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ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC
Part Two of the Economic and Social Survey of Asia and the Pacific, 1999
Asia and the Pacific into the Twenty-first Century: Information Technology, Globalization, Economic Security and Development
VI. ICT AND INVESTMENT FOR PRODUCTION
In this chapter, three aspects are discussed which lie at the heart of the influence of ICT on the location of production facilities by TNCs and domestic companies. First, the application of ICT links the production and marketing units of a company and so allows it to locate its productive capacity in the optimal location in terms of access to factors of production (land, labour, natural resources and technology) and of a preferred climate of laws and regulations, infrastructure, security of investment and personnel. (See chapter IV for a discussion of new determinants of competitiveness.) Restrictions on access to product markets are less important with the progressive reductions in tariffs and non-tariff barriers under multilateral trade negotiations, particularly for manufactured goods. Transport costs have been progressively reduced to levels where they are no longer a significant determinant of production location. Also, because of ICT applications, firms can easily have components of production undertaken in different locations, effectively eliminating the need for large single-unit industrial complexes. Second, partly as a result of the trend towards more intensive use of ICT, the ICT industries themselves have become increasingly important and their location in different countries is a factor in determining the location of production units of other industries which rely on the use of ICT. Third, underlying both of these is a country's policy towards encouraging the development and use of ICT applications by industry.
ICT AND INDUSTRIAL NETWORKS
Globalization and new rules governing competition have induced changes in production strategies of both TNCs and major domestic companies. In this dynamic economic situation, the attractiveness of countries in the ESCAP region will depend on whether their investment climate is judged as favourable, and their economic policies are seen as open, by those investing in productive capacity. Judgements on the relative attractiveness of policies and on whether the domestic infrastructure is favourable to the intensive use of ICT influence the decisions of TNCs to transfer production units of effective size to particular locations. Many companies, including those involved in the production of automobiles, textiles, shoes and electronics, have followed this strategy.
These changes have put immense pressure on enterprises to innovate by introducing ICT in areas such as production (computer-aided design and computer-aided manufacturing), marketing (the Internet), financial management and document processing. In particular, large-scale enterprises, including TNCs, have introduced management information systems which have facilitated their business decisions by ensuring a timely flow of reliable and accurate information. Box VI.1 illustrates this use of ICT by a major TNC in the Asian region. The application of ICT can also greatly facilitate the implementation of management techniques such as "just-in-time" inventory management and other working capital management techniques, making the operations of an enterprise more cost-effective. ICT applications can thus assist in access to information in all kinds of areas relevant to the operations of an enterprise, and help to expand products and markets, boosting both domestic and foreign investment. Table VI.1 displays in schematic form the information networks frequently used in Japanese companies. In particular, the Internet has provided alternatives for advertising and the operations of business, and can be expected to evolve into a full-scale computer-operated business environment.
Table VI.1. Uses of information networks in Japanese companies
Source: OECD, Information Technology Outlook
(Paris, 1997), table 2.2.
As globalization of trade and investment has greatly boosted FBI flows in the Asian and Pacific region, the enhanced application of ICT has facilitated the practice of outsourcing by TNCs. This might be explained by the fact that the use of ICT lowers transaction costs, favouring "buying" to "making".1 Outsourcing involves the manufacturing of components in separate locations and then assembling them in a different one. In its extreme form, the so-called virtual factory system has made it possible to manufacture any product at any time in any factory worldwide, with all the engineering specifications and invoices being transmitted electronically. A typical network includes not only a parent firm and its affiliates, but also its suppliers and subcontractors, its distribution channels and value-added retailers, as well as its research and development alliances and a variety of cooperative arrangements (such as standards consortia). Box VI.2 provides an illustration of such a network for a domestic concern in a large country of the region.
