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Chapter I East Asia as the hub of a mega-competition era
The end of the Cold War saw China, Eastern Europe and other former Communistcountries began a shift toward market economy which integrated the formerly divided East-West markets. In Europe, the Western European market of 350 million people merged withthe Eastern European market of 130 million, marking dynamic progress in the drive towardthe optimal allocation of capital and management resources and launching the worldeconomy into an era of full-scale globalization—the “mega-competition era”. Over thedecade of the 1990s when global mega-competition became manifest, the only region toachieve a steep growth rate of around seven percent in a fiercely competitive environmentwas East Asia1. While the Asian currency crisis sparked in 1997 remains fresh in memory,East Asia’s subsequent dynamic rebound has brought it to prominence once more as a worldeconomic growth center. Although it will have to deal with structural issues such as theworking-out of non-performing loans, over the medium- to long-term, East Asia willundoubtedly sustain its place as a focal point in the world economy.
What lies behind East Asia’s strong growth? In addition to information technology (IT)innovations, there would seem to be three key factors supporting recent growth inparticular—the swift pace at which East Asian trade and investment barriers are beinglowered; the new entry of US and European companies through M&As; and the emergence ofChina on the back of its new market economy. The first section of Chapter I looks at thecurrent situation in terms of the intense competition occurring in East Asia and changes ininternational industrial and trade structures. Section 2 examines the three factors which haveinduced mega-competition in East Asia, including the reduction of trade and investmentbarriers.
Section 1 Changes in the East Asian industrial and trade structure
【【【【Key points】】】】
1. Dynamic growth and intensifying competition For a decade as of the 1970s, East Asia maintained a growth level of around seven percent,high even by world standards. In terms of trade, East Asia’s share of world imports andexports soared from a mere five percent in the 1970s to 18 percent for exports in 1999, 15percent for imports. In terms of capital too, East Asia attracts around 40 to 50 percent of theforeign direct investment and bank financing received by developing countries as a whole.Amid the globalization of goods, money, and people, East Asia is acquiring increasing statureas a world growth center.
1 See Introductory Notes for the definition of East Asia used here.
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Foreign companies are also boosting their East Asian presence, spearheaded by Europe andthe US. Striking examples include the automobile industry, which is in the midst of globalbusiness reorganization and production relocation; the distribution and electronic machineryindustries, where Western companies are moving particularly aggressively; and the financeindustry, which, powered by large Western financial institutions, has experienced a majorshake-up since the Asian currency crisis. At the same time, local companies are also emergingas strong contenders, as in the case of China’s television market. East Asia is now the stagefor increasingly intense global competition.
2. Changes in industry and trade patterns As seen in the active trade in intermediate goods, cross-border international specializationin East Asia is becoming more and more intermeshed, prompting greater regionalinterdependence. Japan’s trade structure is also depending more heavily on trade within EastAsia, with trade in intermediate goods growing particularly strongly.
China has rapidly expanded its production capacity in a wide range of areas from thecomparatively labor-intensive textile industry through to the comparatively technology-intensive information machinery industry. As a result, even as East Asian interdependencedeepens, the “flying-geese” pattern of development which has characterized the region todate is giving way to a new pattern in which national economic development levels are nolonger necessarily a deciding factor in industrial location.
1. Dynamic growth and intensifying competition(1) Strong growth in East Asia The East Asian economy has boomed since the 1970s. A comparison of the average realGDP growth rates for the various regions for each decade since the 1970s reveals East Asia tobe well ahead of the rest of the world (Fig. 1.1.1). East Asia’s nominal GDP has alsoskyrocketed from a slim US$100 billion in the late 1960s to more than US$2.4 trillion in thelate 1990s, while the region’s share of world GDP has been rising since the 1990s inparticular, reaching 8.5 percent in 1997 (Fig. 1.1.2).
0
2
4
6
8
10
12
1960s 1970s 1980s 1990s
JapanUSEast AsiaEU 15Latin America
(%)
Figure 1.1.1 Trends in real GDP growth rates
Notes:1. Figures are average growth rates for each decade. Figures for the 1990s are up until 1998. 2. OECD figures have been used for the 15 EU countries, with figures for the 1990s up until 1997.Sources: WDI(World Bank), Global Development Network Growth Database (World Bank), National Accounts (OECD).
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0
1
2
3
67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 980
1
2
3
4
5
6
7
8
9
Nominal GDP (left scale) World share (right scale)
Figure 1.1.2 Trends in East Asian nominal GDP and world share
(US$ trillion) (%)
(Year)Sources: Global Development Network Growth Database (World Bank), IFS (IMF).
(2) East Asian flows of goods, money and people continue to expand(a) Flourishing East Asian trade in goods The value of East Asian trade has shot up since the late 1980s in particular. Where neitherimports nor exports topped the US$20 billion mark in 1970, by 1999 exports had grown toaround US$970 billion and imports to around $US850 billion. East Asia’s share of worldtrade value also soared from only five percent in 1970s for both exports and imports to 18percent for exports and 15 percent for imports in 1999 (Fig. 1.1.3).
(b) East Asia attracts world capital In terms of money, East Asia has seen major gains in both direct investment and banklending from abroad. Direct investment has grown consistently since 1982, with East Asia’sshare among developing countries expanding particularly strongly in the early 1990s, to thepoint where by far the greatest amount of world capital flowing into developing countries is
0100200300400500600700800900
1,000
70 72 74 76 78 80 82 84 86 88 90 92 94 96 9802468101214161820
East Asian export value (left scale)East Asian import value (left scale)East Asian export share (right scale)East Asian import share (right scale)
Sources: DOT (IMF), Taiwan Statistical Data Book (Council for Economic Planning and Development).
(US$ billion) (%)Figure 1.1.3 Trends in East Asian trade value and world share
(year)
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LatinAmerica
641
Central andEasternEurope Russia
22
East Asia846
Japan130
139
59
72
56
178
6
65
2
45
EU308
US184
(1998; US$100 million)
158
absorbed by the region (Fig. 1.1.4). Looking at the value of direct investment in developingcountries by Japan, the US and the EU in 1998, in all cases the largest amount of investmentflowed into East Asia, which now draws 51 percent of all world investment in East Asia,Latin America, Central and Eastern Europe and Russia (Fig. 1.1.5).
0100200300400500600700800900
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 990102030405060708090
Direct investment value (left scale)Developing country share (right scale)
Figure 1.1.4 Trends in inward East Asian FDI and developing country share(US$ 100million) (%)
Notes: 1. Taiwan is not included among East Asian countries.Notes: 2. See Appended Note 1.1.1.Sources: IFS (IMF), WDR (World Bank).
(Year)
Figure 1.1.5 Value of direct investment from Japan, the US and the EU into developing countries
Notes:1. Circled figures for developing countries indicate the value of direct investment received from the world as a whole.Notes:2. “Central and Eastern Europe” refers to Albania, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, former Yugoslav Republic of Macedonia, Poland, Rumania, Slovakia and Slovenia.Sources: WDI (World Bank), IFS (IMF), Monthly International Payments Statistics (Bank of Japan), European Union Direct Investment Data (Eurostat), materials from the Taiwan Council for Economic Planning and Development, SCB (US Department of Commerce).
In terms of bank lending too, figures for outstanding loans from BIS-reporting banks(Japan, US, EU) reveal a total of US$451 billion to East Asia from Japan, the US and the EUas at the end of June 2000. This figure comprises 47 percent of all outstanding loans todeveloping countries, indicating that an enormous amount of money is flowing into East Asia
US920
Central andEastern Europe
650
Russia440
Japan1,320
50530
19
1,687 357
EU4,550
20
4
Figure 1.1.6 Bank financing for developing countries by BIS-reporting banks (Japan, US, EU)
Notes: 1. Singapore and 2. The top figur 3. Circled figure 4. “Central and Lithuania, for 5. “EU” refers tSource: Consolidated I
(Fig. 1.1.6). The magrowing attractivene
(c) Active flows of Annual world vistimes the level in 191985 to 11 percent,
5
1
2
3
4
5
6
7(1 m
NoSou
－5－
LatinAmerica
2,820
East Asia4,510
Singapore andHong Kong
2,070
1691,197
105
1,989
285
(As at the end of June 2000; unit: US$ 100million)
Hong Kong are offshore markets.es for Japan, the US and the EU indicate the amount lent to developing countries.s for developing countries indicate the amount of financing received from the world as a whole.Eastern Europe” refers to Albania, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia,mer Yugoslav Republic of Macedonia, Poland, Rumania, Slovakia and Slovenia.o the 13 EU members with the exception of Greece and Luxembourg.nternational Banking Statistics (BIS).
ssive amount of capital being absorbed by the region is indicative of thess of East Asia from an investment perspective.
personnelitors to East Asia reached around 65 million in 1997, approximately three85 (Fig. 1.1.7). East Asia’s share of visitors also grew from 7 percent in
evidence of the growing influx of people into East Asia.
89
0
0
0
0
0
0
0
0
85 86 87 88 89 90 91 92 93 94 95 96 970
2
4
6
8
10
12
14
No. of visitors (left scale)World share (right scale)
illion persons) (%)Figure 1.1.7 Trends in visitors to East Asia and world share
(Year)tes: Taiwan is not included among East Asian countries.rce: Statistical Yearbook (UN).
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The number of Japanese visitors, particularly businesspeople, is increasing. While visitorsto East Asia as a percentage of all Japanese visitors abroad fell from 49 percent in 1980 to 43percent in 1999, the percentage of those leaving Japan for East Asia on business rose from 41percent in 1980 to 59 percent in 19992. This trend highlights the growing business interactionbetween Japan and East Asia.
(3) East Asian competition intensifies East Asia has maintained strong growth even caught up in the tide of globalization, but thechanging environment since the Asian currency crisis which was triggered in July 1997 hasraised the heat of regional competition still further. Lower corporate costs in the wake of thecrisis and East Asian countries’ deregulation of foreign capital have provided a goldenopportunity for foreign affiliates to break into the market. The flood of new market entrantsfrom abroad has brought to bear new competitive pressure on local companies and existingforeign affiliates such as those from Japan. At the same time, East Asian growth has spurredthe growth of many local companies and brought them to market attention. Some of these areeven sufficiently competitive to be able to go up against foreign affiliates, spurring an evenmore competitive environment.
(a) Foreign players boost competition (Automobiles) The East Asian automobile industry is in the midst of dramatic change in terms of itscompetitive environment due to the realignment of forces in the automobile world,particularly among Western manufacturers, and the physical relocation of production bases.Firstly, Western companies are coming into East Asia through capital tie-ups with stronglycompetitive Japanese and Korean affiliates already established there (Fig.1.1.8). Such tie-upsare intended to help them build cooperative ties with highly competitive local partsmanufacturers, as well as to secure sales bases in the Asian market, which is expected tocontinue to grow. Global automobile manufacturers such as General Motors, Ford andDaimler Chrysler from the US and Europe and Toyota from Japan are also re-locating theirEast Asian production bases. For example, General Motors and Ford have decided toconcentrate their production bases in Thailand, which has few regulations but a growingagglomeration of parts manufacturers. With AFTA3 in the wings, their strategy is to draw intheir production lines, which have until now been scattered throughout the ASEAN countries,in order to reduce costs. Responding to these moves by Western companies, Toyota, whichhas the largest share of the Thai market, has developed a plan to boost the local procurementrate of its Thai affiliate to 100 percent by 2003 to improve its price competitiveness.
(Computers and related equipment) Tumbling prices for computers and related equipment have made greater production speedand price competitiveness vital. Western newcomers are buying up local Asian companies
2 Annual Report of Statistics on Regal Migrants (Ministry of Justice).3 The ASEAN Free Trade Area will reduce basically all intra-regional tariff rates on manufactured andagricultural goods to zero to five percent by the end of 2002.
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through M&As and using EMS4 companies to boost their performance in these two areas.Western companies are pushing ahead in particular with commissioned production fromSingaporean and Taiwanese companies, which have a competitive advantage in terms ofentering the Chinese market and in computer production. Western companies are alsoactively boosting production in Malaysia, which offers a growing electronics industryagglomeration (Fig. 1.1.9). Western parts manufacturers are beginning to flood into the Asianmarket, as seen in the buy-up of NatSteel Electronics (Singapore), an EMS company, bySolectron (US), another EMS company, and the way in which Quantum, a US data devicemanufacturer, has strengthened and expanded its production facilities in Malaysia. USdemand, the locomotive behind world demand to date, is expected to fall away over thecoming years, and this could intensify competition among Western, Asian and Japanesecompanies still further.
