Small and Medium-Sized Enterprises (SMEs)

One of the key features of the Japanese electronics industry is the important role of

SMEs.31 The reform o f the keiretsu system in Japan, and the increasing outsourcing

production o f the lead firm to foreign firms, have raised the question of the relevance of conventional inter-firm relations, especially with sub-contractors, which are almost all SMEs. For example, in the electronics parts industry alone, there are about 520,000 Japanese SMEs.32 In the case of the southwest of Tokyo, the SMEs have undertaken assembly production by being supplied parts and components from the lead firms. The assembly production o f Japanese SMEs has relied heavily on the lead firms (i.e. research and development, distribution of finished products). Although SMEs undertake the OEM production for leading Japanese electronics firms, in the restructuring of the production system, SMEs are now faced with a choice: whether to develop offshore production with client firms or to focus on the improvement o f domestic production. A Japanese battery maker decided to set up offshore production in Dongguan because of the request o f the main client (Toshiba).”

According to recent research (NKS, 23 July 2001 ), as a result of the offshore production of

the parent firms, almost 40% of SMEs have experienced a decline in orders from those firms. The Suwa area (Nagano prefecture) has been a major production site for precision and electrical equipment because Seiko-Epson’s and Sankyo’s complex manufacturing plants are there. In Suwa the rate of firms undertaking offshore production accounts for 25% of total firms, which is the highest level for any region in Japan. One quarter of SMEs in Suwa have already established offshore production. In the Higashi Osaka area in Osaka, which is the home of Matsushita’s and Sanyo’s manufacturing plants, there is a movement

to increase offshore production by SMEs (NKS, 24 July 2001). While some SMEs are

trying to undertake offshore production following the parent firms, 74.1% of SMEs focus

not think that they have an offshore production capability. In order to respond to the hollowing out of precision and electrical equipment factories in the Suwa area, the local government (Okaya) created an industrial promotion division in the spring of 2000 and intends to establish a base for human development and the development of new technology

(NKS, 23 July 2001).

Thus the governance of production networks in the Japanese electronics industry began to evolve quickly in the late 1990s. In particular, the emergence of alliances and outsourcing production has given firms an opportunity to have a more innovative and flexible production system, but at the same time it requires the revision of conventional inter-firm

relations, and ultimately this may lead to the break-up of the keiret.su groups. The vertical

integrated industrial structure of Japanese firms is becoming more disintegrated and market dependent. The response to the new situation is varied among the Japanese SMEs. In the electronics industry, they have to face the challenge of competition with East Asian (especially Taiwanese) firms based on cost, flexible supply and technological up-grading.

5.6 Conclusion

This chapter has examined the pattern of Japanese FDI, its links with ODA, and the development of CPNs, including the role of the Japanese government and the forms of governance of these networks. It has focused on the processes and tactics of Japanese FDI in exploiting East Asian countries as export-base, and varying strategies of key actors (the state and firms) in penetrating their interests.

Japanese ODA has been a central, and perhaps the only visible, political and economic tool of Japan's national interest in foreign policy. It has undoubtedly contributed much to the re-entry of Japanese firms into the East Asian market under the name of economic assistance. The norm of the developmental state, based originally on Japan's own success, with a high level of state interventionist and strong government discipline of the market and of the private sector, was applied to Japanese foreign economic policy. However, with the rise o f global competition, the sharp economic growth of East Asian countries, and the increasing variations in firms’ strategies (from export-oriented to local sales), the Japanese

traditional approach to ODA as a mechanism of support for the entry of Japanese firms into East Asia has heavily declined. New actors (SNGs and NGOs) have also participated in Japanese ODA networks. More importantly, Japan’s long term recession in the 1990s has raised the question o f the effectiveness o f Japan’s ‘developmental state’ model.

Japanese foreign policy toward East Asian regionalism dramatically changed in the late 1990s. Japan’s new foreign economic policy seems to emphasise the role of FTAs. However, as this has not yet materialized in practice, its effect on Japanese FDI cannot be captured. Furthermore, in the case of the involvement o f the ASEAN+3, Japanese ministerial sectionalism and external intervention by the US have made it difficult to create a consolidated new strategic role for Japan on the basis o f a regional (RTA) mechanism. Most importantly, as a result of the spread of Japanese FDI, production networks in East Asia, and deepening interdependence, the strategies and interests within Japan are incredibly diverse, and this makes it more difficult to apply a single foreign economic policy.

Japanese FDI in East Asia has sought to establish offshore production sites on the basis of export-oriented strategies. This investment strategy has major implications for the development of a distinctive pattern of trade and investment in East Asia. It has contributed to the supply of capital and technology as well as managerial know-how, and has had a huge impact on the processes of manufacturing activities. In the electronics sector, with the supply o f Japanese electronics technology and components, East Asian countries have succeeded in transforming themselves into electronic products-exporting countries. They are thus able to make up for trade deficits with Japan by exporting electronics products to the US market. This interdependency among Japan, East Asia and the US is a critical feature of the development of cross-border micro-regionalisation.

