Technology and Skills in ASEAN: An Overview 9789814414265

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The ASEAN Secretariat, based in Jakarta, was formally established by an agreement signed by the ASEAN Foreign Ministers during the First Meeting of ASEAN Heads of Government in Bali in February 1976. The Secretariat provides a central administrative organ for the co-ordination of the activities of ASEAN bodies and the implementation of ASEAN projects a'nd activities. It is headed by a Secretary-General, appointed on a rotational basis among member countries. The Secretariat has three functional bureaus- Economic, Science and Technology, and Social and Cultural- each headed by a Director. The japan Institute of International Affairs ( JIIA), founded in 1959 by former Prime Minister Shigcru Yoshida, is a non-profit research organization concerned with international affairs. The Institute's priority areas of research arc on the A SEAN countries, China, Korea, the Soviet Union and japan's relations with these countries. Research projects are conducted by the Institute's research staff members in co-operation with university scholars and researchers from other institutions in the public and private sectors. Research output is published in the form of either books or articles in any of the Institute's five periodicals, including the monthly Kokusai Mandai (International Affairs). The]IIA currently serves as the secretariat inj a pan for the Pacific Co-operation Committee, the ASEAN Regional Studies Promotion Programme, and the .Japan-Indonesia Conference. The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the multi-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, 'the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit is an integral part of the Institute, coming under the overall supervision of the Director who is also the Chairman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. The day-to-day operations of the Unit are the responsibility of the Co-ordinator. A Regional Advisory Committee, consisting of a senior economist from each of the A SEAN countries, guides the work of the Unit.

TECHNOLOGY AND SKILLS IN ASEAN An Overview

RESEARCHERS A SEAN Indonesia

Dorodjatun Kuntjoro-J akti Slamet Senoadji Arindra A. Zainal Candra Darusman Malaysia

H. Osman-Rani Toh Kin Woon Anuwar Ali Philippines · Alejandro A. Reyes Robert Y. Siy, Jr. Yolanda Azareon M ylene Mendoza Felicidad Tanchoco Thailand

Nathabhol Khanthachai Kanchana Tanmawad Tawatchai Boonsiri Chantana Nisaizook Anucha Arttanuchit Singapore

Chng Meng Kng Linda Low Tay Boon Nga Amina Tyabji Institute of Southeast Asian Studies N arongchai Akrasanee

JAPAN R yokichi Hirano Yoneji Kuroyanagi Yasumitsu Nihei Takiyoshi Ohwada Tatsumi Okabe

EFFECTIVE MECHANISMS FOR THE ENHANCEMENT OF TECHNOLOGY AND SKILLS IN ASEAN An Overview

Edited by C.Y. Ng Institute of Southeast Asian Studies

R. Hirono Seikei University

Robert Y. Siy, Jr. Asian Institute of Management

The ASEAN Secretariat and

Japan Institute of International Affairs in collaboration with

ASEAN Economic Research Unit Institute of Southeast Asian Studies

Cataloguing in Publication Data Effective mechanisms for the enhancement of technology and skills in ASEAN: an overview/edited by C.Y. Ng, R. Hirono and Robert Y. Siy, Jr. Papers presented at a meeting held for ASEAN Regional Studies Promotion Programme: Phase II, Tokyo, 1985. I. Technology transfer- ASEAN - Congresses. 2. Technology and state --- ASEAN -- Congresses. ASEAN- Congresses. 3. Technological Innovations 4. ASEAN - Industries - Congresses. I. Ng, C.Y. II. Hirono, R. III. Siy, Robert Y. IV. ASEAN Regional Studies Promotion Programme: phase II. DS 503-4 A83 no. 2 1986 ISBN 9971-988-27-5

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang _ Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior consent of the Institute of Southeast Asian Studies.

© 1986 Institute of Southeast Asian Studies

The responsibility for facts and opinions expressed in this publication rests exclusively with the contributors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters. Printed by General Printing & Publishing Services Pte. Ltd.

Contents

Foreword Preface

IX XI

PART ONE: ASEAN OVERVIEW INTRODUCTION

3

1. INDUSTRIALIZATION IN ASEAN Past Trends and Patterns Current Policies in the Industrial Sector Economic Relations Between A SEAN and Japan

7 7 9 14

2. TECHNOLOGY TRANSFER, ADAPTATION AND DIFFUSION IN ASEAN: PROBLEMS AND ISSUES Multinational Firms as Agents of Development Issues of Concern Limited Transfer of Technology Restrictions Imposed on Technology Transfer Costs of Technology Transfer Inappropriate Technologies The Scarcity of Skilled Labour

19 19 20 21 21 21 22 22

3. SCIENCE AND TECHNOLOGY POLICIES IN ASEAN The Role of Technology and Skills Development Policy Frameworks Incentive Schemes for S&T Development

25 26 27 31

4. THE EXPERIENCE FROM SELECTED ASEAN INDUSTRIES Background on the Surveyed Industries Research Methods Research Findings Ownership Structure and Nationality Autonomy and Indigenization Economic Linkages of Foreign Firms Channels for Technology Transfer

33 33 35 36 36 38 40 42

Content;

VI

Terms and Conditions of Technology Transfer Costs of Technology Transfer Appropriateness of Technology Training and Staff Development Local Research and Development Linkages with Local Technical or Research Institutions Linkages with Suppliers and Sub-contractors

45

46 48

49 51 54 55

5. CONCLUSIONS AND RECOMMENDATIONS Constraints to Enhancement of Technology and Skills Constraints Related to Host-Country Policies Constraints Related to the Practices of Multinational Firms Constraints Related to the Characteristics of Local Firms Constraints Related to the Attributes of the Local Labour Force Recommendations to Governments Recommendations Addressed to Firms Recommendations for Regional Co-operation

59 59 59 60 61 62 63 67 68

PART TWO, SECTION 1: JAPANESE OVERVIEW

71

1. INDUSTRIALIZATION, TECHNOLOGY TRANSFER AND SKILLS ENHANCEMENT IN ASEAN: A JAPANESE VIEW Introduction Changing Patterns of Industrialization Growth and Patterns of Foreign Manufacturing Investment General Trends and Patterns of Technology Transfer and Skills Enhancement 2. MAJOR ISSUES OF TECHNOLOGY TRANSFER, ADAPTATION, DIFFUSION, AND DEVELOPMENT, AND SKILLS ENHANCEMENT Appropriateness of Technology Transferred from Overseas Adaptation and Diffusion of the Technologies R&D Capabilities in Host Countries Improvement of Operating and Management Skills Regional and International Arrangements for Technology Transfer 3. TECHNOLOGY TRANSFER AND DEVELOPMENT IN ASEAN: MACHINERY AND ELECTRONICS INDUSTRIES Growth and Characteristics of the Machinery and Electronics Industries Technology Transfer and Development in the Machinery and Electronics Industries Constraints on the Choice of Technology Constraints on Technology Absorption Capability Public Policies on Technology Transfer

73 73 74 76

82

87 87 89

91 93 95

97 97 103 103 108 115

ContentJ

VII

4. REGIONAL AND INTERNATIONAL ARRANGEMENTS FOR TECHNOLOGY TRANSFER Regional Arrangements for Technology Transfer International Arrangements for Technology Transfer

119 119 122

5. CONCLUSIONS AND RECOMMENDATIONS Recommendations at the Corporate Level Recommendations at the Host Country Level Recommendations at the Home Country Level

125 129 129 130

PART TWO, SECTION 2:JAPANESE EXPERIENCES IN TECHNOLOGY TRANSFER

133

JAPANESE EXPERIENCES IN TECHNOLOGY TRANSFER Introduction Growth and Structural Changes during the Post-war Period High Rates of Economic Growth Rapid Structural Changes in GNP and Employment Major Factors for the High Economic Growth and Rapid Structural Changes Post-war Factors Long-run Factors Flow of Technological Innovations in the Manufacturing Sector Steady Inflow of Foreign Manufacturing Technologies Changing Composition of Imported Technologies Constant Process of Adaptation and DifTusion of Imported Technologies Rapid Expansion of R&D Programmes and Expenditures Major Factors for the Efficient Transfer, Adaptation and Diffusion of Imported Technologies At the Corporate Level At the National Level Major Weaknesses and Constraints in the japanese Technology Development Programmes At the Corporate Level At the National Level

135 135 136 136 136 137 137 137 138 138 139 140 141 142 142 144 14 7 14 7 148

Foreword

One of the central objectives of the Association of Southeast Asian Nations (ASEAN), as embodied in the Bangkok Declaration under which ASEAN was founded, is the promotion of Southeast Asian studies. In this context, ASEAN warmly welcomed the offer of Mr Zenko Suzuki, the Prime Minister of Japan, in early 1981 to support the launching of an ASEAN Regional. Studies Promotion Programme. After extensive consultations among ASEAN member countries and between A SEAN and .Japan, it was agreed that the A SEAN Regional Studies Promotion Programme, initially to extend over a period of five years, should focus on policyoriented socio-economic research. Given the overriding importance that ASEAN attaches to economic development and the vital role of A SEAN-Japan economic relations in this regard, ASEAN-Japan Industrial Co-operation was adopted as the first topic of research under the Programme. The second topic chosen was EfTeetive Mechanisms for the Enhancement of Technology and Skills in ASEAN. An integrated ASEAN-.Japan Overview, together with volumes on the individual ASEAN countries, are the fruits of this second phase of research. The recent history of ASEAN-Japan relations has been marked by a degree of ambivalence. As the first Asian nation to industrialize successfully and to have risen as a phoenix from the ashes of war-time destruction to the leading heights of industrial and technological power, Japan has always been held with a degree of awe and admiration by its southern ASEAN neighbours. Such awe and admiration have, however, been tinged with a certain amount of suspicion derived from war-time memories, especially as the impact ofjapan's post-war economic expansion becomes increasingly felt in the ASEAN region. On the Japanese side, historical circumstances and the need for economic reconstruction in the early post-war years made it unavoidable that, initially, its external relations were largely oriented towards the \Vest, especially the United States. However, as Japan rose to global economic prominence, and its economic presence in Southeast Asia grew, it increasingly came to attach greater importance to its relationship with the ASEAN countries. ASEAN first approached] a pan collectively in the early 1970s on the question of Japan's production of synthetic rubber and its adverse impact on the ASEAN economies. From such narrow beginnings, the dialogue has quickly expanded into the present broad-based consultative framework of the ASEAN-Japan Forum. Given the historical background, there is a general recognition that while economics must remain the central pillar of ASEAN-japan relations, the socio-

X

Foreword

political context under which such economic relations evolve is also of prime importance. Thus, a central objective of the ASEAN-Japan dialogue is the development of greater mutual awareness, understanding, friendship, and trust between the peoples of A SEAN and Japan, especially among the younger generation. In this regard, it is particularly heartening that the present Programme has begun to bring together many young researchers from both ASEAN and Japan in collaborative research on various important and pressing issues of mutual concern. The interactive thought process involved in such research, and the development of common perceptions on a wide range of issues, cannot but help improve the effectiveness of the dialogue and establish A SEAN-Japan relations on a firm basis. The A SEAN Secretariat and the Japan Institute ofinternational Affairs, as the ASEAN and japanese co-ordinating units for the Programme respectively, are happy and honoured to be playing a part in this process. Phan W annamethee Secretary-General ASEAN Secretariat Jakarta Toru Nakagawa Chairman Board of Directors Japan Institute of International Affairs Tokyo

Preface

Japan is an economic giant in every sense of the word. In accordance with the size of the Japanese economy and its growing importance in foreign trade and investment, its economic activities and policies have had and will have substantial impact on many national economies the world over - especially the ASEAN countries. Japan is not only ASEAN's most important trading partner but also its largest source of aid and investment. Economic interaction between] a pan and A SEAN is not limited to flows of commodities and finance. Technology has a vital role to play in the economic development of the ASEAN countries. It is often said that the possibility of borrowing technology gives latecomers to the development process an advantage that the pioneers of industrialization did not possess. Furthermore, it is widely recognized that the phenomenal achievements in the economic development of Japan have been made possible by its acquisition of technical knowledge and successful adaptation and utilization of this knowledge selectively borrowed from the West. Japan, therefore, has an accumulated stock of scientific, technical and managerial expertise as well as a stock of rich experiences in borrowing, adapting, diffusing and developing technology which are invaluable to A SEAN. The ASEAN countries are aware of the importance of technology and related skills required for the processes of industrial development. However, little has been done so far to identify, let alone establish, proper mechanisms for the enhancement of technology and skills at the national level. If this situation is not quickly rectified, it will remain a serious impediment to industrial development. On the other hand, Japan is naturally concerned that successful industrialization in the A SEAN countries may result in theJ apanese market being flooded with cheap imported manufactures. It may also shrink Japanese exports in third markets. Thus, any co-operative effort on the part of japan in the ASEAN countries may be considered in the short run to be contrary to its own self-interest. This concern is misplaced. At the current stage of the debate, there is an increasing recognition that with careful industrial restructuring in ASEAN and Japan, the expansion of japanese marketing opportunities is highly probable. The growth of new activities in the ASEAN countries may foster an expansion in markets for a variety of capital goods, materials and services whichj a pan can supply. An added bonus of co-operative effort is that it bridges the information gap for Japan on the policies and objectives of the ASEAN countries' plans and priorities for sustained industrialization. Although technology transfer and skills enhancement in the private sector are

Xll

Preface

likely to be mutually beneficial, the reliance on market forces alone to achieve these may not be sufficient. Co-operative action in the dissemination of information, exchange of views and ideas and the analysis of potential opportunities are essential to smoothening and quickening the process. It is for this reason that research and academic exchange and co-operation have an important role to play. "Effective Mechanisms for the Enhancement of Technology and Skills in ASEAN'' represents ongoing collaborative research efforts of ASEAN and Japanese scholars. It started in 1984 as an outgrowth of the first phase of the ARSPP. Building upon the results of an earlier study, "ASEAN-Japan Industrial Co-operation: An Overview'', this volume is the logical progression to the next phase where we examine "Industrial Restructuring and Adjustment for Japan-ASEAN Investment and Trade Expansion". Country research teams were required to identify and examine problems in their respective countries in technology transfer and skills enhancement. Conclusions were drawn from the findings of sample surveys taken on selected industries located in the ASEAN countries. Based on this, five country papers were produced by the respective ASEAN-country research teams. These papers provided the raw material from which the A SEAN Overview was developed. Likewise, the Japanese team developed ajapanese Overview and an account on japanese experiences in technology transfer. These were then put together to form this volume. This study indicates that basic difficulties relating to technology transfer and skills enhancement are nearly identical in most of the ASEAN countries, although the magnitude and effects vary. There are also noticeable differences in emphasis, assumptions and approaches - especially with regard to the Singapore paper. While the findings of the investigations in these countries cannot be said with certainty to be fully representative of the problems and difficulties faced by all the ASEAN countries, they indicate some of the directions in which efforts of ASEAN-Japan co-operation will have to be aimed. The main focus of this volume is on these general directions. It is divided into two parts. Part One consists of the ASEAN Overview. It reviews industrial trends and policies in ASEAN, with special emphasis on economic relations between ASEAN and japan and presents the concerns of the ASEAN countries in technology transfer, adaptation and diffusion. Science and technology development efforts in ASEAN are highlighted, with elaboration on major policies and incentives that ASEAN governments provide. It also analyses the experiences of the ASEAN countries in technology and skills development, particularly in the machinery and electronics industries, which are drawn from the primary research conducted by the five ASEAN-country teams. Finally, the conclusions and recommendations of the five ASEAN-country papers are presented. Part Two contains two sections. The first discusses the changing patterns of foreign manufacturing investment, technology transfer and skills enhancement in the process of industrialization in the ASEAN countries except Brunei, as well as deals with some major issues confronting them in technology transfer, adaptation, diffusion and development, and skills enhancement. It focuses, among other things, on the issues of: 1) the appropriateness of the various technologies being transferred from overseas; 2) the adaptation and diffusion of those technologies;

Preface

Xlll

3) the research and development capabilities in the ASEAN countries; 4) the improvement of operating and management skills; and 5) the regional and international arrangements for technology transfer involving the ASEAN countries. As in the A SEAN Overview, the Japanese Overview analyses some key issues of technology transfer and development as revealed in the machinery and electronics industries in the ASEAN countries. Identified and analysed as the major constraints on the choice of technologies are the presence oflow-wage labour, the small size of the domestic markets, the incompatibility of some modern technologies with traditional ones, and the underdevelopment of supporting industries in these countries. Equally important are the constraints on technology absorption capability in the ASEAN countries. Most conspicuous are the inadequate vocational training programmes and facilities, the inflexibility of mind and attitudes among workers, the high incidence of job-hopping resulting partly from the lack of financial and other incentives for transferring the skills and technologies acquired, and the underdevelopment of institutional mechanisms for technology transfer. At the end of the critical examination of private-sector practices and public policies on technology transfer and development, the Overview offers some policy recommendations at the corporate, host-country and home-country levels. The second section focuses on the patterns and issues of technology transfer and development in post-war Japan. Particularly emphasized here are the extensive search for better technologies overseas, the constant process of adaptation and diffusion of the imported technologies, the growing importance of indigenous technologies and some major factors responsible for it, including the rapid rise in research and development efforts at the corporate and public-sector levels and the national policies conducive to such expanded R&D efforts in post-1970 Japan. The major weaknesses and constraints in Japanese technology development efforts at the corporate and national levels are also identified. It is hoped that the paper will contribute to better understanding of the strength and weaknesses of technology transfer, diffusion and development in post-war Japan, which in turn will help the ASEAN countries in their efforts to upgrade and diversify the technologies, whether indigenous or imported.

C.Y. Ng, R. Hirono, and

R.Y. Siy, Jr.

PART ONE

ASEAN OVERVIEW

Introduction

The research studies focus~d on the problem of identifying effective mechanisms for raising the levels of technology transfer and skills development in the A SEAN countries. This concern stemmed from the recognition that technology is a key factor in national development efforts, both in the West and in the East, and that sustained technological advancement is urgently needed in order for national economies to industrialize, and more broadly, to modernize. Except for Singapore, all the other ASEAN nations arc basically agricultural countries, relying in the main on the export of primary commodities for the earning of foreign exchange. However, given the fluctuating international demand for primary commodities, these countries have all embarked upon industrialization programmes with a view to reduce dependence on primary exports, and to increase income and employment opportunities of their expanding labour force. Beginning from the early 1970s, the industrialization process in the whole of ASEAN was given a major boost when many multinational electronics firms decided to locate their offshore assembly operations in this region. Among the factors that led to this relocation were the stable political climate, generous investment incentives, relatively good infrastructure, low wages, a docile labour force, and subdued trade union activity. During the decade of the 1970s and right through to the early eighties, the electronics industry attained impressive growth rates. As a result, its output as a percentage of total manufacturing output increased substantially and a significant proportion of manufacturing exports from ASEAN consisted of electronic products. The labour-intensiveness of the industry also led it to become one of the largest, if not the largest, single absorber oflabour in the manufacturing sector in this region. While the contribution of the electronics industry to growth and employment generation was impressive, its effectiveness in the transfer of technology and the upgrading of skills was more doubtful. Concerned that the manufacturing sector should continuously upgrade its technical skills, the ASEAN governments exhorted multinational corporations (MNCs) from technologically advanced countries such as Japan and the United States to devote attention to the development of the technological capacities in their host country staff. To promote greater transfer of technology, the ASEAN governments encouraged local branches of MNCs to enter into technical licensing agreements with their parent companies and suppliers while generous incentives were granted to firms willing to undertake local research and development.

