After decades of economic decline in Zambia, the transition to multiparty democracy in 1991 presented Zambians with an opportunity to redraw their political and economic landscape. Despite an auspicious start to the reform process, however, by the end of the decade there had been no fundamental revision of the role of business in economic policy-making. The puzzle that this chapter seeks to solve concerns this surprisingly low level of input by business into the policy-making of a government that had embraced, apparently fervently, an extensive role for the private sector in the economy. In particular, why was it that, despite a high level of influence in the formation of the Movement for Multi-Party Democracy (the MMD) as a party and in the early days of the MMD as a government, the business sector as a corporate entity rapidly lost this level of influence in that decade?

The proximate answer is twofold. First, despite the apparent political revolution represented by the return to multiparty politics and the conversion to neo-liberal economics, government by the MMD rapidly reverted to an older, neo-patrimonial mode of governance in which the access of business to the state was personalized. Second, the voice of organized business weakened over the course of the decade.

In a classic study, Clifford Geertz reflects on the differences between two very different Indonesian towns, one dominated by peddlers, the other by princes. Modjokuto, on the one hand, is a market-centered society with an extraordinarily energetic commercial life characterized by “vigorous competitive interaction.” The Muslim traders are somewhat marginal to the political life of the town but their industry forms the dynamic core of its economic life. By contrast, in Tabanan, “it has not been the bazaar but the palace which has stamped its character upon the town.” Here the political elites are dominant, and they would like to parlay their political power into economic power too. The danger is that “Tabanan's firms can become easily politicized in modern terms and this is … extremely dysfunctional to further growth or even to continued solvency.”

The same phenotypes are evident in the griot's account of two sons of a Malian king: “the younger preferred fortune and wealth and became the ancestor of those who go from country to country seeking their fortune” while “the elder chose royal power and reigned.”

In the Mauritius of the 1990s there appeared to be few political incentives for the government to consult seriously with its business community. Not only was the private sector dominated by an ethnic minority, but it was dominated by the very ethnic minority that historically had oppressed the majority group which subsequently assumed political power. Common sense, and much politics literature, tells us that such a setup invites economic and political conflict. Yet, despite a relatively high level of hostility between business and government, business was able to exert a moderate level of influence on economic policy in the 1990s and Mauritius has been described as “a case study in the successful management of an economy.”

This chapter investigates the contribution of the private sector in Mauritius to economic policy-making in the 1990s. While business' level of influence varied across the sub-sectors of the economy, the private sector overall had a high level of political capacity and received a surprisingly receptive hearing from government. Crucially, its challenge to government's leading role in the economy was ignored, but as this leading role has served business well, the outcome was still net positive.

Roland Lamusse, former economic advisor to the prime minister, argued that “if you want to talk about the relationship between the business community and government in Mauritius, you have to start with sugar.”

OVERVIEW OF THE SINGAPORE ECONOMY

Singapore is well-known to be a model economy that achieves remarkable economic growth over the last thirty years with heavy dependence on foreign direct investment. There is always a lingering question of whether such a model which yielded an average eight per cent annual GDP growth over the last four decades can be sustained. One school of thought is that the model based on FDI and export-led growth is relevant given the small size of the domestic economy. Nonetheless, it is also not surprising that there are others that call for a more sustainable development that focuses on indigenous enterprise development, promotion and expansion as a means to compliment and reduce the over reliance on TNCs for economic growth.

This paper reckons that FDI will continue to be a strategic component for the growth of the Singapore economy despite development of local enterprises and the advances in information and communication technology (ICT). However, the composition of the multinational activities in the city state is expected to change due to the emergence of large economies of China and India which are endowed with large labour resources and market potential. FDI outflows will continue to be a potent factor to integrate the world economies, but the types and qualities of FDI are far from uniform. The multitude of these outflows with different attributes have enabled ever new and growing opportunities to be exploited and tapped for powering economic growth (WIR 2004).

As Singapore transits into a higher value-added economy, the economic growth is expected to be moderated. This is depicted in quantitative terms in Table 6.1, where the average annual growth rate of GDP which average 9 per cent during 1965 to 1989, has slowed to an average of 7.7 per cent in the 1990s, and further down to 4.1 per cent during 2000–05.

The development of an economy may undergo four different phases of growth: (1) factor driven, (2) investment driven, (3) innovation driven, and (4) wealth driven (Porter 1990). In the initial phase, economic growth may be solely derived from effective factor allocation and mobilization of basic factors of production such as labour and natural resources in the establishment of more labour intensive industries. The changes in the relative factor prices will be the catalyst for the second phase of 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.