At the microlevel, Japanese manufacturing FDI has had an impact on industrial integration in East Asia through the rationalisation of the production system. While there is no clear intention, Japanese FDI has undoubtedly encouraged the opening up of international production networks across Japan and East Asia. In trade, except for China and Indonesia, East Asian countries tend to have huge trade deficits with Japan, mainly due to the increase

of manufacturing imports and exports, including electronics, transport, and precision machinery, with Japan supplying key components for East Asian production through intra- and inter-firm transactions. Also in Japan-China trade the share of Japanese intra- and inter-firm trade accounts for the major proportion.

The development o f CPNs across East Asia has major implications for the viability of the

conventional management structures o f the Japanese keirei.su in electronics products

manufacturing. A micro-level analysis of production networks in the electronics industry reveals the unique structure of their multi-layered governance arrangements. As long as the

production networks were confined to Japan, the keirel.su were indeed helpful in sustaining

Japan's competitive production on the basis o f long-term relations. When leading Japanese

firms went abroad, they tried to organise local mini~keirel.su firms. This is illustrated by the

experience o f the automobile industry in the US and Europe, and the electronics industry (case of Matsushita in Taiwan). However, the digitalisation and computerisation of consumer electronics has led to the urgent need to achieve quicker development cycles and technological upgrading as well as the rationalisation of procurement in the electronics industry. The outsourcing of manufacturing and the formation of international alliances became popular strategies among Japanese electronics firms in the 1990s.

With the restructuring of production in the electronics industry, the reform of the keirel.su

system has had a major impact on conventional inter-firm relations. SMEs previously formed cooperative relations with the parent firms, but then had to decide whether to commence offshore production or focus on the improvement o f domestic production. The client’s request has a major impact on their decision. This helps us to understand the varying impact of changes of the governance o f production networks on the shift of Japanese electronics firms into East Asia. Such firm-led integration processes present an enormous challenge to policy-makers not only in Japan but also in host countries. The improvement o f the broader political and economic environment is also a crucial factor for business activities. Firm-led micro-regionalisation is therefore not confined to the reform of business activities (cross-border production networks) but also challenges conventional notions of economic governance.

1 For example, Tsusansho (2000: 40) presents the key processes of industrial agglomeration in Guangdong and the involvement o f foreign firms (Japanese. Hong Kong, Taiwanese, US, South Korean firms ) and local Chinese firms.

2 The figure is from Kohama (1997)

' The researcher's calculation based on the lists from Mitsubishi (2001 edition). 4 http://www.roc taiwan.or.jp/data/fags.html/

5 For example, see the comment by the Finance Minister, Xiang Huangcheng, in January 2001. http://www sankei co jp/paper/today/itimen/09iti003.htm/

6 For example, Beijing airport was funded by Japanese ODA and established in 1999 However, the management company o f Beijing airport was then listed on the Hong Kong stock market

7 It is difficult to see China as a developmental state See Shaun Breslin (1996). Taiwan is also greatly effected by its cultural roots See for example, Lam and Clark (1994)

* These are (1) active intervention by the government (often by M1TI); (2) emphasis on a specific industry,

(3) the promotion of exports, (4) guidance; (5) a selective protectionist policy, (6) the restriction o f inward FDI; (7) the loose implementation o f the Anti-Monopoly Act, (8) the rationalisation o f declining industries, led by the government; (9) the approval of cartels, (10) the regulation of the financial market and limited implementation of corporate governance, (II) research and development funded by the government, (12) the solid management of the macro economy See Porter and Takeuchi (2000: 41).

9 The figure is taken from Yamazawa (2001).

10 These and the following arguments are based on Ehashi (2001).

11 The FTA between Japan and Singapore was agreed in January 2002

http://www yomiuri.co jp/top/20020113it 13 htm/ 12 For theoretical discussions, see Chapter 2.