4

A SEAN Overview

Despite these, many policy-makers and researchers became concerned that the much desired transfer of technology and its adaptation to local conditions were slow in coming. Such concerns had to be verified, however, and it was with a view to finding out the exact state of affairs that these research studies were undertaken. To obtain a more precise picture of the ongoing process of technology acquisition and development in the ASEAN countries, the researchers undertook a detailed scrutiny of specific industrial branches, namely, the electronics and machinery industries. These industrial branches were selected by the ASEAN and Japanese researchers after taking into consideration the facCthat these industries, besides being among the most recent to develop, require more sophisticated technology than the earlier import-substitution activities in the ASEAN countries. Case studies on firms within these industries were written and analysed with special attention paid to the problems of technology transfer particularly from Japan to the respective ASEAN countries. On the basis of their findings, the country research teams have made recommendations on how the A SEAN countries can achieve an optimum level of technology transfer and, thus, raise their respective levels of technology and skills development. These recommendations also outline the role that japan can play in these efforts as well as the mechanisms required by the transfer process in both the public and the private sectors. Organization of the Overview

The Overview is divided into five chapters. The first chapter reviews the experiences and thrusts of industrialization in A SEAN. In this chapter, the broad policy framework in each of the countries is described and special emphasis is given to the economic ties between Japan and the A SEAN nations. Chapter 2 presents the major issues surrounding technology transfer, adaptation and diffusion in ASEAN, and highlights the respective concerns of the individual member countries. Chapter 3 focuses on the specific approaches to the development of science and technology in ASEAN, and elaborates on the existing mechanisms and schemes that have been instituted in order to accomplish stated objectives. Chapter 4 draws upon primary research on the electronics and machinery industries in A SEAN. The comparative analysis of the five country studies helps to illustrate the issues of concern in technology and skills development and to reveal the opportunities for intervention, assistance, and co-operation. The analysis is based on the information generated from survey research and case studies of ASEAN firms, many of which are either subsidiaries, joint-venture partners or licensees of multinational corporations. The final chapter presents the conclusions and recommendations reached by the various country research teams. The chapter begins with a summary of the constraints encountered by the individual countries in their attempts to upgrade local technology and skills. Recommendations are then presented. These are addressed

Introduction

5

to three types of institutions that have key roles to play in the technology development process: agencies of government as well as public enterprises; private firms, both the users and suppliers of technology; and regional and international bodies that promote technology transfer and development.

1

Industrialization in ASEAN

The analysis of the process of technology transfer must be clone within the larger context of a particular country's economic development. Given the pervasive economic interdependency between countries at different stages of development, attention must be directed to the impact of these evolving relationships on the process of technology transfer. In this study, therefore, the process of technology transfer is discussed as a key aspect of the process of industrialization, which is now developing rapidly in A SEAN, and also, within the larger context of growing interdependence between A SEAN and Japan. Past Trends and Patterns

In recent history, the A SEAN region has stood out as a centre of economic growth. From 1971-82, the five original member countries experienced average rates of real GDP (gross domestic product) growth ranging from 5.7 to 9.0 per cent, an outstanding record by any comparison with the developed countries during the same period (Table 1). The average growth rates of the industrial sector in the ASEAN countries during the period 1971-82 were even higher, ranging from 7.6 to 11.9 per cent (Table 2). From 1975 to 1980, the share of industry in the GDP ofASEAN also increased dramatically (Table 3). This indicated the substantial contribution of industry, particularly manufacturing, to the overall progress of the A SEAN economies. It should also be noted that these advancements were achieved in spite of the instability in the world economy during this period, brought about by such events as the oil price increases in 1973-7 4 and in 1979-80 and the recession that followed in many industrialized countries. The economic performance of the region was truly remarkable in view of the marked differences in the culture, endowments, characteristics, and industrial policies of the five countries. Singapore and Indonesia stand in extreme contrast to each other. One possesses a small, relatively skilled population with few natural resources. The other is equipped with vast natural resources, a large domestic market, and an agriculture-based population. Malaysia, the Philippines and Thailand arc between the two extremes, with strong dependence on exports of primary commodities but respectable efforts at developing light manufacturing industries. From the early 1960s, Singapore, limited by its poor national resourcr

8 TABLE 1 Average Growth Rates of Real GDP (In per cent)

Year 1982 1971-75 1976-80 1971-82

Indonesia

Malaysia

Philippines

Singapore

Thailand

4.5 7.9 7.9 7.6

3.9 7.3 8.6 7.5

2.9 6.1 6.3 5.7

6.:)

9.6 8.7 9.0

3.9 6.3 7.6 6.7

SOURCE: Asian Development Bank (ADB), Key Indicators, April1983.

TABLE 2 Annual Growth Rates of the Industrial Sector (In per cent)

Year 1971-82 1971-75 1976-80

Indonesia

Malaysia

Philippines

Singapore

Thailand

11.9 14.1 10.7

7.9 4.0 11. ()

7.6 8.6 8.2

10.2 10.2 9.9

9.4 8.3 11.5

SOURCE: ADB, Key lndicatorr, April 1983.

TABLE 3 Share of Industry in GDP (In per cent)

Year

Indonesia

Malaysia

Philippines

Singapore

Thailand

1980 1975

30.9 27.3

30.0 26.8

36.0 33.0

32.0 30.4

29.9 25.0

SOURCE: ADB, Key lndzcators, April 1983.

endowment, chose to pursue an export-led industrialization strategy. Policies and incentives were established to encourage the use of unskilled labour in light consumer-goods industries such as toys, clothing, footwear, and electronic components. Since the 1970s, growing competition in the world markets for unskilled labour-intensive goods and rising protectionism in both the developing and developed economies brought about adjustments in Singapore's industrial strategy. Although its strategy was always geared towards industrial production and exports during the last decade, greater emphasis was given to skill and capitalintensive manufactures. The new thrusts were manifested in such policies as the

9

Industrialization inASEAll/

promotion of skills development programmes in industrial firms and the offering of higher compensation and incentive schemes for skilled workers. Prior to the 1960s, the economies of the four resource-rich ASEAN countries were all based on agriculture, resource extraction, and exports of raw materials. Their earnings from the last paid for their imports of manufactured products from the developed countries. The 1960s signalled the turn towards import-substitution strategies - the establishment of import restrictions and tariff barriers, and the encouragement of investments in the so-called advanced sectors which served the domestic markets. Exports, however, remained concentrated in primary commodities which were subjected to wide price fluctuations in the world markets. The experience with import substitution revealed several unfavourable results. Although industrial productivity increased, this was not accompanied by substantial employment creation. Moreover, domestic production of the imported goods inevitably required the costly importation of inputs. Finally, the tariff barriers imposed implicit taxes on local production, thereby making manufactured exports more expensive and less competitive in the world markets. With the next decade came gradual shifts in the industrial strategies of these countries. Initially, Malaysia, followed by Thailand, Indonesia, and the Philippines, began adopting policies to promote industrial exports. The policies ranged from the lowering of trade barriers to the radical devaluation of currencies with the purpose of expanding exports of processed goods. Foreign investments in export industries were actively encouraged. In addition, these countries began to support the establishment of capital-intensive basic industries to process local natural resources such as metals, wood, and petroleum. The motivation behind this was the perception that the local availability of the raw materials would provide a comparative advantage vis-a-vis foreign suppliers of the processed commodities, and that local processing of resources would serve as a foundation for building a more balanced and integrated manufacturing sector. Current Policies in the Industrial Sector

In 1982, there was a substantial decline in the growth rates of GDP among the ASEAN countries (Table 4). Ranging from 2.9 per cent in the Philippines to a still respectable 6.3 per cent in Singapore, they were the lowest in at least the past six

TABLE 4 Growth Rate of Real GDP (In per cent)

Year

Indonesia

Malaysia

Philippines

Singapore

Thailand

1982 1981 1980

4.5 7.6 9.9

3.9 6.9 7.8

2.9 3.8 5.0

6.3 9.9 10.3

3.9 7.6 5.8

SOURCE: ADB, Key Indicators, April 1983.

10

ASEANOurrcirw

TABLES Annual Growth Rates of Merchandise Exports and Imports (In per cent)

Indonesia

Malaysia

Philippines

Singapore

- 10.8 25.8 52.6

- 1.4 28.3 21.7

-12.7 20.7 21.2

-0.9 29.4 31.2

- 1.4 24.3 27.7

32.8 18.8 38.3

5.4 25.4 23.7

-8.0 17.5 28.4

2.1 24.6 29.3

- 13.5 23.3 220

Thailand

Exports

1982 1976-80 1971-75 Imports

1982 1976-80 1971-75

SOURCE: ADB, Key lndlcators, April 1983.

years. Several factors were cited for the downward shift in growth rates. Continuing recession and rising interest rates in the industrialized countries limited the external financial resources available to developing nations in terms of commercial credit, development assistance, and direct foreign investment. Likewise, reduced demand for manufactured goods from the developing countries as well as the resurgence of protectionism brought about decreases in levels of merchandise exports from A SEAN. In 1982, all the countries of A SEAN suffered negative growth rates in merchandise exports ranging from -0.9 per cent in Singapore to -12.7 per cent in the Philippines (Table 5). During the 1970s, the ASEAN countries, with the exception of Singapore, sought to maintain economic growth, in part through foreign borrowings. High rates of inflation made the accumulation of debt quite attractive and, in some cases, loans were available even at negative real interest rates. In the early 1980s, the burden of growing loan repayments, higher interest rates, as well as the slowdown in export trade resulted in balance-of-payments difficulties as evidenced by the declining balances in the current accounts of the ASEAN countries (Table 6). Although productivity continues to rise in the economies of ASEAN, there is a growing consensus that development should result in more than economic growth.

TABLE 6 Current Account Balance (In million US$)

Year 1982 1981 1980

Indonesia

-

n.a. 692 2850

Malaysia

Philippines

Singapore

Thailand

-3703 -2377 362

-3357 -2293 -2050

- 1279 - 1383 - 1564

- 1200 -2569 -2078

SouRCE: ADB, Key lndlcators, April1983.

11

Industrialization in A SEAN

As such, the social objectives of employment and equitable distribution of income are now of major concern. Singapore has already been able to maintain full employment conditions, and Indonesia, Malaysia, the Philippines, and Thailand are currently implementing measures to absorb their labour surpluses. In the area of technology, there is now greater pressure for the A SEAN countries to examine the nature of the technologies being introduced particularly those which are labour-saving or labour-displacing. There is mounting concern that perhaps more effort should be placed on adapting imported techniques to suit domestic factor endowments. In the 1980s, the industrialized countries continue to be the major market for the exports of A SEAN. Among the five countries, only Singapore exports less than 50 per cent of its goods to developed countries (Table 7). Moreover, the share of exports to developed countries has been increasing as a result of the growth of trade with Japan, which since 1980 has been the largest single export market for ASEAN. In the last few years, the countries of ASEAN have continued to undertake a process of structural adjustment although in varying degrees and with different priorities. In general, they have a common purpose of industrial diversification to expand manufactured exports and to bring incentives, policies, and investments in line with areas of comparative advantage. In Singapore, manufacturing policies are now oriented towards the expanded production of technology-intensive goods and selected heavy engineering goods, both of which require high human-skill inputs. Wage levels in Singapore have been gradually increased in order to induce a shift from unskilled to skilled labour-intensive activities where higher levels of productivity are expected. Some of the industries that have been identified as priority areas for investment in Singapore are chemical process industries, machinery and precision engineer-

TABLE 7 Direction of Merchandise Exports (Percentage of Total: 1979)

Industrial Market Economies

Indonesia

Malaysia

Philippines

Singapore

Thailand

76

62

81

44

58

3

2

2

34

16

49

37

5

4

Non-Market Industrial Economies Developing Countries Capital Surplus Oil Exporters

23

( < 1)

SOURCE: World Bank, World Development Report, 1981.

12

A SEAN Overview

ing, electrical machinery and electronics, and research and development (R&D) activities. The support for R&D and R&D institutions was, in fact, legislated in 1980, with the provision of tax incentives for R&D expenditures and for the purchase of R&D equipment. In 1984, a new scheme called Initiatives in New Technology (lntech) was also formulated for firms involved in automation and robotics, micro-electronics, information technology, bio-technology, optical and laser technology, engineering science, and materials science. This new scheme allowed firms in these priority areas to apply for subsidies of up to 90 per cent of manpower costs for training and development and to receive low-interest loans for the purchase of machinery and equipment. Computer literacy has also been actively promoted through various incentive schemes. The new policies appear to have made an impact on Singapore's manufacturing sector. By 1984, there were roughly 100 firms using 800 robots and manipulators for such operations as arc welding, spray painting, and automatic insertion of printed circuit boards. Over 35 companies reported the installation of systems for computer-aided design and manufacture (CAD/CAM). The thrust of Singapore in the coming years will be to further expand the application of high technology and automation in their industries in order to reach higher levels of productivity and value-added per worker. In the resource-rich ASEAN countries, the push for exports continues with adjustments in exchange rates to reduce the overvaluation of currencies, and with the establishment of export processing zones, export credit facilities, tax incentives, and duty-free importation allowances for necessary imports. Initial progress is also being made in the lowering of protection and in the reduction of incentives for enterprises producing solely for the domestic market. In the case of Thailand and the Philippines, loans have been sourced from institutions such as the World Bank for the purpose of easing and facilitating the process of structural adjustment. The most rapidly growing industries in Thailand are textiles and apparel, transport equipment and non-traditional export products. In the past five years, Thailand has gained comparative advantage especially in garments production. It has likewise enjoyed rapid growth in such non-traditional exports as integrated circuits, plastic and rubber products, and medicine. The motor vehicle industry, has also expanded phenomenally in order to supply domestic market requirements. There are currently over 20 automotive assemblers producing 22,000 cars and 66,000 commercial vehicles, in addition to annual imports of 18,000 vehicles. In Thailand, current industrial policies are designed to promote manufactured exports, labour-intensive industries and agriculture-based industries in order to solve the basic problems of unemployment, unequal distribution of wealth and income, and trade deficits. Investment promotion remains the responsibility of the Board of Investment which is empowered to offer incentives, guarantees, measures to protect industries against competition, and special exemptions from various laws. In spite of the thrust towards export-oriented enterprises, the manufacturing sector is still characterized by import-substituting industries, many of which continue to enjoy protection from cheaper imports. In the Philippines, the trends in the composition of exports reveal a marked shift away from traditional agricultural and mineral commodities. Although minerals,

Industrialization in A SEAN

13

sugar, coconut and forest products were the major foreign exchange earners, nontraditional export products such as electronic components, handicrafts, and garments exhibited significant growth in the last decade. In support of the push for exports, the Philippine Government provides a package of incentives to attract and reward firms that are successful in penetrating foreign markets. Massive investments have also been made in public utilities and infrastructure to supplement existing facilities, especially in underdeveloped regions of the country. However, the economic difficulties in the last few years have set back the industrial development programmes and have discouraged new investments. This situation has forced the government to place its priorities in sharper focus and to carefully weigh the trade-offs. As a result, inefficient and uncompetitive industries that were able to survive under protectionist policies have since been permitted to expire. Many of the import-substituting industries, for example, have been required to export and to earn their own foreign exchange to finance their importations of raw materials and supplies. Indonesia has undergone similar difficulties in recent years. Until the early 1980s, the pattern of Indonesian industrialization could be described as highly import-dependent import substitution. The large income from oil and gas sales resulted in a relatively painless period from 1973-81. However, the drop in oil prices and the disappointing performance of the manufacturing sector in 1982led to a re-examination of Indonesia's industrial thrust. In 1983, drastic measures were taken. The fixed exchange rate system was abandoned and the currency was allowed to devalue to realistic levels. Controls were lifted in the banking system resulting in higher interest rates. The manufacturing sector, especially small firms and "cottage industries" suffered during this period. Production stagnated, capital was tied up in inventories, and many small firms disappeared. This difficult situation continued throughout 1984. According to the Indonesian study, this experience revealed numerous structural weaknesses in the industrial sector which may set back plans to promote subcontracting industries, to pursue the indigenization of management in multinational firms, to require the nationalization of companies in key industries, and to adopt a progressive domestic manufacturing scheme. Malaysia has opted for a more aggressive export drive but has tempered this thrust in recognition of the vulnerability of the export sector. It has, therefore, accorded some attention to the promotion of selected import-substituting industries, mainly in consumer durables, intermediate inputs and certain capital goods industries. In the export manufacturing sector, the direction of expansion is towards more capital- and technology-intensive products. Such manufactures would include machinery, motor vehicles, petrochemicals and other resourcebased industries in which presumably the country would enjoy comparative advantage. This policy trend has been labelled "industrial deepening", in which the strategy is to establish heavy and resource-based industries which reduce the dependence on foreign suppliers, and to promote forward and backward linkages that can strengthen the foundation for sustained industrial development. Among the basic industries that are being promoted in the Malaysian industrial plan are cement plants, sponge-iron plants, a cold-rolling mill, a methanol plant,

14

A SEAN Overview

an ammonia-urea plant, a pulp and paper plant, and energy-related projects to service these industries. Attractive packages of incentives are, therefore, offered to local investors as well as foreign companies. There is also a trend towards greater "privatization" and a reduction in the activities of public enterprises. The countries of ASEAN, due to differences in their resource endowments, have taken different paths to achieve economic development, and today, have different strategies for industrialization. However, as these countries move through the process of structural adjustment, they will have to meet some common challenges. Firstly, each country will need to devise clear, consistent, and complementary policies which will address its unique circumstances and environment. Secondly, each will need access to the resources and funds that arc required for achieving consistency between industrial structure and comparative advantage. Thirdly, each will have to acquire, adapt, and internalize new skills and capacities. Finally, each country will have to manage the tensions and shocks which inevitably arise from efforts to scale down the inefficient, uncompetitive sectors of the economy and to shift resources to more dynamic industries.

Economic Relations Between ASEAN and Japan Today, Japan remains the single largest export market for ASEAN as well as the single largest source of its imports. In 1982, Japan absorbed 52 per cent of Indonesia's exports, 20 per cent of Malaysia's, 23 per cent of the Philippines', 11 per cent of Singapore's, and 14 per cent of Thailand's (Table 8). Japan has also been a major source of development assistance, commercial lending, industrial technology, and foreign direct investment for A SEAN. Between 1960 and 1976, over US$3.2 billion were invested in ASEAN by Japanese private businesses (Table 9). The movement of capital was so rapid that many observers described it as an' 'economic invasion''. During this period, antiJapanese sentiments grew among the populations of the host countries; in 1972, there was even a threat in Thailand to boycott Japanese goods. In spite of these concerns, Japan's direct foreign investments in A SEAN have continued to grow. From 1981 to 1982, the inflow of direct foreign investment from] apan to ASEAN was over US$3.6 billion, representing over 65 per cent of japan's investments in

TABLE 8 Japan's Share in ASEAN Imports/Exports (Percentage of Total Trade: 1982)

Indonesia

Malaysia

Philippines

Singapore

Thailand

Japan's Share in Total Imports

28

25

20

18

24

Japan's Share in Total Exports

52

20

23

11

14

SOURCE: ADB, Key Indicators (Supplement), October 1983.

15

Industrialization inASEAN

TABLE 9 Japan's Investments in ASEAN (In million US$)

1970

1972

1974

1976

Cumulative Total (1960-76)

44.6 12.7 28.8 n.a. 13.8

124.8 21.1 12.9 n.a. 25.1

231.3 68.7 71.6 59.1 40.6

784.8 45.2 56.3 55.6 7.7

2,113.5 303.1 323.4 313.0 190.5

Country Indonesia Malaysia Philippines Singapore Thailand

SOURCE: Ministry of Foreign Affairs, Japan, Nanboku Mondai to Keizai Enjo [The North-South Problem and Economic Assistance], 1978; as cited in Saburo Okita, The Developing Economies andjapan: Lessons in Growth (Tokyo: University of Tokyo Press, 1980).

