AUTOMOBILE INDUSTRIALIZATION IN EAST ASIA:

POLITICAL ECONOMY OF NATIONAL PERFORMANCE

Richard Doner (Emory University)Gregory Noble (University of Tokyo)

John Ravenhill (Australian National University

April 27, 20111

Project Overview• Co-authored book project on cross-national variation in East Asian automobile industries• Puzzle

– Extensive growth– Upgrading

• Alternative Arguments• DNR approach• Role of Business Associations• Limitations / Questions

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Automobile Industry Performance: Extensive Growth / Upgrading

Extensive Growth Upgrading

Vehicle production Vehicle production

Parts production Parts production

Vehicle exports Vehicle exports

Parts exports Parts exports

Auto trade balance Auto trade balance

Auto employment as % of mfg. Auto employment as % of mfg.

National ownership – assembly

National ownership – parts

Local value added / upstream linkages

Local technology capacity

OEM – ODM - OBM

Investment-driven growth Innovation-driven growth

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East Asian Auto Performance

Integrated Production Korea

Upgrade

Performance: Strong. Global automakers with world-class engineering / design capabilities; two successful indep. brands (Hyundai-Kia); major vehicle and parts exports; overseas assembly but few strong indigenous components producers. Strategy change? No. Consistent support for domestically-owned assemblers since 1960s

China

toward upgrading

Performance: Strong. Increasingly competent Chinese-foreign joint ventures; emerging independent firms with growing capacities (augmented by foreign design and engineering consultants), own brands, some export capability; major parts exports; some vehicle exports. Strategy Change? Yes. After mid-1980s, significant opening to foreign investment; active export promotion.

Malaysia

No upgrade

Performance: Weak. Indep. assembly capabilities (with substantial foreign help on R&D), heavy protection and imported tech; limited exports of assemb. vehicles; weak parts prod./exports. Strategy Change: Minimal. Increase number of “national cars” and foreign involvement; slow trade liberalization under AFTA

Specialized Parts Production and Export Taiwan

Partial upgrade (limited to parts)

Performance: Strong. Significant exports of replacement parts; some local OEM parts production; some regional and even global expertise in electronics-related parts and electric vehicles (industry increasingly economically integrated with that of mainland China). Strategy Change? Yes: From mid-1980s, gradually reduced efforts to promote domestic assembly base.

Volume Assembly / Export Thailand

No upgrade

Performance: Strong. Assembly of volume models for local and regional markets; significant regional exports of parts; foreign firms dominate; weak indigenous presence: little local engineering or design; few domestically-owned upper tier suppliers Strategy Change? Yes: From mid-1980s, gradually reduced efforts to promote domestic assembly base

Indonesia

No upgrade

Performance: Weak but improving. Assembly of a few volume models primarily for local market; some local production of OEM parts and modest exports. Strategy Change: Yes. Shift away from extensive protection of locally owned assembler and parts, especially after 1997 financial crisis

Philippines

No upgrade

Strategy Change? Yes. Shift away from protected localization, but new strategy still not clear. Strategy Change? Yes. Shift away from protected localization, but new strategy still not clear. 4

Alternative Explanations

• Market size / Scale economies– Population not determinate of “effective market size” (Indonesia vs. China)– Exports and niche markets (Thai one-ton pickup trucks; Taiwan REM exports; Korea “Pony”)

• Washington Consensus: “Sound Money / Free Markets”– Maro stability necessary….but– NICs experience with “wrong” prices (e.g. low % loans, targeted fiscal incentives, e.g. Thai pickup) – Trade liberalization important but

• Alternative sources of competitive pressures (export push)• Benefits depend on build-up of local technol capacities

• FDI– Consequence or cause of development?– Singapore vs. Malaysia?– Endogenous growth: Benefits depend on domestic absorption capacities– Promotes wage inequality? Depends on existing education system and pool of skilled labor

• Key role of technical education (e.g. Thailand)• Growth of informal labor

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“Institutions” Are The Answer….(well, sort of)

• “Good Governance”– Bureaucratic quality (Weberianness) is important (merit-based recruitment, stable career tracks,

expertise)– But…value of bureaucratic quality depends on what leaders make of it – But…effective institutional designs vary with policy goals / local conditions– Capacity for experimentation key (e.g. China)– Good governance “endogenous”?