1' The figure is the researcher's calculation using Yeung (1998: 12)

14 The establishment o f the ADF was formally approved in 1973 at the ADB’s (Asian Development Bank’s) annual meeting

15 For example, the value o f the Japanese yen appreciated by 42.5% against the US dollar between 1970 and 1978

16 In September 1985, in order to respond to the rise of protectionism and trade friction, the Group of Five (meetings o f the governors of the central banks and finance ministers from the US, the UK, France, West Germany and Japan) agreed to enhance international cooperation, including joint intervention by the financial authorities in the foreign exchange market The name o f the accord was taken from the Plaza Hotel, where this meeting was held

17 Between 1985 and 1987, the NT dollar (Taiwan) appreciated by 28%, and the Korean won also appreciated by 17% from 1986 to 1988 See Bernard and Ravenhill (1995: 180)

1 Developed countries grant preferential tariff treatment for imports o f manufactures and

semi-manufactured products from developing countries See Rutherford (1992)

19 T he RMB depreciated by 63% between 1985 and 1990 There was a further 80% depreciation between

1990 and 1994

211 The figures are taken from Kaku (1999)

21 According to the categories o f MOF’s data, ‘Europe’ refers to all European countries, including Eastern Europe.

" The UK is the largest destination o f Japanese FDI Japanese FDI in the UK accounted for 24% o f total

Japanese outward FDI in 1998, 17.6% in 1999 and surprisingly 39 4% in 2000. MOF

(htt p : //www. mof go j p /fdi/1 c008j 2 htm/)

21 These figures are taken from MOF, http //www mof.go jp/fdi Japanese investment in these countries is due to their attraction o f the tax-haven According to Toyo Keizai (2000), by 1999, there were 44 Japanese firms (most of them are financial and trading firms) in the Cayman Islands.

The figure is the researcher’s calculation using MOFTEC

(http://www.moftec.gov cn/moftec_cn/tjsj/2000_9-22-15 html

25 The figure is the researcher’s calculation using Koryu No. 572 (1998), and No 626 (2000). However,

Taiwanese roundabout investments through the central American island countries are also included Thus, in practice, the percentage o f Japanese FDI in Taiwan’s inward FDI is higher than the statistics suggest

The figures are from http://www mofat go kr/embassy_htm/asia/japan/ 27 http://www investhk gov hk/ENG/FAC/foreign htm

211 The share of the government-related sector was 23 98% in 1997 These figures are taken from Higashi

Alla eno Shiten, spring special edition (2000).

The figure is the researcher’s calculation based on data from MOF These figures are from Tsusansho (2000).

31 The figure is taken from Keisansho (2001).

12 European developed countries here include France, Belgium, Luxembourg, the Netherlands, Italy, Germany, the UK, Ireland, Denmark, Greece, Spain, Portugal, Austria, Sweden, Finland, Switzerland, Iceland and Norway

II Same as above

" These figures are the researcher's calculation using data from Higashi Ajia eno Shilen, 2000, spring

special edition

1 These figures are taken from Higashi Ajia eno Shilen 2000, spring special edition

36 Based on the research by Kaburagi Shinji, Noda Hidehiko, and Ikehara Gakushi (2000). 37 The figures are from Toyo Keizai (2000).

,K The figure is from Kim (2001: 142)

39 The figures are taken from http //www investhk gov hk/ENG/FAC/

III Japanese firms accounted for 34% o f the total value of Hong Kong's inward manufacturing investment, followed by the US (27%) and China (10%) in the mid o f 1990s. See Enright, Scott and Dodwell (1997) 31 The average share o f Japanese banks in Hong Kong’s borrowing from foreign banks between 1994 and

1998 was 45%. The figure was calculated by the researcher by using Higashi Ajia eno Shilen, 2000, spring

special edition

4 These figures are calculated by the researcher using Tobari and Ryu (1996)

43 These figures are calculated by the researcher using the USA Trade Website

http /Avww usatrade.gov/Website/ccg nsf/CCGurl/CCG-HONG-KONG2002- -006D4D2/ 44 These figures are taken from Toy5 Keizai (2000)

43 The following is based on Inagaki (1997)

4,1 The shiisha and (group) relations are as follows: Mitsubishi Corporation (Mitsubishi Group), Mitsui & Co

(Mitsui Group), Sumitomo Corporation (Sumitomo Group), Marubeni (Fuyo Group), Nissho Iwai (Sanwa), and Itochu (lchikan).

4 The figures are taken from http://www unctad org/en/pass/prO 116en htm/

IK The six major groups have been transformed into four big groups (Mistubishi, Mitsui-Sumitomo, Mizuho and UFJ).

49 The figures are taken from The Economist (1 September 2001).

311 In the summer o f 2001, Toshiba announced that 19,000 jobs would go, Fijitsu would cut 16,000, NEC

would cut 15,000, Kyocera would cut 10,000, and Oki Electric would cut 2,200 The Economist (1

September 200: 59).

31 In Japan, small and medium firms are in general defined as firms with capital o f less than 100 million yen and with less than 300 full time workers In the case o f the retail and service sectors these numbers are smaller

: The figure is taken from Kyaria Deberopumento Senta (2001: 137)

" Interview with the president o f a Japanese electronics firm in Dongguan (13 October 2001)

CHAPTER 6

CROSS-BORDER PRODUCTION NETWORKS ACROSS THE