TABLE 10 Japan's Foreign Investment by Country/Region (In million US$)

1982

Indonesia Malaysia Philippines Singapore Thailand Asia/Pacific World-wide

1981

Amount

Share(%)

Amount

Share(%)

410 83 34 180 94 1,805 7,700

5.3 1.1 0.4 2.3 1.2 23.4 100.0

2,435 31 72 270 31 3,762 8,906

27.3 0.3 0.8 3.0 0.3 42.2 100.0

SOURCES: World Bank, World Development Report, 1983; Nomura Quarterly Review, April-June 1983; International Monetary Fund (IMF), International Financial Statistics, Annual Yearbook, 1982, August 1983; Ministry of Finance, Japan, Monthly Finance Review, September 1983; and The Dai-chi Mutual Life Insurance Company, Nippon: A Chartered Survey ofJapan, 1982-83.

the Asia/Pacific region and 22 per cent of Japan's investments worldwide during this period (Table 10). Among the ASEAN countries, Indonesia has been the most popular location for Japanese direct investment. In 1981, the aggregate amount of Japanese equity in Indonesia totalled US$2.4 billion, representing over one quarter of Japan's new investments abroad that year. Indonesia remains the second largest recipient country for Japanese direct investments, second only to the United States. The

16

A SEAN Overview

major areas ofJapanese involvement in Indonesia arc in textiles, iron and nonferrous metals, chemicals, and transport equipment. Japan and the U nitcd States are the two most important sources of capital for Thailand. Between 1970 and 1982, Japan accounted for 27 per cent of the net inflow of investments. As of 1983, Japan was the largest source of foreign capital for manufacturing firms that were granted incentives by the Board oflnvestments, comprising 24 per cent of the total foreign registered capital in Thai joint ventures. Japanese subsidiaries or joint ventures in Thailand are among the major competitors in nearly every industrial sector, and in the transport industry, J apanesc firms control nearly three-quarters of the total investment in that sector, giving them a virtual oligopoly position. Japan is the second largest source of foreign capital in Malaysia, accounting for 17.3 per cent of total foreign capital inflows. About three-quarters of the Japanese investments are in the form of capital stock while the remainder is in the form of loans. In Malaysia, the Japanese have invested primarily in export-oriented textiles and textile products, electrical and electronics products, food and wood products. Related studies report that not only do Japanese firms in Malaysia export a smaller proportion of their output than their American counterparts, but they also export less to Japan than the American firms export to the U nitcd States. In recent years, Singapore has become one of the most popular locations for .Japanese foreign investments; from a figure of US$313 million in 1976, J apancse cumulative investments in Singapore exceeded the US$1. 5 billion mark in 1982. The primary attraction of Singapore for Japanese firms has been its political stability. Other factors that have encouraged.} apanese investors are, in order of importance, adequate infrastructure, low labour cost, and investment incentives. The Philippines, as a result of the recent political and economic crises, has lost much of its attractiveness for Japanese investors. Doubts have been raised regarding the political stability of the country, and the depressed economic conditions have severely reduced domestic market demand. Most of the Japanese investments in the country have not grown significantly since 1980 and the Philippines' share in Japan's direct investments in ASEAN has been decreasing. Japan's involvement in certain industry sectors remains considerable, however, particularly in the transport machinery, electrical appliance, and mining industries. Another feature of the relationship between A SEAN and.J a pan is the balance of trade. In general, the balance of trade with.J apan has been favourable for ASEAN as a whole with ASEAN exports regularly exceeding imports over the past ten years. However, serious trade imbalances may be observed in the trade of individual countries with Japan. Indonesia, for example, which directs over half of its exports to Japan, enjoys a positive balance of trade which grew to almost US$6 billion in 1982. On the other hand, the other countries of ASEAN in recent years have experienced negative trade balances with Japan, with imports exceeding exports by US$5 billion. Singapore alone accounted for US$2.8 billion of the negative trade balance in 1982 (Table 11). In addition, Japan's importations from A SEAN consist largely of primary commodities or raw materials- oil, minerals, and wood. There has been much dissatisfaction among the ASEAN countries about protectionist measures which have

lndustrialz'zation in ASE./1."-i

17 TABLE 11 ASEAN Trade with japan (In million US$) 1982

Total ASEAN Indonesia Malaysia Philippines Singapore Thailand

1975

1970

Exports

Imports

Exports

Imports

Exports

Imports

17,129 10,297 2,449 1,145 2,262 976

16,320 4,428 3,101 1,645 5,044 2,102

5,611 3,132 546 858 466 609

5,599 1,477 707 1,006 1,372 1,035

1,478 452 309 418 118 181

1,871 295 245 369 476 486

SOURCE: ADB, Key lndz'cators, April and October 1983.

made the entry of ASEAN agricultural products into the Japanese market difficult. Although there has been a lowering ofJ a pan's average tariff rates in recent years, the dominant view is that significant non-tariff barriers remain. The success of ASEAN efforts at industrial restructuring depends to a great extent on the stability of its export earnings. Any protectionist movement in Japanese trade with ASEAN, therefore, could easily derail the plans of the ASEAN countries to make necessary structural adjustments. These risks cannot be taken lightly in view of the fact that] a pan holds such a large share of A SEAN trade, while ASEAN accounts for only about 10 per cent of Japan's trade with the world. A SEAN is far more dependent on Japan than Japan is on A SEAN. This asymmetrical relationship is even more pronounced when the pattern of trade for specific countries and products is examined. Even a slight shift in Japanese trade policies could have a significant impact on the ASEAN economies. Japan, however, is likewise undergoing a process of industrial restructuring in the light of its changing comparative advantage and the trends in the international economic environment. It is gaining competitiveness in industries that are high technology intensive and R & D intensive. Correspondingly, it is losing comparative advantage in some of the light consumer-goods industries and labour-intensive industries. Thi-s process of adjustment in Japan's industrial sector will naturally uncover new opportunities for ASEAN. Japan's withdrawal from competition in certain industries will open up new markets for the emerging industries of ASEAN, markets not only inJapan, but also abroad which the japanese have traditionally dominated. Japan, moreover, has a clear, though less explicit, interest in the economic development of ASEAN. Today, ASEAN consists of over 270 million people, a huge market by any comparison. Increase in income, employment, purchasing power, and consumption in ASEAN would definitely translate into the expansion of markets for the intermediate goods and consumer products of Japan. In addition, as the ASEAN nations expand their manufacturing sectors through the development of resource-based industries and the elaboration of forward and backward linkages, there will naturally be greater scope for Japanese exports of capital goods and high technology products to A SEAN.

2

Technology Transfer, Adaptation and Diffusion in ASEAN: Problems and Issues

Multinational firms, because of their dominance in the world economy and their capacity for technology generation are seen as potential contributors to the industrial development of the ASEAN countries. They are considered a major source of investment funds and of production technology. Although it is generally recognized that the involvement of multinational firms in ASEAN has resulted in employment creation and in the upgrading of technological capacities, there are several issues that have been raised about the net impact of the capital infusions of the multinational firms and their effectiveness as technology transfer agents. Multinational Firms as Agents of Development

Infusions of capital from multinational firms can be evaluated in terms of direct and indirect income and employment generation effects. Employment creation as a result of capital investments is certainly a positive factor. However, this contribution must be weighed against the possibility of reducing jobs in traditional industries that are displaced by more efficient manufacturing processes. Jobs may also be lost when investments are made in labour-saving equipment. Indirect effects may be derived through the development of forward and backward linkages with other industries and through the generation of additional income and, therefore, effective demand, both of which act as stimuli for increased production and consequently greater employment within the economy. These indirect effects, however, are difficult to measure precisely. The potential income expansion benefits may be lost if income either drains from the country through increased consumption of imports, especially luxury commodities, or through the repatriation of funds in the form of dividends, interest, royalties, management fees, and hidden transfers through the overpricing of goods and services provided by the multinational firm to its local affiliate. Other potential benefits that can be derived from multinational firms are related to technology transfer. It is, however, in the area of technology transfer that much of the controversy over multinational firms is centred, and that the avenues for deliberate policy are less clear. Multinational firms, because of their

20

ASEAN Overview

leadership in technology generation, are often considered to be the most practical source of technology. The control by multinational firms over technology is such that a breakthrough in process technology (which lowers unit costs of production or raises product quality) renders other existing processes virtually obsolete or uncompetitive by the standards of the world market. Consequently, competing firms, including other multinationals, are forced into matching these shifts in technology if only to survive. Firms in developing countries, especially those in highly competitive industries, therefore, often find themselves caught in a relationship of technological dependence. They are constantly under pressure to apply the technologies in use in developed countries in order to keep up with the pace of technological advances. This often implies the establishment in developing countries of similar if not identical plant and equipment used by multinationals in developed countries. At times, host country governments have taken ambiguous, sometimes contradictory positions in their dealings with multinational firms. This is due, in part, to the failure to distinguish between employment and technological development objectives and to establish their respective priorities. On the one hand, objections are raised by governments regarding the inappropriateness (or excessive capital-intensity) of the technologies being introduced by multinational firms. On the other hand, multinationals are accused of transferring obsolete, less sophisticated technology. The drive for rapid industrialization in many ASEAN countries turns them towards favouring the state-of-the-art techniques in manufacturing (which are usually capital-intensive or labour-saving), whilst their employment generation objectives cautions them against applying labourdisplacing techniques. These competing perspectives on technology choice often lead host-country governments to formulate policies and rules which may be inconsistent. There are, in addition, several questions that need to be addressed in formulating industrial policies related to technology. These are: to what extent does technology transfer from multinational firms contribute to local scientific and technical capacity? In other words, do such patterns of technology transfer build local capacities for adaptation, generation and diffusion of technology? To what extent does technology transfer through multinational firms develop local ability to understand and control the technology? If problems exist in this area, what are they and how can they be solved? These are questions which many developing countries are raising today. Issues of Concern

The individual country reports reiterate many of the issues that have been discussed. However, each gave emphasis to particular problems. The following are the major concerns that were reflected in the country papers: a) the limited transfer of technology to local partners or staff; b) the restrictions found in technology transfer agreements which were imposed by technology suppliers; c) the stated and hidden costs of technology agreements; d) the inappropriateness of the technologies introduced; and e) the scarcity of skilled local labour.

Technology Transfer, Adaptation and Diffusion in A SEAN: Problems and Issues

21

Limited Transfer of Technology The Thai, Indonesian and Malaysian papers argued that the actual transfer of technology from transnational firms has been minimal or insignificant. The Thai report cited the experience of Thai-Japanese joint ventures in which the local partners failed to receive much of the technical know-how and the production technology was known only to the Japanese expatriates. The Malaysian paper maintains that the choice of techniques as well as improvements in process and product design are determined entirely by the technology suppliers with limited participation from the Malaysian staff. Consequently, numerous opportunities for training, skills development and experience generation have been wasted. The report, however, attributes the limited technology transfer in part to the lack of technical, managerial and organizational capacities, especially during the early years of the industrialization programme. The Indonesian report admits that the country remains almost completely dependent on foreign suppliers of technology in spite of having actively procured technology in the world market for the past eighteen years. Restrictions Imposed on Technology Transfer The weak bargaining position of the buyer and the international interest of technology suppliers have resulted in numerous inhibiting restrictions on the transfer of technology. This view was reported in the country papers of Indonesia, Malaysia, the Philippines, and Thailand. The Malaysian report traces the vicious circle within which many local companies are caught: it begins with a market for technology in which a small number of suppliers face a large number of buyers, with whom costs, terms and conditions are determined individually on the basis of crude bargaining power rather than competition. Moreover, the buyers are usually uninformed and lack the technical and legal expertise to evaluate alternative sources of technology and to negotiate effectively with suppliers. As a result, contracts are concluded to the advantage of the supplier and the buyers accept restrictions which have the effect of increasing their dependence on the technology suppliers. Similar experiences have been documented in Indonesia and Thailand where, for example, local firms are required to purchase raw materials, intermediate products, machinery and even technical assistance from the owner of the technology. Other restrictions have also prevented the buyers from competing against the owner of the technology in the export markets. Such restrictions, which have also been of concern to the Philippine Government, work to support an import-substitution strategy for industrial development, but very effectively hamper any drive towards outward-looking, export-oriented industrialization. Costs of Technology Transfer Although technology transfer is usually identified with the inflow of foreign capital, there have been questions raised about the prices paid for technology. Again, the disadvantaged position of the buyer and his ignorance about the costs of alternative sources have resulted in unreasonably high profits for the owners of technology. The Malaysian study reports that the evaluation of an offer to supply technology

22

A SEAN Overview

grows in complexity when the technology is offered in packaged form, with technical assistance and management provided. The offer may contain many hidden costs. The Thai report provides information to support the contention that the outflows of funds (foreign remittances and expenses for imports) have exceeded fund inflows (foreign capital infusions and export receipts) among Thai joint ventures that have been paying copyright fees and royalties. Indonesian planners have also been concerned about the unreasonably high prices for technology that Indonesian firms are being charged. Inappropriate Technologies The Malaysian, Thai and Philippine papers suggest that the technologies that foreign firms have introduced are generally inappropriate or excessively capitalintensive, given the labour surplus conditions in these countries. Moreover, these technologies are seldom adapted to make better use of local factor endowments. The Malaysian study attributes this pattern to the familiarity of the foreign firms with capital-intensive technologies, their excessive concern for global technological standardization, and their near-monopoly positions in host country markets or even in the world market. The Thai paper cites cases on the other extreme, where the foreign firm introduces second-hand, antiquated, semi-obsolete equipment and passes it off as ''labour-intensive, appropriate technology''. These are usually machines that had become less efficient and had to be replaced in the originating country. The unfortunate impact on the host country or on the technology buyer is usually high maintenance costs which offset the benefits from increased employment and cheaper equipment costs. The Scarcity of Skilled Labour This is an issue of concern in all five countries. In Malaysia, the shortage of skilled labour is regarded as the major bottleneck to the effective transfer and absorption of technology. Two types of labour have been identified as most essential in the selection and adaptation of technology to suit conditions in Malaysia. These are R&D personnel and skilled industrial labour. In Indonesia, the various skills training programmes are unable to cope with the needs of the extremely large labour pool and the requirements of industrial firms. Moreover, the educational system has thus far failed to keep up with the demands for more science-based technically-grounded and relevant educational programmes. In the Philippines, the dearth of skilled manpower has likewise been recognized as a major constraint to technology development. The inadequacies are underscored when Philippine statistics are compared with similar indicators for other nations. In 1981, only 20 per cent of Philippine college enrolment was in engineering and technology courses, compared to Japan's 64 per cent. The total Philippine work-force engaged in R&D activities is estimated at 5, 000 persons or less than . 01 per cent of the total population. Japan's R&D work-force accounts for 0.49 per cent of its population. Although the services of qualified R&D staff are available in many of the science departments of Philippine universities, there appears to be

Technology Transfer, Adaptation and Diffusion in A SEAN: Problems and Issues

23

very few formal linkages between such institutions and the firms in the manufacturing industry. One explanation for this is the lack of confidence on the part of most local firms in the technical competence of such institutions. Another reason could be the complete reliance of most local firms on their licensers or parent companies for technical support. The Thai study stressed that the potential for technological absorption and control is related to the availability of qualified and experienced technical personnel. Although such individuals were to be found in most Thai research institutions and universities, the report lamented that such institutions have been unable to adequately supply the requirements of private industry. In Singapore, the concern was centred on the need to retrain the existing labour force to prepare them for the requirements of new, more advanced production processes. To meet the needs of multinational firms in high technology industries, Singaporeans require training in specific skills - in the operation of highly automated equipment, in handling computer-based manufacturing systems, and in conducting market-oriented R&D activities.

3

Science and Technology Policies in

ASEAN

The transfer of technology has been a critical element in the industrialization plans of the A SEAN countries. Access to production technology has always been a necessary condition for the expamion of the manufacturing sector and ultimately the growth ofindustrial employment. Moreover, foreign firms have been regarded as the most ready and expedient source of industrial technology. Under these conditions, foreign direct investment was actively promoted in ASEAN as a means of gaining access to new technologies. The import-substitution strategies of the 1950s encouraged transnational firms to establish production facilities within the trade barriers of the host countries. However, these policies promoted the dependence of domestic industries on foreign suppliers of technology and raw materials. Although foreign technologies were introduced, the import-substituting industries were insulated from competition from cheaper imports and, therefore, were under less pressure to increase production efficiency, reduce costs and utilize the more abundant factors of production. The availability of preferential credit for capital goods imports and the ready access to government allocation of foreign exchange tended to undervalue machinery and equipment and to encourage use of imported supplies and components. These policies emphasized the transfer of "hardware" instead of the "software" elements of technology. Moreover, the comfort of the protectionist measures and the limited domestic market reduced the inclination, respectively, to adapt the imported techniques to suit local conditions and to pursue economies of scale. The shifts in the industrialization policies towards more export-oriented manufactures and the desire to reduce the dependence on foreign technology suppliers have caused the ASEAN nations to review their respective science and technology development policies and to institute measures to build local capacities to adapt, innovate, and absorb technology. The primary impetus for the enhancement of local technology and skills differ from country to country and so do their policies, measures, and institutions. The sections below discuss the activities and experiences of each of the ASEAN countries with regard to their efforts to promote science and technology development.

26

A SEAN Overview

The Role of Technology and Skills Development Indonesia recognizes that, for a long time to come, it will have to rely on external suppliers of essential inputs - capital, managerial skills, and technology. At present, policy-makers recognize that the technological base of the industrial sector is extremely weak. The majority of the production units are merely "cottage industries'', which are domestic-market oriented, family-managed, staffed by unskilled workers, and without access to technical assistance. In addition, the system of formal education in Indonesia has not been able to generate the technical manpower required by the growth envisioned in the industrial plans. The general view is that much of the work must start at the grass-roots- with comprehensive planning and reorientation of the educational system from primary all the way to university levels. In Malaysia, the indigenization of foreign firms has been a major objective of national policy. This thrust has come to imply the simultaneous development of new technical and managerial skills and the upgrading of existing production technology. National planners, however, have recognized that complete technological self-reliance is not attainable and, therefore, that in the near future, Malaysia will need to continue to import its technology from abroad. As such, the development of science and technology in Malaysia is in the direction of creating local skills for screening, selecting, adapting and disseminating technology already developed elsewhere. In Thailand, the upgrading of science and technology has involved the promotion of direct foreign investment and the encouragement of applied research activities by local universities and research institutes. Foreign direct investment is seen by policy-makers as the means by which technology can be brought into the country, while the local research institutes and universities provide the skilled manpower base to absorb the new information. The general perception, however, is that the strategy of building capacities in local institutions has not met with much success, in part because of the absence of effective linkages between the public and private sectors, as well as the lack of explicit measures and schemes to promote technological literacy. The five-year Philippine Development Plan ( 1983-87) specifically identifies the science and technology sector as the catalyst for raising national productivity and the international competitiveness of its products. As in Thailand, emphasis has been given to applied and developmental research, particularly in the areas of agriculture, natural resources, energy, health, and nutrition. In industry, the science and technology (S&T) plan envisions the expansion of downstream R&D activities such as product tests and standards setting. Support will also be provided for basic research and technical training. Singapore's industrial restructuring directions are founded on the promotion of high technology, science-based industries. It hopes to attract increasing numbers of small- to medium-scale "sunrise" enterprises to locate their R&D facilities in Singapore. In the last decade, Singapore has succeeded in fashioning itself into a hospitable site for the manufacturing plants of large multinational firms which are often the technological leaders in their respective fields. Many of these firms

Science and Technology Policies in A SEAN

27

invested in Singapore to take advantage of its location, its cost-efficient labour and its political stability rather than its labour skills or its technological capability. These were firms who normally conduct their R&D activities at their homecountry headquarters. Singapore is aware that its economic future is tied to its continued attractiveness as a base for multinational operations. Its science and technology development plan is, therefore, geared towards sustaining its competitive edge through the coming era of micro-electronics technology, automation, and computerized manufacturing systems. Technology and skills development therefore enjoys the highest priority in Singapore's industrial development plan. This plan incorporates, firstly, a concentrated and intensive programme of computer education and awareness at every level of society; secondly, the development of educational and research institutions which can support the R&D activities associated with the manufacture of high technology products; and thirdly, the retraining of the industrial labour force in order to maintain its flexibility in an environment of very rapid technical change. Each country, therefore, gives its own rationale for promoting technology and skills development and, consequently, its strategies and concerns vary from those of the other countries. There are, of course, common elements, but there seems to be a distinctive emphasis in each country's science and technology policies. In Malaysia, indigenization and the development of skills in screening and adapting technology appear to be of primary importance. In Thailand, the focus is on enhancing local capacity to absorb imported technology by supporting specific institutions. Indonesia is concentrating on the expansion and upgrading of its technical education and skills development programmes. In the Philippines, activities in technology development are geared to increasing productivity and lowering costs to enhance the competitiveness of local manufactures. In Singapore, technology and skills upgrading is oriented towards meeting the requirements of multinational firms for their overseas production sites. The differences are subtle, but, as will be discussed below, the dominant objectives of each country shape its policy directions. Policy Frameworks The science and technology policies in ASEAN are in the process of evolution and refinement. In general, the policies are moving in the direction of more direct government support for technology and skills development. In most countries, the major role of the government has been to regulate and monitor the technology agTeements between local and foreign firms. There is, however, a perceptible shift towards positive contributions from government particularly in the areas of research and development and technical training. In Malaysia, for example, the Ministry of Trade and Industry has been given the responsibility of ensuring an orderly inflow of technology to benefit local firms. The major policy initiative was to create in 1976 the Technology Transfer Unit to screen all agreements signed between Malaysian and foreign companies. At the start, the objective of the unit was merely to prevent restrictions on the transfer of