• “Developmental States”– Highly useful in demonstrating benefits of coherent state intervention– But danger of confusing institutional presence with institutional capacities (e.g. “pilot agencies”)– Little attention to stage-specific needs– Emphasis on autonomy minimized contribution of private actors (“embedded autonomy”? )– Emphasis on autonomy led to “thin politics” – little attention to leaders’ motivations, pressures etc.

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Political – Institutional Approach• Development stages: Institutions for what?

• What kinds of competences and resources needed for different stages?

• What are the difficulties of building these competencies?

• Institutional design or institutional capacities?

• Politics of institutional origins: Where do “good” institutions come from?

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Explaining Performance Variation

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Performance Outcomes

extensive growthupgrading

Competencies / Resources

property rightsmacro stability

investment incentivestrade administration

new marketseducation / skills

R&Dstandards / testing

Resource Providersbuyers, competitors, suppliers of intermediates and capital equipment, public research institutions, public-private research consortia, company-oriented service suppliers.

“Governing” Institutions state agenciesbus. Assocs.

Unionspub.-priv. consult

Performance Outcomes via Development Stages

• Igniting vs. sustaining growth (Rodrik)

• 1st vs. 2nd generation econ reforms (Nelson)

• “Extensive” vs. “intensive growth” (Irmen)

• Diversification vs. specialization (Imbs and Wacziarg )

• “Middle-income trap” (e.g. Yusuf / Nabeshima)

• Extensive growth vs. upgrading

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Extensive Growth: Challenges• Investment-driven process

– Requires mobilizing resources “hidden, scattered, or badly utilized...” – Market failures: existing information and assets will not lead entrepreneurs to put

their resources into new activities. – Need to facilitate investment of invest scarce funds in activities whose short-term

risks exceed potential but uncertain, long-term development benefits

• Key challenge: Risk socialization– Assume stable property rights and macro stability– Information (e.g. through low interest loans, tax/tariff incentives)– Coordination through provision of complementary assets (e.g. infrastructure) – But also….expose producers to market discipline

• However, …no focus on indigenous tech. capacity and/or linkages

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Upgrading: Challenges of Learning and Linkages

• Learning – To operate existing production efficiently via engineering, product management, raw materials

control, scheduling, repair / maintenance, trouble shooting– To create new capacity through search and select technology, new management skills etc.– To innovate products and processes through adaptations of tools, products, processes

• Challenges of innovation and improving technology capacity– Innovation refers to products/processes “new” to firm– Externalities (poaching)– Public bads (monopolistic markets for certain technologies)– Public goods (R&D)– Information imperfection

• What works in local context?• Variability of learning by technology• Tacit, not codified knowledge need to “tinker”; requires active learning

• Linkages: Ustream capacities developed enough to serve competitive downstream users

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Competencies / Resources

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Competencies / Resources

Development Stages Competency/Resource Providers

Extensive Growth

Upgrading

Buyers / Global Value Chains

Competitors

Suppliers of intermediates, capital equipment

Company-oriented service suppliers

Customs agents

Industrial extension agents

Public research institutions

Public-private research consortia / cooperative learning arrangements

Open factor markets: competitive pressures on producers and conditional access to inputs

tariff reduction; end of NTBs

complex tariff regime to promote upstream-downstream linkages

Investment incentives (fiscal, monetary)

relatively generic much more targeted

Scale economies: Market exploration / development

export incentives export incentives; identification of niches;

Scale economies: industry rationalization

moderately important very important

Infrastructure logistical; more specializedEducation and Skills general education;

unskilled or semi-skilled

need for higher-level and sector-specific skills; better vocational and technical training

Research and Development

not necessary important

Standards and Testing local not needed important to develop problem solving capacities of local firms

Others? (e.g. Environmental Services

Distinguishing Development “Difficulties”

• Number of actors whose participation is required to implement policy

• Information intensity– Level and novelty of technology– Site specificity– Availability of existing template

