1.1 Background and objectives
This book consists of 13 selected country studies that were conducted in a series of ERIA (Economic Research Institute for ASEAN and East Asia) Microdata Projects in the 2010â2017 fiscal years. These projects aimed to clarify the effects of globalization on firms and the aggregate economy, as well as the globalization process itself, utilizing firm or firm product-level microdata, although the specific theme of each yearâs project varied.1 Chapters in this book cover nine countries in the Asia-Pacific region: Australia, China, Indonesia, Japan, Korea, Malaysia, Philippines, Thailand, and Vietnam. The topics can be classified broadly into four categories: globalization, productivity and innovation (Ch.2âCh.6), globalization and wage/income inequality (Ch.7âCh.9), foreign direct investment (FDI) and domestic production structure/organization (Ch.10âCh.12), and exchange rate, firm productivity and product choice (Ch.13âCh.14).
During the past few decades, countries in the Asia-Pacific region, or East Asia in particular, have undergone tremendous changes in their economies and economic structures, which probably dwarf those in countries elsewhere. Above all, countries in this region have become more closely integrated through trade and foreign investment, not only among themselves but also with countries in other regions. At the same time, many of them have exhibited strong and sustained economic growth. Although most researchers and observers accept that globalization was at least one of the main driving forces behind the rapid growth of East Asian countries, exactly how and through what mechanism it promoted economic growth have not been satisfactorily understood. This provides the main motivation for many studies in this volume.
Rapid growth dramatically raised the living standards of the citizens but there were also some worrisome developments as well, such as rising within-country income inequality, as exemplified by the Chinese experience. In some countries, such as Japan, there was also a concern raised that the outbound FDI of firms may hurt the domestic economy by reducing domestic production and employment of multinationals as well as their supplier firms. Did globalization really contribute to rising wage/income inequality in East Asian countries? If so, exactly how and to what extent? Answering these questions provides another motivation for this volume.
During the past several decades, there has been a surge in empirical research that aims to understand the causes and effects of globalization utilizing firm- or firm-product-level microdata. This trend was triggered mainly by the appearance of monopolistic competition trade models with heterogenous firms, led by Melitz, which consider firm heterogeneity as the key building block, as well as by the increased availability of microdata to researchers. Melitzâs model and its extensions show that trade induces a selection of more efficient firms into global activities (exporting and FDI) and makes less efficient firms contract and exit, leading to aggregate efficiency gains. Thus, the recent monopolistic trade model shows that the gains from trade are realized by increased product variety, the pro-competitive effect of lower prices, and selection-based between-firm resource reallocation, which go beyond the traditional gains from trade in comparative advantage trade models.
Most empirical studies along this line seem to have been guided by the theoretical models above and have certainly contributed a lot to understanding the causes and effects of globalization. However, whether recent trade models, as well as empirical studies guided by them, satisfactorily explain the causes and effects of globalization in the real world is, at the very least, arguable. For example, most, if not all, monopolistic competition trade models are based on the assumption that firm productivity is exogenously determined and not affected by their global engagements. However, whether this assumption adequately reflects reality may be questionable. In the real world, firmsâ global activities, such as exporting and FDI, may have beneficial effects on their own productivity and innovation as well as on the productivity of other firms through spillovers. Evidence of this possibility is provided by some of the chapters in this volume. To take another example, most recent trade models abstract away from inter-firm buyer-supplier linkages along the supply chain. Clarifying how the effects of globalization propagate through this linkage is likely to help us better understand the experiences of East Asian countries as well as the effects of globalization in general. Several chapters in this volume address this issue.
The chapters in this volume taken together give us the following several messages regarding the effects of globalization. First, globalization is likely to have positive effects, through various channels, on firm productivity and, hence, the aggregate economy, which may well go beyond those effects that are identified by standard monopolistic competition trade models. Firm productivity may rise in response to globalization through spillovers between foreign and domestic firms or from advanced foreign knowledge embodied in imported intermediate inputs. It may also rise as a result of the increased competition associated with output tariff reductions, which raise firmsâ incentive to conduct do R&D or to improve worker quality. Insofar as long-run economic growth of a country is driven by productivity improvement, the productivity-enhancing effects of globalization, as evidenced in this volume, suggest that globalization promotes long-run economic growth. If we take this effect into account, the gains from trade in the real world may be much larger than conventional estimates of the gains from trade based on standard theories.
