: Evidence from South Korea. Journal of Development Economics, 108, 222–236. Costinot, A., & Rodríguez-Clare, A. (2018). The US gains from trade: Valuation using the demand for foreign factor services. Journal of Economic Perspectives, 32(2), 3–24. CRS Report. (2019). China’s economic rise: History, trends, challenges, and implications for the United States. Congressional Research Service. https://crsreports.congress.gov. RL33534. Dunn, J. H., & Litzinger, P. J. (2017). Trade policy in perspective: 1948–2017. Journal of Business and Behavioral Sciences, 30(1), 58–71. Hanson, G. H. (2012). The rise of middle kingdoms: Emerging economies in global trade. Journal of Economic Perspectives, 26(2), 41–64. Jensen, J. B., Quinn, D. P., & Weymouth, S. (2017). Winners and losers in international trade: The effects on US presidential voting. International Organization, 71(3), 423–457. Jensen, N. M. (2003). Democratic governance and multinational corporations: Political regimes and inflows of foreign direct investment. International Organization, 57(3), 587–616. Kang, M., Park, I., & Rhee, D. E. (2017). Korea’s growth-driven trade policies: Inclusive or exclusive? The World Economy, 40(11), 2475–2490. Kosack, S., & Tobin, J. (2006). Funding self-sustaining development: The role of aid, FDI and government in economic success. International Organization, 60(1), 205–243. Kuznets, P. W. (1988, April). An East Asian model of economic development: Japan, Taiwan, and South Korea Author(s): Source: Economic Development and Cultural Change, 36(3), Supplement: Why Does Overcrowded, Resource-Poor East Asia Succeed: Lessons for the LDCs? (pp. S11–S43). the University of Chicago Press. Lawrence, R. Z. (1993). Japan’s different trade regime: An analysis with particular reference to Keiretsu. Journal of Economic Perspectives, 7(3), 3–19. Medlen, C. (2018). The great escape: The multinational trade deficit in historical perspective. Journal of Economic Issues, 52(1), 227–245.

References

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Milner, H. V., & Kubota, K. (2005). Why the move to free trade? Democracy and trade policy in the developing countries. International Organization, 59(1), 107–143. Mousseau, M., Hegre, H., & O’neal, J. R. (2003). How the wealth of nations conditions the liberal peace. European Journal of International Relations, 9(2), 277–314. Nam, C. H. (2008). Does trade expansion still promote employment in Korea? The World Economy, 31(6), 720–737. Pitruzzello, S. (2004). Trade globalization, economic performance, and social protection: Nineteenth-century British Laissez-Faire and post-world war II U.S.-embedded liberalism. International Organization, 58(4), 705–744. Seib, G. F. (2019, May 28). China likes its own model, US learns. Wall Street Journal, p. A4. Singh, J. P. (2006). Coalitions, developing countries, and international trade: Research findings and prospects. International Negotiation, 11, 499–514. Stein, A. A. (1984). The hegemon’s dilemma: Great Britain, the United States, and the international economic order. International Organization, 38(2), 355–386. Stephen, M. D. (2014). Rising powers, global capitalism and liberal global governance: A historical materialist account of the BRICs challenge. European Journal of International Relations, 20(4), 912–938. Tong, T., Li, B., & Singh, T. (2018). China’s economic growth and foreign direct investment flows. World Economics, 19(3), 107–132. Wolff, E. N. (1995). Technological change, capital accumulation, and changing trade patterns over the long term. Structural Change and Economic Dynamics, 6(1), 43–70. World Bank Group. (2008). International capital flows and economic growth. Global Development Finance (pp. 59–83). Yanikkaya, H. (2003). Trade openness and economic growth: A cross-country empirical investigation. Journal of Development Economics, 72(1), 57–89.

Chapter 3

Rising Asia: Case of Japan, South Korea, China and India

Asian economies, as defined by UNCTAD, will be larger than the rest of the world combined in 2020, for the first time since the 19th century. (March 25, 2019, Financial Times on “The Asian Century is Set to Begin”).

Abstract This chapter examines Rising Asia. Special focus is on the economic growth of four countries: Japan, South Korea, China and India. The cases of high growth economies (e.g., Japan, South Korea, China and India) suggest unique patterns of growth, challenges and transitions. Economic growth movement in Asia assumes unified efforts of domestic capabilities and international liberal order for expansion beyond national boundaries. Government mandated investment plans work well during this early period of growth up to $10,000 GDP per capital economy. As economy moves into mid- or advanced level, innovation in every level becomes increasingly important. Necessary conditions include free flows of information, private property, free movements, and demographic support. First level of rapid economic growth is attainable through disciplined execution of controlled economy. The next level into advanced maturity stage involves the transformation of liberal economic governance rules. Naturally, advanced level of sustainable growth requires national system that is conducive to international liberal order.

3.1 Introduction Growth of nations requires political stability as of primary importance. Firms, similar to individuals, flourish in the environment of predictable and safe environments. Among more than 4,000 longevity firms that report for more than 300 years of existence, two countries are most prominent—Japan and Germany. Relatively speaking, these two countries, despite their engagements with World War (Germany’ case twice—I & II and Japan for II), have maintained stable political structure over the centuries. Stable political structure allows individuals plan for long-term goals and pass their wealth to the succeeding generations. © Springer Nature Singapore Pte Ltd. 2020 P. Hong and Y. W. Park, Rising Asia and American Hegemony, https://doi.org/10.1007/978-981-13-7635-1_3

39

40

3 Rising Asia: Case of Japan, South Korea, China and India

According to Rose (2019), US has displayed the amazing tension between “American interests and American ideals by achieving them simultaneously, on the installment plan”. Interestingly enough, US has experienced several real successes in Asia. Among four mega events that Henry Kissinger mentioned—European Union, Unification of Germany, and the fall of Soviet Union and the rise of China and India, the most noticeable one is the rise of Asia. Prior to the rise of China and India, there was the rise of Japan and South Korea. This chapter is devoted to discuss the rise of four Asian countries—Japan, South Korea, China and India.

3.2 An Overview of Four Countries Japan, South Korea, China and India experienced growth as each country allows private ownership as an important incentive for entire population to grow. Japan and South Korea have adopted private ownership relatively early. In Japan’s case, it started as early as 1890. South Korea, after Japan’s colonization from 1910–1945— although Japan’s colonialism was exploitative for the primary benefits of Japan. China’s case is somewhat different. In China, like all other nations, the concept of private ownership is crucial for wealth creation and productivity enhancement. However, to promote economic growth Chinese government allows hybrid form of private-public ownership. Government still claims ownership of the land and yet the various forms of private ownership are allowed to promote productivity growth in vital economic sectors. India, with the long history of British rule, widely practiced private ownership, although strong traditional caste system was held in vast part of rural areas. With the increasing urbanization, private ownership allowed low social class to build wealth through entrepreneurial innovation activities. Figure 3.1 is a summary of economic growth patterns of four countries—Japan, South Korea, China and India. Japan and South Korea started early with their economic development. In terms of historical experiences with liberal order, both Japan and China had competed with US. Imperial Japan attacked US with Pearl Harbor in 1941. Rivalry between Japan and US spanned territorial, economic and political with its ambition for greater Asian integration in 1940s including Korea, China and Southeast Asia. After 1945, the relationships between US and Japan transformed into one as a reliable ally in security arrangement. Yet, the historical memory of the past rivalry is not completely erased (Weinstein 1995). However, after World War II, Japan, the former rival of the US, did engage in massive economic redevelopment thriving on the favorable international conditions (e.g., the threats of unified China and Russia, Cold War tensions and Korean War) and taking part of liberal international order—mostly by the sustained efforts of the US. By 1960s, Japan had achieved significant progress from World War II damages. In the early 1960s, Korea started dynamic long-term economic growth plans. China and India also began their economic development movement in late 1970s–1990s and beyond. In that sense, they were later starters. Japan, South Korea and China all hosted Summer Olympic

3.2 An Overview of Four Countries

41

Fig. 3.1 Initiation of economic growth planning and relationships of US

Games in 1972, 1988 and 2008 respectively as they could showcase to the world for their significant economic-political and social development. Figure 3.1 shows initiation of economic growth planning after World War II and the relationship experiences of the US. Governments of Japan and South Korea initiated economic growth planning in the period of 1950s and 1970s whereas China and India engaged in economic growth planning during 1970–1990s. Although Japan has normalized the relationships with the US after 1945, the memory of rivalry during World War II remains. In modern history of the USA, Japan is the only country that attacked the US territory directly. China had on-going conflict relationship with the US including Korean War and 20 more years afterward until China and US normalized diplomatic relations in 1972. In terms of economic governance systems, both South Korea and Japan adopted free market system whereas China adopted hybrid system with strong socialistic political control with market elements in economic aspects. Roy (2002) argues “…India was a more open economy in the colonial period relative both to the eighteenth century and to the first 40 years of its independence. Until the 1980s, the principal use for economic history in India was to supply a critique colonialism, which formed the ideological basis for an economic policy of self-reliance.” In light of its 200+ years of British imperial rule experiences, huge population and complex social structure, India has adopted aspects of socialistic economic approaches until 1980s. Its strong emphasis on self-reliance and non-alignment policy persisted. It was in the late 1980s, before it decided to join in liberal international order and move toward free market system and India’s attitude toward US become more engaging and collaborative. Although Japan, South Korea and China hosted Summer Olympic Games in 1972, 1988, 2008 respectively as their showcase to the world for their economic development success, India has not yet done so. However, in the coming decades India will also have chances to display

42

3 Rising Asia: Case of Japan, South Korea, China and India

Table 3.1 Comparisons of four countries: start conditions for rapid economic growth Country (Year)

GDP per capita

Urbanization (% of Population)

Agriculture (% of GDP)

Human capital (% of college level education)

Population and annual growth rates for 30 year growth perioda

Japan (1955)

259

39

32

8.0

5.50% (1955–1985)

South Korea (1961)

250

37

31

9.0

8.80% (1961–1991)

China (1979)

276

19

31

4.9

5.49% (1979–2009)

India (1981)

285

24

36

3.4

10.01% (1981–2011)

Source IMF, “World Economic and Financial Surveys Asia and Pacific”. Regional Economic Outlook, September 2006 a Population growth rates are based on calculation of change of every five year growth rates For example, Japan (1955, 1960, 1965, 1970…), South Korea (1961, 1966, 1971…) China (1979, 1984, 1989, 1994….), India (1981, 1986, 1991, 1996, 2001,….)

their eminent features to the world through massive scale of public events, even if it is not through Summer Olympic Games. Table 3.1 shows the changing conditions through sustained economic growth. As of 2017, GDP per capita of Japan, Korea, China and India is $38, 428, 29,742, 8,526 and 1,939 respectively. China has shown highest average growth rates for 30 years—more than 8.00% per year. Since Japan and Korea’s rapid growth periods are different from China and India, the last column shows comparison of 30 years. For Japan and Korea, it is 30 years from 1961 to 1991 and for China and India, 1981–2011 respectively. Both Japan and Korea also showed consistent high level of growth 5.07 and 7.09% whereas India showed 8.99 and 4.28%. Economic growth patterns of four nations after World War II are somewhat different. However, the conditions of their economic growth have some similarities in rapid urbanization, decreasing percentage of agriculture, and the role of government, human capital. The starting conditions of economic growth patterns of four nations (Japan, Korea, China and India) are somewhat similar in terms of GDP per capita. Japan’s GDP per capita (1955) was $259, South Korea (1961) $250, China (1979) $276 and India (1982) $285. Urbanization rate ranged between 19% (China) to 39% and 37% for Japan and South Korea respectively. Agricultural contribution to GDP was between 31–36% whereas % of college level education was higher for Japan and South Korea (8.0 and 9.0%) whereas China and India were 4.9% and 3.4% respectively. As a matter of fact, demographic factor is crucial in all four countries. All four countries (Japan, South Korea, China and India) have substantial population that support the initial economic growth requirements of labor force through adequate size of population (Japan and South Korea’s case, a middle level of population size

3.2 An Overview of Four Countries

43

Table 3.2 Comparison of four countries: changing conditions through sustained economic growth Country (Year)

GDP per capita (2017)

10 year growth average (%) (2007–2017)

20 year growth average (%) (1997–2017)

30 year growth average (%) (1987–2017)

30 year growth average (1961–1991—Japan, Korea; 1981–2011—China, India)

Japan

38428.10

5.92

5.37

4.83

5.07

South Korea

29742.84

2.75

3.49

4.95

7.09

China

8526.99

8.25

8.46

8.57

8.99

India

1939.61

5.92

5.37

4.83

4.28

whereas China and India had a huge pool of youth population base). It was only after Japan and South Korea achieved GDP per capita more than $20,000 that their population growth slowed down to a noticeable level. This is coincident with the slow economic growth rate as both countries entered the status of advanced economies with membership in OECD. Table 3.2 compares four Asian countries—Japan, South Korea, China and India. They are the leading nations in Asia by their size of economic and political influence. These countries have shown their own unique patterns of growth and development.— in terms of GDP per capital, 10 year, 20 year and 30 year growth average in different periods. In terms of GDP per capita as of 2017, Japan is the highest with more than $38,000, South Korea is around $30,000, China is moving toward to $10,000 and India about $2,000. Although purchasing power parity (PPP) index might show somewhat different light, this comparison provides how these four nations fair in terms of individual standard of living in terms of nominal GDP. South Korea’s industrial policy aimed at sustaining “an export propelled economy” through its government’s strategic and selective intervention to “affect the allocation of resources among industrial activities” in the form of favorable taxes and subsidies, and credit guarantees. Furthermore, the benefits of “an export-led industrialization strategy” raised the overall standard of living of large number of people despite the occasional corruption charges against individuals and firms (Westphal 1990). Figure 3.2 shows GDP size of five countries—USA, China, Japan, India, and Indonesia. The growth rates of USA and China are steady while Japan’s growth rates were fluctuating with moderate growths. Among Asian nations, five countries (i.e., China, Japan, India, Korea and Indonesia) would show sustained economic leadership in Asia. The combined GDP size of four counties (China, Japan, India and Korea) is bigger than USA or European Union. Zhu (2012) reports the unprecedented “pace and scale of China’s economic transformation….In 1978 the real per capita GDP in China was only one-fortieth of the U.S. level….China’s real per capita GDP has grown at an average rate exceeding 8% per year. As a result, China’s real per capita GDP is now almost one-fifth the U.S. level…China is now the second-largest

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3 Rising Asia: Case of Japan, South Korea, China and India

Fig. 3.2 GDP trends of five countries (USA, China, Japan, India, Korea and Indonesia) Source IMF GDP of nations from 1960–2017

economy in the world….China’s rapid growth over the last three decades has been driven by productivity growth rather than by capital investment”. The factors of China’s rapid growth are both internal and external. External factors include “the role of globalization-foreign trade and investments and special economic zones”. Researchers that emphasize internal factors cite “the role of internal reforms, especially rural reforms” and other Chinese government reform initiatives (Huang 2012). This is a matter of emphasis. Both internal and external factors are complementary. Integration of both internal and external factors results in amazing outcomes. For example, apart from capital investment for better technology, global market access and education and training of workers, it would have been impossible to achieve productivity growth. China’s impressive growth for the past thirty years has been possible through the support of liberal international order. After more than 30 years of continuous high level of economic growth, modest level of growth follows. Japan and South Korea have maintained high level of growth for more than 30 years. Taiwan, Hong Kong and Singapore also sustained high level of growth. The role of infrastructure becomes prominent after a nation reaches GDP per capita more than $10,000. As an economy reaches GDP per capita more than $20,000, then the growth rates slow down for several reasons. Such prolonged GDP growth rates’ difference resulted in contribution to world economy substantially changed. In 1990s, the US’ contribution to world economy was 29.1% per year when China was no more than 9% per year. However, between 2008–2016, China’s economy is catching up to that of US to the world economy in PPP terms. With continuous military tensions with North Korea, South Korea has reported remarkable economic growth since 1960. It is one of the few success stories in modern economies. Its growth experiences through authoritarian governments for more than two decades (1965–1988) plus transition to more democratic governance made Korea quite extraordinary both from the perspective of economic growth and political-social transitions. In this book, the focus is how these four Asian countries took steps toward

3.2 An Overview of Four Countries

45

the paths of growth and prosperity in somewhat different patterns. Yet, their shared experiences suggest the active roles of demographic factors, political-social system, trade sectors and roles of business enterprises. At least three of four factors are internal (i.e., demography, political-social, and business enterprises). Trade sectors play positive roles in the context of liberal international system. Apart from liberal international systems, none of these four countries could have maintained sustained long-term growth. India’s economic growth is somewhat modest compared to China until recently. China’s growth is strongly associated with manufacturing sector and rapid penetration in advanced markets. On the other hand, India’s growth has been in service (e.g., IT sector) and agricultural sector with relatively weak basis in manufacturing sectors. The rate of absorbing large population into growth sectors was not as vibrant in India as in China (Bosworth and Collins 2008). Ahluwalia (2002) characterizes India’s growth as “a latecomer” (from 1991–2001) and “a gradualist’ in implementing economic reforms. Compared to other Asian nations such as Japan, South Korea, and China, India’s central government is not as disciplined and strong-willed in carrying out the growth mandates—forcefully and consistently. Regional priorities and emphasis are much stronger and the ability to implement uniform policies is somewhat limited. The level of poverty in India is widespread and the social and cultural hierarchies are relatively deeper than its three other Asian neighbors. Naturally, the pace of aggregate poverty reduction is slower and the distribution of benefits of economic growth is not as efficient as desired with relatively low level of literacy and educational systems. In this context, it is natural for Datt and Ravallion (2002) to raise a question, “Is India’s Economic Growth Leaving the Poor Behind? Other than several national sports such as crickets, India has not yet demonstrated its ability to develop adequate infrastructures and host Olympic Games like Japan (1972), South Korea (1988) and China (2008).

3.3 Impact of Demography on Growth Prospects The rise of China and India—two largest countries in terms of demographic size, brings fourth the role of demographics in economic growth. Large population necessitates growth imperative (“To feed large population, a nation must innovate and grow”) and engine of growth mechanism (“large population base provides human resources essential for spurring growth”). Countries with small population may not grow as expected. Yet, countries with large population do not necessarily grow fast. Countries with large population (e.g., Bangladesh, Nigeria, and Indonesia) grow faster when their political-social infrastructure meet three conditions for growth: (1) private ownership; (2) rule of law and; (3) education. With the spread of liberal democracy, more countries are more likely to move forward with the above-mentioned three conditions for growth. Demography is a huge factor for economic growth. The debate between Julian Simon and Paul Ehrlich centered on the role of population in economic growth

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3 Rising Asia: Case of Japan, South Korea, China and India

and prosperity. Ehrlich (1968) regarded population, as “bomb” that is detrimental to economic growth and high standard of living. He viewed resources as finite and therefore more population will deplete scarce resources over time. On the hand, Julian Simon regarded population as “the ultimate resource” for disruptive innovation and continuous growth (Simon 1981). Resources are not finite in that different and diverse resources are discovered and utilized as scientific innovation continues. Both Ehrlich (1968) and Simon (1981) are right in their specific time frame and contexts on which their research is based on. History in longer time horizon suggests that new resources arise with new challenges. At the same time, a vast proportion of the world’s population lives in the conditions of undernourishment and deprivation. The key is to find and use the engines for growth with social discipline and political will.

3.4 Asia’s Rise and International Order Since 1945, the U.S. has not decreased in power in absolute terms. However, with the rapid growth of these emerging economies, its relative power has been on decline. In 1945, its GDP constituted almost 50% of the world GDP. By 1970s it fell to 25% and since then it has maintained 20% of global GDP. In fact, the US has sustained a unique role in the international order that it has developed over the past five decades. With the election of Donald Trump as the President and the Brexit movement in UK, there has been a noticeable new trend. Its move to pull back from global leadership includes its withdrawal from Paris Accord, UN Human Rights Commission, Trans Pacific Partnership, and US troops from Syria and Afghanistan. U.S. disengagement stems from two underlying assumptions. The first is that US strategic alliances are too expensive to benefit the U.S. interests. In particular, with the break-up of Soviet Union, the nature of Russian threat to Europe’s security has changed. European countries are capable of bearing their appropriate level of defense costs and yet they do not. With the abundant shale gas production in the US, the Middle East is no longer critical energy source. Compared to Trump Administration’s effort to build $5 billion southern border wall, US spends much more in Syria and Afghanistan. The second is that liberal international order provided benefits to Asian economies such as Japan, South Korea, and China and global firms that do outsource their production base in other emerging economies. American workers feel left out in this global development and growth boom. Liberal international order allows both Germany and Japan to attain full-fledged membership in the international community as viable members. Rapid economic rebuilding requires capital flows and international market access. As they grew in economic size and political prominence by 1970s, power dynamics showed different dimensions. Similar to the rapid economic growth in other Asian nations such as South Korea, Taiwan, and Singapore, the rise of China and India are noted for the growing influence of emerging economies. China exceeded Japan in 2015 in terms of nominal GDP, and India joined the fast growing economy after 1981. As nations grow older, they need to pull back from vigorous engagements and focus more on

3.4 Asia’s Rise and International Order

47

their internal needs. However, as nations prematurely disengage from the world, their value creation potential diminish, their standing becomes smaller, and their influence accordingly declines. U.S. is still a young nation. It is too early to retire to mind one’s own needs. By 2030, the largest economies of the world are forecasted to be mostly populous countries (e.g., China, India, Indonesia, Brazil, Nigeria, Pakistan, and Bangladesh) despite their weak political and social infrastructure. Such prediction is based on two premises: (1) PPP (purchasing power parity). Countries with low standard of living are similar to countries with high standard of living. Beijing, China, for example, is supposedly half of that of New York, NY in housing and transportation, energy costs. Therefore, according to PPP theory, the value of $100,000 of Beijing is same as $200,000 of New York. Such comparison ignores two basic economic realities. (1) Purchasing power parity is country specific; (2) international arena, absolute, nominal income level is what determines purchasing power in general sense. Table 3.4 also shows several noteworthy trends. One is the slow growth of the rich segment and the rapid growth of the middle class. The vulnerable segment stays constant; the extremely poor segment is also decreasing rapidly. The projected growth of other regions is relatively low. In contrast, the growth prospect of Asia Pacific is enormous. The majority of growth would occur with countries including China, India, Indonesia and other ASEAN nations. Table 3.3 shows that growing middle class is spread throughout the world. What is noted is the sheer size and the extraordinary growth rates of the middle class in Asia Pacific Region that is predicted to 571% growth whereas Europe, the growth rates of North America and Latin American are very modest at best. The rapid growth of middle class in Asia Pacific has a huge impact in the ways of international politics, trade flows and economies operate. Table 3.4 shows that by 2030, India (1,614 million) will surpass China (1,417 million). In contrast, Japan and South Korea are likely to show negative growth in total population. US will maintain healthy level of growth from 2010 to 2050 at a rate of 29.6% increase with natural increase plus immigration. However, Korea (South and North combined) may show moderate increase in population. (Note: Current Table 3.3 Projecting growth of middle class by region (millions of people and global share) Region

2009

2030 (projected)

% of growth (people)

Asia Pacific

525

28%

3,228

66%

514.86

Europe/Russia

664

36%

680

14%

2.41

Central/South America

181

10%

313

6%

72.93

Middle East/North Africa

105

6%

234

5%

122.86

North America

338

18%

322

7%

−4.73

Sub-Saharan Africa World

32

2%

107

2%

234.38

1,845

100%

4,884

100%

164.72

Source Homi Kharas (2011). The Emerging Middle Class in Developing Countries, Brookings Institution

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3 Rising Asia: Case of Japan, South Korea, China and India

Table 3.4 Population change of USA, China, India, Japan and South/North Korea Population (million)

2010

Projected 2050

Change in population (in million)

% Change

USA

308.7

400.0

91.3

China

1,354

1,417

63

4.6

India

1,215

1,614

399

32.9

29.6%

Japan

127

102

−25

−20.0

South Korea

49

44

−4

−9.1

North Korea

24.6

26.8

2.2

8.9

Asia (Total)

3,958

4,888

930

23.5

Source UN Statistics Division 2010 and US Census Bureau

North Korea issues—nuclear threats, economic needs, political conflicts, humanitarian abuses, regime sustainability—are complex and timely (Clemens 2016). Separate section will be set aside for later discussion). Since 1979, the simultaneous implementation of “China’s one child policy” and “China’s market-oriented economic reform” has resulted in rapid economic growth in the subsequent 30-year period (Zhang 2017). After one generation, its long-term effect is aging population with decline in active labor force and changing dynamics of traditional family culture. The prediction is that with this changing demography China would not be able to “maintain 7% or more in the next 20 years” and instead the realistic rate is “a growth rate of 3% over the next two decades” (Li et al. 2017). Although some advanced economies have small population size (e.g., Scandinavian countries, New Zealand), major economic powers have large population base (e.g., USA, Japan, UK, Germany, France, Italy…..). Emerging economies with large population have potential to grow much more than countries with smaller population base (e.g., Indonesia, Mexico, Vietnam, Nigeria, Turkey, Poland…). Within the next 50 years, the countries that would lead the world in terms of GDP are all countries with large population base. Anderson and Strutt (2016) project the emerging Africa and Latin America of 2030 that “….choose to invest more in public agricultural R&D to take advantage of Asian import growth…China and India dampen that import growth by restricting their imports of key food grains …”

3.5 Focus on the Rise of China There are quite diverse views on China’s rise. Chong (2014) argues for historical perspective to understand China’s rise. China’s rise is to correct past wrongs and reclaim its glorious past. A stable Chinese-led order has been peaceful and dismisses the myth that China’s rise somehow disrupts the world peace. Fenby (2014), on the other extreme provides a quite pessimistic picture about China with “an exhaustive

3.5 Focus on the Rise of China

49

list of the many challenges” and thus conclude that China may not keep up with “current growth trajectory”. Durschmied (2010) points out that China’s stable economic growth is good for America. For sustainable growth, China might consider supporting the rules of international order. In discussing China’s three decades of “high growth performance”, China’s manufacturing sector is noted as an engineer for China’s labor productivity growth and wage increases (Lee 2017). Its low-wage advantage by abundant pool of labor force, massive influx of foreign direct investment and their ability to secure larger “trade credit” made the “export intensity” of Chinese manufacturing possible (Sun and Anwar 2016). Most of all, China’s competitive capabilities could flourish as these global firms secure large “trade credit” and relatively free market access in liberal international order (Lin and Ye 2018). China’s “policy reform programs” often disrupt the social and economic structure to its domestic firms with its top-down authoritarian manager of execution. When global events like the world financial crisis of 2008–2009 strikes, such policy changes are not necessarily effective. There needs to be more supporting coordinating mechanism by non-government entities (e.g., Think Tanks, Public and Private Partnerships Associations…) that may provide linkage between government and business sectors. Yet, such dynamic infrastructure is yet to be developed and utilized. Long et al. (2017) report the challenges of Chinese manufacturing that are related to making transitions from “production factory of the world” to “innovative value creator”. Practical issues are related to developing and applying new technologies (e.g., 3D printing) that fit to Chinese contexts and at the same time expand innovation frontiers. This requires “creative culture” that tolerates the pursuit of “novelty” ideas with individual freedom and open information network flows. In Chinese context, this is still an issue. Fortunately, Wei et al. (2017) argue that the rising wages and expanding markets are among the important drivers of China’s growth in innovation. Compared to state-owned firms that receive more subsidies, private firms exhibit more innovation results with efficient resource allocation”. Optimistic or pessimistic predictions about Rising Asia in general and China’s rise in particular have one thing in common. The debate is if the past records of growth would continue without major disruption whether high level of growth can be sustainable. Optimistic camp tends to value GDP based on Purchasing power parity (PPP). The opposing view insists that nominal GDP is more meaningful indicator of the future. Another important factor is to examine how China can achieve massive structural change that requires free flows of information, rule of law and individual freedom. China’s current political leadership is experimenting with somewhat hybrid system configurations that promote ambitious and innovative goals on the other hand while sticking to more tightly controlled political-social system on the other hand. Figure 3.3 is based on the projection of Economic Intelligence Unit Data base. This is different from conventional projections of China’s growth which assume high and moderate growth rates of China on perpetual basis. According to this projection, China’s growth rate hit below 6% in 2018. Since then, its growth rate never returned to 2010 level of 10%. It is expected to steadily decline until 2035 when the rate becomes

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3 Rising Asia: Case of Japan, South Korea, China and India

Fig. 3.3 U.S. and Chinese real GDP growth rates in 2010–2017 and projections through 2050 (%) Source Economic Intelligence Unit Database (Access on June 27, 2019). Note Although longrange economic projection is subject to debate, two main assumptions are: (1) No country has ever maintained high rates of growth more than 30 years; (2) The rate of declining is relatively steady and gradual; (3) US growth rates are expected to maintain around annual 2% growth

around 2% per year similar to that of the US growth rates. Between 2038 and 2048 China’s growth rate might be slightly lower than that of the USA. After 2050, their growth rate would be comparable. Such projection is based on demographic, political, and technological and resource related factors. What is noteworthy is that even after China may exceed USA in terms of nominal GDP, the probability of sustaining such size advantage would be relatively small. Between 2020 and 2030 China’s hidden weaknesses would surface on multiple fronts. China’s export-driven economies lose market accesses to the US and other advanced economies. With one child policy for 30+ years, China’s large aging population cannot sustain high growth rates. Countries may achieve high level of economic growth rates through state planning up to $10,000 GDP per capita. Afterward, the growth engine is not through state planning but innovative and creative private initiatives. Top-down political leadership and democratic free enterprises do not go together. No country has ever succeeded in achieving advanced economic status and mature social development without private property rights, flexible mobility, dynamic inquiries, critical freedom of press and due process of fair rules and law. Highly controlled, authoritarian government simply cannot facilitate entrepreneurial creativity and innovative risk taking in expanding new value frontiers. Slow economic growth may further deepen social unrest among sizable segment of rural migrants that struggle to find jobs for affordable income. A large number of state-owned enterprises report big sales and huge assets to be listed as Global Fortune 500 firms. They focus on maintaining employment for social stability rather than appropriate level of productivity for rational business operations. Most importantly, debt-based growth plans result in huge ghost towns with high rise apartment complexes, shopping centers and expensive transportation infrastructures

3.5 Focus on the Rise of China

51

without vibrant business opportunities and thus little hint of thriving presence of middle class residents. Li et al. (2017) suggest that China may realistically expect “a growth rate of 3% over the next two decades”. Lee (2017) also notes, “China’s average potential GDP growth is predicted to decline significantly in the coming decade, to 5%–6% and fall further to 3%–4%—due to the convergence effect and structural problems—unless China substantially upgrades its institutions and policy factors and improves productivity, particularly in its services sector”. With shrinking labor force and increasing wage level, China must make “the necessary transition” toward highly innovative economy and Chinese government is optimistic to achieve such an ambitious goal (Wei et al. 2017). Liu (2018) argues that ‘Made in China 2025’ plan is well set to transform the vast nation to another level of transformation that China will not make “substantial concessions” even during serious trade tensions with the US. However, it might still be a too optimistic assertion. Asia’s rise is not primarily about China. The discussion of Asia’s Rise includes Japan, South Korea, India and the many nations in Southeast Asia. Increasingly, China’s rise is portrayed by a different light. China, despite its participation in WTO and international order, is fundamentally different political and social orientation than the leading nations of liberal international order. In contrast, none of the other three countries—Japan, South Korea and India—have any real threats to US security, economic and political interests. In fact, they are aligned with US in multiple fronts. China’s alliance efforts through BRI still are not solid enough to demonstrate reliable partnership patterns. China-Russia relations are at best “reluctant allies” because of “differing economic models and negative historical memories” (Korolev and Portyakov 2019). In particular, engagement outcomes of China and Russia with other Asian nations (e.g., Korea, Vietnam, and India) suggest conflicting patterns. At the beginning of Korean War, it was Russia that supported North Korea and it was China that fought against the US-led coalition. During the Sino-Vietnamese War (1979), Russia sided with Vietnam. The Sino-Indian War (1962) also displayed different priorities of China and Russia. Having stable and reliable alliance partners is still a huge challenge for China.

3.6 Dynamic Complexity of Rising Asia Three Asian nations—Japan, Korea, and China—hosted Summer Olympic Games. Olympic Games highlight the showcase of economic development and growth of nations that hosted such a prominent international event. Japan’s 1972 Summer Olympic Games showed to the world about Japan’s amazing comeback after the humiliating defeat in World War II. South Korea’s hosting 1988 Summer Olympic Games demonstrated the miraculous transformation of its neglected country status for more than a century. It opened a window to present Korea to the world after the two previous Summer Olympic Games in Moscow and Los Angeles were marred with boycotting the games with political reasons. At 1980 Moscow’s Games, most

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3 Rising Asia: Case of Japan, South Korea, China and India

of nations that aligned with Western powers chose not to participate. In 1984 Los Angeles Games, most of Eastern bloc nations were absent. Yet, in 1988 Seoul Games, a record number of countries joined and competed. Athletes and viewers of these Games from all over the world were simply shocked to see the level of development in South Korea. In a sense, 1988 Summer Olympic Games opened the door for the reorganizing the world order—the dissolution of the Soviet Union in 1991 and reunification of Germany in 1994. The patterns of trade tension between the USA and China are replicated in other countries on a smaller scale. It becomes more evident as liberal international order is disrupted by political factors that invade economic rationale. At the 2019 Osaka G20 summit, free trade was briefly mentioned. In the communique after the 2019 Osaka G20 summit, there was no explicit reference to the rules-based order. The overriding rule may be more or less dictated by the will of the major powers. In fact, Japanese government immediately announced the punitive measures against Korean semiconductor industry in the form of imposing trade barriers. From Japanese perspective, this is in response to Korean government’s new aggressive measures against Japan’s colonial era actions (e.g., mistreatment of Korean women and sacrifices of Korean young men in battles and mines during World War II). Japan, Korea, and China are all the beneficiaries of liberal international order. They are at the frontline of increasing trade tensions. According to Booth et al. (2019), Asia’s rise suggests the nature of “Rise of the rest’. Certainly, this rise of Asia has facilitated “a structural shift” in progress. Even so, Asia’s rise may not bring about drastic change in the international system and the global governance system in short term. Asia’s rise involves rapid increase of vast number of middle class, top 20 global mega cities with more than 10 million, and competitive presence of Asian large firms in global markets. Such rise is never independent. Rising Asia may not stand alone at least within a decade or two. The reason is American hegemony might not be easily taken away. Even a slight miscalculation of power shift timing and scope by any Asian powers, China may increase the chances of potential conflicts at small scale and then expand to larger scale of confrontation by major powers. Table 3.5 is a summary of the positive and negative assessments of the Asian Century. Among many authors that wrote about Asia, there are clearly competing visions and realities of Asia. Both Khanna (2019) and Auslin (2017) agree that Asia is the most dynamic region of the world. They also recognize the impressive success stories of this region. What differs is their perspectives and predictions. Khanna (2019) considers Asia’s bright future in terms of its rich past achievements, present capabilities and future potentials measured by the size of GDP, cities and population, numbers of global firms, volumes of productions and business opportunities, and technological advancements with huge educated human resources. “The future is Asian” in that the growth prospect of North America and Europe is limited. Asia’s potential for growth and expansion is not yet realized. On the other hand, Auslin (2017) looks beyond the surface and sees the complex risk factors embedded in major countries in Asia including Japan, South Korea, China, India, Indonesia, and Pakistan. The realities of uncertainty, insecurity, and instability have not been noticed

3.6 Dynamic Complexity of Rising Asia

53

Table 3.5 Future is Asian versus end of Asian century “The Future is Asian”: positive assessments of rising Asia

“The End of Asian Century”: negative perspectives of rising Asia

Define Asia

Asia is the most ethnically, linguistically and culturally diverse region of the planet

Asia is a “fractured region”, not “a cohesive powerhouse”

Assumptions

American decline in global stage and rise of Asia as prospect

American hegemony sustains and dark sides of rising Asia need to be reckoned

Asia’s capabilities

“Five billion people, two-thirds of the world’s mega-cities, one-third of the global economy, two-thirds of global economic growth, third of the Fortune 100, six of the ten largest banks, eight of the ten largest armies, five nuclear powers, massive technological innovation, the news crop of top-ranked universities”…

Asia’s growing risk factors include “failed economic reforms in China and India”, lack of political community across Asia, threats of constant war, unfinished political reforms and revolutions, demographic risks in China, Japan, South Korea, huge debt burdens of Japan and China”. China adopts “authoritarian rule” apart from free press and India chooses “discriminatory practices” against “religious minorities”

Asia’s future

Asia is graduating from “democracy to technocracy”, going through “top-down revolutions”, Asia’s “civic societies” choose to govern in the Asian way… Asia as a “mega region is coming together and reshaping the entire planet in the process”

Since 2014 both China and India report consistently declining annual GDP growth rates. Cycles of “uncertainty, insecurity and instability” lead to ongoing conflicts and wars. Despite a half-century Asia’s success stories, no longer can ignore “the cracks and issues with the “potential of opening up massive sinkholes”

Rivalry and interdependence

Rising Asia can be peaceful without “inevitable” conflict with the existing powers. Because of interdependence nature, large scale of conflicts needs to be avoided and pursue peace if possible

America is not necessarily pursue conflicts with rising China or any other nation. Oppose globalism in the name of interdependence with particular nations. America can find other sources of global supply chain networks other than China (continued)

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3 Rising Asia: Case of Japan, South Korea, China and India

Table 3.5 (continued) “The Future is Asian”: positive assessments of rising Asia

“The End of Asian Century”: negative perspectives of rising Asia

Leadership, business growth, rule of law and capitalism

“State capitalism” and “strong political leadership” (e.g., China) and “vibrant democratic institutions”, and “demographic advantage” (e.g., India) offer promising perspective on the global arena with declining American influences. The number of global firms listed in Global Fortune 500 continues increasing. In 2019, China has the largest number of Global Fortune 500 firms surpassing that of the U.S. While most of the Western governments—USA, UK., Italy, France, Japan—experience gridlocks in effective and timely decision making for massive infrastructure development and strategic policy implementations, “authoritarian” leadership turns out to achieve rapid catch-up and swift implementation of goals nationwide

China’s “crony capitalism” favors a small minority of leaders in government through excessive exercise of power, results in massive debts while taking advantage of the benefits of domestic market growths, real estate investments, and concealing the reality of policy failures The world expects that “the Chinese government honors its binding treaty, made with the British and registered with the United Nations”… “How China chooses to handle the situation will say a great deal about its role in the world in the future.” India’s “overreliance on bureaucrats, Hindu nationalist movement, excessive reporting requirements” for businesses, intrusive work of tax inspectors stifle entrepreneurial innovation and fails to implement vibrant level of economic reform activities. Since 2013 India’s annual growth rates continually declined below 6%

Domestic market growth

The size of monthly retail sales of China is comparable to that of U.S. (>$500 billion) The market share of foreign products in China drops while Chinese domestic brands in smartphones, passenger vehicles, pet foods and watches grow between 2009–2018. Similarly, Indian’s preference to its domestic brands steadily grow

In response to China’s inconsistent policies of favoring domestic firms, rapid rise of labor costs, and deteriorating business conditions, the list of global firms that withdraw from China and reconfigure their global supply chains also increases. These firms include Apple, HP, Oracle, Amazon (US), Lotte, Samsung, Hyundai (South Korea), Nintendo, Epson (Japan), Carrefour (France) (continued)

3.6 Dynamic Complexity of Rising Asia

55

Table 3.5 (continued)

Sources

“The Future is Asian”: positive assessments of rising Asia

“The End of Asian Century”: negative perspectives of rising Asia

Some representative authors that argue for Asian’s Rise in positive light include Chadda (2014). Gordon (2014), Rachman (2016), Khanna (2019), Xuetong (2019)

Key authors that examine Asian’s challenges in mixed/negative light include Auslin (2017), Pei (2016). Lewin et al. (2016), Minzner (2018) and McMahon (2018). Trump’s Address to the United Nations (September 24, 2019)

because Asian countries have demonstrated tremendous growth in too many areas too rapidly. However, these hidden and forgotten aspects are now on the surface. China, for example, has still huge population segments that are outside of economic growth benefits. To control potential unrest, China is moving forward with tight control of authoritarian rule evidenced by permanent rule options for Xi Jinping. Other authors also differ in their assessment of leadership styles and economic systems. Xuetong (2019) affirms the importance of leadership in the rise of great powers in the past. In light of classical Chinese political philosophy, he proposes a Chinese theory of international relations with humane leadership for collective goods of society. The underlying assumption is that with continuous growth and expansion as it did for the past 30 + years, China is to compete and cooperate with the US in bipolar world. In contrast, Minzner (2018) and McMahon (2018) suggest that “authoritarian” leadership of Chinese Communist Party (CCP) undermines its continuous rise with the built-in “corruption” of small group of the privileged elites that dominate massive wealth. For an example, many CCP leaders are billionaires. The combined wealth of fewer than 200 political elites are 20 times or more in their wealth possessions than 600+ US counterparts. Many state-owned Chinese firms require connections with these political elites that facilitate the strategic decisions for massive infrastructure investment decisions for highways, railroads, real estate developments and planning new cities. Such avenues of corruption might lead to exaggerate statistical results and fail to take corrective actions on China’s increasing debt burdens, pollutions and industrial accidents. China’s wealth may increase but it will not be distributed fairly. Any founders of innovative firms cannot operate without proper “social” and “relational” connections with the political elites. Once they lose the favors of the political leadership, their positions and business interests might be at risk. Japanese government is carrying the highest level of debt burdens in the world. Its low birth rates and aging population pose serious productivity challenges. Besides, its continuous conflicts with Korea and China in regard to the past wrongdoings prevent from pursuing the vision of shared prosperity. India, despite its dynamic democracy and fast economic growth, its inability to implement broad reform agenda and resolve

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disputed relationships with Pakistan suggest that the future of having a cohesive and collaborative region might not be realistic within a foreseeable future. Other South East Asian countries including Indonesia, Thailand, Myanmar, and Malaysia also carry their own cycles of uncertainty, insecurity and instability. Instead of predicting bright future, the reasonable assessment is “wait and see” what may really happen in this region. The discussion of Asia’s Rise includes Japan, South Korea, India and Southeast Asia. Despite the size advantage, it is unlikely that China or India replace the existing international order that the USA has designed and its allies have supported. With growing tensions with the US and increasing domestic challenges, China’s long-term economic growth prospect needs to be carefully reexamined. Asia’s Rise is about the total expansion of Asian economies—both Northeast Asia (i.e., Japan, South Korea, and China/Taiwan) and Southeast Asia (i.e., India, Vietnam, Thailand, Malaysia, and Indonesia). Asian countries, with their strong nationalistic elements and fierece independence, may not tolerate the dominance of any single country as a regional hegemon. Russia, despite its tremendous military power, is not bigger than South Korea in terms of economic wealth. Russia cannot go beyond exerting its influence over its vast border countries in Europe (e.g., Georgia and Ukraine) and Central Asian countries (e.g., Kazakhstan and Uzbekistan). China is cautious in view of North Korea’s strong independent stance. Japan has not achieved peaceful resolution with South Korea and China over its recent past. India and Vietnam will be against any China’s territorial aggression. Pakistan will not rest still with India’s dominant move. In brief, Asia in general and China in particular are rising. But no single country can become a global hegemon out of Asia. In fact, the US is forming the “balancing power coalitions” against China’s assertion in South China Sea and its ambitious Belt and Road Initiatives (BRI). In fact, Asian countries such as Japan, India, South Korea, Vietnam, Malaysia, Indonesia and Thailand are interested in the U.S. led “Indo-Pacific” strategy not because they believe the preservation of liberal international order but to preserve their national identity, cultural values, long-term interests of their own civilization against any new threats. In this sense, the U.S. efforts of alliance formation in Asia should not be the “Westernization of Asia” like the existing NATO-based military network but the “Easternization of Asia” with the emerging nature of collaborative alliance (Rachman 2016). The next chapter will focus on the unfolding drama between the USA and China in the form of growing rivalry.

References Ahluwalia, M. S. (2002). Economic reforms in India since 1991: Has gradualism worked? Journal of Economic Perspectives, 16(3), 67–88. Anderson, K., & Strutt, A. (2016). Impacts of emerging Asia on African and Latin American trade: Projections to 2030. The World Economy, 39(2), 72–194. Auslin, M. R. (2017). The end of the Asian century: War, stagnation, and the risks to the world’s most dynamic region. New Haven, USA: Yale University Press.

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Booth, K., Bain, W., & Zarakol, A. (2019). ‘Rise of the rest’: As hype and reality. International Relations, 33(2), 213–228. Bosworth, B., & Collins, S. M. (2008). Accounting for growth: Comparing China and India. Journal of Economic Perspectives, 22(1), 45–66. Chadda, M. (2014). Why India matters. Boulder, CO: Lynne Rienner Publishers. Chong, J. I. (2014). Popular narratives versus Chinese history: Implications for understanding an emergent China. European Journal of International Relations, 20(4), 939–964. Clemens, W. C. (2016). North Korea and the world: Human rights, arms control, and strategies for negotiation. Lexington, USA: University of Kentucky Press. Datt, G., & Ravallion, M. (2002). Is India’s economic growth leaving the poor behind? Journal of Economic Perspectives, 16(3), 89–108. Durschmied, E. (2010). Playing our Game—Why China’s Rise Doesn’t Threaten the West. Oxford University Press. Ehrlich, P. R. (1968). The population bomb. Ballantine Books. Fenby, J. (2014). Will China dominate the 21st century. Cambridge: Polity Press. Gordon, S. (2014). India’s rise as an Asian Power: Nation, neighborhood, and region. Washington, DC: Georgetown University Press. Huang, Y. (2012). How did China take off? Journal of Economic Perspectives, 26(4), 147–170. Khanna, P. (2019). The future is Asian: Global order in the twenty-first century. Great Britain: Weidenfeld & Nicilson. Korolev, A., & Portyakov, V. (2019). Reluctant allies: System-unit dynamics and China-Russia relations. International Relations, 33(1), 40–66. Lee, J.-W. (2017). China’s economic growth and convergence. The World Economy, 40(11), 2455– 2474. Lewin, A. Y., Kenny, M., & Murmann, J. P. (2016). China’s innovation challenge: Overcoming the middle-income trap. United Kingdom: Cambridge University Press. Li, H., Loyalka, P., Rozelle, S., & Wu, B. (2017). Human capital and China’s future growth. Journal of Economic Perspectives, 31(1), 25–48. Lin, S., & Ye, H. (2018). Foreign direct investment, trade credit, and transmission of global liquidity shocks: Evidence from Chinese manufacturing firms. Review of Financial Studies, 31(1), 206– 238. Liu, K. (2018). Chinese manufacturing in the shadow of the China–US trade war. Economic Affairs, 38(3), 307–324 (18 pp.). Long, Y., Pan, J., Zhang, Q., & Hao, Y. (2017). 3D printing technology and its impact on Chinese manufacturing. International Journal of Production Research, 55(5), 1488–1497. McMahon, D. (2018). China’s great wall of debt: Shadow banks, ghost cities, massive loans, and the end of the Chinese miracle. New York: Houghton Mifflin Harcourt. Minzner, C. (2018). End of an era: How China’s authoritarian revival is undermining its rise. UK: Oxford University Press. Pei, M. (2016). China’s crony capitalism: The dynamics of regime decay. Cambridge, Massachusetts, USA: Harvard University Press. Rachman, G. (2016). Easternization: Asia’s rise and America’s decline from Obama to Trump and beyond. New York, USA: Other Press. Rose, G. (2019, January/February). The fourth founding: The United States and the liberal order. Foreign Affairs, pp. 10–21. Roy, T. (2002). Economic history and modern India: Redefining the link. Journal of Economic Perspectives, 16(3), 109–130. Simon, J. (1981). The ultimate resource. Princeton: Princeton University Press. Sun, S., & Anwar, S. (2016). Interrelationship among foreign presence, domestic sales and export intensity in Chinese manufacturing industries. Applied Economics, 48(26), 2443–2453. Wei, S.-J., Xie, Z., & Zhang, X. (2017). From ‘Made in China’ to ‘Innovated in China’: Necessity, prospect, and challenges. Journal of Economic Perspectives, 31(1), 49–70.

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Weinstein, D. E. (1995). Regionalism and rivalry: Japan and the United States in Pacific Asia. Journal of Economic Literature, 33(2), 846–884. Westphal, L. E. (1990). Industrial policy in an export-propelled economy: Lessons from South Korea’s experience. Journal of Economic Perspectives, 4(3), 41–59. Xuetong, Y. (2019). Leadership and the rise of great powers. Princeton, NJ, USA: Princeton University Press. Zhang, J. (2017). The evolution of China’s one-child policy and its effects on family outcomes. Journal of Economic Perspectives, 31(1), 141–160. Zhu, X. (2012). Understanding China’s growth: Past, present, and future. Journal of Economic Perspectives, 26(4), 103–124.

Chapter 4

Growing Rivalry: China’s Rise and American Hegemony

….there is a Marathon, maybe the most difficult to take, but it is also the most important. America may fail to recognize the problem and may refuse to face the long-term scenario of China not only surpassing us but also growing to doubt and then triple the size of our economy, by 2049. Then China will have own by default. (Michael Pillsbury 2015).

Abstract China has been growing for more than 30 straight years. From 1990s, there has been consistent predictions about China’s rise and America’s decline in mainstream researchers. This is based on extrapolation of China’s 30+ years of growth records. However, as the trade tension between US and China intensifies, a new stream of research suggests that such may not necessarily be the case. Since China’s population is about four times of the US, one may argue that China needs another 100 years to exceed the current level of U.S. standards of living. Discussions include the background of American Hegemony and China’s Rise and their impact on liberal international order.