Figure 1.1.8 Western manufacturers moving into East AsiaCompany Year Form Country Action
1996 Investment Japan Raises share in Mazda to 33.4%, signaling a full-scale move into East Asia.1998 Production Thailand
Begins primarily export-directed production of the Ranger through a joint venturewith Mazda.
Assembly,sales
Malaysia Ford Malaysia, which assembles and sells Ford vehicles, increases its share amongnon-nationally produced cars to third place (up 93% on the previous year) in 2000behind Toyota and Nissan, an improvement from seventh place in 1996.
FordMotors
2000Technologytransfer China Agrees to establish a joint venture with Tyouan Motors grupe.
1998/99 Investment Japan Capital tie-ups with Isuzu, Suzuki, and Fuji Heavy Industries.Sales Indonesia Increases share in General Motors Indonesia, which handles domestic Opel sales, to
51%.2000Production Thailand Launches operation of GM’s first passenger vehicle assembly plant in Asia.Investment China Invests in Itubishi Motors together with Shanghai Motors.Sales Philippines Sells Fuji Heavy Industries’ Forester. Uses this sales base.
GeneralMotors
2001Investment Korea Now in negotiations to purchase Daewoo, a deal rejected by Ford.
InvestmentJapan,Korea
Investment of 34% in Mitsubishi Motors. Investment of 10% in Hyundai. Executivessent out.2000 Sales Malaysia Plans move into local market using the advantage of its investment in MitsubishiMotors, which has a capital tie-up with Proton.
Production Thailand Plans to raise local parts procurement ratio in order to cut costs.DaimlerChrysler
2001 Localestablishment China Sets up a local branch in Beijing as the company’s Asian headquarters.
1999 Investment JapanInvestment in Nissan Motor Corp. and Nissan Diesel Motor Co. Starts reorganizationof Nissan.Renault
2000 Investment Korea After purchasing Samsung Motors, establishes Renault-Samsung.Sources: Company annual reports, newspaper articles.
Figure 1.1.9 Western computer and IT-related manufacturers moving into East AsiaYear Industry type Company Asian company Country Action
Mobile handsets Felix II Computers (Netherlands)LG-powered cathode tubes,LCDs, mobile handsets Korea Buy-out
Mobile handsets HP (US) Omni Industries SingaporeCommissioning of mobile handsetproduction
Semi-conductors IBM (US) Mosel Vitelic TaiwanCommissioning of DRAMproduction
Semi-conductors Felix II Computers (Netherlands) TSMC Taiwan InvestmentElectronic parts Solectron (US) NatSteel Electronics Singapore Buy-outHDD Western Digital (US) － Malaysia Bolstering production facilities
Computers Compaq (US) Inventec TaiwanExpansion of commissionedcomputer production
2000
Mobile handsets Motorola (US) Flextronics Singapore InvestmentComputers Dell (US) － Malaysia Construction of second plantComputers HP (US) － Malaysia Construction of new printer plantData devices Quantum (US) － Malaysia Bolstering production facilities2001
Computers Dell (US) Quanta TaiwanExpansion of commissionedcomputer production
Sources: Company annual reports, newspaper articles.
4 EMS (electronic manufacturing service) takes the old OEM (original equipment manufacturing) methoda step further to allow one-stop orders including capital and parts procurement.
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(Distribution) Asia’s distribution market has traditionally been characterized by a comparative immaturedistribution system due to a lack of large-scale capital, but now small Western retailers arepouring in, leaving Western markets with their growing oligopolies and poor growthprospects for the brighter prospects of Asia (Fig. 1.1.10). The horde of newcomers is spurringcompetition among Western companies in the local markets, with some even being forced towithdraw. At the same time, the sophisticated distribution control systems which the Westerncompanies are bringing with them are increasing competitive pressure on local small- andmedium-sized retailers, encouraging a transformation in East Asian distribution systems.
Figure 1.1.10 Main Western retailers moving into East Asia
Country US France Germany UK Netherlands Belgium
Company Wal-Mart Calfur Ocean Casino Metro TiscoRoyalAhold Macro Delize
Year 1998 2000 1998 2000 1998 2000 1998 2000 1998 2000 1998 2000 1998 2000 1998 2000 1998 2000Japan U.C. 1 U.C. U.C.
Korea N.A. 5 6 20 2 7
China N.A. 6 14 27 1 4 7 U.C. 40 M.E. 4 4
Taiwan 21 24 U.C. 1 10 1 7 8
Hong Kong 4 M.E.
Singapore 1 1 14 M.E. 22 30Malaysia 5 6 U.C. 45 39 7 7
Indonesia 1 7 8 10 12 20Thailand 7 11 1 1 20 24 14 24 39 41 16 19 5 20Philippines U.C. U.C. 7
Note: Data is for the end of 1998 and the end of 2000. :N.A. as Not Available. U.C. as Under Consideration. M.E. as Market Exit.Sources: Company annual reports, newspaper articles.
(Finance) After the 1997 Asian currency crisis, many local East Asian banks experiencedmanagement crises as a result of skyrocketing bad loans and credit uncertainty. Governmentssought an early recovery for their monetary regimes by, for example, relaxing financingregulations for financial institutions and eliminating fixed terms. Foreign affiliates haveresponded to these changes by using corporate acquisitions to move in to the Asian market(Fig. 1.1.11). Financial institutions backed by foreign capital have promoted large-scalefinancial restructuring as well as the provision of new financial instruments and services,boosting competition with the participation of local financial institutions.
Financial restructuring in, for example, the case of Korea, brought about a mergeragreement in October 2000 for the Korea National Bank and Housing & Commercial Bank,the major stockholders of which are now Goldman Sachs (US) and ING (Netherlands)respectively. The Korean Exchange Bank, which expressed reservations over participation inthis merger, is controlled by Commerzbank (Germany). In Thailand, progress has been madein nationalizing or privatizing banks which have undergone management collapses, with allthree banks for which sell-outs have been determined going to foreign affiliates
Figure 1.1.11 Foreign-affiliated financial institutions moving into East Asia
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Year Buy-out bank Bank bought out Market1998 Commerzbank (Germany) Korean Exchange Korea
Standard Chartered (UK) Nakornthon ThailandHong Kong-Shanghai (UK) Bangkok Metropolitan ThailandABN AMRO (Netherlands) Bank of Asia ThailandABN AMRO (Netherlands) Great Pacific Savings PhilippinesING (Netherlands) Housing & Commercisl Bank KoreaSanwa Bank Siam Commercial ThailandNewbridge Capital (US) Korea First Bank KoreaGoldman Sachs (US) Korea National Bank KoreaStandard Charter (UK) Bank Bali PT IndonesiaAllianz (Germany) Korea First Life Korea
1999
Allianz (Germany) Hana Bank KoreaCity Group (US) Fubon Securities,Fubon TaiwanCerberus Capital Management LP（US） Cho Hung Bank Ltd KoreaGIC Real Estate(Singapore） Seoul Finance Centre Korea
2000
Standard Chartered (UK) Chase Manhattan Hong Kong Hong Kong
Sources: Company annual reports, newspaper articles.
(Nakornthon Bank, Ratanasin Bank, and the Bangkok Metropolitan Bank will go toStandard Chartered (UK), United Overseas (Singapore) and Hong Kong-Shanghai (UK)respectively). In terms of new financial services, for example, Allianz AG (Germany)established an asset-management company to work out bad debts, and having invested inKorean life insurance company and bank, is now beginning to operate trust assets.Meanwhile, ABN AMRO (Netherlands) is tackling e-commerce in Asia. These moves byforeign-affiliated financial institutions are putting new competitive pressure on local financialinstitutions, which were protected by financing regulations before the Asian currency crisis,and should boost the competitiveness of the formerly frail financial sector.
(b) Competition boosted by growth of local companies The influx of foreign affiliates into East Asia is sparking greater competition in the regionand also encouraging the growth of local companies. Local companies which initially wentlittle further than technology tie-ups with foreign or affiliates merger-led production havegradually mastered international-level production control, and today, a growing number oflocal companies are establishing international competitiveness in production of their ownbrand. The emergence of strong local companies in China’s television market is one goodexample.
In the 1990s, the Chinese television market became dominated by color televisions,production of which soared. Local companies originally engaged primarily in technology tie-ups and merger-led production with Japanese affiliates in particular, but later began toimprove their production technology and use their price competitiveness, independent salesnetworks and after-sales service networks to produce their own brands. In the late 1990s, thecolor television market saw increasing brand competition, to the extent that while in 1996Japanese affiliates captured the top market share, they were not even among the top four
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Figure 1.1.12 Changes in companies with top shares in the Chinese TV market
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1993 1994 Mar-96 May-96 Dec. 1997 Dec. 1998
Changhong
Konka
ＴＣＬ
Nanjin Panda
Beijing
Matsushita
Sony
Phillips
（％）
Note: Statistics drawn from the PRC Market Statistics Yearbook for 1993 and 1994, the Chinese Electronic Journal from March 1996 onward.Sources: “Chinese home appliance corporate business models”, IDE World Trends, No. 66 (Institute of Developing Economies), China’s economic structural adjustment and financial/government finance issues: Impact on the industrial structure of the growth and weakening of state owned companies (International Trade and Investment Research Institute).
companies a bare two years later, and local companies now fill all the top rankings (Fig.1.1.12). These new companies at the top of the rankings operate flexibly, procuring their mainparts through merger production with foreign affiliates but engaging in minimum-cost in-house production of other general-use parts, a strategy which has allowed them to maintainboth their quality levels and price competitiveness while boosting their market share.However, competition among local companies is also heating up—Chohang, for example,which has been China’s biggest television manufacturer as a result of its immense scale andlow-price strategy, is now beginning to lose its market share to Konka and TCL and theirstrong sales networks. Moreover, not only is the local market faced with more and moretelevision digitalization and the forward march of informatization, but China will have toallow direct sales by foreign companies as of its accession to the WTO, which will putforeign affiliates back in the running and push competition up a further notch.
2. Changes in industrial and trade Patterns(1) Deepening international specialization in East Asia(a) Increasing sophistication of East Asian specialization East Asian trade in the 1990s was characterized by the way in which the trade value ofintermediate goods such as parts and materials grew faster than the trade value of finishedgoods. Intra-regional trade as a whole shot up 92 percent in the case of finished goods from1990 to 1998, but 179 percent for machinery parts. This shows in the share of parts trade inmachinery trade as a whole, which rose from 35 percent to 51 percent. Figure 1.1.13compares the trade value and share for machine parts trade among Japan, the NIEs, theASEAN 4 and China between 1990 and 1998, demonstrating a marked rise in intermediategoods trade in East Asia. This increase can be traced to the transfer of technology fromforeign companies to their East Asian affiliates, consequently upgrading the region’sproduction base. The reduction and elimination of trade and investment barriers in East Asiahas also contributed substantially to creating an environment in which companies are freer tochoose their cross-border production bases and conduct their economic activities. As a result,the intra-regional international specialization structure in East Asia has become increasingly
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sophisticated.
However, examination of statistics by industry reveals that not all industries haveexperienced a similar lift in intermediate goods trade. Figure 1.1.14 divides machinery typesinto general, electrical, transport, and precision machinery and compares the results. Whiletrade in interim goods has grown and specialization progressed in industries such as electricalmachinery, transport machinery was among those in which the same progress was not evident.
Figure 1.1.14 Comparison by industry of value of Japanese and East Asian intermediate goods trade
Figure 1.1.13 Expansion of intermediate goods trade in Japan and East Asia Trade Value of machinery parts (1990-98) (Unit: US$100 million)
Share of machinery parts in machinery as a whole (1990-98)
Notes: 1. Because of data restrictions, 1992 data for China and Hong Kong and 1991 data for the Philippines have been used for 1990, and 1996 data for Taiwan and 1997 data for Thailand used 2. The figures below country names indicate trade value as a percentage of world trade value, share as a percentage of East Asian trade share.3. The figures within brackets for the NIEs and the ASEAN 4 indicate trade in intermediate goods within these groupings.
Source: AIDXT (Institute of Developing Economies).