Another good example of such a network is Seagate, a world leader in the production of hard disk drives, which operates 22 plants worldwide, 14 of them in Asia. In fact, Asia has absorbed most of the company's high-volume labour-intensive assembly activities and the production of low- and mid-range components, while high-end, knowledge-intensive stages of the value chain, such as precision component manufacturing and research and development, remain in a few highly specialized locations in the United States. The production network in Asia has evolved to include a regional division of labour to take advantage of the differing labour-cost advantages of countries in the region. Bottom-end work is done in China and Indonesia, while Malaysian and Thai plants make components and specialize in partial assembly. Singapore is the centre of this regional production network; its focus is on higher-end products and important coordination and support functions, including precision testing. Increasingly, the managers and engineers in its Singapore operations are drawn from the international labour market, including developing countries such as China, India and the Philippines.2
Similar networks have been established in the textile sector. A Japan-based group, which is the world's fifteenth largest producer of polyester, has established a production network in eight countries including China, Indonesia and Thailand.3 In Thailand, it set up the first integrated polyester plant in South-East Asia in 1967. The production of staple fibre began in 1970, and was followed by filament yarn and spun bond fabric in 1994. These factories are located in different regions of Thailand.
In the automobile sector, as Japanese automobile makers started relocating their production to Asian countries, the manufacturers of their parts and components also shifted their production sites to different parts of Asia, either in the form of joint ventures or with local ownership. There were 189 production plants in the ASEAN countries and 176 production plants in the rest of Asia in 1995.4 One of the primary suppliers of a Japanese automobile maker started its operations in Australia and South-East Asian countries in the 1970s, extended its operations to India, the Republic of Korea and Taiwan Province of China in the 1980s, and moved to China in the 1990s. Its initial operations were limited to the simple assembly of parts and components imported from Japan. However, its assembly was upgraded in the 1980s because of the increasing procurement of local parts and components such as die-cast and rubber products. With the expansion of markets and the appreciation of the yen in the 1990s, production facilities have increased and local procurement in Asian countries has expanded. This huge network is even larger because each primary supplier may deal with as many as 100 secondary subcontracting firms or suppliers under its control.
Most of the above trends are expected to continue or increase as more countries develop an ICT-friendly infrastructure to support the needs of production units. To date, most TNCs have relied on their own ICT network but as Internet facilities and other forms of connectivity expand, many firms may be able to diversify production without investing in such a dedicated infrastructure. This will favour countries which have invested in their own ICT structures. Most of the ones which have been the beneficiaries of diversified investment by TNCs and others have concomitantly also been part of the growing production and trade pattern of ICT products.
NETWORKS FOR ICT PRODUCTION
Products related to ICT have become a leading target of FBI through the outsourcing of the labour-intensive production stages in selected Asian and Pacific economies. For instance, in 1993, the output of computer equipment manufacturers produced by foreign affiliates of United States firms was 40 per cent greater than total domestic production in the United States;5 27 per cent of the total assets of United States foreign affiliates in the ICT industry was located in Asia. For many developing countries in the region, manufacturing subsectors such as semiconductors and other computer peripherals have been major recipient sectors of FBI in the 1990s. For example, in 1996, electronics was a leading export sector for Malaysia, the Republic of Korea, Singapore and Taiwan Province of China. The share of Asia, excluding Japan, in worldwide ICT production rose from 7 per cent in 1985 to 19 per cent in 1994, with a growth rate of 21 per cent over the period compared with 7 per cent for OECD (see table VI.2 and figure VI.1). In 1994, Malaysia produced over 15 per cent of the world's audio equipment.6 The Republic of Korea accounted for over 10 per cent of the world's video equipment and over 8 per cent of world production of electronic components.7 The gradual rise of firms in the Republic of Korea to rank among the world's top 20 semiconductor companies was related to the specialization in dynamic random access memory chips (DRAMs), a product for which demand was growing rapidly; over 80 per cent of the semiconductor production in the Republic of Korea in 1994 consisted of DRAMs.8
Table VI.2. Production of ICT goods in the Asian and
Source: OECD, Information Technology Outlook (Paris,1997),
Asia also developed a strong telecommunications equipment sector. This has evolved in two ways. First, large markets hungry for telecommunications, such as China, Indonesia, the Philippines and Thailand, have been able to attract foreign equipment manufacturers to set up joint ventures. Initially, much of the production was used locally but it is now starting to be exported as well. Second, the tendency towards liberalization of domestic markets and the promotion of competition has opened up new markets for customer premise equipment such as telephone sets, facsimile machines and cellular phones. This type of equipment fits in well with the expertise that South-East Asian economies have acquired from exporting consumer electronic products such as radios, televisions and video recorders. Japanese companies have established many subsidiaries in the region. Many other leading vendors, such as Alcatel, Siemens, NEC, Lucent and Ericsson, have set up joint ventures, including, for example, building telephone switches in China because that country is adding millions of telephone lines per year.