• Distributional Consequences– Numbers of winners vs. losers– Political strength (e.g. cohesion, leverage) of winners vs. losers– Speed of gains vs. losses

• Upgrading more difficult than extensive growth (ceteris paribus)

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Competencies / Resources

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Competencies / Resources

Development StagesDifficulties / Challenges

Extensive Growth-- UpgradingCompetency/

Resource Providers

Extensive Growth

Upgrading # Actors Info. Distrib. Buyers / Global Value Chains

Competitors

Suppliers of intermediates and capital equipment

Private service suppliers (e.g. training)

Customs agents

State industrial extension agents

Public / private schools, colleges, polytechnics

Public research institutions

Public-private research consortia / coop. learning

Open factor markets: compet. pressures on producers and conditional access to inputs

tariff reduction; end of NTBs

complex tariff regime to promote upstream-downstream linkages

rising complex moderate

Investment incentives (fiscal, monetary)

relatively generic much more targeted

rising complex med-high

Scale economies: market development

export incentives export incentives; ID niches;

rising med low-med

Scale economies: industry rationalization

moderately important

very important high

Infrastructure logistical; more specialized

rising med

Education and Skills general education; unskilled or semi-skilled

higher-level and sector-specific skills

rising high low-med

Research and Development

not necessary Important rising high low

Standards and Testing local not needed Key for local firms’ problem solving capacities

rising high low

Others? (e.g. Environmental Services

Example: Investment PromotionDimension Extensive Growth Upgrading

Core objectives: Job growth; foreign exchange; access to GPNs

Job growth; foreign exchange; technology / managerial spillovers; stronger local producers

Incentives Generic one-size-fits-all tax / tariff incentives; pre-investment screening;

Sector specific; more conditional based on value added, tech. sharing; emphasis on post-investment performance

Information requirements Relatively low (Thai BOI example) High sector-specific info; forecasting;

#s of Actors Relatively low: mainly investment promotion agency

High: Investment agency + consultants, universities, RTOs, firms

Distributional consequences Low; mostly winners Moderate: low performers lose incentives

Promoting upgrading requires that “government investment agencies develop greater expertise and flexibility - rather than a sector-neutral and minimally active policy stance” Felker and Jomo (2000: 17).

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Example: Vocational / Technical Training

Dimension Extensive Growth Upgrading

Core objectives Supply sufficient personnel at lowest cost

Provide high-skilled personnel to attract and benefit from higher value added investments

Information requirements

Low High: narrow vs. broad curricula? How technical?

#s of actors Low High(er): good curricula is “co-produced,” i.e. involves input by consumers being served

Distributional consequence

Low Moderate: requires consolidation and higher entry barriers for providers

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Vocational/Technical Training “Network” in Thailand (Ritchie 2010)

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Upgrading Requires “Governance” Institutions

• “Governing” – reconciling interests and preference of diverse yet interdependent actors

• State agencies with functional supervisory responsibility– Ministries– Investment promotion agencies– Environmental protection agencies

• Business associations

• Unions

• Public-private consultative

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Effective Governance Depends on Institutional Capacities

• Consultation– Identify actors’ preferences, interests, capacities– Multiple forms:

• Top-down vs. bi-directional• Participation in formulation and/or implementation• More difficult task, more bi-directional, participation in implementation

• Credibility– “Problems of credibility …major obstacle to better growth performance” (Brunetti and Weder 1994)– Rewards and sanctions– Need to avoid unexpected change (time inconsistency) while maintaining flexibility to change…based

on consultation• Monitoring

– Provides information about actors’ actual behavior– “Without monitoring, there can be no credible commitment” (Ostrom (1990).

• More difficult the development policy task, stronger institutions requires

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Example: University-Industry Linkages in Thailand

• Collaboration fragile

• Partly result of weak S&T research in Thai universities

• Underlying problems in governance institutions, especially Ministries of Education and University Affairs, as well as local business associations

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Automotive Business Associations

Taiwan China Thailand

Leadership / composition

Largely local Local and foreign …but increasing local influence

Foreign dominated, espec. after ‘98; fragmented – OEMs vs. REMs

Technical training? Yes Yes Yes but weak: AHRDP led by MNCs

Data gathering? Yes Yes Sort of; JETRO and private sector more important sources

Standards and Testing facilities?