4.1 Introduction With the disintegration of Soviet Union in 1991, it seemed that US-led liberal international order has prevailed. European Union also provided a model of economic cooperation as another form of liberal international order. However, with the Brexit and a visible disharmony with the Northern leaders (e.g., Germany and France) and Southern member countries (e.g., Italy, Spain and Greece), the diverging interests within the current liberal international order are becoming visible. Slow disintegration of European Union question the notion of sustainable liberal order and independence of member nations (Webber 2014). In addition, China’s rise is becoming a huge challenge to this international liberal order. Pillsbury (2015) warns about “China’s secret strategy to replace America as the global super power”. It is based on China’s systematic and concerted long-term efforts—it is what he calls “the hundred-year Marathon”. In response to China’s such © Springer Nature Singapore Pte Ltd. 2020 P. Hong and Y. W. Park, Rising Asia and American Hegemony, https://doi.org/10.1007/978-981-13-7635-1_4

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ambitious drive, what is the US strategy? The US policy directives and governance systems are less likely to have such long-term orientation. US presidents at best serve 8 years and new administration replace the previous one and often their policies differ greatly. This does not mean that there is no continuity in overall policy direction of priorities. Since George Kennan wrote on “The Sources of Soviet Conduct” (1947), more than 40 years of consistent US policy of containment and encirclement has brought about the demise of the SOVIET Empire and achieved what Fukuyama referred to as “The End of History” (1991). In 1990s there was an optimistic notion that with long-term economic growth China would be more likely to pursue “decentralization of power” and “liberalization of social order” (Segal 1994; Overholt 1996). However, with growth of wealth, greater level of complexity and diverse risk factors arise in China. As its economy slows down, social unrest is an increasing possibility. Naturally, its national priority is to avoid divided and fragmented China like Soviet Union after 1991. The source of such unwelcome change might be both internal and external. Beckley (2018) states, “China is not about to overtake the United States economically or militarily—quite to the contrary. By the most important measures of national wealth and power, China is struggling to keep up and will probably fall further behind in the coming decades. The United States is and will remain the world’s sole superpower for the foreseeable future, provided that it avoids overextending itself abroad or underinvesting at home.” Such views assume sustained American resilience and its comprehensive capabilities and take critical assessment on the weaknesses of China’s total system. Even such an optimistic view does not deny that China’s rise still poses a strategic challenge to the U.S. Here is the on-going debate on an increasing scale of “clash” between China and US (Allison 2017). With Trump’s “America First” assertion, the bold pursuit of America’s strategic interest disrupts liberal international order. On the other hand, Xi’s “New Revolution” justifies “an unlimited presidential term” and move China to becoming “an illiberal state” which also challenge the liberal world order (Economy 2018). The growing trade tension between the US and China is another symptom of larger underlying complex issues—political, economic and technological dimensions in liberal international order. On the initial level, the tension shows in the areas of trade. This further extends to the areas of finance, politics and even military conflicts. However, the rivalry implications for global hegemon between US and China deserve careful attention. China’s ‘belt and road initiative’ reaffirms its identity as not only a rising but also an “ancient Great Power” to reclaim its influence to immediate neighbors and the larger world everywhere. Such move of China coincides with the Trump administration’s notion of “burdensome” cost of sustaining liberal international order. This chapter discusses if “the erosion of US hegemonic power” and “the peaceful rise of China” are as real as they sound. Instead, as the primary beneficiary of the liberal international order, both the enduring prosperity of US and China requires the promotion of liberal order in their domestic fronts while recognizing their growing challenges and opportunities beyond their national boundaries.

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Cronin (2001) explains the ‘paradox of hegemony’ which signifies “an inherent tension between a dominant state’s role as a hegemon and its role as a great power”. US is in a sense “torn between its conflicting roles as a great power and systemic leader. The US is an indisputable great power. Yet, the United Nations operate under the rules that favor participation of all nations. In spite of paying large sum of dues to the United Nations, the US often feels that its influence on UN is limited. From US perspective, original vision of liberal international order is so diverted that US has to stop key engagement activities (e.g., its withdrawal from UN Human Right Commission in 2018).

4.2 Evolving Patterns of American Hegemony There has been notable changes in international order from 1945 till 2020—in less than 100 years. The focus is how patterns of American hegemony have changed during this period. The major events during this period include World War II, European Union, collapse of the former Soviet Union, Unification of Germany and Rise of Asia. Throughout this period, America’s position in the world evolved from absolute advantage (e.g., 50% of world GDP after World War II) to relative advantage (e.g., 20%+ of world GDP in 2019). Table 4.1 is a summary of evolving American Hegemony in two periods: 1945– 1991 and 1991–2020 beyond. American hegemony is based on multiple factors of its exceptional strengths. They can be summarized with five advantage factors such as geo-political, resource, global currency, innovation capabilities and global network flows. After World War II, the United States has assumed the leading role in establishing liberal international order organizing the Bretton Woods system through which nations engage in free trade. The United States opened the market to nations including Japan and Germany that it had fought against. In the period of 1945–1991, the following are noted: • US allies (e.g., NATO) united to face SOVIET/Warsaw Pact threats, Korean War (UN Support), Vietnam War (US and selected allies) • International institutions (e.g., IMF, World Bank, WTO) as mechanisms for achieving America’s strategic interests of free world and market economies. • In 1970s, a decision to leave the gold standard, a move that brought “an end to the postwar-Bretton Woods monetary system” and the formation of G-7, a forum dedicated to coordinating economic policy among the major industrialized nations. • Maintain democratic alliances and international institutions that define rules of engagement among nations. • Worth the cost to provide global public goods (e.g., freedom of navigation) based on shared principle of national self-determination, democracy and individual liberty. • Allies and friendly nations receive preferential treatment compared to the illiberal and undemocratic regimes. As of 2015, increasing numbers of nations choose to

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Table 4.1 Changing patterns of American hegemony American hegemony (1945–1991)

American hegemony (1991–2020 and beyond)

Five factors of advantage

Five factors of advantage

(1) Geo-political advantage: US geographic advantages—friendly Canada and Mexico and East and West vastly separated by Atlantic and Pacific Ocean

(1) Geo-political advantage: US geographic advantages—friendly Canada and Mexico and East and West vastly separated by Atlantic and Pacific Ocean

(2) Resource advantage: abundant agricultural products, domestic transportation network, steady population growth

(2) Resource advantage: abundant agricultural products, shale gas—energy independence, domestic transportation network, steady population growth

(3) Global currency advantage: US Dollar as global currency, largest holding of gold reserves

(3) Global currency advantage: US Dollar is global currency, largest holding of gold reserves

(4) Innovation capabilities advantage: productivity-driven innovations, face off Japan’s quality challenges

(4) Innovation capabilities advantage: silicon valley innovations, implement US and global standards for telecommunication network

(5) Global network flows advantage: maintain naval power, formation and implementation of NATO-western alliance

(5) Global network flows advantage: sustain military capabilities, managing china rivalry and OBOR challenge, evolving beyond NATO-Western alliance to Indo-Pacific-Nationalism alliance

adopt democratic governance. Serious internal issues arising in Russia, China and Iran. In contrast, we see change in the set of events that occurred after the Cold War (1991–2020). • Two decades of war (i.e., Iraq and Afghanistan) • Surging China that rapidly translate its economic growth into diplomatic clout and military might • With Shale Gas revolution, US is likely to achieve energy independence. • With dwindling power of Russia and fragmentation of European Union and lack of actual military firepower of member nations, NATO is becoming increasingly irrelevant. • Growing nationalism in Europe, USA and Asia and Africa, globalism is in retreat worldwide. • Election of Donald Trump as 45th President of the United States (2016) • US views allies as entangling free riders. • International institutions as devices of for reducing America’s power and restricting freedom of action. • International alliance is viewed not as synergistic addition but zero-sum choice. Both Zeihan (2014) and Tierney (2018) discuss the “accidental nature” of America’s rise to power during the end of World War II (1945) and the Cold War (1991). They content that the US rise is not necessarily the result of long-term strategic

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deliberation but seemingly random and yet consistent changes. In addition to the enormous geo-political and resource advantages, such “accidental nature of America’s rise to primacy” is coincided with the “collapse of its rival, the USSR.” With the disappearance of the major rival, Soviet Union, the world seemed likely to spread liberal democracy across the world and foster an open international economy, and build core institutions. Table 4.1 shows the changing patterns of American hegemony. In hindsight, the climax of American power extends beyond 1945–1991. American economic and political power continues. Rise of other nations resulted so that the relative share of American GDP in the world is less dominant than before. However, no other nation or block of nations match the strategic advantage of the US in terms of geo-resources advantage and social-military-political infrastructure capabilities. In examining any potential rivals of the United States, it is easy to focus on one or two dimensions such as economic growth. The above five advantage factors deserve careful consideration for other rising rivals and China in particular. Does China really have similar set of combined advantages to lead the world? This is what we will explore further. International order does show continuous redefinitions and reconfigurations. As Allan et al. (2018) state, “….the future of international order is shaped not only by material power but also by the distribution of identity across the great powers.” The stage of such great power display is in the way rules of international order is implemented. Kreuder-Sonnen and Zangl (2015) analyze the United Nations security system and the European Union economic system as two “post-Westphalian orders. Despite having their philosophical root in liberal international order, there are “authoritarian nature” of control and dictation in “the United Nations Security Council’s counter-terrorism policy after 9/11 and European emergency governance during the sovereign debt crisis of Greece in 2017. Besides, the evolving prospect of liberal international order with the growing rivalry between the US and China is an important issue for coming years.

4.3 Growing Rivalry Between the US and China The idea of rivalry goes back to ancient history. Rivalry may occur in a narrow scope of economic interest such as “the Anglo-Dutch rivalry for the East India trade” (Irwin 1991). Growing rivalry between US and China has complex dimensions—economic, political and hegemonic. The very notion that “US power is in relative decline and China is rapidly rising” assumes that no particular world order can indefinitely go on without a new challenging hegemon. The argument is that liberal international order by ‘rules-based, institutionalized governance mechanism’ has benefited those who make rules with the favorable distribution of power as they please. Figure 4.1 shows growing rivalry between the US and China. To counter China’s Rise, modest policies are to contain China within its sphere of influence. Ikenberry (2016) states that the U.S. alliances in Asia are “multi-dimensional” in terms of security, political and economic partnerships that have been built for more than 70 years.

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Containment

Policies

Ambitions

China 2025

One Belt One Road (OBOR)

Fig. 4.1 The growing rivalry between the US and China: policies and ambitions

No country can build such high level of economic and military capabilities. Despite China’s rise, it has no enduring economic and political alliances with other Asian nations. In this sense, the American-led alliance system can still contain China’s expansionist ambition in the regions. Such containment polices include continuous engagements with China in diverse fields including research and development (R&D) as “unequal partners” in that same rules and cultural values are not readily applied (Kennedy 2017). In other words, containment strategy requires open engagements with vigilance. Trump’s America first and China’s continuous rise has reached to a point of collusion. China has to find ways to safe and secure access to global markets. For this goal, China engages in One Belt One Road (OBOR) and South China Sea disputes. On the other hand, the US will not give up its prominence peacefully to any emerging power. As John Mearsmeier noted, US is not a global hegemon that can handle all the conflicts in the global arena—anywhere and anytime. With adequate strategic alliances with counties like Japan, South Korea, Australia and India, US may contain China. Growing rivalry is more likely to disrupt the liberal international order. Liberal international order is like vast sea. Companies that sells their products to services to global markets are ships on the sea. As the sea surges with turbulent storms, ships need reliable direction and steadfast anchor. China has positioned to reconfigure the international order and is vigorously promoting its interests. The US hegemonic power shows its limitation in a more explicit manner. In view of increasing economic, political capabilities, a “risen” China would not submit itself to US-led liberal international order (Layne 2018).

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The ongoing debate over “the durability of the US-led world order” took a drastic turn when Trump Administration proposed “a renewal of international principles” to reconfigure a global system with the US’s evolving priorities (i.e., America First) of “security, trade and money” (Norrlof 2018). Stokes (2018) also suggests that the Trump administration does not defend the value of US-led liberal international order but instead portray it as “burdensome” and therefore taking steps to disregard essential steps to sustain the liberal order in the world. Trump has built his political base on “the wave of domestic discontent”. Such move damages the US global leadership in the world where no viable alternative is on the horizon. Trump has triggered trade tensions in the form of exercising executive tariff actions. Besides raising tariffs on strategic products (e.g., steel), Trump’s withdrawal from the Pacific trade accord is described as his “worst strategic blunder” and “congressional action to remain in presidential tariff power is overdue” (WSJ 2-8-19 A14). Figure 4.2 shows the changing nature of relationship between the US and China. From 1970 to 2010, China has maintained high rates of economic growths. China has achieved rapid industrialization and increased its production capacity in 40 years took other advanced nations for more than 100 years. Different from other great powers such as Imperial Japan, Nazi Germany, and the Soviet Union, China challenge is unique in that China reached 60% of U.S. GDP by 2014. China’s economy is competitive in multiple fronts—whether it be highly networked economic power or political prowess. The growing rivalry between China and the US is now moving beyond conflicting point. Until this point, the US leads China in the competitive capabilities in terms of hard (e.g., GDP and military capabilities) and soft

Fig. 4.2 The time for real conflicts between the USA and China

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(e.g., innovative and social Infrastructure) power. As of 2018, China’s nominal GDP is more than 70% of that of the US. Although military and other soft power capabilities are not at parity with the US yet, China’s aim is clear—it is to match or surpass the US in the next 20–50 years. Up to this point, the US has opened its market to China and supported the rapid rise of China. China’s huge labor resources, production capabilities, massive capital flows and flexible technology transfers have made real differences. As China expands its overall hard and soft power capabilities beyond the level of those of the US, it would eventually reach a tipping point. Afterward, the balance of power switches to the rising power (i.e., China) over the dominant power (i.e., USA). From the US standpoint, the time to wrestle with China is now. The US has no reason to wait until China reaches the equal status in comprehensive competitive capabilities.

4.4 China’s Responses to Evolving Liberal International Order China’s dream is to achieve innovative value excellence through China 2025 through which it aims to achieve global competitive position in scientific innovation leadership. Its long-term goals such as One Belt and One Road (OBOR) are to connect global flows of goods and services through land and sea. OECD (2018) summarizes the goals and scope of OBOR as follows: “The Belt and Road Initiative is a large-scale project of economic integration, now including 65 countries representing two-thirds of the world’s population and one-third of its GDP. Promoting trade and investment in Asia and Europe, it aims to enhance connectivity as well as coordination and harmonization in many other areas…A 2015 document designated 18 Chinese provinces and province-level municipalities—most of which are among those with lower service-sector productivity—as major participants in the Belt and Road Initiative.” Across Asia, the Middle East and beyond, China’s ‘One Belt and One Road’ (OBOR) Initiative has aimed to organize Chinese global influence and to sustain economic development and expansion in the western areas. Another purpose is to diversify China’s trade routes and secure long-term flows of energy imports and vast amount of Chinese products without potential maritime intervention by the naval forces of the U.S. and its alliances along South China Sea and Indian Ocean (Singh 2019). To counter these long-term initiatives, US engages in encirclement policies through mobilizing Indo-Pacific nations including Japan, Australia, and India and secure Indian-Pacific Ocean pathways. In recent years, such rivalry has been manifested in the form of trade tensions. For three decades (1978–2008), low cost advantage was a central feature of the Chinese growth model. In 1978, “the annual wage of a Chinese urban worker was only $1004 or only 3% of the average U.S. wage at that time…. From the late 1990s, the rapid increase in China’s wages was for both skilled and unskilled workers, for both coastal and inland areas, and for both exporting and non-exporting firms.” (Li et al. 2012). By 2010, there was “the end of cheap Chinese labor” (Li et al. 2012).

4.4 China’s Responses to Evolving Liberal International Order

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Many Belt and Road Initiatives (BRI) haven’t reaped the anticipated harvest because countries involved are too poor to pay back the loans and the heavy investment in roads and harbors are not converted into revenue generating sources. As a result, China has had to write off many of these investments or take over the assets in other countries with enormous political backlash. Figure 4.3 shows Chinese expansion initiative to secure resources and trade flows. From China’s perspective, this is not an expansion policy but peaceful efforts to engage with its neighbors. Geographically, China is encircled and contained. Connecting roads to Europe have not yet been developed. The marine routes for securing strategic resources (e.g., oil and minerals) are constrained unless China builds several naval bases along South China Sea and Indian Ocean. Recently, China has access to Sri Lanka and Cambodia with its naval base construction. Even so, China is not really in possession of vital trade flows. With this backdrop, China insists that there is no real imperialistic motive for regional domination. However, the current US containment structure includes allies surrounding China—including South Korea, Japan, Australia, and India. Other countries such as Vietnam, Thailand, Philippines and other NATO nations are also a part of US global alliance network. The continuous rise of China may develop different scenarios between extremely violent (e.g., the rivalry experience of Nazi Germany and Imperial Japan against the existing order) and peaceful transitions (e.g., British transfer of power to the US). Ringmar (2012) presents two East-Asian alternatives—the Sino-centric China order and the Tokugawa-oriented Japan vis-à-vis the US-led–“the Westphalian Order”. Allan et al. (2018) argue, “….the future of international order is shaped not only by material power but also by the distribution of identity across the great powers”.

Fig. 4.3 Chinese expansion initiative and US containment structure. Source data US Department of State, https://2009-2017.state.gov/s/l/treaty/collectivedefense/index.htm. Treaties in force: a list of treaties and other international agreements of the United States in force on January 1, 2019 https:// www.state.gov/new-travel-advisories-for-u-s-travelers/: September 2019

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Compared to relatively stable, dependable and long-standing patterns of alliance across Asia, in particular with Japan, South Korea, Australia and India, and Europe (i.e., NATO), China’s alliance network is short-lived and the level of engagement is limited and somewhat fragmentary. Their modest suggestion is that “China is unlikely to become the hegemon in the near term”. From China’s standpoint, its goal is not global dominance. It simply refuses to be encircled and entrapped. In a 2017 speech to the Communist Party Congress, President Xi Jinping noted the fact that China “has become a global leader in terms of total national strength and international influence”. China no longer needs to hide itself with the “low profile”. Instead, China asserts its leadership role in the world and demand its rightful position in global affairs. Without building a community of alliances and communicating shared vision for future, China’s sudden international expansion, trade practices, aggressive resource acquisition initiatives in Africa, Latin America and Australia, and military moves in South China Sea invite unwelcome backlash from the US, Europe, and its neighbors.

4.5 China’s Progress Challenges Over the years, many researchers hailed China’s Rise as a sign of new world order. Zhang (2013) discusses “The rise of Chinese exceptionalism in international relations based on China’s long history. It explains why contemporary China’s exceptionalism forcefully claims of “great power reformism”, prefers “benevolent pacifism”, and practices “harmonious inclusions”. China presents its long-term engagement patterns as defensive and non –intrusive toward the neighbors and the world, although its domestic governance policy is highly control-driven (Scobell 2017). Kang (2014) notes that unlike countries with Christianity and Islam traditions, most of East Asian countries, Korea, Japan, Vietnam, and China, rarely experienced violent religiondriven struggles. The religions of the East are less combative and their approaches rather avoid exclusive claims of truth. In this sense, Chinese religious sentiment has much more focus on social harmony and moderation in understanding ultimate reality. According to Kelly (2012), for the past two hundred years (1644–1839) (Note: to US, it is most of its modern history), China maintained “remarkably peaceful toward its Confucian neighbors” in contrast to on-going wars in in the West. The point is that China is neither militarily aggressive toward its neighbors and it is positioned to lead the world in peaceful manner. Increasingly, Chinese scholars and Chinese leaders openly argue with “historical narratives” as an ongoing effort to challenge US-led liberal international order. The main thesis is that China as “an ancient civilization” peacefully ruled the world. The rise of China is not a new but reclaiming its historical norm in the world. China’s ambition to redefine international order and engage in “infrastructural investments (e.g., ‘One Belt One Road initiative’) and territorial claims in the South China Sea (Mayer 2018). However, China’s progress contains huge challenges. China’s vigorous efforts presents its engagement patterns and impacts in positive light. A growing body of

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research discusses obvious contradictions of China’s rise: (1) with growing trade surplus, increasing disputes over China’s “unfair practices” including “intellectual property abuses”; (2) China’s emphasis of peaceful world and accelerating conflicts with its neighbors in South China Sea; (3) China’s vision to connect the world and avoidance of OBOR projects. Behind China’s rapid economic growth, there are longhidden calls for “economic freedom” and the impact of “questionable political ethics” (Pei 2006). As China declares its will to exert its power and influence in the world, the US is more likely to take actions to contain China’s ambition. China’s growing risk factors include (1) the prospect of modest level of growth before it reaches middle-income level country (e.g., achieving GDP per capital larger than $20,000), (2) inefficiencies of state-owned enterprises, (3) enormous debt burdens of local governments (e.g., real estate bubbles), (4) demographic challenges with aging population and low birth rates, (4) massive non-recoverable investments for international physical infrastructure (e.g., projects related to One-Belt and Road Initiatives), (5) political and social eco-systems built on highly controlled and rigid flows of information. China’s massive OBOR investment projects in neighboring countries such as Sri Lanka, Pakistan, Malaysia and Burma do not seem to report positive intended investment objectives through massive and effective usage of the roads and harbors built. With relatively slow capacity utilization of this infrastructure, the revenue streams are not as desirable as planned. Without healthy rate of returns, these countries will not be able to repay their loans. They may default their debts obligations and thus seek financial help from international organizations like IMF or World Bank. Yet, the prospects of getting enormous level of loans is quite unlikely without the support of other advanced nations and US in particular. In this case, Chinese governments have to assume these “default” debts in the form of claim the investment assets. For example, China has now exclusive right to use the harbor that it built in Sri Lanka in lieu of normal payment of loans. Similar cases are noted in other countries such as Pakistan, Malaysia, Kenya, and Montenegro. Such ambitious projects heap huge level of debt upon China and other emerging economies. It requires more multilateral and commercial funding. According to International Monetary Fund Managing Director Christine Lagarde, prudent project execution must include “increased transparency, open procurement with competitive bidding and better risk assessment in project selection”. Otherwise, the risks of OBOR may simply be too great to bear for China and all countries involved.

4.6 America’s Shifting Priorities Toward Asia Kaufman (2017) examines how the US relationship with NATO and the security guarantees have evolved for the 70 years. Trump often described NATO as ‘obsolete’ and his administration reiterated the changing priorities. It reflects the changing international political dynamics. The threats of Russia are no longer as deadly as

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before in the SOVIET era. Russia, despite owning an enormous amount of nuclear warheads, is a declining giant with aging population, negative population growth and dwindling economic capabilities. This is true with the Middle East. With “the shale revolution” and abundant domestic energy production, the US is much less dependent on Middle East for its energy needs and in fact may afford to become “an absent super power” (Zeihan 2017). Post 9–11 US heavy investment in Afghanistan and Iraq have produced no tangible outcomes for US long-terms interests. Instead of the security threats by terrorist groups of Middle East, the massive inflows of illegal entrants from US Southern border is a more critical national security threat. The trade strife comes amid frictions elsewhere. U.S. warships routinely patrol the South China Sea to challenge Beijing’s claims to disputed territory. Washington is alleging Chinese cyber-attacks, while taking steps to curb the growing market share of Chinese telecom giant Huawei Technologies Co. over concerns that its equipment, found on networks around the world, could be used for espionage. Moreover, the U.S. plans to counter China’s massive investments on international infrastructure building efforts that aim to expand its influence globally. Both sides accuse the other of aggression, but the Trumpet administration says it has done more than its predecessors to confront China.

4.7 Design Efforts of China-Led International Order China, with its growing influences in its economic and political engagements, aims to shape the world order by its own design. Without directly confronting USA, China strives to play major roles in world affairs in Asia, Europe and Middle East. Its efforts focus on advancing its interests without “intensive investment of political, economic, and military resources” (Evron 2017). Other than China’s production and exporting of goods, it is quite challenging for China to present its model of socio-political resources. China’s communist-rule based political and controlled economic order is not readily welcome in advanced nations and emerging economies. Against this backdrop, China’s two moves involve the Belt and Road Initiative (BRI) and regular BRICS meetings. Table 4.2 compares the Marshall Plan and the Belt and Road Initiative (BRI) in terms of timing, focus, methods, issues and results. US Marshall Plan was initiated to promote US long-term interest of standing against SOVIET access to Eastern European countries. It aimed to work with post-war European countries. Marshall Plan was instrumental in rebuilding war damaged major European powers—UK, France, Italy and Germany. With the growing economies, these Western European countries demonstrated productivity enhancements in key strategic industries and quality of life vastly improved. US opened its market to these countries and supported upgrading their productivity capabilities in structure development and manufacturing industries. It thus helped reviving their economies and consolidated post War international order with NATO.

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Table 4.2 The marshall plans and the belt and road initiative (BRI) US marshall plan

China’s one-belt-one-road

Timing and target

After World War II; Post-war Europe excluding Eastern European Countries; International order needs serious repairs and reconstruction

2015 and beyond Pakistan, Sri Lanka, Malaysia, Maldives, Tajikistan

Focus

Reconstruction; massive investment of rebuilding the economic capabilities and infrastructure development

Physical infrastructure: highways, railroad and harbors

Methods

Free aid, grants and long-term low interest loans by the US and international financial institutions (e.g., IMF, Development Banks)

Debt financing; export of Chinese surplus production and utilization of its labor resources

Issues

US-led defense alliances and trade surplus by US allies (e.g., Germany, Japan) and long-term trade deficits (e.g., USA)

Loan default; debt renegotiations; limited China’s ability to extract payment of loans

Results

Building “strong consumption-based global economy”; economic independence of nations; increase of trade flows; political alliance and economic cooperation

Construction of physical infrastructure without corresponding economic growth effects of participating countries; China’s debt assumption in exchange of building China’s naval bases and increasing access to strategic trade routes

China’s Belt and Road Initiatives (BRI) aims to secure maritime supply chain routes for vital resources such as oil, minerals and safeguard exporting their goods to global markets. To sustain high rates of GDP growth and use excess foreign reserves from continuous trade surplus, it is crucial for China to utilize excess production capacities and vast idle labor force through grand scale of infrastructure development. Most of loan terms are generous in that they are below market rates. Hungary, possibly the first East European country that considers joining BRI, is welcoming Chinese engagements. BRI is an acceptable alternative to Germany-based European initiatives. Contrary to the economic development models of Japan, Korea and China that heavily invested in transportation and logistics infrastructures (e.g., highways, railroads, and ports), Southeast countries have generally lagged behind. Countries like Sri Lanka, Pakistan, and Malaysia decided to join and India has not. Unlike the Marshall Plan, China’s BRI has not resulted in productivity enhancements and quality of life improvements. Vast infrastructure network (e.g., highways, railroads, bridges and ports) is becoming surplus capacities not utilized for economic growth. Naturally, countries, after building these network, are not able to generate enough revenues and thus do not pay back the loans. Chinese government has no option but to use their collateral contingency options. Sri Lanka does not need additional capabilities of

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the newly built Humbantota Port. Such port does not generate sufficient commercial flows of products and services for positive economic impact. Sri Lanka project has not resulted in productive results. Since China cannot merely write off bad debts, it annexed the port for 99 years. It is now used for Chinese naval base. Such action might be justifiable from China’s standpoint but other countries do perceive as Chinese imperialistic move. India is not happy with China’s access to India’s Ocean. Similar patterns of Chinese naval base built-up in Southeast Asia and horn of Africa increase the chances of security conflicts with surrounding nations. Since BRI is still in progress, hasty conclusion about it is not appropriate. Yet, not creating corresponding economic growth and trade flows among these nations would not be China’s real BRI objectives. Another main difference is that Marshall Plan is supported by international financial governance systems such as IMF and Regional development banks. China also tried to establish its own international financial system that support BRI. With lack of enthusiastic participations of the USA, UK, Germany, France, Japan and India, such financial arrangements do not provide adequate guarantee in case participating countries failed to respect their loan agreements. Thus, China alone has to assume the heavy responsibilities of default loans.

4.8 Five Factors of Hegemony There has been noticeable shift of vigilant efforts in the US against China since 2016—during Trump Administration. Besides China’s rise in economic terms, there has been more scrutiny on the behaviors of Chinese government and Chinese people. With the changing status of China with its economic growth and political influence, China also takes much more aggressive attitude in the world. Chinese government’s retaliatory measures against Lotte, a Korean global firm, after it offered its golf source for THAAD installations, invited the fury of Chinese government and serious economic boycott actions. After taking losses in China, Lotte announced plans to withdraw from mainland China last year. All its retailer outlets in Chengdu, Tianjin, Weihai and Shenyang are closed for sale. It then switched to the US, Australia, Pakistan and other countries for new business opportunities. Its investment is diverted to USA and its investment decision to Louisiana resulted in the attention of Trump Administration. On May 14, 2019 the U.S. president gave an extraordinary welcome to Shin by inviting him to the White House. Pillsbury (2015) notes that China’s secret strategy to replace America’s competitiveness is quite “deliberate and systematic”. Growing suspicion on China’s “cyber intrusions into US business networks” target in high-tech areas through “industrial espionage” “intellectual theft” and “systematic hacking” practices. To achieve rapid catch-up, China’s efforts to force the transfer of advanced technologies from global technology firms are frequently reported. Chinese state-owned enterprises (SOEs) carry out the ambitious long-term strategy of becoming the global superpower. By raising tariffs on China Trump Administration takes tough line and exerts visible

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pressure on these open-kept secret of Chinese practices over the years. The rivalry between US and China has come to a pivotal point. China’s rise is now taken seriously and US is taking actions to deal with this threat. Kagan (2018) argues that the world can be compared to a jungle where the powerful rules over the weak. The historical norm is more likely to move toward chaos of lawless jungle. For the long-term national interest, US cannot afford merely to retreat and let other regional hegemons to write rules in their own making and impose on other nations. Hameiri and Jones (2016) demonstrate how rising powers experience “state transformation”. The Chinese government’s overseas development assistance (e.g., OBOR) and behaviors in conflict zones like the South China reflects China’s changing sense of identity as a great power. Chong (2014) suggests, “the nature of China’s rise may be more contingent on the external environment that it faces than popular received wisdom may indicate”. Major Chinese dynasties are not necessarily from traditional Chinese mainstream (Han Chinese); rather, China’s outsiders (e.g., Mongolians, Manchurians) ruled China for hundreds of years. Interesting enough, whoever ruled it, China as a nation has maintained its enduring identity. The rise of China depends both by internal environments but external surroundings. In this sense, China’s rise is likely to respond to the evolving liberal international order with its unique traditions and cultural norms. Roles of a hegemon are more than maximizing national self-interest. Rather, any enduring hegemony is to promote broad interests through international order that nations accept. Edward Gibbon published six volume “Decline and Fall of Roman Empire” between 1776 and 1881. It was his lifelong work. As British Empire was moving forward to climactic dominance in the world with “A Empire that sun never set”, he examined the lessons and implications from the study of Roman Empire. British Empire lasted 150 years more before it passed the baton to the USA. Since 1945, the US exercised its global position—no more than 100 years. No country in history is capable to become a global hegemon. Assyrians, Babylonians, Alexander the Great, Mongols, Rome, Ottoman Empire, British Empire, are all examples of regional hegemons, not global hegemons. Regardless of ambitions, no single power could attain the status of global rule. The tragedy of great powers in a sense is to falsely assess their positional strengths. Setting proper boundaries of influence is important. Table 4.3 is a summary of five factors of US hegemony in the Western Hemisphere in terms of geo-political, resources and infrastructure, innovation capabilities, global currency, and global network flows. These are the essential elements of hard and soft power of regional hegemon like the USA. Geo-political Advantage. Essential qualifiers of a hegemon is geographical position, economic and military power and unity of nations. The size of country in terms of geographical size, position and security with neighboring nations matter. The US has no credible threats from its neighbors (Canada and Mexico) and safely isolated with two major oceans—Pacific and Atlantic Ocean. Among the advanced OECD economies which expected either 0 or negative population growth, the US is the only country that predicts the healthy growth from 300 million to 450 million in the next 30 years or so. The size of the US nominal GDP is the largest and its total annual military spending is greater than other ten largest countries (China + Russia + UK + France + Italy + South Korea + Japan + India + Saudi Arabia + Turkey). Besides,

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Table 4.3 Five factors of the US hegemony in the western hemisphere Advantages

Factors

Comments

Geo-political advantage

Size, safety and allies

The US is geo-graphically large, safe with its neighbors (Canada and Mexico) and maintain significant numbers of allies in all regions including Asia, Middle East, and Europe

Resources and infrastructure advantage

Demography, food/water, energy, transportation network

The US population growth prospect is stable, agricultural production and water supply are sufficient. With shale gas revolution plus energy reserve, it is self-sufficient with energy needs. Domestic transportation networks in terms of road, highways and river are adequate and the level of maintenance is stable

Innovation capabilities advantage

Breakthrough value and wealth creation, delivery and capture

The US has led innovation capabilities in creating new growth engine of value and wealth creation for individuals, communities and nations. Various modern innovations from electricity, internet, medical devices and technologies are discovered, developed and distributed

Global currency advantage

Key currency for global financial systems and governance

The USD ($) is the only currency that is accepted as global currency. Other major currencies are used as key currencies

Global network flows advantage

Vital global flows of transportation, cyber security and logistical networks

The US maintains free, safe and flexible access of vital flows of information goods and services through global maritime, air and land network flows

the US military has enormous actual combat experiences and breadth of expertise through many small and large wars in particular in Europe, Korea, Vietnam, and Iraq and Afghanistan. No other nation has such level of actual war engagements. China has engaged with wars with its major neighbors including Vietnam, India, and Korea. Its military alliance with other nations are somewhat limited. No major Chinese military bases are installed outside of China except recent naval base arrangements with Sri Lanka and Cambodia. Belt and Road Indicatives (BRI) extend to other

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countries such as Pakistan and Myanmar and yet the nature of military alliances are in diplomatic relational level. China’s nominal GDP has reached 65% of that of the US. China and Russia have more close military engagements in recent years. It has more to do with countering the potential threats of the US rather than building stable long-term military and economic partnerships. In brief, China’s geopolitical advantage is not clearly superior to that of the US. Resources and Infrastructure Advantage. Abundant food, sufficient energy, abundant water and clean air are essential resources that a nation can lead the world. The US is adequate in agricultural productions. Less than 5% of the US farmers provide the vital food resources—wheat, corns, vegetables, fruits and livestock. Until 2000, the US had to important 10–15% of energy needs from Middle East and other countries. With recent shale gas revolution and increasing energy production, the US is now achieving greater energy independence. Water resources are sufficient with five Great Lakes in the north and rivers that flows across the land. Although climate change and population growth are likely to increase water shortages in many areas of the United States, rainfalls and snow provide more than adequate water needs in terms of average global water usage level (Brabec et al. 2002; Blanc et al. 2014; Brown et al. 2019). Except large cities such as Los Angeles and New York, overall air quality in the US is assessed better than world average (Gulia et al. 2015; Ritchie and Roser 2019). In contrast, other major leading countries including China, India, and Japan do not have adequate vital resources of food, energy, water and air. The UN water development report (2019) suggests critical water shortages of Asian, Middle East and African countries. Asian countries, China, India, Japan and South Korea are also expected major water shortages in the coming decades. Water crises are visible in major cities of India where their groundwater reserves are rapidly depleting. Situations in China are not drastically different from India. Innovation Capabilities Advantage. The United States has demonstrated innovation capabilities in a wide range of ideas, products and services that created, delivered and captured value for individuals and wealth for nations. Innovations improve current value and wealth creation capabilities by using existing technologies and production systems. Countries like China, Japan, Germany and South Korea now leading in manufacturing industries including steel, consumer electronics, automobiles, and shipbuilding. The US still maintains key advantages in defense industries—aircraft, missiles, high tech defense systems. The US advantage lies in exploring new frontiers of innovation with creative ideas and new systems through its investment on basic research. Many of 21st-century innovations (e.g., digital images, internet, mobile phone, and operations system) originated in US. It takes much time and resources to come up with “disruptive innovation” but the follower nations rapidly catch-up with these innovations and develop with them further with accelerated learning, rapid catch-up and competitive capabilities. Trump administration’s insistence on allies in Europe and Asia to pay more for the joint defense costs and fair trade deals reflect this changing sentiment. Besides, using tariffs as a weapon, US encourages firms to reshore their operations in the US. The US national ecosystem also shows a sign of open source innovation.

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Fig. 4.4 Outdoor air pollution death rates in 1990 and 2017. Source Adapted from IHME, global burden of disease

While the US and China focuses on an increasing rivalry, India is quietly growing under the radar. Within next 20 years or so, India may show itself a very different status in world economies. India’s future lies in its innovation outcomes in politicalsocial-economic spheres. OECD (2018) reports on India’s innovation as: “Increasing innovative activities in India would contribute significantly to continued growth, and can also be directed to help address inequalities in growth and development. Spending on research and development (R&D) in India relative to GDP is lower than in most of the wealthier Emerging Asian countries. Innovation capacities have improved in the recent past, however. The number of researchers in R&D has increased faster than the population and patent applications have grown with legislative reform and participation in international agreements.” Figure 4.4 shows death rates from outdoor air pollution in 1990 and 2017. This measures the number of deaths per 100,000 individuals in two periods. For the fair comparison among nations, death rates are age-standardized. The number of deaths in China and India are significantly higher than South Korea and Japan. Other advanced nations, USA and European countries, are doing much better in this regard. China and India need to overcome specific challenges in terms of basic quality of life measure like this. Global Currency Advantage. After World War II, the US has maintained international order through global financial governance system such as IMF, WTO, and World Bank. USD ($) has been the single global currency throughout the world. Although its global position has been challenged over the years and other key currencies of Europe, Japan, China, Canada and Australia are used, the global transactions are done through USD. In simple terms, the US provides the world $ in return to all the goods and services the nations of the world provides. USD’s global currency advantage is tremendous. The US huge debts are shared in the world, and global investors keep their investment assets in terms of USD (although gold and other

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precious forms of assets are used). USD’s global currency position requires a sound political and economic leadership. This is all the more the reason why the US hegemony cannot be easily transferred to other countries. If any other nations—Russia, Japan, Germany, China, India—exceed the US with the size of their nominal GDP, the world may not accept USD’s global dominance. As long as the US maintains its superiority in economic power, USD’s global position is secured. In brief, USD’s global currency brings huge economic and political advantage which other countries with mere key currency status do not enjoy. Global Network Flows Advantage. It is critical for a hegemon to maintain the free and secure flows of vital resources—information, people, goods and services. China, despite its huge size of economy and growing political power, is not free. From China’s standpoint, securing global network flows through land and maritime routes is crucial for its national security. Maçães (2019) examines China’s Belt and Road strategy encompasses from “shipping to agriculture, digital economy to tourism, and politics to culture”. Beyond economic power projection and enormous profit potential, its overall goal is to secure its global network flows. In reality, China is encircled and contained by its geographical location. China does not have open access to Europe by land routes. The Silk Road that passes through central Asian countries does not yet have open access. Although the US has free and open access to Atlantic, Pacific and Indian Ocean, China is not. China’s claim of ownership of South China Sea is its effort to secure global network flows for resources—minerals and oil and their export of goods and services. The more China claims the majority of South China Sea, the more likely formidable responses arise from the US and Southeast Asian countries including Vietnam and Philippines. The US and China now come to the surface and displays their impacts in multiple fronts. The US has global network flows advantage whereas China does not. Network flows include capital and human resources. In assessing long-term prospect of competitive capabilities, it is worthy to review the preferred country for capital investment and potential immigration destination. Asian countries—China, India and other Southeast Asian countries— are growing but they are not necessarily chosen for long-term investment and quality of life decisions for future generations.

4.9 Unpredictability of Trump Administration Wike and his research team (2018) reports that America’s global image under the Trump, administration is much lower than during Barack Obama’s presidency. Large majorities of international publics perceive that American influence is waning, although a median of 50% still maintain a favorable opinion of the U.S and 70% lack confidence in Trump as a leader of the free world. Even so, the US alliances with NATO and other key allies have not been seriously damaged. The US resolve to resist China’s international expansion is firm with solid support of both Democratic and Republican congressional leaders. The US recent responses

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to China’s rise are steadfast, strategic and sustained in multiple fronts. USA-China rivalry is measured by the influence of each nation to the world. Beyond the above five tangible advantages, differentiating factors of a hegemon are practices of universal human value (freedom and rule of law), openness and flexibility (immigration and transparency) and social infrastructure (equality, fairness and broad social fabric for national unity). In both of these factors, China is not likely to match the US in decades. However, an increasing level of unpredictability of the Trump Administration suggests that the US’s international commitment is not “clear” and “believable”. In dealing with key issues, there have been vacillating responses on multiple fronts. Donald Trump “tweets compulsively”, “insults allies”, “praises dictators”, and discards his close advisors and former cabinet members like “used issues”. (Rachmann 2019). Table 4.4 Unpredictability of the Trump administration policies Cases

Unpredictable actions

Comments

US domestic issues

Calling US firms to return home and encouraging foreign investments in the US. Increasing military budgets while “starving public investments” and slow in implementing a vigorous industrial policy

Bi-partisan implementation of industrial policy for building competitive capabilities of US industries and improving infrastructures

International relations

Criticize and undermine the WTO. Adopt unilateral approaches and work against U.S. allies including trade wars against close partners (e.g., Canada, Mexico, Germany, withdrawal of Trans Pacific Partnership, renegotiation of FTA with South Korea)

Work with and deepen ties with U.S. allies. Apply a consistent protocol for defining and responding legitimate national interests and security threats

Uni-/bilateral approach versus multi-level coalitions

U.S. chooses to act alone or engages in negotiations in bilateral-base. In G7 summit (2017–2019), U.S. clashes with other allies over the U.S. trade war with China and a host of foreign policy issues at a Group of Seven summit. U.S. formulates Indo-Pacific strategy that requires the alliance efforts. Tough trade negotiations with allies and adversaries alike—often serious criticism against allies

The growing impression that U.S. “left isolated at G-7 summit” and neglects building strong alliances and committing to broad cooperation in international coalition efforts

(continued)

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Table 4.4 (continued) Cases

Unpredictable actions

Comments

Iran/Syria

U.S. withdrew the Iran nuclear accords. In June cancelled an air strike on Iran after Iran shot down an American drone. In protecting the Strait of Hormuz important, the world’s busiest shipping lane, the U.S. prefers confrontation to negotiations Trump’s “sudden” decision to withdraw U.S. troops from northern Syria after a phone call with Turkish President is regarded “reckless rush”. It demonstrates the “habit of impulsive judgement” and “all too typical of Trump’s decision making by abandoning the Kurds and Syrians”

Iran is emboldened to seize three oil tankers in the strait of Hormuz. European and Asian allies (e.g., Japan) hesitate to join with U.S. against Iran Trump’s decisions are “mostly tactical” and “rarely strategic”. Increasingly, allies wonder about the steadfastness and reliability of the US policies

China

Keep expanding trade tensions with China. The US ordered additional tariffs on $300 billion on Chinese goods and designated China as “Currency manipulator”. Trump called the Hong Kong protestors “riots” and suggests his support for Xi’s “very responsible” actions for Hong Kong as domestic issue. Series of policy actions and statements that suggest students and scholars from China are not “welcome”. Initial strong measures against ZTE and Huawei and soon express concessions on these firms. US trade policies are implemented with increasing irregularity and uncertainty with lack of consistent rules and clarity of long-term objectives

Continuous trade and financial wars between the US and China do not necessarily boost domestic growth and instead disrupt global trade, supply chains and deter economic growth of nations. US trade policies against China aim to “disrupt” and “impact” Chinese industry structures but they also result in slowing down of US economic growth outcomes as well

(continued)

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Table 4.4 (continued) Cases

Unpredictable actions

Comments

Intermediate-range missiles

The US withdrew from Treaty of Intermediate Range Missiles and indicated its intent of deployment of these missiles to Japan, South Korea, Taiwan, and Australia

The “hosting” nations are nervous of making such commitments under accelerating security threats involving China and Russia while doubting American “security guarantee at face value”

Kashmir

The US plans to withdraw 14,000 US troops from Afghanistan. Trump announced its willingness to offer mediation over Kashmir in response to India’s request. India immediately denied of any such request

In the matter of Kashmir, both India and Pakistan regard the US as an uninvited “mediator”

Korean Peninsular

An increasing level of North Korea’s missile and nuclear weapons threats and expansion of Russian and Chinese military activities. Moscow and Beijing conducted its first joint long-range air patrol in Asia. Trump expresses his friendship in love with North Korean dictator, continues enforcement of economic sanctions against North Korea, pressuring Seoul to increase its share of the costs for sustaining US troops. Trump repeatedly complain about the annual US-Korea defense drill as “expensive and aggressive” and even unnecessary. Trump ridiculed Seoul by saying, “It was easier to collect one billion dollar from Korea than getting rental fee of $114.13”

The US Congreve expresses caution against “unreasonable” level of demand of defense cost share to its allies in particular to South Korea. David Maxwell in Voice of America suggests, “US troops in Korea are not mercenaries for money but support shared value of freedom and human rights”. On August 22, South Korea quits intelligence sharing pact with Japan, disrupting U.S. plan for U.S.-Japan-South Korea defense alliance

Japan

Regard Japan as central to Indo-Pacific strategy and maintains close security relationships. Exert pressures through ongoing trade talks with Japan replacing a trade agreement with the Obama administration

Japan is committed to a strong and continuous alliance with the U.S. Japan replicates similar US tactics to South Korea and escalating conflicts disrupt US-Japan-South Korea alliance structure

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Table 4.4 is a summary of unpredictability of the Trump Administration policies. It is pursuing narrowly defined national interest rather than the preservation of liberal international order. The cases are almost at random and unrelated but steadily there has been consistent pattern of “unpredictability” with Iran, Kashmir, Korean Peninsula, Strait Hormuz, Ukraine, and Hong Kong. The mounting pressures of the US on its allies to share defense costs burdens may change the perception of the role of the US forces as a legitimate vehicle of achieving mutual interests plus the international order of the world. The US may not afford to alienate allies in Asia including Japan, South Korea and Europe concerning its alliance commitments. In discussing rivalry between the US and China, we need to distinguish between Chinese government and Chinese people. China’s long history suggests that dynasties and governing systems changes every 30, 100, 200 years. Yet, China as a nation stand firm because of great capabilities of Chinese history, culture and people. Many Chinese firms are state-owned. The rise and fall of Chinese global firms may be related to Chinese governing system. Even so, wealth creating and capturing capabilities of Chinese people may build up different types of business firms that are competitive and thriving. The question is how the innovative gene of Chinese people can display their potential to the fullest. The real issue is not merely rivalry between the US and China or any other rising power. Rather, as American hegemony continues, the international order it created and supported—the ideas, rules, systems and values—requires a strong basis to sustain. The American global leadership depends on the quality of American democracy and its capitalism outcomes. Challenges associated with Rising Asia in general and China’s rise in particular may demand another “Sputnik moment” for U.S.—major repositioning for enhancing industrial capabilities and strengthening alliances. U.S. is not a global hegemon capable enough to handle global challenges alone. The sign of American decline is not inevitable. However, American sustainable leadership must avoid the dangers of unilateralism and build on the power of alliances. In the next section, we discuss how these macro-level factors affect business models and the rise and fall of global firms.

References Allan, B. B., Vucetic, S., & Hopf, T. (2018). The distribution of identity and the future of international order: China’s hegemonic prospects. International Organization, 72(4), 839–869. Allison, Graham. (2017). China vs. America: Managing the next clash of civilizations. Foreign Affairs, 96(5), 80–89. Brabec, E., Schulte, S., & Richards, P. L. (2002). Impervious surfaces and water quality: A review of current literature and its implications for watershed planning. Journal of Planning Literature, 16, 499–514. Beckley, M. (2018). Unrivaled: Why America will remain the world’s sole superpower. USA: Cornell University Press. Blanc, E., Strzepek, K., Schlosser, A., Jacoby, H., Gueneau, A., Fant, C., et al. (2014). Modeling U.S. water resources under climate change. Earth’s Future, 2, 197–224.

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Brown, C. P., & Irwin, D. A. (2019). Trump’s assault on the global trading system. Foreign Affairs, 98(5), 125–136. Brown, T. C., Mahat, V., & Ramirez, J. A. (2019). Adaptation to future water shortages in the United States caused by population growth and climate change. Earth’s Future, 7(3), 219–234. Campbell, K. M., & Sullivan, J. (2019). Competition without catastrophe: How America can both challenge and coexist with China. Foreign Affairs, 98(5), 96–110. Chong, J. I. (2014). Popular narratives versus Chinese history: Implications for understanding an emergent China. European Journal of International Relations, 20(4), 939–964. Cronin, B. (2001). The paradox of hegemony: America’s ambiguous relationship with the United Nations. European Journal of International Relations, 7(1), 103–130. Economy, E. C. (2018). China’s new revolution. Foreign Affairs, 97(3), 60–74. Evron, Y. (2017). China’s diplomatic initiatives in the Middle East: The quest for a great-power role in the region. International Relations, 31(2), 125–144. Furman, J. (2019). Trump is losing the trade war with China. Wall Street Journal, A15 (August 20). Gulia, S., Nagendra, S. M. S., Khare, M., & Khanna, I. (2015). Urban air quality management—A review. Atmospheric Pollution Research, 6(2), 286–304. https://doi.org/10.5094/APR.2015.033. Hameiri, S., & Jones, L. (2016). Rising powers and state transformation: The case of China. European Journal of International Relations, 22(1), 72–98. Ikenberry, J. G. (2016). Between the eagle and the dragon: America, China, and middle state strategies in East Asia. Political Science Quarterly, 131(1), 9–43. Irwin, D. A. (1991). Mercantilism as strategic trade policy: The Anglo-Dutch rivalry for the East India trade. Journal of Political Economy, 99(6), 1296. Kaufman, J. P. (2017). The US perspective on NATO under Trump: Lessons of the past and prospects for the future. International Affairs, 93(2), 251–266. Kreuder-Sonnen, C., & Zangl, B. (2015). Which post-Westphalia? International organizations between constitutionalism and authoritarianism. European Journal of International Relations, 21(3), 568–594. Li, H., Li, L., Wu, B., & Xiong, Y. (2012). The end of cheap Chinese labor. The Journal of Economic Perspectives, 26(4), 57–74. Maçães, B. (2019). Belt and road: A Chinese world order. NY, USA: Oxford University Press. Kagan, R. (2018). The jungle grows back: America and our imperiled world. New York: Alfred A. Knopf. Kang, D. C. (2014). Why was there no religious war in premodern East Asia? European Journal of International Relations, 20(4), 965–986. Kennedy, A. B. (2017). Unequal partners: U.S. collaboration with China and India in research and development. Political Science Quarterly, 132(1), 63–86. Kelly, R. E. (2012). A ‘Confucian long peace’ in pre-western East Asia? European Journal of International Relations, 18(3), 407–430. Layne, C. (2018). The US–Chinese power shift and the end of the Pax Americana. International Affairs, 94(1), 89–111. Mayer, M. (2018). China’s historical statecraft and the return of history. International Affairs, 94(6), 1217–1235. Norrlof, C. (2018). Hegemony and inequality: Trump and the liberal playbook. International Affairs, 94(1), 63–88. OECD. (2018). Economic outlook for Southeast Asia, China and India 2018: Fostering growth through digitalisation. Paris: OECD Publishing. http://dx.doi.org/9789264286184-en. Overholt, W. H. (1996). China after Deng. Foreign Affairs, 75(3), 63–78. Pei, M. (2006). The dark side of China’s rise. Foreign Policy, 1(153), 32–40. Pillsbury, M. (2015). The hundred year marathon: China’s secret strategy to replace America as the global superpower. Henry Holt and Company. Rachmann, G. (2019). The cost of American unpredictability. Financial Times, August 10, 2019, 5.