1990
2
Japan775
ＮＩＥｓ380(69)
ＡＳＥＡＮ４125(5)
China55
186
50
72
37
10
43
4
270.2
43
17
1998
11
Japan1262
ＮＩＥｓ1126(236)
ＡＳＥＡＮ４618(55)
China208
299
217
153
76
68
85
40
559
192
69
1990
39%
Japan21%
ＮＩＥｓ34%(49%)
ＡＳＥＡＮ４47%(69%)
China41%
23%
53%
34%
46%
5%
42%
32%
9%24%
53%
44%
1998
82%
Japan33%
ＮＩＥｓ48%(66%)
ＡＳＥＡＮ４71%(84%)
China64%
46%
67%
38%
63%
22%
57%
64%
22%58%
74%
67%
●Total value of general machinery parts (1990 → 1998) (Unit: US$100 million)
●Total value of electrical machinery parts (1990 → 1998) (Unit: US$100 million)
Note: Same as Fig. 1.1.13.Source: AIDXT (Institute of Developing Economies).
1990
0.6
Japan254
NIEs91(14)
ASEAN427(2)
China14
44
14
24
7
4
8
0.6
5 0.0
12
4
1998
3
Japan403
NIEs285(40)
ASEAN4157(22)
China57
62
41
37
17
24
21
7
15 4
47
17
1990
1
Japan308
NIEs232(47)
ASEAN487(3)
China27
104
32
29
20
5
29
2
14 0.1
26
11
1998
6
Japan586
NIEs726(179)
ASEAN4418(29)
China105
193
160
98
44
35
54
21
29 4
134
46
●Total value of transport machinery parts (1990 → 1998) (Unit: US$100 million)
●Total value of precision machinery parts (1990 → 1998) (Unit: US$100 million)
1990
0.1
Japan114
NIEs13(1)
ASEAN42(0.2)
China2
11
1
12
0.4
0.6
1
0.1
0.00.0
0.4
0.2
1998
0.2
Japan144
NIEs40(4)
ASEAN415(1)
China9
13
3
6
2
3
3
1
1 0.0
2
1
1990
0.0
Japan52
NIEs11(1)
ASEAN42(0.0)
China2
7
1
2
1
0.4
2
0.2
1 0.0
0.4
0.4
1998
0.2
Japan87
NIEs27(4)
ASEAN49(0.4)
China10
17
3
6
2
4
3
3
4 0.2
1
3
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Industries display different trends in intermediate goods trade for the following reasons.Firstly, the growth in intermediate goods trade in the case of electronic machinery can beascribed to: (1) the wide range of products in terms of production technology, quality anddesign; (2) the comparative ease of separating product development and the processing,assembling and manufacturing processes; and (3) the relative lightness of parts andaccordingly low transport costs. Similar specialization has not occurred for automobiles andother transport machinery because: (1) many countries have policies in place to protect andfoster domestic industries; and (2) the many heavy parts involved mean comparatively hightransport costs, boosting the cost of specialization across physical distance.
(b) Japanese machinery industry builds specialization with Asia Fig. 1.1.15 examines trends in the trade specialization coefficient5, export ratio6 and degreeof import penetration7 of the Japanese machinery industry from 1965 through 1998. The tradespecialization coefficient fell twice, once from 1986 to 1990, and once from 1993 to 1996.The export ratio and degree of import penetration, however, reveal different patterns ofchange for these periods. This difference may demonstrate a gradual turnaround in Japan’sapproach to international specialization. In the first period, a lower trade specializationcoefficient was accompanied by a falling export ratio, while the degree of import penetrationbarely altered. This was due to the shift abroad of the machinery industry in response to theperiod of yen appreciation in the late 1980s, which meant that exports once primarily directedat foreign markets were instead being produced abroad. In the second period, on the otherhand, the falling trade specialization coefficient met with a slight rise in the export ratio,while the degree of import penetration also increased. The different response in this case wasdue to growing intra-industry trade and a deeper specialization structure between Japan andother countries, particularly in East Asia.
Figure 1.1.15 Trends in Japan’s machinery industry
0
5
10
15
20
25
30
35
65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 970.00.10.20.30.40.50.60.70.80.91.0
（％）
(Year)
Trade specialization coefficient(right scale)
First period Secondperiod
Notes:1. Trade specialization coefficient = (export value – import value)/(export value + import value) 2. Export ratio = export value/domestic production(output) 3. Degree of import penetration = import value/(domestic prduction(output) + import value – export value)Sources: Industrial Statistics Database (UNIDO), Trade Statistics (Ministry of Finance).
Export ratio (left scale)
Import penetration ratio(left scale)
5 Trade specialization coefficient = (export value – import value)/(export value + import value).6 Export ratio = export value/GDP.
－13－
Figure 1.1.16 compares regions and products in regard to the degree to which the tradevolume of the Japanese machinery industry increased in the 1990s. Exports from Japan havefallen steeply as of 1997, the year of the Asian currency crisis, but even compared to the 1990level, where there has been little sign of increase in product exports, parts exports have beengrowing to East Asia in particular. Japanese imports of both parts and products from EastAsia have also shown a striking upward curve. These data too suggest that the trade structureof the Japanese machinery industry in the 1990s lent toward specialization in parts exports,particularly to East Asia, while in terms of imports, Japan’s dependence on East Asia for bothparts and products rose. Within the machinery industry, export and import trends have beenparticularly marked for products and parts8 related to IT, a leading-edge industry. Fig. 1.1.17
Figure 1.1.17 Japan’s IT goods trade
0
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91 93 95 97 99 91 93 95 97 99 91 93 95 97 99 91 93 95 97 990
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Other regions
East Asia
East Asian share(right scale)
（100 million yen） （％）
IT product exports
Source: Trade Statistics (Ministry of Finance).
(Year)IT product imports
partsIT product exports
partsIT product imports
7 Degree of import penetration = import value/(GDP + import value – export value).
Fig. 1.1.16 Japan and East Asia trade patterns as seen in machinery and machinery parts
Note: Export and import values indexed with export and import value for 1990 set at 100.Source: Trade Statistics (Ministry of Finance).
Japan’s exports Japan’s imports
6 0
8 0
1 0 0
1 2 0
1 4 0
1 6 0
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9 0 9 1 9 2 9 3 9 4 9 5 9 6 9 7 9 8 9 9
P ro d u c ts ( E a s t A s ia )
P ro d u c ts ( r e s t o f th e w o rld )
P a r ts ( E a s t A s ia )
P a r ts ( re s t o f th e w o rld )
( Y e a r)
0
1 0 0
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9 0 9 1 9 2 9 3 9 4 9 5 9 6 9 7 9 8 9 9( Y e a r )
－14－
shows trends in Japan’s trade in IT-related goods. As is clear from the figure, while exports ofIT products have fallen away, those to East Asia included, parts exports have soared. Theincrease in IT parts exports to East Asia has been particularly substantial, with exports to EastAsia as a ratio of Japan’s total IT parts exports rising from 26 percent in 1991 to 56 percent in1999. In terms of imports, while both IT parts and products have shown an increase, thegrowth in imports from East Asia has been particularly large. The East Asian share of Japan’simports of IT products and parts has shifted up from around 40 to around 60 percent for bothcategories, with East Asia now beating out imports from other regions into Japan’s market.
(2) Changing East Asian development pattern due to emergence of China(a) Change in East Asian development pattern (Upgrading of Japan’s industrial structure) In terms of the major industries driving the Japanese economy, textiles in the 1950s gaveway to heavy chemicals in the 1960s, while as of the late 1970s, machinery came to the fore,with Japan upgrading its industrial structure a step ahead of the rest of Asia. Fig. 1.1.18captures the metamorphosis of Japan’s industrial structure since 1965 with indices based onproduction and domestic demand ratios. Where the textile industry had the greatest exportcompetitiveness in 1965, by the late 1980s it had shifted to an excess of imports, while theheavy chemicals industry passed its peak in the mid-1970s, replaced by machinery in termsof strong export competitiveness. The machinery industry too, although retaining a high level,began to slip away as of the 1985 Plaza Accord and the consequent shift abroad of Japanesecompanies.
Figure 1.1.18 Developments in Japan’s industrial structure
▲ 20
▲ 10
0
10
20
30
40
65 75 85 95
Textiles
Heavy chemicals
Machinery
（％）
Textiles industryshifts to excess ofimports
Note: Data takes the production/domestic demand (production + imports – exports) ratio and replaces this with (production/domestic demand – 1) x 100. This ratio expresses the production surplus/shortage compared to domestic demand, measuring an industry’s international competitiveness.Sources: ISD(UNIDO), Trade Statistics (Ministry of Finance).
(Year)
Machinery industryexport peak
Heavy chemicals industryexport peak
98
8 See Appended Figure 1.1.2 for a definition of IT-related products and parts.
－15－
(Changes in East Asian development pattern) Asia is said to have echoed Japan’s development path in a flying-geese pattern9. Fig. 1.1.19shows trends in the international competitiveness of the textile industry in East Asia since1980. As the figure suggests, since the 1980s, Japan’s textile industry has begun toexperience an excess of imports, while the NIEs, and then the ASEAN 4 and China, havegradually boosted their exports. Fig. 1.1.20 similarly examines trends in the internationalcompetitiveness of the machinery industry. Japan’s industry began to decline as of the mid-1980s, with the NIEs improving their export competitiveness, followed by the ASEAN 4.However, this flying-geese pattern of development in East Asia has also begun to changewith the emergence of China. China is not only pushing up its production and export volume,but has also increased its international competitiveness from the comparatively labor-intensive textile industry through to the comparatively technology-intensive machineryindustry. As can be seen in Figs 1.1.19 and 1.1.20, China’s textile industry has become moreinternationally competitive since the late 1980s, while the machinery industry too has rapidlyacquired export competitiveness since the mid-1990s. These trends suggest that East Asia isbeginning to shift away from the flying-geese development pattern to a new pattern.
▲ 40
▲ 20
0
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80 85 90 95 98
JapanNIEsASEAN4China
Fig. 1.1.19 International competitiveness trends in the East Asian textile industry（％）
NIEs fallASEAN4 rise
ASEAN4 stagnationChina rise
NIEs rise
(Year)
Note:1.Ratio:(domestic production-domestic demand)/domestic demand * 100 (domestic demand=domestic production + import - export) 2.This shows the international competitiveness of industrial sector.Sources: AIDXT (Institute of Developing Economies), ISD(UNIDO).
▲ 70
▲ 50
▲ 30
▲ 10
10
30
50
80 85 90 95 98
JapanNIEsASEAN4China
Fig. 1.1.20 International competitiveness trends in the East Asian machinery industry（％）
Japan fallNIEs rise
ASEAN4rise
SteepChinarise
(YEAR)
Note:1.Ratio:(domestic production-domestic demand)/domestic demand * 100 (domestic demand=domestic production + import - export) 2.This shows the international competitiveness of industrial sector.Sources: AIDXT (Institute of Developing Economies), ISD (UNIDO).
(b) Emergence of China (Emergence of China in terms of production and exports) The unique development pattern observed above for China is also present in its production 9 The theory of a flying-geese pattern of development was put forward by ??Motomu Akamatsu?? in themid-1930s, when Akamatsu (now a professor emeritus at Hitotsubashi University) was teaching at theNagoya Commercial High School. This economic development theory concerned national industrialdevelopment patterns, as well as the pattern of the international transfer of industry in line with changes incomparative advantage.
－16－
trends by product. Since 1995 in particular, where the production volume of the NIEs andASEAN 4 has stagnated over a wide range of areas, China’s production volume has beensteadily increasing (Fig. 1.1.21). China has also rapidly expanded its share of Japan’s importstoo, which comprise two-thirds of East Asian domestic demand, becoming a force to bereckoned with as an export base (Fig. 1.1.22).
0
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90 91 92 93 94 95 96 97 98 990
2
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12
14
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ASEAN4
NIEs
China
ASEAN4 (right scale)
NIEs (right scale)
China (right scale)
Figure 1.1.22 Trends in value of Japanese imports from East Asia and world share(billion yen) (%)
(Year)Note: Bars indicate import value, lines the share in Japan’s total imports.Source: Trade Statistics (Ministry of Finance).
40
60
80
100
120
140
160
95 97 95 97 95 97 95 97 95 97
ChinaJapanNIEsASEAN4
Figure 1.1.21 Comparison of production value by industry in East Asia
Food processing
Notes:1. The figure uses 1995 production values as 100, indexing the 1997 production value to that. 2. Food processing: Foods, beverages, cigarettes Resource processing: Petroleum, coal, non-ferrous metals, ceramics and cement, paper and pulp,rubber, plastic. Labor-intensive: Textiles,clothing, leather and footwear, wood and furniture, other manufacturing. Capital-intensive: Chemicals, iron and steel, metal products Machinery: General machinery, electrical machinery, transport machinery, precision machinery.Sources: ISD (UNIDO).