28

ASEAN Overview

technology which might be prejudicial to the national interest and to make sure that a fair price was paid for the technology provided. In trying to accomplish this objective, the unit has since encouraged local firms to evaluate alternative sources of supply and to examine whether the transfer costs are competitive internationally. These guidelines have encouraged Malaysian firms to expand their information base on available technologies and to attach greater importance to the process of technology choice. There is now the realization that the selection and effective adaptation of technology cannot proceed without a technically skilled manpower base. The latest Industrial Master Plan, therefore, envisions the preparation of a comprehensive manpower development programme, where the technological needs in each industrial sector are detailed and elaborated. This plan will, likewise, form the basis for other policies that will support science and technology development in Malaysia. In recognition of the need to upgrade the education and skills base of the labour force, the Government of Indonesia has incorporated two major thrusts in its national plan. Firstly, the education sector has been granted a larger share of the total development budget - an increase to 14.4 per cent from less than a 10 per cent share in the past ten years. Secondly, the Department of Manpower has programmed a rapid expansion of its various skills training activities. As of 1984, about 80,000 persons had undergone such training programmes; by the end of this decade, Indonesia hopes to accommodate over 280,000 persons in these skills upgrading programmes. The Thai Government also sees itself as playing a key role in science and technology development. Its efforts are centred on the transfer, adaptation and development of technology related to agricultural production, raw materials processing, and energy conservation. Performance targets are set at a 10 per cent annual increase in scientific and technological personnel in the above sectors and an increase in total national R&D expenditures to at least 0.5 per cent of the gross national product (GNP). It is also in the process of developing a comprehensive S&T plan and its broad strategy for accomplishing the stated targets relies on the following key measures: a) the establishment of institutions to screen and adapt imported technology to local conditions; b) the strengthening of local research and dev~lopment capabilities; c) the emphasis on manpower development; d) the establishment of a scientific and technological data and information centre; e) the provision of incentives for using science and technology to raise production efficiency; f) the promotion of science and technology awareness and literacy among the general public; and g) the expansion of scientific and technological co-operation with foreign countries. Several key institutions are being considered for direct involvement in the implementation of the plan. A Technology Transfer Centre is being established to collect, evaluate, and disseminate foreign technological information for local business and industry. The Industrial Finance Corporation of Thailand is being tapped to provide low interest loans to encourage the use, adaptation, or improvement of certain specified technologies. The adaptation of foreign technology and the solution of technical problems is seen as the responsibility of the Thai Institute of Scientific and Technological Research. In addition, a number of specialized

Science and Technology Policies in A SEAN

29

research centres are being considered for applied work in such areas as energy conservation, minerals, and metallurgical engineering. The Philippine Science and Technology Plan aims to improve the utilization of available technologies, to develop sufficient S&T manpower and facilities and to enhance functional linkages between the science and business communities. As in Malaysia, the emphasis has shifted from the regulation of technology transfer to the strengthening of the scientific and technological manpower base. Since 1978, the Technology Transfer Board, an agency within the Ministry of Trade and Industry, has monitored all technology transfer agreements in order to prevent the inclusion of restrictive clauses. The Board prohibits payments for patents and other property rights beyond the term of the agreement as well as limitations on the following: 1) the use of the technology supplied under the agreement after the expiry of the agreement; 2) continued access to related improvements of the technology during the period of the agreement; 3) the acquisition of technology from other suppliers; 4) the recipient's right to question the validity of the patents; 5) sources of raw materials, components and equipment; 6) scope and volume of production; 7) sale and exportation of products manufactured under the agreement; and 8) research and development activities intended to improve the technology. Moreover, all agreements are required to have fixed terms not exceeding five years and may not be renewed without the Board's approval. One reason for the current de-emphasis on the regulation of technology transfer contracts is that the above policies have been difficult to enforce. Exceptions arc often granted in order to attract foreign investments. An examination of the terms and conditions of the registered agreements between 1978 and 1981 revealed that 86 per cent of the contracts contained restrictive clauses prohibited by the Board's regulations. Limitations on the export destinations for licensed products as well as on the utilization of the technology after expiry were found to be the most common restrictions. At present, a case-to-case approach is being taken with regard to the Board's approvals of technology contracts. In general, the reformulation of contracts has been more effective in situations where the domestic firms support the demands for a renegotiation of terms. The policies of the four resource-rich ASEAN countries, therefore, bear similarities. They are each striving to establish a firm foundation for absorbing and adapting imported technology and each has given a high priority to the technical training of its labour force. At the same time, there is the concern that the unregulated entry of foreign technology may not be in the national interest especially in cases where the techniques that arc offered arc excessively capital-intensive or where limitations imposed by the technology suppliers run counter to industrial development goals. However, it is usually dif1icult for most host-country governments to discern whether a technology is inappropriate unless it has had prior experience with the technology and is well informed about comparable alternative techniques. The case of Singapore is perhaps unique in the ASEAN region. In contrast to the other four nations, Singapore has an entirely free market approach to the acquisition of technology from abroad. There are no restrictions or regulations on the use or transfer of technology. There is not even the need to disclose the terms,

30

AS~'AN Overview

conditions, or costs of the technology agreements. The philosophy of the government is that any curbs on the freedom of firms in transferring technology can only reduce their (the firms') competitiveness and would likewise reduce the attractiveness of Singapore as an investment site. Although the Singapore Government considers the indigenization of managerial and professional personnel as desirable, it is not a statutory requirement. Instead, its strategy is to improve the quality oflocal manpower such that the indigenization of the management of the firm would be in the economic interest of the foreign company. Moreover, there is the recognition that transnational firms provide much of Singapore's life-blood. These firms make their decisions on products, technologies and overseas investments in response to global market forces and their own international corporate strategies. As such, instead of requiring these firms to fit themselves within some master development plan, the approach of the government has been to shape Singapore so that it can best fit into the global operations of multinational firms. The objective, therefore, of manpower development and R&D promotion is to make Singapore a more attractive place for multinationals to locate their technology-intensive and brain-using activities. In addition, Singapore's promotional efforts are aimed at attracting smaller high-technology companies - firms that may be more willing to locate R&D activities in Singapore because of the attraction of economic incentives. The argument for focusing on smaller firms is that the larger multinationals tend to centralize their R&D operations, particularly in areas where their major markets are. Singapore, however, lacks a large domestic market which would be critical to market-oriented R&D activities. The larger firms are also conscious of the security risks inherent in decentralized R&D. Smaller firms, however, may be more willing to locate part of their R&D facilities aboard because their Singapore operations are likely to be a more substantial part of their total operations compared to the large multinationals. From the general design of Singapore's S&T policies, it is apparent that an indigenous technology generating capacity is not an immediate or even a medinmterm objective for Singapore. Instead, it seeks to become an important regional centre for the production of high technology, science-based products. The clarity and specificity of the objectives of industrial development in Singapore have resulted in plans and policies which are consistent, complementary and suf1iciently elaborated. The policies of the four other ASEAN countries are more general and open to broad interpretations. As a result, their priorities are less clearly defined. It is perhaps also the fact that these countries are richer in natural resources and therefore have more alternatives and opportunities that makes it more difficult for them to narrow down their directions in industrial development. The range of choices has resulted in a hesitancy to commit to a certain path and to focus on specific targets. The next few years, however, will bring clearer and more detailed plans for science and technology development in ASEAN. This will come about as a result of deeper experience in operationalizing some of the stated policies, and with the availability of information on the manpower and technology development requirements of specific industries.

Science and Technology PolicieJ in A SEAN

31

Incentive Schemes for S&T Development The ASEAN countries are also in the process of devising and evaluating various schemes to encourage private-sector participation in and contribution to S&T development. In Thailand, for example, the national development plan argues for the provision of special incentives for scientists and technologists in order to attract and retain skilled manpower. A revolving fund is being established to allow firms to borrow at subsidized rates for projects that involve technology generation and adaptation. Scheme~ are also being proposed to provide financial and related assistance to professional groups, societies and academic institutions which will permit such organizations to, in turn, extend technical support to firms. These activities are all part of the government's effort to offer incentives to both private-sector and state enterprises in order to encourage them to utilize local S&T resources. In the Philippines, economic incentives for S&T development is, at present, concentrated in credit schemes which also provide low interest loans to firms that invest in projects with significant technology transfer, adaptation, and dissemination aspects. One example is the Agro-lndustrial Technology Transfer Program (AITTP) which is administered by the Technology Resource Center. The AITTP makes use of soft loans provided by the Japanese Government and relends them to small and medium-sized firms. In order to qualify for these concessionalloans, the firms are required to make use of innovative, labour-intensive technologies for the processing of agricultural products. Among the ASEAN countries, Singapore has had the most experience in the use of fiscal incentives to support its science and technology plans. It also has the most elaborate set of incentive schemes including tax credits, subsidized loans, and various grant programmes to encourage skills and manpower development, R&D, consultancy services, new equipment purchase, and other forms of technology transfer. The major policy instrument in Singapore's manpower development programme has been the Skills Development Fund (SDF). The rationale behind the SDF is that employers are not likely to undertake elaborate training schemes under Singaporean labour market conditions. Such programmes are usually costly, their benefits may not be immediate, and there are the risks oflosing trained workers to competitors in a tight, mobile labour market. The government therefore is required to intervene in order to provide education and training activities with the support they deserve. The SDF collects a levy from all employers based on the payroll of workers earning less than S$750; this levy is then used to support training for all levels of manpower or to pay for the acquisition of improved technology and equipment. Under the SDF scheme, firms can apply for grants to cover between 30 and 90 per cent of training costs in eight priority areas: technical skills, computer-related skills, management and supervisory skills, craft skills, specialist professional skills/further education programmes, product design and R&D skills, productivity improvement programmes, and the retraining of existing, older workers. The SDF also provides grants to cover between 30 and 90 per cent of the cost of engaging short-term consultants in operations, technical know-how, management, and manpower training. In addition, the SDF has launched related schemes to support

32

A SEAN Overview

the emerging micro-electronics, information-based, high technology industries. A grant programme to support the "training of trainers'' has also been recently established. Another major incentive scheme was established in 1981 for R&D activities. The programme, called the Research and Development Assistance Scheme (RDAS), was provided with S$50 million to support specific R&D projects undertaken by public institutions or by private firms in co-operation with public sector organizations. Collaborative activities between multinational firms and the Singapore Government have also been strongly supported. The joint Government Training Scheme OITS) which was established in 1972 is one example. TheJITS was conceived initially as a programme to train workers during recessionary periods, so that they could use their time productively and the industries would be in a good position when the economy regains its health. At the start, costs were shared with the government bearing all capital costs and 50 per cent of recurring expenses. Since 197 4, the government has assumed all costs while the participating multinationals contribute the software. The above discussion provides a comparative profile of the incentive schemes for technology and skills enhancement that are being planned or implemented in A SEAN. Singapore has displayed the widest range of government-supported programmes to meet the varied needs and requirements of private-sector firms, while the other countries are either in the process of applying new approaches or have limited their incentives to credit subsidies.

4

The Experience from Selected ASEAN Industries

From April 1984 to February 1985, research was conducted in each of the five (excluding Brunei) ASEAN countries. The studies focused on two areas: the transfer of technology from other countries, in particular fromJ a pan, and the technological capabilities and absorptive capacities of ASEAN firms. The research studies attempted to identify barriers to, or bottle-necks in, technology transfer and to formulate measures that the public and private sectors in ASEAN and in Japan can undertake to facilitate the process of technology transfer and skills enhancement. In the research, technology was defined broadly to include such aspects as product design, production processes, management systems, and even marketing strategies. A transfer of technology was considered to have occurred when the new technology was employed efficiently; when the local work-force was able to use the technology with confidence; when the know-how was successfully disseminated to other local enterprises or plants; or when the local work-force was able to adapt and further improve the imported technology. Consequently, the country research studies aimed at generating information on the experiences of various firms in utilizing foreign technology and on the constraints that were encountered in attempting to transfer or absorb the imported methods.

Background on the Surveyed Industries The studies chose to focus on two key industries in ASEAN - machinery and electronics. Following the International Standard Industrial Classification (ISIC), the researchers limited the machinery industry to firms producing non-electrical machinery and transport equipment. The electronics industry was limited to firms producing electrical and electronic goods. Both industries were chosen because of their significance in the industrial development strategies of the ASEAN nations. The two industries account for a large segment of industrial investment and employment in ASEAN. The two industries are also heavily dependent on technology from the Western nations and from japan in particular. Finally, it has been said that these two industries contain those sectors in which the ASEAN nations are gaining comparative advantage while Japan is losing its comparative advantage, and in which perhaps the greatest opportunities for economic co-operation and technical exchange exist between A SEAN and Japan.

34

ASLilA' Overview

In Malaysia, the electronics industry has been growing at an impressive annual rate of 11 per cent during the period 1971-80. Even during the recessionary period from 1981-83, the industry expanded by 10.7 per cent each year. In 1981, the electronics industry contributed 7. 9 per cent of the country's gross domestic product, 11.1 per cent of total exports, and 4 7 per cent of total manufacturing exports. In that year, it was also the largest employer in the manufacturing industry, with a labour force of81 ,000 people or 15.2 per cent of total employment in manufacturing. In the Philippines, the electrical machinery industry accounted for 5.3 per cent of the gross value-added in manufacturing during the period 1978-83. The industry grew by an average annual rate of 16.1 per cent, almost five times more than the growth rate of total manufacturing for the same six-year period. The industry, however, has suffered serious setbacks in the economic crisis which surfaced in 1983. In Singapore, the electronics and electrical appliance industries are highgrowth sectors of the economy. In terms of output and value-added, the average annual growth rates of electrical appliances between 1971 and 1982 are 21.0 and 20.8 per cent respectively. For electronics, the figures are 30.0 and 23.7 per cent respectively. These sectors accounted in 1982 for 24.2 per cent of total manufacturing employment, 15.3 per cent of total manufacturing output, and 22.2 per cent of total manufactured exports. The electrical equipment industry has likewise been a dynamic sector in the Indonesian economy. Between 1972 and 1980, the sector posted a rapidly increasing share of the gross value-added oflarge- and medium-scale firms- from a 1.4 per cent share in 1972 to a 5.6 per cent share in 1980. In Thailand, the electrical machinery industry has experienced an average annual growth rate of 10.4 per cent between 1969 and 1978, and 11.8 per cent between 1978 and 1980. It is a relatively smaller sector of the economy, contributing only 2 per cent of the total value-added in manufacturing. In Thailand, there are currently about 20 large companies producing television sets, radios, airconditioners, electric fans, and integrated circuits. In addition, there are numerous small firms, each employing less than 20 persons. The electronics and electrical appliance industries comprise a major segment of the manufacturing sectors in Singapore and Malaysia. These industries occupy a smaller but still significant position in the Philippines, Indonesia, and Thailand. The research teams, therefore, selected these industries for more intensive case studies in each of their countries. In addition, four of the five country papers included case studies and survey data on the non-electronics industries. The Thai paper covered the machinery industry whilst the Singapore paper included findings on the machinery and precision equipment industry. The Malaysian team examined a diverse group of firms involved in such industries as chemicals, wood, rubber, textiles, food products as well as machinery. The Indonesian paper gave attention to the diesel engine industry. In Thailand, the machinery industry included firms manufacturing general, agricultural, and transportation machinery and equipment. Within this industry,

The Experiencefrom Selnted ASE/LV Industries

35

automobile and automobile parts manufacturers comprise a major segment. This sector experienced steady growth following the imposition oflocal content regulations in 197 4 and the import restrictions on completely built-up passenger cars and buses since 1978. The motor-cycle and agricultural machinery industries have also expanded as a result of similar import-substitution policies. In Singapore, the chief output of the industrial machinery industry (ISIC 382), from which the surveyed firms are drawn, arc oil-field and gas-field machinery and equipment (50 per cent in 1982) followed by air-conditioning and ventilating machinery (9 per cent). In the precision equipment industry (ISIC 386), the dominant output in 1982 included watches, clocks and parts thereof ( 4 7 per cent) followed by photographic/optical goods (20 per cent) and medical instruments and supplies (20 per cent). In 1982, industrial machinery accounted for 10.8 per cent and precision equipment 1.3 per cent of manufacturing value-added. Direct exports in 1982 accounted for 72 and 98 per cent respectively of the output of these two industries. The Indonesian study covered five diesel-engine assembling companies which comprised the entire diesel-engine industry, and eleven firms in the televisionassembly industry. Both industries arc key segments of the manufacturing sector in Indonesia. In 1982, the five diesel-engine companies manufactured 58,240 units of diesel engines out of their total production capacity of 113,500 units per year. From an output of 27,34 7 diesel engines in 1978, production levels have been rising steadily, hitting a peak of 75,450 units in 1981. The television assembly industry in Indonesia experienced rapid growth from 1970 to 1981, although recently, output had dropped from 846,931 units in 1981 to 653,498 units in 1982. Research Methods

The methodology in all five country studies involved a combination of firm-level questionnaire surveys, supplemented by follow-up interviews with key personnel. The contents of the questionnaires varied significantly from country to country in detail and emphasis. However, several common aspects were measured and investigated in each of the country studies. All five studies devoted attention to the following issues: the ownership structure of the firm and nationality of the firm's owners; the level of autonomy and indigenization of subsidiaries of foreign firms; the degree of forward and backward integration in the industry; the various channels for technology transfer; the costs, terms and conditions for technology transfer; appropriateness of the technology in usc; the modes of training and staff development; the efforts at local research and development; linkages established with local support institutions; and assistance provided to local subcontractors and suppliers. For l'vlalaysia, of 154 questionnaires that were mailed out, 55 were returned and, of these, 49 were usable. These 49 firms were distributed as follows: 11 Japanese electronics firms, 19 non-Japanese electronics firms, and 19 Japanese non-electronics firms. In Singapore, of the 194 firms approached, only 65 usable questionnaires were returned. Of these, 20 are in the machinery, 10 in the

36

ASE4ll/ Ovrrvirw

precision equipment, and 35 in the electronics and electrical machinery industry. In Thailand, 87 satisfactorily completed questionnaires were obtained, 46 of which were from the machinery industry and 41 from the electronics industry. In the Philippines, out of 28 firms in the electrical machinery industry, only 13 were able to accept the request for interviews. Many of the firms in the industry had, by that time, shut down operations or were operating at less than 50 per cent of production capacity. In Indonesia, information was collected on five firms in the diesel-engine industry and eleven firms in the television assembly industry.

Research Findings Ownership Structure and Nationality Out of the 41 electronics firms surveyed in Thailand, 20 of them were Thai firms, 12 fully or partially Japancse owned, and 9 fully or partially owned by other nationalities. In general, the local and foreign firms of similar size were found to be manufacturing similar lines of products. The main determinant of the types of products manufactured appeared to be the size of the firm. Large firms, both local and foreign, concentrated on refrigerators, air-conditioners and television sets, whilst the smaller firms concentrated on radios and electric fans. In recent years, the larger foreign firms shifted their production towards integrated circuits. Of the sample of46 firms in the Thai machinery industry, 23 were fully local, 12 fully or partially Japanese-owned, and 5 fully or partially owned by other nationalities. The Thai firms were engaged in the manufacture of agricultural machinery, motor vehicles, motor-cycles and parts, and metal working machinery (in descending order), whilst the Japanese firms were predominantly (56 per cent) in the manufacture of motor vehicles and motor-cycles and parts. In the Thai machinery industry, the survey revealed that the majority of the local firms were involved in the production of components and sub-assemblies, whilst the majority of the foreign firms were doing both component production and assembly. This pattern indicated that some of the local firms in the industry were suppliers of parts to the foreign firms. In the case of the Thai electronics industry, both the local and foreign firms carried out production as well as assembly operations. However, among the foreign firms and joint ventures, those with Japanese participation exhibited a higher domestic content in their products. In both the machinery and electronics industries, however, the local firms were found to be using a larger proportion oflocal raw materials and intermediate inputs than the foreign firms. The Indonesian study examined five firms in the diesel-engine industry- three joint-venture firms with Japanese partners, and two wholly Indonesian-owned firms with licensed technology from Germany. Two of the joint ventures were established in the early 1970s whilst the third began operations in 1980. The two locally owned firms were established in 197 7. The joint-venture firms specialized in small (3-30 horsepower) engines whilst the local firms produced 30-500 horsepower engines. In general, all the firms in the industry were producing below capacity. The local firms were in fact operating at less than 10 per cent of their production capacities.