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Part II

ToP and BoP Interface Capabilities (TBIC): Cases for Competitiveness

Expanding the various journal papers published by Hong and Park between 2015 and 2017, this section presents theory and practices of network capabilities related to trade partnerships and industry competitiveness in the Asian Economies (i.e., China, Japan, India, South Korea, Indonesia, and other three ASEAN Nationals (i.e., Vietnam, Thailand, and Malaysia)) and Mexico. Cases of advanced economies also examine the practices of global firms from Japan and Korea in USA and Mexico. This section includes: • Chapter 5: Evolution of Business Models. This chapter discusses changing requirements of industry competitiveness in terms of five flows: (1) Productivity; (2) Quality Excellence; (3) Value Chain Capabilities; (4) Ecosystem Sustainability; (5) BoP and ToP Interface Capabilities. Each of these flows is explained with their primary characteristics and associated strategic priorities. • Chapter 6: Network Capabilities: National Innovation Ecosystem. This chapter defines issues related to potentially problematic mismatch between evolving patterns of trade partnerships and changing requirements of industry competitiveness. This chapter summarizes the theory of network capabilities. • Chapter 7: Chinese Global Firms: Challenges and Opportunities. This chapter examines challenges and opportunities of Chinese global firms and the strategic process of rapid catch-up and global competitiveness and provide Chinese global firms for illustrations. • Chapter 8: The Self-contained Localization Strategy: Case studies of Japanese firms. Huge numbers of middle-income groups are distributed in China and Association of South East Asian Nations (ASEAN). This chapter presents the development of a self-contained localization system based on organizational capabilities and suggests the self-contained localization strategy through case studies of Japanese firms.

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• Chapter 9: Changing Industry Competitiveness: Case of Asian Automotive Firms. This chapter uses the paradigm of SCP (structure, conduct, performance), introduces important structural factors (e.g., demographic patterns, economic growth, and middle-class size) and industry-level factors (e.g., innovation-based and growth-oriented practices), and discusses the performance of automotive industry (e.g., competitiveness, sales, and market share). Case illustrations primary focus is on automotive market strategies of global firms from four major Asian economies (i.e., Japan, South Korea, China, and India). • Chapter 10: The United States-Mexico-Canada Agreement (USMCA) and Japanese Firms. This chapter discusses cases of Japanese firms in Mexico after NAFTA Agreement. Recently, U.S.-Mexican tensions remain high with Trump’s proposal to build a wall and Peña Nieto’s cancellation of a trip to Washington. In this new fluid trade partnership context, this chapter examines how NAFTA talks affect global firms in Mexico, Japan and Korea.

Chapter 5

Evolution of Business Models

The evolution of management models represents the emergent result of bottom-up and top-down innovation and selection. It is driven by the tension between the possibilities opened up by technological revolution and the constraints created by established organizational paradigms and practices….Actors involved in creating, theorizing, and diffusing organizational innovations play an important role in shaping management models and concepts and thereby in shaping organizational paradigms. (Z. Bodrozˇic and P. S. Adler on “The Evolution of Management Models: A Neo-Schumpeterian Theory”).

Abstract This chapter discusses changing requirements of industry competitiveness in terms of five flows: (1) Productivity; (2) Quality Excellence; (3) Value Chain Capabilities; (4) Ecosystem Sustainability; (5) BoP and ToP Interface Capabilities. Each of these flows is explained, with their primary characteristics and associated strategic priorities described.

5.1 Introduction From 1945 to 2018, economies of nations went through significant global supply chain transformations. Foreign direct investment (FDI) and input sourcing thrived in a liberal, international order fashion, while smooth flows of goods and services were enabled by free trade agreements. Such a macro-level context provides the basis of describing the evolving patterns of business models in terms of competitiveness—national, firm and individual dimensions. The Business model is “emerging as a new unit of analysis”, where business models explain the value creation process through a “system-level, holistic approach” as firms “do business” (Zott et al. 2011). Environmental drivers contribute to adapt existing business models and changes in strategies disrupt business processes to move from “closed model” concepts to “open, platform-based business models” to seize market opportunities, reduce costs and deal with disruptive competitors (Cozzolino et al. 2018). Business models change © Springer Nature Singapore Pte Ltd. 2020 P. Hong and Y. W. Park, Rising Asia and American Hegemony, https://doi.org/10.1007/978-981-13-7635-1_5

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in response to changing international socio-political dynamics (e.g., market, technology, customers, and competitive pressure). Bodroži´c and Adler (2018) note business models respond dynamically to “waves of technological revolution” and provide complex problem-solving processes for value creation and delivery. Table 5.1 is a summary of evolving patterns of competitiveness dimensions in terms of competitiveness themes, key indicators and practical implications. The division of periods reflect how particular business models are introduced, widely adopted and eventually replaced by new ones. Business models are amazingly continuous, complementary, and integrative. Business models are continuous as early models become the basis of subsequent models through demonstrating added value Table 5.1 Competitiveness themes, key indicators and implications Time period

Key technology

Competitiveness theme

Key indicators

Competitive implications

1940s–1960s

Economies of scale mass production

Productivity

Growth measures (e.g., input/output ratios, GDP, sales, labor productivity, trade-offs)

USA strategy, trade off idea

1970s–1980s

Automotive

Quality

Customer satisfaction, process improvement; benchmarking measures; differentiation measures; integration measures

USA—Japan-Korea-China customer, continuous improvement and integration

1990s–2000s

Electronics

Value chain

Value-added; interorganizational collaboration; supply chain effectiveness; value creation and delivery measures

Japan, Korea value chain network capabilities

2010s–2020s

Automation; IoT; supply chain technologies

Sustainability

Triple bottom line; corporate social responsibility; environmental performance; corporate reputation

Triple bottom line. Corporate social responsibility trade tension. USA fight back

2020s–2040s

AI; 5G entrepreneurial innovation

ToP and BoP Interfaces

Inequality index; shared economy; frugal innovation index; engagement, interactions and linkages

G7 versus E7; flows of capital, human resources; massive infrastructure building

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and evolving dimensions. Any new model aims to overcome deficiencies of once prominent previous ones. The identified limitations and shortcomings of old business models iteratively shape new model development by integratively responding to emerging challenges through different options and approaches. Successful Business models combine external requirements with internal responses at each iteration. Considering America’s dominant productivity influence and superiority during and after the Second World War, it is no coincidence that productivity and economic growth impacted business models. Until the rise of Japanese firms during the 1970s and 1980s, emphasizing improving productivity through the development of state of the art quality models was given little attention by western industries. It is to be noted that the productivity model is the basis of a quality model. The Japanese model presented a superior option for achieving desirable levels of productivity and quality outcomes. As US firms embraced quality models, a new wave of value chain modeling became the mechanism that began to create competitive advantages. Implementation of a value chain model requires that business processes are aligned with productivity goals and measured by quality results. Value chain models provide paths for competitive advantage through cross-functional collaborations within supply chain network capabilities.

5.2 Productivity Era Beginning in 1895, technological innovation and the scientific management movement in the US accelerated mass-production processes and efficiencies by creating large economies of scale. The effects of mass production could be felt in many diverse industries; from steam engines, to clothing, to automobiles, to steel mills. The results of the US Civil War (1861–1865) demonstrated the superior labor power and manufacturing capabilities of the Northern Union overcame the lesser population of the Southern Confederacy and its lack of manufacturing power. According to Hurt (2015), the “backbone of the southern economy was agriculture and “the disintegration of southern agriculture led to the decline of the Confederacy’s military, economic, and political power”. Massive capital investments in the South enhanced its manufacturing capabilities and raised the region’s standard of living (Jaworski 2017). With the U.S. victory in World War II, the US dominated the world. Aside from political leadership, the single most decisive factor for this dominance was superior productivity. Allen (2014) relates “the causes of the United States’ exceptional economic performance” to “surging American productivity” that “shifted the country’s comparative advantage to manufacturing” from an agriculture-reliant economy. Figure 5.1 presents the productivity era in terms of drivers, process and outcomes. In the context of its Second World War victory, the US demonstrated the valuable role

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Scientific Management Objective Analysis Organizational Measurements

Trade-off Input-Output Ratios Standardization Mass Production [Economies of scale]

Post World War II Reconstruction Efforts Sustained Cold War Tensions

Productivity Performance [Input / Output]

Economic Growth Movement

Fig. 5.1 Productivity era: drivers, process and outcomes

of scientific management in American industries in general and manufacturing sectors in particular. Economies of scale advantages through standardization and rationalization of production processes reflect the tremendous productivity performance of leading industries. During the five-year World War II period (1940–1945), the US produced “…over 300,000 aircraft and bombers, 20,000 ships, nearly 90,000 tanks and 350,000 trucks, as well as 9 million rifles and machine guns, and 40 billion bullets, to equip 16 million servicemen” (Klein 2013, pp. 515–16; Jaworski 2017). The US became the envy of the world in the race for greater productivity. How individuals and organizations achieve more productivity and create greater value are fundamental dimensions to ensuring high standards of living. The key herein is to measure input (efforts) against output (results). At the national level, this productivity movement was the basis for economic growth in other aspiring countries during the 1950s–1960s. In particular, Rostow (1959) presents a model containing the five stages of economic growth, where a traditional agriculture-based economy evolves towards a manufacturing-based economy once a culture understands the effect of immense productivity fostered by a mass-consumption mindset. The Rostow model is rooted in American experiences of rapid productivity growth; formed at the organizational level, where strategic mission excellence is combined with superb operational execution that achieves individual and organizational goals.

5.3 Quality Era In the late 1970s and 1980s, American firms were challenged by Japanese quality initiatives that produced superb electronic and automobile products at low cost and high quality. Prevailing US business models viewed quality from a trade-off perspective, where the cost of improving quality would increase overall costs, slow production processes and reduce outputs; therefore generating an unacceptable trade-off. Great

5.3 Quality Era

Transition Trade-off (A or B) Integration (A and B)

Japanese Challenges

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Customer Focus Process Management Statistical Control Continuous Improvement

Competitive Capabilities Customer Satisfaction Quality Excellence Waste Reduction Cost Reduction

Quality Movement Benchmarking Lean Management

Fig. 5.2 Japanese challenges and quality movement and the quality era

quality of products was assumed to require a higher cost. The Japanese refined the idea of quality power integration within internal business processes; quality is not a simple binary choice, choosing A or B, but inclusive of A and B; great quality was assumed to be achievable at low cost (Fig. 5.2). The Japanese quality challenge has and continues to have considerable impact on “trade-off” philosophies held in the mindsets of US strategic management. Porter (1980, 1987) engaged a front-end level of competitive analyses and clarified business goals in terms of a cost-differentiation orientation, where a strategic fit emerges enabling firms to remain competitive. However, little attention was paid to the backend processes and their impact on performance outcomes. Porter (1996) even argues that “operational effectiveness” is not strategy, nor that Japanese firms have any real strategy. However, as Sadun et al. (2017) noted, apart from “competent management” and “operational excellence”, firms may not achieve a sustainable competitive advantage. The contribution of the quality movement is three-fold: (1) bring customer focus to the forefront of business management; (2) emphasize process management beyond setting long-term and short-term goals; and (3) performance management becomes a chain of combinative leading indicators, not merely the lagging indicators of financial results. With the quality movement, competitive capabilities (i.e., measured by operational, productivity performance) surface to prominence when aligned with business priorities and the strategic focus. In other words, firms may not achieve desirable financial results (e.g., sales and income growth) and market performance (e.g., market share) without paying attention to operational performance (e.g., customer satisfaction, quality, cost, and delivery). Quality movements further direct the attentions of senior management to integrating front-end management (e.g., strategy, R&D marketing) with back-end operation management. Thus quality movements laid the groundwork for value chain management.

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5.4 Value Chain Era At the individual level, the value of the network relationship becomes strategically important. It is not necessarily about who the individuals are and what they know. Instead, it’s about who they know and how organization leaders create and use network relationships for productivity and influence (Ibarra and Hunter 2007). The critical differentiator is who they know and interact with to build constructive network relationships for value creation and delivery (Cross and Thomas 2011). The productivity of people is not simply knowing a large number of people. Instead, it is about collaborating on innovative ideas and implementing them through organized efforts (Leonardi and Contractor 2018). In the late 1980s and 1990s, the competitive battleground shifted to the value chain—supply chain management resting on the importance of combined network capabilities. The value chain is not about what individuals and companies alone do but what the combined network capabilities do. For example, Ford’s suppliers, not the Ford Company, produce 95% of Ford’s components. The key functionality of network capabilities are collaborative work, communication flows and contribution, and additive outcomes by diverse value participants. In other words, at the firm-level response to customer requirements, competitive pressure and technological change provide the base for supply base management, cross-functional collaboration and process driven approach. The results are the creation, delivery and capture of value outcomes across the global market. The global market is an extension of value network to teams, organization and nations. The enduring success of individuals and organizations requires strategic learning about international relations on a national scale to sense emerging trends at the macro-level. Nations that understand the norms of global trade engagements thrive and prosper, while those unfamiliar with the rules and practices of international order, suffer. Figure 5.3 models the supply chain management and value chain advantage. With the increasing complexity of customer requirements, global competitive pressure,

Complexity Requirements Competitive Pressure Technology Changes

Supply Chain Management

Strategic Orientation Supply Base Management Cross-functional Collaboration Process-driven Approach

Creation Delivery Capture of value through Global Market

Value Chain Advantage

Fig. 5.3 Supply chain management and value chain advantage

5.4 Value Chain Era

93

and technological changes, the goals of firms are not merely to satisfy diverse performance requirements. Their focus is not merely A or B (quality or cost). It is about A and B and C and D, or great quality of products, low cost, great flexibility, and innovation. The key of integration is to master the productivity game while minimizing waste, focusing on customers, maintaining keen awareness of processes, and engaging in continuous improvement initiatives. Osgood (2018) examines how “manufacturing supply chains became global from 1960 to 2000” and provides “systematic evidence” of the linkage “between global supply chains and industrial preferences”. The liberal, open-market international order facilitated foreign direct investment (FDI) from advanced economies to emerging economies and global sourcing outcomes (GSO) from emerging economies to advanced economies. Mason and Leek (2008) define the purpose of supply networks to reduce operating costs and maximize market competitiveness. The primary means to achieving network goals are either building an offshore supply network to extend and or broadening the scope of global supply chains. Osgood (2018) suggests that “foreign direct investment (FDI) and input sourcing are the primary drivers of support for trade liberalization”. As firms globalize supply chains, there is systematic evidence of “a link between global supply chains and industrial preferences”, noted by Jensen et al. (2015) observations that as firms increase the size and capabilities of their supply chains through foreign direct investment, “trade disputes [are] far less likely” since firms support the resolution of trade disputes. The global economy is connected by networks. In 1998, Michael Dell highlighted ‘the Dell virtual integration model’ in an interview article conducted by the Harvard Business Review. The model conceptualizes the connectivity of supply and demand chains through a virtual internet network without direct ownership of any manufacturing capabilities. The key to this model is not ownership but connectivity. The basis of Amazon’s digitally native business model is the network connectivity among its vast network of suppliers and customers. As long as the supply chain network of producers and demand network of customers remain connected, value creation, delivery and capture is possible without physical ownership of key manufacturing assets. Rather, Amazon relies on its ownership of logistic assets (e.g. state of the art automated distribution centers, ground package delivery networks, and growing air-cargo fleet) to enable its network capabilities; considering R & D on logistics, services, and the engineering of timely package delivery systems as critically important functions to developing global network connectivity. The business model of value creation, delivery and capture is about network capabilities. Uber and Lyft offer worldwide ride-hailing services without owning any vehicles, yet both own software as a service (SaaS) and data assets that enable network connectivity between passengers and drivers on mobile devices. Likewise, Airbnb provides global lodging services without owning any physical hotelier type facilities, yet it owns the software and data assets that allow guests to book rooms within a network of privately owned facilities. Software as a service and data assets,

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similar to the ownership of physical assets that manufacture a product requires continuous maintenance, user experience awareness, and process innovation to remain competitive in sustaining network capabilities. Network capabilities that connect worldwide resources make these digitally native business models possible. On July 7, 2019, Samsung’s new smartphone “Galaxy Note 10” was introduced to much fanfare. At the event, Microsoft’s chief executive officer Satya Nadella spoke about the goal of partnering with Samsung “to connect devices such as smartphones, TVs and PCs into our lives … to make meaningful changes” on how we interact with technology. It is essential for global actors to adapt to the rapid pace of change in the Fourth Industrial Revolution brought on by wireless connectivity. The frontiers of technological innovations, such as 5th generation (5G) internet connectivity, have accelerated the movement of data so information is delivered almost at the speed of thought. Artificial intelligence (AI) applications are being developed to enhance and augment human capabilities, and in the coming years will be widely implemented. Each of these technologies rely on network connectivity, creating a conducive environment where value creation can take place. Network connectivity is indeed global, and the network capabilities found in varied global resources can be exemplified with China’s Huawei smartphones. These mobile devices include technology from US Qualcomm communication chips, and incorporate Google’s operating system (OS) and mapping application. Viewed from a network capabilities perspective, the “Huawei phone is also an American phone.” Any platform that connects network capabilities with new technology value frontiers will be better positioned to compete and thrive in this age of network capabilities.

5.5 Sustainability Era Timeless legacies of individuals, organizations and nations extend heritage lifecycles from generation to generation. The longevity of business organizations requires not only serving their direct customers, but also customers at large and society as a whole. Organizational goals must include economic viability (cost, quality and network capabilities for competitiveness), environmental stewardship (minimal environmental damage environment and limited depletion of the earth’s resources), and corporate social responsibility (taking care of your direct customers and the larger potential customer base). Figure 5.4 illustrates the foundation of sustainability initiatives, the reality of resource constraints, demographic pressures and ecosystem risks (e.g., energy, water and agricultural resources to support rapid population growth worldwide in view of continuing deforestation, climate changes, and tremendous population growth in emerging economies). Firms feel pressured to achieve a triple bottom line; the financial, environmental and social outcomes required to sustain an organization for future generations. To foster and achieve these comprehensive performance requirements, it is crucial for firms to use business capabilities to fully develop productivity management,

5.5 Sustainability Era

Resources Constraints Demographic Pressures Ecosystem Risks

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Productivity Management Quality Management Supply Chain Management Corporate Social Responsibility

Sustainable Resources Management (Preventing depletion of resources for Long-term world sustenance)

Economic Performance Environmental Performance Socially Responsible Performance

Triple Bottom Line (Economic, Social and Environmental Outcomes)

Fig. 5.4 Sustainable resources management and triple bottom line

quality management and supply chain management. Leading firms thrive on building multiple layers of capabilities through productivity, quality, and the value chain, with each layer serving to develop longitudinal sustainability. Firms simply are not able to act on triple bottom line performance requirements without a proper productivityquality-value chain foundation. Sustainability is too large a concept for business organizations to singularly handle. It requires society as a whole to become involved and work together on comprehensive and continuous innovative solutions. Villani et al. (2017) regard PublicPrivate Partnerships (PPPs) as “an important form of hybrid organization” that “generate innovative solutions to complex problems by combining different institutional logics”. In the context of sustainability (i.e., remaining in business for long periods by managing limited earthen resources), PPPs enable participants to integrate the economic goals of firms and the environmental requirements of larger society, to achieve a lasting firm reputation.

5.6 TOP and BOP Interfaces The sustainability movement recognizes the long-term survival goals of individuals, organizations, and nations and integrates economic, environmental and societal responsibilities, and other moral dimensions. Advanced economies face the potential of slow or negative growth prospects, yet possess enormous amounts of capital and advanced technological capabilities. Vast segments of emerging economies expect significant population growth much greater than that of advanced economies and as a result, need the abundant capital and technological capability resources of advanced economies to prosper. This distinction directly points to the supportive interface that has and is developing between the Top of the Pyramid (ToP) and the Base of the Pyramid (BoP) economies. Figure 5.5 illustrates the world from a ToP and BoP perspective, with an interface mechanism connecting resources and capabilities. The world is now populated with

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Top of Pyramid (ToP)

Capital-Technological Resources and Search for New Value Frontiers

Interface Mechanism

Bottom of Pyramid (BoP)

Population Pressure and Growth Engine Opportunities

Fig. 5.5 The two world view of ToP and BoP and interface mechanism

7 billion people. By 2050, the world’s population is expected to approach 10 billion. In the past, very little attention was paid to the billions of people living at the Base of Pyramid (BoP) because their relatively meager purchasing power and lack of available products, services, and people connecting technologies. However, the world is like a huge lake; people in the upper regions (i.e., ToP) may afford to live well in clean and safe environments while dire living circumstances in the lower regions (i.e., BoP) affect the upper regions with pollution, immigration pressures, and most pressing, social unrest caused by the lack of resources to improve BoP living conditions. It is crucial for ToP economies to use capital and technology resources to improve the quality of life in BoP economies. To continuously neglect 70–80% of the world population living at the BoP would put tremendous stress on the quality of life at the ToP. To sustain this earth, it requires firms of all sizes and industries to implement the vision embodied in a triple bottom line strategy. Providing economic performance for current and future customers, observing the impact of environmental performance, and practicing social responsibility are critical to sustaining billions of lives and allowing them to flourish. Interface mechanisms are various. Benchmarking could be a useful tool for individual, organizations, industries and nations from emerging economies to help learn from and improve to the best practices of advanced nations (Hong et al. 2012, 2018). Global logistics serves as a “linkage mechanism that connects Base of Pyramid (BoP) to Top of Pyramid (ToP) and facilitates capital, product and service flows to create new value frontiers” (Hong et al. 2019). Nations form blocs based on their shared

5.6 TOP and BOP Interfaces

97

interests. Bringing nations together requires commonalities in the form of interactive infrastructures, motivational tools, and relationships dynamics. Such interface mechanisms cannot be limited to mere intermediaries. They should be developed and tested within specific segments of nations in the form of political-economic-social institutions. Moyo (2009) argues, “government-to-government foreign aid has harmed Africa” in that it “fostered dependency, encouraged corruption and ultimately perpetuated poor governance and poverty”. The very notion of “teaching how to fish rather than giving fish for food” illustrates this point. Without developing capabilities for longterm independence, merely giving aid in the form of financial assistance rarely works. The success stories of the Asian countries of Japan, South Korea and China confirm this point. New approaches mobilize a vast number of entrepreneurs for poverty reduction and wealth creation initiatives. As the growth rate of China slows, the next frontier of global growth engine is among the world’s seven billion people. The ToP and BoP interface model suggests vigorous engagements are needed between entrepreneurship and frugal innovation in the BoP and public-private minded capital and talent investment from ToP. It further argues for a linkage mechanism between urban– rural communities, helping mitigate economic inequality. Manning et al. (2017) discuss “the strategic potential of a community-based hybrid model, in rapid catch-up business model” in emerging economies. ToP and BoP engagement models identify macro- and micro-responses that can help alleviate inequality based on entrepreneurship and frugal innovation, and emphasize how they serve as linkage mechanisms between the urban-rural sector. Christensen et al. (2019a) suggest new “frontier economies such as Nigeria and Pakistan” with potential for success. The “Prosperity paradox” (Christensen et al. 2019b) also suggests a new model of economic growth based on “entrepreneurship and market-creating innovation” in the context of advanced (e.g., US, Europe, Japan, South Korea), emerging (e.g., India, Argentina, Mexico) and frontier economies (e.g., Nigeria, Rwanda). In spite of occasional inadequate infrastructure and institutional imperfections, the role of entrepreneurial innovation through market-based products and services provides jobs and meets productivity requirements for competition. The secret of success is to make frugal innovation work in a scalable fashion. These attract investors seeking socially responsible opportunities congruently with wealth creation for the large BoP economies. Potential engagements between ToP and BoP interfaces are in the area of productivity growth, quality enhancements, and the development of the hardware and software infrastructure essential for building value chain networks. For example, adequate water, sanitation, waste management are essential for productivity and quality of life. “The irony is that Africa has abundant fresh water: large lakes, big rivers, vast wetlands and yet without proper infrastructure, only 4 per cent of the continent’s available fresh water is currently being used” according to Africa Renewal (https://www.un.org/africarenewal/magazine/october-2007/ bringing-water-africa%E2%80%99s-poor). Simply installing running water in villages at costs of no more than $1000 can improve the lives of hundreds and even thousands.

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Without such investments, enormous damages befall beyond regions directly affected. In August 2019, as dozens of intentional fires destroyed large areas of the Amazon, the Brazilian practice of “runaway deforestation” for the sake of “reckless land development projects” received worldwide alarm and backlash. “The ongoing forest fires in Brazil are deeply worrying,” the European Commission said in a statement on August 22, 2019. “Forests are our lungs and life support systems (McFall-Johnsen 2019). The interfaces between ToP and BoP moves slowly and steadily; evolving from selected segments to larger components of the ToP and BoP that break down barriers. The patterns of economic evolution are in a sense repetitive of how different nations overcome dire poverty through interactions with other advanced economies. Examples of economic growth with responsible environmental management in East Asian nations (e.g., Japan, Korea, Taiwan, and Singapore) are replicated in other South East Asian nations (e.g., Vietnam, Thailand, Malaysia, and Indonesia), Eastern European countries (e.g., Bulgaria, Romania, Serbia), and the Middle East (e.g., Turkey, Arab Emirates, Saudi Arabia). In the current market environment of pursuing national interests under trade tensions and regional conflicts, the idea of expanding interfaces between ToP and BoP seems somewhat distant and unachievable. However, dynamic business model transitions will continue to close the gap between these two economic worlds. The world cannot prosper in segments. Advanced economies that were or are not ready for declining population and stagnant growth will look for growth opportunities. The economic rationales for growth imperatives, enlightened self-interest for shared destinies and the desire to preserve this planet through responsible management of resources, will guide innovative individuals and business organizations as they explore new value frontiers through ToP and BoP interfaces.

References Allen, R. C. (2014). American exceptionalism as a problem in global history. The Journal of Economic History, 74(2), 309–350. Bodroži´c, Z., & Adler, P. S. (2018). The evolution of management models: A neo-Schumpeterian theory. Administrative Science Quarterly, 63(1), 85–129. Christensen, C. M., Ojomo, E., & Dillon, K. (2019a). Cracking frontier markets. Harvard Business Review, 97(1), 90–101. Christensen, C.M., Ojomo, E.., & Dillon, K. (2019b). The prosperity paradox. Harper Business. Cozzolino, A., Verona, G., & Rothaermel, F. T. (2018). Unpacking the disruption process: New technology, business models, and incumbent adaptation. Journal of Management Studies, 55(7), 1166–1202. Cross, R., & Thomas, R. (2011). A smarter way to network. Harvard Business Review, 89(7/8), 149–153. Hong, P., Hong, S. W., Roh, J., & Park, K. (2012). Evolving benchmarking practices: A review for research perspectives. Benchmarking: An International Journal, 19(4/5), 444–457.

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Hong, P., Kang, M., & Zhang, Y. (2018). Dynamic benchmarking issues in emerging markets: Building relevant theories and examining evolving practices. Benchmarking: An International Journal, 25(5), 1274–1278. Hong, P., Schoenherr, T., Hult, T., Zinn, W., & Goldsby, T. (2019). Emerging logistics and supply chain management issues in base-of-pyramid markets. Journal of Business Logistics, 40(2), 76–80 Hurt, R. D. (2015). Agriculture and the confederacy: Policy, productivity, and power in the civil war south. The University of North Carolina Press. Ibarra, H., & Hunter, M. (2007). How leaders create and use networks. Harvard Business Review, 85(1), 40–47. Jaworski, T. (2017). World War II and the industrialization of the American South. The Journal of Economic History, 77(4), 1048–1082. Jensen, J. B., Quinn, D. P., & Weymouth, S. (2015). The influence of firm global supply chains and foreign currency under valuations on US trade disputes. International Organization, 69(4), 913–947. Klein, M. (2013). A call to arms: Mobilizing America for World War II. New York: Bloomsbury Press. Leonardi, P., & Contractor, N. (2018). Better people analytics. Harvard Business Review, 96(6), 70–81. Manning, S., Kannothra, C. G., & Wissman-Weber, N. (2017). The strategic potential of communitybased hybrid models: The case of global business services in Africa. Global Strategy Journal, 7, 125–149. Mason, K. J., & Leek, S. (2008). Learning to build a supply network: An exploration of dynamic business models. Journal of Management Studies, 45(4), 774–799. McFall-Johnsen, M. (2019). Earth is a spaceship, and the Amazon is a crucial part of our lifesupport system…. Business Insider, August 24, 2019. https://www.businessinsider.com/whyamazon-rainforest-is-important-life-support-is-burning-2019-8. Moyo, D. (2009). Dead aid: Why aid is not working and how there is a better way for Africa. Straus and Giroux: Farrar. Osgood, I. (2018). Globalizing the supply chain: Firm and industrial support for US trade agreements. International Organization, 72(2), 455–484. Porter, M. E. (1980). Competitive strategy. New York: Free Press. Porter, M. E. (1987). From competitive advantage to corporate strategy. Harvard Business Review, 65(3), 43–59. Porter, M. E. (1996). What is strategy? Harvard Business Review, 74(6), 61–78. Sadun, R., Bloom, N., & Van Reeven, J. (2017). Why do we undervalue competent management? Harvard Business Review, 95, 120–127. Rostow, W. W. (1959). The stages of economic growth. The Economic History Review, 12(1), 1–16 (New Series). Villani, E., Greco, L., & Phillips, N. (2017). Understanding value creation in public-private partnerships: A comparative case study. Journal of Management Studies, 54(6), 876–905. Zott, C., Amit, R., & Massa, L. (2011). The business model: Recent developments and future research. Journal of Management, 37(4), 1019–1042.

Chapter 6

Network Capabilities: National Innovation Ecosystem

….the global proliferation of digitally mediated linkages between individuals and nonstate actors constitutes a fundamental challenge to traditional dynamics of interstate communication in the form of the diplomatic system. This provides an opportunity to reconceptualize world society as an alternative site of politics distinct from mainstream international society and generative of its own logic of communication, mobilization, and action. (Tobias Lemke and Michael W. Habegger, 2018).

Abstract This chapter defines issues related to potentially problematic mismatches between evolving patterns of trade partnerships and changing requirements of industry competitiveness. This chapter summarizes the theory of network capabilities. Two previous books (i.e., Park and Hong in Building network capabilities in turbulent competitive environments: Practices of global firms from Korea and Japan. CRC Press, Boca Raton, 2012; Hong and Park in Building network capabilities in turbulent competitive environments: Business success stories from the BRICs. CRC Press, Boca Raton, 2014) examined the theory and practices of network capabilities of global firms from Korea, Japan and BRICs. In this book the new framework of ToP and BoP Interface Capabilities (TBIC) are presented along with the concept of technology, customer, and linkage competence.

Theoretical discussion focuses on the practices of global network capabilities (GNC) for Top of Pyramid (ToP) and Based of Pyramid (BoP). A special focus is on trade partnerships and industry competitiveness in the Asian Economies (i.e., China, Japan, India, South Korea, Indonesia, and the other three ASEAN Nations (i.e., Vietnam, Thailand and Malaysia) and Mexico. Extensive industry and firm level case studies discuss Top and BoP Interface Capabilities (TBIC) in the form of manufacturing and services life cycle management (MSLCM). MSLCM extends value creation and delivery of manufacturing and services that integrate cloud ecosystems (e.g., timely data/information/knowledge flows via virtual world) and ground-based value chains (e.g., complex real goods and services flow in the visible world). © Springer Nature Singapore Pte Ltd. 2020 P. Hong and Y. W. Park, Rising Asia and American Hegemony, https://doi.org/10.1007/978-981-13-7635-1_6

101

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6 Network Capabilities: National Innovation Ecosystem

6.1 Network Capabilities Individuals, teams, institutions and nations may compete based on their own capabilities alone or forms networks in the form of continuous political-social-economic interactions and engagements. Goddard (2018) asks, “How do institutions shape revisionist behavior in world politics?” By “applying a network-relational approach”, the focus is network positioning in terms of access and brokerage. The research model and findings suggest that nation’s actions, in spite of inadequate available resources, can achieve desirable results (“violent hegemony”) through institutional logics; as demonstrated in the case of “Russia in the 1820s, Prussia in the 1860s, the Soviet Union in the early Cold War, and Japan in the 1920s and 1930s.” Our focus is more on achieving desirable results in peace. We posit that individuals, organizations, communities and nations create and deliver greater level of value consistently through network capabilities. In our previous two books (Park and Hong 2012; Hong and Park 2014) we have discussed the role of network capabilities in turbulent competitive environment. The research focus to date has been centered on projects and firm level. In this book, we include industry and national levels of analysis. We argue that network capabilities include horizontal relationships, vertical integration and dynamic movements. Figure 6.1 presents network capabilities in terms of scale, scope and complexity on the firm level. Diverse entities (individuals, teams, organizations, industries, communities and nations) demonstrate their scale of interactions in terms of activities. The combined sum of each level increases as the level moves from individuals all the way to nations. Interaction scale parameters include identity attributes (e.g., personality,

Fig. 6.1 Network capabilities: scale, scope and complexity

6.1 Network Capabilities

103

character, culture elements), relationship intensity (e.g., socialization, collaboration and competition patterns) and activities volume (e.g. actions, routines and tasks). Strategic scope contains time horizons with each entity’s goal movements. Each entity, either individuals, organizations and even nations is more likely to engage in goal-based movements in terms of defining long-term purpose and meaning, setting direction and mission, and implementing priorities and focus. Governing complexity entails operational mechanisms in the form of constitution, charters, rules, value creation and delivery venues and performance indicators. Farrell and Newman (2019) discuss “weaponized interdependence” in “global economic networks”. In liberal international order, national security and economic policy are now merged into competitive weapon of nations. The U.S. uses the national security argument to implement tariffs against China and its allies. The U.S. took strong measures against Huawei and its products with security concerns. Japan recently removed South Korea from the list of preferential trading-partners and tightened export controls on three materials crucial for semiconductors and displays. South Korea in return engaged in boycotting Japanese products and withdrew from an agreement to share military intelligence with Japan. These actions go against the very foundations of networked economies and disrupt global supply chains. In highly networked world of business, global supply chain capabilities require flexible access of materials and component parts from supplies from all over the world. As national and international ecosystems are increasingly controlled by political arguments rather than economic rationale, damages the credibility of global trade rules and disrupts supply chain flows. Then how do individuals, organizations and industries function? Individuals and organizations create, deliver and capture practical outcomes of network capabilities through dynamic interactions within domestic and international ecosystems. Global firms in particular demonstrate the results of implementing innovative ideas into effective actions.

6.2 Global Fortune 500 Firms and Forbes 2000 Firms The growth of any economy requires constructive roles of business firms that operate beyond national boundaries. Undoubtedly, with the sustained economic growth the number of firms that are active in international market. With the growth of GDP and trade sector, another noticeable aspect of growing economies is the role of global firms. Table 6.1 is a summary of # of firms from key advanced economies and Asia. It shows the changing configurations of Global Fortune 500 firms from 2000 to 2018 and Global Forbes 2000 firms for selected three years—2014, 2016, and 2018. In the case of China, it is quite noteworthy that the number of global Fortune 500 firms and Forbes 2000 grew at the same pace as the country’s economic growth rate. China in particular grew from 10 in 2000 to 103 in 2018. The number of global firms from Japan decreased from 107 in 2000 to 52 in 2018. However, the number of Forbes 2000 of Japan, Korea, China and India have slightly increased or rapidly increased (e.g.,

10

4

France

South Korea

India

18

6

11

37

35

37

81

8

14

35

30

34

68

47

9

15

31

28

28

57

103

134

2016

2017

9

15

29

23

27

52

109

133

2018

10

16

28

21

32

52

120

126

54

61

225

207

554

56

72

219

249

540

2016

58

67

57

94

54

228

291

557

2018

Source Fortune’s Annual Global Fortune 500 Firms and Forbes’ Global 2000. Global 500 https://fortune.com/global500/2019, https://fortune.com/global500/ 2018, https://fortune.com/global500/2000. Global 500 https://fortune.com/global500/2000-2019, Global 2000 https://www.forbes.com/global2000/2019-2000

38

39

UK

37

Japan

Germany

10

107

China

141

2010

2014

175

2005

2000

179

Global Forbes 2000

Global Fortune 500 Firms

USA

Country (Year)

Table 6.1 Comparisons of four countries: global fortune 500 and Forbes 2000

104 6 Network Capabilities: National Innovation Ecosystem

6.2 Global Fortune 500 Firms and Forbes 2000 Firms

105

China from 207 to 291 in four years from 2014 to 2018). The increase of Chinese Global Fortune 500 firms are noticeably in contrast with the decrees in number of Japanese Global Fortune 500 firms (Hong 2017). This reflects the greater exposure of Chinese firms beyond its domestic market. Interestingly, Japanese Forbes 2000 maintain the similar size over the years. This also suggests the underlying strength of Japanese firms in their competitiveness.

6.3 National Innovation Ecosystem Output A recent survey of over 5000 American manufacturing sector firms suggests that “external sources of invention—customers, suppliers and other open source– make a significant contribution to the overall rate of innovation in the economy” (Arora et al. 2016). Any serious innovation unit is more likely to interact directly with the next level of entity (e.g., individuals and teams engage with organizations and industries). Organizations and industries contact and work with next level of community and national affairs. At the same time, each entity also influences directly without going through intermediaries. Individuals engage with national issues through direct political process of elections. Communities and nations dictate individuals to participate the policy mandates in the form of laws and regulations. According to Teece (2018), the digital economy is different from the industrial economy with “the dynamics of platforms and ecosystems”. Enabling technologies presents both “coordination and market design challenges” to the innovator because licensing is difficult to implement from “a value-capture perspective”. An important measure of national innovation system is annual patent applications and patent grants. Table 6.2 is a summary of recent patent applications and patent grants by country for 2014, 2016 and 2017. Compared to 2014, the rate of increase has slowed down except India. China continues to maintain the top position in the number of total patents granted (as well as applications). Three countries (China, USA and South Korea) maintains steady rate of increase each year. On the other hand, other leading countries (Japan, Canada, and Australia) have reported slight decrease in the number of patents granted. What is noteworthy is that Asia is leading in overall parent activities. Table 6.3 suggests that Asia leads in three aspects of innovation measures: patents, trade marks, and industrial designs. Three Asian countries—China, Japan and South Korea—lead the world in these respects. USA, European countries (by European Patent Office) demonstrate great deal of innovation productivity. Other countries— Russia, Iran and Turkey are also noted for their innovation activities. Table 6.4 suggests that patent applications by regions between 2007 and 2017 show drastic increase of Asia and Europe and Latin America as two leading regions. The growth rate of Asia is between 2007–2017 is 8.3% in contrast to Europe (0.3%) and North America (2.6%). Changes in share of world total is evident in Asia from 49.7 to 65.1% whereas Europe and North America declined their share of world total from 18.1 to 11.2% and 26.4 to 20.3% respectively. Mere number of applications of

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6 Network Capabilities: National Innovation Ecosystem

Table 6.2 Patent applications and patent grants by country (Granted) Country

2014

2016

2017

% Change (2017 versus 2016) (%)

% Change (2017 versus 2014) (%)

China

233,228

404,208

420,144

3.94

80.14

USA

300,678

303,049

318,828

5.21

6.04

Japan

227,142

191,032

183,919

−3.72

−19.03

South Korea

129,786

101,678

110,408

8.59

−14.93

European patent office

64,608

95,940

105,645

10.12

63.52

Russia

33,950

34,383

33,988

−1.15

0.11

Canada

35,481

26,424

24,099

−8.80

−32.08

Australia

19,304

23,744

22,742

−4.22

17.81

Germany

15,030

15,651

15,653

0.01

4.15

6,153

8,248

12,387

50.18

101.32

India

Source WIPO (World Intellectual Property Organization) (2017, 2018). World Intellectual Property Indicators

Table 6.3 Intellectual property filings summary (2017)

Patents

Trademarks

Industrial Designs

Total

3.17 million

9.11 million

945,100

China

1,380,000

5,700,000

628, 658

606,956

613,921

45,881

USA Japan

318,479

560,269

South Korea

204,775

230,466

67,357

371,508

111,021

European patent office

166, 585

Other countries

33,988 (Russia)

358,353 (Iran)

N/A

46,875 (Turkey)

Source WIPO (World Intellectual Property Organization) (2018). World Intellectual Property Indicators

patent does not mean actual attainment of patent. Large number does not determine innovation value outcomes. Instead, what it suggests is that Asia region as a whole makes tremendous stride to win in this value war.

6.4 Extension of Customer-Technology-Linkage …

107

Table 6.4 Patent applications by region, 2007 and 2017 Region

Africa

Number of application

Share of world total (%)

2007

2007

2017

Avg. growth rate (%) 2007 versus 2017

2017

14,100

16,000

0.8

0.5

1.23% was 1.3

Asia

932,500

2,062,500

49.7

65.1

11.02% was 8.3

Europe

339,300

355,700

18.1

11.2

Latin America*

58,100

57,600

3.1

1.8

North America

496,300

642,000

26.4

20.3

Oceania World

0.44% was 0.5 −0.008 was −0.1 2.67% was 2.6

34,700

35,100

1.9

1.3

0.011% was 0.1

1,875,000

3,168,900

100.0

100.0

6.27% was 5.4

Note *Latin America includes the Caribbean region Source WIPO Statistics Database, September 2018

6.4 Extension of Customer-Technology-Linkage Competence Model (CTL Competence Model) In the soil of national innovation ecosystem, certain firms play visible roles of innovative leadership. Table 6.5 shows top 20 patent applicants world wide in terms of the total number of patent families. As of 2013-2015, electronic and IT firms are in the position of global leadership. However, the real value creation is not based on the number of patents but the quality and value impact of patents. Park and Hong (2012) and Hong and Park (2014) presented the Customertechnology-linkage (CTL) competence model. In this book, we now extend the CTL model in the context of (1) changing international order and trade partnerships; (2) 5G value creation-delivery-capture modes; (3) growing opportunities and challenges of ToP and BoP interface. Innovation is through human creativity. It is ingenuity-based innovation. These theoretical discussions of network value capture show enormous relevance in the context of 5G. Genuine human ingenuity-based innovation requires open network information flows along with AI-machine and IoT generated value mechanisms. Such combined sources of innovation generate competitive capabilities of 5G network infrastructure. Recently, the theory of network value capture has attracted more research attention for its broad implications. Gans and Ryall (2017) claim “value capture theory” is unique in “its use of cooperative game theory as a general, mathematical foundation upon which to build a deep understanding of firm performance in market settings”. This is different from traditional strategy theory based on “informal, qualitative reasoning”. Dyer et al. (2018) explain how the “alliance life cycle” starts with an initial alliance formation through “informal trust, repeated ties, customized assets” and then over time “trigger diminished value creation and increased competition for value

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6 Network Capabilities: National Innovation Ecosystem

Table 6.5 Top 20 patent applicants worldwide, based on the total number of patent families #

Applicant

Origin

2013–2015 Total

1

Canon Inc.

Japan

24,006

2

Samsung electronics Co. LTd.

South Korea

21,836

3

State grid corporation of China

China

21,635

4

Mitsubishi electronic corp.

Japan

15,277

5

IBM corporation

U.S.

14,972

6

Toyota jidosha kabushiki kaisha

Japan

14,840

7

Huawei technologies Co., LTD

China

14,605

8

Toshiba KK.

Japan

14,567

9

LG electronics Inc.

South Korea

14,561

10

Robert bosch GMBH

Germany

12,598

11

China petroleum & chemical corporation

China

12,049

12

Ricoh Co., LTD.

Japan

11,745

13

Seiko epson copr

Japan

11,741

14

Panasonic IP Man Corp.

Japan

11,511

15

Fujitsu LTD.

Japan

10,176

16

Denso Corp.

Japan

10,008

17

ZTE corporation

China

9,264

18

Hyundai motor Co. LTD.

South Korea

9,209

19

Sharp corporation

Japan

9,077

20

QualComm incorporated

USA

8,571

Source WIPO Statistics Database, September 2018

capture among partners”. They suggest that the level of resource interdependence in alliances determines value creation potential and alliance dissolution. Afuah (2013) argues that “a network’s structure (feasibility of transactions, centrality of members, structural holes, network ties, the number of roles each member plays) and the participants’ conduct (opportunistic behavior, reputation signaling, perceptions of trust) have significant impacts on a network’s value to users and to network providers”. Lee et al. (2014) examine “the role of learning and commitment in overseas expansion for banking services under stable and critical periods”. After they experienced “two global crises, one in 1998 and the other in 2008” the response to crisis is different—passive withdrawal at the first crisis period and then choose to aggressive strategies to emerging markets in the second crisis. It shows that crisis events facilitate organizational learning and encourages firms to take bolder steps for strengthening their international business network. Figure 6.2 shows the role of competitieve capabilities of 5G infrastructure network. In the coming decades of Industry 4.0, the source of value creation are threefold: (1) Closed-Open Network Information Flows; (2) Human Creativity-Ingenuitybased Innovation; (3) AI-Machine-IoT Generated Value Mechanisms. All three are

6.4 Extension of Customer-Technology-Linkage …

109

People-Machine-Interactive Value Mechanism Linkage Competence

Human Ingenuity-Based Creative Innovation

Network Information-Enabled Product-Service Innovation

Technology Competence

Customer Competence

Competitive Capabilities of 5G Network Infrastructure

Value Creation, Delivery and Capture

Fig. 6.2 Role of competitive capabilities of 5G network infrastructure

not interactive by nature. They are segmented and separated. What effectively connects them are the competitive capabilities of 5G network infrastructure. Value creation and delivery is processed through 5G network infrastructure. Whoever holds the competitive capabilities of a 5G network infrastructure has greater potential to capture the value created and delivered. Kang and Zaheer (2018) view the firm “as an entity comprised of fragmented interests”. For firms to create and capture value for broad interest it is important to avoid opportunistic and self-serving behaviors of managers. They suggest, “…stock ownership owned by managers and strong board monitoring are effective governance mechanisms to align managers’ interests with those of shareholders.” Grimpe and Hussinger (2014) argue that patents hold preemptive power allowing firms to capture the value from combining complementary technologies and to realize gains from trade in strategic factor markets. Cattani et al. (2017) suggest that “strategists interpret cues” of emerging demand and introduce new categories of products by applying often-overlooked factors and introduce as new ones. Ranganathan et al. (2018) show that firms engage in “competition–cooperation interplay” as setting global technology standards require coordination among firms with competing interests. Firms that hold controlling power on distribution network of information highways have greater chances of value creation, delivery and capture potential. Although Jia et al. (2018) report that a major corporate governance reform in China empowers minority shareholders, it may still be an exception than a rule in China. In other words, the innovative capabilities between Chinese firms and US firms lie whether the firms operate in environments where human creativity is encouraged and interact in open networks that promote free flows of information and people flexibly use machine-generated big data.

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6 Network Capabilities: National Innovation Ecosystem

6.5 One World: Two Domain Dividing Firewalls The US and China lead in the world of internet that create, deliver and capture value based on information capabilities. Figure 6.3 shows three major internet firms from China (Alibaba, Tencent and Baidu) and US (Amazon, Alphabet and Facebook). These two firms operate in two different models. One is China-based “Cyber Sovereignty Model” in which the state does control internet traffic based on state’s value interests. The other is US-led “Open Network Model” which operates by market-driven internet model. These two models operate within the boundaries drawn clearly by a firewall. Amazon, Google and Facebook are blocked in China whereas Alibaba, Baidu and Tencent are not readily accessible in the US and many of the market economies. As a communication tool, WhatsApp users are more widely spread in most market economies including US, Europe, Japan, South Korea and Brazil. In contrast, WeChat has more options that are flexible and yet they are not readily available beyond China and other selective countries. Increasingly, the diverging world of internet shows the two different patterns of value orientation of China and the US. In this sense, the case of Huawei highlights the visible paths of two opposing visions of innovative value creation, delivery and capture.

