A Comprehensive Introduction to Regional Issues
Edited by Masahisa Fujita, Ikuo Kuroiwa and Satoru Kumagai
Chapter 4: International Production/Distribution Networks in East Asia
, with extensive promotion of foreign direct investment (FDI), is an important phenomenon (see Box 4.1). The very recent and rapid development of production networks since the 1990s undermines, or at least partially nullifies, the applicability of a wide range of traditional theories and practical thought. In the context of international trade theory, the pattern of industry-wide location of production and international trade in East Asia no longer follows the typical North-South division of labor, which is explained by traditional comparative advantage theories such as the Ricardian and Heckscher–Ohlin models. International division of labor in terms of production processes (that is, fragmentation of production1, 2 (see Box 4.2)), rather than of industry level, has explosively developed in the region, particularly in machinery industries,3 while European-type horizontal intra-industry trade has rarely emerged heretofore.4 International production/distribution networks have been formed in other regions in the world as well. The production networks observed mainly in machinery industries in East Asia, however, are distinctive in (i) their significance in the regional economy, (ii) their geographical extensiveness involving many countries at different income levels, and (iii) their sophistication in both intra-firm and arm’s length (inter-firm) relationships (Ando and Kimura 2005). More specifically, first and foremost, production networks have already become a substantial component of each country’s economy in the Asian region.5 No longer can each country’s manufacturing activities and international trade be discussed without considering the existence of production networks. Secondly, production networks involve a large number of countries with various income levels in...
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