(Year)
MachineryCapital intensiveLabor intensiveResourceprocessing
－17－
(Features of China’s industrial structure in terms of FDI) Changes have also been appearing in the behavior of foreign affiliates using East Asia as aproduction bases. In recent years, some companies have been shifting their production basesfrom the NIEs and the ASEAN 4 to China, or moving directly out of their home countries andbypassing the NIEs and the ASEAN 4 to set up production bases in China. Figure 1.1.23provides a breakdown of destinations for Japanese direct investment in East Asia by industry(textiles, machinery, electrical machinery, and transport machinery). China’s share has grownsubstantially in all cases. A look by industry at the total asset value of foreign affiliates inChina also indicates that companies are investing in both labor-intensive industries such astextiles and technology-intensive industries such as machinery (Fig. 1.1.24).
As seen above, China is attracting FDI as a production base from industries as wide-ranging as the comparatively labor-intensive textile industry and the comparativelytechnology-intensive IT industry, demonstrating a divergence from the flying-geese pattern.As a result, East Asia’s industrial structure is moving away from a time when industriallocation was determined by a country’s level of economic development, with competitionintensifying even in leading-edge industries. The fiercer competition environment shouldprovide East Asian companies with the incentive to boost their efficiency still further, actingas a locomotive behind the further development of the East Asian economy.
Figure 1.1.23 Trends in value of Japanese direct investment in East Asia
Source: State of Inward and Outward Direct Investment (Ministry of Finance).
0
500
1,000
1,500
2,000
2,500
3,000
82-85 86-89 90-93 94-99
NIEs ASEAN4
China
Textiles(100 million yen)
(fiscal Year)
0
500
1,000
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2,000
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82-85 86-89 90-93 94-99
NIEs ASEA N4
China
Machinery (general machinery)(100 millio n yen)
(fiscal Year)
0
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82-85 86-89 90-93 94-99
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C hina
Electrical machinery(100 million yen )
(fiscal Year)
0
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3,000
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82-85 86-89 90-93 94-99
NIEs ASEA N4
China
Transport machinery(100 millio n yen )
(fiscal Year)
Figure 1.1.24 Share by industry of foreign affiliates’ assets in China(%)
Industry 1999Telecommunications equipment 16.6Textiles and apparel 11.8Transport machinery 8.7Chemicals 8.5Electrical machinery 6.8Non-minerals 5.8General machinery 4.1Other 37.7Total 100.0Source: Chinese Statistics Yearbook (Chinese National Statistics Agency).
－18－
Section 2 Rapidly transforming East Asian competition environment
【【【【Key points】】】】
1. Reduction and elimination of trade and investment barriers in East Asia East Asian trade and investment barriers have been progressively reduced or eliminated asa result of the voluntary efforts undertaken by Asia-Pacific Economic Cooperation (APEC)members in response to the 1994 Bogor Declaration (produced by the Second Informal APECEconomic Leaders’ Meeting in Indonesia) and the Information Technology Agreement uponwhich basic agreement was reached at the 1996 WTO Ministerial Conference in Singapore.These lower trade and investment barriers are promoting competition in East Asia andlending great impetus to the region’s growth.
2. Sudden surge of Western companies into East Asia World direct investment (stock) approximately tripled over the 1990s, with directinvestment shooting up at a much faster pace than trade value. Direct investment in East Asiagrew faster than world direct investment, almost quadrupling. The global boom of M&As inthe late 1990s was echoed by a similar jump in cross-border M&As in East Asia. The 1997Asian currency crisis in particular spurred an M&A rush to triple the pre-crisis level. M&Asby Western companies mushroomed in stark contrast with the slower engagement of Japanesecompanies. This shift into East Asia by foreign companies, spearheaded by Western firms,should link with the emergence of strong local companies to help boost East Asiancompetitiveness still further.
3. Emergence of the Chinese economy and further market economy penetration The Chinese industrial structure of recent years has been characterized by major growthand the emergence of international competitiveness in both comparatively labor-intensiveindustries, such as textiles, and comparatively technology-intensive industries such aselectronic machinery. Since the late 1980s, export ratios for both the textile and machineryindustries have been rising. The Chinese industrial development process, meanwhile, hasbeen characterized by the way in which the movement of foreign companies into Chinathrough direct investment has led to the creation of industrial clusters. For example, foreigncompanies accounted for 46 percent of total Chinese exports and 52 percent of imports in1999, as well as 12 percent of fixed capital formation in 1996. At the same time, the locationof foreign processing and assembly industries in China has spurred the emergence of localparts companies, while clusters of such companies have led processing industries to formsimilar clusters nearby, setting in place a virtuous circle whereby clusters foster furtherclusters.
Stimulated by foreign companies’ FDI-led drive into China, the Chinese economy hasachieved remarkable growth—an average of approximately 10 percent in the 1990s—whileChina’s GDP had expanded to seventh in the world in 1998, following the US, Japan,Germany, France, the U.K., and Italy. Chinese exports have also roughly quadrupled over thelast decade, making China the ninth largest exporter in the world in 1999. In East Asia too,
－19－
China’s share of East Asian GDP rose from 25 percent in 1980 to 37 percent in 1999. Chinesedevelopment is therefore contributing significantly to East Asian growth, acting as the drivingforce behind the regional economy (China accounted for approximately 40 percent of EastAsian growth in the 1990s).
Further, China’s accession to the WTO as a means of promoting greater marketeconomy permeation is finally becoming a real possibility. WTO membership wouldcommit China to instituting reforms in line with international rules in a wide range ofareas, from improving market access (tariff reductions on manufactured goods,liberalization of distribution, etc.) through to protection of intellectual property rights.The resulting market economy permeation will increase domestic industrial structureadjustment pressure over the short term, but over the long term, this structuraladjustment should boost Chinese competitiveness and lead to economic growth. This isin turn will encourage dynamic changes in the industrial and trade map for East Asia asa whole, boosting the region’s competitiveness still further as one of the world’s keymanufacturing centers.
1. Reduction and elimination of trade and investment barriers in East Asia East Asian trade and investment barriers have been falling steadily as a result of the GATTmultilateral trade negotiations and work in fora such as APEC. The Second Informal APECEconomic Leaders’ Meeting in Indonesia in 1994 adopted the Bogor Declaration, whichcommits member economies to undertake voluntary trade liberalization and facilitation.Member economies have since been lowering and removing their trade and investmentbarriers based on their respective Individual Action Plans (IAPs). This trend is promotingcompetition in East Asia and contributing to regional growth. In order to continue to attractgoods, money and people and develop further as a world growth center, the region mustsustain its efforts to lower and eliminate trade and investment barriers and otherwise improvethe investment environment.
(1) Tariff cuts promote competition Fig. 1.2.1 shows trends in the average tariff rates of East Asian economies from the late
Figure 1.2.1 Trends in East Asian average tariff rates as reported in APEC Individual Action Plans
0
10
20
30
40
50
1988 1993 1996 1998 2000
ChinaHong KongIndonesiaKoreaMalaysiaPhillipinesSingaporeTaiwanThailand
(Year)
(%)
Note: Figures are simple average tariff rates.Sources: Manila Action Plan for APEC, IAPs(1996,1998,2000) (APEC).
－20－
Figure 1.2.2 Changes in tariff rates on some IT-related goods in East Asia （％）
Semiconductor parts Computers, etc.Economy 1995 2000 1995 2000
China 20 5 9 9Hong Kong 0 0 0 0Indonesia 0 0 20 0Korea 16 0 18.6 0Malaysia 5 * 0 30 * 0Philippines 25 * 0 50 * 0Singapore 0 0 0 0Thailand 35 0 40 0Taiwan 1 ** 0 4.2 ** 0Notes: 1.Semiconductors here are those falling in the HS Code 854290 category, except in the
case of Indonesia, Thailand and Taiwan,where data has been used for the HS Code854219 category.
2.Computers are those covered under HS Code 847110, except for Taiwan(data for HSCode 847130) and Malaysia (data for HS Code 847210 (copiers)).
3.Single asterisks indicate 1994 data, double asterisks 1997 data.Sources: Tariff schedules of the various countries.
1980s to 2000. As seen in the figure, tariff rates have generally dropped steeply (with theexception of certain products), suggesting that economies in the region have been proactivelyengaged in trade liberalization. East Asian tariff reductions have been strongly driven bytariff reduction efforts within the GATT/WTO multilateral framework and voluntary tradeliberalization and facilitation efforts in APEC. In the case of Indonesia, IMF financing at thetime of the Asian currency crisis led the country to lower its tariffs for chemical, metal andagricultural products as part of its structural reform program. Such positive efforts to reducetariffs indicate the new awareness of the East Asian countries of their high degree of tradeinterdependence, resulting in the active development of policies whereby tariff barrierreduction and elimination links to greater national competitiveness and profit, includingconsumer profit.
This drive to build national competitiveness as world-leading production centers throughreduced trade barriers is evident in moves to abolish tariffs on IT machinery and parts. Fig.1.2.2 presents the change in East Asian tariff rates on IT machinery and (some) parts. Onemajor force behind this trend has been tariff elimination based on the Information TechnologyAgreement on which basic agreement was reached at the 1996 WTO Ministerial Conferencein Singapore. The ITA provides developing countries with a grace period on some productsup until 2005, but basically required tariffs to be reduced to zero on around 200 IT machineryand parts by 1 January 2000. Tariff cuts for IT goods, intermediate goods included, willcontribute to the construction of an even more sophisticated international specializationstructure in East Asia, which is becoming a global hub for the production of IT machineryand parts, and will further strengthen the region’s competitiveness.
(2) Elimination of non-tariff barriers and greater transparency Along with tariff reductions, the East Asian countries have also been pursuing thereduction and elimination of import quotas and other non-tariff barriers, led by APECinitiatives. In line with their respective IAPs, APEC member economies are progressivelylowering and removing their non-tariff barriers in parallel with tariff barriers, while also
－21－
Figure 1.2.3 Examples of reduced or eliminated East Asian non-tariff barriers
Economy Examples of reduced or eliminated non-tariff barriersChina * Elimination of import quotas and import licenses for 13 items, including heavy machinery,
electrical machinery, and optical instruments (1997).Hong Kong * Relaxation of the requirements of registering as rice stockholders in order to import rice
(2000).Indonesia * Reduction of export taxes on leather, cork, ore and waste aluminum products (1998).
* Elimination of subsidies for fertilizers and aviation fuel (1999).* Deregulation in regard to car import license requirements (1999).
Korea * Elimination of the Import Diversification Program (1999).Malaysia * Elimination of import licenses for polyethylene, polypropylene, and diamonds (1996, 1997).Philippines * Elimination of all import licenses except for coal, coal derivatives and those which have to be
maintained for health, safety or national security reasons(1998).Singapore * Nothing in particular.Taiwan * Elimination of import licenses for 24 items (1999).Thailand * Elimination of regulations on import licenses for vinyl chloride monomers, benzine, engine
fuel, kerosene, high-speed diesel oil, naphtha, LNG and other fuel products (1998).Source: IAPs (1998, 1999, 2000) (APEC).
heightening transparency. Fig. 1.2.3 shows a number of examples of recent non-tariff barrierreduction and elimination efforts by the various member economies as reported in their IAPs.As seen in the elimination of import quotas by China, Malaysia, the Philippines and Taiwan,as well as Korea’s elimination of its Import Diversification Program, member economies areall working to cut out their non-tariff barriers and promote liberalization.
(3) Steady investment liberalization and greater transparency APEC is also leading the way in the elimination of investment barriers. To bring about afree and open investment environment, member economies are progressively extending MFNand national treatment and heightening transparency based on their respective IAPs. Fig.1.2.4 gives a number of examples of the recent situation in member economies in terms of
Figure 1.2.4 Examples of reduced or eliminated East Asian investment barriers
Economy Examples of reduced or eliminated investment barriersChina * Permission for certain foreign banks to operate RMB(Renminbiyuan) business in Pudong,
Shanghai (1998).
Hong Kong * Formulation of new patent and trademark ordinance and tightening the legislative frameworkagainst bootlegging activities (1998).
Indonesia * Elimination of local content program for motor vehicles producers (1999).* Formulation of anti-monopoly and unfair competition prevention laws (1999).
Korea * Formulation of Foreign Investment Promotion Act to promote investment in Korea byliberalizing foreign investment in principle (with the exception of some industries), simplifyingprocedures and providing one-stop service (1998).
