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.
^a The network application is likely to be owned by a third party.

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.

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Footnotes:

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.