INTRODUCTION

Cross-border dispersion of the different stages/slices of production processes within vertically integrated global industries has been a key structural feature of economic globalization in recent decades. This international division of labour, which we label “global production sharing” in this chapter, opens opportunities for countries to specialize in different slices (tasks) of a production process within a global manufacturing value chain (GMVC). Trade based on global production sharing—that is, trade of parts and components and final assembly within GMVC—has primarily driven the dramatic shift in the geographical profile of world manufacturing exports from developed to developing countries. High-performing developing countries in East and Southeast Asia have been the main beneficiaries of this structural shift in world trade. In the early 1970s, the Philippines had a promising start in export‑oriented industrialization by engaging in GMVCs. But subsequently, its growth trajectory has not lived up to the initial expectations.

This chapter aims to document and analyse the Philippines’ engagement in GMVCs from a comparative Southeast Asian perspective. This has been motivated by two related objectives: (a) to inform the policy debate in the Philippines on the feasibility and desirability of export‑oriented industrialization by joining GMVCs and (b) to contribute to the wider literature on GMVC participation as a vehicle for global economic integration of developing countries and the related policy issues. The importance of this phenomenon in designing national industrialization strategies is now widely acknowledged in both academic and policy circles. However, there is a dearth of time-profile studies of individual countries, which are needed to broaden our understanding of how government policies and the overall investment climate condition a country’s potential for export-oriented industrialization by joining GMVCs. The Philippines provides a valuable laboratory for a case study of this subject, given the country’s engagement in global production sharing since the early years of the GMVCs’ arrival in the region and its mixed achievements in the ensuing years compared with other Asian countries.

The next section presents a brief typology of GMVCs to provide the analytical context for the ensuing analytical narrative.

**Paper for the International Conference on Trade, Investment and Production Networks in Asia organised by Leverhulme Centre for Research on Globalisation and Economic Policy, University of Nottingham, 16-16 February 2012, Kuala Lumpur

Introduction

Global production sharing—the division of production processes into geographically separated stages—has been an increasingly important facet of economic globalization over the past few decades. With a modest start in the electronics and clothing industries, multinational production networks have evolved and spread into many industries such as sports footwear, automobiles, televisions and radio receivers, sewing machines, office equipment, power and machine tools, cameras and watches, and printing and publishing. At the formative stage, production sharing involved assembly of small fragments of the production process in a low-cost country and re-importing the assembled parts and components to be incorporated in the final product. Subsequently, production networks began to encompass many countries engaged in the assembly process at different stages, resulting in multiple border crossings by product fragments before they were incorporated in the final product. As international networks of parts and component supply have become firmly established, producers in advanced countries have begun to move the final assembly of an increasing range of consumer durables, including, computers, cameras, televisions, and automobiles, to overseas locations to be closer to their final users and/or take advantage of cheap labour. There has been a steady rise in trade in parts and components and assembled final products – network trade – within global production networks. In 2007, network trade accounted over half of total world manufacturing exports, with over two-fifths of these exports originating in developing countries (Athukorala 2011a).

Global production sharing in consumer goods such as garments and footwear normally takes place through arm's length relationships, with international buyers playing a key role in linking producers and sellers in developed countries. However, the bulk of global production sharing in electronics and other high-tech industries still takes place under the aegis of MNEs. This is because the production of final goods requires highly customized and specialized parts and components whose quality cannot be verified or assured by a third party, and it is not possible to write a contract between the final producer and input supplier that would adequately specify product quality. This is particularly the case when establishing production units in countries that are newcomers to export-oriented industrialization.

Introduction

The global landscape of the apparel industry is being profoundly transformed following the termination of the Multi-Fibre Arrangement (MFA) on 1 January 2005. International buyers are now free to source apparel from any country, subject only to the system of tariffs. Since they are no longer constrained by country-specific quotas, buyers can demand many more attributes of products from suppliers in addition to price. These would include things like product variety, quality and timely delivery. They have also started to aggressively restructure their sourcing patterns to procure from fewer efficient suppliers worldwide and to develop long-term strategic partnerships with core suppliers by setting up local sourcing offices, bypassing their erstwhile sourcing agents (Fung, Fung and Wind, 2007; USITC, 2012). The importance of these non-price factors in export success in the post-MFA era has been further elevated by the ongoing process of ‘lean retailing’, a business strategy that has become widespread in the apparel trade in developed countries since the mid-1990s (Abernathy et al., 1999, 2006; Evens and Harrigan, 2005; Harrigan and Barrows, 2009). Lean retailing involves replenishing the range of apparel on offer on the shop floor in very short cycles (rather than seasonally, as was traditionally done), while defraying the inventory risk by holding low stocks. In the process of lean retailing, ‘suppliers’ warehouses and distribution centres act in many ways as virtual warehouses and distribution centres for the retailer (Abernathy et al., 1999, 16). The buyers also increasingly require suppliers to undertake tasks such as labelling, packaging and barcoding, which were traditionally done in the buyer's warehouses or distribution centres (Abernathy et al., 2006; Fung et al., 2007).

