Edited by Daisuke Hiratsuka and Yoko Uchida
Chapter 7: Production Networks in East Asia: Evidence from a Survey of Japanese Firms
Hiromichi Ozeki INTRODUCTION Background 7.1 7.1.1 A large amount of Japanese foreign direct investment (FDI) went to East Asia. After the Plaza Accord, many Japanese firms established manufacturing affiliates in ASEAN countries, as well as in China. The series of production processes is sliced and located in different countries to obtain cost advantages; the manufacturing process of parts and components, which is relatively capital intensive, remains in Japan, and the assembly process, which is relatively labor intensive, can be beneficially located in East Asian countries with low labor costs. Sometimes this is called production network or production fragmentation. Ando and Kimura (2005) pointed out that a sophisticated production network had been developed in East Asia where a complicated procurement link that includes third countries plays an important role. Japanese multinational firms have developed links among overseas affiliates and with their headquarters in Japan by trading in intermediate goods. The trade volume in parts and components expanded and its share of total trade increased in East Asia. However, one question remains: will such a production network continue to expand in the future or shift to another mode? Some recent statistics show two different features. One is a rapid expansion in the total value of intermediary trade or international procurement. The other is an indication that Japanese manufacturing affiliates seem to shift their procurement activities to local purchases rather than cross-border purchases from Japan or other countries in Asia. The share of local procurement within host countries has increased while the share...
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