EXPANDING PRODUCTION NETWORKS IN SOUTHEAST ASIA

Since the mid-1980s, liberalization in trade and investment in Southeast Asia has encouraged the expansion of production networks into the region. A well-known case study by McKendrick et al. (2000) demonstrated how production networks in the hard disk drive (HDD) industry were established in Southeast Asia, spanning Singapore, Thailand, and Malaysia. In this process, industries in these countries participated in the cross-border production networks and gained access to markets and the transfer of technology from multinational corporations (MNCs). At the same time, the development of industrial clusters has strengthened the competitiveness of industries.

The above process is expected to accelerate as new ASEAN member countries — namely Cambodia, Laos, Myanmar, and Vietnam (CLMV) — follow suit in opening up their markets and liberalizing investment. Simultaneously, as a result of spatial concentration of economic activities in more developed regions, labour and land costs, as well as the burdens of pollution and congestion, have increased dramatically, and some economic activities, especially standardized labour or land-intensive activities, have started to shift to less developed regions. For example, due to higher production costs in Thailand, some Japanese firms based in Thailand set up factories or started outsourcing in Laos (see Chapter 5). Similar cases can be found in Vietnam, Cambodia, and Myanmar.

In a similar vein, the Singapore and Indonesian governments signed the Framework Agreement on Economic Cooperation in the Islands of Batam, Bintan and Karimun in 2006. This agreement aims to facilitate the access of Singapore firms to abundant land and labour resources in Indonesia, while Indonesian firms gain access to the networks of MNCs centred on Singapore (see Chapter 9).

These are typical examples of production fragmentation across borders, which are caused by significant labour costs and land price differences between the countries. Production fragmentation is facilitated by lowering communication, transport, and coordination costs in production (i.e. service link costs) and other costs related to the investment (see Chapter 2). At the same time, the growth of cross-border production networks is breaking down vertically-integrated production processes into smaller incremental steps, so that the range of potential niches appears to be increasing. Such development in production fragmentation will increase opportunities for less developed economies to participate in production networks.