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 Pacific region,
1985 - 1994

Source: OECD, Information Technology Outlook (Paris,1997), p. 50.
a includes Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, Spain, Sweden, Switzerland, United Kingdom and United States.

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

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Footnotes:

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.