From the perspective of geographical proximity as well as economic, social, and cultural affinity, the experience of industrial development in leading Southeast Asian economies should be most relevant and helpful for their neighbouring countries. After facing difficulties in import-substitution policies, Southeast Asian countries liberalized trade and investment and promoted integration with the global economy. Moreover, rapid technological progress reduced transportation and logistics costs and made fragmentation of production economically feasible.

The change in the policy environment attracted massive foreign direct investment from Japan, Asian NIEs, and others, and allowed Southeast Asian countries to participate in production networks. Less developed countries in Southeast Asia, namely Cambodia, Laos, Myanmar, and Vietnam (CLMV), face the same challenge today as leading ASEAN countries did a few decades ago. In particular, they must build up links with neighbouring East Asian countries and participate in their regional production networks.

The authors in this book examine development strategies for less developed Southeast Asian countries. They discuss what policy measures are effective in attracting foreign direct investment, reducing trade and transport costs, and forming competitive industrial clusters. In Chapter 1, location advantages of less developed countries are examined from the viewpoint of five features of location, namely factor costs, market access, public policies, agglomeration economies, and cross-border production networks. The first part of this book (Chapters 2–4) gives an overview of less developed Southeast Asian countries from the perspective of production networks. The authors discuss crucial policy elements for participating in production networks and forming competitive clusters. They also discuss the role of the ASEAN Economic Community (AEC) in extending production networks. In the second part (Chapters 5–9), the focus is on specific countries or regions. Here, in addition to CLMV, it also examines the link between Singapore and the Batam-Bintan-Karimun (BBK) Special Economic Zone, Indonesia and clearly demonstrates that it is vital for less developed Southeast Asian countries to strengthen their links with neighbouring East Asian countries if they are to fully utilize their location advantage in low labour costs, and at the same time overcome their handicaps, such as small local markets, less developed infrastructure and institution, and land-locked geographic locations (in the case of Laos).

INTRODUCTION

In view of their geographical proximity, as well as social and cultural affinity, the experiences of industrial development in the neighbouring Southeast Asian economies can provide invaluable lessons to the less developed economies in the region. In the more advanced Southeast Asian economies, a rapid decline in transport and communication costs and diminishing trade and investment barriers have reduced the costs of organizing production networks across borders, so that extensive production networks have been established through the activities of multinational corporations (MNCs). At the same time, local industries have enhanced their capacities by participating in such networks, and the emergence of local suppliers and local workforce with industry-specific skills have become important factors in determining the competitiveness of industries (Kuroiwa and Toh 2008).

Less developed economies in Indochina — Cambodia, Laos, and Vietnam — are northern neighbours of Thailand, Malaysia, and Singapore. At the same time, they are southern neighbours of China and other Northeast Asian economies. Such geographical proximity facilitates the movement of goods, services, natural persons, and investment across borders. Moreover, AFTA and other regional frameworks, as well as infrastructure development such as the East-West, North-South, and Southern Economic Corridors, are leading to the reconfiguration of corporate activities, so that production networks spread into the region.

This chapter focuses on the industrial policy in less developed Southeast Asia with particular reference to Indonesia and the three Indochinese countries of Cambodia, Laos, and Vietnam. In this chapter, industrial policies in Southeast Asia are first reviewed. In Southeast Asia, liberalization in trade and investment was crucial in extending production networks into less developed regions. At the same time, two constraints on industrial policy — shrinking policy space and the constraints on state capability — are examined to consider feasible and appropriate industrial policy in an era of globalization, at a time when participation in the WTO and FTAs are becoming the norm. Industries such as electronics, automotive, and clothing are expected to expand production networks. Production networks in Southeast Asia are examined with the use of input-output analysis and statistical data. Finally, industrial policies in less developed Southeast Asia are revisited with particular reference to policy measures whereby participation in production networks, as well as the formation of competitive industrial clusters, plays a crucial role in industrial development.

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.

INTRODUCTION

The chairman of the Myanmar Garment Manufacturers Association (MGMA) deplores the fact that the garment industry in Yangon and its suburbs has been losing workers, in particular experienced workers, to Mae Sot, a Thai border town opposite Myawaddy on the Myanmar side. His own factory employed 150 workers but has recently lost 10 sewing-machine-operators to Mae Sot. The question is why Myanmar workers have left Yangon, the former capital and business centre of the country, for a small border town on the Thai side.

The garment industry in Yangon was severely damaged by the United States’ sanctions of July 2003, which banned all imports from Myanmar. The industry exported nearly half of its products to the United States, and more than 80 per cent of U. S. imports from Myanmar were clothes. Myanmar' garment exports declined sharply from US$829 million in 2001 to US$312.4 million in 2005, a 62.3 per cent decline. Many factories were closed and many workers lost their jobs. Some garment workers who were made redundant went to Mae Sot to seek employment. Such a migration reflects the poor business conditions and serious unemployment problem in Myanmar, as well as the significant wage gap between the two countries. It is therefore only natural that Myanmar workers migrate to Thailand, attracted by abundant job opportunities and higher wages.