Baidu 15.53

Alibaba 53.13

Tencent 46.13

Cyber Sovereignty Model Control Internet Traffic Model

WeChat (as of Sep 2018) 1.1

D o m ai n Di vi di ng Fir e w all

Amazon 232.89 Alphabet 136.82 Facebook 88.83

Open Network Model Market Driven Internet Model

WhatsApp (as of Jan 2018) 1.5

Monthly Active Users, in billions Fig. 6.3 Two diverging internet world. Source Companies ($1 = 6.74 Chinese Yuan)

6.6 Implementing 5G Infrastructure for Innovations and Wealth Creation

111

6.6 Implementing 5G Infrastructure for Innovations and Wealth Creation 5G (Fifth-generation wireless) is expected to be 100 times faster than current 4G networks. 5G’s increasing capabilities enable emerging innovations such as driverless cars, AI-based robotics applications, and IoT to have faster, richer and broader impacts (Wu 2019). New innovations have greater potential for value and wealth creation. In the race to 5G, two competitiveness indicators are 5G cellular sites and actual investment. According to Bernstein Research wide area 5G cellular sites by the end of 2019 by country are: China (150,000), South Korea (75,000), US. (10,000), U.K. (2,500), Australia (1,000). Dell’Oro Group reports that difference in the projected investment between China and North America (US and Canada combined) are $12 billion and $11 billion. This suggests China is more strategic on approaching 5G network installations and applications. These differences arise in the way China and U.S. approach national level technology strategy. China executes national government decisions with precision and speed, whereas the U.S. takes a private sector-driven approach. When defining the direction and scope of U.S. industrial policy, it takes more time to arrive to a national consensus.

6.7 Free Market Capitalism Versus Authoritarian Capitalism Two streams of a national ecosystem are based on the nature of capitalism—Free Market versus Authoritarian. Carney and Richard (2018) argues that “In contrast to the liberal-democratic world order that has persisted since 1945, a new statistauthoritarian world order is on the rise. The sudden retreat of the United States from globalization has accelerated this transition and amplified the need to make sense of hos authoritarian regimes work with their state infused corporate sectors” (pp. xi). Extending beyond the geographical boundaries of China, the reach and influence of this authoritarian ecosystem is particularly noticeable in other Asian countries. For example, Singapore, Malaysia and Indonesia have significant capital ownership, and or foreign direct investment (FDI) by overseas Chinese owned companies who maintain the cultural traditions of Confucianism; emphasizing order, discipline, obedience, harmony, and control. Countries like Japan and South Korea, to similar extents, demonstrate such similar world views and cultural values rather than liberal democratic ideas of “freedom, equality, justice, individuality, creativity and tolerance” of western nations. However, Asian world views also have a great deal of diversity. Such cultural values impact negotiation practices on strategic and routine sourcing (Kang et al. 2018). In this cultural sense, the trade tensions currently experienced between USA and China

112

6 Network Capabilities: National Innovation Ecosystem

continue to go much deeper, creating economic angst among both nations. As Asia rises, the scope of clash is on the level of civilization (Huntington 1996). As liberal international order is in retreat, another alternate model is becoming more visible. Certainly, governments of advanced economies have control practices in place. On the other hand, Chinese sovereign model asserts the role of national state over the private realm. Therefore, it tends to selectively subscribes to the pillars of liberal international order (e.g., individual freedom, property rights, rule of law). China, in a relatively short period of time, has achieved rapid economic growth and social development. Such productive models appeal to many emerging economies, especially those who are in the infancy of establishing and applying democratic rules to advance their economies. However, results do not always justify the means to do so. Evidence of progress pursues those who are otherwise unconvinced the merit of such systems that emphasize state control mechanisms. In the next chapter we discuss challenges and opportunities facing Chinese global firms. As companies emerge from China and move into global markets, they experience the impact of rules of international order on how business affairs are conducted.

References Afuah, A. (2013). Are network effects really all about size? The role of structure and conduct. Strategic Management Journal, 34(3), 257–273. Arora, A., Cohen, W. M., & Walsh, J. P. (2016). The acquisition and commercialization of invention in American manufacturing: Incidence and impact. Research Policy, 45(6), 1113–1128. Carney, R. W. (2018). Authoritarian capitalism: Sovereign wealth funds and state-owned enterprises in East Asia and beyond. United Kingdom: Cambridge University Press. Cattani, G., Porac, J. F., & Thomas, H. (2017). Categories and competition. Strategic Management Journal, 38(1), 64–92. Dyer, J. H., Singh, H., & Hesterly, W. S. (2018). The relational view revisited: A dynamic perspective on value creation and value capture. Strategic Management Journal, 39(12), 3140–3162. Farrell, H., & Newman, A. L. (2019). Weaponized interdependence: How global economic networks shape state coercion. International Security, 44(1), 42–79. Gans, J., & Ryall, M. D. (2017) Value capture theory: A strategic management review. Strategic Management Journal, 38(1), 17–41. Grimpe, C., & Hussinger, K. (2014). Resource complementarity and value capture in firm acquisitions: The role of intellectual property rights. Strategic Management Journal, 35(12), 1762–1780. Hong, P. (2017). Macro-level trends, linkage role of ethics and entrepreneurial responses: A conceptual framework for research agenda. IBA Journal of Management & Leadership, 9(1), 77–87. Hong, P., & Park, Y. (2014). Building network capabilities in turbulent competitive environments: Business success stories from the BRICs. Boca Raton: CRC Press. ISBN-13: 978-1466515758. Huntington, S. P. (1996). The clash of civilizations and the remaking of world order. New York: Simon & Schuster. ISBN 0-684-84441-9. Jia, N., Shi, J., & Wang, Y. (2018). Value creation and value capture in governing shareholder relationships: Evidence from a policy experiment in an emerging market. Strategic Management Journal, 39(9), 2466–2488.

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Kang, M., Hong, P., Bartnick, R., Park, Y. W., & Ko, C. (2018). Aligning purchasing portfolio management with sourcing negotiation styles. Management Decision, 56(11), 2341–2356. Kang, R., & Zaheer, A. (2018). Determinants of alliance partner choice: Network distance, managerial incentives, and board monitoring. Strategic Management Journal, 39(10), 2745–2769. Lee, J. W., Song, H. S., & Kwak, J. (2014). Internationalization of Korean banks during crises: The network view of learning and commitment. International Business Review, 23(6), 1040–1048. Park, Y., & Hong, P. (2012). Building network capabilities in turbulent competitive environments: Practices of global firms from Korea and Japan. Boca Raton: CRC Press. ISBN 978-1-43985068-8. Ranganathan, R., Ghosh, A., & Rosenkopf, L. (2018). Competition–cooperation interplay during multifirm technology coordination: The effect of firm heterogeneity on conflict and consensus in a technology standards organization. Strategic Management Journal, 39(12), 3193–3221. Teece, D. J. (2018). Profiting from innovation in the digital economy: Enabling technologies, standards, and licensing models in the wireless world. Research Policy, 47(8), 1367–1387. Wu, S. (2019). In the race to 5G, China sprints ahead. Wall Street Journal, B1 & B6, September 7, 2019.

Chapter 7

Chinese Global Firms: Challenges and Opportunities

While Chinese firms have been innovative in terms of cost and speed, most are yet to build the capabilities to deliver a pipeline of truly innovative products and services. As innovation inevitably becomes more collaborative and eco-system-based, Chinese firms will have to gain the trust of potential partners around the world that they are genuinely commercial enterprises not tools of the state and that they will not benefit disproportionately from the joint effort. (Yves Doz and Keeley Wilson on Advantages and Challenges on Chinese MNEs in global competition).

Abstract The rise of Chinese global firms has been quite noticeable since 2000. This chapter examines challenges and opportunities of Chinese global firms. Since 2000s, there has been a significant increase of Chinese firms listed in Global Fortune 500. Amongst major nations, China’s growth speed is most prominent. This chapter examines the strategic process of rapid catch-up and global competitiveness and provides illustrations of Chinese global firms for illustrations. Challenges and opportunities of Chinese global firms are also discussed.

7.1 Strategic Process of Rapid Catch-up and Global Competitiveness Asian firms have started their competitive race much later than the firms from Europe and North America do. Therefore, rapid catch-up and global competitiveness requires a strategic process in terms of economies of scale and economies of scope (Fig. 7.1). Table 7.1 provides a framework that summarizes transition steps of Asian global automotive firms and other details in terms of definition, key indicators and illustrative examples. In firm context, motivations and leadership capabilities of entrepreneurialminded individuals are the driving force of any company aspiring for greatness. Developing quality products that are tested beyond local, regional and domestic levels is a real challenge for taking-off to large segments of global markets. Although © Springer Nature Singapore Pte Ltd. 2020 P. Hong and Y. W. Park, Rising Asia and American Hegemony, https://doi.org/10.1007/978-981-13-7635-1_7

115

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7 Chinese Global Firms: Challenges and Opportunities

Fig. 7.1 Five stages of global business transitions

the major firms of Japan, South Korea, China and India were established in different years, the patterns of their global competitiveness are similar. Here, global competitiveness is measured in terms of their substantial access to both advanced and emerging markets through offering market-tested quality products and services (Sheth 1986; Gehlhar et al. 2006; Hong et al. 2017). Asian firms have made transitions from entrepreneurial leadership driven growth for their domestic market. Its domestic advantage in terms of large market share was possible through implementing a strategy for rapid catch-up with Western leading firms. For example, Japanese Toyota and Honda, from their early years of development, pursued to meet their domestic needs (e.g., support military-related defense products) with their domestic advantage. As they targeted markets in USA and Europe, their goals were to adopt the best practices of US firms for design and productivity performance (Torrey 1952; Shimokawa 1997; Shimokawa 2010). In 1960 and 1970s, their product quality excellence through Japanese quality management practices received much favorable attention. Such product quality excellence enabled these Japanese firms to expand their global markets and accordingly their focus has been mass customization fulfillment through customer excellence with supply chain capabilities. Global brand positioning is to join in the global leadership position in the automotive industry. Similar patterns are also repeated with Korea’s Hyundai-Kia (Park and Hong 2012; Hong and Park 2014). Transition steps from early inception and growth years to achieving the status of domestic advantage, global competitiveness and global prominence. Japanese

Transition step

Visionary Entrepreneurial Leadership

Product Quality Excellence

Mass-Customization Capabilities

Stage

1

2

3

Superb fulfillment of diverse customer requirements in different global market segments through supply chain capabilities

Design and deliver products that satisfy multiple competitive capabilities through applying organization-wide process excellence

Solid business philosophy, daring business goals, and superb inspirations in words and actions embodied by firm founders and their successors

Definition

Table 7.1 Essential characteristics of transition steps

Diverse product offerings to global markets for both premium and functional products; Increasing sales growth in emerging markets along with advanced economies;

Competitive performance in advanced markets through quality guarantees and consistent top performance records

Exciting stories of early trials and subsequent successes, having business goals for national wealth growth, establishing network firms in multiple industries

Key indicators

(continued)

Toyota’s global success performance; Hyundai’s success performance in India; Tata’s success in Middle East and Africa;

Toyota’s quality excellence performance in early US Consumer Reports; Hyundai’s 100,000 miles and 10 years guarantee; simultaneous achievements of cost, quality, delivery, innovativeness

Stories of founders of Toyota, Honda (Japanese), Samsung, Hyundai (Korean), Geely (Chinese), Tata (Indian) illustrate the larger purpose-driven leadership of founders beyond narrowly defined corporate goals especially as the growth of firms receive notice of public at large

Illustrative examples

7.1 Strategic Process of Rapid Catch-up and Global Competitiveness 117

Transition step

Global Brand Positioning

Sustainable Market Development

Stage

4

5

Table 7.1 (continued)

Pursuit of emerging trends in industry through systemic sensing efforts by internal, external and open sources

Secure establishments of large growing loyal customer base both in advanced and emerging markets

Definition

Early definition of growth business lines; % of R & D for developing disruptive innovation on non-existing potential product lines;

Steady sales increase, sold market share of major product lines and stable financial performance in diverse global market segments

Key indicators

Major automotive industry leaders (e.g., Toyota, Honda, Hyundai) all involve in potential growth engine product and service lines in relation to 4th Industrial Revolution (e.g., autonomous driving, IoT system tools)

Steady sales even after Toyota’s global product recalls; Hyundai-Kia’s winning design awards in Germany and consistent high reviews from US Customers Report

Illustrative examples

118 7 Chinese Global Firms: Challenges and Opportunities

7.1 Strategic Process of Rapid Catch-up and Global Competitiveness

119

automakers, after catching up with US automakers, maintain their global market leadership position and thrive on enormous value chain capabilities based on their high level of quality and technological capabilities. Hyundai-Kia groups, through rigorous learning processes from Japanese automakers (e.g., with Mitsubishi group in the initial period of establishment worked) and rapid catch-up growth periods, have also reached global No. 4 position in terms of sales performance. The rapid growth of Chinese and Indian automakers is quite visible. Chinese and Indian indigenous firms have taken aggressive steps for rapid catchup by building their organizational capabilities in terms of technological competences for quality excellence (Balcet et al. 2012; Kumaraswamy et al. 2012; Hong and Park 2014; Kobayashi et al. 2014). With foresight and resolve, entrepreneurial and innovative leadership of the founders and top management provide vision, and sense of direction and driving power to move forward. The distinctive mark between the top level and ordinary firm is the presence of strong leadership. For example, SAIC-GM Wuling Automobile (SGMW) has achieved 2 million car sales in 2016 in China market alone (Sou 2017). Geely has also showed tremendous progress in its quality performance through acquisition of Volvo. These firms, SGMW and Geely, learn and acquire core technological capabilities in a very short period through their formation of strategic partnerships with major global leaders or merger & acquisition (M & A) of a financially troubled brand-name company. India’s Tata also entered strategic partnership with European automakers. Instead merely benchmarking quality performance, it successfully built its own product architecture for low-priced and high quality vehicle lines.

7.2 Rise of Chinese Global Firms Performance measures of major firms of nations are the reliable indicators of an economy’s strength. Table 7.2 is a summary of comparisons of the US and China in terms of Top 100 firms, Global Fortune 500 firms, Forbes 2,000 firms, Top 100 global brands and nominal GDP. In keeping up with the rising GDP (As of 2019, China is No. 2 in terms of nominal GDP), Chinese firms have made visible progress in positioning itself in global markets. Since 2000, the list of Global Fortune 500 firms includes an increasing number of Chinese firms. USA and China alone 64% of Global Fortune 50 firms (32 firms out of 50) and 66% of PwC Global 100 Firms by Market Capitalization (66 firms out of 100). USA is dominant in Global Top 50 by sales (42% vs. 22%) and Global 100 Firms by market capitalization (54% vs. 12%). By the late 1970s, numerous Japanese firms slowly join the list of Fortune 500. As of 2000, the number increased to more than 107 and then by 2018 it decreased to 52. In contrast, China has shown enormous growth in the number of global firms. In 2000, China only had 10 Fortune 500 firms and by 2018, now has 120—closer to the number of US firms in the category. In addition, the number of firms from each country that are listed in Global Fortune 500 and Forbes 2000 are also accounted for

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7 Chinese Global Firms: Challenges and Opportunities

Table 7.2 USA and China comparison of Top Global 50, 100, 500 Firms (2018) and GDP (2019) Global Top 50 Firms (#) 2018

PwC Global 100 Firms (Market capitalization)

Global 500 Firms (#) 2019

Global 500 Firms (#) 2018

Forbes 2000 (#)

FT Top 100 Global Brands (#)

Total (#)

Nominal GDP (2019 in billion USD)

USA

21

54

121

126

557

55

813

21,482.41

China

11

12

119

120

291

14

448

14,172.20

Japan

3

1

52

52

228

3

287

5,220.57

Germany

3

4

29

32

54

8

101

4,117.07

United Kingdom

2

5

17

21

94

4

126

2,809.01

France

3

4

31

28

57

4

96

2,844.70

South Korea

1

1

16

16

67

1

86

1,699.68

Canada

0

2

13

12

51

2

67

1,820.36

India

0

0

10

10

58

1

69

2,957.72

Source Fortune 500, Forbes 2000, PwC Global 100 Firms, FT Top Global Brands, and GDP (IMF)

by country. Although same firms might be listed more than once in each category, for the simple comparison, the total number of all four categories are added for the comparison purpose. The total number (55) of US global brands is much larger than that of China (12). While US brands are somewhat diverse, China brands are focused on retail, insurance and banking. Rapid rise of Chinese brand firms are also noted. In 2019, China reports 119 firms in Global Fortune 500 list whereas the US has 121 companies in the list. Three Chinese firms are made to the top ten, surpassing the US and Japan. The drastic increase of Chinese firms in Global Fortune 500 list is primarily with the growth of the Chinese economy. Total 16 industries (two industries—Global Banks and Personal Care are combined with Regional banks and Baby Care). The largest number (15) is from technology, and the next 6 are from retail. These US global brands suggest several important characteristics: (1) diversity of industries. The 16 different industries include technology, retail, regional/global banks, payments, fast food, telecom providers, logistics/transport, baby/personal care, soft drink, entertainment, tobacco, conglomerate, apparel, beer, oil & gas, cars; (2) global impact. Many of these products and services are global in market scope. Their products reach out the world; (3) technology and service orientation. The largest segments are in technology, retail, regional/global banks, payments, fast food and telecom providers with more than 4 in each industry category; (4) the total number of manufacturing and energy sectors (such as baby/personal care, soft drink, tobacco, beer, oil & gas and cars) 11. These US firms with global brands are in contrast with those of China (Table 7.3).

7.2 Rise of Chinese Global Firms

121

Table 7.3 US Major Global Brands Total #

Names (2018 ranking: Brand value, 2018 m$)

Industry

15

Google (1: 302, 063), Apple (2: 300, 595), Microsoft (4: 200, 987), Facebook (6: 162, 106), IBM (11: 96, 269), Accenture (32: 33,723), Intel(38: 28, 316), Oracle (45: 25, 802), YouTube (51: 22, 958), Cisco (57: 21, 331), Adobe (75: 17, 831), Salesforce (78: 17, 026), LinkedIn (83: 15, 657), HP (89: 14, 749), Instagram (91: 14, 496),

Technology

6

Amazon(3: 207, 594), The Home Depot (20: 47, 229), Walmart (31: 34, 002), Costco (72: 18, 265), EBay (88: 14, 829), Lowe’s (95: 13, 111)

Retail

6

Wells Fargo (18: 54, 952), Citi (58: 21, 258), Chase (67: 19, 324), J.P. Morgan (73: 18, 251), Bank of America (77: 17, 439), US Bank(80: 16, 278),

Regional/Global Banks

4

VISA (7: 145, 611), MasterCard (15: 70, 872), PayPal (30: 35, 440), American Express (35: 30, 046),

Payments

4

McDonald’s (8: 126, 044), Starbucks (23: 44, 503), Subway (70: 18, 766), KFC (87: 15, 131),

Fast Food

4

AT&T, (10: 106, 698), Verizon (12: 84, 897), Xfinity (24: 43, 056), Spectrum (27: 39, 372)

Telecom providers

3

UPS (16: 60, 412), FedEx (56: 22, 218), Uber (81: 16, 045),

Logistics/Transport

3

Pampers (64: 20, 183), Colgate(71: 18, 516), Gillette (85: 15, 358)

Baby/Personal care

2

Coca-Cola (14: 79, 964), Pepsi (98: 12, 685)

Soft Drink

2

Disney (19: 53, 833), Netflix (61: 20, 819),

Entertainment

1

Marlboro (13: 81, 914),

Tobacco

1

GE (28: 39, 041)

Conglomerate

1

Nike (29: 38, 479),

Apparel

1

Budweiser (40: 27, 031),

Beer

1

ExxonMobil (74: 18, 222),

Oil & Gas

1

Ford (96: 12, 742)

Cars

55

Good (1: 302, 063) to Pepsi (98: 12, 685)

Average (46: 55, 534) Total 16(18) Industries

Table 7.4 shows Chinese major global brands. The total number of Chinese brands are: three are from technology, two are from retail, and six are from regional banks and insurance, and alcohol and logistics are one each. These Chinese global brands are the results of rapid growth of Chinese domestic economy and their access to US and other global market segments. It is an outstanding achievement for China to produce such a number of global brands less than 50 years. Other European and Japanese firms do not have such numbers. Having noted with such an achievement, Chinese global brands also have the following characteristics: (1) As of 2018, manufacturing firms are not yet listed; (2) most of these firms are serving customers in China. Their

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7 Chinese Global Firms: Challenges and Opportunities

Table 7.4 Chinese Major Global Brands 2018

2017

Name

Category

Sales (2018)

Brand Value 2018 ($m)

Brand Value 2017 ($m)

Value change (%)

5

8

Tencent

Technology

178,990

108,292

65.3

48

49

Huawei

Technology

24,922

20,338

22.2

41

39

Baidu

Technology

26,861

23,559

14.0 91.8

9

14

Alibaba

Retail

113,401

59,127

59

New

JD.com

Retail

20,933

10,768

21

17

China mobile

Telecom providers

46,349

56,535

22

28

ICBC

Regional banks

45,853

31,570

45.2

49

54

China construction Bank

Regional banks

23,747

18,770

26.5

84

94

Bank of China

Regional banks

15,607

12,013

29.9

69

72

Agricultural bank of China

Regional banks

19,141

14,981

27.8

43

61

Ping An

Insurance

26,141

17,260

51.5

79

78

China life

Insurance

16,429

13,910

18.1

34

64

Moutai

Alcohol

32,113

16,983

89.1

90

New

SF express

Logistics

14,537

n.a.

94.4 −18

n.a.

Source FT Top Global Brands (https://ig.ft.com/top-100-global-brands/2018/)

expansion to the global market is not yet so noticeable. Tencent and Huawei are in transition for global market impact.

7.3 Rise of Huawei: Opportunities for Global Market Leadership Huawei’s case is an illustration of managing risks of global firms from emerging economics to take competitive position in advanced markets. Chinese firms with state ownership may result in a significant level of innovation by utilizing R&D resources and discipline culture and goal-driven practices (Zhou et al. 2017). It is one thing that firms from China and India export their products based on the low cost advantage. Yet, as these companies become competitive and even assume the position of global leadership in premium value-added products and services, they

7.3 Rise of Huawei: Opportunities for Global Market Leadership

123

overcome these hurdles through dynamic interplay of social network, the state’s support and aggressive market positioning. As late comers, these firms make enormous stride to move beyond the domestic advantage and expand to international markets by achieving cost-quality competitiveness and the market adaptation disciplines (Park and Hong 2012; Luo and Zhang 2016). Obloj and Zemsky (2015) show that “the key contracting parameters such as efficiency, transactional integrity, incentive alignment, and gaming increase value creation and capture for all parties and are complements when buyers face competing suppliers”. “Science-based start-ups are more likely to engage in acquisitions and collaborations with established firms. Diversifying firms are more likely to commercialize products after leveraging of internal development, acquisitions, and alliances” (Moeen and Agarwal 2017). “Firms cooperate and invest to create value in the early years of product lifecycle and then while compete for resources on value capture tactics” (Panico 2017). Cooperative game theory is useful in explaining strategic processes of value creation and value capture (Ross 2018). Such risks are quite different from how global firms from advanced economies respond to the risk factors in emerging economies. On January 28, 2019, the twin U.S. indictments of Huawei sent a clear message to Chinese companies. Since most China’s Global Fortune 500 firms are state-owned, these firms reflect the political and economic policies of Chinese government. The US Justice claims, “Huawei employees in the U.S. stole T-Mobile technology and ….Huawei and CFO Meng Wanzhou for using a shell scheme to concept its business in Iran that violated U.S. sanctions for a decade.” (WSJ 1-30-2019). The indictment lists a series of “alleged conspiracy, and bank and wire fraud” including “lying to the FBI, lying to Congress, lying to banks ….for the theft of trade secrets from T-Mobile” and may lead to criminal violations. The recent decision of European Court of Justice (ECJ) also relates to the circumstances of abuse for infringement of standard-essential patent (SEP) (Barthelmess et al. 2015). The world has seen China’s rapid rise through dramatic catch-up of Chinese companies in global markets. There has been continuous suspicion of Chinese industrial espionage on the firm level and strong push for forced technology transfer by the government level. In a broad perspective, Huawei’s case is an illustration of how China-U.S. rivalry over attaining 5G network advantage is unfolding (Tweed and Gao 2019). Certainly, to Huawei, gaining the confidence of customers at large and American consumers in particular is important for its positioning in global market as a leading brand like Apple Inc. and Samsung Electronics Co. Recent US government’s warning to other allies about security risk about Huawei’s telecommunication products have not yet secured broad supports from other major European and Asian countries including UK, Germany, and India. However, it is to be seen how Huawei sustains its global market leadership through implementing credible standards that satisfy and assures security-conscious constomers. Chinese global firms have heavily invested in both advanced and emerging economies. These Chinese firms have implemented sourcing localization and marketing localization as other Japanese and Korean firms did.

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A large number of state-owned Chinese firms are more sensitive to political risks compared to privately owned Chinese firms (Liu et al. 2016). This may be related to the growing perception that Chinese state-owned firms are influenced by policy decisions of Chinese government. In this sense, challenges of Chinese global firms may not be limited to Huawei. As Chinese global firms become more prominent in the eyes of global customers, their practices will be increasingly scrutinized beyond their sales and market growth. Their practices of human resource management, corporate social responsibility, individual rights, and safety and security measures will be closely watched until they recognized as global firms in form and substance.

7.4 Challenges of Huawei As of May, 2019, Huawei faces another huge challenge for global market acceptance. As a part of US rivalry strategy against China, Trump Administration targets Huawei technologies by disrupting its access to critical US suppliers. For instance, Google has cut Huawei’s Android access. Google has suspended all business with Huawei “that requires the transfer of hardware, software and technical services except those publicly available via open source licensing”. Current Huawei phones will continue to have access to services including Google Play and security from Google Play Protect because Huawei has been one of “Android’s key global partners”. Yet, it is unclear how the business interests and relationships between Google and Huawei will play out. Ultimately, the impact of US government actions on Huawei and US firms depends on how US-China rivalry is resolved. Defenders of free trade have not remained silent. George Gilder (2019) asserts, “Huawei isn’t a problem. It’s an opportunity to revitalize the U.S. economy and enhance its digital infrastructure. The U.S. should embrace Huawei as a triumph of the American-led system rather than push it into the arms of Chinese hard-liners who revel in autarkic dreams”. Yet, such sympathetic statements do not reflect the majority opinion. Building the image of a global brand requires the support of the prevailing international order. Even the most prominent firms, if being thrown into the rivalry storm of nations and, are singled out on a watch list for examination and investigation from the market. Huawei’s case suggests a critical test that Chinese global firms must pass through. Huawei’s phenomenal growth certainly deserves respect and its achievement is worthy of wonder. Criticisms against Huawei allege “thefts” from its tech partners like Cisco Technology Inc., and T-Mobile US Inc., and Motorola Inc.—to name a few. However, its “wolf-like organizational culture” that focuses on rapid results by all means has reached the ceiling. Global market leaders like Huawei must excel in ethically transparent behaviors beyond outstanding productivity and competitivenss. In the following chapters, we focus on how firms with relatively free access to international markets engage, grow and thrive in emerging markets.

References

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Chapter 8

The Self-contained Localization Strategy: Case studies of Japanese firms

…Asian-focused research allows researchers to extend and revise theories through the consideration of new contextual variables…by developing context-specific conditions and operationalization of key constructs, which in turn allows researchers to develop new theories and constructs which are generalizable to research in other contexts. (Garry D. Bruton and Chung Ming Lau, 2008).

Abstract: A huge number of middle-income groups are distributed in China and the Association of South East Asian Nations (ASEAN). In this context, global firms recognize the need for localization strategy. The practical upcoming challenge of global companies is to determine the best way to accomplish localization. This chapter presents the development of a self-contained localization system based on organizational capabilities and suggests the self-contained localization strategy through case studies of Japanese firms. The foreign subsidiaries with self-contained units have their own R&D, operations, marketing, service, and human resource functions. Therefore, the self-contained localization strategy allows the foreign subsidiary a large degree of autonomy in responding appropriately to local competitive conditions with locally responsive strategies. For Japanese firms that implement self-contained localization strategy, they allow a larger degree of autonomy and achieve a higher global market share of their products.

8.1 Introduction With prolonged economic slowdown and recessions in advanced economies, emerging economies such as BRICs (Brazil, Russia, India, and China) and ASEAN (Association of South East Asian Nations) are receiving more investors’ attention. Their rapid economic growth and extraordinary changing speed, among income groups Note: This chapter content is initially published in “Park, YW. Hong, Paul, GC Shin, GC (2017). Self-Contained Localization Strategy: Case Studies of Japanese Firms. Perspectives on Global Development and Technology.” Vol. 16 No. 5, pp. 487–500 © Springer Nature Singapore Pte Ltd. 2020 P. Hong and Y. W. Park, Rising Asia and American Hegemony, https://doi.org/10.1007/978-981-13-7635-1_8

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with substantial disposable income, are noted in these nations (Park and Amano 2011; Hong and Park 2014). In particular, the ratio of middle-income groups is steadily increasing. Thus, their income distribution is transitioning towards a diamond shape (just like many advanced nations) rather than the pyramid income structures of many traditional poor nations. For example, according to Japanese Economic Industry Bureau Statistics, the number of middle-income households in Asia which reports their annual per capita income between $5,000 and $35,000 is 140 million in 1990, 220 million in 2000 and 880 million by 2008 (METI 2011; Hong et al. 2004). Middle-income groups in China, India and ASEAN are growing rapidly and most of the new groups are distributed in these emerging economies. With the fast economic growth in BRICs and ASEAN, the purchasing power potential of these groups shows phenomenal growth rates. Increasingly, global firms are pouring their resources into emerging economies such as BRICs to overcome their slow growth in advanced and mature markets. However, pioneering these new markets requires different business models in contrast to their old-fashioned business-as-usual approaches (Park and Amano 2011; Park 2012; Hong and Park 2014). Although Japanese global firms entered these emerging markets (such as China, India, and Brazil) much earlier than their Korean rivals (as suggested by their market share in these countries), their business performance has not been so impressive (Park 2009, 2012; Park and Amano 2011; Park et al. 2012). Since most Japanese firms consider product quality of highest importance, the prices of their products sold in Japan and other advanced markets (e.g., USA and EU) are relatively high. For this reason, Japanese firms tend to offer products in these emerging markets at lower prices—with existing products that had already been introduced in advanced markets. Customers in emerging markets do not show any real enthusiasm for such “old model” products. Recently, some Japanese firms however showed successful market positioning in these emerging markets (Park and Amano 2011; Park 2012; Hong and Park 2014). These firms serve their target customers with high quality products that fit the unique market needs. These successful firms respect the unique customer needs in the emerging markets. In other words, they no longer apply “minus” product strategy (i.e., offering products to emerging markets with fewer product options compared to those offered to the advanced markets). Instead, they offer products that satisfy the local needs of the customers through “multiplying” specific production functionality and service options. Outstanding R&D functions are essential for such winning market performance. In the past, Japanese firms made direct investments in manufacturing facilities in these emerging economies to take advantage of low labor costs (Hong and Park 2014). Yet, many did not adopt direct product development strategies in these nations to satisfy customer needs. This chapter aims to examine cases of successful Japanese firms in these emerging markets with a specific focus on the Japanese firms in Chinese and ASEAN markets. Specific focus is on the Japanese firms in Chinese and ASEAN markets. Based on extensive interviews with executives and actual field visits, this chapter discusses

8.1 Introduction

129

the self-contained localization strategy of selected Japanese firms. For the purpose of this article, we define “self-contained localization” as “the extent of autonomy of all vital value creation and delivery functions (e.g., product development, procurement, manufacturing, distribution and customer service) with local initiatives”. In subsequent sections, we will review the relation between localization strategy and organizational capability.

8.2 Localization Strategy and Organizational Capability The focus of this chapter is the localization strategy of Japanese global firms. This section examines the coordination mechanism between headquarters and local business units in implementing such a strategy. March (1991) emphasized exploration and exploitation dynamics of learning organization. He defined exploration in the form of search, variation, risk taking, experimentation, play, flexibility, discovery, and innovation, whereas exploitation in terms of refinement, choice, production, efficiency, selection, implementation, and exaction. Although many firms tend to exploit their existing competences (Levinthal and March 1993), the strategic priority is to seek balance between exploration and exploitation (Danneels 2002; Dougherty 1995; Dougherty and Heller 1994; Hamel and Prahalad 1994; Helfat and Raubitschek 2000; Henderson and Clark 1990; Henderson 1991; Henderson 1993; Henderson and Cockburn 1994; Hong and Park 2014; Leonard-Barton 1992; Morone 1993; Park and Hong 2012; Prahalad and Hamel 1990; Schulze 2009; Sidhu et al. 2004, 2007). In this sense, knowledge sharing and network capability building are crucial throughout the product development, manufacturing transformation, and customer delivery processes (Hong et al. 2004, 2005, 2011; Park and Hong 2012, Park et al. 2012). From the perspective of competence exploration and exploitation, the following explanation is useful for organizational capability dynamics. Figure 8.1 shows that technology competence enhances technology orientation but reduces product attractiveness (Hong and Park 2014; Park and Hong 2015). On the other hand, customer competence raises product attractiveness but works against Fig. 8.1 Organizational capability dynamics (Source Adopted from Hong and Park (2014) and Park and Hong (2015))

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the technology orientation. Linkage competence operates in counter-response to both customer and technology competence. The trade-off relationship between product attractiveness and technology orientation occurs primarily because of resource constraints. Firms use their limited resources for achieving product attractiveness and technology orientation and therefore “choose and concentrate” their management efforts. Such trade-off become more explicit in the environment of intense global competition and short product life cycle. As firms experience successes through their “choice and concentration” management, they tend to maintain similar patterns of business practices. If a firm’s successes came from the enhancement of product attractiveness (i.e., customer competence), then it would continue to pour its resources into marketing functions. On the other hand, if a firm’s success was based on product quality, then it would focus on technology competence. In this way, firms may either excel in customer competence or technology competence but not in both. For example, after World War II, Japanese firms had to choose and develop technology competence because of their serious resource constraints in terms of human and natural resources (Fujimoto 2003; Hirota et al. 2010). Yet, such a one-sided move toward technology competence tends to weaken their product attractiveness via customer competence. Thus, firms may produce products with high technological sophistication which lack in product attractiveness and ultimately lose their market share with lack of customer appreciation of their highly technological products. In the 1990s, many Japanese auto-manufacturers faced “excessive quality products”. The Japanese electronics industry also experienced similar patterns in the global markets. Excessive focus on technology competence may not prepare firms for rapid changes in the market environment. In reality, most firms avoid excessive “choice and concentration” either technology level or product quality until they lose their market competitiveness. Most firms use their sense of balance to recover their market positions through using their linkage competence. In the past, most Japanese global firms used forecast data for their product development and adopted push-based decision making patterns. However, new business models that fit the changing global market contexts require simulation capability and speedy decision making that simultaneously integrates their internal technology competence and unique local customer needs. Thus, these firms increasingly use realistic simulation models that accurately reflect the needs of local customers, engineering, and manufacturing capabilities. Such analysis allows local business units to decide to what extent they use their own organizational capabilities and to what degree they need the support of other global network capabilities in determining what to “make” and “buy” and where to produce. Related studies on these double-edge practices of global management are found in the duality model and hybrid model (Abo et al. 1991; Amano 2005; Bartlett and Ghoshal 1989; Eisenhardt 2000; Evans 1999; Graetz and Smith 2008; Hillman and Wan 2005; Kogut 1985; Oki 2009; Park and Shintaku 2016). This stream of research notes (1) selective transfers of the successful domestic practices, and (2) adaptation of practices to fit the new field characteristics (Park and Shintaku 2016).

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131

In past studies, there has been little research about localization strategy in terms of organizational capability building. Thus, this study aims to analyze the localization strategy of Japanese global firms based on their organizational capability dynamics and portfolio management. Specific case studies also focus on the relationship between self-contained localization and market positioning success (i.e., organizational capability dynamics and the self-contained localization strategy vs. market share).

8.3 Case Analyses 8.3.1 Case Firms and Scope of Interviews This particular study explored two broad research questions. First, research is about global strategic direction, which is based on (a) understanding the emerging trend in Chinese and ASEAN markets; and (b) defining and building relationship between Japanese headquarters and local business units in these emerging markets in terms of value-added processes (e.g., development, procurement, manufacturing, and services). Additional details include establishing distribution centers, collaboration in the areas of product development, use of local component suppliers (OEM and EMS included), manufacturing, procurement, and other business issues. Second, we examine local initiated integration (i.e., self-contained localization) as opposed to headquarters-centered integration. This study focuses on global organization and strategy formulation related to localized development or the role of local manufacturing plants (advantage and strengths). In the past, most firms concentrated their efforts on production cost reductions and limited the scope of local functional integration to the extent of purchasing, production, and quality control. Thus, local R&D remained nothing but an imitation of the headquarters R&D in Japan. Local manufacturing functions also followed the patterns of manufacturing facilities in Japan. Even in the case of developing products that fit the local market needs, engineering designs merely adapted to the development patterns of Japanese HQ (i.e., development model and platform design). The case studies of this chapter are based on field visits during the month of August 2012. The purpose of the extensive executive interviews is to examine and study localization strategy models for global competitiveness among firms that are the members of Industry-University Research Alliance of the University of Tokyo. Figure 8.2 shows the locations of these ten Japanese business units in China and ASEAN nations. The interviews focused on R&D and manufacturing functions and other support areas. With rapid changes in global markets, such limited localization strategy no longer proved to be effective. Increasingly, global market positioning is becoming an important strategic priority. As Chinese and ASEAN markets grow at a record speed (i.e., transformation into attractive markets) and increasing local labor costs, mere labor

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Fig. 8.2 Distribution of firms for case studies map

cost reduction-driven and manufacturing-based strategy shows serious limits. Furthermore, local constraints (e.g., government regulations, environmental concerns, and local customers’ demand) are much more challenging to handle compared to the past. As indigenous firms develop their organizational capabilities, they are able to produce high-quality goods at low cost. In this sense, low-cost strategy such as having their manufacturing facilities in the emerging markets is no longer sufficient. Instead, from a purely cost advantage standpoint, it is better for these Japanese global firms to use local component suppliers (EMS or ODM). Based on these research questions, the research team visited ten business units of Japanese global firms in China and other ASEAN nations (see Table 8.1). Table 8.1 Japanese business units used in case study Location

Company

Unit(s)

Shanghai

PI

Production development

Guangzhou

N

Production development

J

Quality technology

Hanoi

N

Technology engineering

Bangkok

N

Production and new product development

PI

Production, new production development, and marketing

Kuala Lumpur Singapore

Y

New product development

PA

Production and new product development

O

Production

PA

New product development

8.3 Case Analyses

133

Fig. 8.3 Autonomy and globalization

8.3.2 Analysis Results This section reports the analysis results of our case studies. Successful global firms in these emerging markets adopt integrative and speedy monozukuri based on local advantage. Figure 8.3 shows that these ten firms are Kuala Lumpur PA, Kuala Lumpur O, Shanghai PI, Bangkok PI, Guangzhou N, Guangzhou J, Bangkok N, Hanoi NT, Bangkok Y, and Singapore PA. The concrete global strategy of these firms is to pursue integrative supply chain management that implements speedy local decision-making and offers quality products to serve local customer needs. Their cross-functional synergy encompasses all value-added processes such as product design, manufacturing-marketing services, human resources training and development and IT system (i.e., know-how, process, and system). These firms also systematically sustain their technological advantages by classifying their technology capabilities in terms of Japan HQ-based core technologies, overseas-applicable technologies, and overseas-transferrable technologies. Profits from these emerging markets flow back to Japan in the form of technology license fees. They also develop resident engineers that are quite adaptable to local product design-development-manufacturing-marketing functional requirements. These firms also clarify global monozukuri flow processes. Local managers take initiatives in all areas—from front-end marketing and development to back-end manufacturing-distribution. Finally, they also integrate the processes of customer service and quality management. Seven out of ten firms are those that implement self-contained localization strategy from manufacturing and distribution. However, Kuala Lumpur PA is the only one that has mastered a self-contained localization strategy that realizes the local advantage in full.

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Fig. 8.4 Performance differences of diverse national business units

The ideal self-contained localization strategy of PA in Kuala Lumpur is summarized here. First, as shown in Fig. 8.4, it is positioned at the top of ASEAN and other global markets. Second, it also prepares its own roadmap to enhance the total effect of value added to local firms and shares with its headquarters in Japan. Third, it also completed the self-contained global monozukuri (i.e., manufacturing infrastructure). Specifically, it moved R&D functions from Japan and established services business units to complete the thoroughly independent localized supply chain from product design-development-purchasing-production-marketing-service. Fourth, it also operates ASEAN training centers to raise outstanding professionals that create valueadded innovation. Their monozukuri training is mostly in the standardized areas of marketing and engineering functions. Fifth, it also secures enough customer service personnel to communicate and deliver the right value of its diverse products to its customers in marketing and engineering service areas. Finally, its overall global strategy (monozukuri flow) includes excellence in four areas—speed, cost, quality and decision making—through localization in all aspects of value chain processes (i.e., product design—new product development-procurement-manufacturing).

8.4 Emerging Market Strategy of Japanese Global Firms and their Prospects This chapter presented a self-contained localization strategy framework, which bases product architecture concept and utilizes technology-competence, customercompetence, and linkage-competence in their product development processes (Park

8.4 Emerging Market Strategy of Japanese Global Firms and their Prospects

135

and Hong 2012, 2015; Hong and Park 2014). We also examined cases of Japanese global firms. These successful firms do not depend on the product development efforts in Japanese headquarters. Instead, they use dynamic sensing mechanisms in these emerging markets, and offer products with technological depth and customer sensitivity. These firms moved their R&D functions to these emerging markets and constructed a self-contained localization strategy that covers product development, manufacturing, marketing, and distribution. In this way, their successful globalization strategy demonstrates their integration of both technology competence and customer competence through linkage competence. Yet, among ten participating firms in our case studies, only one firm is successfully realized the full sense of self-contained localization strategy. Thus, it is crucial for Japanese firms to further pursue the broad sense of localization strategy. Japanese firms had penetrated emerging markets such as India and Brazil before Korean global firms even started their operations (Park and Amano 2011; Park 2012; Hong and Park 2014). However, their past strategy was no more than to assemble and sell finished products that were merely providing the “old premium models” that had already passed their time in advanced markets such as the US and EU. As a result, Japanese firms lost their market leadership to Korean global firms that offered products based on thorough market research of the customers in these emerging markets—India and Brazil in particular. Based on these painful lessons, Japanese global firms benchmarked Korean rivals from the mid-2000s and strengthened their emerging market strategy. The cases of PA and Etios model of Toyota in India illustrate such successful transformations (Park and Amano 2011). The development of self-contained localization strategy framework integrates technology-competence, customer-competence, and linkage-competence and their interactive mechanisms. Case study findings suggest useful managerial implications for formulating and implementing effective emerging market strategies. Increasingly, global markets are becoming fiercely competitive. Thus, future studies may further examine the practices of global firms from advanced economies (e.g., USA, Europe, Japan and Korea) with those of indigenous firms from emerging economies (e.g., Brazil, Russia, India, China, Mexico and Turkey)—both in the ways they compete and collaborate.

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Oki, K. (2009). Building capabilities of overseas subsidiaries in the context of international functional specialization: A case study of Japanese HDD makers. Journal of International Business, 1(1), 19–34. (in Japanese). Park, Y., & Hong, P. (2012). Building network capabilities in turbulent competitive environments: Practices of global firms from Korea and Japan. New York: Taylor & Francis. Park, Y., & Hong, P. (2015). The role of IT for global firms in emerging markets. International Journal of Business Information Systems, Special Issue, 18(4), 490–505. Park, Y., & Shintaku, J. (2016). The replication process of a global localisation strategy: A case study of Korean firms. International Journal of Business Innovation and Research, 10(1), 8–25. Park, Y., & Amano, T. (2011). Localization strategy of the Korean companies in India: The comparison with the Japanese companies. Hitotsubashi Business Review, 59(3), 6–21. (In Japanese.). Park, Y., JeWheon, O., & Fujimoto, T. (2012a). Global expansion and supply chain integration: Case study of Korean firms. International Journal of Procurement Management, 5(4), 470–485. Park, Y., Fujimoto, T., & Hong, P. (2012b). Product architecture, organizational capabilities and IT integration for competitive advantage. International Journal of Information Management, 32, 479–488. Park, Y. W. (2009). [A 33th Story of Monozukuri’s Journey in Asia] Korean firms’ localization strategy in Indian market: From local accommodation marketing to premium market pioneering. Akamon Management Review, 8(4), 181–211 (in Japanese). Park, Y. (2012). Product architecture and emerging market strategy: Competitive studies of Japanese and Korean firms. WIAS Research Bulletin, 4, 17–30. (in Japanese). Prahalad, C. K., & Hamel, G. (1990). The core competence of the corporation. Harvard Business Review, 68(3), 79–91. Schulze, P. (2009). Balancing exploitation and exploration: Organizational antecedents and performance effects of innovation strategies. Gabler Verlag. Sidhu, J. S., Commandeur, H. R., & Volberda, H. W. (2007). The multifaceted nature of exploration and exploitation: Value of supply, demand, and spatial search for innovation. Organization Science, 18(1), 20–38. Sidhu, J. S., Volberda, H. W., & Commandeur, H. R. (2004). Exploring exploration orientation and its determinants: Some empirical evidence. Journal of Management Studies, 41(6), 913–932.

Chapter 9

Changing Industry Competitiveness: Case of Asian Automotive Firms

Growth in emerging market and developing economies is less dependent on advanced economies over the long run, but in the short run they dance together. (Kemal Dervi¸s 2012).

Abstract This chapter uses the paradigm of SCP (structure, conduct, performance). We introduce important structural contexts (e.g., demographic patterns, economic growth and middle class size), automotive industry-specific characteristics (e.g., innovation-based and growth-oriented practices) and discuss the performance of automotive industry (e.g., competitiveness, sales and market share). Global firms from four Asian countries show distinct patterns of growth and expansion to emerging markets based on strategies for domestic advantage, global competitiveness, and global prominence. This review is useful in analyzing and evaluating their competitive performance in emerging markets and predicting their future moves focusing. Case illustrations primary focus on automotive market strategies of global firms from four major Asian economies (i.e., Japan, South Korea, China, and India).

9.1 Introduction Nations converge for shared purpose, stay interdependent for common challenges and diverge to follow their chosen paths (Dervis 2012; Hoffman and Furcht 2014; Fung 2009). The changing roles of emerging economies are worthy of careful examination. By 2050, the prediction is that “China will be the largest economy in the world by a significant margin, while India could have edged past the US into second place and Indonesia have risen to fourth place.” (Hawksworth et al. 2017, pp. 3). Despite of disagreements on the specifics, the shifting market dynamics is extensively being discussed (Mohr et al. 2013; KPMG 2017). Even the modest prediction suggests that emerging economies may assume larger roles in the coming decades (Drabble et al. 2015; OECD 2019). In view of these changing economic contexts, the prospect of Asian global firms in general and global automotive firms in particular deserve © Springer Nature Singapore Pte Ltd. 2020 P. Hong and Y. W. Park, Rising Asia and American Hegemony, https://doi.org/10.1007/978-981-13-7635-1_9

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research attention of benchmarking scholars on industry competitiveness (Veloso and Kumar 2002; Nag et al. 2007; Shaheen and Cohen 2013; Gereffi and Sturgeon 2013). Benchmarking is to gain perspectives on the target entities based on relevant framework and credible comparative indicators (Kyrö 2003; Hong et al. 2012). For industry level analysis, we use macro-level data. For the theoretical framework, in this study, we use the modified version of SCP (structure, conduct, performance) paradigm (Hannan 1991; McWilliams and Smart 1993; Panagiotou 2006). We first present three macro-trends—demographic patterns, economic growth and global middle class makeup—for structural contexts. We examine the conduct of automotive industries that seek positional transitions in the global markets. We further discuss the performance of automotive industry in terms of sales and market share. This article aims to provide a comparative review of Asian automotive industries that are characterized with noteworthy transitions in global markets. For this goal, we focus on Japanese, Korean, Chinese and Indian Automotive Industries using key benchmark indicators (Cutter et al. 2010; Hong et al. 2012; Wilson et al. 2015). Based on the research findings, implications for future research are discussed.

9.2 Emerging Structure of Global Automotive Markets Global automotive industries are complex and huge, evident from the level of sales volume in the global markets. Automotive suppliers have been steady in recent years. Although winners and losers and those in between are common, global automotive suppliers are here to stay. Suppliers focused on innovation—product and process— are more likely to maintain higher than the average profit margin level. In view of increasing volatility and turbulence of global markets, suppliers are required to excel in flexibility and agility in developing their business. In particular, “thinking well ahead of the next vehicle generation, scenario planning and innovative approach for new product development” are regarded as crucial success factors for competitiveness in the future (Berret et al. 2016).

9.2.1 Market Structure: Growing Middle Class This long-term expectation of growing middle class in emerging economies shows signs of change. Emerging dynamics of global automotive industry have already occurred. World vehicle production by country suggests noticeable patterns. As of December 2016, advanced economies (e.g., Italy, France, Spain, Japan, UK, and Germany) have reduced their production volume up to 4.9% or managed a moderate increase (e.g., USA, South Korea) with 2% and 11% respectively. In contrast, the level of the increase of the production volume for emerging economies is significantly greater, e.g., 26% (Brazil), 46% (Mexico), 72% (India) and 149% (China). Such drastically different patterns of the production volume growth reflect the changing shift

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in the global markets (Lacroix 2014). This reflects the rapid growth of emerging markets, China in particular. As of 2009, China became the world’s largest market, surpassing the United States. China’s position as the world’s largest customer base would not change. Most executives believe that China will keep up its leader position for sales in the automotive industry (KPMG 2017). Because of the need to be geographically proximate to the growing demand of emerging markets, it is estimated that “by 2030 less than 5% of global car production will originate from Western Europe” (KPMG 2017, pp. 47). With growing Asian middle class, expanding infrastructure in Asia, Asian automotive firms are likely to engage in intensive competition for capturing these growing market segments. Table 9.1 is changing global population prediction of United Nations (2015) by continents. It shows that by 2100 the world’s population may reach 10 billion. With Africa’s rapid population growth, Asia’s relative strength position in world population is expected to steadily decline from 59.8% (2015) to 43.6% (2100) while Africa is likely to grow from 16.1% (2015) to 39.1% (2100). Table 9.2 is an estimate of global middle class by major regions. Careful analysis suggests that this prediction on changing global middle class is based on consistent Table 9.1 Changing global population prediction (# in million) (2015, 2030, 2050 and 2100) 2015 #

2030 %

#

2050 %

#

2100 %

#

%

Africa

1,186

16.1

1,679

19.8

2,478

25.5

4,387

39.1

Asia

4,393

59.8

4,923

57.9

5,267

54.2

4,889

43.6

Europe

738

10.0

734

8.6

707

7.3

646

5.8

Latin/America/Caribbean

634

8.6

721

8.5

784

8.1

721

6.4

North America

358

4.9

396

4.7

433

4.5

500

4.5

39

0.5

47

0.6

57

0.6

71

0.6

7,348

100.0

100.0

9,726

100.0

11,214

100.0

Oceania World total

8.500

Source United Nations, Department of Economic and Social Affairs, Population Division (2015)

Table 9.2 Changing global middle class 2015 #

2020 %

#

2025 %

#

2030 %

#

%

Sub-Saharan Africa

114

4.0

132

4.0

166

4.0

212

Middle East/North Africa

192

6.0

228

6.0

258

6.0

285

5.0

1,380

46.0

2,023

54.0

2,784

60.0

3,492

65.0

Europe

724

24.0

736

20.0

738

16.0

733

14.0

Latin/America/Caribbean

285

9.0

303

8.0

321

7.0

335

6.0

North America

335

11.0

344

9.0

350

8.0

354

7.0

7,348

100.0

100.0

9,726

100.0

11,214

100.0

Asia Pacific

World total

8.500

4.0

142

9 Changing Industry Competitiveness: Case of Asian Automotive …

reasonable economic growth plus an assumption about middle class portion in respective regions with heavy emphasis on China and India. It is safe to conclude that this is more or less about potential, not actual middle class size figures. Other contextual factors (e.g., physical infrastructure, health status, and rule of law, and economic growth outcomes) and actual buying power of middle classes require more careful scrutiny. In view of continuous economic growth in emerging economies, the potential shift of middle class requires strategic responses of global auto manufacturers.