Figure VI.1 Breakdown of worldwide production of ICT goods by region, 1994
Source: OECD, Information Technology Outlook (Paris,1997), p. 51
Investment in ICT production among the countries of the Asian and Pacific region
FBI from Asian countries has been an important vehicle facilitating the diffusion of ICT within Asia,9 and Japan has played an especially important role in this area. In the 1980s, Japanese export-oriented ICT firms relocated production processes and the associated technology to selected Asian countries. Supporting industries followed. Simultaneously, the recipient economies developed increased, or improved, levels of capabilities in ICT, particularly in respect of qualified human resources required to absorb foreign technology. They created policy frameworks favourable to attracting FBI and building supportive infrastructure. By the late 1980s, many of them had started exporting information technology to other developing countries. The NIEs have been net exporters of FBI and the ASEAN countries have had declines in net inflows. The surge in the regional flows of FBI in ICT in the Asian and Pacific region illustrates a step-wise spread of investment and technology flows from Japan to the NIEs, from NIEs to ASEAN, and from ASEAN to others, with the more recent involvement of China and India in this process.
In particular, the production of higher-end Japanese electronic products (for example, computer peripherals) that have lost their cost advantage in Japan have shifted to the NIEs, while the production of standardized products (for example, large colour televisions, air-conditioners) have shifted to ASEAN countries. At the same time, lower-end products (for example, cassette recorders) produced in the Asian NIEs and the more advanced ASEAN countries have shifted to China and Indonesia. A division of labour between Japanese subsidiaries is also evident, with subsidiaries in ASEAN specializing in products for export to third countries. There is thus an increasing trend towards intra-industry or horizontal division of labour which allows maximum exploitation of resources available in different locations. The sharing of network formation among different subsidiaries, facilitated by a substantial increase in applications of ICT and intra-firm trade, has contributed to the rising intra regional trade in the Asian and Pacific region.
In recent years, some manufacturing firms from the Republic of Korea have also been pursuing a globalization strategy and, as part of this, have started operating Asian networks.10 A typical example is the Samsung Group's network. Samsung Corning provides glass products for Samsung Devices, Malaysia, whose colour picture tubes are sent to the subsidiaries of Samsung Electronics in Thailand and the Philippines to manufacture colour television sets. Samsung Electric and Mechanics in Thailand also supplies Samsung Electronics in Thailand and the Philippines with tuners.
Several TNCs have used Singapore as a base from which to expand into the region. These TNCs adopted a decanting approach in that they transferred product lines from their Singapore operation to Malaysia and Thailand as labour costs rose in Singapore and profitability declined. However, as decanting proceeded, TNCs upgraded their Singapore operations.11 One example is a Japanese integrated circuit maker which started off as a labour-intensive maker of wire harnesses and connectors. The company moved this operation to Johor (Malaysia) but upgraded the Singapore operation by introducing an entirely new product line. In other cases, the upgrading of the Singapore operations took other forms, ranging from significant automation efforts to introducing product and process research and development. As product lines were transferred, the Singapore operations often became the technical support centre for operations in Malaysia and Thailand. Technical personnel from the Singapore operation played an important role for Malaysian and Thai operations in terms of start-up, training of workers and trouble-shooting in the initial phases of operation. Singapore has also been used as a training base for Malaysian and Thai staff, an option which was considered to be cheaper than sending the staff to the home country of the TNC for training. The components and sub-assemblies produced in Thailand and Malaysia are sometimes brought back to Singapore for final assembly. The Singapore-Malaysia-Thailand network is an interesting trend in intra regional investment greatly facilitated by the use of ICT and supported by the ICT infrastructure in the three countries.