Yes Yes Only partial, weak, recent

Commercial focus Yes: auto shows; terms of liberaliz. With PRC

Yes: Yes: market devel; but MNCs key in regional arrangements (BTB, AFTA)

Links to technical institutes?

Strong: Auto Parts Promotion Center; Automotive Research and Testing Center

Moderate (?): Often through firm-based institutions?

Weak-moderate: Through Thailand Automotive Institute

Strength of local technical institutions

Strong Moderate-strong Weak: Operating under unstable ambivalent / unstable MoI

Association’s consulting / credibility / monitoring – espec. technical issues

Strong Moderate-strong Very weak

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Explaining Business Association Strength / Weakness

• Level #1: Key role of state institutions in providing incentives for associational strength / role– Corresponding ministries (e.g. Industry)– Investment promotion agency– “isomorphism” (coercive, mimetic, normative)

• Level #2: Political Institutions (veto players)– Number of parties and factions– Government / cabinet (in)stability (The key government agency overseeing the auto

industry in Thailand – Ministry of Industry - had 14 different ministers in 11 Years)

• Level #3: Preferences of Political Leaders– Short term / particularistic focus on rewarding narrow coalitions– Longer term / broader focus on development outcomes

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Why Would Political Leaders Forego Short-term Gains for Long-term Development?

• Alternative approaches– Good governance….but problems of measurement and endogeneity – Democracy…but no clear link between regime type and development– Deep background factors, e.g. colonial legacies…links unclear– Able/corruption-free leaders…but silent on leaders’ incentives

• Systemic Vulnerability– Claims on state resources

• External threats requiring• Internal, popular pressures and demands

– Available resources to satisfy claims• Natural resource revenues• Foreign aid• Foreign investment

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Political Origins of Institutional Capacities

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GovernanceInstitutions’ Capacities-consultation

-credibility-monitoring

Political Institutions(veto players)

Preferences of Political Leaders

Constraints / Pressures on Political Leaders

Claims on resources-external threats

-internal demandsAvailable resources

-natural resource revenues-foreign aid

-FDI

Big Questions• Crises and Threats

– What constitutes crisis / threat?– Threshold to promote institutional strengthening?– Threshold to transform veto players?– Mechanisms linking threats to outcomes?– Positive outcomes inevitable? likely?

• Ambiguous impact of FDI– Source of technological spillovers….in presence of strong local competencies– Can reduce demand for competencies by providing in-house or at home– But sudden loss of FDI might prompt internal strengthening…?

• Crisis as stimulus to cross-class collaboration – N. Europe: “vulnerability and openness…(can)…impress on elites the need for internal

unity and cooperation” (Katzenstein 1985)“– E. Asian NICs: threats key to push elites on need for export strategy that engaged and

rewarded non-elites, including labor

• Expansion of informal labor

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THANK YOU….

QUESTIONS? COMMENTS?

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Difficult Analytics of Crises

• Crisis literature is extensive but offers few consistent guidelines – What is a “real crisis”?– Impact and consequences?– Mechanisms through which crises influence outcomes?

• Defining “crisis:” dimensions of difference– Substance: economic vs. political– Spatial: internal vs. external– Onset speed: rapid vs. gradual (Pierson: “time horizons”)– Duration: shorter vs. longer

• Crisis categories: from shock to ongoing threats– Rapid onset, short-term, exogenous econ. shock (e.g. 1997 Asian $ crisis)– Rapid onset, long-lasting, exogenous econ. shock (e.g. 1970s oil crisis)– Gradual onset, long-lasting, endogenous econ. “exhaustion” (ISI, mid-income trap)– Gradual, long-term external security threats (e.g. S. Korea, Taiwan post-WWII)– Gradual, long-term (?) contentious politics (e.g. Singapore labor early 1960s)– Gradual, long-term combination of external / domestic political threats with low access to resources, i.e. systemic

vulnerability (e.g. E. Asian NICs)

