East Asia, Globalization and the New Economy

F. Gerard Adams

• Publisher: Routledge
• Year: 2006
• eBook ISBN: 9781135989323
• Topic: Business
• Subtopic: Business General
• Index: Business

We are witnessing a transformation in the world economy as a result of the IT/e-business revolution. Modern logistics based on cheap communication and transportation are shifting the locus of production and the international division of labour between the West and the lower wage countries of East Asia and similar changes are occurring within East Asia itself. Looming over the entire picture is the colossus that is China and this transformation is making East Asia the manufacturing centre of the world economy.

Written by a recognized expert in the area of business economics, this book analyzes these developments and evaluates their future impact on the development of East Asia and its role in the world economy. The book examines the effect of the IT revolution, globalization and the 'new economy' on the development of East Asia. The first book-length treatment of IT/e-business in the region, it questions whether the e-business revolution will renew and sustain the rapid economic development of East Asia.

Part I
East Asia, globalization, and the new economy

1
Introduction

The challenge of sustaining East Asian growth

In the past 40 years, the developing countries of East Asia have shown remarkable economic growth. All the world admires what has been achieved in the region. Countries that were dirt poor not so long ago grew rapidly and achieved Western-style living standards. Countries that used to rely on oxcart agriculture have become manufacturing powerhouses. Many entrepreneurs from the region and from the advanced countries have directed their attention and, in many cases, their investments into the East Asian region. The East Asian miracle¹ has been based largely on the development of manufacturing, much of it exports to the West. Growing domestic markets, high rates of domestic saving and investment, and modernization have also made important contributions.

East Asian development has been closely linked with the globalization of world production and trade. There has been a radical geographic reorientation of industrial production from high-wage countries in North America and Europe toward East Asia. Specifically, mass production products, at first simple ones, like apparel and toys, and then more complex ones, like automobiles and computers, are increasingly being sourced in East Asia. Huge advantages in labor cost, favorable exchange rates, growing production experience, and recent improvements in local technology have established the competitiveness of the East Asian countries in world markets. With reference to China, the headline in the Financial Times (February 04, 2003) summarizes these developments neatly: “How cheap labor, foreign investment and rapid industrialization are creating a new workshop of the world.”

The microeconomics of the export-competitive industries are traditional—manufacturing with high labor content, often assembly, done on production lines that have substantial economies of scale. They involve relatively standard products—in some cases, standardized “commodities,” and in others trademarked goods that are differentiated but still call for known and widely available technology. Much of this production is being done with the backing of foreign direct investors and with foreign management, although increasingly local capital and acquired skills have supported such projects.

In 1997, the East Asian growth momentum was rudely interrupted by, what has since been called, the East Asian Financial Crisis. The crisis called into question the ability of several East Asian countries to compete effectively and to participate in a world of open capital markets. Since then, some countries in East Asia have had to struggle to get back on a sustained steady growth track, although others such as China and South Korea have continued to achieve steady and rapid growth.

Today, the world economy faces new challenges. The dot-com crash in 2000–1 and the recent worldwide economic slowdown now appear to have been only short-term interruptions in more fundamental long-term development trends. Globalization is extending its reach. Financial and entrepreneurial flows continue to revolutionize the geography of world production, trade, and financing. Rapid technological progress in computers and networks lies behind these developments. Indeed, in recent years, the pace of technical change seems to have accelerated. New information and communications technology (ICT) promises radical reductions in the costs of carrying on international transactions. Lower communication and transportation costs reduce the disadvantages of distance: the world is getting smaller and more interrelated. Manufacturing of many products is increasingly outsourced to developing countries providing opportunities for export industries and employment in many parts of the world. East Asia has been a leader in these developments. The mix of products originating in East Asia is evolving from traditional labor-intensive export goods to technically advanced products such as computers and chips. Electronic networks are taking over many of the tasks of coordinating the ever more complex supply chain. Service functions that can take advantage of telecommunications, even in some cases sophisticated knowledge-intensive activities like research and engineering, are being relocated to low-wage countries. The ongoing changes are organizational as well as technical. The ICT/e-business revolution promises to alter further where and how enterprises do their business.

The East Asian development process has been going on for many years, expanding East Asia’s export markets, building efficient new industrial centers, and rapidly raising living standards. Many experts argue that this growth pattern is likely to continue. Indeed, this process will be facilitated by increased computerization and reductions in transportation costs. New communication and networking technologies enable East Asian countries to participate more easily, more effectively, and more widely in the “new economy” and e-business world. However, the technical characteristics of some new economy products are significantly different from the old economy products, requiring much higher capital intensity and technological sophistication. That may make a difference for some East Asian countries but not for others.

The developments in technology and business are likely to have a major impact in East Asia. Technical and organizational changes have facilitated the process of globalization. This broadening of relationships across the world offers some important advantages but also poses substantial risks: a more global world economy means that each country is more and more dependent on what is going on in other countries.

On the one hand, exposure to advanced management and technology promotes rapid economic progress, as the East Asian experience demonstrates. And foreign capital and entrepreneurship, often originating with overseas East Asians, have facilitated this kind of development. Competitiveness in world markets requires product quality and specifications that are usually well ahead of products designed for home markets. Participation in export markets builds modern industry. Competition from abroad keeps domestic producers on their toes.