The Experirncefrom Sdrcted ASEAi'v' lndustrirs

37

Among the eleven television assembly firms studied in Indonesia, two were J apanese-controlledjoint ventures, seven were locally-owned firms using] apanese technology, and two were local firms without exclusive sources of technology. With the spread of television broadcasting and electrification to remote areas of the country, the local production and sales of television sets rapidly increased from 1977 to 1982, reaching a peak production level of 846,931 sets in 1982. All the firms were producing exclusively for the domestic markeL In the Singapore study, of the 65 firms surveyed, 4 7 were wholly foreignowned, 5 were wholly local, and 13 were joint ventures. This was reflective of the ownership pattern in Singapore's manufacturing sector. Thirty-nine of the firms in the sample were found to be wholly Japanese-owned, 17 were owned by other nationalities, and 9 were under local equity control. Wholly foreign-owned firms dominated in all categories of firm size- small, medium, and large. In general the wholly owned foreign firms were much bigger than the locally owned or jointventure concerns. The Singapore survey revealed that firms with very large numbers of workers, that is, 1,000 and above, were either foreign or joint-venture firms. These very large firms constituted about one-eighth of the sample; medium-sized firms, with between 100 and 999 workers, comprised nearly half of the sample, whilst the small firms formed about one-third of the sample. The Malaysian sample of firms was drawn from a diverse field. There were 11 electronics firms under Japanese equity control. The minimum extent of] apanese control was found to be 43 per cent. Six of the firms were located in the Free Trade Zones ofSelangor andjohore; and as expected, all the firms with the exception of two were exporting their entire output. The Malaysian study also surveyed nineteen non-] apanese electronics and electrical companies. The firms were either wholly owned subsidiaries of multinational firms or joint ventures with local equity participation. There were a total of eleven wholly owned subsidiaries- seven American, two West German, one Canadian, and one British, The controlling interests of the eight joint-venture firms were as follows: three firms with majority Malaysian interests; one with majority British interests; two with majority Hong Kong interests; and the last two with majority interests held by other nationalities. As in the case of the Japanese electronics firms, most of the non-Japanese electronics firms were located in the Free Trade Zones and were exporting nearly all of their output. The destinations for their products in most cases were found to be the home countries of the controlling multinationals. A large proportion of the firms were in fact exporting to their own parent companies or to other subsidiaries of their parent companies. The remainder of the Malaysian sample consisted of 19 Japanese nonelectronics firms manufacturing such products as textiles and textile products, plastics, rubber products, chemicals, wood products, and transport machinery. Of these firms, six had more than 50 per cent equity whilst twelve firms were controlled by Malaysian interests. In general, the Japanese-controlled firms in Malaysia were found to be much bigger than their locally-controlled competitors in terms of either output, employment, or fixed assets. The Japanese-controlled firms tended to be more capital-intensive and export-oriented; however, they

38

ASF:A.V Overview

also exhibited a higher propensity to import their input requirements compared with Malaysian-controlled companies. The sample of Philippine firms revealed a wider range of ownership arrangements. Out of the sample of 13 firms in the electrical appliance and machinery industry, two were wholly foreign-owned subsidiaries of multinational enterprises; one was a foreign-controlled joint venture; four were Filipino-controlled joint ventures; and six were wholly Filipino-owned firms. Of the firms which were wholly or partially foreign-owned, two had sourced their capital from the United States, two from Japan, and three from other countries. The smallest firm in the sample reported a total of90 employees whilst the largest employed 2,150 persons. Most of the firms catered exclusively for the domestic market; only three firms in the sample were involved in regular exportation of part of their output. The firms in the sample collectively accounted for a sizeable share of the Philippine market for certain electrical appliances: 98 per cent of the market share for airconditioners; 86 per cent share for refrigerators; 38 per cent share for stoves and ranges; and 20 per cent share for electric fans. In contrast to the firms in the other ASEAN countries, the wholly foreign-owned firm was oriented completely towards the local market, whilst the larger Filipino-controlled firms were more active in exploring markets abroad. One explanation was that the electronics firms in Singapore and Malaysia were largely producing integrated circuits intended for the export market, whilst most of the Indonesian, the Philippine, as well as the Thai sample firms belonged to the consumer electronics sector which was historically oriented towards the local market.

Autonomy and Indz:genization Among all the ASEAN countries, where foreign-controlled firms dominate in the electronics and machinery industries, major concern has been expressed regarding the extent of autonomy of the local subsidiary and the level of indigenization of management. Clearly, the degree oflocal autonomy and indigenization, as well as the policies of foreign firms on these aspects, have serious implications for the pattern of technology transfer and the commitment to research and development work. The Thailand study reported that, in general, foreign firms attached little importance to indigenization. This was attributed to the negative attitude of the expatriate management towards the capabilities of local staff Doubts were also expressed regarding the rationale for, and effectiveness of, head-office training programmes for local staff. Previous studies of] apanese joint ventures in Thailand had reported that some of these training programmes were actually meant to serve as rewards for hard work rather than to contribute to the transfer of valuable skills to local staff The Malaysian study emphasized the extent of foreign control over technology, from product choice to production methods as well as the employment of expatriate personneL The research noted that expatriate staff seemed to occupy only the top management or professional posts and were less prominent in technical positions. Japanese-controlled firms seemed to employ a larger proportion of expatriates compared with their European or American counterparts. Moreover, within the

The Experienafrom Selected A SEAS Industries

39

Japanese-controlled firms, about half of the managerial posts were occupied by Japanese expatriates. Firms with minority Japanese interests tended to hire fewer Japanese expatriates than those firms with majority Japanese participation. The study also revealed that nearly all of the crucial decisions, especially technological decisions, were being referred to the parent companies of the multinationals. This seemed to be the pattern in nearly all the firms in the Malaysian sample with foreign equity participation. The Indonesian diesel engine and television manufacturing industries did not differ much in terms of the pattern of involvement of expatriates. Foreign managers as well as foreign technical personnel were generally found among the joint-venture firms. Among locally-owned enterprises, there tended to be fewer numbers of expatriate personnel. Invariably, they were in the positions of consultants or instructors, whilst the local staff were in the senior management positions. In the television industry, foreign personnel in joint-venture firms occupied not only production management positions but also key positions in finance and aftersales service. It seemed that the more advanced the technology in television assembly, the greatn the roles of the expatriate managers, particularly in the areas of production and after-sales service. Among the television firms, one approach to maintaining smooth communications between foreign and Indonesian managers was to hire university graduates who had studied or lived in the country of the parent company. Although recent Indonesian policies require a gradual replacement of foreign personnel by Indonesians, the view of many observers is that foreigners arc still needed at this point to assist in skills development and technology upgrading, particularly in the diesel-engine industry. In Singapore, the study confirmed that invariably, whether the multinationals were Japanese, American or European, the top management posts, including the managing director and the production manager were expatriates. They were usually senior managers who had gained experience at the company headquarters or who had previously headed other overseas manufacturing facilities. Compared with other firms, the Japanese firms in the surveyed sectors have a larger proportion of professional expatriate staff and a lower level of indigenization. This pattern was found to hold true particularly in the precision equipment industry. The Singaporean data also revealed that the degree of decentralization was least in Japanese firms compared with American or European firms. This finding was consistent with the information on the level of indigenization of Japanese firms in Singapore. One explanation offered was that the Japanese ''overseas'' management style tended to be more autocratic, with less delegation of authority. Compared with firms of other nationalities, Japanese firms were more tightly controlled by the parent companies, especially in the management functions of production and finance. In the Philippines, in nearly all the firms with foreign equity participation, expatriates from multinational companies were found in senior management positions. As in the other ASEAN countries, firms with Japanese equity held a larger proportion of expatriate professional and managerial staff. In a number of joint ventures, every Filipino manager was actually assigned a Japanese counter-

40

ASE4 /I/ Overvim'

part manager. In the initial years of operations, this pattern of organization was justified as a means of facilitating skills transfer from the expatriate to the local manager. However, in a number of firms, this ar-rangement persisted for more than five years, suggesting that the "man-to-man" approach could merely be a mode of close control and supervision, rather than a tool of management indigenization. All five studies indicated that while MNCs in general try to maintain a relatively high degree of control over their full or partial subsidiaries in the ASEAN countries, especially in the crucial areas of technology, marketing, and finance, the degree of control, with minor variations across countries, was highest among Japanese firms. Moreover, the level of indigenization of managerial and professional staff was also generally lowest among] apanese companies. In Malaysia and Singapore, where most of the foreign subsidiaries produced overwhelmingly for the export market, the country surveys indicated that Japanese subsidiaries had relatively higher autonomy with respect to marketing decisions than financing or choice of production techniques. Central control over technology has been particularly important in maintaining the global reputation of high quality branded products. This explains the reluctance by parent companies to decentralize such functions to subsidiaries in the ASEAN countries. Economic Linkages of Foreign Firms The total impact of a foreign firm's operation on the domestic economy, including its impact on technology and skills, can be measured by its local linkages, both forward and backward. The extent of linkages vary from country to country. It is particularly low in Singapore where most of the output is exported and no mandatory domestic sourcing rules apply. Thus, of the 22 firms in the machinery and precision equipment industries which reported on the extent of local sourcing, 16 obtained less than 25 per cent of their inputs from local sub-contractors, and 5 obtained between 25 and 49 per cent. Only one firm, a joint venture, obtained more than 75 per cent of inputs locally. Among the Singaporean firms surveyed in the electrical and electronics industries, 21 reported on their local sourcing. Fourteen firms reported that they obtained less than 25 per cent of their inputs from local subcontractors, four obtained between 25 and 49 per cent, one between 50 and 74 per cent and two, more than 7 5 per cent. These figures indicate the low technical capabilities of the local sub-contractors and input suppliers. Several firms, in fact, expressed their dissatisfaction with the poor quality of domestically manufactured components and the lack ofreliability of local suppliers. A number offoreign firms have opted to source from sub-contracting firms of their own nationality rather than patronize the indigenous sub-contractors. The Indonesian diesel-engine industry currently imports 70 per cent of its inputs, and only 30 per cent is locally sourced. All of the existing plants are basically assembling units using relatively simple techniques. In order to encourage local manufacture of components, the government enacted a law which stipulated that every project financed by the government should use local inputs. The policy was further explicated with the "Component Depletion Program" which aims to

The Experience from Selected A SEA X Industries

41

motivate local industries to begin components manufacture. The television manufacturing industry has had a similar history. Today it still remains largely an assembly operation. Although a similar "Component Depletion Program" has been implemented since 1981, full manufacturing is not expected before 1984. The major constraint appears to be the lack of skills in electronics and high precision design. Moreover, there are very few firms that have the experience or technical capability to begin to serve as component producers. Most of the industrial sector still consists of small ''cottage industry'' producers. The Thai study noted that a number of local firms in the machinery industry were suppliers of parts to the foreign firms. The survey also revealed that local firms utilized a higher proportion of local raw materials and intermediate inputs compared with the foreign firms in both the machinery and electronics industries. Between Japanese and non-Japanese firms in the electronics industry, the former made greater use of local raw materials and intermediate inputs than the latter. The converse was true in the case of the machinery industry in Thailand. When asked about the prospects of expanding the local content of their products, many foreign firms cited the absence of local supply of certain inputs, and the low quality of locally produced raw materials and intermediate inputs. The higher usc of local materials in Thai industries compared to those in Singapore is in part due to the availability of natural resources and the enforcement of local content regulations in Thailand. Local content regulations have also been applied in the Philippines' electrical machinery industry. The regulation which was established in 1975 required a gradually increasing minimum local content each year. The programme was later abandoned and replaced by the new policy which instead allocated a progressively decreasing amount of foreign exchange to each firm. In 1983, all foreign-exchange allocations for the industry's importations were withdrawn and manufacturers were then required to earn through export activities the dollars that they needed to import raw materials, parts and components. In the survey, most of the firms in the industry claimed to use more than 50 per cent local content. However, several firms revealed that many of the components that were sourced locally actually had a large import content, but were assembled by local firms. Hence, many of these parts and components disappeared from the market when foreign exchange allocations were cut off in 1983. The firms interviewed in the Philippine study also cited the low capability of local support industries to supply acceptable inputs. Three critical support industries were named- the plastics, rubber, and metal industries. One of the related constraints to greater use of local materials was the lack of adequate standards for intermediate goods and raw materials, with the result that variations in the quality of raw materials were later magnified in the final products. In Malaysia, it was observed that firms that produced final consumer goods tended to acquire a larger proportion of their inputs locally. Firms that produced electronic components for export generally imported the bulk of their raw materials from foreign sources, notably Japan. In the electronics components industry, hardly any local raw materials were used in production; when they were used, they constituted less than 5 per cent of the total inputs. In terms of production equipment, nearly all the electronics firms in Malaysia chose to import all their

42

machinery requirements. In most cases, pmduction equipment and inputs were purchased through f(Jreign trading companies or parent companies, instead of through Malaysian trading companies. Among the non-electronics firms, Malaysian-controlled enterprises were more domestic-market oriented thanJ apanese-controlled firms. As a result, the extent of forward linkage was higher for locally controlled firms. Locally controlled firms also exhibited much higher levels of backward linkage: five out of the six firms which purchased most of their input locally were locally controlled firms. Of the other five Japanese-controlled companies, only two sourced as much as 15-25 per cent of their input locally. In general, the main source of input was fromJ a pan and this was true not only of J apant>se-controlled firms hut also of locally controlled firms. Thus, eight out of the thirteen locally-controlled Japanese-minority firms import more than 60 per cent of their inputs fromJ a pan, and four of these import as much as 100 per cent. The reasons most often cited in the studies for not having a higher level of local sourcing were poor quality and delivery unreliability. Japanese firms, especially, seemed to attach particular importance to quality and standards. As highlighted in the Singapore study, many Japanese firms producing for the international market actually bring their traditional sub-contractors with them to Singapore or integrate backwards to maintain a much higher level of self-sufficiency than is the norm for such a scale of operation in Japan. The emphasis on quality and standards by Japanese firms also seemed to accord with the Thai finding that whilst they source proportionately less locally than other foreign firms they seem to provide a higher degree of technological support. As reported by the Thai and Singapore studies, the great majority of firms provide some technical support to their local sub-contractors. Channels for Technology Transfer There are many difTerent means that can be used to transfer technology from one country to another. The principal channels of technology transfer arc the following: a) direct foreign investment, b) the purchase of technology through a licensing and management agreement, c) imports of machinery and equipment, d) technical assistance contracts, e) turn-key arrangements, and f) piracy or illegal imitation. The preferred or most popular methods of transfer difTer from country to country and from firm to firm. Very often, the choice of the mode of transfer is influenced by the objectives and capacities of the users and by the desire of the supplier to control or limit the use of the technology. The distinction is often made between so-called "packaged" and "unpackaged" technology agreements. The former refers to a method of purchasing technology as part of an' 'investment package'' together with management, marketing services, and capital. In many instances, especially in the early years of operation, this approach may reduce the set-up time as well as the costs of establishing operations in a country. However, this approach has been under attack by many developing-country governments who claim that it perpetuates the economic dependency of their countries. Consequently, there are many current efforts to find ways of "unbundling" the package in order to permit separate treatment

The Exprr£encefrom Sdected ASEA /1/ I ndw·tries

43

and evaluation of the elements being offered such as management, production methods, marketing strategies, and control systems. The other general method of technology acquisition is through licensing agreements·and management contracts. Such approaches are usually "pure technical collaboration agreements'' which do not include foreign equity infusions. Japan is an example of a nation whose dynamic industrial growth was linked to its success at acquiring American and European technology through licensing agreements. A licensing approach can be effective in countries with well-developed infrastructure and high levels of technical and managerial competence. One disadvantage is that there is not much pressure that can be exerted on the licenser by the local firm or its government since the licenser has no tangible local assets to protect. In Singapore, the predominant form of transfer especially among the electronics firms, second to direct investment, was the turn-key method, where the entire technology was delivered as a package. In many cases, a few local managers and engineers were selected prior to the establishment of the local firm. They were then sent abroad for training at the multinational headquarters or at other subsidiaries. After some time, they were sent back to Singapore along with a team of expatriate managers. At the same time, the machinery and equipment were brought in together with the production process and product design specifications. This approach is considered one of the fastest ways of setting up a local subsidiary, but one disadvantage from the host country perspective is that such turn-key projects may lead to technological dependence on the multinational firms. However, such dependence can be gradually reduced by accelerating the training oflocal staff and by pursuing the indigenization of the management and professional categories of employees. Most firms that participated in the Singapore study reported that the most important mechanism for technology transfer was training abroad for local staff. The persons sent abroad were usually at least at the level of technician or supervisor. lnj apanese-controlled firms, these training visits provided the trainees with exposure to other aspects of work within the firm. For example, even administrative or management personnel were instructed on technical activities associated with the production process. This broadening of staff skills is consistent with such Japanese practices as job rotation and participatory decision-making. The two methods of technology transfer which were also considered to be important in Singapore were the visits of foreign experts and the long-term contracts of expatriate engineers. These approaches were valuable in the transfer of problem-solving skills. Such persons were usually brought in to handle problems that local engineers could not solve; this was most common during the introduction of new machines, new products, or new production processes. Local firms were less inclined to send staff overseas or have foreign experts visit, unless these activities formed part of the existing licensing or technical assistance agreements. However, most of the local firms in Singapore had tie-ups or business relationships with foreign suppliers of equipment or materials who were able to offer technical assistance when required. In addition, local firms, especially the smaller ones, were encouraged to employ foreign experts as in-house consultants under the Small Industries Technical Assistance Scheme (SITAS). Under the

44 SIT AS programme, small firms may recover up to 90 per cent of their actual expenses for the visits of technical consultants and experts. In the Philippines, licensing agreements and technical assistance contracts were the primary mechanisms for technology transfer in the electrical machinerv industry. With the exception of two firms (who relied primarily on producing or improving on local imitations of foreign products), all the survey respondents held licensing agreements with multinationals. The licensing agreements allowed for the transfer of technology in the form of product designs and production specifications which normally described the essential components, the form and nature of the materials used, and the gentTal process of assembly. The production equip· ment required may also be specified. Technical assistance contracts were usually made on a need basis. These contracts normally covered such areas as equipment installation and operations management. Earlier studies conducted by the Philippine Technology Transfer Board (TTB) revealed that technology was usually imported in packaged form which included direct equity investments, technological know-how, patents, trademarks, and, in some cases, marketing strategies. Foreign controlled firms, in comparison with locally controlled firms, displayed a heavier reliance on packaged technology. Pure technical collaboration agreements- that is, those which allowed for the purchase of technology without admitting foreign equity participation- accounted for hall of the agreements registered with the TTB. Japanese firms seemed to have stronger preference for pure technical collaboration agreements compared with the American or European firms. Sixty-two per cent ofJapanese technology agreements covered pure technical collaboration, whilst 37 per cent involved minority participation in joint ventures. In contrast, nearly half of the American and European technology contracts were associated with either· direct management control or equity participation. The firms in Indonesia received technology primarily through licensing agreements and technical assistance contracts. Among joint-venture firms, training abroad was a popular mode of technology transfer, although the number of local staff that were sent abroad each year was not significant. Three of the five dieselengine firms opted to bring in expatriate instructors to conduct training programmes locally. However, the use of expatriate trainers was not reported among any of the television manufacturing firms in the sample. Among the firms in the Malaysian sample, the most important method by which technology was transferred was technical assistance from parent companies. The other important method of technology transfer was through training programmes and seminars for personnel. Locally controlled firms were more inclined to source their technology through patents, trademarks, or licensing agreements. In marked contrast to the Singapore case, none of the firms in the Malaysian sample considered the turn-key method as important. The popularity of pure technical collaboration agreements, which do not include capital infusions from technology suppliers, was attributed to the equity guidelines under the New Economic Policy. In the Thailand study, it was found that the majority of the sampled firms with foreign equity had sourced technology from their parent companies or multinational partners. Foreign firms relied on several methods or channels for techno-

The Experienrefrom Seln!i'd ASFA .V lndu.>trin

45

logy transfer - through the purchase of machinery and equipment, licensing agreements, employment of foreign experts, and overseas training. Local firms, in contrast, reported that they developed much of their technology on their own or acquired it in the form of machinery and equipment. Japanese firms were also observed.to depend heavily on parent companies for their technology, and to make less use of overseas training than other firms with foreign equity participation. There seems, therefore, to be substantial differences in the experience of the five countries with regard to the channels for technology transfer. Singapore's use of "packaged'.' turn-key agreements reflects its open-door policy towards multinationals and technology transfer. In the other countries, various types of restrictions on foreign equity and technology transfer have made arrangements such as licensing or management contracts more attractive. In general, locally-controlled firms in all the countries were less dependent on foreign sources of technology and several of these firms had in fact reported that they were able to develop technology or to innovate on their own. However, these situations were not common and were only observed in sectors where the local industry was well protected. Terms and Conditions of Technology Transfer Most of the terms and conditions attached to technology transfer agreements impose restrictions or limitations on such aspects of operations as marketing territories, purchasing and pricing strategies, diffusion of the technology, and local research and development. In Thailand, the respondent firms revealed that the most salient restriction was the prohibition on the export of goods produced under the technology agreement. In a few cases, technology recipients were also prohibited from producing competitive products; they were in fact required to secure prior approval from the suppliers before they could sell intermediate products that were also covered by the agreement. There were also cases where the recipient firms were required to sell the products through local agents or marketing firms appointed by the technology suppliers. Another common restriction was the prohibition on the transfer or sublicensing of the technology to other firms. Among the Japanese firms in the Thai machinery industry, the common restriction was the tied purchase of raw materials and intermediate inputs from the technology suppliers. In general, the Japanese technology suppliers were found to be more stringent and restrictive than suppliers of other nationalities. Among the firms in the Indonesian diesel-engine industry, the most common restrictions were the tied purchase of materials from the technology suppliers (3 of the 5 firms) and the prohibition on exports of products (4 of the 5 firms). A similar pattern of limitations was also found among the firms in the television manufacturing industry, although, in general, joint-venture companies seemed to have more rigid and stringent terms. The licensing agreements of the wholly localowned companies usually permitted the local firm to decide on its sources of raw materials and components whilst most of the foreign joint-venture partners insisted on the purchase of both machinery and supplies from the parent companies. However, none of the television manufacturers were allowed to export their products.