However, there are two important questions that must be answered: the first is why so many garment factories are concentrated in a small Myanmar-Thai border town. This question raises issues unique to Cambodia, Laos, and Myanmar, as shown below. The other question is why the industry is located on the Thai side, not the Myanmar side. Mae Sot and Myawaddy are separated by a small river called the Moei. The friendship bridge that was constructed by the Thai government in 1997 connects the two towns. The Thai garment industry could easily cross the bridge and relocate to Myawaddy, where it could probably employ more Myanmar workers at lower wages. However, this did not happen. The absence of a border industry in Myawaddy indicates that there exists some hindrance or impediment which prevents the Thai garment industry from operating on Myanmar soil.

Introduction

In view of geographical proximity as well as economic, social and cultural affinity, the experiences of industrial development in the neighbouring Southeast Asian economies, such as Singapore, Thailand, and Malaysia, can provide invaluable lessons to the less developed economies in the region. In the more advanced Southeast Asian economies, a rapid decline in transport and communication costs and diminishing trade and investment barriers have reduced the costs of organizing production networks across borders, so that extensive production networks have been established through the activities of multinational corporations (MNCs). At the same time, local industries have enhanced their capacities by participating in such networks, and the emergence of local suppliers and local workforce with industry-specific skills has become important factors in determining the competitiveness of industries (Kuroiwa and Toh 2008).

Less developed economies in Southeast Asia, especially Cambodia, Laos, Myanmar, and Vietnam (CLMV), are northern neighbours of Singapore, Malaysia, and Thailand. At the same time, they are southern neighbours of China and other Northeast Asian economies. Such geographical proximity facilitates the movement of goods, services, natural persons, and investment across borders. Moreover, AFTA and other relevant free trade agreements (FTAs), as well as infrastructure development such as the East-West, North-South, and Southern Economic Corridors, are leading to the reconfiguration of corporate activities, so that — as in the NAFTA and EU — regional production networks spread from the high income to low income countries to exploit lower labour costs in the latter countries.

In this paper, industrial policies in Southeast Asia are first reviewed. In Southeast Asia, liberalization in trade and investment was crucial in extending production networks into less developed economies. At the same time, constraints on industrial policy, notably shrinking policy space, are examined to consider feasible and appropriate industrial policy in an era of globalization, at a time when participation in the World Trade Organization (WTO) and FTAs are becoming the norms. Industries such as electronics, automotive, and clothing are expected to expand production networks and production networks in these industries are examined with the use of input-output analysis. Finally, industrial policies in less developed Southeast Asia are revisited, with particular reference to policy measures whereby participation in production networks plays a crucial role in industrial development.

In Southeast Asia, de facto economic integration preceded de jure economic integration. Unlike in Europe, firms in Southeast Asia have expanded their production networks without any formal framework of economic cooperation, and as a result, economies in Southeast Asia are increasingly integrated through the trade of parts and components rather than final products. The drivers for the expanding production networks are rapid decline in transport and logistics costs as well as export oriented industrialization policy adopted by Southeast Asian economies. However, further advancement of production networks cannot be achieved without progress of de jure economic integration — notably FTAs and other regional economic cooperation are crucially important.

Production networks in Southeast Asia have often advanced in tandem with industrial clustering. Without industrial clustering, the competitiveness of industry cannot be sustained. Clustering enables companies to tap on agglomeration economies, reduced transport costs, and development of tacit knowledge that would otherwise stifle. These help companies to contain rising labour or land cost, and retain profitable production activities in the country. Singapore electronics industry cluster, for example, still maintains competitiveness and continues to move up the value chain, while other activities — especially standardized labourintensive or land-intensive activities — are decanted and relocated to the neighbouring Southeast Asian countries.

In this study, we investigate how the production networks and industrial clusters have progressed in Southeast Asia, especially in Singapore, Malaysia, Indonesia, and Thailand. The analytical frameworks of Global Value Chain (GVC), Global Production Network (GPN) and fragmentation theory are being used to elucidate the development of industries and production networks in the countries considered. These approaches look at similar phenomena from different perspectives, providing important insights for formulating development policies. Furthermore, several models of industrial clusters are being considered in the chapters, and some of them are examined using data obtained from field works and surveys.

In Chapter 1, trends of trade and investment in Southeast Asia are demonstrated, followed by an overview of economic theories on production networks and industrial clusters. In the first part of the book (see Chapters 2–4), the authors focus on the production networks and industrial clusters in Southeast Asia based on the trade statistics and other empirical data.