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Impacts of Crises

• Views on crises’ impacts have evolved– Initially very optimistic: (“f there is one single theme…(in)…the political economy literature it is…that crisis is

instigator of reform” – Rodrik 1996)– Now, recognize cross-national variation in response to similar crisis– Now, disaggregate reform process (formulation, implementation, sustinability, macro/micro components)– Now, highlight key role of domestic variables

• Nature of coalitions• Nature of assets held• Capital-labor conflicts• Political institutions..influencing elite cohesion

– Now, suggests causal mechanisms

• Mechanisms: How might crises influence outcomes – Learning: chaos reassessment of previous policies and new mapping– Special politics: economic disarray and weaker opposition suspension of rules and delegation of authority to

particular actors– Change in equilibrium behavior: actors revise payoffs and time horizons– Increase risk-taking behavior (“prospect theory”)

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Preliminary Arguments

• Mechanisms: Crises and Innovation– Learning: scanning for new models and institutional experimentation– Change in equilibrium behavior: lengthen time horizons to account for long gestation periods– Increase risk-taking behavior: forego immediate benefits of particularistic policies for longer-term

benefits of more public goods– Special politics: reduction in # of veto players AND/OR increase in # of veto players, i.e. elite

cohesion and popular/labor incorporation

• When will such mechanisms operate? What kinds of crisis?– Gradual onset, multi-dimensional, threats ,as reflected in the vulnerability concept , constitute a

necessary condition for the development of innovation-supporting institutions

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TitleIndicator Year Notes China Indo. Korea Malay. Phils. Thai Taiwan

Extensive Growth

Vehicle prod. - cars and commercial vehicles (units)

2009 13,790,994 464,816 3,512,926 489,269 62,523 999,378 226,356

Vehicle prod. - cars (units) 2009 1, 8 10,383,831 352,172 3,158,417 447,002 28,169 313,442 251,490

Vehicle prod. - commercial vechiles (units)

2009 1, 8 3,407,163 112,644 354,509 42,267 34,354 685,936 51,966

Vehicle export (units) 2009 2, 3 153,740 48,222 1,462,218 21,791 7,731 1,321,864 15,560

Vehicle import (units) 2009 2, 3 409,225 67,619 78,647 333,458 130,227 42,737 52,482

Vehicle export (Value) (in USD except for Malaysia)

2009 2, 3, 9 1,104,609,515 628,661,069 22,396,942,201 145,031,166 94,354,176 4,090,004,688 203,928,742

- Calculating USD equivalent 41,143,593

Vehicle import (value) (in USD except for Malaysia)

2009 2, 3, 9 14,354,398,503 902,297,098 1,862,825,578 1,579,587,714 955,442,302 462,385,421 1,349,326,857

- Calculating USD equivalent 448,109,990

Auto trade balance (value) 2009 7, 9 -13,249,788,988 -273,636,029 20,534,116,623 -1,434,556,548 -861,088,126 3,627,619,267 -1,145,398,115

- Calculating USD equivalent -406,966,397

Parts prod.

Parts export (in USD except for Malaysia and Taiwan)

2009 4, 5, 6 26,285,581,680 2,838,111,670 9,615,868,304 862,048,628 1,836,946,849 4,841,374,536 139,671,696

- Calculating USD equivalent 4,226,136,432

Parts import* (in USD except for Malaysia and Taiwan)

2009 4, 5, 6 21,149,069,746 2,405,294,320 5,840,650,186 2,138,522,977 366,345,604 3,707,147,788 60,049,234

- Calculating USD equivalent 1,816,948,335

Auto trade balance (Parts) 2009 5, 7 5,136,511,934 432,817,350 3,775,218,118 -1,276,474,349 1,470,601,245 1,134,226,748 79,622,462

Total Exports (in USD except for Malaysia)

2009 3, 9, 10 1.20165E+12 1.1651E+11 3.63531E+11 1.57195E+11 38435801947 1.52497E+11 193,801,188,481

Global share of auto. products in trade

2009 2.28% 2.98% 8.81% 0.64% 5.02% 5.86% 0.18%

Auto employment as % of mfg. 200811, 12,

162.88 9.10 6.12 3.09 3.45

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Title 2

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Indicator Year Notes China Indo. Korea Malay. Phils. Thai Taiwan