9.2.2 Urbanization and Transportation Structure: Infrastructure Development Increasing urbanization and expanded transportation structure are two crucial benchmark indicators of infrastructure development. Table 6.5 shows that Asia’s urban population will nearly double by 2050 (Asian Development Bank 2011, pp. 63). Northeast Asia (i.e., China, Korea and Japan) will have a higher rate of urbanization compared to other Asian regions. Increasing urbanization trends will affect all Asian regions and thus the total urban population is expected to grow from 1,649 (millions) in 2010 to 3,247 (millions), and the average urbanization ratio of the entire region will also change from 41 to 64%. Such increasing urbanization prospect requires heavy investment on physical infrastructure development—transportation and logistics networks in particular Table 9.3. In 2016, China initiated ambitious plans to connect Asia and Europe (i.e., Eurasia Initiatives) starting with the formation of Asian Infrastructure Investment Bank (AIIB). These ambitious plans include building direct routes between China, Central Asia and Europe and extending to Russia and other Southeast Asian countries in building intercontinental transportation linkages. Except USA and Japan, the majority of advanced nations (e.g., Germany, UK, France, and South Korea) and other major powers (e.g., India, Russia, and Brazil) joined in this international financial collaboration that could match the scale of World Bank and Asia Development Bank. Table 9.3 Asia’s urbanization: 2010 and 2050 Asian Region

2010 Total Urban population (millions)

2050 Urbanization (%)

Total Urban population (millions)

Urbanization (%)

Northeast Asia

805

50

1,284

74

South Asia

495

30

1,261

55

Southeast Asia

252

42

520

65

96

52

182

67

1,649

41

3,247

64

Central Asia Total

Source UN World Urbanization Prospects 2007 Report

9.2 Emerging Structure of Global Automotive Markets

143

Fig. 9.1 Routes of proposed the Belt and Road Initiative. Source Adapted from Bloomberg Straits Times Graphics

The goal is to extend the transportation infrastructure drastically by connecting all major sections of China, Central Asia and European countries plus through the combinations of inland and sea routes, most of major Southeast Asian nations are also connected to the vast international transportation network. Figure 9.1 shows the routes of proposed the Belt and Road Initiative (Daily Press 2017). These routes are comprehensive by covering land, air and sea. As Asia, Europe and Africa are connected with these massive infrastructure initiatives, the potential impacts of economic-social-cultural engagements are enormous. For the past thousands of years, Europe and Asia have been separated except brief periods of conquest efforts of Alexander the Great and Genghis Khan. This might redraw the very power structure dynamics of the world. Such connectivity has also huge implications of economic development of emerging economies as well as expanded demand for transportation vehicles. Automobiles would certainly be benefited with these massive macro-developments. The extended intercontinental transportation network will have huge implications on changing dynamics of demand and supply of automobiles in emerging economies (Hwang et al. 2017).

9.3 Conduct of Global Automotive Firms Global automotive industries are sensitive to emerging macro-trends which present tremendous growth opportunities and challenges. In examining growth strategies of Asian automotive firms, we present a five stage model. Developing comprehensive business growth stage model—both small and large firms—is quite challenging (Scott 1987; Leitch et al. 2010). Our model is the modified version of the theory of five stages of growth which explains the growth principles of national economies (Rostow 1960). This growth stage model considers innovative leadership, product and market definition, movement from domestic advantage to global competitiveness which is

144

9 Changing Industry Competitiveness: Case of Asian Automotive …

further directed to market prominence This is based on multiple years of fieldwork based studies of Asian automotive firms—early years of formation by entrepreneurial founders, the process of defining their business model, and series of efforts for growth beyond the domestic market, and the processes of globalization of their operations. Extensive discussions are available in Park and Hong (2012), Hong and Park (2014).

9.4 Global Market Positioning As of 2017, Japanese and Korean automakers (e.g., Toyota, Honda, Hyundai-Kia, Nissan and Suzuki) occupy a relatively high level in both global market position and value chain capabilities. On the other hand, Chinese firms, such as SGMW and Geely, while not having strong global market position, their value chain capabilities are getting close to Japanese and Korean automakers. Indian automotive firms, including Tata and Mahindra, are in the process of building their value chain capabilities and preparing to expand beyond India and other emerging markets (e.g., Middle East and Africa). It is to be seen how these leading Chinese and Indian auto manufacturers compete with other global players in USA and European market. In the meantime, their growing market position in their domestic markets is an important competitive advantage. Our market positioning matrix is based on two parameters: global market position and value chain capabilities. For positioning strategy, firms pay attention to value chain capabilities in terms of entrepreneurial innovative leadership, quality excellence and mass-mass customization competences and global market position is moving beyond the domestic market advantage to sustained growth in diverse global market segments. In the next section, we examine further how the rapid growth of the domestic market size in China and India do impact in the global automotive market landscape. Figure 9.2 shows the competitive positions of Asian automotive firms in terms of global market position and value chain capabilities. Two parameters—global market position and value chain—capabilities analyze the global market position of major automotive firms from Japan, Korea, China and India.

9.5 Performance of Global Automotive Firms The third element of the SCP framework is performance. In the context of macrolevel market contexts, firms formulate and implement their strategies and the results are reported by their performance outcomes. The automotive industry is foundational for transition of Asian economies for three reasons: (1) transportation infrastructure need; (2) middle class productivity tool and status symbol; (3) employment and multiplier effect on other industries.

9.5 Performance of Global Automotive Firms

145

Fig. 9.2 Market positions of major Asian automotive firms

Table 9.4 shows the comparison details of top ten global automotive firms in terms of their 2016 sales performance. The origin of top ten automakers is from Germany, Japan, France, South Korea and Italy. The number of cars sold in the world as of 2016 is 76.86 (in million) and total numbers of cars sold by these ten global automakers Table 9.4 Top 10 global automotive firms (As February of 2017 based on 2016 sales) Rank

Name

Home basis

Sales volume (in million)

# of Employees (As of 2016)

1

Volkswagen

Germany

10.10

626,715

2

Toyota

Japan

9.94

348,877

3

Renault-Nissan

France

8.51

127,086 (Renault), 142,925 (Nissan, 2014)

4

Hyundai-Kia

Korea

8.17

104,731 (Hyundai), 33,255 (Kia, 2014)

5

GM

USA

7.97

215,000

6

Ford

USA

6.29

201,000

7

Honda

Japan

4.90

208,399

8

Fiat Chrysler

Italy

4.86

225,587 (2015)

9

PSA

France

3.24

N/A

10

Suzuki

Japan

2.82

57409

Source Marklines (http://www.marklines.com/ja/) and each company data and. DriveSpark http://www.drivespark.com/four-wheelers/2017/top-10-car-manufacturers-in-2016-in-the-world020233.html

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9 Changing Industry Competitiveness: Case of Asian Automotive …

Fig. 9.3 Top Global Auto makers (2018 sales in million)

are 66.8 (in million) and thus, 86.9% of global automotive sales are through these top ten automakers. The growing Asian market reflects the emerging reality: (1) increasing middle class segments in Asia; (2) vigorous efforts for infrastructure developments in China, India and other Southeast Asian countries; (3) accelerating urbanization and pollution control demand. In addition to the growing Asian middle class, massive infrastructure building plans that connects Asian countries will also have a huge impact on Asian automotive industry. Two factors are worthy of special attention. Figure 9.3 shows a slight difference of 2018 sales in the ranking compared to 2016 sales. Volkswagen and Toyota maintained their top two positions whereas GM moved up and Fiat Chrysler, Renault and Nissan split up. Table 9.5 shows the number of cars sold worldwide from 2005 to 2016. For seven consecutive years as of 2016, China has maintained No. 1 global market leadership in terms of car sales volume. The total car sales in 2016 is 28.03 (in million) which is 14% of growth compared to 2015 sales of 24.66 (in million). What is noteworthy is the rapid rise of Chinese automakers in the domestic market. Global automakers are under enormous pressure in dealing with uncertainties related to a demand shift toward car-sharing among younger drivers (although it is predicted, the trend is not yet mostly notable as of May 31, 2019). Emission standards are becoming steadily more stringent. The demand for less expensive, complex, pollution-averting electric cars in emerging economies (e.g., China and India). Autonomous driving opportunities with a great deal of AI applications invite the competitive entries of Alphabet Inc., and Apple, and make the global automobile market quite different after 2020s.

9.6 Chinese Market Performance

147

Table 9.5 Number of cars sold worldwide (in million units) Year

Sales volume (Worldwide) (Worldwide: 100%)

Sales volume (USA) (worldwide %)

Sales volume (China) (worldwide %)

Sales volume (India) (worldwide %)

2005

65.92

100%

17.44

26.5%

5.76

8.7%

1.44

2.2%

2006

68.35

100%

17.05

24.9%

7.22

10.6%

1.75

2.6%

2007

71.56

100%

16.46

23.0%

8.79

12.3%

1.99

2.8%

2008

68.32

100%

13.49

19.8%

9.38

13.7%

1.98

2.9%

2009

65.57

100%

10.60

16.2%

13.64

20.8%

2.27

3.5%

2010

74.97

100%

11.77

15.7%

18.06

24.1%

3.04

4.1%

2011

78.17

100%

13.04

16.7%

18.51

23.7%

3.29

4.2%

2012

82.13

100%

14.79

18.0%

19.31

23.5%

3.60

4.4%

2013

85.61

100%

15.88

18.6%

21.98

25.7%

3.24

3.8%

2014

88.34

100%

16.84

19.1%

23.50

26.6%

3.18

3.6%

2015

89.68

100%

17.85

19.9%

1424.66

27.5%

3.42

3.8%

2016

93.86

100%

17.87

19.0%

28.03

29.9%

3.67

3.9%

Source OICA: Organisation Internationale des Constructeurs d’Automobiles (http://www.oica.net/ category/sales-statistics/)

9.6 Chinese Market Performance Figure 9.4 is Registration by the automaker origin in China market. At first glance, 61.5% of domestic demand in China is handled by non-Chinese firms. However, the total market share of Western automotive firms (i.e., USA, Germany and France

Fig. 9.4 Registration by automaker origin (in China). Source National Statistics and Lacroix (2014)

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9 Changing Industry Competitiveness: Case of Asian Automotive …

combined) is 36%, which is much smaller than the total market share of Asian automotive firms (i.e., Japan, South Korea, and China), 54% (Lacroix 2014). In view of heavy emphasis of the domestic advantage by Chinese governments, it is more likely that the market share of Chinese automotive firms will increase at the expense of other Western and non-Chinese Asian automotive firms. The visibility of Chinese automakers in the domestic market is quite clear in 2016. Volkswagen of Germany is No. 1 with the sales of 3.3 million cars in 2016. All top three Chinese automakers, SAIC-GM-Wuling Automobile (SGMW), Changan Automobile Co., Ltd. (CAC), Great Wall Motor Company Limited (GWM), sold more than one million cars, ranking 2nd, 7th and 8th, respectively. Furthermore, Changan Automobile Co., Ltd. (CAC), Great Wall Motor Company Limited (GWM) have shown 22.6 and 26% sales growth compared to their 2015 sales records. They were successful in developing multiple lines of large SUVs (i.e., sports utility vehicle) that Chinese affluent customers delight in. Top three Japanese firms (e.g., Nissan, Honda, and Toyota) have achieved fairly good market performance in China. The emerging trends of global automotive markets are how these leading Chinese auto manufacturers use their domestic advantage through developing products that meet the unique requirements of Chinese customers and improve their global competitiveness through massive capital investments in R&D and cutting-edge manufacturing facilities. Such moves would be noticeable to Indian auto-manufacturers like Tata and Mahindra that are not afraid to show their global market ambition beyond their domestic market segments (Hong and Park 2014; Kobayashi et al. 2014; Sou 2017). In light of the strategic role of possessing crucial future innovative technologies, both internal organizational and network value chain capabilities are likely to define the competitive position of Asian automotive firms. At present, Toyota, the most resourceful firm (in view of its sustained heavy investments in innovative R&D and strategic join research projects with leading US research universities and institutions) among other rival Japanese automakers, is expected to maintain its superior market leadership position. In contrast, it is worthy to examine how other rivals (e.g., Honda, Suzuki, and Hyundai-Kia) form strategic alliances, deploy investment decisions and maintain their global market positions. Aggressive international market strategies of Chinese and Indian leading automakers (e.g., SGMW, Geely, Tata and Mahindra) are getting the attention of the market watchers. The McKinsey report (2013) suggests that “By 2020, global profits for automotive OEMs are expected to rise by almost 50%. The new profits will come mainly from growth in emerging markets…” (Mohr et al. 2013, pp. 6). Because of the cumulative effect of slow rates of population growth in Europe and North America, we are witnessing steady decline of the relative size of the potential global middle class in North America and Europe from 11% and 24% in 2009 to 9% and 20% in 2020, 8% and 16% in 2025, and 7% and 14% in 2030 (Drabble et al. 2015; Hawksworth et al. 2017).

9.7 Conclusion

149

9.7 Conclusion In this chapter, we have examined the emerging contexts of Asian automotive markets, growth patterns and modest predictions of the future competitive positions. For a long time, the dominant design architecture of global automotive markets is related to gasoline engine powered vehicles. In a relatively short period, Japanese and Korean automakers have achieved rapid catch-up with US and European automakers. To a large extent, Japanese and Korean automakers have achieved their share of the competitive advantage in Asian markets. However, in the era of 4th Industrial Revolution, the future automobile market is in the turbulent and dynamic transitions (e.g., electric vehicle (EV), driverless cars, and auto-driving shared cars) into a totally different product architecture and thus competitive advantage of the present market leaders might vanish quickly. With the appearance of new industry-wide ecosystem the competitive dynamics are beyond precise prediction. With the worldwide availability of driverless cars, the traditional value of automobiles might be reduced to movement function while the service value would require a much higher degree of sophistication. In this environment, a new service-based business model is on the horizon and firms need to prepare for building an appropriate ecosystem accordingly. On April 3, 2017, Financial Post reports, “Tesla Inc. surpassed General Motors Co as the most valuable U.S. auto firm. In late morning trade, Tesla had a market capitalization of US$ 52.7 billion compared with $49.6 billion for GM.” What is interesting is that Tesla delivered fewer than 80,000 vehicles globally which is far less than any global firms in terms of car volume sales. Investors are looking forward to the growth potential to a broader audience (New York Times 2017). In other words, disruptive innovation like Tesla can break apart competitive landscape at any moment. In such dynamic contexts, the challenges of Chinese and Indian automakers are how to respond to these new industry environments. Their strengths are not merely benchmarking the existing global leaders in the areas of gasoline power based product architecture. Instead, they must come up their unique products that respond to the changing needs of the emerging Asian middle class and satisfy sophisticated customers of advanced markets (e.g., US and Europe).

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Chapter 10

The United States-Mexico-Canada Agreement (USMCA) and Japanese Firms

After decades of building vehicles in relative stability in North America and spending billions of dollars to move factory capacity and suppliers from Japan, the Japanese now must re-examine their supply chains and plant investments to make sure they can meet the local- content rules of the United States-Mexico-Canada Agreement. (Hans Greimel and Naoto Okamura, Automotive News, Nov 5, 2018).

Abstract Building production networks is important for expanding value chains and achieve “locational interdependence” between advanced (e.g., USA) and emerging (e.g., Mexico) economies to achieve “location-specific advantages” within North American market region (Suder et al. in J World Bus 50(3):406–416, 2015). Internationalization decisions aims to achieve “institutional diversity and international dispersion” for regional market integration (Arregle et al. in J World Bus 53(6):896– 910, 2018). In this aspect, regional free trade agreement such as NAFTA support the goals of business decisions for internationalization. Recently, U.S.-Mexican tensions remain high with Trump’s proposed building of border wall and Peña Nieto’s cancellation of a trip to Washington. In this fluid trade partnership context, this chapter examines how NAFTA talks affect global firms in MEXICO in general and those of Japan in particular. Japanese and Korean firms maintain their operations both in USA and in Mexico. Impacts of changes in NAFTA and other free trade agreements are discussed.

10.1 Nippon Motor Company After NAFTA’s Re-negotiation Until now, the main market for Japanese auto companies has been the US and European market. However, with the trade policies of the Trump administration, the US market is becoming more opaque. In May 2018, US President Trump imposed import duties on products to the United States, while opening for renegotiation of NAFTA

© Springer Nature Singapore Pte Ltd. 2020 P. Hong and Y. W. Park, Rising Asia and American Hegemony, https://doi.org/10.1007/978-981-13-7635-1_10

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with Canada and Mexico in 2017. Japanese automakers are under enormous pressure due to the US trade deficit. Asian companies from Japan and South Korea, with their production base in Mexico and South America, have to drastically rethink their export strategies to the US market. The leading Japanese auto-manufacturers such as Toyota Motor Corporation, Nissan Motors, and Honda, have done reasonably well in 2017, but operating profits in North America have dropped sharply. For example, Toyota’s consolidated operating profit at the end of March 2018 was 2.39 trillion yen, but North America was only 138.8 billion yen, accounting for only 6% of the total, down about 10% from 2016. The global automobile market is 96 million units per year, while the North American market is 17 million units, the second largest after China. In the 1980s, most of Japanese automobile companies entered the US market. In 1982, Honda began its production in Ohio. Partnering with US suppliers, Japanese firms have earned the decent rates of profits in the US market. However, by 2018, Japanese automakers such as Toyota and Honda recognized that the US market is in the process of major adjustment. In addition, the economic and political environment in the US market is not favorable. As crude oil prices continue to decline until 2018, the proportion of large-sized cars such as pickup trucks and SUVs is rising, so it is true that Japanese auto companies, which had been highly reliant on compact cars so far, are at a disadvantage. President Trump also plans to increase the finished car tariffs for foreign automakers, including Japanese brands, to 20%. The United States has also resumed negotiations with Canada, Mexico, and NAFTA, and Japanese and Korean companies, which have production plants in Mexico, are expected to be affected. Japanese companies have increased the local production rate in the North American market on the premise of NAFTA. Specifically, Honda’s local production ratio in the North American market is more than 90%, and Toyota and Nissan maintain a 70% share of the North American market. However, Toyota and Honda have production plants in Canada and Toyota, Nissan, Honda and Mazda have American plants in Mexico. The negotiations between the United States and Canada on NAFTA as of December 2018, resulted in the new agreements called the United States-MexicoCanada Agreement (USMCA). Japanese automakers operate production plants in Mexico and Canada to take advantage of NAFTA, and 1.5 million cars are exported to the United States from factories in Canada and Mexico. In addition, the wage provisions introduced by the NAFTA’s new agreement, the United States-Mexico-Canada Agreement (USMCA), and the increase in the absence of procurement rates in the region, will inevitably have an impact. On December 3, 2018, the US, Mexico, and Canada Agreements (USMCA) signed by Argentina, Mexico, and Canada leaders tightened the tariff-free standard in the region from 62.5 to 75%. It also included the requirement that up to 45% of automotive parts need to be produced in countries with an hourly price of $ 16 or more. This is aimed at checking automobile production in Mexico, where wages are low, among the three countries. Japanese automakers have been working on supply chains since the development stage of new cars and the quality of parts and delivery times. Therefore, according to NAFTA’s new agreement, USMCA, when the supply chain is reviewed. This is likely to lead to an increase in costs. As such, President Trump’s 20% tariff on finished

10.1 Nippon Motor Company After NAFTA’s Re-negotiation

155

Fig. 10.1 Where’s that car from? America’s neighbors, Japan and Germany are the sources of most auto imports (Source U.S. Commerce Department, 2018)

cars and the new agreement of NAFTA have been rapidly increasing their impact on foreign automobile companies such as Japan and Korea. Here, we discuss the trends and influential factors mainly of Japanese automobile companies, which have production bases in southern US and Mexico.

10.2 The Impact of NAFTA’s New Agreement, the USMCA, on Automobile Companies Mexico has become a major manufacturing base for most global car brands, including U.S. ones, as assembly-line workers there earn about one-10th of what their U.S. counterparts make (Fig. 10.1). Trump has blamed low-cost Mexican production for the outsourcing of U.S. manufacturing jobs south of the border. Trump’s probe request was met with immediate criticism from industry groups that represent both manufacturers and auto dealers, which said protectionist measures would hurt consumers by limiting car supply and making them costlier. “To our knowledge, no one is asking for this protection,” said John Bozzella, president of the trade group Global Automakers, whose members include Honda, Nissan Motor Co. and Hyundai Motor Co. “This path leads inevitably to fewer choices and higher prices for cars and trucks in America.” (Beene 2018). Mazda will continue to pay close attention to tariff policies in the markets it operates in, outgoing Chief Executive Officer Masamichi Kogai said in Tokyo. The biggest reason for building a plant in the U.S. would be to strengthen the company’s brand, he said (Beene 2018).

10.3 USMCA in Manufacturing The United States, Mexico, and Canada have reached an agreement that supports North American manufacturing and mutually beneficial trade. The new United States-Mexico-Canada Agreement (USMCA) will create more balanced,

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reciprocal trade that supports high-paying jobs for Americans and grows the North American economies (https://ustr.gov/about-us/policy-offices/press-office/ fact-sheets/2018/October/united-states–mexico–canada-trade-fa-0).

10.3.1 Rules of Origin and Origin Procedures The United States, Mexico, and Canada have concluded substantive discussions on new rules of origin and origin procedures, including product-specific rules for passenger vehicles, light trucks, and auto parts. This update to the rules of origin will provide greater incentives to source goods and materials in the United States and North America. This deal encourages United States manufacturing and regional economic growth by requiring that 75% of auto content be made in North America. The rules will help to locally-produced sales of goods up to billions annually and help to preserve and re-shore vehicle and parts production in the United States. Furthermore, it will transform supply chains to use more United States content, especially content that is key to future automobile production and high-paying jobs. Close gaps in the current NAFTA agreement that incentivized low wages in automobile and parts production. This deal uses trade rules to drive higher wages by requiring that 40–45% of auto content be made by workers earning at least $16 per hour. The rules will support better jobs for United States producers and workers by requiring that a significant portion of vehicle content be made with high-wage labor. It will also ensure that United States producers and workers are able to compete on an even playing field, and incentivize new vehicle and parts investments in the United States. Encourage more investment by auto companies in research and development in the region. The United States, Mexico, and Canada have agreed to stronger rules of origin that exceed those of both NAFTA 1.0 and the Trans-Pacific Partnership (TPP), including for autos and automobile parts and other industrial products such as chemicals, steel-intensive products, glass, and optical fiber. This deal exceeds NAFTA 1.0 and the TPP by establishing procedures that streamline certification and verification of rules of origin and that promote strong enforcement. This includes new cooperation and enforcement provisions that help to prevent duty evasion before it happens. The new rules will help ensure that only producers using sufficient and significant North American parts and materials receive preferential tariff benefits.

10.3.2 Goods Market Access New commitments have been included in the Market Access chapter to reflect developments in United States trade agreements that address non-tariff barriers related to trade in remanufactured goods, import licensing, and export licensing. Key achievement is for exceeding NAFTA 1.0 and TPP standards to more effectively support

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trade in manufactured goods. The new market access section addresses ways to promote trade in manufactured goods between the United States, Mexico, and Canada by removing provisions that are no longer relevant, updating key references, and affirming commitments that have phased in from the original agreement. Specifically, the mark access chapter maintains duty-free treatment for originating goods and prohibits parties, from applying: (a) requirements to use local distributors for importation; (b) restrictions on the importation of commercial goods that contain cryptography; (c) import restrictions on used goods to remanufactured goods; and (d) requirements for continuous transactions and their associated fees and charges, additional provisions for duty-free temporary admission of goods to cover shipping containers or other substantial holders used in the shipment of goods.

10.3.3 Textiles The new provisions on textiles incentivize greater North American production in textiles and apparel trade, strengthen customs enforcement, and facilitate broader consultation and cooperation among the parties on issues related to textiles and apparel trade. Key achievement is for strengthening supply chains to provide new market opportunities for the textile and apparel sector. The provisions will promote greater use of ‘Made-in-the-USA’ fibers, yarns, and fabrics by establishing a textile chapter for North American trade, including textile-specific verification and customs cooperation provisions that provide new tools for strengthening customs enforcement and preventing fraud and circumvention in this important sector. The new Textiles chapter provisions are stronger than those in NAFTA 1.0 with respect to both enforcement and incentivizing North American production of textiles.

10.3.4 The Impact of the USMCA on Companies with Manufacturing Plants in Mexico The United States, Mexico, and Canada have also reached agreement on new provisions covering trade in specific manufacturing sectors, including Information and Communication Technology, Pharmaceuticals, Medical Devices, Cosmetic Products, and Chemical Substances. Each of the annexes includes provisions that exceed NAFTA 1.0 and TPP that promote enhanced regulatory compatibility, best regulatory practices, and increased trade among the countries. The impact of NAFTA’s new agreement, the United States-Mexico-Canada Agreement (USMCA), on companies with manufacturing plants in Mexico includes several changes. First, the main changes in the “rules of origin” in the automotive sector set the conditions for NAFTA preference (zero tariff). The regional value-added ratio (RVC) increases from 62.5% to 75%. Of those, 40–45% are obliged to produce

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workers with an hourly wage of more than $ 16 (wage provisions). As other items, 15–20% of the 40–45% as a flexible measure for achieving the “wage provision” can be covered by the credits granted by the R&D and software development costs in the region, or the engine production scale. 70% of the steel, aluminum and glass procured by the finished car maker is procured from North America. Other areas set the RVC of 65, 70, and 75% (core parts), respectively. In addition, Mexico’s “export restrictions to the United States” stated in the agreement. This will enable the United States to apply up to 25% tariffs on excess of Mexico’s passenger cars and SUVs exported to the US by 2.4 million units a year and parts over 90 billion US dollars. Mexico’s exports of passenger cars and SUVs to the US in 2017 amounted to about 1.74 million units, yet there is still room to spare. Second, the indirect measure of the regional value-added ratio (RVC) of carmakers is specified in “procurement rate of US and Canadian parts” and “source of engine/transmission” based on the AALA. The RVC of AALA’s procurement rate and NAFTA origin rule differ in calculation method. The RVC has a higher value compared to the local procurement rate of AALA (absence obesity), since all expenses of the non-member labor and manufacturing are included in the RVC. In AALA data, there is a case where procurement rates of parts made in Mexico are lower than the actual situation because countries with procurement rates of less than 15% are not displayed in the US and Canada. The proportion of North American parts used by Japanese car makers (hereafter, local procurement rates) is estimated to be around 60% on a weighted average basis. This is less than 80% of the United States, but slightly higher than 50% of European and Korean. Above all, there is a difference in local procurement rates among Japanese manufacturers, and Honda is the highest, showing around 70%. Generally, the local procurement rate tends to increase with the increase in local production and procurement networks, mainly for North American vehicles such as mass-sales vehicles and light trucks with annual sales of over 200,000 units. Third, based on the AALA data, Japanese automakers produce cars from US and Canadian factories are treated as similar to US automakers, as parts procurement rates in the US and Canada exceed 50%. On the other hand, except for Toyota pickups, local procurement ratios are relatively low for Japanese-made cars produced in Mexico, and it is expected that it will be difficult to achieve labor cost provisions for some models. This tendency is common among Korean and European makers that focus on compact cars in Mexico. For example, Nissan currently accounts for about half of Japan’s exports to Mexico from Mexico. The compact cars Sentra and Versa produced by Nissan in Mexico are about 20% of Nissan’s sales in the United States. At present, 62.5% of NAFTA value added condition is satisfied, but there is a possibility that tariffs will be imposed if NAFTA does not meet the new standard in the future. Among Japanese makers with Mexico as a base for exporting to the US, it is believed that moves will be made to change export markets to the United States or to open up export markets outside of the United States by using an FTA network that links Mexico to 46 countries.

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10.4 Trends of Japanese Automobile Companies in Mexico Japanese automakers, who are building production bases for exporting to Mexico by signing a new agreement that tightens the conditions for the US and Mexico to zero tariffs on automobiles, cannot help but reconsider its future production position. There are factories of Japanese companies in Nissan, Honda, Matsuda and Toyota in Mexico. In 2017, 1.38 million cars are produced and exported to the United States (Fig. 10.2). Among Japanese automakers, Nissan entered Mexico the earliest. Fifty years ago, we built a factory in Mexico as our first overseas production base. Honda also went on to Mexico 30 years ago, producing motorcycles. Mazda has started its production plant in 2014. The agreement between the United States and Mexico makes it difficult to procure parts from overseas, such as Japan, because it raises the proportion of parts procurement from within the region from the current 62.5–75% when making automobiles. Furthermore, the new wage standards are likely to cover 40–45% of the production process in factories with an hourly price of $16 or more, so companies with manufacturing plants in Mexico are more vulnerable than those in Canada. In the United States, the proportion of sales to Mexico is about 25% for Nissan, and less than 10% for Toyota and Honda. Mazda produces about 30% of its US sales in Mexico. The companies most affected by the new agreement are Nissan and Matsuda, followed by Honda and Toyota. Toyota and Honda may not experience the impact as heavily influenced by Nissan or Mazda because Mexico accounts for less than 5% of the world’s production sites. On the other hand, according to the ratio of cars sold in the US, the ratio of cars produced in Japan is less than 10% for Honda and Nissan, but about 40% for Toyota. As President Trump has decided to strengthen tariffs on imported cars sold in the United States, Toyota is expected to be hit hardest in terms of sales.

Fig. 10.2 Cars produced by Japanese automobile firms in Mexico, Canada and USA in 2017 (Source JETRO, Cars produced and Sales in 2017, 2018)

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10.5 Nissan Cars in Mexico Since the 2000s, Mexico has emerged as a major exporter of automobiles because it is tariffs-free to the United States and is less expensive than Canada, according to the NAFTA agreement. As a result, Japanese automakers have become more prominent in recent years. If Toyota and Matsuda, including Nissan and Honda, are included, it is predicted that Japanese automobile companies will have an annual production capacity of 2 million units in the future. However, such rosy prospect has completely disintegrated after President Trump’s renegotiation push of NAFTA terms. In 2017, the number of cars manufactured by Japanese companies in Mexico is 137.8 million, but the number of cars produced by the Japanese companies in 2017 is expected to shrink after 2018 due to the impact of the new agreement signed in December 2018. Nissan was the first Japanese automaker to enter Mexico. Nissan’s global plant is also evaluated as having good productivity in Japan. Since it already has a 50year history, a stable supply chain has been established in Mexico. Nissan, however, is exporting its products to the US centered on small sedans “Centra” and “Vasa” produced at its Mexican plant. Nissan produced 830,000 units in Mexico in 2017, about half of which is exported to the United States. As renegotiation of NAFTA began in 2017, Nissan began to rethink its global supply chain, and is expected to be hit hardest by Mexico’s highest production and exports to the United States. Nissan’s third plant in Mexico produces and sells mid-sized sedan “Centra”, which is the flagship model, to the US. As such, Mexico’s auto market has continued to grow in the background of exports to the United States, but due to the review of NAFTA, led by the US Trump regime, export-dependent industrial structures are being forced to change. Because of this impact, the Mexican economy is also expected to be stagnated due to the declining value of Mexico’s currency, so that the number of cars sold in 2018 will be lower than the 2017 earnings. As a result, the NAFTA has not only made sales in Mexico worse, but also increased the barrier to export to Mexico. Accordingly, Nissan Motor said it would fire about 1,000 employees in Mexico in December 2018. Nissan has announced that it needs to adjust the production of factories in Mexico to cope with the difficult market conditions in Mexico.

10.6 Mexico Mazda On February 27, 2014, Mazda established a passenger car factory in Salamanca, central Mexico. It is a strategy to export compact cars, which are the main models, to North and South America and Europe. Since the ratio of exports from Japan was high at that time and the influence on exchange rate fluctuations had a negative impact on business results, there was a purpose to disperse the risk due to concentration in Japan. In the early period of 2010s, Nissan Motor and Honda all started new factories in Mexico, and Japanese carmakers’ advancement was remarkable. Mazda’s 70% stake

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in the Mexican plant and Sumitomo’s 30% stake. The investment amount is 770 million dollars. The firm produced “Matsuda 3 (Japanese accearra)” of small car from January 2014 and added “Matsuda 2 (demio)”. The production scale is 230,000 units per year, of which 50,000 units are contracted production of compact cars from Toyota Motor Corporation. Except for the small-scale knockdown method, Mazda’s overseas plants are the third largest after China and Thailand. The Mexico plant is expected to become the second export base after Japan by exporting to North America, Central and South America and Europe. Mazda has exported 81% of its cars produced in Japan since 2013, after withdrawing its US manufacturing plant, which is suffering from a deficit in 2012. However, as the yen advanced, the earnings deteriorated. While the Abe government has been in business since 2013, it has stabilized somewhat since its transition to Enju. However, the risk of exchange rate fluctuations is still ongoing. However, with the signing of the new agreement, it is inevitable that Mazda will feel the competitive pressure from Nissan. Mazda produced 186,000 units in Mexico in 2017 and is exported to the US and Latin America. Production is the third largest after Nissan and Honda, but Mazda believes it will have a bigger impact than Honda because it has production plants in the US and Canada. Although the risks are less than Nissan’s high production volumes, Mazda can no longer afford to consider a new global supply chain strategy after 2019.

10.7 Mexico Honda Honda established its first factory in Mexico in September 1985. It started importing and selling motorcycles at first, and has been running passenger cars since 1995, passenger car production from 2015, and transmission factory in 2015. Matsuda factory is in close proximity to GM and VW production facilities. With an annual production capacity of 200,000 units, it produces 800 units in two shifts per day. In 2016, the number of employees was 8,200, while the number of expatriates in Japan was 200. In 2017, the factory was stabilized, with 4,049 employees at the body and engine plants, 1,097 employees at the transmission factory, and 100 employees at the Japanese expatriates. In 2017, Honda produced 213,000 units in Mexico with full production capacity. At the time of our visit, the impact on NAFTA renegotiation was expected to be small. In addition, Honda has already produced 1,208,000 units in the US and 430,000 in Canada by 2017, and is forecasting that it will not be hit harder because it is trying to diversify the risks in North America. In 2018, Honda revised its strategy to have a large impact on NAFTA renegotiation. Specifically, Honda has revised its global production and sales plans in 2018 because of the risk of exporting Mexican cars to the US before the new agreement is signed. In other words, it was planned to integrate the American compact car “Fit”, which was produced in Japan since 2018, in Mexico, but it was modified for export from Japan for the time being. In addition, the US-based SUV “HR-V (Japanese name: bezel)”, which was planned to be produced in Mexico in 2018, was also exported directly from Japan to the

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United States. However, if the new agreement is concluded and the tariff rate on automobiles exported from Japan to the US increases in the future, the new global supply chain strategy should be considered, including increasing the production rate in the US.

10.8 Conclusion Free trade agreements (FTAs) have played a role in “liberalizing or managing crossborder flows in goods, services, intellectual property (IP), and people”. Beyond USMCA, the Trans-Pacific Partnership (TPP), fully implemented, may enhance the rivalry advantage of US over China. Thus, the national security the United States through dynamic engagements with countries surrounding China and thus encircle China to bring about containment effects on China’s external engagement efforts (Mavroidis et al. 2017). Unfortunately, Trump Administration withdrew from it. However, the US recognizes the need to strengthen its regional economic engagements with its neighbors—Canada and Mexico. So far, President Trump has seen the effects of NAFTA renegotiation on Japan and Asian countries in North America. Re-negotiation of the United States and Canada on NAFTA was concluded in December 2018, but it seems unlikely that it will be easy to respond to the USMCA, which has strict conditions for tariff elimination. Japanese automakers operate production plants in Mexico and Canada to take advantage of NAFTA, and 1.5 million cars are exported to the United States from factories in Canada and Mexico. In addition, the wage provisions introduced by the NAFTA’s new agreement, the United States-Mexico-Canada Agreement (USMCA), and the increase in the absence of procurement rates in the region, will inevitably have an impact. Increasingly, global firms of Japan and Korea practice diversity management practices that result in positive effects on improving their perception of “procedural justice” and employees’ organizational commitment and productivity outcomes (Magoshi and Chang 2009). Japanese automakers have been working on supply chains since the development stage of new cars and the quality of parts and delivery times. Therefore, according to NAFTA’s new agreement, USMCA, when the supply chain is reviewed, this is likely to lead to an increase in costs. As such, President Trump’s 20% tariff on finished cars and the new agreement of NAFTA have been rapidly increasing their impact on foreign automobile companies such as Japan and Korea. The conclusion of this chapter is that all global companies operating in global markets should refer to it because it is expected that not only Asian companies such as Japan and Korea but also European countries will have the same effect.

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References Arregle, J.-L., Miller, T. L., Hitt, M. A., & Beamish, P. W. (2018). The role of MNEs’ internationalization patterns in their regional integration of FDI locations. Journal of World Business, 53(6), 896–910. Beene, R. (2018). Politics: Mazda and Mexico Would Be Hit by U.S. Car Import Crackdown, Bloomberg. Retrieved May 24, 2018. www.bloomberg.com/news/articles/2018-05-24/mazdaand-mexico-would-be-hit-hard-by-u-s-car-import-crackdown. Greimel, H., & Okamura, N. (2018). Japan’s automakers wonder how to go more ‘local’ under USMCA. Automotive News. https://www.autonews.com/article/20181105/OEM01/181109890/ japan-s-automakers-wonder-how-to-go-more-local-under-usmca. Magoshi, E., & Chang, E. (2009). Diversity management and the effects on employees’ organizational commitment: Evidence from Japan and Korea. Journal of World Business, 44(1), 31–40. Mavroidis, P. C., Janow. M. E., & Bhala, R. (2017). TPP, American national security and Chinese SOEs. World Trade Review, 16(4), 655–671. Suder, G., Liesch, P. W., Inomata, S., Mihailova, I., & Meng, B. (2015). The evolving geography of production hubs and regional value chains across East Asia: Trade in value-added. Journal of World Business, 50(3), 404–416.

Part III

ToP and BoP Interface Capabilities (TBIC): Network Interactions

This section discusses how Top of Pyramid (ToP) and Base of Pyramid (BoP) interacts. In view of the slower rates of economic growth, firms in advanced nations seek new growth engines. Such opportunities reside in base of pyramid (BoP) nations. While trade tension between USA and China in particular impact the global trade patterns between advanced nations and emerging economies, the growth sustainability imperative (i.e., both nations and firms must seek new frontiers for growth and expansion) requires interactions between ToP and BoP. The interface capabilities require linkage roles of trade partnerships, global logistics, and wide applications of emerging technologies. Part III includes: • Chapter 11: BREXIT: Case of Japanese Firms. This chapter examines Brexit and increasing fragmentation pressure on international order with case studies of Japanese firms. The prospect of Brexit, with enormous political uncertainty, has serious impacts on UK’s economy in multiple fronts (e.g., immigration, financial regulations, and flows of goods and services) and strategic practices of global firms. • Chapter 12: Free Trade Agreements (FTAs) and Korean Firms. FTAs and Global Supply Chain Management (GSCM): Case of Korean Firms. A research model explains the relationships (1) between FTAs and GSC strategies and (2) supply chain costs and business impact results. Case illustrations highlight how Korean firms apply the potential benefits of multi-FTAs for achieving their GSC management strategic priorities and goals. • Chapter 13: Competitiveness of Korean Small and Medium Enterprise (SMEs) in ASEAN Region. This chapter identifies competitiveness of Korean Small and Medium Enterprise (SMEs) in ASEAN Region. Emerging markets invite opportunities and challenges for both global and small and medium enterprises (SMEs). We summarize historical globalization trend and global competitiveness of Korean SEMs though case study.

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• Chapter 14: Supply Chain Integration in China: Case Study. This chapter examines the strategic and operational issues related to supply chain configurations between set-makers and back-end suppliers in China. The case studies examine supply chain practices through low cost module (LCM) and demand chain management (DCM) strategy, which includes the movement of production facilities in China, integration of upstream and downstream suppliers, and vigorous distribution network building. • Chapter 15: TBIC (ToP and BoP Interfaces Capabilities): Case for SMEs. This chapter discusses importance of TBIC (ToP and BoP Interfaces Capabilities) in SMEs. It is crucial to manage interfaces between Top of Pyramid (ToP) and Base of Pyramid (BoP) for the global competitiveness for individual firms. This chapter discusses how small and medium enterprises (SMEs) expand their market scope in emerging economies. Through the case of Ace Technology, we will look at TBIC (ToP and BoP Interfaces Capabilities) in SMEs, and look for strategic issues to be solved for future growth and future directions. • Chapter 16: Beyond Rising Asia and American Hegemony: Prospect. This chapter discusses future prospect of trade partnerships and industry competitiveness in global markets. In addition to the summary of the book, the final chapter presents lessons and implications—both theoretical and managerial. It also further extends the research issues related to TBIC (ToP and BoP Interfaces Capabilities) and manufacturing service lifecycle management (IMSLM) that integrate cloud ecosystem (e.g., timely data/information/knowledge flows via virtual world) and ground value chains (e.g., complex real goods and services flow in the visible world).

Chapter 11

BREXIT: Case of Japanese Firms

Japanese companies that have invested in Britain offer an interesting example of how international business is coping with the political tumult roiling the UK economy over Brexit. Japanese firms operating in the UK and the Japanese ambassador to London have been uncharacteristically outspoken about their dissatisfaction with Brexit and its inept handling by British politicians. However, they are not rushing to exit the UK. Instead, they are making limited, defensive moves while they wait for clarity to emerge from the chaos. (Paul Maidment, Strategy and Execution).

Abstract Europe’s long-term sluggish growth is structural. Traditional fiscal policy options are limited and the prospects for healthy level of growth are becoming more unattainable, especially in the context of Brexit and increasing fragmentation pressure on international order. The prospect of Brexit, with enormous political uncertainty, has a serious impact on UK’s economy in multiple fronts (e.g., immigration, financial regulations and flows of goods and services) and strategic practices of global firms.

11.1 Brexit: Causes and Development Europe’s growth problem is “structural” in nature, the deeper reasons are based on the policy failures for years, and return to accelerating growth in Europe would become more difficult in the context of Brexit (Salvatore 2017). As Fig. 11.1 shows, Brexit’s impacts have increased uncertainty on the region’s social, political and economic future. In particular, the economic impact depends on the negotiation outcomes. Both sides need to approach with the spirit of “rationality and cooperation” in resolving issues of immigration, market access, and financial regulations (Chang 2018). Gasiorek et al. (2019) note that the direct impact of Brexit would be “an overall reduction in UK manufacturing output”. In particular, high tech and medium–high tech sectors are more at risk with an increasing challenge of securing needed high skilled workers on time. Hantzsche et al. (2019) suggest that the costs of services © Springer Nature Singapore Pte Ltd. 2020 P. Hong and Y. W. Park, Rising Asia and American Hegemony, https://doi.org/10.1007/978-981-13-7635-1_11

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Causes of Brexit (Internal UK; EU at large)

Impacts of Brexit (US, EU, Global Firms)

Process of Brexit (Negotiation Positions)

Fig. 11.1 Brexit: causes, processes and impacts

would be higher and the long-term adverse effects on living standards would be 2–3% reduction. Portes and Forte (2017) notes that post-Brexit reductions in migration are likely to have a significant negative impact on UK’s GDP. According to Hosoe (2018), Brexit may cause the significant contraction of bilateral trade between the UK and the other members of the European Union (EU27) with the “imposition of the tariff and nontariff barriers”. However, the UK chemical and automobile industries are expected to contract whereas its food and beverage sector and the business and information and communication technology service sectors would expand. The substantial cost of Brexit is large to both UK and the EU-27. Even so, the EU-27 would likely to bear relatively small share of the total cost because of its being five times larger than the UK in terms of economic size and therefore may exercise stronger negotiation position (Belke and Gros 2017).

11.2 Brexit’s Shock In 2016, the result of the British referendum on Brexit was approval to leave the EU by a narrow margin. According to Article 50 provision of an invocation procedure, UK notified the European Council for its withdrawal intent and has taken two years of negotiation period. In December 2017, the United Kingdom and the EU reached a basic agreement on the main issues of settlement, protection of the rights of both citizens, and Irish border management as a first stage bargaining. At the EU Summit in late March 2018, the “transition period” was approved by the end of December 2020 with the aim of mitigating the catastrophic consequences of disruption caused by exit, but the negotiations between Europe and the UK did not go smoothly. As for the actual Brexit method, “Hard Brexit” means a scenario in which Britain withdraws from the EU single market and tariff alliance without agreeing to the departure conditions, followed by the World Trade Organization (WTO). An alternative scenario is access

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to a single market with limited immigration and limited domestic tariffs. However, as a result of the final implementation process, both are likely, but as of February 2019, Hard Brexit is expected to begin in March 2019. Brexit not only affects the UK economy but also has a significant impact on foreign companies. This chapter analyzes the impact of Brexit on Japanese companies that have entered the UK and Europe. After the Brexit, Japanese companies that have made inroads into Europe and the United Kingdom will be affected by changes in the regulatory environment, changes in the UK economy, burdens on tariffs and import and export procedures, increased costs due to tax withholding tax, The impact is believed to be significant. In addition, the impact of GDPR (the EU General Data Protection Rules) must be taken into account. Furthermore, in the past, London has played almost a role as the financial center of the EU, but in the future it will be possible to attract the functions of European countries outside of the UK, thus changing the financial services base. Specifically, there is a new movement to install the EU financial center functions in Germany or the Netherlands after Brexit. In fact, Brexit is affecting not only Japanese automakers, railroads and utilities, but also finance and global head office functions. Panasonic also relocated its European headquarters to the Netherlands in October 2018, and Sony plans to relocate its European headquarters from suburban London to Amsterdam, the Netherlands, on 29 March 2019. After Brexit, it is becoming more important for global companies to actively respond to changes in this new industrial structure. Global companies’ response strategies aimed to have an impact on expected performance and future corporate management. Therefore, global companies prepared various scenarios after Brexit, and it is necessary to cultivate human resources capable of preparing them and utilize experts. Implications of Brexit go beyond the UK and European economies. Numerous global companies operating in the UK need to consider the short and long-term impacts of Brexit.

11.3 Brexit Impact on Japanese Automobile Companies Japanese automobile companies started production in the UK in the 1990s, and then began dispersal production from the late 1990s to the 2000s into the EU and neighboring countries. As the Brexit negotiations progresses, the British Pound will continue to weaken, and it is likely that this trend will continue after Brexit. Therefore, if we do not consider the tariff problem, exports from the UK to the EU are favorable, but it is a challenge for automakers in the UK because of their high procurement rates. Of course, Nissan is likely to assume smaller parts procurement costs than other companies, since it has an 80% component procurement rate in the UK compared to other Japanese auto companies. Japanese automakers have responded to new business opportunities since the EU was established. From 1986 until 1999, the Japanese companies continued to control automobile exports to Europe. The members of the European Community signed

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the Maastricht Treaty (officially the Treaty on European Union) on 7 February 1992 in Maastricht, Netherlands to move European integration forward. Before and after this period, Japanese automobile companies have set up a regional headquarters in the UK, anticipating the formation of EU. Specifically, Nissan in 1989, Toyota in 1990, and Honda in 1991 established the regional headquarters. After the EU and Turkey entered into a tariff alliance in 1996, the euro (the virtual currency for settlement, the cash currency in 2002) became the official currency in 1999. Since then, ten countries joined Poland, Hungary and the Czech Republic in 2004, Bulgaria and Romania joined in 2005, and Croatia joined in 2012. Prior to Britain’s Brexit decision in 2017, Japanese automakers implemented their supply chain strategy for the European market through the UK operation to avoid EU tariffs. If you look at the characteristics of the UK auto industry, in 2017, the UK produced about 1.81 million cars and 2.55 million engines. Among them, 78% (1.41 million units) of automobiles are exported. About 60% of parts produced in the UK are procured within the EU. Of the approximately 3.12 million cars sold in the UK market, 228 million are dependent on imports. All of the existing automobile companies in the UK are under foreign companies. For example, Venture is under VW, Rolls-Royce Mini is under BMW, Jagalend Rover is under TATA, and MG is under China Southeast Railway.