Second, globalization may interact with skill-biased technical progress or within-firm changes in production structures to increase wage inequality between skilled and unskilled workers. We find some evidence of this effect in some countries (Japan, Korea, and Vietnam). However, it is not clear whether this conclusion can be generalized in other countries. Even when globalization affects wages of workers, it is not clear, either, whether it worsens income inequality across regions. Chapter 8 shows that, in the case of China, import tariff reductions lowered, rather than increased, income inequality across Chinese cities.
Third, some of the concerns casually expressed about the possible adverse effects of outbound FDI on domestic supplier firms may be exaggerated or even may not be supported by evidence. Chapter 11 shows evidence that Japanese firmsâ outbound FDI strengthens, rather than weakens, their existing transaction ties with domestic supplier firms. It shows further evidence that outbound FDI increases, rather than decreases, the employment of domestic supplier firms. More generally, the existence of inter-firm transaction linkages, which are mostly abstracted away in standard trade models, may play an important role in determining the effects of globalization in the real world. Further examination of this issue seems to be a profitable avenue for future research.
Below are the synopses of what follows.
1.2 Synopses
1.2.1 Globalization, productivity, and innovation
Liu, Qiu, and Yuâs paper (Chapter 2), âWorker Training, Firm Productivity, and Trade Liberalization: Evidence from Chinese Firmsâ, explores a novel mechanism, worker training, through which output tariff reduction affects firm productivity and its export market participation. The authors argue that one important question that has not received adequate attention in the literature is how exactly trade policy changes induce firms to improve productivity and, thereby, enter the export market. This paper argues that worker training is one important mechanism: the pro-competitive effect associated with tariff reduction on final goods is stronger for ex-ante low-productivity firms, so that the tariff reduction causes them to spend more on worker training, which boosts their productivity and enables them to enter export market more easily. In order to examine these mechanisms empirically, their paper employs disaggregated Chinese firm-level production data from 2004 to 2006. After controlling for firmâs self-selection to invest in worker training, the authors obtain the following empirical results. First, with fiercer import competition, firms experience a decrease in profitability and hence are less likely to invest in worker training. Second, less productive firms are more likely to train their workers, as otherwise they would collapse and exit from the market. The lower the firmâs productivity, the higher its worker training expenses. Finally, the effect of output trade liberalization on firm productivity is more pronounced for firms with more training investment.
Jongwanich and Kohpaiboonâs paper (Chapter 3), âThe Effect of Trade Policy on Firm Productivity in Thai Manufacturingâ, examines the effect of trade policy on firm productivity, using two recent industrial censuses of Thai manufacturing (2006 and 2011). As measures of trade policy, the authors consider effective rate of protection, as well as output and input tariffs. Generally, the authors find an important role of trade policy in promoting firmsâ productivity. Specifically, they find, first, that firms operating in a more liberal trade policy environment, measured by the lower effective rate of protection, generally have higher productivity. More importantly, they find that lowering input tariff negatively affects firmsâ productivity. The authors explain the latter results as follows. Lowering input tariffs would have at least two effects running in opposite. On one hand, it could enhance firmsâ productivity, as it allows firms to access higher-quality foreign inputs and benefit from increased input variety as well as advanced foreign technology embodied in them. Through these channels, input tariff reductions can positively affect firmsâ productivity, as found in most existing studies. On the other hand, however, lowering input tariffs could increase the effective rate of protection granted toward finished products, reduce competition pressure, and negatively affect firmsâ productivity. If the latter effect dominates the former, input tariff reductions can have an adverse effect on a firmâs productivity. The authors argue that this result is whatâs new in this study. Based on these results, they argue that any trade policy reform process should consider both input and output tariffs so as to ensure that protection is actually reduced.