Malaysia * Complete import tax exemptions for raw materials and intermediate goods used in themanufacturing industry, regardless of whether the finished product is exported or sold on thedomestic market (1999).* Elimination of local procurement requirements related to preferential investment treatment(1999).
Philippines * Permission for foreign capital participation in retail business in some industries given certainconditions (2000).
Singapore * Elimination of foreign investment restrictions in the banking and communications sectors(1999).* Permission to establish joint ventures with foreign companies in judicial services (1999).
Taiwan * Administrative procedures law introduced to ensure fair and transparent administrativeprocedures (1998).
Thailand * Elimination of local content conditions on car engines and motorcycles manufacturing (1998).* Establishment of one-stop service for visas and work permits (1997).
Source: IAPs (1998, 1999, 2000) (APEC).
－22－
reducing and eliminating investment barriers. Progress is being made in improvinginvestment environments in East Asia, including the better business environment resultingfrom permission for foreign capital participation in China and the Philippines and theprovision of one-stop services in Korea and Thailand, and fairer and more transparentadministrative procedures in Taiwan achieved through the entry into force of administrativeprocedures legislation.
The lowering and removal of trade and investment barriers in East Asia as described aboveis boosting East Asian competition (as seen in the previous section) and serving as a stronglocomotive force behind regional growth. Further efforts will be needed in this area to ensureEast Asia’s continued development as a world economic growth center.
2. Sudden surge of Western companies into East Asia(1) Emergence of East Asia as a business location for foreign affiliates(a) State of East Asian absorption of direct investment Over the decade of the 1990s, world direct investment (stock) roughly tripled, with directinvestment growing far faster than trade value. East Asia’s absorption of direct investmenthas also grown faster than the rate of increase in world direct investment to reach aroundUS$700 billion in 1999, or approximately four times the 1990 level. As a result, around 15percent of world direct investment, and around 50 percent of direct investment in developingcountries is now absorbed by East Asia (Fig. 1.2.5). In terms of the flow-basis share ofcountries providing direct investment in East Asia, where Japan provided around a quarter in1990, by 1999 this share had tumbled to less than 10 percent (Fig. 1.2.6). The US and Europe,on the other hand, have boosted their shares, with both outweighing Japan in 1999.
Looking at direct investment trends by country, the Western share in Malaysia, Thailandand Singapore has seen particularly striking growth. In 1990, Japan invested by far the mostin Malaysia (manufacturing industry only; license base), accounting for around 30 percent,while the US and Europe covered less than 10 percent. In 1998, however, investment from
0
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80 85 90 95 96 97 98 99 (Year)
(US$100 million)
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12
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16
Source: WIR (UNCTAD).
(%)
ASEAN4
NIEs
China
East Asian share of world DI(right scale)
Figure 1.2.5 Trends in direct investment (stock) into East Asia and share of world direct investment
－23－
Fig. 1.2.6 Trends in share of direct investment (flow) into East Asia by investing country/region
US$36.1 billion
ＥＵ10%
ＮＩＥｓ33%
Other17%
US14%
Japan26%
US$102.5billion
ＥＵ18%
ＮＩＥｓ25%
Other31%
US18%
Japan8%
19901999
Notes:1. Investment in China (1990) was calculated based on contracts, Hong Kong (1990) on questionnaires, Hong Kong (1999) on balance of payments, and other investments on licenses. 2. 1990 figures for Singapore, Malaysia and Hong Kong are only for the manufacturing industry. 3. Figures for the EU include some European countries which are not EU members.Sources: Local statistics, IFS (IMF).
Japan had dropped to less than 10 percent, while investment from the US and Europe stood atmore than 50 percent. In the case of Thailand too, Japan, the US and Europe all accounted formore than 30 percent in 1990, but by 1990, investment from Japan had fallen to 20 percent,while the US and Europe provided around 60 percent, or around 80 percent with the inclusionof Switzerland and Canada (approvals base).
(b) East Asia as a business location for foreign affiliates East Asia’s status has been rising rapidly in recent years as a business location for foreignaffiliates. Looking at trends in terms of the number of foreign affiliates in East Asia, by thelate 1990s, around four times the number of foreign affiliates of the early 1990s had set upbusiness locally, while East Asia’s world share as a business location for foreign affiliatesrose to around 45 percent (Fig. 1.2.7). Given that the number of foreign affiliates establishing
0
5
10
15
20
25
30
35
(10,000companies)
0
10
20
30
40
50
60
70（％）
Notes:1. “Foreign companies” are as defined by each particular country. 2. Early 1990s: Data for Japan (1992), US (1991), East Asia (1986-93), EU (1991-92, 1978 for Belgium and Luxembourg), and Central and Eastern Europe (1991-92). Late 1990s: Data for Japan (1998), US (1997), East Asia (1994-1999), EU (1997-99, 1991 for Greece), Central and Eastern Europe (1994-99).Source: WIR (UNCTAD).
East Asia Japan US EU Central and Other Eastern Europe
No. of foreign companies (early 1990s) (left scale)
No. of foreign companies (late 1990s) (left scale) World share
(right scale)
Figure 1.2.7 Trends in number of foreign companies by country/region and in world share
－24－
themselves in Japan, the US, the EU and other developed countries rose around 1.1 times inthe late 1990s compared to earlier in the decade, it is clear that East Asia’s attractiveness as abusiness base is soaring.
(c) Corporate evaluations of East Asia The FDI Confidence Index is based on a survey10 by US-based management strategyconsulting firm A.T. Kearney of the leaders of companies in the world top 1,000 in terms of1998 revenue. In 2001, China was placed second behind the US; Singapore, which came in24th in June 1998, rose to 13th place; and Taiwan moved up from below 25th to 19th, proof ofEast Asia’s growing popularity among companies as an investment destination (Fig. 1.2.8).Reasons for this popularity include preferential policies for foreign affiliates, deregulation,growing awareness of East Asia’s recovery from the currency crisis, and good prospects forlong-term growth.
June 1998Rank Rank Trend
China 3 2 ↑
Singapore 24 13 ↑
Thailand 15 14 ↑
Korea 21 17 ↑
Taiwan － 19 ↑
Malaysia 22 22 →
Hong Kong － 25 ↑
Indonesia 18 － ↓
Philippines 25 － ↓
Note: Empty columns indicate a ranking of 26 or below.
February 2001
Source: A.T. Kearney (2001).
Figure 1.2.8 Trends in evaluations by corporatemanagement of East Asia as an investment destination
(2) East Asian direct investment driven by boom in cross-border M&As M&As among existing companies are one form of investment used in corporatemanagement strategies, and while M&A trends in themselves are not enough to evaluateoverall investment trends, given today’s emphasis on speedy management, M&As havebecome a key investment mode. An overview follows of East Asian trends in terms of cross-border M&As11, which have been increasingly popular in recent years.
(a) Swift rise in cross-border M&As in East Asia The transaction scale of world cross-border M&As has come to account for around 80percent of total direct investment in recent years12. In fact, the rise in cross-border M&Ascould be said to be driving today’s world increase in direct investment. M&As mushroomedall over the world in the late 1990s, with world M&As growing around seven times over a
10 Around 85 percent of the 1,000 companies are US and European. Moreover, the 1,000 firms in thesurvey account for around 70 percent of world FDI. For details, see A.T. Kearney, Global Business PolicyCouncil (2001).11 In line with the UNCTAD definition, securities investment under 10 percent is not included here.12 Note, however, that because direct investment figures are calculated on a net base where cross-borderM&As are on a gross base, the M&A figure cannot be compared as a ratio of direct investment as it stands.
－25－
Figure 1.2.10 Trends in cross-border M&As in East Asia and FDI ratios
0
50
100
150
200
250
300
90 91 92 93 94 95 96 97 98 99 (Year)
(US$100 million)
0
5
10
15
20
25
30(%)
China, Taiwan, Hong Kong, SingaporeFive Asian countries most affected by the currency crisisM&As/FDI (right scale)
Note: The five Asian countries refferred to here are Indonesia, Thailand, Malaysia, Philippines and Korea.Source: WIR (UNCTAD).
decade (Fig. 1.2.9).
The greater number of M&As worldwide in the late 1990s was paralleled by a similarincrease in cross-border M&As in East Asia, which reached around US$24 billion in 1999.East Asian M&As grew particularly strongly after the 1997 Asian currency crisis to aroundthree times the pre-crisis level (Fig. 1.2.10). Even the ratio of M&As to direct investment inEast Asia has been rising, indicating a rate of growth outpacing even direct investment.Expansion has been particularly marked in the five countries struck hardest by the 1997currency crisis (Indonesia, Malaysia, the Philippines, Korea and Thailand). In 1998, after thecrisis, around 80 percent of the cross-border M&As in East Asia were in these five countries,demonstrating how the Asian currency crisis has spurred a vigorous M&A trend.
Source: WIR (UNCTAD).
Figure 1.2.9 Trends in world cross-border M&As and the US/EU share
0
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（％） （％）
－26－
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(%)
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M&AsM&As/fixed gross capital formation (right scale)
Notes:1. Data exclude Taiwan. 2. M&A data are based on the country making the sale.Sources: IFS (IMF), WIR (UNCTAD).
Figure 1.2.11 Trends in East Asian M&As and their ratio to gross fixed capital formation(US$100 million)
0 20 40 60 80 100 120 140
Taiwan, Hong Kong,Singapore
Japan
US
EU
(US$100 million)
1998-1999
1995-1996
Note: The five Asian countries refferred to here are Indonesia, Thailand, Malaysia, the Philippines and Korea.Source: WIR (UNCTAD).
Figure 1.2.12 Cross-border M&As in Five Asian countries most affected by the currency crisis
(Purchaser)
Fig. 1.2.11 looks at trends in the ratio of cross-border M&As to gross fixed capitalformation. The increasing significance of cross-border M&As in the region is evident in thegrowth of this ratio from 1.2 percent in 1990 to 3.5 percent in 1999.
(b) Pro-active pursuit of M&As by Western companies European and US companies account for approximately 80 percent of all cross-borderM&As both in terms of buying and selling, and the recent worldwide string of M&As hasbeen initiated primarily by these companies. In the five countries hit worst by the Asiancurrency crisis, where M&As have been particularly active in recent years, a comparison ofthe home country of the purchaser in cross-border M&As in 1995-96 and 1998-99 reveals aswift rise in the share of US and Western companies. Where M&As by EU companies were
－27－
worth around $US12 billion, those by US companies approximately US$6 billion, Japanesecompanies recorded a far lower $US1 billion, a sharp contrast to the pro-active Westernpursuit of M&As (Fig. 1.2.12).
The bulk of East Asian cross-border M&As in recent years have therefore been initiated byWestern companies, who have been driving this trend. This influx of foreign (and particularlyWestern) affiliates into East Asia should, together with the emergence of strong localcompanies, boost the competitiveness of the region still further.
3. Emergence of the Chinese economy and further market economy penetration(1) Features of Chinese industrial development: Foreign-invested enterprises (FIEs) andindustrial clusters Attention has been drawn in recent years to the sudden emergence of the Chinese economyon the world stage. As seen in the previous section, China is competitive in a broad range ofareas, from the comparatively labor-intensive textiles industry to the comparativelytechnology-intensive electrical machinery industry, becoming in consequence increasinglyimportant as a world production center. One of China’s industrial development characteristicshas been the way in which the direct investment-led movement into China by FIEs hasspawned numerous industrial clusters.
(a) FIEs underpinning Chinese industrial development and China’s investmentenvironment (Movement into China by FIEs underpinning Chinese industrial development) Since the 1979 formulation of the PRC Law on Wholly-Owned Foreign Enterprises, thepro-foreign investment policies adopted by the Chinese government encouraged many FIEsto establish a presence in China, particularly in the special economic zones created along thecoast. For example, FIEs accounted for 46 percent of China’s exports in 1999, as well as 52percent of its imports (Fig. 1.2.13). The ratio of FIEs to fixed capital formation also reached
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80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 990
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90Export value (left scale)Import value (left scale)Export share (right scale)Import share (right scale)
(US$ (%)
Sources: China Foreign Economic Statistics, China Statistical Yearbook, Foreign Economic Statistics Yearbook (National Bureau of Statistics, PRC).
(Year)
Figure 1.2.13 Trends in trade value and share of Chinese trade of foreign affiliates based in China
Note: All figures refer to foreign affiliates.
－28－
12 percent in 199613.
(Investment environment attracts foreign affiliates) Various factors prompt companies to invest abroad, including lower-cost production, thesecuring of sales channels, avoidance of trade friction, responses to exchange rate changes,and the acquisition of technology and knowhow. According to a survey14 by the Japan Smalland Medium Enterprise Corporation and JETRO, the main reasons given for FIEs inchoosing China were low labor costs and the growth potential of domestic markets (Fig.1.2.14).