11.3.1 The Impact of Brexit on Nissan and Honda Cars 11.3.1.1

Influence of Brexit on the Nissan Plant

In February 2019, Nissan announced it would produce a new model in Japan and thus scrapped its initial plan of production at a factory in Sunderland, northeastern England. With the EU withdrawal deadline set, the impact on the Japanese auto industry extends to the local residents in the UK, where Japanese auto companies have moved. In the Sunderland, the shipbuilding and coal mining industries were flourishing after the Industrial Revolution, but since the 1960s the local economy experienced rapid changes in the industrial structure. At that time, the policy of Margaret Thatcher closed down the coalmines in this area and the residents of the area lost the vital livelihood and became unemployed. The coming of Japanese auto companies in this area was a welcoming news to the large number of unemployed people. Nissan, Toyota and Honda all built large manufacturing facilities in Sunderland. The Nissan plant in Sunderland employs about 8,000 people and produces about 500,000 cars a year. Eighty percent of the cars produced were exported, with the EU countries the main export destinations. At the Sunderland plant, plans were announced for the production of the new X-Trail in 2016, and hundreds of new jobs were expected to occur. In 2013, Cameron was expected to play a role in supporting the local industry by visiting the Nissan Sunderland plant. However, after Brexit announcement in 2017, Nissan re-examined its global supply chain strategy, and on February 3, 2019, announced that it will cancel plans to manufacture the next model in Sunderland.

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The model will be produced at the Nissan plant in Fukuoka, Japan, rather than in the UK. If the UK breaks out of the EU, exporting cars from the UK to the EU will add a 10% tariff. Meanwhile, EPA in the EU and Japan entered into force on February 1, 2019. Tariff breaks on automobile exports from Japan to the EU were immediately discontinued from what was 10% so far. It is clear that the competitiveness of UK factories is likely to deteriorate given that the main export destination for Sunderland factories is the EU countries. The Nissan Sunderland factory has announced that it will not immediately arrange the personnel for canceling the next model production plan, but there are outcries in the UK concerning the future. In Sunderland, there are not only 8,000 employees working at Nissan plants, but many people who work in Nissan-related companies. Since the Sunderland plant in Nissan is the largest in Europe, the impact of Brexit has had a huge impact on the UK’s Sunderland region. If the UK departs from the EU, Nissan will gradually lose its competitiveness in the Sunderland plant, even though it will not be unemployed in the near future, as a result of its impact on the global supply chain strategy of foreign companies invested locally.

11.3.1.2

Influence of Brexit on Honda

On February 18, 2019, Honda announced it had closed its factory in Swindon in southern England in 2022, which operates a car factory in southern England. Honda did not attribute its closure of the UK plant directly to Brexit. Honda is expected to close production at its UK plant and to produce the remaining models in Japan. Honda’s UK plant produced about 160,000 passenger cars, roughly 10% of the UK auto industry in 2018, employing about 3,500 people. The UK’s Brexit decision not only has a direct impact on Japanese auto companies operating in the UK, but also has a direct impact on the local economy within the UK.

11.3.2 Brexit and Japanese Companies’ Response Strategies As the UK’s EU departure date is approaching the end of March 2019, locally based Japanese companies are struggling to prepare for the “chaos” of Hard Brexit. As I mentioned before, not only Honda, which announced the end of production of passenger cars in the UK until 2021, but also other companies in the UK, such as the Hitachi Plant, which we will introduce later. Honda has produced compact cars, such as “Civic”, at the Swindon factory in southern England, and exported them mainly to Japan and the United States. However, as the closure of the plant is confirmed, there is a possibility that the

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remaining supply will be produced in China or Japan. In the UK, Honda has been unable to secure operating profits on its own in Europe, as competition in the European market has intensified and production capacity has shrunk from 250,000 units per year. Both Honda and Nissan Motor Co., have unveiled the production plans for the next model of the SUV at the Sunderland plant in northeast UK. Toyota also produces about 130,000 units a year at the Burnerton plant in central England and discontinuing production is under review. In addition, in the case of Hard Brexit, Suzuki, which exports SUV to UK from Hungary, is also concerned that logistics will be stagnated due to customs clearance. According to a report analyzing tariffs between the UK and the EU, it is known that the sum of Toyota, Nissan, Honda and Suzuki’s costs will increase by about 159 billion yen in total (Usui and Yamasawa, 2019, SankeiBiz). With the new tariffs imposed between the EU and the UK, companies other than Honda are likely to transfer vehicle production functions to Japan and the United States.

11.4 Influence of Brexit on Japanese Railway Companies The UK is a country of railways. It has been nearly 200 years since the first train was operated. In the UK in the 21st century, there are many places that utilize the railway infrastructure of the past. There are still stations and tracks that are still being used based on the infrastructure of the British Empire. As a result, the infrastructure is so old that it is not uncommon for introductions to be delayed gradually as new problems start to occur, as well as problems that are not expected. Hitachi, Japan, in July 2012, ordered a vehicle for the IEP from the British Ministry of Transport, and set up a factory to produce rail vehicles in the UK. In the United Kingdom, railroad cars produced by Hitachi are starting to run everywhere. It is Hitachi that produces Shinkansen vehicles and subway trains in Japan, but in the UK the firm has faced multiple unexpected setbacks. Here is a background on how Hitachi set up a factory that produces trains in the UK. The UK government has been pursuing plans under the name Intercity Express Program (IEP) aiming to help solidify aging high-performance trains running on major arterial railways. In July 2012, Hitachi received a car for the IEP, and Hitachi’s high-speed trains were introduced to Japan’s “Class 395” high-speed railway, “HS1,” connecting London and southeastern England. In the fall of 2017, the “Class 800” for the Great Wesen Railway (GWR) began running in 122 orders (866 total). The new model is equipped with a pantograph that looks like a “train,” but it is equipped with a “bi-mode” that can travel in areas where electricity does not pass through as they embedded a diesel engine. The BaiMode vehicle is a “major technological innovation” brought to the UK by the IEP. The car for Scotland put in a “Class 800” for the GWR, but the first train was touched by an unexpected trouble. In 2015, Hitachi will receive a total of 234 vehicles for the Scott Rail and receive 10 years of vehicle maintenance business. Initially, it was intended to start operation in 2017, but the actual start of operation was delayed in July 2018.

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Hitachi received the first railway car order in 2012 and was strengthening its infrastructure business in the UK. The head of the railway business is British and has built a new factory to produce railway vehicles in northern England by investing about 12 billion yen in September 2015, while receiving 27 trillion yen of maintenance business for about 1 trillion yen. The factory plan to sell rail vehicles across the EU had a very smooth start. However, as Britain voted for Brexit in 2016, the plan completely fell apart. Above all, after the hard Brexit in March 2019, there will be high tariffs on exports to the EU. Also, as many of the major UK headquarters are under review, the bargaining itself is unlikely to proceed smoothly. Because of this, Hitachi executives are fundamentally rethinking their global strategy for the European market, with unexpected results in a year after the establishment of a local factory in the UK in 2015.

11.5 Prospect of Brexit Before Brexit, Japan regarded the UK as the fourth largest investment destination, next to the United States, China and the Netherlands. UK was a production base for conducting business with the EU. Financial performance According to the Bank of Japan, the balance of direct investment from Japan to the United Kingdom at the end of 2018 amounts to 10,405.3 billion yen. By business type, investment in the financial center and the city’s financial and insurance industries accounted for 32%, followed by 14% for the development of crude oil and natural gas in the North Sea oil fields. In recent years, investment in infrastructure has been on the rise, as the aforementioned Hitachi Works received high-speed railway orders, and Toshiba and others bought power plants that are planning to build nuclear power plants. For this reason, the investment amount for 2018 is 2,135.1 billion yen, 2.6 times of 2018, and it is the second largest investment after 2018 for one year investment in 2018. In addition, many companies are based locally. According to the statistics of the Ministry of Foreign Affairs of Japan, in October 2018, 1021 Japanese companies are based in the United Kingdom. By country, it is the 12th and in Europe it is the second largest after Germany. The number of Japanese residents staying or staying in the UK for the reasons of business is about 67,900, making it the fourth largest after the United States, China and Australia. However, after Brexit, scheduled for the end of March 2019, tariffs will be incurred when exporting to countries in Europe. For this reason, it is clear that this will also affect the sales of companies producing products in the UK and exporting them to countries in the EU via the UK from Japan. As we have already seen, the three companies of Nissan, Toyota, and Honda produced a total of about 780,000 vehicles in the UK in 2018. This is close to half of the total number of cars produced in the UK, and most of them are exported to EU countries, which is considered to have a large impact. Furthermore, when goods are transported between the UK and the EU, customs clearance is required.

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After Brexit, there is a great possibility that regulations based on EU rules may change. For example, with respect to the protection of personal information, the introduction of other regulations between the UK and other countries will increase the burden on businesses. In addition, it is clear that visas can be exchanged without obtaining a visa at present in the EU. Many Japanese companies in the UK and across Europe anticipate that they will face a number of business challenges affecting the employment status of their employees. Japan’s large financial institutions are using a licensing system called “single passport” that can provide financial services to other member countries once the business is approved in one country that is a member of the EU. For example, Sumitomo Mitsui Banking Corporation and Nomura Holdings have acquired a single passport in the UK and are conducting financial business in EU countries other than the UK. After Brexit, there is a high possibility that financial transactions or branch offices will be operating within the EU outside of UK. Thus, Brexit is affecting not only automotive companies, railroads, utilities, but also other sectors. Many Japanese global companies are moving their headquarters functions from the UK to the EU countries. Sony plans to relocate its European headquarters in London suburbs to Amsterdam, the Netherlands on March 29, 2019, and Panasonic has also moved its European headquarters to the Netherlands in October 2018.

11.6 Conclusion Brexit indicates the results of the ongoing conflicts between national sovereignty and European integration. Global firms operating in an integrated system of European Union need to make major adjustments. In this chapter, with the uncertainty factors related to Brexit, we have shown how some Japanese companies decided to move away from UK and relocate within EU area because of strategic importance of EU market. In a sense, Brexit suggested that UK abandons its linkage position to the EU market with Brexit decision. In the next chapter, we discuss how Korean firms expand their markets through free trade agreements (FTAs).

References Belke, A., & Gros, D. (2017). The economic impact of Brexit: evidence from modelling free trade agreements. Economic Journal, 45(3), 317–331. Chang, W. W. (2018). Brexit and its economic consequences. The World Economy, 41(9), 2349– 2373. Gasiorek, M., Serwicka, I., & Smith, A. (2019). Which manufacturing industries and sectors are most vulnerable to Brexit? The World Economy, 42(1), 21–56. Hantzsche, A., Kara, A., & Young, G. (2019). The economic effects of the UK government’s proposed Brexit deal. The World Economy, 42(1), 5–20. Hosoe, N. (2018). Impact of border barriers, returning migrants, and trade diversion in Brexit: Firm exit and loss of variety”. Economic Modelling, 69, 193–204.

References

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Portes, J., & Forte, G. (2017). The economic impact of Brexit-induced reductions in migration. Oxford Review of Economic Policy, 33, S31–S44. Salvatore, D. (2017). Europe’s growth crisis: when and how will it end? The World Economy, 40(5), 836–848.

Chapter 12

Free Trade Agreements (FTAs) and Korean Firms

Although a latecomer, economically important Asia has emerged at the forefront of global free trade agreement (FTA) activity……The focus for policymakers should then be how best to minimize the costs of FTAs while maximizing their benefits. (M. Kawai and G. Wignaraja, 2011).

Abstract Firms increasingly utilize global supply chain (GSC) management to expand their resource base and integrate diverse network capabilities in global markets. According to Kawai and Wignaraja (J Asian Econ 22(12):105–128, 2011), many Asian nations vigorously pursue “global free trade agreements” (FTAs) with advanced nations (e.g., USA and Europe). In view of increasing demands and requirements, Asian nations pursue FTAs within their regions at large such as China-JapanKorea FTA, ASEAN + 1 FTAs, and extend to Australia, India, and New Zealand, UK (2019) and Israel (2019). In this way, FTAs between countries or regional blocs provide added competitive advantages to global firms. This chapter explains the relationships (1) between FTAs and GSC strategies (2) supply chain costs and business impact results. Case illustrations highlight how Korean firms apply the potential benefits of multi-FTAs for achieving their GSC management strategic priorities and goals.

12.1 Introduction In this volatile and competitive environment, firms increasingly utilize GSC management to expand their resource base and integrate the diverse network capabilities to penetrate in the large segments of global market. Since the entry to diverse sets of markets have various restrictions, FTAs between countries or regional blocs provide added competitive advantage to global firms. This chapter discusses the relationships between GSC management in the contexts of FTAs. Since 1960s, Korea has adopted export-oriented national policy for its rapid economic growth. In view of its small domestic market and relatively weak natural resource base, Korean firms have engaged in serious global market driven growth © Springer Nature Singapore Pte Ltd. 2020 P. Hong and Y. W. Park, Rising Asia and American Hegemony, https://doi.org/10.1007/978-981-13-7635-1_12

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and expansion policies. Too often, the trade restrictions have become serious barriers of entries to key markets in the world. South Korea has sustained economic growth for more than two decades. Its priority was to become a regional economic power and then “translate its economic clout into global political influence” in the form of strategic alliance and FTAs (Kalinowski and Cho 2012). Increasingly, Korean governments have focused on promoting FTAs with key economic blocs of the world. A series of agreements include with Chile (2004), Singapore (2005), EFTA (2006), ASEAN (2007), India (2009), Peru (2010), European Union (2011), and USA (2011). With these FTAs, Korean firms—both global and SMEs—have formulated and implemented GSC management strategies. Global competitiveness requires aggressive market entries in diverse sets of trade agreements. FTAs are critical in determining effective flows of materials and key components from suppliers, the locations of manufacturing plants, and the nature of marketing strategies. Korean firms have been quite vigilant of these trade conditions in their overall GSC strategies. However, little is known about how Korean firms have implemented their GSC management in the contexts of FTAs. The aim of this chapter is to examine how Korean firms implement their GSC management as Korea establishes FTAs with key trading partners. Specific research questions are: (1) what types of free trade agreements does Korean government have with different nations; (2) how do Korean firms position their products and services in the global market by utilizing FTAs; (3) How do Korean firms implement their GSC management—particularly through effective information flows for their competitive advantage? This chapter provides essential details of several FTAs that Korean government has successfully completed since 2010. A research model also explains and defines the relationships in the form of testable hypotheses between FTAs and GSC strategy, GSC strategy and GSC management practices, GSC management practices and business impact results. In the subsequent section, case illustrations of Korean firms are provided.

12.2 Previous Studies About Free Trade Agreement (FTA) Policy of South Korea Previous FTA research attention has focused on the relationships between FTAs and regional economic integration (Jayathilaka and Keembiyahetti 2009; Lee et al. 2009; Batra 2010; Mölders and Volz 2011), free trade, industrial restructuring and international business (Breinlich 2008; Giroud and Scott-Kennel 2009), market entry and GSC management (Gouvea 2004; Hatani 2009), very little is known on how firms have implemented their GSC management in the contexts of FTAs.

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Here, it is worthy to review previous researches about FTA policy in Asia. The FTA boom since 1990 has brought great influence on each country’s trade policy. However, for countries in Asia, except the AFTA issued in 1992, most FTAs were issued after 2000s. Prior to that, Asia remained open to direct investment from the world, kept developing the network for trading and manufacturing, and forming industrial systems with high international competitiveness (Ando and Kimura 2005; Shintaku and Amano 2009; Kawai and Wignaraja 2011). Recently, FTAs are positioned to reinforce these things (Kawai and Wignaraja 2011; Manger 2014; Park et al. 2010). For example, Kawai and Wignaraja (2011) made four points based on the rapid progress of FTA establishments in Asia: (1) advanced market growth within the region supports economic integration, (2) economic integration in Europe and North America caused the Asian FTA, (3) because of the currency crisis in late 1990s, there is a need for cooperation on trading and investment within Asia, (4) WTO negotiation make slow progress. After the financial crisis in 1997, South Korea built the backbone of FTA policy over the decade. Prior to that, South Korea was conservative toward multinational agreements. However, after the currency crisis in 1997, South Korea accepted the policy intervention from IMF, and made changes to the trade policy. In addition, due to the small domestic market, South Korea had to expand its exports by depreciating its currency, and revive its economy. Through FTA, South Korea hoped to open the domestic market, increase the access to the free industry world market, and strengthen the international competitiveness. Recent research on the impact of FTA policy of South Korea involves crossdisciplinary perspectives. These streams are (1) to estimate the economic effects of FTA according to international trade theory, (2) to analyze the political process of FTA, (3) to check the effect on domestic economic growth and income distribution after the introduction of trade liberalization and market-oriented perspective, (4) to analyze the impact on specific industries (Park et al. 2011).

12.3 FTA Policy and Global Supply Chain Network Recently, Kawai and Wignaraja (2011), Manger (2014), and others have been talking how Asian FTA has impacted manufacturing and supply chain networks within the region. Kawai and Wignaraja (2011), argues that the trade of finished goods, components and raw materials within Asian region has progressed due to the low trade barrier, logistics cost and the developed division of labor. Manger (2014) also mentions that based on the assumption of the formed network between manufacturing and distribution in Asia, through enlarging the FTA network, it is possible to reduce or eliminate tariffs and non-tariff measures, improve the efficiency, simplify the customs procedures, improve the procedures on trade and investment, improve the infrastructure and logistics, lower service link cost, and further develop manufacturing and distribution network.

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Iizuka (2010) identifies that the changes of tariff rates and origin rules, formed as a result of FTA with South Asian Countries (AFTA), have an impact on the network of materials procurement and production deployment in Japanese consumer electronics companies. These Asian countries (e.g., Malaysia, Vietnam, Thailand, and Indonesia) have been promoting the liberalization with countries outside of region. Furthermore, for consumer electronics industry, some parts may be imported duty free based on international trade agreement (ITA) of World Trade Organizations (WTO). Exporting companies have been aiming to consider how to minimize the cost and lead time and optimize the supply chain. For example, recent origin rules in AFTA have become more flexible in relation to the intra-regional preferential tariff condition. If the final assembly of any products is completed within these Asian countries, AFTA origin can be issued. Consequently, more companies have choices of material procurement, and production facility location from within the region. For example, the LCD TV business, the panel accounted for 60–70% of material cost. It was difficult to gain the origin certificate previously, but now they are assembled at local place and then exported to AFTA target countries in an easier way. These factors have also affected the company’s supply chain strategy.

12.4 Research Model Figure 12.1 is a research model that explains the relationships between FTAs and partner nations, GSC strategy of Korean firms, GSC practices of Korean firms and business impacts of Korean firms.

Global Supply Chain Strategy of Korean Firms FTAs with Partner Nations

Business Impact Results of Korean firms

Global Supply Chain Practices of Korean Firms

Fig. 12.1 Research model

12.5 South Korean FTA and GSC Management

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Fig. 12.2 FTA agreement of Korea. Source Korea Customs Service (www.customs.go.kr/)

12.5 South Korean FTA and GSC Management 12.5.1 The Trends of FTA The negotiation of FTAs has been actively carried out throughout the world in order to support Korean firms to pursue greater business opportunities. Interestingly, the scope of free trade extends to products, services investments and the flows of human/capital resources. Currently, 15 FTAs have been concluded with 52 countries (effectuated and agreed) (Fig. 12.2, Table 12.1).

12.5.2 Trade Structure of South Korea The industry structure of South Korea relies heavily on global trade. Korea’s export dependence is more than 40% while Japan’s is around 10%. When we look at import, export and trade balance of South Korea, trade balance change shows extreme fluctuation due to high level of import. The main reason of such fluctuation is due to fluctuation of Won. Comparatively, Yen is stable against Dollar. The top export destination of South Korea is China, followed by EU and North America and top import source is Japan. As for the content, 34% are electrical and electronic products, followed by transportation equipment. The dependence of export on China is high, but import is low. It has a trade deficit with Japan, since the import dependence is high. As for exports to countries related to the FTA, after the FTA alliance, exports are increasing. Since the 2000s, key component parts of semi-conductor products of South Korea are imported from Japan. At the time, South Korea also export their semiconductor equipment to Japanese firms. In this regard, both Korea and Japan are highly interdependent in strategic industries.

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Table 12.1 Summary of Korea’s FTAs and Significance Countries

Progress

Note

Significance

Chile

Effectuated April 1, 2004

Concluded in October 2002

First FTA concluded Bridge-head for Latin American market penetration

Singapore

Effectuated March 2, 2006

Concluded in November 2004

Bridge-head for ASEAN market penetration

EFTA

Effectuated September 1, 2006

Concluded in July 2005

Bridge-head for Europe market penetration

ASEAN

Effectuated June 1, 2007

Goods: June 2007/Service: May 2009 Investment: September 2009/Whole: November 2010

First FTA with world’s large economic bloc

India

Effectuated January 1, 2010

Signed in August 2009

BRICs, huge market

EU (28 countries)

Effectuated July 1, 2011

Signed in October 2010

World’s largest economic bloc (based on GDP)

Peru

Effectuated August 1, 2011

Signed in March 2011

Resource-affluent country Bridge-head for Latin American market penetration

U.S.

Effectuated March 15, 2012

Signed in June 2007 Additional negotiation concluded in December 2010

Huge and advanced economy

Turkey

Effectuated May 1, 2013

Signed on Framework Agreement and Agreement on Trade in Goods in August 2012 (Service and Investment: Not effectuated)

Bridge-head for Europe and Central Asia market penetration

Australia

Effectuated December 12, 2012

Signed in April 8, 2014 Ratification of National Assembly in December 2, 2014

Resource-affluent country Major market in Oceania (continued)

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Table 12.1 (continued) Countries

Progress

Note

Significance

Canada

Effectuated January 1, 2015

Signed in September 23, 2014 Ratification of National Assembly in December 2, 2014

Advanced country of North America

China

Effectuated December 20, 2015

Signed in June 1, 2015 Ratification of National Assembly in November 30, 2015

Largest trading partner of Korea (As of 2015)

New Zealand

Effectuated December 20, 2015

signed in March 23, 2015 Ratification of National Assembly in November 30, 2015

Major market in Oceania

Vietnam

Effectuated December 20, 2015

Signed in May 5, 2015 Ratification of National Assembly in November 30, 2015

Third largest investment destination of Korea (As of September 2015)

Colombia

Effectuated July 15, 2016

Ratification of National Assembly in April 29, 2014

Resource-affluent country Emerging market of Central and South American market

Korea, China, Japan

10th negotiation with chief delegates June 2016

11th negotiation to be held

Establishment of foundation for economic integration in Northeast Asia

RCEP

16th negotiation December 2016

17th negotiation to be held

Contribution to economic integration in East Asia

6 countries in Central America

Declaration of conclusion November 2016

Legal review to be scheduled in December 2016

Creating a new market in Central America

Ecuador

5th negotiation November 2016

6th negotiation to be held

Resource-affluent country Bridge-head for Latin American market penetration

ASEAN—revision

14th implementation committee July 2016

Under negotiation on the implementation committee schedule

Trade expansion and reflection of change in trade environment

India—revision

1st negotiation October 2016

2nd negotiation to be held

Granting preference to leading exports and improving origin criteria for trade expansion (continued)

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Table 12.1 (continued) Countries

Progress

Note

Significance

Chile—Revision

Declaration of negotiation initiation November 2016

1st negotiation to be held

Reflection of change in trade environment

Israel

August 21, 2019

Concluded three years of negotiations on a free trade agreement. Nearly half of Israeli exports to South Korea are machinery, electrical and medical equipment

South Korea’s exports to Israel include automobiles and automobile parts, refrigerators, medical equipment, electronic components, toys and games, plastics and chemicals

UK

August 22, 2019

‘Continuity’ trade agreement that allows businesses to keep trading freely after Brexit

South Korea’s exports to UK are electronics, steel and the auto industry (£5.2 bn in 2018) and Britain exports crude oil, cars and whisky

Indonesia

October 16, 2019

Concluded talks on a bilateral trade deal

Total Korea-Indonesia trade volume ($18.62 bn in 2018). By 2022, it is expected to exceed ($30 bn)

EFTA (4 countries): Switzerland, Norway, Iceland, Liechtenstein ASEAN (10 countries): Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Vietnam, Thailand RCEP (Regional Comprehensive Economic Partnership): Korea, 10 ASEAN member countries, China, Japan, India, Australia, New Zealand 6 countries in Central America: Panama, Costa Rica, Guatemala, Honduras, El Salvador, Nicaragua

12.5.3 South Korean FTA Policy Before 1997, Korea’s agricultural sector received special protection from international competition. As South Korean government pursued FTA with other countries, there was strong opposition from the Agricultural Ministry. In the early stages of FTA, South Korea’s FTA with Chile and U.S. included special provisions for agricultural products. Korean government secured special funds to compensate farmers from 2004 to 2013. For example, Korean government’s support policy details for farming villages are: • Step 1 (1992–98): 4.2 billion Won to improve farming/fishing village structure policy: As a response to the open market through the Uruguay Round negotiations, it supported the construction of agricultural infrastructure, such as assurance for land consolidation, agricultural road maintenance, and agriculture water.

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• Step 2 (1999–2003): 4.5 billion Won to develop agricultural and village plan: the purpose was to establish a new agricultural policy in accordance with the Basic Law of Agriculture and country, and it was mainly used in Agricultural product distribution innovation, farm management stabilization, and expanding agricultural products export. • Step 3 (2004–2013): 11.9 billion Won for agricultural and village general measure: this policy is strongly conscious of FTA. The differences with the previous stage policy were (1) to reduce the proportion of building infrastructure, (2) to increase the proportion paid directly to farmers (from 8.7 to 23%), (3) to evaluate and adjust the policy every 3 years. • Step 4 (2014–): Currently this policy it to enforce previous policy and is ongoing. The Characteristics of South Korea’s FTA Policy and GSC management. FTA Road Map and Step 2 strategy involve (1) establishing in September 2003 and completing in May 2004; (2) simultaneous multiple FTA; (3) consideration of the economic relevance and diplomacy implications; (4) selected partner countries. First step is to construct the bridgehead of each continent and economic zone and second step is to fully promote the huge scale economic zone (e.g. Chile =⇒ Central South America, Singapore =⇒ ASEAN, EFTA =⇒ EU, Canada =⇒ U.S.). Finally, Korea will consider emerging countries such as India and China as potential market leading acquisition strategy. Korean government has been quite fast in establishing FTAs with different partner nations. As of March 2008, the average time of South Korea to establish FTAs with partner nations was 18 months while Japan for 23 months. (1) FTA with Chile: FTA with Chile took effect in 2004. But it was scheduled that the wine tariff would be abolished in 4 years. However, people thought Chilean wine would be cheaper, so those who used to buy French wine, which was most popular in South Korea, started to buy Chilean wine (it was an interesting case of the FTA impacting GSC management. Later France had to decrease their wine price). (2) FTA with Singapore: an initial negotiation with Singapore occurred at APEC Summit Meeting (1999). Its significance is that Singapore is a member of ASEAN group and the potential trade volume would be much larger than that with Chile. Singapore is also a bridge to other Asian nations. In November 2002, Industry-government joint study group was formed and by December 2005 the Korea Parliament ratified FTA with Singapore. With this FTA, there was a big increase of trade flows afterward. (3) FTA with ASEAN: ASEAN approached South Korea first with the FTA intent. It was the largest trade scale as FTA partner at that time. In August 2003, industry-government joint study group started. By November 2008 Commodity trade agreement was established. In 2007 FTA with ASEAN also took effect. ASEAN became the third largest trade partner of South Korea following China (168.3 billion) and EU (98.4 billion). (4) Comprehensive Economic Partnership Agreement (CEPA) with India: the establishment of common research group was in 2003. Aiming the FTA with India, there were total 15 rounds of negotiations between March 2006 and February

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2009. The ratification in the Parliament was in November 2009. This CEPA required strict rules of origin. The priority was economic partnership rather than increasing trade flows. This facilitated competitive entry of large and small Korean firms to Indian market. Such establishment of CEPA, Korean firms could expect tariff reduction effect on their long-term competitiveness. Under CEPA provision for industry products, tariff would be abolished or reduced in 5–8 years. For the rapidly growing Indian automobile market, Hyundai-Kia, a South Korean firm, expanded its production capabilities and built supply chain network involving both Korean suppliers and local Indian suppliers. Electronic firms (e.g., Samsung and LG) also have established local production system to build their Indian production network infrastructures to meet the growing demand of Indian customers and other ASEAN markets. (5) FTA with Peru: in November 2008 Summit Meeting South Korea and Peru decided to promote FTA. After 5 rounds of official negotiation, South Korea– Peru FTA was concluded on August 30, 2010. In 2009, the South Korea’s export to Peru was $640 million, import was $920 million with trade deficit 280 million. Current trade scale is not so large. South Korea is Peru’s 13th largest exporting country, and the 9th importing country. South Korea–Peru FTA in the short term has greater impact to Peru. Looking at the trade items, South Korea exports automobiles, wireless phones, and heavy chemical products, including petrochemical products, to Peru, and Peru exports mineral resources such as copper, and zinc, and fish textiles material and natural resources to South Korea. In South Korea’s main export items, automobile, TV, and medicine maintain a high tariff of 9%, and whether FTA is concluded or not expected to be a significant factor in export market competitiveness. Korean automobile price competitiveness has been enhanced by the conclusion of the South Korean– Peru FTA. Sales were expected to grow by more than 10% annually. From 2011 when the FTA takes effect, tariff for automobile with emissions over 3000 cc, was abolished immediately. Tariff for automobiles with emissions under 3000 cc was also abolished between 2016 and 2021. In fact, Japanese automobile share, which was two thirds in Peru’s imported car market, is falling, but South Korean automobile share is increasing. Share of Japanese cars accounted for 64.3% in mid 2000s, but by the first half of 2015 (January to June) the share has fallen to 47.1%, but the share of Korean cars rose from a mere 7.4% to 35.1%. An official of Hyundai Motors also expressed the expectation for a positive impact on market growth because of FTA. For example, by July 2009, South Korean automobile export scale to Peru was about 16 thousand, among which nearly 14 thousand are Hyundai KIA cars. Currently, South Korean cars represent about 35% market share in the Peruvian market, following Japanese cars, which have more than 47% market share, running in second place. In particular, recently local consumers have higher preference for South Korean automobile. For example, top 10 of sold cars in the first of 2015 are Kia Rio (357), Toyota Hilux (345), Toyota Yaris (319), Hyundai Accent (310), Kia Picanto (256), Toyota RAV4 (171), Hyundai

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Elantra (163), Kia Sportage (154), Hyundai Tucson IX (143) and Honda CVR (142). (6) FTA with European Union (EU FTA): FTA negotiation with EU started in 2000. It was a simultaneous negotiation with several EU countries for the first time. This was the first FTA with developed countries. In May 2004 Industrygovernment joint study group was established and by June 2006, the ratification in the Parliament was completed. As of September 2007 (one year after South Korea-EU FTA took effect), South Korea’s export to EU included items such as automobile and machine tools. However, the total volume of trade was reduced by 35.0%. Export for automobile and machine tools continued to increase after FTA took effect. EU investment in Korea amounted to 49.8 billion won in 2015, up 33% from 2010 before the EUFTA took effect. This accounts for 3.5% of the EU’s foreign direct investment to other countries. The EU’s imports from Korea were $ 5.5 billion in 2017 and the EU’s exports to Korea were $ 5.6 billion in 2017. In the 2017 EU-Korea FTA annual report, the EU trade volume on both the import and export scale is similar, so it is a treaty that benefits both parties. There are no tariffs within the EU. All products imported from Korea are not tracked in the region as soon as they cross the EU border, so the EU functions as one integrated entity in trade. (7) FTA with USA: according to FTA promotion roadmap in August 2003, U.S and EU were selected as mid-term FTA promotion partner countries. During the negotiation, U.S. sought for 3 requirements as FTA negotiation condition: (a) Resume the importing American beef; (b) Stop the introduction of re-evaluation system, which was aimed to lower medicine price; (c) Postpone the enhanced emission standard applied to US by 2 years. Started official FTA negotiation in 2006. Signed the Agreement in June 2007. Committed to abolish tariff of 94% commodity within 3 years. Sensitive agricultural products are exceptions. FTA was concluded by USA’s Bush administration and Korea’s Roh Administration. Criticism from within the United States was: the severe economic situation also became hot topic in the presidential election. In June 2010, two governments committed negotiation on U.S-South Korea Summit G20 in Seoul. Negotiation didn’t finish at G20, and renegotiation started within the year and as of December, 2010, both governments reached agreement on limited areas Parliament Ratification in November 2011. The FTA was in effect after March 2012. However, Donald Trump became a president of USA in 2017 and he called the FTA signed by U.S. President Barack Obama a “horrible” deal. His administration threatened to impose a 25-percent tariff on steel. The Korean government renegotiated the FTA. The new agreement was signed in September in 2018. The biggest change in the FTA revision in 2018 was the widening of opportunities for American cars in Korea. The Korean government agreed to accept U.S. safety standards on U.S. vehicles rather than applying Korean safety standards. In 2018, U.S. car imports rose 8.8% to $1.8 billion (Lee, 2019.3.15). This is a turnaround from the 2.9% decline in 2017 to $1.68 billion. In 2018, Korea’s automobile exports shrunk 6.9%. The Korean government said the increase in

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U.S. auto imports wasn’t a result of the renegotiated trade agreement as it takes effect in 2019. (8) FTA with Canada (2018). Korea has concluded an FTA with Canada on March 11, 2014. As it became effective from 2015, car tariffs began to reduce and ultimately were abolished in 2017. The FTA negotiations started in July 2005 and were concluded in 8 years and 8 months. South Korea was the first country in Asia to conclude FTA negotiations with Canada. Canada became Korea’s 12th FTA. Canada eliminated tariff barriers for automobiles and household appliances, while South Korea gradually reduced tariffs on beef and pork imports. (9) UK-South Korea free trade agreements (FTA) The UK and South Korea formally signed a continuity FTA on August 22, 2019. This bilateral trade is to continue in the event of UK leaves Brexit with no-deal that may happen on October 31, 2019. Annual trade flows between UK and South Korea totaled £14.6 bn in 2018 which accounted for about 1.1% of total British trade (UK government statistics, 2018). This is the first FTA under a no-deal Brexit. UK expects similar FTAs with Japan, Turkey and Canada and other countries on the preferential list of 16 nations. The UK-South Korea FTA replicates the effects of the EU-South Korea trade deal, allowing businesses to continue to benefit from preferential terms. As part of its preparations for Brexit, the UK has thus far signed 13 trade continuity agreements with 38 countries. These include the Southern Africa trade bloc, the Caribbean nations, Iceland, Israel and Norway. With UK’s FTA with South Korea, KIA and Hyundai have better UK market access (Table 12.2). In the midst of growing trade tension with Japan, South Korea has finalized FTA with Israel on August 21, 2019. This is Israel’s first FTA with an Asian economy. This also reflects Israel’s continuous trade growth with China and Japan along with other Persian Gulf countries. As Korea’s trade tensions with Japan escalate, a FTA with Israel provides opportunities for securing key component parts of machinery, electronics, and mechanical devices. With the abolition of 7% duty on cars and 12% in refrigerators, freezers, video games and consoles, Korea expects a greater market access in Israel. Most importantly, Israel’s entrepreneurial start-ups and R&D capabilities provide collaborative business opportunities for Korean entrepreneurs and SMEs. In summary, the effect of FTA for Korean global firms is enormous. With complete implementation of FTA with EU countries, Korea will have 5.6% advantage over Japanese firms. Firms from USA, China, EU and Japan may intend to produce their goods in Korea and then export their products to FTA partner nations of Korea with tariff advantage. In this way, Korean firms take advantage of tariff jumping in case of their investment with partner nations. Korean firms may thrive through diverse sets of FTA. Investment decisions of multi-national corporations require more than tariff rates. Other crucial factors such as wage level, quality of human resources, market approachability are considered. FTA with Chile, EU and ASEAN did not show big effects. It also had impact in GSC management. FTA with India, Peru, EU, and USA

12.5 South Korean FTA and GSC Management Table 12.2 South Korea-UK and South Korea-Israel trade flows

189

Year

Trade flows

Comments

2017–2019

Total South Korea-UK annual trade flows £5.8 bn (2017), £14.6 bn (2018). Continuity FTA August 22, 2019. UK exports mainly consisted of services, cars and fuel. UK’s exports of cars £943 m. Allow bilateral trade to continue in the event of a no-deal Brexit on October 31, 2019

2017–2019

Total trade volume $1.9 bn (2016), 2.1 bn$ (2017) and $2.5 bn (2018). Concluded negotiations for a FTA on August 21, 2019. Lower or eliminate customs duties on (1) South Korean automobiles and automobile parts, refrigerators, medical equipment, electronic components, toys and games, plastics and chemicals, and soy sauce; (2) Israeli goods such as machinery and electrical equipment, mechanical devices, fertilizer, medical equipment, cosmetics, plastics, metals, fruit juices and wine

Source https://www.ons.gov.uk/economy/nationalaccounts/ balanceofpayments Source https://www.jpost.com/Israel-News/Israel-South-Koreaconclude-talks-on-Free-Trade-Agreement-599270

expected to have effect (Especially for automobile). For South Korean enterprises, merit they would get in the future would be indirect effect from non-tariff rather than tariff effect.

12.6 GSC Management and Korean Firms GSC Management of Korean Firms using IT system. Globalization of South Korean firms is based on excellent IT infrastructure. GSC management of Korean firms encompasses complex business processes including procurement, product design and manufacturing processes and marketing initiatives. South Korean enterprises actively used IT system not only in products and business lines, but also in globalized management infrastructure. Currently South Korean global enterprises, with Samsung and LG walking in advance in IT infrastructure, are carrying out accounting in 3+ days. Among South Korean enterprises, there has been increase in enterprises adapting International Financial Reporting Standards (IFARS), and are considering about the consistency with the global ERP system. GSC management system, which

190

12 Free Trade Agreements (FTAs) and Korean Firms

connects manufacturing factories, global suppliers, distribution companies and dealers, is developing into a system where product development and production decision can be made automatically. IT infrastructure became an important trigger, which is leading South Korean global enterprises to rapid and flexible management. The 1997 Financial Crisis also led to improving transparency of management. Data management of origin certificate has become a top priority, requiring firms to systematically clarify the origin of their products. Data management of origin certificate is most important. For the satisfactory conformance to the origin criteria, it is necessary to manage HS code (Harmonized System Code) of purchased raw material and products for sale. It is also essential to establish a system that can extract relevant data in an ERP system to meet added value criteria. Errors would occur if system is not automated. Strong leadership and IT support of South Korea government. IT supported SCM strategies of South Korean global enterprises. South Korea government also took consistent custom policy (such as integration with EU) to support South Korean enterprises’ SCM. South Korea government working to promote FTA actively, set sensitive items for agricultural department, tried its best to protect them, and abolished tariff for main export items. Additionally, the government negotiated with countries to have complementary export and import commodities. Exports fell due to the financial crisis, but it started to recover from 2010. However, there is concern for the continuous depreciation of Won. FTA focusing on the second stage of the two-step strategy is ongoing. Next, let us explain the establishment and spread of tariff reduction and risk management strategy. South Korea International Trade Association established tariff reduction and risk management strategy, and made special circuit lecture in order to prevent cases that member companies suffer from tariff penalty for violating the application of tariff law, foreign exchange transactions, and FTA tariff. (Industrial Daily, May 25 2009). As Fig. 12.3 shows the development of origin management program, “FTA-PASS”. South Korea Customs Service held origin management program “FTA-PASS”, in which about 220 people related small and medium enterprises (SMEs) participated and popularized the program for free.

12.7 Conclusion In conclusion, we explain the relationship between FTA/EPA (Economic Partnership Agreement) and GSCM from the perspective of a company. First, we should consider which FTAs/EPAs should be used to optimize supply chains of parts (import/export), assemblies (import/export), and sales. Not only the charm of the country and overseas logistics, but also the presence or absence of tariffs had a major impact on FTA. It also has a great influence on the location of the procurement destination of the parts and the assembly factory. Second, the FTA/EPA is essential to win the supply chain management (SCM) advantage. Korean companies overseas have already used FTA/EPA strategically.

12.7 Conclusion

HR

191

Origin-based DB

UNI-PASS Electronic Inspection

Origin Conformance Material Information

Data Transfer Module

Assessment Management

API

Documents Issuance

Country of Origin FTA-PASS Administrati ve Server

Small and Medium Enterprises (SMEs) FTA-PASS

Fig. 12.3 FTA-PASS system

From a supply chain strategy perspective, considering the parts suppliers, production bases, etc., we should consider the optimal solution for FTA application and analyze which strategy pattern will be the optimal for that supply chain. For Korean domestic export companies, it is necessary to examine FTAs utilization strategies between the US and Korea. From logistics point of view, producing in the US is cheaper than in Japan. One contributing factor to the globalization of Korean companies was excellent IT infrastructure such as global SCM integration. In the mid-1990s, when digitalization began, Korean companies actively utilized IT systems as infrastructure to globalize management, their products and business lines. Currently, Korean global enterprises that are leading in IT infrastructure such as Samsung and LG can carry out account settlement in D + 3 unit. Korean companies are increasingly introducing International Accounting Standards (IFARS). The intention was to consider the consistency with the global integrated ERP system. Third, a GSC management system that connects manufacturing factories with global supply companies, distribution companies, and dealers is being deployed in a system in which product development and production decision making are almost automated. IT infrastructure has become an important trigger for Korean global enterprises to switch to quick and flexible management. The consequences of 1997 currency crisis also contributed to increasing the transparency of management. In order to respond to FTAs, companies must prepare new business strategies spanning from raw material purchasing to sales. It was the most urgent task for companies to have a certification system of origin. For this purpose, data management for origin certification is more important than anything. It is necessary to manage the HS code

192

12 Free Trade Agreements (FTAs) and Korean Firms

of the raw materials to be purchased and the products to be sold in order to meet the origin standards. It was also necessary to create a system that can extract related data in the ERP system held to process this data according to the calculation method of the added price. Since the application standards differ for agreement and item by item addition standards, mistakes occur unless the system is automated. From a firm level point of view, we explain the relationship between the FTA/EPA and GSC management. • In order to optimize the supply chain of parts (import and export), assembly (import and export), and sales, it is necessary to consider which FTA/EPA should be applied. • Not only the country’s attraction and foreign logistics, but also the tariff of FTA is important, because it influences the material destination of procurement and the location of assembly factory. • FTA/EPA is necessary in order to gain supply chain management (SCM) advantage. Foreign companies have already applying FTA/EPA strategically. • Other Korean firms implement “a blending of localization and global standardization across detailed elements” to achieve both productivity goals and market growth in politically sensitive emerging economies (Chung et al. 2014). As a point of supply chain strategy, it is necessary consider destination of material procurement, production place, and the application of FTA, and analyze which strategy pattern results in optimum supply chain. In the mid-1990s when the conversion to digital technology begun, South Korea companies not only used IT system in production and business line, but also actively used it in infrastructure to globalize management. Now more South Korean companies adopted international financial accounting reporting standards (IFARS) in order to consider the integrity of the global integration and ERP system. GSC management system, that connects manufacturing plant, global supply companies, distribution companies and sales, has been developed where product development and production decisions are made almost automatically. We think IT infrastructure became an important opportunity for South Korean global companies to rapidly shift to flexible management.

References Ando, M., & Kimura, F. (2005). The formation of international production and distribution networks in East Asia. In T. Ito & A. K. Rose (Eds.), International trade in East Asia, NBER-East Asia seminar on economics (Vol. 14, pp. 177–213). Chicago: University of Chicago Press. Batra, A. (2010). Asian Economic Integration and Sub-regionalism. International Studies, 47(1), 1–25. Breinlich, H. (2008). Trade liberalization and industrial restructuring through mergers and acquisitions. Journal of International Economics, 76(2), 254–266. Chung, C., Sparrow, P., & Bozkurt, O. (2014). South Korean MNEs’ International HRM approach: hybridization of global standards and local practices. Journal of World Business, 49(4), 549–559.

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Giroud, A., & Scott-Kennel, J. (2009). MNE linkages in international business: A framework for analysis. International Business Review, 18(6), 555–566. Gouvea, R. (2004). Doing business in Brazil: A strategic approach. Thunderbird International Business Review, 46(2), 165–189. Hatani, F. (2009). The logic of spillover interception: The impact of global supply chains in China. Journal of World Business, 44(2), 158–166. Jayathilaka, R., & Keembiyahetti, N. (2009). Adverse selection effect for South Asian countries in FTA formation. South Asia Economic Journal, 10(1), 1–30. Kalinowski, T., & Cho, H. (2012). Korea’s search for a global role between hard economic interests and soft power. The European Journal of Development Research, 24, 242–260. Kawai, M., & Wignaraja, G. (2011). Asian FTAs: Trends, prospects and challenges. Journal of Asian Economics, 22(1), 1–22. Lee, H., Owen, R. F., & van der Mensbrugghe, D. (2009). Regional integration in Asia and its effects on the EU and North America. Journal of Asian Economics, 20(3), 240–254. Manger, M. (2014). The Economic logic of Asian preferential trade agreements: The role of intraindustry trade. Journal of East Asian Studies, 14(2), 151–184. Mölders, F., & Volz, U. (2011). Trade creation and the status of FTAs: empirical evidence from East Asia. Review of World Economics, 147(3), 429–456. Park, Y., Shin, J., & Kim, T. (2010). Firm size, age, industrial networking, and growth: a case of the Korean manufacturing industry. Small Business Economics, 35(2), 153–168. Park, Y., Hong, P., & Hwang, W. (2011). Building supply chain capabilities: A case study of Korean Hyundai-Kia motor company. International Journal of Logistics and Systems Management, 9(2), 238–250. Shintaku, J., & Amano, T. (2009). Emerging market strategy of Japanese firms—reshaping the strategies in the growing market. MMRC Discussion Paper Series. No 275. Japan: Manufacturing Management Research Center, University of Tokyo.

Chapter 13

Competitiveness of Korean Small and Medium Enterprise (SMEs) in ASEAN Region

…..since firms with relatively small volumes of trade are usually small and medium-size enterprises (SMEs), policy assistance for reducing administrative costs should be geared toward SMEs. Our results further indicate that policymakers should also try to negotiate more extensive tariff reductions on products not only where MFN rates are high but also where shipments are large. (Hayakawa et al. 2014).

Abstract This chapter identifies competitiveness of Korean Small and Medium Enterprises (SMEs) in ASEAN Region. Emerging markets invite opportunities and challenges for both global local small and medium enterprises (SMEs). Particularly, the rapid growth in the Southeast Asian countries including India, Thailand, Vietnam, Malaysia and Indonesia, requires effective innovation strategy. The nature of these emerging Southeast Asian markets is somewhat different from the other markets in North America, Europe and North East Asia. Emerging markets in southeastern countries deserve adequate research attention. We summarize the globalization trend of Korean SMEs through case study.

13.1 Introduction Emerging markets invite opportunities and challenges for both global and small and medium enterprises (SMEs). Particularly, the rapid growth in the Southeast Asian countries including India, Thailand, Vietnam, Malaysia and Indonesia, requires effective innovation strategy. The nature of these emerging Southeast Asian markets is somewhat different from the other markets in North America, Europe and North East Asia. North America and Europe are regarded as advanced economies. North East Asia (e.g., China, South Korea and Japan, Taiwan) is a mixture of well-developed domestic markets, disciplined national innovation capabilities and export-driven growth engines (Sakakibara and Cho 2002; Hu and Mathews 2001). Historically, Southeast Asian nations had been somewhat “forgotten” and yet are now emerging economies with enormous growth potentials with rich natural and human resources © Springer Nature Singapore Pte Ltd. 2020 P. Hong and Y. W. Park, Rising Asia and American Hegemony, https://doi.org/10.1007/978-981-13-7635-1_13

195

196

13 Competitiveness of Korean Small and Medium Enterprise (SMEs) …

(Budhwar 2001; Wedel and Rondinelli 2001; Scheela and Van Dinh 2001; Bond and Simons 2009). Emerging markets in Southeastern countries deserve more intense research attention.

13.2 Roles of SMEs in ASEAN Market Innovative Korean SMEs also work in these Southeast Asian countries. This perspective is useful in exploring innovation policy for these emerging economies in three ways. First, the experiences of Korean firms provide insights on the issues related to market entrance and expansion strategies in these emerging economies (Kim et al. 2004; Nielsen 2005; Winch and Bianchi 2006). Second, a critical aspect of these Korean firms’ engagement in these emerging economies is their dynamic technological innovation practices (Lee and Lim 2001; Mahmood and Singh 2003; Kim and Lee 2002; Lee 2009). Third, the dynamic interactive practices of global firms, the small and medium enterprises (SMEs) and the local firms are examined as well (Namiki 1989; Ernst and Kim 2002; Berger and Diez 2006). Traditionally, Small and medium enterprises (SMEs) work as suppliers of dominant Original Equipment Manufacturers (OEM) or large conglomerates. Their market positions are fairly limited to domestic markets only. Recently, many SMEs in emerging economies, particularly in India, have expanded their market scope beyond their domestic market. As many Korean global firms (e.g., Samsung, Hyundai, and LG) enlarge their operations in the global markets, these SMEs have also enlarged their operations as global suppliers particularly in Southeast Asian countries. Some SMEs pioneer global markets quite independent of other global Korean firms. In terms of size of sales they are not yet global; yet their business orientation is global in that their sales performance mostly targets the global market. The paper is divided into the following sections: First, Southeast Asian market contexts; Second, research model of Innovative SMEs in the South Eastern Market; Third, case illustrations; Fourth, we close with theoretical and managerial implications.