In this context, the export success of apparel manufactures depend crucially on industrial upgrading, the ability to ‘climb the value chain from basic assembly activities to full-package supply and integrated manufacturing’ (Gereffi and Fernandez-Stark, 2016, 5). Understanding the processes and drivers of industrial upgrading is vital for crafting national policies for facilitating the required industrial adjustment. Much has been written about the impact of MFA on global trade patterns and the governance of the global apparel value chain, especially about the way in which lead firms organize their supply chain on a global scale. There is, however, a dearth of studies of the experiences of exporting countries in repositioning in the apparel value chain in the post-MFA era.

The purpose of this chapter is to document, analyze and explain Southeast Asia's engagement in global production sharing and to examine its implications for the process of industrially transformation in these countries.

A BRIEF HISTORY

Southeast Asia's engagement in global production sharing dates back to 1968 when two US companies, National Semiconductors and Texas Instruments, began assembling semiconductor devices in Singapore (Lee 2000). As early as 1972 the MNEs with production facilities in Singapore began to relocate some low-end assembly activities in neighbouring countries, particularly Malaysia, Thailand and the Philippines, in response to the rapid growth of wages and rental costs. By the late 1980s this process had created a new regional division of labour, based on differences in relative wage and skill requirements in different stages of the production process.

By the mid-1980s, the hard disk drive assemblers entered Singapore, further boosting the country's role as a global assembly centre. As in the case of semiconductor industry, a regional production network encompassing Malaysia, Thailand and the Philippines and centered in Singapore have developed by the early 1990s.

Until about the early 1990s, Southeast Asian countries’ engagement in global production sharing was predominantly a two-way exchange with the home countries of MNEs: parts and components were brought to these countries for assembly, and the assembled parts and components were then re-exported to the home country to be incorporated in final products. As supply networks of parts and components became firmly established, producers in advanced countries began to move the final assembly of an increasing range of electronics and electrical goods such as computers, cameras, TV sets and motor cars) to Southeast Asian locations.

In recent years, the East Asia production networks have begun to spread to Vietnam and Cambodia. Despite obvious advantageous in terms of its location and relative wages, Indonesia has continued to remain a small player in regional production networks. Its engagement has so far been limited only to some low-end assembly activities under-taken mostly by Singaporean subcontracting companies in the Batam free trade zone (BFTZ).

TRADE PATTERNS

The past two decades have seen palpable shift in global production sharing away from mature industrial economies toward developing countries and in particular countries in East Asia. The share of network trade in total manufacturing trade is much higher in East Asia compared to the other major regions.

This volume is a tribute to Hal Hill, one of the most distinguished and internationally renowned Australian development economists and a stimulating, considerate, and compassionate colleague and friend. Over a highly productive career spanning almost four decades, Hal has greatly advanced our understanding of the process of economic development and policy challenges, using Southeast Asia as his laboratory. The enthu-siastic response to our invitation to contribute to this volume from such a distinguished group of scholars who are at the forefront of their own chosen subject areas is a reflection of the high regard and esteem in which Hal is held in our profession. The span of nationalities of the contributors testifies to the international dimension of his research interests. We feel privileged to have the opportunity to compile and introduce this volume in honour of Hal Hill, ‘the economist and the man'.

Hal Hill was born in Melbourne in 1948. He grew up in three cities (Melbourne, Ballarat, and Bendigo) as his family moved with the postings of his father, a school headmaster in the Victorian public school system. Hal's original career ambition was to become a schoolteacher, following in the footsteps of his father.

After delaying sitting for the Higher School Certificate by one year to captain Bendigo High School's tennis team, Hal entered Monash University in 1967 under a Secondary Teachers Scholarship offered by the Victoria Department of Education. He graduated from Monash in 1970 and obtained a Diploma in Education from La Trobe University the following year.

Following a career experiment combining secondary school teaching with winemaking, Hal returned to Monash in 1973 as a Master's student. During the final year of this program, he was captivated by a seminar on the Indonesian economy given at Monash by Professor Heinz Arndt, the then Head of the Division of Economics (later renamed the Arndt-Corden Department of Economics) in the Research School of Pacific Studies (RSPS) of the Australian National University (ANU). In 1976 Hal moved to the ANU under a Commonwealth Postgraduate Research Award to undertake doctoral research under the joint supervision of Heinz Arndt and Peter McCawley.

After completing his PhD in 1980, Hal spent two years as a visiting scholar in the School of Economics at the University of Philippines, one of Southeast Asia's leading universities, under the International Devel-opment Program of Australian Universities and Colleges.

Introduction

International production fragmentation – the geographic separation of activities involved in producing a good (or service) across two or more countries – has been an important feature of the deepening structural interdependence of the world economy in recent decades. After a modest start in electronics and clothing industries in the late 1960s, international production networks have gradually evolved and spread into many industries, such as sport footwear, automobiles, televisions and radio receivers, sewing machines, office equipment, electrical machinery, power and machine tools, cameras and watches. At the formative stage, outsourcing predominantly involved locating small fragments of the production process in a low-cost country and reimporting the assembled components to be incorporated in the final product. Over time, production networks have begun to encompass many countries, resulting in multiple border crossings on the part of unfinished parts before the completion of the final product.

In the early stages of the international fragmentation of production, the processes normally involved a multinational enterprise (MNE) building a subsidiary abroad to perform some of the functions that it once did at home (Helleiner, 1973). Over the years, MNE subsidiaries have begun to subcontract some activities to local (host-country) firms, to which they provide detailed specifications and even fragments of their own technology.