While Chinese markets are expected to grow, per capita income remains low, which is why,compared to other East Asian countries, China tends to be more of a production base than asales base. At the same time, China’s enormous 1.3 billion population and the risingeconomic growth and consumption levels of recent years have led to a surge in interest intelevisions, home appliances and other consumer durables, particularly in urban areas,turning China into the world’s largest center of consumption (Fig. 1.2.15). Further, sales ofcomputers, mobile phones and other hi-tech equipment have also blossomed of late, withChina now regarded as second only to the US as a consumer. As the markets of developedcountries mature, companies are keenly eyeing China’s 1.3-billion-strong growth market.
China also offers a cheap, abundant labor force. The average Chinese wage (annual base)in 1999 was US$1,008, around a 30th of the Japanese level15. Even comparing personnel costsin the major cities of the ASEAN members and in Shenzhen in the Pearl River Delta,
0 10 20 30 40 50 60
Securing orders (requests from major clients)
Use of cheap products and raw materials
Breaking into or securing a share of theChinese domestic market
Use of low-cost labor force
Diversification of foreign production andsales bases
Figure 1.2.14 Reasons for entering the Chinese market (%)
Source: 2000 Report on Survey of Management Conditions for Japanese Affiliates in China (Japan Small and Medium Enterprise Corporation/ JETRO Shanghai).
Notes: 1. This survey was conducted over the end of 1999 and the beginning of 2000, targeting Japanese affiliates which had established themselves in China. 674 valid responses. 2. Multiple answer format.
13 National Bureau of Statistics, PRC (2000).14 JETRO Shanghai (2000)15 Where the average annual wage in China in 1999 was US$1,008 (China Statistical Yearbook, NationalBureau of Statistics, PRC; exchange rate: US$1 = 8.28 yuan), it was US$37,259 in Japan (Monthly LaborStatistics Survey, Ministry of Labor; exchange rate: US$1 = 113.91 yen).
－29－
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Air conditioners Washing machines Refrigerators Microwaves
China
NIEs
ASEAN 4
Japan
(10,000 appliances)
Figure 1.2.15 Comparison of demand for consumer durables in East Asia
Source: Development of Industrial Clusters in Asia and Co-existence with Japan (Japan Machinery Export Association).
Notes: 1. 1998 figures. 2. The NIEs here do not include Hong Kong.
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Shenzhen Shanghai Jakarta Bangkok Manila KualaLumpur
Singapore
($)Figure 1.2.16 Comparison of average wages of industrial workers in main East Asian
Source: China Data File (JETRO).
home to many FIEs, these costs are overall lower in China (Fig. 1.2.16). Even where laborshortages emerge along the coast where foreign direct investment is concentrated, this can beimmediately supplemented by bringing in more workers from further into China, with theresult that personnel costs have remained comparatively low overall, and certainly under thereal economic growth rate. Not stopping with low-cost labor, China has recently beenbolstering its development of personnel trained in science and engineering, so that technicaluniversities are sending around 400,000 engineers out into the market every year. Moreforeign students are also coming to study in China and staying on to work for FIEs or set uptheir own businesses, lending depth to the labor market in terms of both quality and quantityand underpinning the development of the Chinese economy.
－30－
However, while many companies are drawn to China by its low labor costs, personnelcosts today account for a minimal percentage of the unit price for assembled goods. Parts andmaterials, on the other hand, comprise on average 80 percent of the manufacturing unit price,and as cost competition intensifies in all product areas, the cost and speed of partsprocurement is becoming even more important than labor costs. As seen in Fig. 1.2.16,Indonesia (Jakarta) actually offers lower labor costs than China (Shenzhen, Shanghai), andyet Indonesia has not demonstrated the same development as China. To understand theChinese economy of today, it must be realized that China’s competitiveness lies not only incheap labor costs, but also in the industrial clusters which are emerging particularly in theparts industry. The Pearl River Delta, home to Shenzhen, and the Yangtze Delta, whereShanghai is located, host world-leading industrial clusters, positioning these areas as key sitesfor companies engaged in global strategies. Industrial clusters in China will be discussed ingreater depth below.
(b) Formation of world-leading industrial clusters (Industrial clusters in China) A major feature of Chinese industrial development has been that the movement of FIEsinto China through direct investment, as observed above, has led to the formation ofindustrial clusters which also include local industries. The establishment of assemblycompanies has attracted parts companies to the same areas, while further assembly firms havecollected around the new clusters of parts companies, creating a virtuous circle wherebyclusters breed clusters. In this process, the influx of FIEs and their advanced technology andmanagement knowhow has encouraged the upgrading of local companies throughcompetition and business transactions. These higher-grade local companies have in turnattracted more FIEs, resulting in a process of synergetic development. These industrialclusters have become a source of competitiveness for the Chinese manufacturing industry.
(Formation of industrial clusters in China) As FIEs flock into China and the Chinese manufacturing industry continues its swift paceof development, the areas around the Pearl River Delta in Guangdong and the Yangtze Delta(particularly Shanghai and Suzhou) have experienced particularly extensive development asindustrial clusters (Fig. 1.2.17). The Pearl River Delta saw Shenzhen and Zhu jiangestablished as Special Economic Zones when China’s reform and open policies werelaunched in 1979, with foreign investment propelling their growth. Companies from HongKong started to arrive in the 1980s, followed by large numbers of firms from Japan, Taiwan,the US, Europe, and Korea, and one of the world’s major electronic machinery industryclusters began to evolve, displaying particular strength in regard to cameras, televisions andother home appliances, as well as copiers, computers and peripheral equipment. Localcompanies as competitive as their foreign counterparts and an increasingly robust partsindustry have also been part of this trend. The Yangtze Delta, which has a large populationand, consequently, a large consumer market, also has the advantages of a history offlourishing commerce and industry and a stockpile of human resources, capital andtechnology, with the result that industrial clusters began to form in the area from the late1990s onward in a comparatively wide range of areas, including the Japanese homeappliances and machinery, and information communications, automobiles, and
－31－
0
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Beijing
Yangtze River Delta
Pearl River DeltaChongging
Figure 1.2.17 Production in China of main products by industrial cluster(%)
Source: China Statistical Yearbook (National Bureau of Statistics, PRC).
Notes: 1. Figures indicate the share of each region in total Chinese production volume in 1999. 2. Figures for the Yangtze River Delta are the total for Shanghai City and Jiangsu Province. Figures for the Pearl River Delta are for Guangdong Province.
Chemicals and textiles Color TVs Cars
semiconductors from the US and Europe. Industrial clusters are also forming in areas such asChongging, focused on auto manufacture16.
(Background to industrial clusters) One major factor behind the industrial agglomeration mechanism which causes industriesand companies to concentrate within certain physical areas could be described as “Marshall’sexternal economies of agglomeration”17. More specifically, when one industry concentrates inone spot, other companies gather which specialize in the production of each of the variousintermediate inputs needed by the industry in question, creating a specialization network.This boosts the productivity of the industry using the intermediate inputs, thus attractingmore companies belonging to that industry and setting in place a cycle18. Further, catalystsbehind the evolution of such industrial clusters—the initial conditions—generally include aconcentration of demand for some particular reason, the presence of persons with specialskills, and a topography suited to making the area a transport hub.
The industrial clustering mechanism would appear to have operated in the case of both the
16 Where the Yangtze River Delta and the Pearl River Delta are home primarily to clusters ofmanufacturing industries, around Zhongguancun to the northwest of Beijing, industrial clusters arebeginning to form among companies specializing in computer software and R&D. This area was formerlya Culture and Education Zone containing Beijing University and Qinghua University, but in 1998 was firstin China to be designated as the Beijing Experimental Zone for Development of New TechnologyIndustries, with R&D functions developed and the information communications industry invited in. Theintroduction of various preferential policies also helped to encourage the beginnings of new hi-techindustrial clusters.17 See Chapter III, Section 2 of the White Paper on International Trade and Industry 1997 for details on theindustrial agglomeration mechanism.18 If the company and industry linkage based on Marshall’s external economies of agglomeration isdivided into a forward linkage effect and a backward linkage effect, the relation to the clusteringmechanism is easily understood. See Appended Figure 1.2.2 for a model of this mechanism.
－32－
Pearl River and Yangtze Deltas, but foreign direct investment must be added as one criticalinitial condition in the formation of industrial clusters in China. Both areas also had their ownparticular initial conditions. In the case of Pearl River Delta, the area has high-level port andairport functions, stands next door to Hong Kong, which is home to well-developed serviceindustries such as finance and physical distribution, and also enjoys an abundant low-costlabor pool drawn from adjacent regions. The Yangtze River Delta has the advantages of awide range of well-developed local companies as a consequence of its strong commercial andindustrial history, its location virtually in the center of China’s coastline, which positions it asa center for Chinese transport and distribution in terms of sea, rail and road, and a labor poolmore highly-educated than that of the Pearl River Delta. What the clusters on both deltashave in common, however, is the injection of foreign capital. While the initial conditions forboth deltas were already present, it was the inflow of foreign investment from the 1980sonward which allowed the formation of today’s industrial clusters. Where local companieshad not been advanced enough in themselves at that point to shoulder the burden of Chinesedevelopment, the movement of FIEs and their sophisticated technologies into local marketspushed ahead not just the parts industry but industry as a whole.
(Chinese industrial clusters tackle global competition) Since Hong Kong firms came to the Pearl River Delta region in the 1980s, China has seena growing inflow of companies from all over the world. At the same time, the comparativeadvantage lent to each region by its initial conditions came to bear, with assembly industriesand parts industries each attracting the other and setting in motion a self-propellingdevelopment mechanism whereby clusters fostered clusters while at the same timebroadening the product range. As a result, world-leading parts industry infrastructure was setin place with companies from not only Japan but also Hong Kong, Taiwan, Korea, the USand Europe jostling elbow-to-elbow. Local companies have also grown enormously,contributing to intensifying intra-regional competition. These companies are in factparticipating in the global competition which is unfolding out from China’s industrial clusters,and the fiercer competition is serving to produce even more competitive clusters. For themanufacturing industry, parts procurement costs rate alongside personnel costs as a key costfactor—in other words, how quickly and reliably they can procure low-cost, high-qualityparts. Competitive industrial clusters like these which offer efficient, low-cost procurementare underpinning China’s national competitiveness.
(2) Emergence of the Chinese economy(a) Rapid move to centerstage by Chinese economy As observed above, Chinese industry has advanced through the formation of industrialclusters which has accompanied the direct investment-led movement into China of FIEs. Theresult has been startling progress by the Chinese economy. While China’s economic growthfluctuates wildly, the country has maintained a high growth rate overall, with real GDP liftingfrom an average of 9.7 percent in the 1980s to 10.2 percent in the 1990s (Fig. 1.2.18). Thishigh growth has taken China’s GDP from 11th in the world in 1990 to 7th in 1998, followingthe US, Japan, Germany, France, the UK and Italy. China’s GDP accounted for only 25percent of the East Asian total in 1980, but by 1999 had reached 37 percent. China’scontribution to the average economic growth rate of East Asia as a whole in the 1990s was
－33－
also around 40 percent (Fig. 1.2.19).
China’s exports have expanded approximately four times over the last 10 years,positioning China as the world’s ninth largest exporter in 1999 and accounting for fourpercent of total world export value (Fig. 1.2.20). The country also accounted for three percento f t h e t o t a l
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18Nominal GDP (left scale)Real GDP growth rate (right scale)
Figure 1.2.18 Trends in Chinese nominal GDP and real GDP growth rate(Trillion yuan)
Source: Global Development Network Growth Database (World Bank).
(Year)
(%)
(Unit: %)1980s 1990s 95 96 97 98 99
East Asian growth rate 7.92 6.71 8.56 7.05 5.67 ▲2.28 6.88Contribution by country Korea 1.76 1.43 1.97 1.49 1.11 ▲1.28 2.26
Taiwan 1.17 0.56 0.77 0.28 0.25 ▲1.15 0.97Hong Kong 0.60 0.26 0.26 0.28 0.32 ▲0.31 0.18Singapore 0.28 0.29 0.32 0.28 0.30 0.06 0.22Thailand 0.53 0.40 0.67 0.42 ▲0.09 ▲0.66 0.27Malaysia 0.26 0.26 0.37 0.34 0.30 ▲0.31 0.22Indonesia 0.66 0.45 0.75 0.72 0.43 ▲1.21 0.02Philippines 0.12 0.10 0.16 0.20 0.17 ▲0.02 0.11China 2.53 2.97 3.28 3.04 2.87 2.60 2.62
Sources: WDI (World Bank), Taiwan Statistical Data Book (Council for Economic Planning and Development).