13.3 Southeast Asian Market Contexts ASEAN (ten nations) is one of the top three export regions of Korea. The relative percentage (11.7%) is larger than USA (11/0%). Many ASEAN nations are Free Trade Agreement (FTA) partners with Korea. Table 13.1 lists some vital statistical indicators of these nations (i.e., India), in terms of export and import data with Korea. The total amounts of both import and export have been steadily increasing since 1990. Korea has net trade surpluses with India, Vietnam and Thailand while net trade deficits with resource-rich countries (e.g., Malaysia and Indonesia). Table 13.2 shows the comparative statistics between India and Korea. India is the leading country in Southeast Asia. With the recent free trade agreement between

13.3 Southeast Asian Market Contexts

197

Table 13.1 Korea’s export and import data with five South East Asian Nations: Unit $1,000 (USD) 2000

2005

2010

2015

2018

1,326,166

4,597,837

11,434,596

12,029,587

15,606,221

India

Export Import

984,706

2,112,078

5,674,456

4,240,565

5,884,707

Vietnam

Export

1,686,025

3,431,654

9,652,073

27,770,750

48,622,098

Import

322,441

694,043

3,330,815

9,804,831

19,643,385

Export

2,015,158

3,380,804

6,459,776

6,361,610

8,504,994

Import

1,630,917

2,688,762

4,168,786

4,854,350

5,582,443

Malaysia

Export

3,514,693

4,608,171

6,114,823

7,735,293

8,993,879

Import

4,877,958

6,011,639

9,530,964

8,609,437

10,205,684

Indonesia

Export

3,504,036

5,045,582

8,897,299

7,872,404

8,833,195

Import

5,286,908

8,184,433

13,985,848

8,850,394

11,161,192

Thailand

Source Korea International Trade Association (https://www.kita.net/) Table 13.2 Comparative statistics of India and South Korea Classification

Year

India

Korea

Nominal GDP

2019 estimate

2.972 ($trillions; World 5th)

1.699 ($trillions; World 11th)

PPP based GDP

2019 estimate

11.468 ($trillions; World 3rd)

2.241 ($trillions; World 14th)

Based on purchasing power parity (PPP)

GDP per capita

2019 estimate

$2,199 (World 142nd)

$32,766 (World 28th)

India’s GDP per capita has steadily increased

Actual GDP growth rate

2017/18

6.7%

2.2%

India and Korea maintains 5–7% and 1.5–3% growth rates respectively

Consumer prices growth rate

2008

8.3%

4.7%

Population

2018

1,324 (Millions)

51.4 (Millions)

328.0,000 km2

220,000 km2 (North and South combined)

Land size

Korea’s export to India

2018

–

15.61($billions)

Korea’s import from India

2018

–

5.88 ($billions)

Trade surplus (Deficit)

2018

(33.0) ($billions)

9.7 ($billions)

Source KOTRA

Comment

15 times of Korea

198

13 Competitiveness of Korean Small and Medium Enterprise (SMEs) …

these two countries, the prospect of continuous economic, social and political engagements will be substantial. India is much larger in terms of land size and population; however, in terms of economic activities, both India and Korea are compatible and complementary. India needs to build a growing manufacturing base to create manufacturing employment and infrastructure development while Korea needs India’s growing market access, a vast pool of human resources and technological, social and political collaborations.

13.4 Research Model Kim and Lee (1998) examined the patterns of strategic change of five small Korean firms. Their historical analyses both at the industry and at the firm level report “key success factors” of “product/market segments” and changing labor, technology and market contexts, strategic direction of utilizing their resources, capabilities and competitive outcomes. Building on these analytical methods, this research model (Fig. 13.1) describes the basis of analysis of Korean firms’ entrance and expansion experiences in the emerging economies. This model explains the emerging market contexts, the presence of Korean global firms and the collaborative efforts of Korean public institutions, their organizational practices and outcomes. This shows how Korean SMEs respond to market reality in the emerging economies. Innovative SMEs enter the emerging economies through strategic focus and organizational leadership, product/service innovation, strategic alliances. Market reality. Macro-business environment impacts business strategic practices. Chang and Park (2012) note that “technological complexity and market heterogeneity as important drivers that determine the nature and extent of competitive dynamics between local and multinational firms”. John and Lawton (2018) argue that “the

Fig. 13.1 Research model of SMEs in global environment

13.4 Research Model

199

institutions approach to political risk management is reactive, responding to external stimuli, whereas the resources- and capabilities-based approach is proactive, preparing and acting in anticipation” (John and Lawton 2018). Korea with its limited natural resources and political reality as a divided nation is compelled to seek for broad economic opportunities in the world. This industry level of analysis of Korean manufacturing considers broad macro-economic reality—constantly searching for the new global market opportunities. Increasingly, the market realities in South East Asian nations provide close multiple level of collaborations among global Korean firms, their affiliated suppliers and supportive government policy initiatives. It is a huge challenge for Korean SMEs to enter into the Southeast Asian markets on their own because of trade barriers, political and social obstacles and language barriers. Korean SMEs follow the lead of the global firms (e.g., Samsung, LG, and Hyundai) for market acceptance in these nations. Korean government’s initiatives (e.g., free trade agreement with India and other nations) are critical for SMEs to take more active steps for market entries. Besides, other public organizations, e.g., Korea Trade Investment Promotion Agency (KOTRA), provide vital support links for these firms to find proper business and government channels in each of these nations. Visionary leadership. Manufacturing strategy has a determining impact on the development of competitive capabilities (Hill 2005; Slack and Lewis 2002). Through strategic actions which consider customer demands, competitor actions, supplier capabilities and firm’s internal and external strength and weaknesses, firm develops its capabilities (Schroeder and Lahr 1990). Strategic priorities of innovative Korean SMEs are to define sets of macro-level goals over a long period for the global market. Entrance efforts to emerging markets need to be based on successful experiences in domestic market and other global markets. In other words, firms rarely approach the emerging markets, as the only option they have in this world. Rather, many successful businesses approach these emerging markets as a part of their global market initiatives (Julian and O’Cass 2004; Karagozoglu and Lindell 1998; Chaminade and Vang 2008). Product and Process Innovation. With increased competition and rapid changes in technology, customer requirements, and business practices, product life cycles have shortened (Wind and Mahajan 1997). This has imposed pressures on all organizations, including SMEs, to innovate more effectively and efficiently (Huang et al. 2002). SMEs strive to be innovative in terms of both product and value so that they might generate competitive advantage in a fast changing business environment. Product Innovation. Product innovation refers to the new product development (Mosey et al. 2002; Mosey 2005). The successful market introduction of new products or services is critical for both large firms and SMEs. New products created, as a result of design, customization, and quality enhancements, help to capture and retain market share and improve the ultimate profitability of the firm (Souder and Sherman 1994). SMEs enjoy a comparative advantage in innovation as compared with larger firms, due to their flexibility and ability to provide more rapid responses with a customeroriented focus (Baldwin 2000). This has led to their reputation for having a higher rate of productivity in new product development, as compared to their larger firm

200

13 Competitiveness of Korean Small and Medium Enterprise (SMEs) …

counterparts. Acs and Audretsch (1988) found that SMEs have an innovation-peremployee ratio of six times that of larger firms. In a subsequent study, Audretsch (1995) found that SMEs produced more innovations per employee than larger firms in 14 of the 18 industries studied. Value Innovation. SMEs that pursue value innovation pioneer and deliver premium value products and services to customers (Kim and Mauborgne 2005; Leavy 2005). These firms put innovative efforts with high strategic orientation in terms of securing creative talents, leadership practices, value differentiation, and timely responses to changing customers’ needs and expectations (Salavou et al. 2003). The competitive strategy of these SMEs is not merely cost reduction but it’s about the rapid enhancement of its product and service values. Strategic Alliances. Forming strategic alliances can be an effective way to diffuse new technologies rapidly, to enter new markets, to bypass governmental restrictions expeditiously, and to learn quickly from the leading companies in the given field. Given to the limited resources within SMEs, they will be able to reap the most benefits from developing strategic alliances with other SMEs as they can then tap into each other’s expertise. But most SMEs have weak boundary-spanning functions and a low labor capacity to establish and maintain interfaces to innovation networks (Tödtling and Kaufmann 1999). According to the resource-based view (RBV), firms look for partners that have the resources they lack (Nohria and Garcia-Pont 1991). The partnerships help the firms to achieve a sustained competitive advantage (Dyer and Singh 1988). Chung et al. (2000) found that resource complementarity and status similarity is related positively to the formation of alliances. Lane and Lubatkin (1998) found that firms tend to learn the most from firms with similar basic knowledge but different specialized knowledge. Young firms also can facilitate and can enhance learning from their partners (Grant and Baden-Fuller 1995; Hamel 1991). Thus, partnerships with critical suppliers provide both access to resources and the opportunity for learning. Hudson and McArthur’s (1994) research found that small, high-growth firms seek collaboration because they have no established ties or track record of success. These small firms have a “liability of newness” and a higher risk of failure, which is reduced through partnership. Aldrich and Auster (1986) support this strategy, finding in their research that the use of long-term contracts with other organizations increases the chances of small firm survival. The fourth driver that enables SMEs to be successful on the path to the effective entry to the emerging markets is actively pursuing their market expansion at the global level. In fact, entering the global market is a new opportunity for innovative SMEs to continue to grow. It is obvious that fierce competition in the domestic market that might be already saturated would limit the further growth of individual firms, and naturally lead them to look for markets abroad. In this regard, Winch and Bianchi (2006) note that stretching capabilities in supporting customers in new and unfamiliar markets is one of important features for SMEs going global. They argue that such expansion through going global is normally based on the success and reputation in home markets which act as the building blocks of creating global markets. However, SMEs that enter these Southeast nations’ market may still suffer from

13.4 Research Model

201

lack of capacities and resources to take competitive advantage beyond the domestic market. To overcome this, SMEs need to reinforce their marketing function by dealing with language differences, regulatory conditions, longer supply chains and international intermediaries. Yet, many SMEs look to foreign market for different reasons, which may include (1) intensified competition at home (2); maturing domestic market (3) limited domestic market opportunities (4) a natural extension and a growth strategy on the back of successful and solid home markets (Karagozoglu and Lindell 1998). It should be noted that going into Southeast Asian market is an attractive strategic choice for many SMEs. Related literature supports that export-oriented SMEs exploit a wide range of strategic weapons. For example, Namiki (1989), in his empirical study, noted that export-oriented SMEs achieved the best performance in terms of export growth and profitability, adopting segmentation differentiation or innovation differentiation strategy. Operational Capabilities. The major theme of manufacturing capabilities is the manufacturers’ choice of emphasis among key tasks (Hayes and Wheelwright 1984). The capabilities include cost efficiency, high quality, fast and reliable delivery, and product/process flexibility (Hayes and Wheelwright 1984). Manufacturing capabilities were built sequentially over time. With their relatively short manufacturing history, Korean manufacturing capabilities are about how to secure rapid learning, improvement and innovative in organizations and industries. Market Capabilities. Many researchers consider manufacturing as an important element in a firm’s endeavor to improve firm performance (Hayes and Wheelwright 1984; Skinner 1986). Superior manufacturing performance leads to competitiveness of firms. To excel in manufacturing, the firm must determine what its manufacturing competitive priorities are, and where it stands on these aspects relative to its major competitors. The performance measures of Korean manufacturing industries are in the extent of sustaining solid financial outcomes through consistent delivery of high valued products and services to global end customers. Performance Outcomes. The most obvious outcomes are financial in terms of net sales, operational expenses, net profits, returns of assets. SMEs, however, regard other non-financial outcomes as important for the long-term success of their emerging market strategies. Most successful SMEs do not expect immediate success in these emerging markets. Rather, they take time to lay the basic foundations for market acceptance for years through their quiet and consistent business efforts. These measures include the extent of internal cross-cultural employee integration, business network relationships, product brand recognition and reputation.

13.5 Case of Korean SMEs: An Overview Korean global firms such as Samsung, Hyundai, SK, and LG are recognized for their stellar performance and global brands. SMEs play an important role in the Korean economy. As Table 13.3 shows, SMEs comprise ninety-nine percent of enterprises,

202

13 Competitiveness of Korean Small and Medium Enterprise (SMEs) …

Table 13.3 Korean SMEs: # of firms, employees and ratios (Unit: No. of Firms and Persons and Ratio %) Large + SMEs Combined (A)

SMEs (B)

# of Firms

# of Employees

# of Firms

2000

2,729,957

10,768,597

2,707,805

2005

2,867,749

11,902,400

2,863,583

2010

3,125,457

14,135,234

3,122,332

2015

3,604,773

16,774,948

3,600,882

Year

Ratio (B/A) # of Employees

# of Firms

# of Employees

8,680,694

99.2

80.6

10,449,182

99.9

87.8

12,262,535

99.9

86.8

15,127,047

99.9

90.2

Source National Statistical Office (2015)

eighty-eight percent of total employment, thirty-eight percent of export, and fifty-one percent of added value. Increasingly, Korean SMEs are taking similar steps of global market expansion just like large Korean global firms. This is because they see internalization and R&D alliance as two crucial aspects of their long-term survival (Lee et al. 2012). As Table 13.4 shows, total manufacturing value added production of Korean SMEs increased from 124.57 trillion won in 2002 to 248.18 trillion won in 2013 (Kim 2016). In 2002, the compound and chemicals industries accounted for the largest share of the total manufacturing industry, 15.45 trillion won (12.4%). This was followed by the primary metal/metalworking products industry, which produced 14.3 trillion won (11.5%). In 2013, the electronics, computer, video, audio and communications equipment industries had the highest comparative advantage. The other machinery Table 13.4 Korean SMEs: value-added trends and industry profiles Year

Total manufacturing value added production (won)

Industry details

2002

124.57 (trillion won = approximately billion $)

Chemical industry: 15.45 trillion won (12.4%) Primary metal/metal industry: 14.3 trillion won (11.5%)

2013

248.18 (trillion won = approximately billion $)

Metal processing products industry: 38.42 trillion won (15.5%) Machinery and equipment industry: 30.35 trillion won (12.2%) Automotive and transportation equipment industry: 26.12 trillion won (10.5%)

Source The Export-Import Bank of Korea

Comments

The electronics, computer, video, audio and communications equipment industries (comparative advantage)

13.5 Case of Korean SMEs: An Overview

203

and equipment industries, the rubber and plastics products industry, metals/metal working products industry, automobiles and trailers, transport equipment industry and in the compound and chemical industries had comparative advantage. The share of these industries has changed in 2013. Among the 14 industries of Korean SMEs, the compound and chemical industries had the largest comparative advantage in domestic production, as compared to the rubber and plastic products industry, other machinery and equipment industries, and the automobile and trailer/other transportation equipment industries. In 2013, the largest domestic value added industry among Korean SMEs was the 1st metal industry/metal processing products industry (38.42 trillion won, 15.5%), machinery and equipment industry (30.35 trillion, 12.2%), automotive and transportation equipment industry (26.12 trillion won, 10.5%). As Table 13.5 shows, foreign direct investment in Korea’s manufacturing industry increased from $33.2 million (22.9% of Korea’s total foreign direct investment) in 1980, to a record high of $5,323.6 million (53.7%) in 1996, and to a record high of $91,873.2 million (36.1%) in 2013. The share of SMEs in such foreign direct investment in manufacturing began in 1980 at $8.8 million (26.4%). The share steadily rose reaching $16,261.0 million (25.2%) in 2010. Since then, the proportion of SMEs has gradually decreased, and in 2013 foreign direct investment in manufacturing of SMEs recorded $20,450.2 million (22.3%). The share of SMEs of foreign direct investment on the manufacturing industry is very weak compared to that of the value added production. In 2013, the value added production of SMEs is almost equal to that of large companies, but in the case of foreign direct investment in manufacturing, SMEs account for about 22.3% of the share of large companies. In 2002 the total Korea’s SMEs’ foreign direct investment in the textile, apparel, fur, leather, bag and footwear industries was $1,769.47 million. It accounted for 33% of the total investment of SMEs. Additional investment 19% of $1,019.92 million was in the computer, video, audio and communications equipment industry (Kim 2016). However, in 2012, investments in the electronic components, computer, video, audio and communications equipment industries amounted to $4,385.2 million, accounting Table 13.5 Korean SMEs: foreign direct investment (FDI) Year

FDI in Korea (million ($))

1980

145.2

1990

3,247.4

FDI in Korea’s manufacturing industry (million ($)) (%: ratio of manufacturing of Korea’s total FDI)

SMEs Foreign Direct Investment (million ($)) (%: ratio of SMEs in manufacturing of Korea’s total FDI)

33.2 (22.9%)

8.8 (26.4%)

1,161.6 (35.8%)

271.8 (23.4%)

2000

34,908.5

16,951.5 (48.6%)

4,147.8 (24.5%)

2010

166,877.1

64,542.4 (38.7%)

16,261.0 (25.2%)

2013

254,150.1

91,873.2 (36.1%)

20,452.2 (22.3%)

Source The Export-Import Bank of Korea

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13 Competitiveness of Korean Small and Medium Enterprise (SMEs) …

for 21.2% of total investment in SMEs. This was followed by the industry investing $3,561.5 million, or 19.2%. In 2005, Korean SMEs’ largest segments of overseas production were in textile, clothing, fur, leather, bags, followed by sound/telecommunications equipment industry. On the other hand, the food, beverage, tobacco, wood and wood products, coke, petroleum refining and nuclear fuel industries, and the compound/chemical industries steadily improved their competitive position in the world (Kim 2016). In 2011, the textile, apparel, fur, leather, bags and footwear industries outperformed other industries, followed by the electronics, computer, video, sound and communications equipment industries, followed by rubber and the plastic product industry followed. In particular, the wood and wood products industries, as well as the coke, petroleum refining and nuclear fuel industries, did not have a comparative advantage in 2005, but developed into an industry with comparative advantages in 2011.

13.5.1 Simone Simone is the leading Original Design Manufacturer (ODM) in the handbag industry supplying 10% of the world’s luxury handbags and 30% of the US market, including Michal Kors, Marc Jacobs and Tory Burch. Recently, Bloomberg received attention once again with an article titled, “Handbag King of Korea Becomes a Billionaire.” Founder Chairman Park’s assets in 2018 are $1.2 billion (about $1.2 trillion), based on Bloomberg’s aggregate, with Park and his family holding a 61.9% stake in the company. The company has six manufacturing plants in Vietnam, Cambodia, and China, with sales of KRW 1 trillion and operating profit of KRW 177.7 billion in 2017. Table 13.6 shows Simone’s globalization strategy. It was founded in June 1987 with a capital of 100 million won and 15 employees, and started as an exporter that supplies global luxury handbags to OEM (Original Equipment Manufacturing). Since the mid-1990s, the firm has implemented two strategies for improving global competitiveness have been implemented. First, the company continuously invested in the design, product planning, and materials sectors in order to improve its competitiveness from an OEM supplier to an ODM (Original Design Manufacturer). This transformation required upgrading from high-value business to high value-added activities. Second, with increasing global market opportunities, the firm has actively implemented overseas direct investment to establish production based abroad, especially in emerging countries. As a result, Simone now has more than 150,000 handbag design patterns, and reached $360 million in export revenues in 2011.

13.5 Case of Korean SMEs: An Overview

205

Table 13.6 Globalization strategy of Simone Year

Globalization strategy

Comments

1987

Established Simon Co., Ltd.

4 (millions dollars) export

1990

Established New York branch office

23 (millions dollars) export

1992

Established an overseas factory in Guangzhou, China (100% sole investment)

32 (millions dollars) export

1993

Established the 2nd factory in Guangzhou, China Established Hong Kong branch office

35 (millions dollars) export

1995

Expanded the third factory in Guangzhou, China, exported

60 (millions dollars)

1997

Expanded the fourth plant in Guangzhou, China. Established the Indonesian plant

Exported 120 million dollars

1999

Established 2nd plant in Indonesia

138 (millions dollars) export

2000

Completed construction of new factory in Guangzhou, China

Export 150 (millions dollars)

2003

Established Dongchun factory in China

exported 185 million dollars

2006

Completed the 3rd factory in Qingdao, China

Exported 240 (millions dollars)

2009

Completed Ho Chi Minh Plant in Vietnam

2011

Completion of Tian Giang plant in Vietnam

360 (millions dollars) export

Source http://www.simone.co.eng/swf/main.asp

When Simone founded the company in 1987, it recorded $4 million in OEM exports and continued to increase exports until 1989. However, since many global management environments, such as the emergence of emerging economies and the rise in domestic wages, have been undermining the competitiveness of domestic production since the early 1990s, Simone has actively implemented foreign direct investment. Simone founded its first overseas plant in Guangzhou, China, five years after the company was established in 1992, and continued to add or expand overseas plants in other parts of China, Indonesia and Vietnam. The sharp increase in exports is directly related to foreign direct investment in the early 1990s and early 2000s.

13.5.2 EO Technics EO Technics, often referred as Electro Optics (EO), was established on April 1, 1989, and produces laser marker that mark logos on the surface of semiconductors. It is a back-end company that manufactures machinery for semiconductor manufacturing. Since its establishment in 1989, it was designated as a venture company until 1998. In 2010, it won the $70 million Export Tower and has been exporting steadily ever since. In 2017, it won the Korean Hidden Champion Award for Excellence and was selected as the KOSDAQ Rising Star in 2018. Table 13.7 shows globalization strategy of EO Technics.

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13 Competitiveness of Korean Small and Medium Enterprise (SMEs) …

Table 13.7 Globalization strategy of EO technics Year

Globalization strategy initiative

1989

Established EO Technics

Comments

1998

Philippine branch established

1999

Established local corporation in USA and Singapore

2000

Established local corporation in Taiwan, Thailand and Indonesia

2003

Established local corporation in Tianjin, China

2008

Established a local corporation in Suzhou, China

2009

Acquired Powerlase in UK

2011

Completed Suzhou plant in China. Acquired Innovavent GmbH, Germany

70 (millions dollars) export (2010)

2014

Established a branch in Vietnam

100 (millions dollars) export

10 (millions dollars) export

50 (millions dollars) export

Source http://www.eotechnics.com/company/history.php

EO Technics’ core business is laser technology for a semiconductor production equipment, but has newly developed competitive products applying the accumulated know-how, such as laser control technology, to supply information to the telecommunications and PCB industries. In addition, the company sells a variety of equipment related to displays such as laser, LCD, OLED, etc., to domestic companies, as well as foreign firms in the US, China, Japan, Philippines, Taiwan, Singapore, Vietnam, Malaysia, Thailand, Indonesia, Hong Kong, and Brazil (Shin 2017). Export items include laser marker, laser drill, laser cutter, and laser trimmer. Laser application technology is widely used in various industries because of its uninterrupted, clean and easy automation. In particular, the laser application field for the semiconductor industry has become a core production and manufacturing technology in the semiconductor industry and the electronics industry, such as laser lithography, laser 3D inspection, and laser marking. These equipments are necessary for the production of highly integrated semiconductors, and their application range is different from ultra-precision processing. Recently, the usage range of the display (LCD, OLED) industry, the PCB industry, and the mobile phone industry has greatly increased. In addition, the demand continues to grow in traditional industries such as the automotive and mechanical parts industries, and laser application technology is expected to continue to grow. Laser application technology will have a profound impact on the future environmental field. If the traditional industrial field that used chemicals led to environmental pollution, laser application technology is essential to fundamentally solving environmental pollution. As of 2019, the company is expanding its business to various laser applications such as laser drilling, trimming and cutting. EO Technics started as a small and medium company, listed on the KOSDAQ market in 2000 and has now grown into

13.5 Case of Korean SMEs: An Overview

207

a large company. At the time of establishment EO Technics which had only three employees, now has more than 650 employees and sales of 300 billion won as of March 2017. In 1999, the sales amounted to KRW 19.3 billion, which means that it grew more than 15 times in a short period of time. As on March 2017, the company has become the world’s largest laser marking company with more than 300 customer networks and 10 branches (Shin 2017). In particular, EO Technics is known as one of the most effective utilizes government R & D support (Kim 2016). EO Technics has achieved global growth by activating its foreign direct investment by improving its competitiveness based on the government’s R & D support. From 2001 to 2014, EO Technics received about KRW 12.4 billion in R & D funding. EO Technics also developed its own technology through these studies. In 2011, the company acquired Innovavent GmbH, Germany, to acquire original technology. In addition, EO Technics actively participated in foreign direct investment, starting from establishing a branch in Philippines in 1998. Branch offices were established in Thailand and Indonesia in 2000 and branch offices in Tianjin, Suzhou, China in 2003, and Vietnam in 2014. The rapid growth of EO Technics is the result of the combination of existing technology, domestic production competitiveness, overseas M & A and foreign direct investment strategy.

13.6 Implications and Future Research Issues What can we learn from the successful cases of these two Korean SMEs? First, it highlights the potential of Southeast Asian nations as an important emerging market. The Southeast Asian nations are not homogeneous market. It is growing with abundant natural resources (e.g., Malaysia and Indonesia), vast human resources (e.g., India) and strategic location advantage (e.g., Thailand), national will for industrialization (e.g., Vietnam) and sophisticated financial and organizational infrastructures (e.g., Singapore). Second, the cases showed that the entrance strategy to these emerging markets is a part of their global market strategy. Because of market uncertainty and the required time frame for business development it is not feasible for many firms, particularly SMEs, to focus only on these emerging markets. Rather, they successfully enter, grow and expand through their experiences in other parts of the global markets (e.g., North America, Europe and China). Dinh and Calabrò (2019) suggest that in light of uncertainty of fair and consistent applications of the rule of law, Asian family firms tend to cultivate political connections through personal networks (e.g. guanxi) to reduce uncertainty, gain access to external resources, and practice cultural values and social norms (e.g., ‘face saving’, reputational concerns and adult child adoption). Third, the critical competitive advantage of successful SMEs, as illustrated in this chapter, is in innovative product and organizational innovation. Products that are successful in North American market are not necessarily directly marketable in these emerging markets because of vast differences in purchasing power, technological infrastructure and social and cultural habits. This contextual adaptation requires

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13 Competitiveness of Korean Small and Medium Enterprise (SMEs) …

innovative new product development efforts, organizational change management and most importantly, switches in management mindset. Jamali and Karam (2018) identify ‘CSR Thinking’ and ‘CSR Doing’ and the diverse forms of CSR in the developing world to require local contextualization and implementation of wider formal and informal governance systems. Constructive role of CSR for SMEs is crucial for expanding their market frontiers. A positive corporate reputation can be crucial to successful venture development. Market success requires senior leadership to develop systematic and integrative building of corporate reputation (Goldberg et al. 2003). Fourth, these cases shed light on the greater role that women can play in the form of entrepreneurial leadership. Increasingly, women display innovative leadership for the expansion of SMEs in emerging markets. Lee et al. (2011), for example, investigate the role of the government support on overcoming obstacles for developing innovative ideas into products that target beyond regional market base. The point is that it is not the scale of support but the political attention that matters. Since entrepreneurial SMEs utilize family capital (e.g., financial, network relationships and technology use), the government should step in to allow women entrepreneurs to generate family capital and achieve desirable market entry success as reported in the case of US family businesses (Dyer et al. 2014). Future research will look at more details of how firms from Northeast Asian nations (e.g., China, Korea, Japan and Taiwan) approach differently to these growing markets of emerging Southeast nations.

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Chapter 14

Supply Chain Integration in China: Case Study

…..supply chain integration (SCI)…is the degree to which a manufacturer strategically collaborates with its supply chain partners and collaboratively manages intra- and inter-organizational processes, in order to achieve effective and efficient flow of products and services, information, money and decisions, to provide maximum value to the customer. (Barbara Flynn et al. 2010).

Abstract This chapter examines the strategic and operational issues related to supply chain configurations between set-makers and back-end suppliers in China. The case studies examine supply chain practices through low cost module (LCM) and demand chain management (DCM) strategy, which includes the movement of production facilities in China, integration of upstream and downstream suppliers, and vigorous distribution network building. The case study suggests that these firms respond to the growing domestic demand in China while it addresses the competitive challenges in global markets outside of China with their supply and demand network capabilities. This chapter also shows how Korean global firms in China address customs and border crossing issues between suppliers and hosting countries.

14.1 Introduction Korea-based multi-national corporations are demonstrating their positional strengths in global market through the effective combinations of their global marketing strategy, premium product image, localization initiatives, rational pricing policy, outstanding quality and design. One case in point is how Korean firms rose as the market leader of Liquid Crystal Displays (LCD). LCD is used for a variety of applications that require high quality display–from mobile technologies to large TV. After 40 years of using TVs with Cathode Ray Tube (CRT), many TV customers are now rapidly switching to LCD. Although early display technologies started in USA and Europe, Japanese firms such as Sharp have attained its commercialization success. Korean firms, with their relatively late entry, adopted an aggressive strategy and successfully © Springer Nature Singapore Pte Ltd. 2020 P. Hong and Y. W. Park, Rising Asia and American Hegemony, https://doi.org/10.1007/978-981-13-7635-1_14

211

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14 Supply Chain Integration in China: Case Study

caught up with Japanese forerunners. Korean LCD industry, represented by Samsung Electronics Co., Ltd and LG Display Co., Ltd (since Feb 2008 called LG., Phillis LCD CO., Ltd.). They began their production in 1995. Within four short years Korean LCD panel makers led the global market (Shintaku et al. 2007). By 1998 Samsung’s global market share was No. 1 and by 1999 LG followed it as No. 2. In this way Korean firms have positioned as global market leaders with their sustainable competitive advantages over Japanese rivals (Shintaku et al. 2008). However, LCD industry is experiencing rapid LCD panel price reductions due to the downward price movement of the final finished products. In particular, global Flat Panel Display (FPD) manufacturers for computer, monitor and TV face growing business opportunities with an expanding global market. At the same time, with the continuous influx of competitors the overall prices of computer and TV have shown downward trends. Therefore, it is critical for FPD manufacturers to manage efficiencies in terms of cost, delivery, and quality. In these circumstances, a critical challenge for LCD panel firms is how to improve efficiencies of module assembly processes. The options for overall cost reduction in the value chains are: (1) manufacturing productivity enhancement through workers’ learning curve; (2) product process improvement through better operational systems; (3) effective outsourcing of the back-end assembly and logistical processes. This paper examines the strategic and operational issues related to efficient supply chain configurations between set-makers and back-end suppliers in LCD industry. LCD industry has three processes which are array and cell process (i.e., the front core process) and module process (i.e., the backend process) (Shintaku et al. 2007, 2008). Most of LCD firms including Korean firms handle the array and cell processes in their domestic plants and module process in overseas plants. This paper focuses on relationships between the OEMs that assemble parts of module process and the suppliers in China that produce Driver IC and Back Light Unit (BLU) in the form of modular processes of LCD panels. Our study examines how Korean multicorporations transfer these operations from Korea to China through vertical integration with the suppliers according to the Chinese government rules and operational constraints. In contrast to the dynamic market activities of Korean LCD industry in global market, this area has received scant research attention. This paper focuses on aggressive global market strategy of two Korean firms and examines their supply chain practices. Their global market strategy involves both panel operational process (i.e., frontend process) in Korea and LCD module process (backend process) outside of Korea. Yet, the difference is the strategic alliance details with their suppliers. This research shows that these Korean firms, although in the same industry from the same country, adopt different manufacturing processes depending on their customer characteristics (i.e., either internal or external customers). The literature review describes the unique competitive circumstances of this industry, prior research of collaborative patterns between set-makers and component suppliers, and emerging issues related to government regulations and competitive requirements. The research model depicts the specific challenges from the

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213

standpoint of supply chain management of this industry. This research model identifies how FPD manufacturers achieve the premium value-added under the above mentioned business conditions and constraints.

14.2 Literature Review Supply Chain Integration and Product Architecture. A number of scholars have studied the offshore production of multinational companies (MNC). Classical international business approaches such as corporate advantage theory (Hymer 1976), product cycle theory (Vernon 1966), and OLI (Ownership, Location, and Internalization) approach (Dunning 1979, 1989) explain the patterns of how MNCs expand their operations overseas. Effective MNCs’ supply chain integration is built on the theory of comparative advantage. Transaction of information intensive management resources (IIMR) or intermediate goods across the national borders is possible because of three economic advantage factors (Hasegawa 1998, 2002). First, economies of multi-plant suggest that the value of IIMR does not diminish with the use in multi-plants. Therefore, the common use of IIMR in multiple plants reduces its overall average cost. Second, joint ownership of IIMR may enhance the scope of economies and therefore realize additional profit potentials in the form of brand recognition, customers’ trust and an extended distribution channel. Third, economies of specialization may also achieve a great level of overall network system productivity when diverse sets of upstream/downstream processes within value chain are allocated to many countries according to the differences in factor costs and economies of scale. The relationship between upstream and downstream processes is also quite interactive. For example, outputs of upstream processes are usually added into downstream processes. At the same time, information and knowledge from downstream processes are reversely put into use through the information feedback mechanisms and change the nature of upstream process characteristics. In this way, dynamic flows of intermediate goods and IIMR occur in the international value network. From the standpoint of supply chain integration, it might be desirable to locate upstream and downstream processes in the same location. However, the theory of comparative advantages recognizes the values of utilizing the differences of factor costs and economies of scale through international transactional arrangements. Meanwhile, in turbulent times, configuration, collaboration, and coordination complexities of supply chain matter (Abdelkafi et al. 2011). In particular, Supply chain Integration (SCI) is one of the most important competitive strategies used by modern enterprises. As the main aim of supply chain management is to integrate various suppliers to satisfy market demand, supplier selection and evaluation plays an important role in establishing an effective supply chain (Lee and Kim 2008; Lin et al. 2009; Chen 2011).

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Product architecture is deeply related to supply chain integration. For example, increasing modularity makes it possible for module suppliers to work independently (Fine 1998; Sako and Helper 1998; Baldwin and Clark 2000; Salvador et al. 2002; Sturgeon 2002; Christensen et al. 2002; Fujimoto 2003; Ro et al. 2007; Park et al. 2009; Abdelkafi et al. 2011; Ulku and Schmidt 2011; Park and Hong 2012). In particular, Ro et al. (2007) show that in response to product modularity, leading car producers reduced their supplier base. From the viewpoint of the firm like OEM, the complexity of supply chain integration can be reduced through modularity strategy (Abdelkafi et al. 2011). Yet OEMs should develop trust-based buyer–supplier relationships with their module suppliers to attain to high quality and reliable delivery. Examining link between product architecture and supply chain configuration, Ulku and Schmidt (2011) also suggest that the choice of product architecture depends on firm, market, and product characteristics in addition to supply chain structure and that the optimal mapping from architecture to supply chain structure is not always one-to one. They also find that a decentralized supply chain may be associated with a more integral product when the technical collaboration penalty is not excessive and suppliers have significantly superior product development capabilities. Christensen et al. (2002) also suggest appropriate decision making whether a firm’s network chooses to be vertically integrated or horizontal specialized according to the changes in product architecture. Vertically integrated networked firm performs better in a market where customer requirements for product quality and functionality are not met. To develop supply chain management alignment framework for mass customization, Abdelkafi et al. (2011) formulated ten propositions explaining the relationships between product development and SCM framework. Their propositions concerning product architecture are as follows: (1) Modularity reduces the level of internal variety handled by the manufacturing firm. That reduces collaboration complexity from the OEM’s viewpoint. (2) Modularity reduces the level of configuration and collaboration complexity. In particular, Shintaku’s product architecture theory that explains the catch-up model of Asian firms is applicable to supply chain configuration from one country to another. He points out that cellular phones adopt modular product architecture which allows easy entry of competitors to the market (Shintaku 2006). It is quite challenging to maintain competitive advantages in cellular phone industry which experiences an intense price competition and rapid changes in product design. Naturally, the speed of production transfers from leading nation to the following nation is relatively faster. Figure 14.1 shows how past catch-up model has changed to catch-up model based on product architecture and that modular products are easily transferred to the developing countries because of easy knowledge transfer on the production of equipment and component parts (Fujimoto 2006; Shintaku et al. 2007, 2008; Shintaku 2008). The other contribution of product architecture theory is to give a systemic view to see the integration and division of production processes of targeted products. Production process and Process Architecture. To focus on production processes, here we consider process architecture concept, which explains relationships between product structure and process (Park and Hong 2012). Process architecture is also classified into the two types—modular or integral. The former resembles one-to-one

14.2 Literature Review

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Fig. 14.1 Foreign production transfer model by the theory of product architecture. Source Shintaku et al. (2006)

relationships such as the relationships among the function, structure, and process of a system, while the integral type indicates complex relationships between (1) the function and structure of a system, (2) the structure and process of a system, (3) the function, structure, and process of a system, (4) and the function and process of a system (Tomita et al. 2011). If the manufacturing processes are close to modular architecture, then it is quite feasible to divide the entire process into different subsets and thus firms move certain processes to other countries or use outsourcing instead. It is shown that standardized components can be outsourced to unspecific suppliers, because simple parts are often produced with specific technologies (Hatani 2009). For example, even in case of automobile, a representative integral architecture, standardized or specific components such as sheets, harnesses, and micro-chips could be outsourced. On the other hand, the focal company does not necessarily choose outsourcing for the components contributing the premium value enhancement since technological excellence affects the user’s life and value components (Nolan 2001). Or in that case, the focal company will choose the technological alliances with those suppliers. But architectures are formed by different levels. Even though the final product layer is modular architecture, the component layer could be integral one. For example, PCs are representative products with modular architecture, whereas HDDs are products with integral architecture, where their sub-components are highly integrated with each other. The product architecture of LCD TVs and panels contains upstream component parts, LCD panels in the middle and downstream LCD TVs (Shintaku et al. 2007, 2008). There are also three processes of LCD panels which are array and cell process (i.e., the front core process) and module process (i.e., the backend process) (Shintaku et al. 2007; Park et al. 2008). Figure 14.2 shows the three processes of LCD panel from the perspective of product architecture. Most of the LCD firms including Korean firms handle the array and cell processes in their domestic plants and module process in overseas plants. Here, the array and cell processes of LCD panel are close to integral architecture in that these processes are complex and hidden (i.e., black box mode). On

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Fig. 14.2 Front end and back end modules of LCD panels. Source Park et al. (2008)

the other hand, the module processes are easy to transfer to foreign plants because they adopt modular architecture. However, in the 2000s, as competition became severe, panel firms in LCD industry tried to push the integration of downstream component manufacturers as well as the upstream components suppliers. Integration of backend processes of LCD panels is about combining Driver IC and Back Light Unit (BLU). Korean LCD industry focused on assembly and finished products in economies of scale and therefore there is very little room for technological differentiation other than cost reduction (Park et al. 2008). Particularly, module processes of the back end are mainly simple component assembly operations and therefore, the cost pressures on them are enormously high. How to deal with the problems of vertical integration or disintegration of back end processes in foreign production sites under the competitive pressure of cost reduction and volume change, is the main issue of this chapter.

14.3 Research Model Supply chain integration can be categorized into four levels, namely: (1) enterprise policies and objective integration, (2) operation process integration, (3) application system integration, and (4) organization framework integration (Chen 2011). When one company decides how much it wants to integrate with its suppliers, supplier selection policy must match the supply chain integration process to achieve the goal of strategic performance of focal firm. When firms focus on operation process integration of supply chain, module suppliers can assemble entire product modules and coordinate large component sourcing networks (Doran et al. 2007).

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As Fig. 14.3 shows, our analysis is centered on module processes, one of the three LCD panels’ processes mentioned above, which the foreign plant operations mostly adopt. Since array and cell processes are mostly classified as integral architecture because the process details are kept in “black box”, the domestic plants handle them. On the other hand, module processes are close to modular architecture and they are easy to transfer to overseas plants. As stated above, LCD back-end sub-processes could be integrated to form one module. However, whether overseas factories integrated these processes or not is an issue to be explored. We will see the internalization decision of Back Light Unit (BLU) by the overseas plants. The overseas plants integrate the upstream process (BLU) based on their downstream strategies. Since China is the “factory of the world”, the downstream product demands tend to fluctuate more in other countries. Therefore, a main dilemma that firms in China face is how to respond to the demand fluctuation and make the local supply chain more flexible. As Table 14.1 shows, underlying this issue are two conflicting strategies. One is mitigating the demand fluctuation, and the other is adapting to it. Depending on which strategy we focus on, we could hypothesize different models of value chain.

Fig. 14.3 Domestic and overseas factory of LCD panel production

Table 14.1 Local supply chains: upstream and downstream Firm

Customers (Downstream)

Local supply chains (Upstream)

Firm-A

A few large customers, including internal ones (vertical integration)

Vertical disintegration with major suppliers, using the external capabilities

Firm-B

A variety of customers, including external ones (vertical disintegration)

Vertical integration and creating the internal organizational capabilities

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The first strategy is directly adapting to the demand fluctuation of major products. In this strategy, firms focus on large market segments and a few customers (sometimes internal customers, downstream integration) of major products. Since the markets fluctuate widely and customers demand low cost and large volume, firms tend to outsource some of the upstream modules. In this situation, it is risky for firms to internalize all processes, considering low cost and large volume with wide fluctuation. Therefore, firms seek for the ways to make vertical disintegration with upstream suppliers. In order for firms to respond to the fluctuation of product demands, the suppliers in home country should more to places closer to the local factory with same industrial clusters. We will examine this model in Firm-A. The second strategy is to mitigate the demand fluctuation as much as possible by recognizing market and/or customer portfolios. To do this, firms need to find the optimal mixture of markets and customers and create the capabilities to deal with the demand diversity and complexity in local supply chains. In this strategy, the flexibility is related with the demand diversity and complexity rather than quantitative fluctuation itself. Therefore, firms will deal with external customers more aggressively (i.e., downstream disintegration) and try to create these internal capabilities mainly inside the local factory and related firms (i.e., upstream integration). Forming the cohesive organizational capabilities based on multi-task trained employees is one way to tackle the demand diversity. We will see this model in Firm-B. In the case of the Firm A model, an organization’s calculus of which subsets could be outsourced to external suppliers depend on the process architecture of LCD panels. Since we focus on production activities of overseas LCD panel plants, we analyze supply chain process configuration of LCD module processes from point of view of process architecture. Here we can introduce the architecture theory to interpret the local value chains in Korean multinational corporations in China. In vertical supply chains, integration or internalization could be formed when the architectural integrity is necessary, and disintegration or externalization could be found when the architectural modularity is necessary. For example, in case of Firm-A, they will choose the downstream integration because the architectural integrity is necessary in their product strategies, and will choose the upstream disintegration because the modularity of their product architectures allows it. In case of Firm-B, they will choose the downstream disintegration because they utilize the modularity of LCD modules, and will choose the upstream integration because they stress the importance of organizational integrity for tackling the demand diversity and complexity. These are our main hypotheses that frame our case studies. This chapter focuses on the factories and suppliers in China that produce Driver IC and Back Light Unit in the form of modular processes of LCD panels. Our study examines how Korean multinational corporations transfer these operations from Korea to China and what type of local supply chains they form through the vertical integration/disintegration with customers and suppliers according to local operational constraints and Chinese government rules.

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14.4 Case Study Methodology. Over the years manufacturing firms have experienced process architectural changes in LCD panel productions. The focus of our qualitative study is to examine (1) the overseas transfer process of manufacturing plants, (2) backend production processes in China, and (3) operations management and customer responsiveness. Emerging economies such as China, are an attractive market and it is currently one of the most important targets for direct investment (Li and Zhou 2011). China provides a rich context for research on supply chain such as outsourcing management, given that China is the most important recipient of direct investment by MNCs among emerging economies (Li and Zhou 2011). We adopted field-study methods and conducted in-depth executive interviews. Case Firm Descriptions. • Firm-A first completes the cell processes of panels in Korea and then moves them to Chinese plants via sea and air transport. In Chinese plants Firm A engages backend assembly processes. Firm A’s major products are notebook PC and midsized TV panels. Recently, it increased the module production volume of large LCDTV. The production position in China belongs to the same cluster with its other affiliated firms that produce notebook PC lines for the upstream integration of the final products. Such production position is based on the unique nature of notebook PC industry market. The majority of its production is primarily to serve its internal customers. • Firm-B transports most of cell-completed panels from Korea via ship and does backend module assembly processes of LCD panels in Chinese plants. Similar to Firm A, Firm B also produces mainly notebook PC and monitor-based panels. Firm B’s module production volume of large LCDTV in China is fairly small. Firm B’s LCD monitor and TV assembly plants are in the same industry cluster. However, notebook PC panel has very small portion of internal customers and instead it has large external customer base. Firm A’s Local Production System in China. A-Firm started its Chinese operations in 2002. Upon completion of the cell process for the panel components they are brought to China via sea or air transportation. The Chinese plant is responsible for the backend processes of the panel components. The major product items are medium size panels for notebook PC and monitor. Recently, LCD TV modules are added. For the downstream integration of the final products, notebook PC business is in the same cluster. The primary mission of Chinese operation is SCM integration for Chinese customers. Firm A’s effort to achieve additional production efficiency for cost reduction has reached its limit. For integration purpose it outsources some of module processes (e.g., BLU assembly, final inspection and packing) to the external suppliers. In the past Firm A handled all the production processes within its plants with the BLU that its suppliers provided. From the second half of 2007, Firm A adopts Low Cost Module

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(LCM) strategy by selecting three suppliers which are entrusted for assembly process, final inspection and packing process. In the future, Firm A intends to strengthen its LCM strategy further by expanding BLU integration of upstream, achieves production cost reduction and stable component parts supply through BLU supplier integration. Firm A’s internal operation focuses on high premium value processes (i.e., from PAD clearing to Driver IC). Firm B’s local production system. Firm B is moving towards internalization of BLU within its plants instead of implementing LCM strategy. Thus, it is doing more or less assembly of LED for LED TV in the second floor of the plant. In this respect, Firm A and Firm B show difference in externalization and internalization of BLU assembly processes. Firm A’s Outsourcing: Integration efforts with BLU business operations. Figure 14.4 shows the flow of the module processes of LCD panels in China. This includes PAD Cleaning (or Polarizer attachment), OLB Process (PCB bonding), Assembly Process (B/L inspection and BLU assembly), Aging Process, Final test Process, and Packing Process. A-Firm is in the process of complete component parts localization. The sourcing percentage of component parts in China is very high. A-Firm has formed a cluster in China (i.e., A-Firm China) for the simultaneous market entry with the downstream notebook business. In view of the crowding market condition, A-Firm has been aggressively seeking the diversification strategy of customer segmentations. Over the years A-Firm China’s operation is closely related to other final notebook PC makers and monitor manufacturers. Through the integration with notebook PC’s downstream business, A-Firm China currently supplies panel components to about 85% of notebook panel manufacturers in the same industrial complex. A-Firm China has now exhausted all the production improvement efforts for any further cost reduction. The SCM integration efforts include outsourcing some of module processes such as BLU assembly, Aging process, Final test process and packing process to external suppliers. Previously, A-Firm China received BLU from Chinese local suppliers and then processed them through its manufacturing assembly operations. From the second half of 2007, A-Firm China chose three BLU suppliers and arranged them to take care of all these assembly processes after BLU. This, so called LCM (Low Cost Module) enabled A-Firm China to achieve more than 30% of cost reduction. For the reliable product quality, A-Firm China sends its own inspection team to BLU suppliers regularly. In this way, the task of managing external suppliers is becoming quite important so as to ensure excellence for its own internal operations.

Fig. 14.4 Flow of module processes

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Table 14.2 A-firm’s LCM production model and integration period with suppliers A-firm’s LCM production model

BLU integration suppliers

Time distance between A-firm and BLU supplier

Integration time

One millions

Supplier C-firm

15 min

July 2007

Supplier D-firm

40 min

January 2008

Supplier E-firm

40 min

July, 2008

As Table 14.2 shows, A-Firm China intends to strengthen LCM strategy further by expanding the integration efforts to the upstream BLU as well. Thus, A-Firm China expects to achieve continuous production cost reductions and reliable supply of BLU component parts. A-Firm China then focuses on its front operations such as CP Process and OLB (Outer Lead Bonding) Process which has greater premium values than the assembly operations that are outsourced. On the other hand, from the integration perspective both Firm A and Firm B maintain clusters with their downstream customers and yet their operational responsive patterns for their key products are somewhat different. Firm A is in the same cluster with notebook PC firms while Firm B is in the same cluster with the firms that assemble TV and monitors. Firm A diversifies its customer base with its increasing market saturation and yet it is still in the same cluster with its customers that supply notebook PC panels. B-Firm’s Insourcing: Internal production of BLU parts. For Firm B, the main products are LCD panel for note PC, the downstream firms in the same cluster target external customers with their assembly focus of LCDTV and monitor. Therefore, Firm B (compared to Firm A) has tried to achieve better integration with downstream products and thus its downstream customer base is more flexible. Recently, Firm B increased production volumes of monitor and TV panels as well as panels for notebook PC. For securing their stable customer base, Firm B’s responses are quite flexible to its downstream customer demands. For example, one of Firm B’s customer is Firm T, currently a TV manufacturer, and originally a TV OEM assembler. For five years, it operates some of modular production lines similar to those of Firm B and thus demands a few additional options for module assembly in their backend processes. In response to these additional requests, Firm B offers three assembly options to Firm T. Firm B takes are of the subsequent process of the panels that are completed in Korean plant and provides one of the three following options in response to the customer requirements: (1) Panels from Korea + Flat Panel Display (FPD) assembly products (2) Panels from Korea + Flat Panel Display (FPD) + products up to Driver IC Assembly (3) Panels from Korea + Flat Panel Display (FPD) + Driver IC + From BLU Assembly to Packaging. On examining the integration with downstream customers, Firm A and Firm B show difference in their strategic division of key operational processes. Figure 14.5 summarizes the key differences of these two firms.

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14 Supply Chain Integration in China: Case Study Downstream Firm A

Firm B

Upstream

(LCM Strategy) (Insourcing of BLU)

Internal customer requirements Flexible Response to the external Customer Requirements

Fig. 14.5 Integration of upstream and downstream industry

Constraints of LCM (Low Cost Module) Strategy. Unexpected issues arose in the course of A-Firm’s supplier integration processes. The key issue is about passing through Chinese government customs. As shown in Table 14.2, this case analysis focuses on integration process with C-Firm which happens to be the closest among the three suppliers. C-Firm is the most reliable among the three BLU suppliers. Since 2004 it was getting prepared for local production and by 2006 the plant was all set to fulfill A-Firm China’s localization goals. From July 2007 in keeping up with LCM (Low Cost Module) strategy, the core of A-Firm China’s supply chain integration strategy, C-Firm produced 500,000 units and supplied to the final product manufacturers (i.e., notebook and monitor makers) after passing Chinese government custom and completing BLU back-end assembly processes of the component parts from the front-end of panel module processes. In terms of pure physical proximity, it is more than fifteen minutes between A-Firm China and C-Firm. However, the passing processes (i.e., check the weight and inspect the products) of Chinese government customs takes more than five hours for the firm. Thus, lead time has increased. Undesirable inventory problems add to the overall production costs. The panel, semicompleted products may leave A-Firm China in the early morning and then they arrive by late afternoon at C-Firm. For example, during this process the inventory level goes up from a desirable level of 5,000 to an undesirable level of 15,000. If the custom transit process is delayed, then the component parts may arrive by 5:00 p.m., not 1:00 p.m. Then, the total inventory level easily increases up to 20,000 per day. Two days of inventory accumulation becomes more than 40,000. With the wage differences between A-Firm China and C-Firm, it is possible to reduce 30% of the production cost. It is a critical business challenge overcoming excessive inventory problems with the custom transit processes.