The experience of the NIEs shows that, by blending their national ICT capability with imported technology, an accelerated growth rate in the production of ICT products can be achieved within a relatively short period of time. Some of these economies are now capable of providing other countries with both technology and capital. Large investments in China, Malaysia and Thailand have been made by Japan, the Republic of Korea, Singapore and Taiwan Province of China, as well as Hong Kong, China, and these economies are now beginning to invest in the SAARC countries. While the labour intensity of the production and technology used is often closer to the market conditions of host countries, they in turn acquire capital inputs, a new breed of ICT, and new management and organizational expertise.
Local capability-building in the production of ICT products
The NIEs were very successful in attracting FBI into their ICT industries and in building up their technological capabilities. In general, countries built advanced ICT capabilities in stages: first they obtained access to the technologies and the use of ICT systems; they then built or implemented large ICT systems and undertook infrastructure projects; finally, they produced ICT products and systems domestically. While the Republic of Korea and Taiwan Province of China have generally relied on FBI only to a modest extent, the electronics industry is an exception. In particular, the Republic of Korea encouraged the importation of more advanced technology by liberalizing its FBI policy, and this policy shift increased ICT transfer through FBI. Capitalizing on contacts with TNCs in equipment manufacturing arrangements, local industry acquired the basic skills and absorptive capacity to manufacture ICT applications. Once the basic absorptive capacity was established, licensing arrangements were quite frequently used to acquire advanced technologies. Technological advancement in the form of strategic alliance with TNCs from developed countries helped these companies from the Republic of Korea to close the technology gap, for example, in DRAM chip production. As a result, they have recently become successful in developing and selling their own brand name ICT products in the United States and Europe. To overcome cost pressures at home resulting from rising wages and an appreciating domestic currency, in the early 1980s these companies began to shift the production of electronics to China, India, Indonesia, Malaysia, Mexico, the Philippines, Portugal, Thailand and Turkey.
Singapore's manufacturing sector has been mainly TNC-driven and the share of local firms in total manufacturing output has been consistently less than 30 per cent since the mid-1970s, decreasing to 25 per cent in recent years.12 The electronics industry is of strategic importance to the economy in terms of output, value added, exports, technology generation and spillover effects to the economy. In 1994, the industry accounted for about 12 per cent of GDP, over 50 per cent of manufacturing value added and 62 per cent of domestic exports, as well as over 50 per cent of total expenditure on research and development in 1995. While the spillover effects to supporting industries and services through backward and forward linkages are important, the main benefits come from the TNC-leveraging strategy which Singapore has adopted to maximize technology transfer over time. Technological learning within subsidiaries of TNCs in the semiconductor industry, the hard disk drive industry and the consumer electronics industry in Singapore has been examined and the findings are presented in box VI.3.
Malaysia has become one of the leading manufacturers of electronic components. The main industries are electrical products, electronics and textiles and, in all three, FBI was very significant. However, generally few local or foreign firms undertake high value-added or technology-related activities like design and development. For example, technology transfer from TNCs to the electronics and electrical goods sector in Penang has progressed from the adoption stage to a skill level at which local technical workers are able to master operational skills and carry out maintenance and repair activities. However, very few of the firms have the capability to conduct independent research and development activities. One of the major reasons for this is the strategic preference of TNCs to retain their centres for research and development in their headquarters. Another indication of the lack of integration is that more than half of the firms source less than a quarter of their input from local firms. One reason is that the required inputs are not available; another is the tendency of foreign firms to rely first on their own suppliers at home or their subsidiaries which have relocated to Malaysia. In the Penang region, where over 100,000 electronics workers are employed, 80 of the 150 electronics factories are foreign-owned. The intense competition between TNCs in the electronics industry has led to some transfer of product and process technologies to local subcontractors that are relatively strong technologically.