46

ASEAN Overview

The Malaysian study reported that some of the joint-venture and technicalassistance agreements signed between Malaysian and foreign companies contained clauses which required the local firm to purchase raw materials or certain key non-durable capital goods from the technology supplier. Seven electronics firms ( 4 Japanese and 3 non-Japanese) replied that approval of their technology suppliers was required in order for them to export. In several firms, there was a total export prohibition or restrictions on the areas to which the products could be exported. Malaysia required the screening of technology agreements by its Technology Transfer Unit in order to ensure that the conditions were neither prejudicial to the national interest nor to the interests of the buyers. One condition which was of major concern was the restriction on the appointment of key personnel. The desire of foreign firms to maintain expatriates in management positions had been a constraint to the indigenization of technology and often ran counter to the New Economic Policy guidelines on employment. This was a central issue in the evaluation of technology agreements of Japanese-controlled firms where indigenization had been slower than in other firms. The impact, however, of the screening of technology agreements had not been substantial given that the Technology Transfer Unit was merely a regulatory body. In Singapore, technology agreements were not made public and therefore it was difficult to identify the common restrictions found in the contracts. However, the case studies indicated that restrictions in the area of marketing may exist. Subsidiaries in Singapore were usually given designated marketing areas and many were required to sell their output to head offices or to specified affiliate companies. This was especially prevalent among subsidiaries that produced intermediate products or sub-components rather than final products. In the Philippines, out of the 49 technology transfer agreements that electrical machinery firms had concluded as of 1981, the most common prohibition was on the export of manufactured products, sub-assemblies, and components. This restriction was found in 13 agreements. Other types of restrictive clauses stipulated the tied purchase of raw materials, the royalty-free utilisation of licensee's improvements, the automatic renewal of the agreement, and the secrecy obligation after contract termination. These restrictive clauses were identified in approved contracts in spite of the screening of such contracts by the local Technology Transfer Board and their prohibition on such limitations. This experience, which was similar to Malaysia's, indicated the ineffective role played by such screening units especially during periods when the explicit policy of government was to attract foreign investments and to import new production technology.

Costs of Technology TranJjer Any technology transfer process involves cost. Determining this cost is not easy due to market imperfections and the fact that the transfer often takes the form of a package which includes both explicit and implicit costs. The latter are embodied in the restrictive conditions imposed on the use of the technology. The former consists of royalties, as well as management and consultancy fees. Even the explicit costs arc not easy to compare or quantify because of the variety of methods used in their computation and also because of transfer pricing.

The Experiencefrom Selected A SEAN Industries

47

The Malaysian study reported that the largest proportion of technology transfer payments made by the survey respondents in the last three years was incurred in the form of payments for the import of new machinery and equipment. These purchases were normally made through the parent companies of foreigncontrolled firms. Royalties were a popular mode of payment for contracts involving continuing technical assistance or the use of patents and trademarks. Royalty payments usually ranged from 1 to 5 per cent of net sales, although there was one case where the rate was as high as 30 per cent. Lump-sum payments were also reported in a few cases. Another expense for technology transfer among the Malaysian respondents was the cost of overseas training for local staff. This expense was common among Japanese firms but was less prevalent among the other foreign firms. In the Thai study, royalties and technology fees were calculated as a percentage of both gross and net sales, using the data on foreign remittances that all firms submit to the Bank of Thailand. The total annual costs for technology were divided by 1983 figures for both gross and net sales. In the Thai machinery industry, only two of the interviewed local firms reported any payments for foreign know-how or brand names. The first, a Thai firm producing engine and autoparts paid 0.5 to 1.0 per cent of gross sales for foreign know-how. The other Thai firm reported that it was being charged 5 per cent of net sales for a brand name. In the electronics industry, only two Thai-controlled firms reported technology payments. Both were being charged 6 per cent of net sales. The machinery firms with Japanese equity reported technology fees ranging from 3 to 5 per cent of net sales and from 1.4 to 8.3 per cent of gross sales. The electronics firms with Japanese equity reported technology fees ranging from 1. 0 to 3. 0 per cent of net sales and from 1. 4 to 5.0 per cent of gross sales. In comparison with technology suppliers from other countries, Japanese technology suppliers in the electronics industry seemed to be offering better prices for their technology. The Thai study also examined fees paid for the services of foreign experts. The study concluded that firms with japanese equity paid, in total, higher amounts of foreign experts' fees than other firms with foreign equity. The explanation offered was that firms with] apanese equity tended to employ a higher proportion of expatriate managers than the other firms. Moreover, the firms with Japanese equity seemed to employ Japanese experts for a longer duration, in comparison with other firms. The Indonesian study, which relied on cost data from the Central File of the Investment Board, found that the contracts generally stipulated a fixed management or technical fee plus a royalty of about 2 per cent of net sales. However, interviews with key informants revealed the widespread existence of irregularities. Firms were found to be actually paying royalties as high as 10 per cent of net sales, whilst management and technical fees ranged from 10 to 20 per cent of net sales. In addition, the majority of both licensing and technical assistance contracts contained clauses which required the purchase of materials and equipment from parent companies. In the Philippines, licensing agreements normally stipulated royalty payments from 1 to 5 per cent of net sales, although, in one case, a fixed yearly fee was paid.

48

ASEAN Overview

In another firm, royalties were computed as a fixed fee per unit sold rather than as a percentage of sales. In a few firms, a' 'front end'' or disclosure fee was required in addition to the royalty payments; this fee ranged from US$10,000 to US$100,000. In Singapore, where the details of technology agreements are kept confidential, no data were available on the costs or prices for technology. The research studies indicated that technology buyers who lack the technical, financial and commercial expertise in technology transfer negotiations may be receiving very disadvantageous terms or may be paying unreasonably high prices. This appears to be the case among certain small firms in Malaysia and Singapore who are known to be paying royalties for expired patents. In countries such as Malaysia and the Philippines where screening units exist, there may be some measure of protection for the uninformed or inexperienced local firm. However, Singapore does not have such a unit, but the Singapore Institute of Standards and Industrial Research (SISIR) can offer assistance when approached by firms. There is, nonetheless, a clear need for programmes to educate small firms on the various aspects of technology sourcing, purchase, and negotiation. Appropriateness of Technology

There are various dimensions to the "appropriateness" of a technology, but generally, the term refers to the consistency between the capital intensity, factor proportions or input requirements of the technology and the resource and skill endowments of the country or area. The issue of appropriateness of technology was directly addressed in the Thailand and Malaysian country studies. The Thai paper reported that local firms in both the machinery and electronics industries appeared to be less capital-intensive than firms with foreign equity participation. However, the study concluded that the differences in capital intensity were due to the size rather than the nationalities of the firms since most of the local firms were smaller than the foreign-invested ones. Another related finding was that higher labour productivity in the Thai electronics industry was associated with higher capital-labour ratios. The Malaysian study reported that foreign firms were not involved in activities to search for more "appropriate" techniques of production and that hardly any adaptation was being attempted in these companies. The japanese firms that were involved in joint-venture projects in Malaysia were found to be importing their domestic production technologies intact. In the very few cases where adaptations were made, these changes were in terms of production equipment and product design. Adaptations were found to be more common and frequent among firms with higher degrees of Malaysian ownership and control and among subsidiaries with greater autonomy from their parent companies. The logical explanation for not adapting in the case of the Japanese firms was that R&D activities are usually entirely centralized in their parent-company headquarters. In general, the motivation for technological adaptation among foreign firms in Malaysia was to scale down plant and equipment to suit the much smaller domestic market. This was particularly true of the import-substituting Japanese subsidia-

The Experiencefrom Selected A SEAN Industries

49

ries. There were relatively few cases where the adaptation had been initiated to take advantage of the lower labour costs or to make up for the absence of skilled labour. The other reasons given for adaptation were related to meeting the tastes and special needs of the local market, or the regulations of the government. One example of the latter is the local content regulations imposed on the Malaysian motor-vehicle manufacturing industry. The findings in the studies suggest that there are certain technological rigidities imposed by the choice of product; that even when adaptation is pursued, the technology alternatives for particular products are very limited. This is likely to be the case especially in the high-technology and export-oriented industries, where precision, quality, and product standardization are demanded. Under such conditions, the scope for increasing the labour content is extremely narrow. Training and Staff Development The various levels of skill development include the training of production workers, technicians and professionals. The training of workers, usually of a very short duration, is generally given on the shop floor. At the technician and professional levels, training may be provided by short-term attachments at the parent or other related companies. In general, firms which have formal training programmes are the larger ones. In the Singapore case, all firms provided on-the-job training for their production workers, with some even having more formal in-house training programmes. At the higher skill levels, training was provided in the form of attachments or through short-term courses and seminars such as those organized by the National Productivity Board or the National University of Singapore Extra Mural Studies. In Singapore, training costs for such programmes could be partially funded through the Skills Development Fund. It should be noted here that compared with other firms, Japanese firms, at least in Singapore, adopted a more total or holistic approach to job training. Technical workers, for instance, were usually trained for different stages of the production process. Professional and management personnel who held administrative and sales positions, were also instructed on the actual production process. On the whole, multinationals or firms with foreign equity participation spent more on training compared with local firms and state-owned enterprises in Singapore. Foreign firms also prefer to send their local staff to their headquarters for training because this is seen to be faster and more efficient than sending expatriates to set up and conduct local training programmes. In general, the factors which tend to inhibit the implementation or reduce the effectiveness of training programmes among the surveyed firms were: a) language barriers, especially in Japanese firms; b) high labour turnover; c) staff poaching; and d) the fear that trained staff would divulge production and technical secrets. In Malaysia, on-the-job training was the most important form of skills development for factory workers although regular formal training programmes were also common. On occasion, factory workers were sent to short courses or seminars offered at Malaysian institutions. Similar modes of training were also used for engineers and management personnel.

50

A SEAN Overview

Among the firms surveyed, the usual problems encountered in training factory workers were absenteeism, high labour turnover, language barriers, and inadequate qualifications on the part of the workers. With regard to the training of angineers and technicians, the main constraints mentioned were the lack of qualifications, the lack of interest and commitment to learn, the difficulty of finding enough free time for the training sessions, and, in particular, the difficulty of keeping up with the rapid pace of technological change. Finally, training programmes for managers were regarded as less problematic than training for technical staff. The occasional difficulties encountered in training local managers were usually related to communication barriers (particularly in the case of Japanese firms), the relatively high costs of such programmes, and the lack of discipline among the trainees. The firms in the Indonesian sample also provided both formal and on-the-job training for their workers. Those workers who were promoted to higher positions were normally sent abroad, usually to parent-company plants. Given the dominance of Japanese firms in the diesel-engine and television industries, it was not unusual to find that the local staff who usually received promotions or were sent abroad were those who had studied in Japanese universities and who knew Japanese culture and practices. This implicit policy was viewed as a means of maintaining smooth communications between Japanese senior managers and the local management staff. With regard to local in-house training, the joint-venture firms in the diesel-engine industry found it more economical and convenient to import expatriate trainers rather than to send local staff abroad. This mode, however, did not seem to be popular among firms in the television industry. In Thailand, most of the firms surveyed were found to have conducted training programmes, usually held overseas, for local technicians, engineers and managerial staff b~fore the start of production operations. Japanese firms seemed to use this approach more extensively than other foreign firms. Local firms also applied a similar method of preparing their local staff during the pre-operating phase, but to a lesser extent. In the case of firms with foreign equity participation, overseas training was usually held at the head offices of multinational companies. In the case of local firms, overseas training was usually arranged by the foreign firms that supplied machinery and equipment to them. Such training arrangements were normally included in the contracts to buy the foreign equipment. Local Thai firms were found to have offered significantly fewer training opportunities to their employees. Another finding was that the role of private training centres in servicing the needs of the machinery and electronics industries was marginal. The training institutions of the Thai Government appeared to offer more substantial training to employees of local firms, particularly those in the machinery industry. In the Philippines, the primary mode of skills development for shop-floor workers was on-the-job training. All the firms in the Philippine sample reported that this was being practised. In fact, for two firms, it was the only form of training being promoted by the management. On-the-job training was usually conducted by lower-level managers and supervisors, and was normally augmented by occasional formal classroom sessions. In two firms, professional trainers wlio offered

The Experiencefrom Selected A SEAN Industries

51

specialized training packages were hired, but this practice was not common in the industry. Other modes of training involved sending selected employees to attend short courses, usually at government manpower development centres, or travelling to head offices of multinational firms. However, during the last two years, training opportunities abroad were limited to very few employees and firms, because of the high costs of travel and the foreign-exchange difficulties faced by the electrical machinery industry. One major disincentive to more active training programmes was the high turnover rate for experienced, skilled workers. In the last five years, jobs in the Middle East siphoned off large numbers of competent Filipino technicians and engineers. The annual turnover rate for highly skilled workers was reported to be as high as 30 per cent. The other difficulty cited by several firms in the Philippine sample was related to the use of expatriates, and in particular Japanese expatriates, as trainers or technical consultants. It was observed that occasionally the persons sent as technology transfer agents were experts in their own technical fields but were less able or equipped to communicate the necessary skills to the intended recipients. Communication barriers were the major impediment to the effective transfer of skills, whether the training was on-the-job or otherwise. In summary, the most common constraints, cited by the country studies, were language barrier, the lack of worker discipline and dedication, absenteeism, and high labour turnover. The language problem appears to be the least serious and the easiest one to correct. The other difl'iculties reflect differences in the understanding or perception of proper work attitudes, ethics and behaviour between persons of different cultures and nationalities. For example, what may constitute the correct job attitude for the Japanese may be different from that of a person from Indonesia, Malaysia, or the Philippines. There is, therefore, a need for a reconciliation of these potentially divergent views in the context of each national situation. Local Research and Development

The existence of local research and development activities is one of the strongest indicators oflocal technological capacities. It also presents one of the most effective opportunities for upgrading technical skills in local staff. Naturally, the R&D activities of firms were of interest to the researchers in their surveys and interviews. The country studies presented interesting comparisons and contrasts regarding the extent of R&D activity between foreign-controlled firms and locally-controlled firms. In general, the studies confirmed that in the case of multinational-controlled subsidiaries, which benefit directly from the R&D conducted at head ofl'ices, very little R&D was done locally. The subsidiaries were simply supplied with whatever product specifications and technology that were felt to be appropriate by the parent company. As the Singapore survey showed, most of the basic research, product design, product development and process development were conducted in the home countries. Only in the area of product adaptation was there a degree of activity in some local subsidiaries. Local firms in Singapore were also lacking in R&D resources although a few of the larger local firms had small R&D units engaged in product innovation and process adaptation. Studies ot specific local firms also

52

A SEAN Overview

showed the presence of vanous production personnel engaged informally in product and process development activities. In the Malaysian sample of firms, there were more firms without their own R&D efforts than those which were engaged in R&D locally. Among the firms with R&D activities, the Japanese electronics firms tended to concentrate on production processes whilst the non-Japanese electronics firms emphasized both product development and production methods. The japanese firms tended to rely more on parent companies for basic research and new product designs than the non-Japanese firms. The possible explanations offered for the lack of R&D in the Malaysian electronics industry (especially in the semiconductor industry) were the following: the short product life-cycle, the high costs and economies of scale required m R&D, highly competitive prices, and the small domestic market. However, the Japanese non-electronic companies in Malaysia were found to have diversified R&D activities- process alteration, raw materials substitution, marketing research and product design. These firms appeared to be mainly domestic market-oriented producers. Although the Malaysian data were by no means conclusive, the study raised the hypothesis that the R&D activities of domestic-oriented import-substituting firms may contribute in the long-run to technological independence. The R&D activities of all firms, local or foreign-controlled, however, depended heavily on ideas and inputs from foreign companies or foreign personnel and did not reflect a genuine local R&D capability. The level oflocal R&D activity seemed to be very limited among the Indonesian firms. The diesel-engine manufacturing firms appeared to be completely dependent on their foreign partners or licensers, whilst the television-assembly firms were only involved in minor product modifications to suit the technical requirements in Indonesia. No local work was being done on product design although there were government plans to develop local capability in model design, mechanical design, and electronic design by the next decade. The Thai study reported that, compared with firms with foreign equity, local firms in the electronics industry employed proportionately larger numbers of technicians and engineers for R&D activities. The study also indicated that the ratio of Thai to foreign personnel in electronics R&D work had been increasing. In the Thai machinery industry, there did not seem to be an appreciable difference between local and foreign firms in terms of the proportion of total staff assigned to R&D activities. However, Japanese firms in the machinery industry seemed to have a tighter control over technology than other foreign firms as evidenced by the assignment of Japanese experts to key positions in research and development as well as in management. Firms with foreign equity emphasized quality control in their R&D activities whilst local firms engaged in R&D in order to improve product quality and to catch up with their foreign competitors. Although the firms in the Thai sample reported that the R&D capacities of local technicians and engineers had markedly improved, they noted that several major obstacles or impediments remained. These were: 1) the lack of necessary skills and technical knowledge; 2) the lack of proper attitudes and commitment to work; 3) the lack of capital or budgets for

The Experiencefrom SelectedASEAN Industries

53

R&D; 4) the high cost of research and development; and 5) the lack of adequate support from the government. Moreover, the Thai study concluded that the firms with foreign equity did not perform much adaptation of the acquired technology; local firms, in contrast, were quite actively engaged in ongoing R&D and technology adaptation processes. Another finding was that the pace of adaptation and R&D work was much faster in the electronics industry than in the machinery industry. The survey of Philippine firms revealed that various forms of R&D were being conducted by firms; some were more organized and formal, others more ad hoc and unsystematic. From the sample of 13 firms, 2 reported that they relied solely on their own R&D activities for their technology; they did not have tie-ups or agreements with foreign firms. These two firms had organized their R&D efforts around a few individuals who were highly skilled and experienced in product and process design. Most of the other firms sourced their technology, in terms of product specifications and equipment, from foreign technology suppliers, but were also conducting R&D in order to increase the local content of the products or to adapt the existing product design to the needs or tastes of local consumers. There were other reasons offered for the involvement of the firms in R&D. In the air-conditioning sector, for example, the R&D activities were focused on lowering the energy consumption of the units in order to be able to offer a more competitive product. Other firms were doing R&D in order to tailor their products to the technical specifications of foreign markets. In general, the magnitude of R&D activity in Philippine firms was found to be directly related to the size of the firm, the long-term objectives of the firm, the technical capability of its staff, the level of managerial development, and the access of the firm to foreign or local sources of technology. Larger firms were found to be doing proportionately more R&D work than the smaller firms. Firms with clear long-term objectives and higher levels of managerial competence were also more supportive of R&D activities. Moreover, firms that did not have access to sources of technology had the strongest incentive to try to develop their own internal technological capacities. In terms of the advancement or sophistication oflocal R&D work, about half of the firms in the Philippine sample were merely conducting product and materials quality tests or tests on the substitutability of locally produced materials and components. The other half of the sample was involved in the adaptation offoreign designs to suit local conditions or in the development of new products and manufacturing processes. Higher levels of technological capability seemed to be related to the following elements within these firms: 1) direct, top-level support for R&D work and technical training; 2) a formal organization for R&D; 3) key roles played by 2-3 highly skilled individuals; 4) the support provided to sub-contractors and materials suppliers; 5) the strong emphasis on training and human resource development; and 6) assistance from consultants who sufficiently understand the local context, culture, and conditions. The five studies indicated that the potential for effective local R&D may be limited to particular types of products - those with fairly mature and stable tech-

