Multinationals, Technology and Localization in Automotive Firms in Asia

Rajah Rasiah, Yuri Sadoi, Rogier Busser

• Publisher: Taylor & Francis
• Year: 2013
• Print ISBN: 9780415495585
• eBook ISBN: 9781317969464
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

East Asia has led rapid economic growth in the last few decades with India joining them over the last five years. Automotive parts manufacturers have been an important component of domestic production in all these economies. Experts with several years of multi-disciplinary research experience on the field examine the actual and potential technological and localization implications of MNC operations in East Asia and India. The rich collection of country experiences are both original and incisive.

This volume includes:

• Case studies from China, Japan, India, Thailand and Malaysia
• A study of the role of multinationals in Asian technology building
• An examination of the growing Chinese automobile sector

Featuring leading academics from across Asia, this title is essential reading for those studying industrial growth in the continent's major economies.

Introduction: Critical Issues on Multinational-driven Technological Capability Building and Localization

RAJAH RASIAH

Introduction

Multinational corporations (MNCs) have continued to remain a critical channel for the transmission of knowledge to latecomer firms in developing economies. Japan (see Johnson, 1982; Freeman, 1987; Fukasaku, 1992), Korea (Edquist & Jacobssen, 1987; Amsden, 1989; Kim, 1997) and Taiwan (Hamilton, 1983; Fransman, 1985) enjoyed little FDI but accessed extensively technology from MNCs through licensing and imitation. Singapore and Malaysia have enjoyed direct participation of MNCs. Although FDI levels were low in Thailand, Indonesia and Philippines until the 1990s MNCs have been dominant in export manufacturing (see Pongpaichit & Baker, 1995; Rasiah 1998; 2003, 2005; Thee, 2005). China enjoys strong FDI levels in export-oriented manufacturing industries (see Rasiah, 2005).

Given the importance of MNCs as a critical source of foreign knowledge in latecomer development - indirectly (as in Japan, Korea and Taiwan) and directly (as in Singapore and Malaysia) — this contribution seeks to examine technology diffusion potential to local firms, the extent of techonology diffusion and its channels in the automotive industry in East, South East and South Asia. The Japanese experience has become interesting following mergers and acquisitions that have taken place since the late 1990s.

Automotive manufacturing is an important economic activity in Japan, China, India, Korea, Malaysia, Philippines, Taiwan and Thailand. Japan and the rest of Asia accounted for 22.1 per cent and 16.7 per cent respectively of global automobile production in 2004.¹ The essays in this publication deal with technological capabilities and localization implications — potential and actual —from the direct operations of MNCs.

Multinationals on Technology and Localization

The impact of MNCs on technology and localization vary across economies and industries. Existing work points to initial conditions (including demand-supply conditions), government policy (some as stimulators while others as creators of unproductive distortions), institutional coordination, size of domestic markets, human capital and nature of supply chains as drivers of spillover from MNCs to local firms (see Dunning, 1958, 1974; Lall & Streeten, 1977; Rasiah, 2004a). Foreign MNC affiliates' intensity of participation in technological and localization activities to tap host-site institutions and human capital capabilities is often conditioned by the location of the sites in the technology ladder (see Dunning & Narula, 2000; Cantwell, 1995; Cantwell & Mudambi, 2001; Narula, 2003; Rasiah, 2004a). Host governments sometimes impose conditions to stimulate (for example, financial incentives such as tax breaks for R&D activities) or pressure (for example, R&D activities as a condition to sell in domestic markets) foreign MNCs to participate in technology-intensive and localization activities (see Mathew & Cho, 2000; Mathew, 2001; Wong, 2001). Foreign firms also sometimes relocate aspects of R&D in fairly developed locations such as Taiwan to tap specialized knowledge (see Ernst, 2006).

Nevertheless, whatever the reasons for relocation, the participation of foreign firms offers host-sites the potential for knowledge spillovers. Local firms in some developing economies seek from abroad knowledge through imports, training of personnel abroad, licensing and subcontract deals (Freeman, 1987; 1989; Rasiah & Lin, 2005). MNCs still play a major role involving this channel, albeit indirectly as imitation and arms length transactions figure prominently. Countries such as Japan, South Korea and Taiwan generally imported foreign technology through imitation and licensing from MNCs (Freeman, 1987, 1989; Fukasaku, 1992; Kim, 1997; Amsden, 1989). Others such as Singapore and Ireland have relied extensively on MNCs' foreign direct investment (FDI) to stimulate learning and innovation (UNCTAD, 2002). Clearly, both strategies — learning and innovating to compete, using MNCs both directly and indirectly — are embedded in national economic policies (Rasiah, 2004a). Hence, discussions relating to the role of FDI on technology cannot be detached from the conditions prevailing and economic policies pursued at host-sites.

Because the focus of assessment in this publication is on both the actual and potential benefits brought by foreign MNCs, stand alone foreign firms were excluded from analysis. A number of factors influence the development of technological capabilities, localization and competitiveness. Typical industrial organisation exponents argue that the embedding environment (structure) influences the conduct of firms, which then influences the performance of firms (Bain, 1978; Scherer, 1985). Public policy recommendations from this perspective often target Structural conditions (including institutions) to influence the conduct and performance of firms and these elements transcend economics to include the political sphere (see Nelson & Winter, 1982b; North, 1994). Chandler (1962) articulated an historical account of the origin and growth of national corporations in the United States, which explains the early business understanding of the role of multi-divisional firms.