Takii and Narjokoâs paper (Chapter 4), âFDI Forward Linkage Effect and Local Input Procurement: Evidence from Indonesian Manufacturingâ, examines FDI spillovers through forward linkages, using a dataset of Indonesian manufacturing plants over the period 2000â2008. Many Asian developing countries, including Indonesia, have liberalized their foreign investment regime and have used various âcarrotsâ to induce inbound FDI. One key rationale for the provision of such carrots was that FDI has a positive spillover effect. While a large number of existing studies have found evidence of backward spillovers, the evidence in favor of forward spillovers is scarce. Under this context, this paper examines the latter. In particular, this paper examines whether the FDI forward spillover effects are stronger for firms in downstream industries that source inputs locally. Underlying this analysis is the presumption that foreign firms operating locally produce higher-quality, lower-cost inputs than imported inputs and/or increase the availability of inputs. Then, the downstream firms that source inputs locally are more likely to benefit from foreign firms in upstream industries. The authors find strong evidence to support their hypothesis, as well as evidence of backward spillover effects.
Palangkarayaâs paper (Chapter 5), âThe Link between Innovation and Export Performance of Australian SMEsâ, investigates the direction of causality between innovation and exporting by employing a propensity score matching methodology and a firm-level dataset of Australian industrial sectors. Unlike most existing studies on this issue, which focus on medium and large manufacturing firms, this paper covers all industrial sectors: primary (agriculture, fishery and forestry, and mining); secondary (manufacturing); and tertiary (services). For the all-industry sector sample, this paper finds a positive association between export and innovation, with causality running in both directions; innovation leads to exporting and, to a lesser extent, exporting leads to innovation. However, the results are somewhat different depending on the sector and type of innovation. The effect of innovation on exporting is strongest in the primary sector (agriculture and mining), while not very significant in manufacturing or services. The author interprets these results as reflecting the strength of Australiaâs primary sector in the international market. The effect of exporting on innovation is significantly positive only in services and when the innovation is process innovation. Based on these results, the author argues that trade liberalization should be complemented by innovation policy that addresses the bottlenecks faced by SMEs.
Aldabaâs paper (Chapter 6), âTrade Reforms, Competition, and Innovation in the Philippinesâ, addresses the effect of trade and investment liberalization on the innovation of Philippine manufacturing firms, utilizing a firm-level panel dataset over the period 1996â2006. She postulates that the effect of trade liberalization, which was implemented several times over the 1990s and 2000s, operates through the competition channel. She examines the effect through a two-stage regression approach. In the first stage regression, the tariffs are found to be positively related to price-cost margin, a measure of competition perceived by firms. In the second stage, she finds that higher competition stimulates R&D. Thus, overall, trade liberalization positively affects R&D through the product market competition channel. Based on the results, she argues that maintaining the contestability of markets or enhancing competition is important for the Philippines in order for it to appropriate potential gains from trade reforms. In this vein, she also argues that the gains from trade liberalization in the Philippines may have remained limited, leading to the countryâs slow economic growth, as the inadequate physical and institutional infrastructure of the country has kept market competition forces weak.
1.2.2 Globalization and wage/income inequality
Hahn and Choiâs paper (Chapter 7), âTrade Liberalization and the Wage Skill Premium in Korean Manufacturing Plants: Do Plantsâ R&D and Investment Matter?â, examines the effects of output and input tariff reductions on within-plant wage skill premium in Korean manufacturing plants. They find evidence that output tariff reductions interact differently with plantsâ R&D and investment behaviors, to affect wage skill premium. Specifically, output tariff reduction increases wage skill premium mostly in R&D-performing plants while reducing it mostly in plants making positive facility investments. While there is weak evidence that input tariff reductions increase wage skill premiums, no such interactive effects are found. One story behind these results is that, although both R&D and facility investments may respond to changes in profit opportunities due to output tariff reductions, R&D raises the relative demand for skilled workers, while facility investment, an activity of increasing production capacity, raises relative demand for the unskilled (production) workers. The results found in this study suggest that trade liberaliz...