Figure 1.2.19 Trends in Chinese contribution to East Asian real GDP growth rate
－34－
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4Export value (left scale)
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Import share (right scale)
Figure 1.2.20 Trends in Chinese trade value and share of world trade
(Year)Source: IFS (IMF).
(%)(US$ billion)
(Unit: US$ 100million)1999 ranking Economy 1990 1995 1996 1997 1998 19991st US 479 675 770 1,060 1,863 2,7552nd UK 324 225 324 370 637 8483rd Sweden 20 149 55 103 194 5944th Germany 120 ▲32 117 201 5225th France 132 237 220 231 295 3886th China 35 359 402 442 438 3887th Belgium/Luxembourg 81 105 147 120 227 3848th Netherlands 123 115 78 118 372 3429th Brazil 10 49 99 197 319 32710th Canada 76 108 64 118 217 25111th Argentina 18 42 43 88 67 23612th Hong Kong 148 23113th Ireland 6 15 25 27 110 19114th Japan 18 0 2 32 33 123
Source: IFS (IMF).
Figure 1.2.21 Trends in value of inward FDI
value of world exports in 1999, bringing China in at ninth place in the world. The value ofChina’s trade with other East Asian nations reached US$103.9 billion in 1998, approximatelydouble the 1990 level, as China deepens its interdependence with other countries in theregion. It is also evident that China is attracting enormous amounts of direct investment fromaround the world. Looking at the value of direct investment in China in dollar terms, theUS$3.5 billion absorbed in 1990 grew to US$44.2 billion by 1997, making China secondonly to the US as a direct investment recipient. While the level dropped to US$38.8 in 1999,China is still the world’s sixth largest recipient of direct investment (Fig. 1.2.21).
(b) Broadly competitive Chinese industrial structure While China’s main secondary industries in the early 1980s were apparel, automobiles,foodstuffs, clocks and watches, this line-up consequently expanded to include homeappliances such as televisions, refrigerators and washing machines, which lent a new
－35－
momentum to the Chinese economy. The growth of these manufacturing industries keptsecondary industry rising as a ratio of GDP, resulting in a substantial jump from 25 percent inthe mid-1950s to 50 percent in 1999 (Fig. 1.2.22).
As noted in the previous section, China’s industrial structure has recently beencharacterized by the major growth of both comparatively labor-intensive industries such astextiles and comparatively technology-intensive industries such as electrical machinery,acquiring international competitiveness. Trends in the amount of added-value production bythe textile and machinery industries as a percentage of all manufacturing reveal a swiftincrease in both as of the 1980s (Fig. 1.2.23).
The same characteristic is reflected in China’s exports and imports. Since the late-1980s,the export ratios of both the textile and machinery industries have continued to rise (Fig.1.2.24), while going into the 1990s, the machinery industry has demonstrated particularlymarked export growth. Comparing export value in 1985 and 1988, office appliances have
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52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98
Primary industry ratio
Secondary industry ratio
Tertiary industry ratio
Source: China Statistical Yearbook (National Bureau of Statistics, PRC).
Figure 1.2.22 Trends in composition of Chinese nominal GDP by industry(%)
(Year)
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Figure 1.2.23 Trends in amount of value-added by industry in China(100 million yuan)
(Year)
Source: ISD (UNIDO).
－36－
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TextilesGeneral machineryElectrical machineryMachinery
Figure 1.2.24 Trends in Chinese export ratios by good(%)
(Year)
Sources: ISD (UNIDO), AIDXT (Institute of Developing Economies).
Notes: 1. Export ratio = export value/production value 2. Textiles: Exports—SITC26, 65, 84 Production—ISIC321, 322 General machinery: Exports—SITC71-75 Production—ISIC382 Electrical machinery: Exports—SITC76,77 Production—ISIC383 Machinery: Exports—SITC71-79, 87, 88 Production—ISIC382-385
grown 1,214 times, informationcommunications machinery 128 times,and electrical machinery 125 times,with an increase of 69 times acrossmachinery as a whole (Fig. 1.2.25).Accordingly, a comparison of exportproduct composition in 1998 and 1998shows that machinery has boomed,while machinery, textiles and textileproducts now comprise more than halfthe total (Fig. 1.2.26).
China’s new competitiveness in abroad range of industries has rapidlyintensified competition with other EastAsian countries. The development ofChina’s machinery industry inparticular has meant fiercercompetition with not only ASEAN butalso the NIEs and Japan. Bypromoting East Asian competition andadvancing the construction of anefficient international specializationstructure in East Asia in particular,
however, China’s emergence shouldcontribute to the development of theentire East Asian region.
1
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85 86 87 88 89 90 91 92 93 94 95 96 97 98
Figure 1.2.25 Trends in Chinese export values by good
(1985 = 1; dollar base)
Machinery
All exports
Electricalmachinery
Office appliances
Telecommunications machinery
Source: AIDXT (Institute of Developing Economies).
Textiles and textile products
(6.4%)
(6.0%)
(7.6%)
(30.2%)
(23.7%)
(100.0%)
Note: Figures beneath each good comprise that good’s share in 1998.
(Year)
－37－
Note: SITC 2-digit codes were classified as follows: Foods (0-12), raw materials (21-25, 27-29, 66), light industry (32-43, 61-64), chemical products (51-59), metals and non-ferrous metals (67-69), machinery (71-79, 87, 88), textiles and textile products (26, 65, 84), miscellaneous (81-83, 85, 86,89-97).Source: AIDXT (Institute of Developing Economies).
Figure 1.2.26 Changes in China’s export composition (1988-98)
MachineryFood
Miscellaneous
Lightindustryproducts
Rawmaterials
Chemicalproducts
Metals andnon-ferrous
metalsTextiles
and textileproducts
1988total
US$47.52 billion
Machinery
Miscellaneous
Rawmaterials
Textilesand textileproducts
Metalsand non-ferrousmetals
Food
Chemicalproducts
Lightindustryproducts
US$183.81
1998 totalexport
(3) Further progress toward a Chinese market economy(a) China prepares for WTO accession Some 15 years since China applied to join the GATT in 1986, sufficient progress has beenmade in accession negotiations to bring China’s WTO accession to the point of realization.For China, joining the WTO is a part of its introduction of market principles toward theultimate goal of domestic structural reform, while the international community has also beenclosely interested in what is regarded as an important step. China has pursued a variety ofsystemic reforms to date, but foreign companies still face a number of hurdles in terms oftrade and investment. Many of these issues are expected to be resolved by China’s WTOaccession. Many FIEs believe that China joining the WTO ranks would expand businesschances; at the same time, major economic environment changes seem inevitable, such asfiercer competition and industrial structural adjustment. In the short term, the greater marketeconomy penetration brought about by WTO accession will boost domestic pressure forindustrial structural adjustment, but in the long term, structural adjustment should strengthenthe competitiveness of Chinese industry and contribute to domestic economic growth. This inturn will stimulate dynamic changes in the industrial and trade map of East Asia as a whole,boosting the region’s competitiveness as a world manufacturing center.
(b) Current state of the Chinese environment for economic activities China has introduced systemic reforms in a number of areas in anticipation of WTOaccession—for example, the 1999 relaxation of regulations on foreign capital participation inthe retail and wholesale industries, as well as amendment of the PRC Law on Wholly-OwnedForeign Enterprises and the PRC Law on Equity Joint Ventures. Such changes indicate thegreat significance of China joining the WTO. However, China has yet to resolve themanagement dissatisfactions of foreign companies in regard to the government’s trade-related policies and the extent of market opening. According to a JETRO questionnaire, 55percent of Japanese affiliates established in China wanted to see improvements in China’sdomestic systems (tax and legal systems) (Fig. 1.2.27). Many trade and investment problems
－38－
were also
20.3
22.1
25.4
25.7
26.0
30.6
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38.3
54.5
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Accommodation and other welfare
Communication
Export/import delivery timing and freight
Yuan depreciation concerns
Rising personnel costs
Resource procurement
Labor/personnel management
Manufacturing/quality control
Tax/legal systems
(%)
Figure 1.2.27 Management problems experienced by Japanese companies in China
Notes: 1. Survey conducted in January 2001, with 674 companies responding. 2. Multiple answer format; only those items with a response rate of at least 20% selected for inclusion in the above figure.Source: 2000 Report on Survey of Management Conditions for Japanese Companies in China (JETRO Shanghai).
－39－
Problem Specific content
Areas restricted or prohibited underforeign investment guidelines
The June 1995 guidelines divide foreign investment projects intoencouraged, approved, restricted and prohibited industries, with services inparticular subject to numerous entry restrictions. Strict regulations ondistribution obstruct free marketing and also hamper sales activities.
Domestic production and localprocurement ratio requirements
Domestic production and local procurement ratios are sometimesstipulated as license conditions. Construction insurance has to be taken outwith Chinese insurance companies. In some cases, import tariffs are linkedwith meeting domestic production ratios.
Foreign currency balance obligation
In cases of joint ventures or independent business establishment, foreigncompanies have to show a foreign currency balance on their financialstatements in terms of foreign parts procurement and exports. There isstrong pressure to export, with foreign currency remittance proceduresrigorous for non-exporting companies.
Foreign trade right restrictions Even now, only certain Chinese companies have trade rights, with foreigncompanies in principle unable to engage in trade.
High tariffsHigh tariffs on raw materials and parts prevent full reflection of localproduction cost merit in product pricing. Tariffs have been heavily reducedsince June 1994, but rates are still high compared to other Asian countries.
Problems with the operation of IPRprotection
While an IPR protection system is in place, operation is inadequate interms of trademark protection, etc. The authorities are strengtheningmeasures against imitations, but because of local protectionism, thesemeasures are not properly enforced at the local level.
Double product-safety authorizationBecause two product-safety authorization systems have been in place forelectrical imports since September 1994, exporters to China have toacquire two authorization marks.
Execution of the law, sudden changes inthe law
Policy changes frequently (particularly concerning tax), interpretationsdiffer, and written notifications are basically not given to foreigncompanies. Practices also vary according to the area, with some regionsnot returning VAT. Over-frequent legal amendments also prevent stablemanagement of locally-established companies.
Source: Barriers to Trade and Investment 2000 (Business Council on Facilitation of Trade and Investment).
Figure 1.2.28 Trade and investment problems experienced by Japanese companies in China
highlighted by Japanese affiliates in China in a questionnaire created by the Japan MachineryCenter for Trade&Investment(Fig. 1.2.28).
(c) WTO-related improvements (Broad-ranging improvements) In multilateral negotiations, as well as bilateral WTO accession negotiations with Japan,the US, the EU and other countries, China has committed itself to various domestic systemicreforms which will open its markets. These reforms range from market access issues such asthe reduction of tariffs on manufactured goods and services liberalization through to theprotection of intellectual property rights (Fig. 1.2.29). Where China becomes a WTO memberand undertakes the domestic systemic reforms which it has promised, many of the problemsfaced by Japanese affiliates should vanish. Moreover, direct investment in China from Japan
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Figure 1.2.29 Major trade and investment improvements resulting from China’s WTO accession
Relaxation of foreigninvestment regulations
China will progressively relax and eliminate the foreign investment ratio, geographical andquantitative regulations in distribution, finance, insurance, telecommunications,construction and other service areas within five years of China’s WTO accession.
Implementation of theTRIMs Agreement
China will implement the TRIMs Agreement on accession, and eliminate export-import andforeign currency balance requirements and local content requirements. Also on accession,China may no longer place any performance requirements on investment and importlicenses.
Expansion of foreigntrade rights
Within three years of accession, all companies based in China (including foreign affiliates)must be given trade rights and allowed to import and export freely. During the transitionalperiod, the number of companies licensed under the existing system must be graduallyexpanded.
Tariffs Tariffs on manufactured products will be reduced from the 1997 average of 24.6% to anaverage of 9.4% in 2005.
Non-tariff measures Import quotas, licenses and other import restrictions will be progressively relaxed during thetransitional period and eliminated by 2005.
IPR protection China will conform with the TRIPS Agreement as of its accession.Double product-safetyauthorization
In line with the TBT Agreement, the double inspection of imported electrical goods will bereduced to a single inspection.