INTRODUCTION

Economic development at the regional scale is becoming an increasingly complex phenomenon to be analysed satisfactorily. On the one hand, the accelerated globalization of economic activity has apparently rendered the region as the most significant site of competition across the global economy. Many pundits have argued for a while that macro-regions such as North America, Western Europe, and East and Southeast Asia are becoming important “triad” (Ohmae 1995) and “motors” (Scott 1996, 1998) of the global economy. On the other hand, we are not yet entirely sure of the various mechanisms and processes that connect economic actors in different regions, whether these are macro-regions or regions in specific national territories. One helpful analytical approach burgeoning in urban and regional studies is to think of the global economy as comprising of different territorial regions increasingly interconnected and interdependent through the variegated transnational operations of business firms that resemble a form of networks. For the past decade, different conceptual terms have been developed to describe the formation and dynamics of such global networks (Gereffi 2005; Hess and Yeung 2006) — global commodity chains (GCCs), global value chains (GVCs), and global production networks (GPNs). In this chapter, I will examine how global production networks in different industries serve as the critical link that increasingly influences the economic fate and trajectories of development in specific regions and countries.

More specifically, even though different global production networks are spanning the global economy and drawing different regions closer together in a new form of international division of labour, we continue to observe spatial differentiation in the location of different firms and their production networks. In Southeast Asia, there is a clear regional division of labour in the form of fragmentation of production networks and specialization of different countries in diverse value-chain activities (Yeung 2001; see also Arndt and Kierzkowski 2001; Cheng and Kierzkowski 2001; other chapters in this volume). Intra-industry trade in intermediate goods, particularly in the material and machinery industries, has also increased dramatically during the past 15 years (see Chapter 3 in this volume). For over two decades, American and Japanese transnational corporations (TNCs) have played a highly significant role in the spatial organization of regional production networks in Southeast Asia (Henderson 1989; Doner 1991; Hatch and Yamamura 1996; Hatch 2000; McKendrick et al. 2000; Yusuf et al. 2004).

INTRODUCTION

The production and production capacity of automobiles in Thailand began to increase rapidly in the late 1980s after the appreciation of the yen. It then accelerated in the early 1990s due to the unprecedented economic boom and the government's liberalization policy. After a sharp decline during the 1997–98 economic crisis, production jumped sharply and surpassed the 1996 peak in 2002. Several car-makers have also expanded their production capacity as they had already made a strategic decision to use Thailand as one of their global production bases in the early 1990s. Although there are a number of studies discussing why Thailand became part of the global production network (GPN) of multinational car-makers, this paper will attempt to provide a systematic explanation, particularly a discussion of government policies that not only favoured Japanese carmakers, but may have also been indirectly influenced by the multinational companies concerned. Moreover, the paper will compare the structure of the production networks of two groups of major car-makers. This will allow the authors to draw some implications about the benefits of the GPN to Thai parts suppliers.

The second part of the paper addresses the role of clusters, particularly the creation of industrial districts (IDs). This paper will argue that until recently, the development of industrial districts in Thailand since the 1960s had always been concentrated around Klong Toey port in eastern Bangkok, which is only 120 kilometres from Laem Chabang port — a new but much larger seaport — in the eastern province of Chonburi. Such development has generated powerful agglomeration economy effects. Unfortunately, such huge agglomeration economies, which are one of the major forces that have prevented industrial development from spreading towards other regions of Thailand, have also generated severe congestion and pollution problems in Bangkok (Krongkaew 1995; Poapongsakorn and Fuller 1996). This has naturally forced manufacturers to locate their new plants along the eastern highways.

OVERVIEW OF GLOBAL AND REGIONAL TRENDS

Globalization

Over the past few decades, the world economy has undergone many changes. Central to these changes is the globalization of the world economy. Globalization refers to the increasing integration of economies around the world, particularly through trade and financial flows (International Monetary Fund 2001). The globalization of the world economy allows economies to focus on what they do best and enables them to have easier reach to markets around the world, increasing their access to more capital flows, technology, cheaper imports, and larger export markets.

There are two main driving forces behind the globalization of the world economy. The first is the advancement in technology especially in the area of information and communication technology (ICT). Technological advances have made communication much cheaper and faster, resulting in enormous decrease in the transaction costs of transferring ideas and information. The arrival of the Internet has further accelerated this trend by providing a common platform upon which countries from all corners on the Earth are able to communicate and share information. Technological advances have also significantly lowered the costs of transportation and hence, that of logistics. With the lowering of both communication and transportation costs, firms which had previously focused on a local market, have now extended their range in terms of markets and production facilities to increase their profits. All these enable firms to operate in global markets and hence, providing them with access to more capital flows, technology, cheaper imports, and larger export markets.