FBI in the Philippines has been particularly striking since 1992, with much of this in the electronics and electrical machinery industry, producing export products such as magnetic disk drives, optical readers, computer parts and telecommunications equipment. These are mainly based on subcontracting arrangements with labour-intensive assembly and relatively low domestic value added. In response to the deregulation and export-promotion policies introduced by the Government of Indonesia since the mid-1980s, a number of well-known TNCs (mainly from Japan and the Republic of Korea) in the consumer electronics industry have established, modern, state-of-the-art, export-oriented operations in Indonesia to assemble audio and video equipment for export. However, a strong local supporting industry capable of manufacturing quality parts and components at low cost is still lacking. Local supplier firms need stronger institutional support for technology upgrading, standardization, laboratory testing and manpower training. In Thailand, subcontractors of electronic firms have gained a basic level of understanding of three types of technology: product, quality control, and process technologies.
One of the most important issues for ICT-related technology transfer in industrial development in the Central Asian republics should be the potential contribution of FBI and technology transfer to the conversion of military production for civilian purposes. The first steps in this direction have already been taken. In Uzbekistan, for example, since most of the military suppliers were involved in the production of electronic and radio equipment, personal computers, radar and acoustic installations, printed circuits and electrical systems, the easiest conversion for many of these enterprises was the production of electric and electronic equipment such as electrical household appliances. Several defence conversions have been completed, some of them with the active participation of foreign investors, who brought in both the capital and the technology. The largest of these were Algorhythm Electronics enterprise, a joint venture with Daewoo; Semurg Electronic enterprise which produces radios and televisions for the local market; Zenith Electronics enterprise in a joint venture with Daewoo to produce household appliances; and Kinap enterprise, which also produces household appliances. It is quite obvious from these examples of enterprises undergoing the conversion process that their success relies partly on partnerships with foreign investors to acquire the technologies and know-how needed to create new products, to gain access to regional and eventually global markets and to finance a portion of the conversion.
China provides TNCs with special preferences and incentives for the transfer of advanced technology, including communications and electronics. Large TNCs such as AT&T, Motorola, Nokia and Siemens have invested in telecommunications in recent years. Motorola has already invested $120 million and is now in the process of investing another $400 million in a technologically advanced plant. AT&T's multi-faceted operations in China include the manufacturing of programme-controlled switching systems and large-scale integrated circuits, a joint research and development centre, the transfer of microelectronics manufacturing technology and the development of telecommunications networks.
During the period from 1985 to 1994, many electronics enterprises were established in China, with a total investment of $4 billion, and the industry now has an annual production capacity of 20 million colour television sets and 15.2 million tubes. Seven per cent of the design work in the 10,000 large and medium-sized enterprises in the different sectors will be done through computer-aided design technologies. Production in 140,000 enterprises uses domestic computers. In 1994, the industry exported $12 billion worth of products. Of the current 113 colour television production lines, 72 have been partly or wholly imported. The imported assembly plants have come from most of the world's major television manufacturers, which has posed problems for component standardization and compatibility, and low economies of scale and local content. The total import bill for parts and components has been $300-400 million per year, which is much higher than importing the assembly lines themselves. Because of the limited ability to supply parts domestically and difficult access to foreign exchange, most of the imported colour television lines are only operating at 25 to 30 per cent of their capacity.
In India, the telecommunications area was opened to FBI as a part of changes in the industrial policy in 1991 and other reforms designed to make the Indian industry more competitive, encourage FBI and enhance exports. While these measures did not stimulate the growth of ICT production in India in the short run (see table VI.2), India does provide a good example of the transfer of research and development activities by some TNCs to developing countries. Motorola has set up an advanced microprocessor laboratory at the Indian Institute of Technology, Kanpur, designed to introduce a new postgraduate course on microprocessor design. Motorola has also set up its largest software development facility in Bangalore to design semiconductor products. India has also attracted considerable foreign investment into research and development by Microsoft and Texas Instruments. The primary driving force behind the location of research in India is the availability of appropriate skilled personnel of high quality to cater for the needs of sophisticated research work.
The Indian software industry's core competency is in developing customized software. It has gained worldwide recognition through large customization and downsizing projects for international customers. The Ministry of Science and Technology of India has created a technical development fund which provides foreign exchange for the import of special value-added equipment, technical know-how, foreign consultancy services, designs and drawings and any other inputs needed by an industrial unit to meet its export capability and upgrade its ICT-related transformation.