Nat'l ownership: assembly

Nat'l ownership: parts

OEM / ODM/ OBM

Value added as % of overall mfg. 2010 13 10.30

Value added as % of manufacturing industry 14, 15

- manufacture of motor vehicles 2.9 7.3 6.1 2.4 3.2 7.3

- manufacture of bodies (coachwork) for motor vehicles

0.2 0.1 0.1 0.2 0.2

- manufacture of parts and accessories for motor vehicles

2.1 1.6 4.7 1.0 4.8

Notes(1) www.oica.net(2) Data refers to “Motor vehicles for the transport of persons”. Source: COMTRADE, SITC Rev.3(3) Data for Taiwan is sourced from Taiwan's Bureau of Foreign Trade Statistics (http://cus93.trade.gov.tw/ENGLISH/FSCE/)(4) Parts refer to the same product codes that we had using when calculating Low/Medium/High tech components. Source: COMTRADE, SITC Rev(5) Data denominated in USD except for Malaysia (MYR) and Taiwan (NT$1000)(6) Data for Taiwan is sourced from http://www.ttvma.org/information.php(7) Negative number means a trade deficit.(8) Data for Philippines sourced from http://www.asean-autofed.com/statistics.html(9) Data for Malaysia denominated in MYR(10) Data sourced from COMTRADE, SITC Rev 3(11) For Indonesia, Malaysia, Philippines - calculated from data extracted from ILO LABORSTA Database. Employment in Auto industry refer to employment in the manufacture of motor Vehicles, Trailers and Semi-Trailer and other transport equiment.(12) For Korea, source: Korean Automobile Industry Report 2008(13) For Korea, source: Korean Automobile Industry Report 2010(14) Source: Unido website (http://www.unido.org/index.php?id=1000313)(15) Data for China is 2007, Philippines is 2005, the others 2006(16) Data for Taiwan is for 2006 and is calculated from data extracted from http://win.dgbas.gov.tw/dgbas04/bc2/ics95/GENERAL/EN/ZG8.pdf

World trade of automotive products by selected countries 2001-08 (USD billions)

Source: WTO Statistics database time series. Accessed by 14.12.2009. Figures are rounded off.Notes: SITC groups 781, 782, 783, 784, and subgroups 7132, 7783. USD at current prices. #) Estimated value.Taken from Peter Wad, “Impact of the Global Economic and Financial Crisis over the Automotive Industry in Developing Countries” UNIDO Working Paper.

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Global South motor vehicle manufacturers’ production (all types) and ranking 2001-07 (million units)

Source: OICA statistics. For Proton 2007, Automotive Quarterly Review 2008 Q4, fig. 3.3 p. 229.Taken from Peter Wad, “Impact of the Global Economic and Financial Crisis over the Automotive Industry in Developing Countries” UNIDO Working Paper.

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Development Stages, Competencies, Difficulties

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Competencies / Resources

Development Stages Difficulties Moving to Upgrading Extensive Growth Upgrading Information #s of actors distributional

costs Property rights general general and technical / IPRs more technical,

specific rising n.a.

Exchange rates stable stable not demanding few stable Open factor markets: competitive pressures / conditional input access

tariff reduction; end of NTBs

complex tariff regime to promote upstream-downstream linkages

more product-specific

rising due to need for more info.

Macroeconomic Stability

important important technical but not changing

few few

Investment incentives (fiscal, $)

relatively generic much more targeted high; sector-specific moderate due to need for consult. and monitor.

moderate: benefits depend on performance

Trade administration efficient customs; fast-track;

complex... increasingly technical, product specific

few low

Scale economies: new market devel.

export incentives export incentives; identification of niches;

Scale economies: industry consolid.

moderately important

very important moderate ? high

Infrastructure logistical; more specialized technical; rising rising low? Local supplier development

n.a. critical

Labor market flexible flexible and specialized Education and Skills general education;

unskilled or semi-skilled

need for higher-level and sector-specific skills; better vocational and technical training

high: needs to be sector - or product-specific

moderate-high

low

R&D not necessary important high moderate-high

moderate

Standards /Testing local not needed important to develop problem solving capacities of local firms

high moderate moderate: important for potential winners