Drawing from the ownership, location and internalization (OLI) framework of motives by Dunning (1974), Narula & Dunning (2000) explain the potential implications of MNC relocations in developing economies. Hence, efforts to understand the technological impact of foreign MNCs at host-sites require at least some knowledge of the motives and characteristics of the foreign firms involved. Natural resources (for example, oil in Indonesia and Malaysia), large reserves of literate labour (for example, China, Philippines and Vietnam), domestic markets (for example, China and India) special trading spheres (for example, the Association of South East Asian Nations (ASEAN) Free Trade Area), the strength of the local and national innovation systems (for example, Singapore, Taiwan and Korea) have been important in attracting foreign firms — especially when accompanied by political stability and bureaucratic efficiency (see Narula & Dunning, 2000; Rasiah, 2002; Rasiah, 2004b).

Apart from oligopolistic advantages driving the expansion of national firms to MNCs (see Hymer, 1960) the growth in the number of cross-border subsidiaries is also driven by efforts to internalize intangible assets — embodied and disembodied knowledge — and to appropriate the relative benefits offered by host-sites (see Dunning, 1958; 1974, 2003). The social dimension used in the business school in the activities of MNCs was advanced by Dunning (2003: 1-21) who introduced the concept of relational assets, which are intangible assets that are either internalized directly or indirectly through alliances. Relational assets are human-intensive — though they may be embedded or articulated by individuals or organizations (Dunning, 2003: 4). Subsumed in this concept are the elements of economic transactions influenced by social relationships, which is referred to as social capital. Relational assets are internalized or appropriated directly or indirectly through participation in business networks — a two-way process of fostering intra-network and inter-firm relational capital (Dunning, 2003: 9). These relationships also help enrich human capital, but the diffusion of both codified and tacit and experiential knowledge from foreign firms to the local economy is likely to be strong only when the systemic conditions — institutional, density of firms and systemic links (including elements of trust) — are strong.

A firm's conduct (strategy) and performance are influenced by its own endowments, the nature and degree of coordination with other economic agents (including the structure). Industrial organization typically expounds that firms' performance is determined by the structure (or environment, including other economic agents in factor and final markets) in which the firm is located and its conduct (see Bain, 1968; Scherer, 1973; 1980; Greer, 1992). Five related and overlapping approaches — National Innovation System (NIS), Industrial Policy (IP), institutional economics, Industrial Organisation and the Business School (BS) — discuss the policy and institutional environment necessary to stimulate learning, innovations and firm-level performance. Business School exponents such as Prahalad & Doz (1987), Bartlett & Ghoshal (1989), Andersson et al. (2002), Birkinshaw et al. (1998) and Cantwell & Mudambi (2001) discussed local integration, embeddedness and differentiated subsidiaries on the basis of competence creating and competence exploiting conduct of MNCs.

The earliest IP argument in economic literature can be traced to Smith (1776), Hamilton (1791), Mill (1848) and List (1885). However, the earliest application of IP in driving industrial upgrading and exports can be traced to Henry VII in 1485 in Great Britain, which was followed later by government-led efforts in continental Europe well before its use in the United States and Germany (Reinert, 1994: 175). The national innovation system approach examines knowledge production, flows and diffusion involving learning and innovation, which provides a systemic dimension to firms' conduct and performance (Freeman, 1989; Lundvall, 1992; Nelson, 1993; Nelson & Winter, 1982a, 1982b; Dosi, 1982; Pavitt, 1984; Freeman, 1989). The concept of knowledge flows within industrial districts was articulated lucidly by A. Marshall (1890). Industrial policy approaches typically prescribe a regulated trade environment to nurture infant firms to competitive status (see Lewis, 1955; Myrdal, 1957; Kaldor, 1957). The institutional embeddedness of learning, innovation and knowledge flows can be viewed better by integrating the value chains (Gereffi, 2002; 2003) and the national innovation systems approaches (see also Rasiah, 2007). The Business School and institutional economics approaches offer a broader exposition of the environment — socio-political and cultural, conduct of affiliates, and the importance of social capital — in explaining the operations of firms (see Coase, 1992; North, 1994; Williamson, 1985; Dunning, 2003).

Figure 1 shown below attempts a synthesis of the five approaches above to synthesize the nature of technological and localization linkages that can be expected in host-site locations in Asia. Technological capabilities of firms are often conditioned by the environment they embed: they vary from high levels in locations where strong high- tech support institutions (for example, human capital, R&D laboratories and intermediary organizations) and network cohesion exists, and low levels in locations where the commensurate institutions and networks are weak. Firms' demand and supply for high- tech capabilities increase as the embedding high-tech infrastructure rises (see Dosi, 1982; Pavitt, 1984). High-tech infrastructure is essential to stimulate firms' participation in product and process technology development (for example, R&D support). Foreign firms are generally able to access high-tec...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Acknowledgements
• 1 Introduction: Critical Issues on Multinational-driven Technological Capability Building and Localization
• 2 Foreign Influences on the Japanese Automobile Industry: The Nissan-Renault Mutual Learning Alliance
• 3 'Detroit of the East'? Industrial Upgrading, Japanese Car Producers and the Development of the Automotive Industry in Thailand
• 4 The Development of Automotive Parts Suppliers in Korea and Malaysia: A Global Value Chain Perspective
• 5 Arrested Development: Multinationals, TRIMs and the Philippines' Automotive Industry
• 6 Foreign Ownership, Technological Intensities and Economic Performance of Automotive Parts Firms in India
• 7 Malaysia's National Automotive Policy and the Performance of Proton's Foreign and Local Vendors
• 8 Taiwanese Automotive Parts Suppliers in China
• 9 Technology Transfer in Automotive Parts Firms in China
• 10 Conclusions and Implications: The Role of Multinationals in Technological Capability Building and Localization in Asia
• Index