Small and medium-sized enterprises and investment in ICT
SMEs are becoming increasingly involved in ICT industries. They are often subcontractors and suppliers of parts and components to large-scale companies, including TNCs. These firms have taken advantage of vertical linkages in the outsourcing process and the componentization of production. SMEs have increasingly engaged in FBI between developing economies through joint ventures. This investment has been significantly driven by increased access to information through the Internet and better communication networks. As a result, foreign investors have been in a better position to seek out local partners and suppliers while SMEs have gained better information about prospective partners, possibilities for economies of scale and scope, and expanding markets. Some SMEs have followed their larger partners abroad to continue relationships with large-scale customers. FBI involving SMEs in the Asian and Pacific region is, however, quite small, at only about 10 per cent or less of FBI inflows in many Asian countries. This is estimated at 10-20 per cent of FBI outflows for major Asian investors, in particular the Republic of Korea, although the figure is somewhat higher for Japan.13
ICT PLANNING INTO THE TWENTY-FIRST CENTURY
Many countries in the region have now recognized the importance of the production and use of ICT for competitiveness and growth, and ICT has become a major focus of national investment strategies.14 Developing countries are increasing their spending on ICT significantly, but they have a long way to go compared with developed countries like Japan and the United States. In the United States, business spending on computers alone rose by 86 per cent during the period 1994-1998, compared with a 40 per cent increase in other types of investment.15 Several developing countries in the region have developed ICT plans for the next century which they expect will attract domestic and foreign investment for development, production, transfer and application of ICT. Examples are the Three Gold project of China; Malaysia's ICT plan and Vision 2020; the National Information Technology Plan 2000 (NITP 2000) of the Philippines; the Korean Information Infrastructure of the Republic of Korea; Singapore's IT2000; and Viet Nam's national programme on IT2000. Such plans usually also include national information infrastructure initiatives aimed at sustaining and expanding the competitive advantage of the economies.
The essence of the Singaporean programme is the synergistic development of a well-integrated and extensive national information infrastructure based on advanced ICT. Its implementation is expected to help Singapore to become a leading information society. The National Computer Board will be the government's chief information office and will outsource computer services. New flagship projects worth $200 million have been initiated in eight key sectors: education, construction, manufacturing, distribution, leisure and tourism, health, library, and public services. The Board will help to meet the requirements for ICT professionals needed for the next phase of the plan, but will rely upon universities and the private sector to train them.
Hong Kong, China has very sophisticated, advanced telecommunications at relatively cheap rates. In a workforce of 3 million people, there are already 1.1 million pagers and 800,000 mobile phones, constituting very high penetration per person. Hong Kong, China has a fibre optic infrastructure and most buildings will be fibre-cabled by 1998. Value-added networks and services are to be delivered over these conduits, including electronic commerce, electronic trading, electronic delivery of services, video-on-demand and government services. A government computer network links major government departments and will be the basis for providing bilingual public access to government databases such as the land registry, legislation, court cases and trade. Perfecting Chinese language input, character recognition and voice recognition on computers will be important for achieving greater use of computers and telecommunications.
The Government of the Republic of Korea is building its information infrastructure by implementing the Korea Information Infrastructure initiative over a period of 15 to 20 years. The government has created a steering committee at the interministerial level. In addition, a subcommittee for coordination among participating ministries has been actively working on a superhighway project. The country realizes that the future information society primarily depends not only on how efficiently the high-speed communications networks are constructed, but also on how effectively they are utilized.
The National Information Technology Plan 2000 of the Philippines provides an overall strategy to create a population that is ICT-knowledgeable. The broad objective is to harness the full potential of ICT to maximize social economic development. Some of the elements are currently being implemented. Viet Nam has spent the last several years getting ready for the information revolution. Central administrative arrangements have been set up and policies and plans created for the development of a computer industry and to promote information technology throughout the country. The steering committee for the national programme for information technology has issued two key documents on policy on information technology development in Viet Nam up to 2000 and on a master plan up to the year 2000. However, the country still has some way to go in putting in place the requisite hardware, software and systems.