14.5 Discussion and Conclusion In this chapter, it is our research question to analyze the strategic and operational issues related to efficient supply chain configurations between set-makers and backend suppliers. For these research objectives, we have examined supply chain integration practices of Korean LCD firms which include the movement of its production facilities in China and integration of upstream and downstream suppliers. Our finding

14.5 Discussion and Conclusion

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Fig. 14.6 Comparison of firm A and B operational process analysis

is briefly summarized in Fig. 14.6. Firm-A’s internal customer focus requires cost efficiency in operations and thus use outsourcing strategy. On the other hand, Firm B with its heavy focus on external customers adopts insourcing strategy in order to respond to the customer requirements with their organizational capabilities. In this way, A-Firm China has been successful in geographically integrating with its suppliers. However, Chinese custom issue raises some difficult operational challenges. Chinese cultural characteristics, the country’s regulation system, and increasingly intense market competition make it difficult for firms to achieve strategic goals in the Chinese market (Li et al. 2010; Kang et al. 2012; Bao et al. 2012; Sheng et al. 2011). One central challenge for foreign firms engaging in business activities within China is managing Chinese outsource providers in a dynamic environment (Li and Zhou 2011). Social control as a governance mechanism can be “generally understood to include people or social based mechanisms that enhance open communication and the sharing of information, trust, dependence, and cooperation” (Hoetker and Mellewigt 2009). Figures 14.6 and 14.7 show how supply chain configurations of A-firm with BLU suppliers have changed. To shed light on these challenges, Dell Computer’s effective handling of Chinese custom issues might be worth studying for Firm-A China (Tanikaga et al. 2004). In November 2000 Dell Computer built plants which are 800 m away from Dakasaki Airport in Fújiàn Shˇeng of Southern China. DELL’s business model is zero inventory management through production-on-demand. However, it takes at least ten days from the point of order receipt to Chinese government custom processes that include evaluation of Overseas Economic and Trade Commission (OETC), custom registration (CR) and operation document permission (ODP). Chinese government applied new custom system to support DELL’s business operations. It is to link custom management system (i.e., finished goods export management system and electronic custom

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Fig. 14.7 Change of supply chain configurations of A-firm with BLU suppliers

inspection system) and DELL’s management system (order receipt and fulfillment system) are linked through the firm’s IT infrastructure. With this arrangement, the above-mentioned customer processes (i.e., OETC, CR and ODP) are simplified with electronic management system. DELL also shared the list of their component parts with Chinese Custom Authority and the time required for custom processes was greatly reduced. Chinese customs also applied F custom system to DELL. F Custom refers to fast custom process. DELL’s custom information is handled via electronic evaluation, not by custom personnel manual. Therefore, export and import approval is done electronically. Through this fast-custom process, DELL China could fulfill orders from Japan within 4–7 days. DELL also requires its suppliers for JIT delivery. One supplier who provides up to 70% of component parts arranged its operation in a tax free industrial complex. The custom process in this area adopts a “Concentration Custom” which allows order fulfillment within two hours from order receipt from DELL’s plant. Concentration Custom facilitates the customer process for the global firm operations in China (i.e., sole, joint investment and partnership arrangement) and the component manufacturers (component parts assembly, compensation trade) for which export invoice is adequate for custom evaluation decisions. Unlike Dell, Firm C, the main supplier of Firm A experience custom issues because semi-completed products are delivered to suppliers for manufacturing and assembly operations for finished goods. This is

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a new form of supply chain issue. Therefore, it is critical for Firm A to promote understanding and support of Chinese government to facilitate the custom process with great efficiency. Future research may explore this issue further using case studies to see how intermediate products are effectively transferred to the suppliers that assemble and market the finished products.

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Chapter 15

TBIC (ToP and BoP Interfaces Capabilities): Case for SMEs

…..breakthrough innovations …in BOP markets can often be leveraged in developed markets. The lessons that they learn in BOP markets……are the qualities that will serve them well in becoming globally competitive. (Prahalad 2012).

Abstract How can individuals and firms seek a new source of radical innovation? Necessity is a mother of invention. In a sense, the bottom of the pyramid (BOP) markets provide huge opportunities for “creating awareness, access, affordability, and availability” of products and services. Innovation outcomes achieved in BoP markets may turn out to be “dramatic changes in value, use of hybrid technologies, lean management, market development, deskilling of work, collaboration with NGOs and the public sector, and distribution and logistics in hostile conditions” (Prahalad in J Prod Innov Manag 29(1):6–12, 2012). This chapter discusses the importance of TBIC (ToP and BoP Interfaces Capabilities) in SMEs. It is crucial to manage interfaces between Top of Pyramid (ToP) and Base of Pyramid (BoP) for the global competitiveness for individual firms. This chapter discusses how small and medium enterprises (SMEs) expand their market scope in emerging economies. Through the case of Ace Technology, we will look at TBIC (ToP and BoP Interfaces Capabilities) in SMEs, and look for strategic issues to be solved for future growth and future directions.

15.1 Roles of Business for ToP and BoP Interfaces It is crucial to manage interfaces between Top of Pyramid and Base of Pyramid. BoP refers to the market located at the base of pyramid of the income hierarchy pyramid. BoP is regarded as a large market (estimated by the World Resources Institute), including about four billion people in the developing world and more than 70% of the total world population. The BoP business strategy is a new business model that provides solutions to address poverty and social challenges in these regions. However,

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the subject of this BoP business strategy is a developed global company that has pursued the ToP (Top of Pyramid) market strategy in general. Until now, philanthropic activities in developing countries have been central to emerging market strategies and CSR, but BoP strategies for social value creation based on long-term, multi-faceted partnerships are becoming more important. In particular, we emphasize here the need to build the interfaces between Top of Pyramid and Base of Pyramid, and the ability to manage the interface is the key to a firm’s future competitiveness. In this book, we define these capabilities as Interfaces Capabilities. Companies, societies and countries with excellent interfaces capabilities will have global economic leadership in the future. In this chapter, we examine how small and medium-sized enterprises, especially those who are not large corporations, have built such Interfaces Capabilities in Korea. Figure 15.1 shows a framework for Ace Technology. ToP and BoP interface model suggests vigorous engagements between entrepreneurial and innovation in the BoP. ToP and BoP engagement model identifies how they can serve as linkage mechanisms between advanced countries and emerging markets as well as the urban-rural sector. Ace Technology has succeeded in establishing a business network with global companies such as Ericsson and Nokia with global manufacturing and supply infrastructure and becoming a B2B specialized company based on high frequency (RF) component manufacturing technology. The Founder, Ju Kwan Young, established an antenna company based on his experience at a trading company. He focused on global management and spent four months in the first year as an entrepreneur. This is due to the early recognition of the limitations of the saturated domestic market. Ace Technology has dominated the RF component market due to targeting a global niche and maintained a stable quality ad supply system, ultimately winning the trust of

KOREA

Interfacing Mechanisms

China >Vietnam

Fig. 15.1 Interface mechanism of Ace Technology

India

15.1 Roles of Business for ToP and BoP Interfaces

229

many of its customers. Ace Technology’s growth process and technological success factors as well as strategic issues are examined.

15.2 Startup Background of Ace Technology: Technology Merchant Exploring the World Technician’s path for excellence. After graduating from Kwangwoon University in 1975, he became aware of his destiny as a technology trader after working in a trading company for five years. In 1980, he established Myeongseong Trading, the forerunner of Ace Technology. In 1981, the company became a corporation, and from 1984, his business reported a modest level of profits. In the early days, the company mainly focused on car phone antennas and on-glass antennas attached to windshields. In the 1990s, with the revitalization of domestic mobile communication, the firm diversified RF business, established a research center, and started technology development. In addition, it secured a multinational engineer who can produce core products in the technology support center. The firm began to invest in building consumer trust by allowing foreign buyers visit the institute and directly carry out technical verification. Development of technology to keep up with the market trend. In the 1990s, Korea’s mobile communication has entered a period of revolution. Competition has intensified in the mobile phone business following the wireless paging business, and a new mobile telephone system called PCS became popular. Ace Technology has diversified its business from high frequency (RF) parts business to small-sized antenna maker for mobile communication. In March 1990, the firm established a research institute of communication technology in Yeongok-dong, Bucheon-si, Gyeonggi-do. Despite the pessimistic views of its competitors, Ace Technology focused all its efforts on the cost and effort of recruiting talent and running a research center. Foreign buyers were happy to sign contracts as they visited the firm and observed the passionate leadership. By 1995, the firm created a stable business structure that could handle the rising demand in its key product lines. In June 1996, the firm won the ‘Jang Young-sil Award’ (i.e., Korea’s top inventor award) for the development of ceramic filters and solidified our technical superiority as an RF component manufacturer. Global customer-oriented technology enterprise. Ace Technology maintained high annual growth rates in the range of 30–40%. In the early 1990s, AT & T Bell Labs, the largest telecommunications company in the United States, won the rights to supply antennas after competing with several companies, setting the stage for a global B2B company. In 1995, Motorola, the largest handset maker in the world, received an offer for 2 million antennas, but refused to negotiate due to differences in price. As a result, it failed to gain an opportunity to strengthen the antenna business base and technological competitiveness, but it has gained much experience. Ace Technologies first completed the G-ACE plant in June 2000 in Gao Yao City, Guangdong Province, China, as its main business. In March 2006, the firm constructed D-ACE, a manufacturing and assembly plant in Dongguan, China. In this way, Ace Technology achieved

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Table 15.1 Investing for establishing India’s local business entity Time period

Investment details

February 2008

Establishment of ACE Mechatronix India Limited: 100% ownership

January 2009

Purchase of land and completion of capital payment requirement

October 2009

First investment of 4 million investment (USD)

2000–2011

Second 10 million investment plan (USD)

Source Company data

a vertical integration system and secured global manufacturing competitiveness. In addition, the Global Procurement Office (GPO) (established in Hong Kong in 2006) managed procurement and logistics systems for its global market needs. Ace Technologies, after successfully entering China market, planned a local production system in India, with multiple investment plans (Table 15.1). It also relocated its headquarters and domestic plants to Namchon, Korea.

15.3 Growth and Success Factors New opportunity through “the IMF Crisis”. Since 1996, Korea as a nation went through a severe financial crisis (i.e., called IMF Crisis because Korea had to accept IMF’s terms of serious financial restructuring mandates). Many firms filed for bankruptcy and downsized their operations. Ace Technologies was no exception. However, its conservative approach of financial management (i.e., maintaining low level of debts), international financial institutions gave it a very high credit rating. As a result, it could secure major loans from foreign banks. It succeeded in investment negotiations with two U.S. banks and UBS in Europe. As a result, by in 2000, it remained as an Ericsson’s strategic partner. The year marked the tipping point of when ACE overcame its financial crisis. Build trust for long-term relationships. With its successful records with AT & T, it approached Canada’s Nortel and expanded business deals with Alcatel of France. It took almost two years to make an initial contact and start business relationship with Ericsson. In addition, it also networked with Huawei, the Chinese global company. Strategic alliances with these leading global firms turned out to be crucially important in establishing its market position as a highly reliable and innovative company. When Ace Technology delivered the base station antenna to domestic telecom companies, the contract amount was 10 billion won ($10 million), and the reported loss due to product defects reached 9 billion won ($9 million). Mobile telecommunication technologies are moving from second to third generation, and telecommunication companies who have ordered antennas for second generation have been responsible. However, the tech trader promised 100% free replacement, costing the firm about 1 billion won ($1 million), since then, the carrier has given Ace Techno

15.3 Growth and Success Factors

231

Rolyji a nearly 100% delivery right by replacing the entire system with the third generation, and ultimately, the trust it gained from consumers helped Ace Technology grow. Aim for good people beyond money. Ace Technology operates on the principle of “respect for people and advanced technology”. In the 1997 IMF crisis, almost all companies entered emergency management system and began to organize business and restructure the workforce. At the time, Ace Technology also saw its sales drop to half of last year and its utilization rate dropped. Afterward, the firm focused on reducing its factories’ production cycle. Domestic and foreign investment institutions and management also proposed improvement of management structure through labor force reduction (i.e., labor productivity). However, the founder states that when the organization is face adversity, it cannot overcome the difficulties devoid of trust and affection. Even though the plant utilization rate had fallen, the firm implemented a movement to increase productivity and increase work efficiency, and at the same time, we have providing education information, quality and production sectors. In 1999, Ace Technology’s sales reached 89.6 billion won due to signs of economic recovery and increased orders, more than doubling from the previous year. Even in the emergency of the IMF, the founder was able to overcome the adversity by supporting the high growth potential of the global wireless communication market and its beliefs.

15.4 Source of Competitiveness and Core Competencies Speed is competitive power. In 2001, Ericsson commissioned Ace Technology to develop a tower-mounted amplifier (TMA) for a base station equipment with a $300,000 contract. Ace Technologies successfully completed technology development and prepared for technology transfer, but received a request from Ericsson to transfer technology. After that, it could supply 50 pieces a day. The urgent priority was to build a right production system. Within two months, the production rate increased to 100 orders per day in keeping up with increasing demand. In just six to seven months, it could handle daily orders of 400–500 units per day. TMA is a product with a large technology inducement effect, and it became a product of Ace Technology. In less than one year, it increased the production capabilities more than 10 times. It demonstrated Ace’s rapid learning cycle. Ericsson expectation was that Ace could only produce 80% of the required quantity but in the end Ace Technology managed to deliver 100%, creating a greater trust. Ace Technology also took steps to transfer production from existing OEMs. After this process, Ace Technology is now operating a dedicated factory for TMA production in China. Finally, Ace Technology achieved global marketing by achieving 75–85% of sales through exports by securing 25% of TMA global market share. Ace Technology has continued to win deals through its speed. For instance, when Ace first made a deal with Hutchinson, an Australian telecommunication company, the Australian government was surprised how Ace management to set the changing parts specification within 2–3 days.

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Be a world-class merchants and survive. To earn trust of its global customers, Ace established a global vertical integration system in manufacturing and supply. To accomplish this, Ace Technology will complete the factory facility by the end of 2009 and start mass production of RF components, starting from early next year. After setting this vision, Ace Technology first built a factory in 2009, and started the mass production of RF components the following year. Many of the products produced in India are expected to be sold through Nokia. Ace Technologies has been actively leveraging on the company’s distribution network with partners such as Ericsson to pursue overseas markets. Recently, the same series of DMA (DISTRIBUTED matching ANTENNA) of Ace antenna passed Nokia’s reliability test, and began mass production in 2010. It also launched the D-ACE in 2002 and the G-ADT (Die Casting). In 2005, the firm was able to mass-produce RF produce through four local factories in China. Figure 15.2 shows the structure of Ace Technology’s overseas subsidiaries. In China, G-ADT manufactures housings for RF components and supplies them to D-ACE. G-ACE is processing the housing precisely and delivering it to D-ADT and Ericsson’s Chinese subsidiary. D-ACE has a vertical production structure those massmanufactures RF components and supplies them to Ace Technologies. In addition, the company has painted and plated with G-ADT (G-ADT 49%, Forwei 51%), a joint venture with Ace Technology and China coating/ plating company Forwei. Even an old man with idea can move mountain. Another source of competitiveness in Ace Technology is its commitment to technology development. (Note: A Chinese ancient story about a “stubborn” old man who dared to move mountain

Fig. 15.2 International supply chain structure of Ace Technology

15.4 Source of Competitiveness and Core Competencies

233

through generation-after-generation. A mountain god, deeply touched by his persistence, helped the man to complete the mountain moving project in his generation). Ace has two core technologies. The first is its technology development project of base station antenna. The base station antenna is a component in which core technology affects the quality of mobile communication. Therefore, it requires more advanced technology, quick development capability to cope with rapid evolution, and accurate field adaptability. The Ace Technology Laboratory is responding to this market demand by continuously upgrading the antenna performance and diversifying its functions. Furthermore, MIMO antenna technology is core technology of 4G and 5G mobile communication. The system research institute obtains an average of 5–10 antenna patent applications per year. Table 15.2 summarizes its major development achievements. The second is the development of the repeater. In 1996, System Research Laboratory started developing repeater system for the first time in the world and developed various repeaters for AMPS, PCS, WCDMA, and WiBro to meet the demand for mobile communication power generation. Ace Antenna Co., Ltd., which was in possession of technology superiority when launching PCS in 1997, has positioned as a leading company in the domestic repeater market with many of its old consumers choosing to continuous ordering from Ace. In 1999, IRR (IF Remote Repeater), a repeater that improves the quality of communication in areas such as underground and high-rise buildings, was developed and contributed to the rapid spread of small repeaters. In addition, Ace has developed and exported GSM, USPCS, CDMA2000, UNTS and TD-CDMA repeaters according to the wireless communication environment of USA, Japan and Europe, and received favorable responses from overseas markets. Currently, the main product is Indoor Repeater, which eliminates blind spots in buildings by transmitting the best radio waves using non-vibration technology. In addition, an outdoor repeater delivers high performance and clear signal in tunnel, highway, and even power source with powerful remote control function. It is applicable to high output equipment by using circulator and switch, There is a WiBro Repeater with automatic error detection and recovery function. Figure 15.3 shows a small repeater EzCELL for easy installation in a room such as a home or office. Table 15.2 Ace Technology development center achievements Period

Major development milestones

1992–2001

• AMPS, radio call/CDMA/PCS base station, repeater antenna • Antenna for GSM base station

2002–2006

• An electric beam tilt variable antenna for base stations (WCDMA, CDMA) • 2-way beam switch for base station and electric beam tilt adjustable antenna • Broadband and multi band antennas (CDMA, WCDMA, Wibro (WiMAX), for DMB)

2007–2008

• Wideband, wide beam-beam tunable antenna and remote beam tilt adjustment system

2010–2018

• 5G massive MIMO (Multiple Input Multiple Output)

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15 TBIC (ToP and BoP Interfaces Capabilities): Case for SMEs

Fig. 15.3 Ace Technology’s small repeater EzCELL repeater

Unique Investment in Test Equipment. Ace Technology was able to develop a variety of core technologies behind it because of its high investment in research personnel and test facilities. Ace Antenna invests more than 10% of its annual turnover in R & D to provide higher quality products to its customers. The proportion of research personnel is 50% of the total employees, and the firm has about 170 intellectual property rights including patent rights. In particular, SMEs are equipped with various antenna measurement facilities, including the largest compact range chamber and reliability-testing laboratory in Korea, and have excellent development competitiveness. The radio anechoic chamber is one of the largest in the world with a height of 11 m, a width of 12.5 m, and a length of 22 m. It is the first in the industry to measure frequency from 800 MHz to 100 GHz and establishes an experimental environment that can accurately grasp the characteristics of the antenna in a limited space, ensuring product reliability by providing accurate performance test results to domestic and foreign traders. The reliable system laboratory can evaluate the overall product quality through a comprehensive test evaluation of mobile communication products. The evaluation center is equipped with various test equipment and professional labor that can meet the international test standard to improve the design completeness. It can test the environmental adaptability of antenna such as constant temperature and humidity test, mechanical test and electrical test. In addition, it is possible to make forecasts in field conditions through high-level test and secure analysis equipment such as fluorescence test analyzer (XRP), electron microscope, component analyzer, X-ray multi-layer thickness meter, they further enhanced product reliability by strengthening quality control. In addition, the field measurement system installed at the headquarters in Sangdong, China can measure the antenna field adaptability in the range of 800 MHz to 40 GHz, and the IMD · D spectrum network analyzer and the Anechoic Room are secured in the system laboratory.

15.5 Recent Strategic Task

235

15.5 Recent Strategic Task Securing a stable financial structure. Ace Technology is a company that manufactures and sells Internet telecommunication equipment. The firm struggled to manage the two very distinct competences and saw a substantial decrease in sales. The CEO addressed it by dividing the ACE antenna division, and this structural change solved the inefficiencies and the operating profit has continued to be positive in the current period. As evident in Fig. 14.6, we are achieving a low operating margin compared to sales. In 2008, the increase in operating profit margin was not large compared to the effect of exchange rate increase. Sales were increasing due to Korean won’s depreciation. The company maintains an average operating profit ratio, and has good creditworthiness in corporate credits. However, there is a possibility that its ability to repay debts will deteriorate due to economic recession and environmental deterioration in the future. Therefore, it is important to maintain a sound financial structure at the same time as developing technology. Competitors are nearby. In the antenna sector, there is intensive domestic competition in gear antennas (base station antennas) and EMW antennas (wireless antennas). By 2004, Ace Technologies dominated the domestic mobile phone antenna market with annual sales of 65 million units. Since its establishment in June 1998, EMW Antenna (CEO Yoo Byung hoon) also developed a mobile phone antenna and grew to become No. 1 market leader in Korea and the 4th in the world. However, Ace Technologies has to face the entries of other competitors such as KMW and Danam Electronics. Risk of putting all in one basket. Ace Technologies succeeded in securing stable sales by securing overseas customers in Europe and China and becoming one of the world’s leading telecommunication equipment companies. Thanks to the technology orientation of the founder, Ace has secured a successful niche market, but the proportion of overseas exports has increased by as much as 95%. Also, there are many technologies developed as a response to the demand of the developed countries such as Europe and America, and the technology is increasingly narrowly concentrating. What if a good company set its target low and avoid uncertainty? “When I looked back at why I was so outlandish, I was bored at the time and lost my entrepreneurial enthusiasm,” said the founder in an newspaper interview. In 2003, he acquired a professional manager, and the founder himself was more engaged in hobbies and traveling than business. Upon his return after four to five years of vacancy, he realized the firm was full of loopholes including a widespread sourcing irregularities. Immediately gathered representatives, officers, managers and team leaders every morning to reshape competitive management mindset. Despite some complains, he continued the meetings to improve drastic performance goals and restore normal profit level. Production yields (e.g., ratio of non-defect products) have stabilized. Sales recovered and Ace was becoming again an excellent company overcoming organizational mediocrity. Expansion of the Value Chain. Currently, Ace Technology focuses on ‘simple’ management, focusing on internal R & D, production and sales. The expansion of the

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15 TBIC (ToP and BoP Interfaces Capabilities): Case for SMEs

value chain requires the exploration and exploitation of new markets related to scaled technologies. Ace Technology, therefore, steadily expands its R & D capabilities. Preparing for Entry into the Future. Five to ten years after Ace Technology, it is necessary to establish the future vision and business philosophy and ideology by coordinating to explore and capture new market opportunities and making bold investments decisions. According to a study by Jim Collins, companies with distinct visions (3M, Johnson & Johnson, HP, P & G, Merck, Sony, Motorola, Nordstrom, etc.) earned $6,356 in cumulative $1 investment over 64 years. This is an example that shows the results of companies with a clear vision and those without them. Profit creation is absolute for survival and development of a company, but profit itself cannot be the ultimate goal. Therefore, the core values and beliefs (i.e., business principles) matter. Therefore, Ace Technologies should create a vision and strategy for maximizing the cohesion of market and technology, and pursue value creation positioning. In other words, Chairman Kwan Koo set a target of KRW 1 trillion in sales in 2000, but he should focus on realizing one trillion corporate value. At present, Ace Technology operates as a successful craftsmanship company emphasizing quality excellence, competitive pricing, and operating system discipline. Like Intel, it builds its own business ecosystem and create rules of the game through intellectual property bass and brand recognition. There is continuous growth prospect of the global telecom equipment market (>annual 15% growth) including China. The RF parts industry, the flagship product of Ace Technology, will grow along with the mobile communication market. The firm’s base station parts of mobile telecommunication produced have gained the confidence of the global telecommunication industry based on 30 years of technology accumulated from the past years as a car antenna. In addition to its existing major customers such as Nokia, Siemens, Ericsson, Huawei, Samsung, has expanded its key customer base. However, a weakness of the firm is its dependence on the size of investments by telecom operators. In particular, the RF parts industry is very sensitive to changes in demand from handset makers. In order to survive in such a flexible and unpredictable telecom market, the firm needs to develop insights that will allow you to understand the market from a wider perspective. Increasing market sensitivity requires examination of technology trend in the market. In addition, knowledge management system shares relevant knowledge throughout the organization. As of 2019, Ace Technology is aiming to increase profits by moving its plant to Vietnam, and thus improving the firm’s cost structure. Entering 2019, Korean carriers’ investment in 5G networks is expanding (Fig. 15.4). 4G is still dominant in Southeast Asia including India. Top-line growth occurs as product orders increase on greater investment in North America, including the US. Ace Technology’s 5G investment in non-stand-alone systems is likely to expand antenna modules in existing base stations rather than increasing the number of base stations. In the future, the company plan to expand its adoption to 32T (32X32) in Korea and 64T (64X64) in overseas markets. Thus, the earnings growth potential is high for Korean manufacturers of antenna modules and components of base station. Accordingly, antenna and component sales may increase due to 5G investment by Korean and overseas telecom operators. In particular, as the firm diversifies its global customers, it expects

15.5 Recent Strategic Task

237

Fig. 15.4 Ace Technology’s 5G antenna and filter

2019 sales to increase by 19.5% to W450bn, and operating profit by 110% to W28bn. In particular, cost improvement will expand huge 5G customers’ base in Southeast Asia, including China, India, and Vietnam, and increasing utilization at Vietnam plants. In addition, as overseas 5G investment accelerates from the second half of 2019, the overall market growth prospect is very bright (betanews.heraldcorp.com: 8080/article/1001960.html). In the global telecom industry, “co-prosperity” is a motto to enhance competitiveness. Nokia, Motorola, and other telecom companies use ODMs and EMSs to reduce production costs and improve quality. Such alliance structures provide a good opportunity because they serve as a technology sharing platform and help to secure a stable customer base. Large component suppliers upstream of supply chains like Ace Technology need to pay attention to this trend. In a situation where the market is uncertain as it is nowadays and it is difficult to predict the right demand, it is necessary to establish a close cooperation relationship with large customers and establish a proper supply master plan. It is important to note that cooperation with telecom operators is mutually beneficial from a long-term perspective. The goal should be to establish a true partnership through long-term trust.

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15.6 Conclusion Through the case of Ace Technology, we analyzed ToP and BoP interface model of SMEs. The case suggests the need for vibrant engagements between entrepreneurs and innovators in the BoP. ToP and BoP engagement model identifies how they can serve as linkage mechanisms between the advanced-emerging markets divide as well as the urban-rural sector divide. Ace Technology successfully established a business network with global companies such as Ericsson and Samsung using its global manufacturing and supply infrastructure, ultimately becoming a B2B specialized company based on high frequency (RF) component manufacturing technology. Its success is due to successfully developing a global niche market for RF components, starting from gaining its ability to build trust with global customers. In addition, the company was able to respond quickly to changing technology trend and maintain quality and supply system excellence. The case of Ace Technology suggests how an entrepreneur attains rapid market development and achieves sustainable growth future directions.

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Chapter 16

Beyond Rising Asia and American Hegemony: Prospect

Many advocates of international cooperation today make a grave mistake when they lump all norms, laws, and institutions together into a single ‘liberal world order’ that must be defended, all or nothing….The meaningful question has never been whether to have world order or not; it is what the terms will be and who will set them. In 2019, that question remains open ended, much as it was in 1919. The only certainty is that those who retreat within the nation do so at their peril. (Stephen Wertheim).

Abstract This chapter discusses the future prospect of trade partnerships and industry competitiveness in global markets. In addition to the summary of the book, the final chapter presents lessons and implications—both theoretical and managerial. It also provides a roadmap for future research related to TBIC (ToP and BoP Interfaces Capabilities) and manufacturing service lifecycle management (IMSLM) that that integrate cloud ecosystem (e.g., timely data/information/knowledge flows via virtual world) and ground value chains (e.g., complex real goods and services flow in the visible world). We end by placing future research issues rising Asia and American hegemony in a new light. A rising Asia is causing the international order to evolve and adapt while American hegemony will operate in the world governed by a new type of capitalism. These changing dynamics of global order requires firms to pay attention to their linkage roles of creating, delivering and capturing value beyond their direct customer base. Huge technology changes (e.g., AI, block chains, 5G, IoT) provide both challenges and opportunities for future world of work and entrepreneurial innovation.

© Springer Nature Singapore Pte Ltd. 2020 P. Hong and Y. W. Park, Rising Asia and American Hegemony, https://doi.org/10.1007/978-981-13-7635-1_16

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16.1 Beyond Rising Asia and American Hegemony: International Order Issues 16.1.1 Evolving International Order: Security, Rivalry and Hegemony The September 11 attacks have made drastic changes in approaching “security”, “international order” and “national interests” (Gaddis 2005). Attacks by these terrorists managed to destroy Twin Towers with casualties of several thousands of people using civil aircrafts. However, nuclear attacks by terrorist groups may wipe out of cities of millions of people. Graham Allison noted that potential nuclear attacks by terrorist groups may obtain nuclear weapons from three possible sources: nuclear arms from former Soviet, Pakistan, or North Korea. Nuclear issues Iran and North Korea are serious because of their possible connections with terrorist groups (e.g., by equipping nuclear arms with terrorist groups) more than their direct threats to their neighbors with nuclear wars involving traditional armed forces. No country is safe and secure by the efforts within national boundary. “A true evil” aims involve “war on terrorism” through international order and yet all those well-intended engagements end in a “great delusion” (Frum and Perle 2004; Mersheimer 2018). Developing countries increasingly invest in coalition building to effect gains in international trade negotiations. Nations do not explicitly state their specific interests; instead, they use to the negotiation tactics that take advantage of shared interests of coalitions. Recently, the benefits of a borderless world are doubted. Historical proponents of open markets—the United States and the UK—are retreating with less than obvious advantage of open world. In contrast, China with its sustained huge growth through trade sectors is interestingly enough a globalization’s major defender. Advanced economies throughout North America and Europe have experienced growing anti-globalization sentiment. In the face of such uncertainty, leaders of multinationals wonder whether they should retreat, change strategy, or stay the course. In making that decision, they need to understand two things. The world is less globalized than even experienced executives realize. History tells us that even in the face of a trade war, international trade and investment would still be too large for strategists to ignore. Today’s turmoil calls not for a mass retreat from globalization but for a more subtle reworking of multinational’s strategies. The remedy is to make significant policy changes to remove barriers between multi-national companies (MNCs) and domestic firms, large firms or SMEs. In particular, new tax policies should motivate firms to invest their profits from overseas operations and creation of jobs in the United States. Investment and tax incentives should encourage corporations to offer job training opportunities and skill enhancement trainings for high school graduates (Dunn and Litzinger 2018). Until Lehman Shock in 2007, few people questioned whether companies are aggressively pursuing globalization. However, with the emergence of new national capitalism that prioritizes the protection of domestic industries, there is a possibility

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that a firm may not be able to thrive in foreign markets despite holding excellent products and services; they cannot fight in foreign markets. With the introduction of the 5G communication equipment, China has received increasing attention from the US administration. In 2019, Trump Administration has concluded renegotiations with Canada and Mexico and NAFTA in North America, building a wall on the border with Mexico and beginning a trade war with China. Such anti-globalization movements are not limited to the US. Abe, Japan’s Prime Minister, and his government have been criticized for creating nationalistic policies. In Britain, the issues of Brexit are far from being resolved. The leaders of leading nations including China’s Xi, Russia’s Putin, Japan’s Abe, and South Korea’s Moon, for example, have been following to this trend, resulting in increasing political, diplomatic and economic clashes. National policies are made in the name of national “security” interests affect the market environments of global firms. Thus, the question is, “How would international relations influence global firms to define the scale and scope of their competitive priorities (i.e., what firms do to stay in business in competitive markets) and organizational integrity practices (i.e., How can firms act right in socially and ethically responsible manners in turbulent environments)?”.

16.1.2 New Type of Capitalism: Autocratic Practices Many global firms are state-owned, thus amongst MNCs, the state’s influence is quite strong in terms of ownership and management philosophy. As we entered the 21st century global era, the idea of a borderless world was well-accepted. However, the recent popularity of the new nationalistic capitalism fundamentally upends these rosy prospects. As we addressed in this book, the Nation Interest First Movement (e.g., end of the TPP, Brexit, and renegotiation of previous partnerships) is challenging earlier belief that complete free trade will be realized in the global era. This can be thought of as the 21st century nationalism or the new state capitalism. Despite this trend, it does not justify having a dark perspective of the future. Pankaj (2017) notes that while Trump is in power, the optimism surrounding globalization has declined but a present global climate still offers a positive outlook compared to the 1930s. In fact, the share of trade in the US as a whole is not so large when compared to the 1930s. Moody’s Analytics estimates that if the United States were to impose proposed tariffs on China, both countries may end up reducing exports by $85 billion in 2019. Even so, that’s only about 4% of total U.S. exports in 2015 (Pankaj 2017). Of course, we should took beyond statistical effects on trade, but this new national capitalism may not completely destroy the future of globalism. First, since digitalization has accelerated with the advent of the Internet, the borderless globalization of information will undoubtedly accelerate. With the advancement of digital technologies, firms can monitor customers through Big Data. Customer buying patterns and internet search and material access behaviors are translated into computational data that further predict their future actions and economic decisions. Facebook knows how to engineer behavioral cues

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to predict political inclinations and shape political voting blocs. Big Data and impersonal systems monitor and influence our actions remotely. How would “surveillance capitalism” “undermine human autonomy and self-determination” which is the very foundation of democracy? (Zuboff 2018). China, in particular, shows that hundreds of millions of people become free from dire poverty and at the same time they live in a “police state” in which state capitalism controls. Thus, the questions are, “How can a liberal economic order handle a huge challenge of surveillance capitalism? How would other alternative international orders face different sets of problems that state capitalism presents?”.

16.1.3 Africa: New Value Frontiers Africa is a huge continent. It is larger than the total sum of land size of China, India, USA and Europe. Next to China and India, Africa is receiving attention as the next frontiers of innovation and growth. Africa is known as supply base of raw materials and components with an emphasis on sustainability (Kauppi et al. 2018). Africa’s economic growth patterns are different from Northeast Asia’s experiences. Three countries—Japan, South Korea and China—have relied on both labor-and capital-intensive manufacturing exports, and however, Africa has shown its growth in minerals and agricultural products. With an enormous pool of youth, African countries are in good position to report labor-intensive exports in agriculture, horticulture, fishing and forestry by developing logical capabilities and satisfying health, sanitary and safety requirements for customers in advanced economies (Golub et al. 2017). Normal stages of growth requires certain sequences. The question is, “How do countries with inadequate foundational elements apply scientific methods of organizing work processes and achieve productivity enhancements for economic growth goals? How to pursue quality excellence in organizations and society at large with proper linkage roles of hard and soft power including political leadership and the traditions of rule of law?” (Golub et al. 2017; Hong et al. 2019).

16.1.4 Interactions of the ToP and Bop Interface Capabilities (TBIC) in the Digital Age Companies in the digital age need to innovate their entire business model. If we do not convert the system (digital technology competitiveness) from customer’s perspective (digital customer competitiveness), the product development/design/production to the supply chain that delivers the final product/service to the customer in the digital age, survival will not be guaranteed. Digital transformation requires the integration of digital technology into a business, fundamentally changing how the firm operates

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and delivers value to customers. It is also a cultural change that requires organizations to continually challenge the status quo, experiment, and get comfortable with failure. In the era of digital transformation (DT), advanced analytics (Business Architect), which utilizes science and technology (sensor, robotics, 3D printer, cloud computing, and 5G), the evolution of digital technology has affected not only the current business model but also the entire ecosystem surrounding the enterprise. In order to survive in such times, the present business model should be improved and turned into a business model suitable for the digital age. However, as is also the case in the process, a firm needs to develop a fundamentally different organizational system because it must be able to provide new value propositions to its customers while satisfying changing customer expectations. We define Interface Capabilities (TBICs) as the extent of how digital transformation (DT) connect and increase collaborative capabilities between ToP and BoP. It would be interesting to examine the differences between digital market leadership in emerging markets (e.g., China, India and Africa) and advanced markets (e.g., OECD countries). A potential question is, “How do TBICs combine customer competence (e.g., serving the needs of customers of both ToP and BoP) and technology componence (e.g., applying technological know-hows to develop products and services that fit to the needs of ToP and BoP)?”.

16.2 Global Supply Chain and Business Model Issues 16.2.1 Changing Landscape of Global Firms Global firms reflect changing national competitiveness. By 2030, it is anticipated that the size of combined GDP of E7 (China, India, Brazil, Mexico, Russia, Indonesia and Turkey) would be greater than that of G7 (i.e., USA, Japan, UK, Germany, France, Italy, and Canada). The long-term rapid economic growth of emerging economies including China and India provide a fertile soil for the emergence of more global firms from countries. A natural consequence is that more global firms from the E7 will join the rank of Global Fortune 500 firms whereas the number of Global Fortune 500 firms from G7 will decrease. Global firms from E7 will first aim to maintain their domestic advantage in their own countries and pursue competitive positioning in G7 countries as well. Leading global firms from G7 will increasingly pay more attention to the growing middle class of E7 countries to capture the revenue potential of these fast growing emerging markets. As the rivalry between U.S. and China intensifies, the business engagement patterns of global firms may also change. Chinese global firms (including Hong Kong and Taiwan) may continue to increase in numbers surpassing firms in the U.S. Another possibility is that Chinese global firms may stumble over the increasing scrutiny in advanced markets while facing fierce competition from global firms in other emerging economies (e.g., India, Latin America and Africa). Indian government, for example,

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may not be so welcoming to the growing dominance of Chinese global firms in Indian market. Since India’s population is likely to be larger than China by 2030, Indian global firms may target China market with greater competitive intensity. In this way, the competitive landscape of global firms is not merely between G7 and E7 markets. Rather, within G7 and E7 markets, the competitive battle for market leadership is expected to intensify. An important question to pursue is, “How would, even if in some cases, the dynamic innovations of fast growing E7 markets influence the complexity of slow growing G7 markets and vice versa?”.

16.2.2 Disruptive Technologies and Changing Business Model The impact of 5G, AI, and space technologies may replace existing business models with new ones. Uber, with an e-business model applied to taxi services, has made traditional taxi services obsolete. Many traditional services have gone out of business in major cities. With the advancement of AI, driverless cars could change the business models of automotive firms from ownership-based purchasing patterns to sharinginclined and identity-based customer practices. As of now, automotive industry has successfully achieved automation (e.g., using robotics) in the areas of press, welding, and painting excluding assembly process functions. However, with the development and application of Cyborg (i.e., cybernetic organism) which can master a high degree of dynamic human ingenious movements (e.g., agronomic sequential coordination and complex combination of movement functions), the scope of automation may ever permeate prevailing routines in the work places by 2050. Smart cities will have distinct characteristics based on digital big data and next generation communication technologies (e.g., 5G-xxG). Comprehensive synergies occur by using future technologies, utilizing economic progress, and responding to environmental changes. In particular, exploring alternative green energy sources, addressing issues of an aging population, and increasing urbanization trends on a global scale and appearances of megacities in Asia will be pressing issues. In the meantime, these smart cities also may transform retail-marketing patterns further from direct personal shopping to indirect shopping services through Amazon and other e-platform businesses. Increasing automation and AI-empowered technology capabilities would absolve predictive and routine nature of professional services including accounting, pharmacy, and medical practices. The question is, “If distinction between functionalities of machines and humans become blurred, how to distinguish unique human tasks from machine ones? As the nature of work goes through enormous transitions how to prepare workers for future dynamic world of work?”

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16.2.3 Restructuring Global Supply Chains In the past, supply chain disruptions were mostly related to natural disasters (e.g., earthquake, hurricanes-typhoons, flood, tsunami, and outbreak of contagious diseases). Recently, political factors are becoming major causes of global supply chain disruption. Since 2017, increasing uncertainty related to trade tensions between the U.S. and China as well as Brexit disrupt global supply chains of several industries. The U.S. government “encourages” US firms to leave China. Apple anticipates the impact of added burdens of tariffs on its products produced in China. Chinese firms lose access to US markets. Other advanced markets such as EU and Japan may the steps that the US takes. Political issues may disrupt economic realities in different countries. Highly politically charges trade disputes between Japan and South Korea have forced Japanese and Korean global firms to find new sourcing venues of composite materials. All these macro-level changes (e.g., trade tensions) have real impact on global supply chain in industry and country level. Both G7 and E7 countries will face serious resources challenges in multiple fronts (e.g., clean water, quality job opportunities, housing shortages in urban areas, transportation congestions, outdated waterworks and sewage infrastructures) so that the nationalistic trends will only increase and it will be rarer for collaboration efforts to resolve regional and global issues. As nations are more moving more inward focus, it would be challenging for global firms to implement broad scope of socially mindful services initiatives. Rapid technology development would shorten the product life cycle and thus more products become obsolete quickly. Materials and composite firms face serious risks of market irrelevance under fierce competitive pressures. Global firms may routinely restructure their supply chains at will for their competitive priorities when many of their suppliers are not ready for the drastical changes imposed on them. Global firms may switch their supplier base form specific countries to host of other countries at any time. For example, as more firms move from China to Southeast Asian countries such as India, Vietnam and Thailand, restructuring global supply chains is inevitable. Then the question is, “In view of constantly changing nature of global markets, what would be the restructuring criteria of disruptive global supply chains?”.

16.2.4 Challenges of ToP and Bop Interface Capabilities (TBIC) The trends towards national interest and new state capitalism in the 21st century are expected to continue for the foreseeable future. It is clear that various trade wars and conflicts between countries will continue. Of course, although this tendency cannot completely prevent globalism in the 21st century, what strategies do national and multinational corporations need to take in this political and economic environment? Despite the political, diplomatic, geographical, cultural and economic environment

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and challenges, ToP and BoP Interface Capabilities (TBIC) Interface Capabilities that link market growth potential become more critical. Bremmer (2014) has a similar awareness with us and suggests what kind of strategy the multinational corporations in the future of the 21st century should take in promoting globalization and how to respond to these risks. He suggests that multinational executives need to ask two questions to include new risks from globalization into their strategy: (1) “Are our products strategically important to the governments of the countries we want to enter?; (2) “Are our products strategically important to our national government?” Both developed and emerging economies adopt irrational energy use and environmental pollution practices. For example, the growing use of energy and pollution in China is having an enormous impact not only on China but also on developed nations such as Japan and Korea. This phenomenon highlights the need to weigh in the influence of Southeast Asian countries, South American countries, and African nations in the future on developed countries in the future, as well as India in its continued growth trajectory. The issues reframed in a question would be the following: “If increasing interfaces between ToP and BoP raise bigger challenges, how would global companies take their competitive positions in ToP and BoP markets differently?”.

16.2.5 Measurement Issues of Global Supply Chain Interfaces As of now, there is no known terms of referring to cooperation between countries from the SCM viewpoint. Developing an interface protocol between ToP and BoP bloc, requires generally accepted standards so that they are acceptable to both advanced economies and emerging economies. One way to develop such terms is to use International Standard Organization (ISO). ISO certifications are the standards for businesses practices internationally. The most commonly adopted ISO standard certifications that are applicable to supply chain management are ISO 9001 and ISO 14001. Further, ISO 28000 is used for security management systems in supply chains. However, there are no ISO standards solely devoted to supply chain management discipline. ISO can provide as a neutral and professional terms that are developed by experts from all the participating countries, in both advanced and emerging economies from all the participating countries, advanced and emerging economies. The ISO standards may be good frameworks as a part of interfacing mechanism between ToP and BoP, and eventually to all the parties involved. The interfacing mechanism for ToP and BoP does not provide any implementation tools. Thus, a question is, “How does the interfacing mechanisms include practical implementation tools and processes at the company level and ISO standards for global level cooperation?”.

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16.2.6 Challenges of Market Leadership of Firms in ToP and BoP It is a huge challenge for firms to use an integrated set of customer, technology and linkage competencies in the context of increasing rivalry between advanced and emerging economies. Digital economics and technology provided firms and emerging economies with a competitive edge and advantage over multinational corporations in the analog era. For example, Baidu, Alibaba and Tencent (BAT), the leading digital enterprises in China, have a competitive advantage based on a large market in China. A representative company is ‘Alibaba’, which was established in 1999 by claiming to be the Amazon in China. Now it is no longer necessary to call it “China”, since it has various subsidiaries in relevant markets. Currently, it dominates key IT technologies and platforms needed for e-commerce. Alibaba was listed on the New York Stock Exchange in September 2014, and a sign that it has become a global company. The estimated value of the enterprise was about $166.7 billion compared to Amazon at a value of about $150 billion. Alibaba and other Chinese platform companies have strong competitiveness in terms of infrastructure construction in developed and emerging countries. Developed countries such as the United States have built roads, ports, and communications infrastructure in the analog era, but emerging nations such as China are building infrastructure in the digital age. For this reason, the adoption of digital financial transactions and electronic commerce (ecommerce) is overwhelmingly higher than that of conventional developed countries. In addition, the distribution speed of Omni Channel, which simultaneously pursues existing convenience stores and online e-commerce, is also overwhelmingly different from that of developed markets. Of course, there are differences in logistics cost as well as communication costs between developed and emerging countries, however, this difference in infrastructure is becoming new interface opportunities for global companies from China to compete in the global market. In addition, Dji, a venture company from Shenzen, China, dominated the global drone market showing the difference in innovation scale in the digital age. Founded in 2006, Dji has developed and sold drones. It took about 70% of the global drones market in 2017 after 10 years. Currently, it performs well in the markets in China, the US, Germany, the Netherlands, Japan and Korea, and reports a large market share. The various drones are able to accurately tailor the performance of each function such as portability, flight time, size, strength, weight and camera, meeting various global customer needs. Conventionally, multinational corporations in developed countries have dominated global innovation. Innovation in the digital age, however, doesn’t discriminate against firms from developing markets, as Dji has shown. For many developed countries such as the US, EU, and Japan, institutional and social systems created during the analog era will constrain innovation in the digital age. For example, as of 2019, there are huge institutional constraints in Japan to fly drone. If one visits China in 2019, nobody is concerned about the fact that drones are flying over the university. In other words, new product innovation in emerging economies can receive institutional support that multinational corporations of advanced countries do not

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have. These elements are seen in various areas. In China, we see the transition from gasoline motorcycle with loud speakers to electric motorcycles that run quietly. An electric motorcycle runs with no sound. While the platform of the mobile device in the digital era started in Uber in the United States, it was Didichuxing that dominated China’s vehicle sharing platform market in a short period of time. The company was born in 2015 as a merger of two companies. It offers a full range of commuting options to 400 cities in China. The company offers a full range of tech-based mobility options for close to 300 million users including taxi hailing, private car hailing, Hitch (social ride-sharing), DiDi Chauffeur, DiDi Bus, DiDi Test Drive, DiDi Car Rental, and DiDi Enterprise Solutions. DiDi is committed to work with communities and partners to solve China’s transportation, environmental challenges and employment problems using big data-driven deep-learning algorithms that optimize resources allocation. Didichuxing acquired Uber China in 2016. After occupying about 90% of the Chinese market, it has recently acquired the Brazilian vehicle-sharing company ‘99’ and entering the South American market. Finally, Chinese smartphone companies—Huawei and Xiaomi-are making attempts to expand beyond their current markets and become competitive globally. Furthermore, Oppo, Vivo, and Oneplus are all subsidiaries of the BBK Group, and their brands are approaching the market with strategies targeting different target groups. Huawei is already out of China, expanding its market share in developed markets such as Japan and China, and Xiaomi has a dominant competitive edge in the Indian market out of the Chinese market. Chinese smartphone companies approached ‘cheap’ strategy early on. The price/performance ratio was a so-called “caustic rain” strategy. However, the price did not rise significantly over time, and the technology has improved. Xiaomi has attained a global competitiveness in a short period of time because it has prevailed not only in price but also in distribution structure. As Xiaomi’s MI platform begins to compete in the Indian and global markets beyond the Chinese market, and Huawei’s penetration of developed markets may not be as impressive as suggested. In general, global firms from advanced economies assume market leadership in both advanced and emerging markets. Interfaces between ToP and BoP market requires greater roles of global firms from emerging markets. Some global firms from Asia, Japan, and South Korea in particular, have shown market leadership in both advanced and global markets. Expanding interfaces between ToP and BoP markets require more from rising Asia including China, India and other Southeast Asian nations. In terms of the number of global Fortune 500, China is the largest as of 2019. However, increasingly, the shortcomings of Chinese global firms are noted in more explicit and visible ways. The issues go beyond routine productivity aspects. Their long-term competitive advantage requires economic performance, social responsibility and environmental stewardships. Most of all, Chinese global firms reflect the Chinese cultural practices and value systems. In the coming decades, it is to be seen how China as a nation and Chinese global firms not only compete but also lead in global markets in creating, delivering and capturing sustainable values that the world would appreciate, welcome and love to adopt. Here are the challenges and opportunities of Chinese global firms as well as those from emerging economies. Naturally, here is a modest but compelling question for leading firms

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of the future—wherever they may come from: “How would firms design, produce and offer products and services that reflect the aspiring values and lead people to desirable, transformational and sustainable life experiences in their endless pursuit of a better world?” We close this book by returning to Stephen Wertheim’s epigraph set in the beginning of this chapter: “The meaningful question has neve been whether to have world order or not; it is what the terms will be and who will set them.” We have ventured to respond to his question by showing six sources of change that will upturn the extant global order: changing landscape of global firms, increase in disruptive technologies and proliferation of business models, restructuring of global supply chains, issues concerning ToP and Bop Interface Capabilities, measurement issues of global supply chain interfaces, and challenges pertaining to the market leadership of firms in ToP and BoP. We invite the reader to take into consideration these perspectives and cognizant of the sources of turbulence that will shape the next few decades.

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