54

A SEAN Overview

nologies rather than those in very dynamic fields. Moreover, it appeared that much of the activities that were reported as R&D work were actually simple extensions of regular production, quality control, and maintenance functions rather than formally organized, separately funded and managed R&D programmes. The exceptions were mainly in the industrial sectors that were domestic marketoriented, where R&D activities were focused on product adaptations to suit local tastes. This was confirmed by the case of the Thai agricultural machinery industry and by the data on the Philippine and Malaysian firms that were producing for the domestic markets. Linkages with Local Technical or Research Institutions The country studies were consistent in their finding that the linkages between the firms in the selected industries and local research or technological institutions were poorly developed or non-existent. In Singapore, although substantial resources had been devoted by the government to such institutions, the use of these research centres by local firms was discouraging. This finding was not a reflection on the capabilities of these institutions but rather an indication of the almost total reliance of the firms on their parent companies' own R&D facilities. In the Philippines, nearly half of the firms surveyed reported that they had access to the services of government or university research facilities; however, the assistance requested was, in most cases, limited to the testing of materials. Moreover, the interaction between the firms and these external institutions appeared to be sporadic and irregular. The conclusion of the Philippine study was that each group perceived that the other had very little to offer them. However, Philippine university professors and research directors replied that their equipment and staff were capable of advanced and high technology work, and that they were very interested in doing more applied research. The key informants from the firms reasoned that they had very little information about the services that such research centres could perform. The need for closer communication and information dissemination between the two groups was evident from these responses. The Thai study likewise reported that a serious constraint to successful adaptation or indigenous development of technology was the inadequacy of collaboration and technical exchange between firms and local R&D institutes. Less than 20 per cent of the Thai firms had established linkages with any of the available local research centres. A comparison between local and foreign firms found that foreign firms had, in fact, more frequent interaction with the research institutes although, in general, the linkages were concerned merely with tests of product quality. Occasionally, firms provided lecturers to local colleges and universities or admitted students for short practical training stints in their factories. The potential, however, for more productive collaboration between the two groups was considered to be great but, as yet, unfulfilled. The Malaysian study mentioned a number of public research centres, most of which were agriculture-oriented. Only the Standards and Industrial Research Institute of Malaysia (SIRIM) was involved in the adaptation and dissemination of manufacturing technology. It also offered design and fabrication services and undertook projects in engineering design, drafting, 2--:d the development of low-

The Experiencefrom Selected A SEAN Industries

55

cost automatic systems. However, the study reported that there were very few firms that had taken advantage or had benefited from domestic institutions such as SIRIM. The general practice was to simply import the capital equipment and technical services. Linkages with Suppliers and Sub-contractors The existence of linkages between firms and local suppliers of intermediate goods or sub-contractors is an indicator of the development of the technological infrastructure in a country. These linkages contribute to the diffusion of technology and skills, the spread of ripples from one sector of an economy to another. The flow of technology can move in both directions, from the supplier to the firm, and from the firm to the supplier. In the Philippines, for example, equipment and raw materials suppliers were cited by the surveyed firms as important sources of technical assistance and information. The firms reported that suppliers, especially foreign suppliers, routinely provided information on equipment and raw materials in the form of letters, brochures, proposals, and trade journals. The materials usually contained comparative data on the costs and advantages of new technology or equipment. The personal visits and oral communications of the suppliers' representatives were seen as useful in developing greater awareness and understanding of new developments in production processes and products. In Thailand, suppliers of machinery and equipment organized overseas training programmes as part of technology transfer agreements. Locally-controlled Malaysian and Singaporean firms, likewise, maintained links with their suppliers of machines, materials and components, to enable them to have ready access to technical assistance when required. Some firms were also able to absorb technology by undertaking job contracts for multinational firms which provided them with specifications and instructions, and sometimes even with the essential inputs and equipment. Such symbiotic relationships appeared to have substantial positive impacts, particularly when firms were able to provide technical assistance to their local subcontractors and suppliers. One of the common constraints to technological dC\·elopment mentioned by sample firms was the low capability oflocal input suppliers. In the Philippine study, the plastics, metal, and rubber industries were specifically mentioned. The Singapore study cited the strong dissatisfaction of the multinationals with the poor quality and unreliable delivery schedules of local subcontractors. The Malaysian study reported that local sub-contractors supplied less than 25 per cent of the input requirements of the surveyed firms, the complaints being their high cost, irregular supply, and low technical level. Similar experiences were described in the Thai and Indonesian reports. Given these common difliculties, it appeared that firms in the machinery and electronics industries should have a natural interest in the development and strengthening of the technical skills of their local sub-contractors and suppliers. In Thailand, less than 50 per cent of the firms reported any technical support provided to local suppliers or sub-contractors. Among those where linkages existed, the assistance provided did not seem to be substantial. The assistance was in the form of technical advice (33 .3 per cent of the surveyed firms), provision of

56

A SEAN Overview

technology ( 17.2 per cent), and visits oflocal suppliers to the firm's plant (3 .4 per cent). Firms in the electronics industry exhibited stronger linkages with local suppliers compared to firms in the machinery industry. Japanese firms were also found to have stronger linkages with local suppliers compared with firms of other nationalities. One explanation for these findings was that a number of firms in the sample were, in fact, supplying intermediate goods and components to a number of foreign firms in the two Thai industries. In Malaysia, very minimal linkages were reported with local industries. This was due to the export-orientation of the electronics industry which concentrated almost exclusively on the assembly of imported parts and components. The Singapore study revealed that firms, especially foreign ones, provided assistance to their local sub-contractors who were usually small indigenous firms. Out of a total of 65 firms that were surveyed, only 4 replied that they did not provide technical advice to local sub-contractors. The data from the Philippine sample showed that one of the characteristics common to firms with higher levels of technological capability was their active support to their local sub-contractors and suppliers. Support was provided in the form of production loans and technical advice. What perhaps served as a strong incentive for these firms was the restriction on the importation of intermediate goods and the policies on local content. These limitations pressured local firms to find local substitutes or to encourage local suppliers to produce them. It is clear that, for such industries as machinery and electronics, the reliability and technical competence of the local suppliers of inputs and intermediate goods are critical. In these times of rapid technological change and highly competitive markets, industrial performance depends to a large extent on developing and maintaining effective communication and technical exchange between interdependent sectors and production units. Clearly, one of the most important, yet one of the weakest links is the one between the firm and its suppliers and sub-contractors. This is clearly an area where government can play a key role. In addressing these gaps in industrial organization, the ASEAN countries may find that Japanese industry, with its finely developed networks of small sub-contractors, will have valuable lessons to offer. From the foregoing analysis, it is clear that many similarities exist among the ASEAN countries with regard to their experience in technology transfer and skills enhancement. The common characteristics revolve around the tight control of multinational firms over product choice and production methods, leaving the local subsidiaries or affiliates with very limited control over technology. Most of these subsidiaries of multinational firms, particularly Japanese multinationals, are also required to purchase machinery, parts, and components from their parent companies. Expenditures for such purchases usually constitute a large proportion of the total costs of technology transfer, although there are usually other payments such as royalties and fees for technical assistance. The studies indicate that very little R&D is being carried out in the local subsidiaries of multinational firms. Much of such R&D work is usually conducted by the parent companies to avoid duplication and to exploit economies of scale. Consequently, the parent companies of multinationals are also the major,

The Experience from Selected A SEAN Industries

57

sometimes exclusive, source of technical information and assistance to most of the firms in the ASEAN machinery and electronics industries. This technological dependence was, in fact, found to be relatively more pronounced among the subsidiaries or affiliates of japanese multinationals. This finding should therefore serve as a major input in the formulation of policies and plans for future technical and economic co-operation between A SEAN and Japan.

5

Conclusions and Recommendations

Although there were differences in emphasis between the individual countries of ASEAN, several themes were evident. One was the importance of organized skills development programmes and R&D activities as means for enhancing technology and skills. There was also the recognition that most country governments and multinational firms had major roles to play in facilitating and supporting the process of technology transfer and skills upgrading in A SEAN. Most governments were encouraged to support this process through the provision of required incentives, educational infrastructure and support institutions. Multinational firms were expected to expand their investments in training and R&D and to adopt a more liberal stance with respect to agreements concerning the use of proprietary technology. The papers also noted the need for stronger collaboration between private firms and the government, and between local firms and their foreign partners in various programmes and projects related to technological development in ASEAN. Constraints to Enhancement of Technology and Skills The five country studies cited numerous obstacles and impediments to the development of greater technological capacities. It was not at all surprising to find many common difficulties among the ASEAN countries. These constraints are grouped into four categories as follows: a) constraints related to host country policies; b) constraints related to practices of multinational firms; c) constraints related to the characteristics of local firms; and d) constraints related to the attributes and values of the local labour force. Constraints Related to Host-Country Policies

The studies identified several constraints or problem areas which were related to domestic policies or host government regulations. In the Philippine study, the inadequacy of existing product standards was cited as a common problem of firms in the electronics industry. The firms claimed that variations in the quality of both production inputs and final products were extremely difficult to control. Firms were often forced to source even locally available raw materials from foreign sources in order to maintain a certain level of quality and standardization of products. The firms felt that the establishment of more detailed product standards

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A SA'AN Overview

which would cover even raw materials and intermediate goods would encourage local firms to raise their levels of technological advancement. The Singaporean study pointed out that certain policies tended to favour large, foreign firms instead of smaller local firms. The longer gestation period required by local firms for introducing R&D activities put them at a disadvantage in their access to non-discriminatory across-the-board incentives and assistance offered by the Economic Development Board. Foreign firms that were able to have quicker start-up of new activities were in a better position to benefit from incentives such as the standard five-year pioneer relief from income tax. The Thai study concluded that high tariffs on imported equipment and inputs posed the most important bottleneck in the process of the international transfer of technology in the surveyed industries. Local firms that were not granted exemptions from the tariffs were left at a disadvantage. Moreover, Thai firms found the process of applying for promotional privileges (such as reimbursement or deduction of customs duties) time-consuming and complicated. Another concern voiced by those interviewed was related to the Thai Government policy oflimiting the stay of foreign experts and consultants in Thailand. Most of them considered the allowable stay to be too short to permit the expatriates to assist the firms effectively in the process of technology transfer. Another view was that the government's policies and measures did not have· substantial impact on the R&D programmes of local firms. The respondents noted that, in Thailand, there were no explicit policies and measures which supported or encouraged local R&D. The Malaysian study described similar experiences. The finding was that Malaysia's policies and regulations regarding technology transfer have thus far been confined to financial aspects such as tax concessions, limits on foreign equity participation, repatriation of profits, tariffs, and quotas. As such, there had been very little consideration given to the kinds of technology being introduced, the process of dissemination and absorption, the decentralization of technical or management decisions, or the economic linkages between industries. The Technology Transfer Unit of Malaysia, as in the Philippines, existed primarily as a screening and regulatory body, rather than as an active contributor to the technology transfer and skills development process. Constraints Related to the Practices of Multinational Firms Another set of obstacles and impediments to local technological development was related to the practices and policies of the technology suppliers themselves. The Thai report acknowledged the tremendous control exercised by parent companies over local subsidiaries. Usually, the degree of control was reflected in the number of expatriate managers that were posted with the subsidiary. The reluctance of most multinationals to increase the autonomy of the domestic firm was evidenced by the slow process of indigenization in Thai joint-venture companies. Another common constraint, especially among Thai-Japanese joint ventures, was the language barrier between the expatriates and the local staff. Th~i engineers normally spoke only the Thai language, whilst foreign experts, dispatched by the parent company, had no knowledge ofthe local language. The high costs of technology transfer, as well as the restrictive conditions attached to the

Conclusions and Recommendations

61

agreements, were also among the key difficulties linked to the policies of multinational firms. In Indonesia, the limitation~ found in technology contracts were considered to be a major constraint to local technology development. The prevailing view was that technology suppliers were not effective in their efforts to transfer their technology and know-how, and that restrictions were deliberately included in the contracts to reduce the flexibility of the local firms and to maintain their dependent position. This conclusion was also echoed in the Malaysian and Philippine reports, where numerous restrictive conditions were cited, in spite of the existence of a technology contracts screening unit in both countries. Although the Singapore study did not have much concern regarding the existence of restrictive conditions (given Singapore's open-door policy towards multinationals), there were indications that the predominant channel of technology transfer - the turn-key project - fostered technological dependence. The turn-key approach was preferred by multinationals because it minimized start-up time and costs, but there seemed to be very little real transfer of skills or development oflocal technological capacities. This was noted particularly among] apanese firms where positions occupied by expatriates were slow in being indigenized. Under such conditions, the danger was that there may be little incentive for the local staff to upgrade their abilities and to aspire for greater managerial responsibilities. Where the indigenization process was slow, skilled labour turnover rates were usually high, as more qualified personnel were forced to seck their fortunes in firms that offered at least a more promising career path. Another issue raised in the Singapore paper was the propensity of multinationals to centralize their most sophisticated and up-to-date technological operations at their home bases. The explanations for this were the economies of scale in R&D, the long gestation periods involved, the uncertainty of the outcomes, and the risks of theft or piracy. This tendency to keep R&D close to home made it difficult, especially in the science-based industries, for the ASEAN countries to attract R&D operations to locate here. Constraints Related to the Characteristics of Local Firms One of the limiting factors which local firms recognized was the size of the domestic market. The Philippine, Malaysian and Singaporean studies argued that the small domestic markets in these countries made it difficult to justify large investments in R&D equipment. In the highly competitive industries, R&D work is usually tailored to meet the needs of large markets, and, therefore, immediate access to information on these markets is critical. Singapore, for instance, cannot hope to conduct effective market-oriented R&D because it lacks proximity to the major markets for most of its products. The Malaysian study goes a step further to say that a country's bargaining power is closely related to the size of its market, and, in effect, smaller countries have much less bargaining power in technology negotiations with multinationals. The weak bargaining power of the ASEAN countries in the markets for technology was also underscored by the Indonesian study which cited other explanatory factors. The dependence of local firms on multinationals for other resources

62

A SEAN Overview

such as credit, equity or equipment prevented the local firms from negotiating for the best conditions. Moreover, the low level of technological literacy among the staff of local firms and the absence of information on technology alternatives and their costs led many local firms to accept unreasonable and disadvantageous terms for technology transfer. Another point, supported by the Malaysian paper, was that local firms in some cases were not interested in negotiating the best attainable terms. They were willing to accept less than favourable terms, terms which in fact ran counter to the national interest; some of them actually resented the roles played by agencies that screened technology agreements. Such firms were content to maintain their smooth relationships with technology suppliers rather than develop their own capacities to adapt or generate technology. The limited capabilities of local support industries and sub-contractors also posed problems for firms that were seeking to reduce their dependence on imported technology. These firms claimed that the poor quality of local raw materials and intermediate goods had discouraged them from conducting research on the increased use oflocal materials and components. The problems with unreliable deliveries and poor quality were cited especially by the surveyed firms in the Philippines, Malaysia, and Singapore. The other factors cited in the studies were related to the inadequacy or absence of R&D facilities in most firms. In the Philippine study, this situation was attributed in part to the high costs of sophisticated R&D equipment. In other studies, the explanation was that the technological gap between the multinationals and the local firms was so great that it would take superhuman efforts and considerable resources to even catch up with the leaders in industrial technology. As such, efforts at R&D were limited to such activities as materials and product testing, quality control, and minor cosmetic adaptation of products to suit local tastes. Constraints Related to the Attributes of the Local Labour Force

A number of constraints were related to the characteristics of the local labour force. Some of the problems were traced to the educational system in the country; others were linked to the culture, values, and attitudes of workers. The Indonesian study placed heavy emphasis on the weaknesses in the national educational system and the fact that there were relatively few opportunities for Indonesians to receive technical training within the formal school system. Moreover, the Indonesian educational system was not geared to keep up with the rapid changes in technology or even to cope with the social and economic problems that come with technical change. Consequently, the ability of the existing labour force in Indonesia to absorb and adapt technology was weak. This situation served to perpetuate the country's dependence on technology imports and its weak negotiating ability vis-a-vis technology suppliers. The need to develop a larger base of skilled workers was cited in all the other country reports. In Thailand, the lack of qualified personnel among recipient firms resulted in the incomplete or improper transfer of technology. One reason cited was the fact that the high salaries paid by the foreign companies attracted many of the more qualified workers from the local firms. The high turnover, therefore,

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63

among skilled workers resulted in the lack of continuity in technology transfer to the local firms. Similar problems were reported for the Philippines with the difference being that most of the qualified Filipino workers sought jobs in the Middle East. A turnover rate of nearlY' 30 per cent per year among skilled workers discouraged the Philippine electrical appliance firms from investing more in human resource development. Singapore and Malaysia likewise experienced similar problems of a limited manpower base and inadequate skills profile. These conditions, in fact, discouraged multinationals from locating their most sophisticated production operations in Singapore. An additional constraint, as pointed out by many of the foreign firms in Singapore and Malaysia, was the attitude of the labour force. The lack of discipline, dedication, and interest in skills improvement was a common complaint cited in both studies. In Singapore, firms also were concerned about the high incidence of poaching and job-hopping, which indicated certain risks in passing on trade secrets and critical know-how to local workers. Another often encountered view characterized Singapore engineers as lacking the enquiring mind that R&D work required. This rigidity was attributed to the autocratic mode of instruction in Singapore which produced proficient engineers and scientists with little experience in or aptitude for less structured, creative pursuits. Based on an assessment of the above constraints, the various country teams formulated recommendations addressed to governments, to technology suppliers (multinational firms), and to technology recipients.

Recommendations to Governments

This section presents the specific recommendations addressed to the ASEAN governments and their responsible agencies. Although there are differences among the countries with regard to emphasis, many of the different proposals are in fact consistent with each other and complementary. Most of the recommendations are addressed to public-sector institutions. This again is a reflection of the large responsibility that rests with government in shaping the environment and in creating the appropriate climate for technological advancement. As explicated in the Malaysian country paper, the common flaw is that the scientific and technological infrastructure in these countries remains relatively undeveloped. The components of that infrastructure remain basically unconnected and unintegrated. For example, there is the well documented communication gap between the industrial, educational, and research sectors within the ASEAN countries. An effort to link these essential sectors into a productive, interdependent system requires government to play a leading role. It necessitates the creation of a supportive environment for creativity and innovation, a climate that will activate and energize the other key actors - entrepreneurs, scientists, technologists, researchers, and educators. The steps in creating the proper climate and infrastructure will need to be guided by a comprehensive plan and policy framework. The ideas and suggestions contained below are therefore intended to provide other concepts and ideas for consideration by policy-makers.

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ASEAN Overview

1. Explicit Policies and Guidelines The absence of explicit policies on technology transfer, adaptation and development, especially in relation to foreign direct investment, was noted in Thailand, Indonesia, Malaysia, and the Philippines. Clear, specific guidelines were felt to be necessary in order to avoid ambiguity and to permit the concentration of scarce resources in priority areas of technology development.