An example of a thriving national focus on the development of ICT to boost national competitive advantage is Malaysia. The ICT industry in Malaysia is being concentrated along the Multimedia Supercorridor that stretches 50 kilometres south from Kuala Lumpur. The development of the supercorridor includes participation by leading TNCs in ICT through FBI and substantial investment by the government. It is based on the use of the most modern technology at a relatively low cost of connection. The Multimedia Supercorridor boasts two of the world's first "smart cities", Putrajaya and Cyberjaya, and it will eventually lead to full electronic government, a totally automated hospital system, smart schools (all of Malaysia's schools are projected to have Internet access in the near future), research and development clusters consisting of universities and corporate centres, and multipurpose smart card systems. The computer services market, including data entry, systems integration, custom programming, data processing management and maintenance, outsourcing services, and virtual reality systems represents approximately 30 per cent of the current ICT market in Malaysia. The country has already introduced the legal and regulatory reforms necessary for the implementation and effective functioning of the supercorridor, including a full body of cyberlaws for ICT applications governing electronic transfers, electronic signatures and other technological features. Intellectual rights legislation will also be expanded to fully cover ICT products.16
Many least developed countries and island developing countries have particular difficulties in developing their information infrastructure because of lack of funds, experience and expertise, and the unavailability of qualified human resources. In this regard, active participation of the private sector acting in close cooperation with the government could be an effective tool for information infrastructure development. Such an approach is used in Maldives.17 Prior to 1988, domestic telecommunications were operated by the Department of Posts and Telecommunications, which was unable to meet the level of funds necessary to realize the country's development potential. A joint venture company was set up between the government and Cable & Wireless, with the government maintaining the majority share, to encourage further investment and to ensure the availability and use of the latest technology. The new company was granted exclusive rights of operation for 10 years and, in return, the government was able to impose certain regulations, including the requirement that a national network permitting access to the whole population should be set up.
The role of the Department of Posts and Telecommunications changed from operator to regulator with the following main duties: to issue operating licences, including transmission station licences; to monitor the quality of service provided by the operator; to regulate tariffs; to consider public complaints and take necessary action; to implement government policy on telecommunications; to allocate and control the radio frequency spectrum; to set technical standards and ensure compliance; and to represent the country in regional and international telecommunications organizations. The growth of the Internet in Maldives has increased the use of computers for information gathering, processing and dissemination. The private sector, particularly the tourism industry, which is the second largest industry after fisheries, has started using the Web as a cost-effective way of advertising and maintaining contact in a dispersed island economy. Small businesses have started to provide Web page publishing, e-mail servicing and also, to some extent, voice and facsimile servicing through the Internet. The government now intends to evaluate the need for the liberalization of the sector in order to achieve its target of basic telephony access to all the inhabited islands of Maldives by the turn of the century.
While national efforts have been stepped up to upgrade the availability and utilization of ICT in many countries, the success of such upgrading is dependent on supportive regulations, and government policies with regard to the free flow of information. As several governments have restricted Internet access for various reasons, the effective utilization of this information tool will be constrained. However, it is recognized that proper regulation will have to be established to ensure stability and orderly use of ICT, consistent with such considerations as protection of privacy and respect for cultural morals.
The new and still evolving applications of ICT have further spurred globalization of production systems, especially through FBI by TNCs, and has induced companies, big and small, worldwide to invest in these applications to sustain and strengthen their competitiveness. ICT is enabling SMEs to enter the international business environment either as subcontractors for larger companies or as partners with other SMEs. Some of these may grow into the TNCs of the twenty-first century. ICT is an effective tool for skills development as well. The componentization of production, facilitated by ICT, also increases the possibilities of an increased number of developing countries attracting investment. As such, its role is pervasive.