The second driving force behind the globalization of world economy has been trade liberalization. This took part in many forms:

1. Reduction of tariffs and non-tariff barriers. Trade barriers have declined substantially as a result of successive trade negotiation rounds under the auspices of the General Agreement on Tariffs and Trade/World Trade Organization (GATT/WTO), unilateral trade liberalization and regional trade agreements. Since the early 1960s, the average worldwide most favoured nation tariffs on manufactured products have declined by 11 percentage points (World Trade Organization 2005). On the other hand, total world trade (exports plus imports) as a percentage of global GDP had increased from 24.3 per cent in 1960 to over 55 per cent in 2005 (World Bank 2007).

Using concepts and insights of value chain analysis, production fragmentation, and cluster analysis, this book investigates the development and establishment of production networks in Southeast Asia. In particular, it has considered three case studies of industries which strive hard to plug into the production networks in Southeast Asia. It also discusses opportunities and challenges for industrial upgrading through participating in the global economy using the GVC and GPN approach.

It is evident from the case studies that countries by being part of production networks reaped benefits from them. Also, industrial clustering and agglomeration economies played important roles in strengthening the competitiveness of industries. The experience in these countries offers valuable lessons for other developing economies which hold the aspiration for growth and development. Prospering in the global economy requires new ways of thinking about economic development and new strategies to catalyze growth. The lessons that can be learnt from the Southeast Asian case studies are described in the next few sections.

ABSORPTIVE CAPACITY OF THE ECONOMY

For a country to participate in production networks, the country should have an economy with absorptive capacity. Absorptive capacity is especially pertinent when it relies on foreign capital and technology to initiate the industrialization process. Besides the availability of basic physical infrastructure, the workforce must acquire basic literacy and numeracy. Then, as the industry grows, they must acquire more specialized skills and knowledge.

A developed financial system is another key component of a country's absorptive capacity. It is also a key determinant of capital inflows because, without a strong and stable financial system, inflows of foreign capital in response to domestic fiscal incentives can engender undue strain on the money supply, unwarranted appreciation of the domestic currency and resultant low competitiveness of exports (Nkusu and Sayek 2005). Financial cooperation among regional players also helps in enhancing the absorptive capacity of a country.

HUMAN CAPITAL FORMATION

Human capital formation is important for successful participation in production networks as well as for growth of competitive clusters. Empirical studies have substantiated a strong link between economic successes of high performers in Southeast Asia and sound policies for human capital formation. For example, it is believed that foreign companies had utilized pre-existing stocks of intellectual capital as the basis for highly efficient manufacturing operations in the host country (Noorbakhsh, Paloni and Youssef 2001).

INTRODUCTION

International trade in services is becoming more and more important. In this paper, we focus on supply chain and logistics services in Southeast Asia. The supply chain concept is an extension of Michael Porter's Value Chain Analysis that involves external entities linked to the production of a product. Nike is a good case in point. Their shoes are made in China but designed in the United States. From design to production, we are witnessing a production process in which the following characteristics are observed:

1. • Production blocks are centres of activities — centres which can produce a particular stage efficiently and effectively. If all activities could be produced in one entity, we then have only one production block. However, specialisation and differences in factor prices result in many production blocks.

2. • Service links are bundles of activities that serve to coordinate and link production blocks. More and more of these service links activities are undertaken by entities in various countries and cross border coordination is crucial and necessary. SCM and logistics are part of these service links activities.

3. • Each node in the supply chain engages in a value-added process.

With this as a backdrop, we will discuss supply chain management (SCM) and logistics in Southeast Asia, starting with a few definitions.

Definitions and Scope

SCM (sometimes called logistics management) refers to the management and control of the flow of inventory, information and other resources (e.g., services, money, equipment, people) across the supply chain with the purpose to satisfy customer requirements. In essence, SCM deals with the geographical repositioning of raw materials, work-in-process, finished, and returned inventories in a cost efficient manner. To facilitate smooth flow between point-of-origin to point-of-consumption, SCM requires an integrated, cross-functional approach, and trust and collaboration among the supply chain partners to provide inventory visibility and inventory velocity. The term SCM was coined by consultant Keith Oliver of strategy consulting firm Booz Allen Hamilton in 1982.