2. Registration and Screenin,g of Technology Contracts With the exception of Singapore which advocates an open-door policy, the country studies all recommended closer scrutiny of technology agreements in order to minimize restrictive clauses and, if possible, to encourage technology suppliers to build real technological capacities. The Indonesian study recommended the establishment of a ''National Registry for the Transfer of Technology'', which would serve essentially the same functions as the technology transfer units already operating in Malaysia and the Philippines. This National Registry would function to screen out restrictive clauses and to require the inclusion of standard clauses which would commit suppliers to establish local R&D facilities and to allow sub-licensing of the same technology locally. The Malaysian, Philippine, and Thai studies also emphasized the inclusion of certain terms and conditions. The Malaysian study endorsed the mandatory requirements for the traini'ng and upgrading of the labour force and the limitations on the number of foreign nationals that may be employed within a specific time period. This view was likewise supported by the Philippine and Thai studies which suggested stricter screening of expatriates or foreign experts to ensure that they had high teaching skills, the willingness to transfer technology to local staff, and, if possible, some command of the local language.

3. Specification of Priority Industries and Types of Firms In general, the studies recommended the specification of priority industries and types of firms for technological upgrading and development. The Indonesian study suggested that such priorities be spelled out in its proposed national plan for science and technology. The Philippine report noted that, in the past, scarce resources had been scattered among many sectors, and that the emerging science and technology plan should concentrate efforts on target sectors, especially those industries which had comparative advantages. The Malaysian study proposed a shift in attention towards medium-scale industries that are domestic resourcebased or domestic market-oriented. The argument presented was that such firms tend to be more receptive to conducting local R&D and to adapt foreign technology to local requirements. Malaysian-controlled firms were likewise identified as being more receptive to policies promoting technological self-reliance. The Singapore study found that joint ventures were the most effective mechanism for technology transfer and that the government should encourage ventures in which local entrepreneurship could play a more active role in technological advancement. The report also suggested that medium- or small-sized firms should perhaps be encouraged to serve as the foreign joint-venture partners, because such

ConcluJions and Recommendations

65

firms may be more easily encouraged to increase their technological commitment to the host country. 4. Upgrading of the Educational System The weaknesses of the format education system were considered to be a primary cause of the low technological capability in most of the ASEAN countries. The Indonesian report, therefore, proposed a restructuring of the system based on a comprehensive national manpower requirement survey. Similarly, the Thai study recommended that specific courses in manufacturing technology should be offered at technical college and university levels, and that experts from foreign jointventure companies should be asked to offer lectures and practical training for students. In Malaysia, the reorientation of the college and university curricula was also felt to be a necessity; the existing curricula were considered to be too academic and theoretical whilst the needs in industry were for a more technical and applied curricula. Moreover, the Malaysian report noted the significant shortage of middle-level skilled manpower and recommended a shift in the orientation oflocal schools to reduce the gaps in supply. In the Philippines, a key problem was the lack of linkages between various academic institutions and local firms, although there seemed to be numerous opportunities for mutually beneficial collaboration. The government was therefore encouraged to establish linkages between the two groups by providing the seed funds for joint ventures between local firms and institutions in training and R&D. 5. Supportjor Technical Training Alternative schemes for expanding activities m technical trammg were also described in the reports. The Singapore study recommended an emphasis on the retraining of older workers in order to improve their flexibility, productivity, and relevance. Assistance for the planning and implementation of such a scheme could be sought from japan, a country which has been confronting similar problems for many years. The Philippine report argued that the government should be offering subsidies for training programmes in priority industries along the same lines as the training fund in Singapore. In addition, the Philippine report proposed that attention should be given to expanding the supply of qualified trainers who can then further disseminate skills to other personnel. Special programmes should be offered by the government to develop and utilize supervisors who are able to effectively impart technical know-how to their subordinates. Both the Malaysian and Thai papers likewise urged schools and government agencies to continue to support manpower development through the offering of short training courses. A related proposal, from the Philippine and Thai reports, argued for the publication and wider dissemination of technical textbooks, handbooks, and manuals. Such materials are important elements in the skills development and technology transfer process, and thus should enjoy the support of the relevant public agencies. These materials could easily be translated into the local language and reproduced at low cost. They could then be used in various training programmes by local firms and training institutes.

66

A SEAN Overview

6. Incentives for R&D and Technology Tranifer Direct incentives should be provided for technology transfer and local R&D activities, according to the studies from Thailand, Malaysia, the Philippines, and Singapore. The Thai paper proposed that the approval of special promotional incentives for foreign firms should be tied to the presentation of a definite plan for technical manpower development and skills upgrading. The Malaysian paper likewise recommended a government subsidy for R&D projects on condition that the beneficiary firms initiate the projects, specify their needs and contribute a portion of the investment required for the R&D project. The Philippine study suggested several specific measures- the reduction of import duties on laboratory equipment and the offering of tax credits for investments or expenditures for local R&D work. Another suggestion was for the government to establish an R&D laboratory which local firms could use. Such a facility would permit even smaller firms to use equipment which would normally be beyond their budgets, and to pay according to the extent of usage. The establishment of these "common" laboratories would also encourage collaborative work and technical exchange among different firms. The Singapore report noted the positive views of most firms regarding the government's incentives for R&D and technology transfer, and recommended that the Economic Development Board should perhaps relax its criteria for granting subsidies and incentives in order to allow even small, local firms to participate. The high costs and risks involved in R&D work had, in the past, discouraged many small firms from undertaking formal, long-term R&D activities. 7. Reorientation of the Patent System The Thai paper argued that a developing country cannot compete against developed nations under the international patent system. The sheer number of foreignheld patents in every industry would benefit developed countries to a greater extent compared with developing nations. However, domestic inventors or scientists should be encouraged to generate technology and to innovate, and a patent system allows them to benefit economically from their work and to enjoy protection from piracy. The Thai paper, therefore, urged the consideration of a domestic patent system and supported Thailand's exclusion from the international patent system. This view was also supported by the Indonesian paper. 8. Establishment of a Technology Development Centre The Malaysian, Thai and Singaporean studies endorsed the creation of technology centres within their respective countries. In Malaysia, the role of such a centre would be to provide entrepreneurs with the latest information on specific technologies- its costs, appropriateness, and various alternatives. The Singaporean study envisions such a centre to operate as a science and technology library which would be involved in the collection and dissemination of information on patents and would offer even small firms access to published materials on various technologies. The Singaporean report also recommends the creation of an organization which would advise local inventors or firms regarding the commercial potential of inventions or assist them in the development and exploitation of technological innovations. The assistance can include financing via venture capital or even the start-up

Conclusions and Recommendations

67

of production operations. The Thai study called for the establishment of official centres for technology transfer and development with counterpart funding from the government and private firms. The Thai centres would have three related functions- firstly, the provision of technical education programmes for local technicians, engineers and managers; secondly, the adaptation and development of industrial technology; and thirdly, the dissemination of technical information and the provision of advice to local firms. 9. Formulation of Acceptable Product Standards The Philippine and Thai studies proposed the establishment and promotion of industry standards that cover not only manufact~red finished products but also sub-components and raw materials. This step was considered essential in raising the technological level of the local industry and in gaining acceptance for manufactured products in markets abroad.

Recommendations Addressed to Firms 1. Expansion of Local Training Activities All five studies recognized the value of skills development and training and encouraged both locally-controlled and foreign-controlled firms to step up their technical training programmes. The Thai report emphasized the importance of on-the-job training as the primary vehicle for building the capacity of a firm to apply new technology. It also suggested that foreign firms should opt for holding training programmes at the local site in addition to those held at parent-company headquarters. The justification was that having the training on-site permits the testing of the technology against local requirements. The Malaysian report pointed out that current training efforts usually benefit those who are already more educated and skilled, whilst unskilled or semi-skilled workers, who account for a large part of the local industrial labour force, are left unaffected by the available training schemes. Firms should therefore make an effort to extend their training programmes to include these groups, especially through on-the-job training methods. The Philippine study suggested the organization of collaborative training activities among several small firms in the same industry. There are many instances where the demand for training in a single firm is not sufficient to .iustify a separate training activity or the hiring of professional trainers. The collaboration of several firms with similar requirements may permit such activities. Here, the government can also lend a hand by contributing part of the resources required in order to motivate local firms to participate. 2. Contribution of Foreign Firms to the Development of the Host Country The studies enjoined multinational firms to be conscious of their expected roles and responsibilities in developing host country technological capabilities. The Philippine study encouraged these firms to develop effective methods of transferring technology. It was noted that oftentimes expatriate technical consultants are experts in their fields but are unable to communicate or impart their knowledge

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A SEA X Oi'm'ieu'

and abilities. The Malaysian report suggested that foreign firms should likewise be prepared to concede certain terms as evidence of their willingness to serve as partners in national economic development. Three major concessions were recommended - firstly, the willingness to take a minority equity position in a joint venture; secondly, the willingness to yield managerial control to local people within a certain period of time; and thirdly, the willingness to share technology and markets. 3. Strengthening of Industry Associations Both the Philippine and Thai reports recommended the strengthening of business or industry associations. The s~udies concluded that such organization can play effective roles in technology dissemination. The presence of such associations can also facilitate the delivery of technical assistance and other services that public agencies provide. As mentioned in the Philippine study, such groups can contribute to the establishment of industry standards and to the monitoring of quality and product acceptability. Moreover, well-organized business associations can help in bridging the gap between technologically advanced sectors, consisting of large-scale companies, and technologically backward sectors, usually composed of many small companies. An effective sub-contracting exchange can be a useful outcome of a well-organized industry association. 4. Linkages with Local Suppliers and Sub-contractors It is in each firm's interest to have dependable, qualified suppliers or sub-contractors. The studies have demonstrated that the low technological base of most sub-contractors in the machinery and electronics industries has been a source of concern for both local and foreign firms. The studies also show that such difficulties can be mitigated through the establishment of constructive linkages between subcontractors and client firms. These linkages have been valuable channels for providing technical assistance and advice to the local sub-contractors. If such relationships were to be promoted throughout the industries, the impact could be farreaching. The Thai, Singapore and Philippine papers considered this approach to be feasible and appropriate, given the conditions in each country.

Recommendations for Regional Co-operation 1. Regional Technology Transfer Centre The Malaysian and Thai reports proposed the establishment of an ASEAN technology transfer centre to serve as the venue for co-operative research and development efforts. The objective of such an institution would be to identify common needs and requirements and to allow for the pooling of resources and expertise from the ASEAN countries. The centre would also permit special technology exchanges in areas where a member country is in a position to export technology to other member countries. There may also be scope for the member countries to share training personnel and facilities. Japan is seen as a potential source of funding and technical support for such a centre. An important step in this direction

Conrlusions and Rerommtndations

69

was the establishment in May 1985 of the Okinawa International Technical Training Centre, funded by the .Japanese Government. 2. joint Negotiations with Multinational Firms The weak bargaining power of local firms was related to the small size of the domestic market in most of the ASEAN countries. One suggestion offered by the Malaysian and Thai papers was the conduct ofjoint negotiations with foreign technology suppliers. The collaboration of two or more ASEAN firms in bargaining for technology would definitely increase their clout which would result in more favourable terms for technology transfer. 3. Scholarship Schemes for Technical Studies The Singapore paper proposed that the Japanese Government and firms should expand the existing scholarship programme for study in Japanese technological institutes. The proposed scheme would include a period of practical training with Japanese firms in Japan, after which, the scholars could return to their home countries to assume positions in Japanese joint-venture firms. The proposal would not only provide direct opportunities for skills development and technology transfer, but it would also enhance the career prospects and trustworthiness of the local staff who go through the programme.

PART TWO

JAPANESE OVERVIEW

1

Industrialization, Technology Transfer, and Skills Enhancement in ASEAN: A Japanese View

Introduction

The development of technologies and skills has long been considered essential to the industrialization of nation-states both in the West and in the East. To the extent that industrialization was interpreted as synonymous with economic development and that even the earliest starter of industrialization in its modern sense, the United Kingdom, had its predecessors elsewhere in Asia and Europe, the development of modern technologies and skills in any nation-state included the transfer, adaptation and diffusion of the technologies and skills imported from overseas. Looking at the crucial importance of technologies and skills in the historical process of industrialization in the East and West, and acknowledging that the development of modern indigenous technologies and skills would be a time-consuming and long-term process, most of the developing countries bent towards rapid industrialization today have placed a priority on the transfer, adaptation, and diffusion of modern technologies and skills from overseas in their respective national development programmes. The ASEAN countries have been no exception to this, and technology and skills enhancement has become a key word in their national development efforts. The ASEAN countries, however, soon realized that the development and diffusion of modern technologies and skills, whether indigenous or imported, would require the availability of skilled, technical, administrative, professional and managerial manpower, together with appropriate government policies for generating such manpower resources and channelling financial resources for such development and diffusion, as well as international environments conducive to this. To facilitate this process, the ASEAN countries have installed a variety of investment incentives and reorganized educational and training programmes at the national level and obtained financial and technical assistance on bilateral and multilateral bases, while joining other Third World countries at the international level in introducing international codes of conduct on technology transfer and transnational corporations. The purpose of this chapter is to review the general patterns of industrialization, foreign manufacturing investment, and the diffusion of modern technologies,

74

Japanese Overvieu

whether indigenous or imported, in the ASEAN countries in the process of their rapid industrialization. Changing Patterns of Industrialization Behind the high rates of economic growth during the last decade, ranging from 6. 0 per cent for the Philippines to 8.5 per cent for Singapore in terms of the annual average real growth rates of gross domestic product (GDP) for the period 1970-82, there was a rapid pace of industrial development in all the A SEAN countries except Brunei which depended heavily upon the exploration, development, and export of petroleum and natural gas. As Table 1 indicates, a positive correlation exists between the growth of manufacturing production and that of gross domestic product. During the period 1970-82 manufacturing output went up in real terms by 9.3 per cent per annum in Singapore and by 6.6 per cent in the Philippines. By the same token, manufacturing employment during the latter part of the 1970s expanded most rapidly in Singapore (8.3 per cent per annum) and more slowly in the Philippines (4.2 per cent). As a result, the structure of national production went through drastic changes in all the ASEAN countries. Although the production and export of primary commodities remained a major economic activity for Brunei, Indonesia, Malaysia, the Philippines and Thailand, manufacturing production as a percentage ofGDP and the export of manufactures as a percentage of the total merchandise exports showed a perceptible increa.se during the last decade (see Table 2). Moreover, reflecting the changing structure of gross domestic production, industrial and manufacturing employment expanded more rapidly than total employment in all the ASEAN countries, though its share as a percentage of total employment varied widely among the member countries (see Table 3). Structural changes were also quite perceptible within the manufacturing sector during the 1970s in all the ASEAN countries. In contrast to the slow expansion of food and beverages, and textiles production, sharp increases were observed in the output of chemical and metal products and machinery manufacturing industries. The only exception to this general trend in the region was the Philippines where the TABLE 1 AveragE' Annual Growth ofGDP and Manufacturing Production, 1960-82 (In per cent)

GDP Countries

1960-70

1970-82

Indonesia Malaysia Philippines Singapore Thailand

3.9 6.5 5.1 8.8 8.4

7.7 7.7 6.0 B.5 7.1

SOURCE:

Manufacturing 1960-70 1970-82 3.3

6.7 1:l.O 11.4

World Bank, WorldDeueloprnrntReport, 1984,pp. 220-21.

13.4 10.6 6.6 9.3 9.9

75

Industrialization, Technology Transfer, and Skills Enhancement in AS£AN

TABLE 2 Structure ofGDP and Merchandise Exports, 1960 and 1982 (In per cent)

Manufactures as % of Total Merchandise Exports 1960 1981

Manufacturing as % of GDP 1960 1982

Countries

13 18 24 26 19

8 9 20 12 13

Indonesia Malaysia Philippines Singapore Thailand

4 20 45 56 27

6 4 26 2

SOURCE: World Bank, World Development Report, 1984, pp. 222-23 and 236-37.

TABLE 3 Structure of the Labour Force, 1960 and 1980 (In per cent)

Countries Indonesia Malaysia Philippines Singapore Thailand

Agriculture 1960 1980 75 63 61 8 84

58 50 46 2 76

Industry 1960 1980 8 12 15 23 4

12 16 17 39 9

Services 1960

1980

17 25 24 69 12

30 34 37 59 15

SOURCE: World Bank, World Development Report, 1984, pp. 258-59.

opposite was true. Steady restructuring of industrial production and employment towards more capital- and technology-intensive and higher value-added industries took place in response to the changing comparative advantages of the A SEAN economies in the face of rising demand at home and abroad for such products with high -income elasticity. The pace of industrial restructuring in the ASEAN economies was quickened by two major factors respectively on the supply and demand sides - that is, the development of modern technologies and skills, indigenous and imported, and further integration into the rest of the world economy by way of an increasing export and import dependence. To the extent that the two major factors were responses to a higher degree of competition both in product and factor markets, the latter accelerated the pace of industrial restructuring in the ASEAN countries, strengthening their industrial base and at the same time making them more susceptible to fluctuations and structural changes in the world economy.

76

Japane.sr

Ol'f'TZ'U'l£'

Growth and Patterns of Foreign Manufacturing Investment

The inflow of private direct foreign investment has been phenomenal in the ASEAN countries during the last two decades. The stock of direct foreign investment in the ASEAN region, amounting to US$2.05 billion in 1967, rose to US$5.85 billion in 197 4. In 197 5 alone, the net inflow of direct foreign investment in the region amounted to US$3.03 billion. Between 1971 and 1977 reported increases in the book value of the stock of direct foreign investments amounted to US$4,265 million in Indonesia, US$1 ,820 million in Malaysia, US$795 million in the Philippines, and US$1, 140 million in Singapore. 1 Most of the direct foreign investment during the last decade went into the mining and manufacturing sectors, unlike in pre-war days when most of the investments were made in the agricultural and mining sectors [sec Table 4]. This trend is consistent with the strategy of industrialization adopted in these countries. Within the manufacturing sector a rapid expansion has been observed in the textiles, electrical machinery and chemical industries, reflecting a broadening of the industrial base through import-substitution and export promotion. "These three branches accounted for 40 per cent of foreign investment in manufacturing in Indonesia, 37 per cent in Malaysia, about 60 per cent in the Philippines, 23 per cent in Singapore, and about 70 per cent in Thailand by the end of the 1970s. " 2 In the 1970s, direct foreign investment flows among industries and countries, though varying from year to year, constituted roughly half of the total private investment outlays in the manufacturing sector in the ASEAN region.l To the extent that equity ratios are a fairly acceptable indicator of how far the parent firms influence management decisions in their subsidiaries, those firms with majority foreign ownership may be considered to have been under the control of the foreign parent firms. And many firms, even with minority foreign ownership, arc likely to be managed in consultation with their foreign partners, in view of the fact that joint-venture agreements usually stipulate the type of product line, the quality of products, the kind of production processes and machinery installed, and the amount of initial investment in plant and equipment, as well as product prices. Thus, the level, quality, cost, adaptation, and diffusion in the recipient developing country of the technologies transferred from abroad would depend as much upon foreign equity ratios and the management strategy of foreign parent firms as upon the quality of the local partners and manpower resources as well as the government policies of the host country. Partly reflecting a deep concern with the possible adverse impact of the management control by foreign parent firms and partly out of a sheer sense of nationalism, selective policies have been laid down in all the ASEAN countries with respect to industry sectors from which foreign equity ownership is barred or discouraged, the maximum ratio of foreign equity participation and the level and time and period of localisation of expatriates and the accompanying schemes of training required for all levels and categories of employees. These policy measures have all been intended to maximize the benefits and minimize the cost associated with private direct foreign investment. Throughout the region Japanese- and U.S. -based corporations have been the

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In US$ million. 2 As percentage of the total stock of foreign direct investment. 3 As percentage of the total stock of foreign direct investment in the manufacturing sector. 4 The data are for the following years: 1970 for Indonesia and Malaysia, 1973 for the Philippines, 1971 for Singapore, and 1969 fi>r Thailand. 5 The data for 1976 refers to 1975. SOURCES: Economic Development Board, Annual Report, 1976-77 (Singapore, 1977), p. 10; Ryokichi Hirono, "Economic Development of Southeast Asia in the Sixties'', Seikei UniversityJournal of Business and !Oconomic.\, Vol. 2, No.1, pp. 51 and 68, and Vol 3, ;\lo. 1, p. 112; the Japan Institute of Labour, ~Vaga K uni Kazgai Shinshut.ru Kigyi5 no Ri5di5 A1ondai f Labour Prohlcm.l atJapanesc !Ontrrj;ri.ll:sj- Singapore (Tokyo, 1975), p. 37; and -Malaysia (Tokyo, 1975), p. 17; United Nations, Tramnational Corporation\ In ~Vor/d Development: A RtExamination (New York, 1978), p. 259.

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