On the other hand, increasing integration throughout the world economy also has its dangers. The saying goes, “when the United States economy sneezes, the rest of the world catches cold.”² Indeed, when the United States and Europe catch cold, some East Asian countries catch pneumonia! If major markets such as Japan, the United States, and Europe were to slow down or if protectionism were again to limit trade flows, suppliers in East Asia could sink into recession. As financial markets become more open, there is also renewed fear of international financial crises such as the East Asian financial crisis of l997. There is even concern that linkages between the producing and consuming countries might cause isolated crises to engulf the entire world economy.

Paradoxically, the enormous size of China also raises fears among people in the developed countries. China is already a superpower, an important geopolitical force, and its influence will increase as it grows. China will dominate the East Asian region.³ Indeed, China may dominate markets for manufactures worldwide. Even today, competition from China’s low-cost industries is challenging producers across the world, some from other developing countries.

The leading East Asian countries are taking advantage of some of the newest technology. They have become major producers of consumer electronics and related equipment. Korea’s Samsung and China’s Lenovo (Allen 2002), powerhouses in flat screen TVs and PCs, respectively, are good examples. On the other hand, East Asia shows somewhat less competitive strength in the software and e-business dimensions of the IT revolution. Some East Asian countries are finding the new technologies and e-businesses a daunting challenge, since they have not yet attained a stage of technological and educational development that permits them to lead or at least to operate competitively in these new fields. As the advanced countries progress to still more sophisticated high-tech systems, some developing countries fear that they may be left behind.

The issue is whether and how the East Asian countries can participate in the new economy. Can they use it to continue to leverage themselves on their rapid growth path?

This book is concerned with East Asia, Globalization, and “New Economy.” What have been the underpinnings of the East Asian growth process and how are they affected by ongoing changes in world business? How do the East Asian countries fit into a larger globally integrated economy? Has the ICT/e-business revolution influenced growth in East Asia? How does it affect the competitive advantage of various East Asian countries? After the 1997 East Asian financial crisis, did participation in the new technology and in e-business offer opportunities to revive the East Asian growth process? How can ICT/e-business development sustain the growth in East Asia over the coming decades? What should be the role of private entrepreneurship and of public policy?

In Part I, we introduce the fundamentals of the ICT/e-business revolution, the “new economy,” and globalization. How do they relate to East Asia?

Part II considers the so-called growth miracle in East Asia and the relative position of the various East Asian countries. Whereas there are important common elements in East Asian development, the situation of each country is somewhat different. They are spaced widely along the steps of the development ladder. They differ considerably in their relative strengths and weaknesses: domestic market size, advancement of technology, education and culture, and cultural links abroad. Most important for our discussion, they differ in their position with respect to the “digital divide.”

Part III is concerned with policy. There are important commonalities and differences in each country’s development strategy. How has government policy played a role in East Asian development in the past and what might be its role looking forward? What are the technological challenges associated with IT-based development and what are the special policies required to advance the ICT revolution in East Asia?

Part IV deals with the future and introduces the opportunities being created in East Asia. As we look ahead, for a few years and, then, for many years, what can we expect to see in East Asia as a result of the changes in technology and business organization that are taking place today? What elements of the ICT/e-business revolution offer comparative advantage to various East Asian countries? What are the implications from a geopolitical perspective? What kinds of policies will advance East Asia’s transition to this “new economy”? What kinds of strategies can businesses use to take advantage of the new opportunities? How will the ICT/e-business revolution sustain East Asian economic growth?

2
The ICT/e-business revolution

A new economy?

Important technological changes lie behind the fundamental transformation and globalization of the world economy that have been taking place in the past few years. The new technology leads to an entirely different perspective on what to produce, how to produce, and, importantly, where to produce. It affects business strategy and organization. It changes traditional ways of looking at economies and at economic development. It influences public policy decisions. We begin by asking about the nature of these technical changes: what is the ICT/e-business revolution? What are its implications? In short, what is new about the “new economy?”

First, this chapter is concerned with the profound changes that are revolutionizing the world’s production, distribution, and management systems. Later, we pose the question about how the IT/e-business revolution is changing the character of the world economy. How may East Asia be affected?

There is wide agreement that the world economy has been undergoing a revolution, one that has produced a bright future. The MIT economist, Lester Thurow summarizes it:

We now live in a period of time historians of the future will call the third industrial revolution. Leaps forward and interactions between six key technologies (microelectronics, computers, telecommunications, manmade materials, robotics, and biotechnology) are once again sending the economy off in new directions. Collectively, these technologies and their interactions are producing a knowledge-based economy that is systematically changing how we conduct our economic and social lives.⁴

(2003:30)

Improved technology has been a central force for economic pro...

Table of contents

• Routledge Studies in the Growth Economies of Asia
• Contents
• Illustrations
• Preface
• Biography
• Abbreviations
• Part I East Asia, globalization, and the new economy
• Part II East Asian development
• Part III Policy and development
• Part IV The IT/e-business revolution in East Asia and the future
• Notes
• References
• Index