In this light, it is necessary for governments to consider the new vulnerabilities facing their domestic industries in an ICT-intensive world. In this context, three risks appear to be of immediate concern. First, the role and position of foreign TNCs in the production structures of many industries are likely to become stronger and more pervasive. There is thus a risk that it will be more difficult to stimulate the development of local entrepreneurship. In addition, under the WTO Agreement on Trade-related Aspects of Investment Measures, governments are constrained in supporting their domestic enterprises as they did in the past by using such measures as local content requirements or trade-balancing requirements. Modalities for addressing the stimulation of local enterprises such as programmes for the provision of credit, infrastructure and transportation facilities, and training/retraining will need to be strengthened in order for these entrepreneurs to become competitive or to be able to develop cooperative relationships with foreign TNCs. Second, there are balance-of-payments risks in that the inflows of capital from FBI do not necessarily match outflows of remittances of profits and interest, and there are likely to be periods of unanticipated deficits on the capital account and sometimes even prolonged deficits. One way of addressing this is to try to encourage FBI flows more into tradeable sectors rather than non-tradeables such as property, construction and provision of infrastructure, from which there are no foreign exchange receipts. In this regard, the use of electronic commerce over the Internet will make it more difficult to keep track of inflows and outflows of funds. Third, the use of ICT means that companies are not having to invest in large factories so that their production units become more footloose and can be moved from one location or country to another more easily. This implies that a government cannot count on the presence of a TNC over the longer term as part of its development strategy unless it maintains the locational attractiveness of its economy. There is a risk of destructive competition whereby governments offer more and more inducements to TNCs to invest or stay in their country, unless there are some agreed rules of the game. As the growing application of ICT is an ongoing phenomenon, these increased vulnerabilities of developing countries should be addressed collectively through regional and international cooperation.
1 See OECD, Information Technology Outlook (Paris, 1997), p. 70.
2 UNCTAD, World Investment Report 1997 (United Nations publication, Sales No. E.97.II.D.10), p. 172.
3 Sun shines again for textiles", 10 December 1998, Bangkok Post <http://www.bangkokpost.com/worldinthailand/teijn.html> (2 February 1999).
4 Yuzuru Hata, "DENSO Corporation and outsourcing", in Developing Supporting Industries: Outsourcers' Perspectives (Tokyo, Asian Productivity Organization, 1998).
5 OECD, Outlook, p. 79.
6 OECD, Outlook, p. 51.
7 Elsevier Advanced Technology, Yearbook of World Electronics Data (Oxford, 1995), cited in OECD, Outlook, p. 51.
8 Electronique International Hebdo, 25 January 1996, cited in OECD, Outlook, p. 32.
9 For further discussion and references on this and the following topic, see volume 4 (forthcoming): Emerging Issues in Regional Technological Capability-building and Technology Transfer in the ESCAP series entitled Technology Transfer and Technological Capability-building in Asia and the Pacific.
10 For more discussion on this topic, see Lee Kwang-chul, "A comparative analysis of South Korean and Japanese foreign direct investments", in D. Singh and R.Y. Siregar, eds., ASEAN and Korea: Emerging Issues in Trade and Investment Relations (Singapore, Institute of Southeast Asian Studies, 1995), p. 48.
11 This issue is discussed in S. Natarajan and Tan Juay Miang, The Impact of MNC Investments in Malaysia, Singapore and Thailand (Singapore, Institute of Southeast Asian Studies, 1992), p. 18.
12 Local participation within manufacturing is more prominent in the more labour-intensive industries (for example, textiles and garments, food and beverages, wood, rubber and plastic products), while high foreign-capital participation is concentrated in the technologically more advanced sectors such as industrial chemicals, petroleum refining, electrical goods/electronics and precision equipment.
13 UNCTAD, Handbook on Foreign Direct Investment by Small and Medium-sized Enterprises: Lessons from Asia (United Nations publication, Sales No. E.98.II.D.4), pp. 28-31.
14 See "Regional economic cooperation as a means for developing and promoting new advances in information technology for industrial and technological applications in Asia and the Pacific" (E/ESCAP/SREC(9)/2).
15 "The twenty-first century economy", Business Week, 31 August 1998.
16 For more information, see What is the MSC? <http://www.mdc.com.my/msc> (12 February 1999).
17 The information on Maldives was provided by the Ministry of Communication, Science and Technology of Maldives (22 December 1998).