Execution of the law,sudden changes in thelaw
Regulations will be publicly announced and an inquiry office will be set up to handleinquiries about lack of transparency in the operation of the law and other law-related issues.
Notes: 1. TRIMs Agreement: Agreement on Trade-Related Investment Measures TRIPS Agreement: Agreement on Trade-Related Aspects of Intellectual Property Rights TBT Agreement: Agreement on Technical Barriers to Trade 2.Based on China-Japan WTO agreement and China-US WTO agreement.Source: METI research.
and other countries will rise, international specialization in East Asia will become moresophisticated, contributing to the economic growth not only of China but of the whole of EastAsia.
(Tariff reductions strengthen competitiveness) China has pledged major tariff reductions in numerous areas (Fig. 1.2.30). In particular, thegovernment has agreed with the US to cut its tariffs on manufactured goods from the 1997average of 24.6 percent to an average of 9.4 percent in 2005, which should expand China’simports of manufactured goods.
Such tariff reductions should also lower costs for those parts of the manufacturing industryinvolved in processing and assembly in China. Looking at the ratio of personnel and raw
Figure 1.2.30 Chinese tariff reductions after WTO accession
Manufactured goods Down from the 1997 average of 24.6% to an average of 9.4% in 2005.Computers, communications equipment,Internet-related equipment Down from the current average of 13.3% to 0% in 2005.
Cars Down from the current 100% or 80% to 25% by July 2006Car parts Down from the current average of 23.4% to an average of 10% by 2006.Chemical products Down from the current 35% to 6.5, 5.5 and 0% according to the category.
Note: Based on China-US WTO agreement.Source: Created by METI from US-China Business Council materials.
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Source: Sixth Questionnaire Survey of Japanese Affiliates: Collation and Analysis Results (Japan-China Investment Promotion Organization).
Figure 1.2.31 Share of raw materials and personnel costs in the manufacturing costs of Japanese affiliates in China
Raw materials costs
0～10～30～50～70～90～100
(%)
Personnel costs
material costs to the total manufacturing costs of Japanese affiliates in China, where 93percent of companies have personnel costs of less than 30 percent, only six percent indicateraw material costs at the same level, with indeed 79 percent reporting costs in this area ofmore than 50 percent (Fig. 1.2.31). At the same time, only 38 percent of parts procured byJapanese-affiliated manufacturers in China were procured locally in 1998; 40 percent camefrom Japan, 22 percent from other Asian countries19. Key parts in particular tended to beimported from Japan. For Japanese affiliates in China, then, with their high ratios of rawmaterials costs and 62 percent import dependence for their parts, substantial tariff reductionswould certainly boost their price competitiveness.
(More open distribution services promote access to the Chinese market) Under the agreement reached between Japan and China for distribution, within three yearsof its WTO accession, China will, with certain exceptions (restrictions will remain on foreigninvestment ratios in large department stores and chain stores), eliminate regional restrictionson foreign-affiliated distribution companies, restrictions on company (store) numbers, andforeign investment ratio restrictions. Foreign-affiliated manufacturers based in China will beable to provide after-service for their products, and, also within three years of accession,China will allow sales companies to offer all products (Japan-China agreement). China hasagreed to progressively eliminate distribution service restrictions on virtually all productswithin five years of accession, and to abolish regulations on distribution-related rentals, cargotransport, warehouses and inspections within three to four years of accession. Within threeyears of accession, China has consented to liberalize trading rights, which will allow foreignaffiliates to trade freely (US-China agreement). Where Japanese affiliates have been unable to 19 MITI (2000).
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sell their own and other products directly to consumers in the Chinese market, WTOaccession will mean government permission to establish sales agencies and otherliberalization of distribution and related areas. Japanese affiliates have been forced to use thecomparatively backward Chinese distribution network; now, they should be able to expandtheir business chances by building new and advanced networks. Where, too, they had todepend on the sales power of their merger partners, it will become easier to create plans forcompany establishment in China on the basis of independent investment, a developmentlikely to draw more Japanese affiliates into the Chinese market.
(Deregulation of the rapidly expanding telecommunications market) From 1988 to 1999, the number of mobile phone subscribers in China grew at an averagerate of 139 percent on the previous year. As suggested by a rate of increase more than doubleJapan’s 63 percent, the Chinese market is booming (Fig. 1.2.32). As at 1999, China hadaround 43 million mobile phone subscribers (compared to approximately 51 million in Japan),while with only three percent of the population (40 percent in Japan) signed up, there isobvious room for expansion and enormous potential demand. China’s rapidly growingtelecommunications market saw the privatization of some telecommunications operations in1993, but the Investment Guidelines (formulated in 1995 and amended in 1998) banned theentry of foreign affiliates. It was the entry into force in September 2000 of the PRCRegulations on Telecommunications which relaxed regulations on participation in theindustry, and foreign affiliates have gradually been allowed through the door, includingAT&T’s establishment of a joint venture to provide value-added telecommunications services.Once China joins the WTO, foreign capital ratio restrictions on all communications serviceswill be loosened, allowing up to 50 percent foreign investment in value-added and basictelecommunications within two years of accession. Foreign capital ratios of up to 49 percentwill be allowed within five years of accession for mobile communications. Participation in
0
1,000
2,000
3,000
4,000
5,000
6,000
88 89 90 91 92 93 94 95 96 97 98 990
10
20
30
40
50
60
No. of subscribers: China (left scale)
No. of subscribers: Japan (left scale)
Subscription rate: China (right scale)
Subscription rate: Japan (left scale)
Sources: Management and Coordination Agency materials, China Statistical Yearbook (National Bureau of Statistics, PRC).
Figure 1.2.32 Trends in number of mobile phone subscribers and rate of increase in Japan and China
(10,000 persons) (%)
(Year)
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value-added and basic telecommunications will be permitted in Beijing, Shanghai andGuangzhou upon China’s accession, participation in mobile communications within a year. Inother parts of China, regional restrictions on value-added and basic telecommunications willbe eliminated within two years of accession, within five years in the case of mobilecommunications (US-China agreement). European companies are already beginning to movein anticipation of this open market in the wake of China joining the WTO.
0
10
20
30
40
50
60
70
80
90
100
Unclear
Negativeimpact
Limited impact
Positive impact
Total Apparel & textiles Electricalmachinery
Chemicals
Source: Survey of Company Management Regarding China’s Accession to the WTO (Development Research Center of the State Council of the PRC).
Figure 1.2.33 Impact on China-based companies of China’s WTO accession
Note: This questionnaire was conducted August-November 1999, targeting 3,562 persons.
(%)
0 10 20 30 40 50 60 70 80
Figure 1.2.34 Measures in preparation for China’s WTO accession
Source: Survey of Company Management Regarding China’s Accession to the WTO (Development Research Center of the State Council of the PRC).
(%)
Improving technology levels
Deepening understanding ofthe international market
Strengthening business management
Strengthening efforts toward management in linewith international standards
Strengthening informatization investment
Lowering product prices
Changing main business areas, investing in other types of business
Active introduction of foreign plants and equipment
Note: Multiple answers.
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(d) Impact of WTO accession (Fiercer competition in Chinese markets) An August 1999 questionnaire20 targeting managers in China (FIEs included) revealedmixed views as to the likely impact of WTO accession on company management (Fig.1.2.23). However, the degree of disparity differed according to the industry—more than 70percent of companies in labor-intensive industries such as apparel and textiles felt thataccession would impact positively, whereas in the chemical industries and other capital-intensive industries, more companies predicted a negative rather than a positive impact. Thebulk of companies were trying to boost their technology levels in anticipation of WTOaccession, obviously foreseeing fiercer competition ahead with imported products and foreigncompanies (Fig. 1.2.34).
Further, a questionnaire which the Japan-China Investment Promotion Organizationaddressed to Japanese affiliates in China in early 2000 found that around 70 percent wereanticipating China’s accession to the WTO as having a positive effect (Fig. 1.2.35). In termsof specific impact, the most common response was greater transparency in systemic andpolicy operation, with expectations rising of improvements in China’s handling of its systemsand policies, the area provoking greatest dissatisfaction. Other popular responses pinpointedmore intense competition with imported products, elimination of foreign capital regulations,and easier domestic sales, suggesting that while Japanese affiliates foresaw greatercompetition in the Chinese market, their tendency was to focus on the major business chancesoffered in terms of capturing a greater share of the Chinese market.
Note: This questionnaire was conducted February-March 2000.Source: Sixth Questionnaire Survey of Japanese Affiliates: Collation and Analysis Results (Japan-China Investment Promotion Organization).
Figure 1.2.35 Impact of WTO accession on Japanese affiliates in ChinaImpact of WTO accession Specific impact
Clearly positive
More positive than negativeMore negative
Clearly negative
Unclear
Respondents: 482 companies
Greatertransparency insystemic andpolicy operation
Greatercompetitionwith imports
Elimination of foreign capital regulations
Easier salesin China
Poorer managementenvironment becauseof elimination ofpreferential policiesfor foreign capital
Frequent policy adjustment
Greater competition with domestic companies
Other
Respondents: 454 companies
(multiple answers)
(Structural adjustment awaits Chinese industry) According to calculations by the Development Research Center of the State Council of thePRC, WTO accession will substantially boost the production and labor force of the highly
20 Conducted by the PRC National Bureau of Statistics and available on the web site of the DevelopmentResearch Center within the PRC State Council.
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competitive textile and apparel industries, but have an equally substantial effect in theopposite direction for the weaker agricultural and transport machinery sectors (automobiles,for example) (Fig. 1.2.36). Accession-related tariff reductions and elimination of non-tariffbarriers were expected to increase imports in many industries. The biggest macroeconomicissue foreseen was employment adjustment, making the creation of safety nets such as jobtraining an urgent task.
Figure 1.2.36 Impact of WTO accession-induced trade liberalization on Chinese industry
Production (%) Labor force (10,000 persons) Imports (%) Exports (%)Agriculture Flour ▲9.0 ▲540.3 205.5 73.3 Cotton ▲12.6 ▲498.2 426.6 209.4 Other foodstuffs 1.8 151.1 10.9 1.1Industry Textiles 25.5 282.5 85.7 63.8 Apparel 74.0 261.0 124.4 214.1 Autos ▲15.1 ▲49.8 105.1 ▲7.8 Electrical machinery ▲3.2 ▲9.7 12.0 ▲4.9
Note: 1.Based on the assumption that China conforms completely with the WTO Agreement. 2.Change from 1996 to 2005,estimated with input-output table for 1995.Source: Impact of China’s WTO Accession on the World Economy and China (Development Research Center of the State Council of the PRC).
Column 1: China’s efforts toward further market economy penetration
WTO accession is expected to prompt major progress in China’s shift to a marketeconomy, and China has already been working in this direction to strengthen domesticindustry. Stock market reform is a typical example. China’s current stock market is smallcompared to the scale of the domestic economy (Fig. 1.2.37), while stock marketcapitalization in the B stock market, in which foreign investors can also participate (China’sstock market was once divided into A stocks, which only domestic investors could purchase,and B stocks, which were restricted to foreign investors), amounts to only 1.3 percent ofChina’s entire stock market (Fig. 1.2.38). To boost the flow of capital into China’s stockmarkets from abroad, the Chinese government began a progressive merger of the A and Bstock markets as of February 2001. China will also relax standards in regard to the listing ofFIEs, merge existing markets with the Shanghai market, and convert the Shenzhen marketinto a Nasdaq-style ventures market. Through these measures, the government aims toincrease the number of foreign institutional investors in the unstable domestic market, whichis dominated by individual investors, thus promoting greater stability, while also facilitatingcapital procurement from capital markets by state-owned enterprises to improve their balancesheets.
Other efforts toward effecting China’s further market economy transition include theplanned introduction of a stockholder representative suit system, clarifying rules for thepursuit of corporate responsibility as a means of bringing its investment environment on to apar with the West.
F
USJapASEChi
NotSou
igure 1.2.37 Comparison of world stock market capitalization and number of companies in domestic market
Stock market capitalization Stock market capitalization/GDP Companies in domestic market(US$100 million) (%) (No.)
166,351 178.9 7,651an 45,469 104.6 2,470
AN 4 3,160 75.9 1,652na 3,307 33.4 950
e: Figures are for the end of 1999.rce: WDI (World Bank).
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Shanghai Astocks
Shenzhen Astocks
Shanghai Bstocks
Shenzhen Bstocks
Figure 1.2.38 Stock market capitalization in the Chinese stock market
Stock marketcapitalization
US$581 billion
Source: METI research.Note: Figures are for the end of December 2000.
