East vs South East Asian Innovation Systems Mike Hobday

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East vs South East Asian Innovation
SystemsMike Hobday
Sussex Conference.ppt

• Presentation to Regional Integration and Deep
  Integration Conference, CARIS Annual Conference,
  Sussex University
• 22-23 May 2008

SPRU Science and Technology Policy
Research University of Sussex, Falmer Brighton,
BN1 9RF, UK e-mail m.g.hobday_at_susx.ac.uk Tel
01273 772726 Fax [phone]
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Key Issues

• East Asia (e.g. Korea, Taiwan and Hong Kong)
  locally owned 'latecomer' firms how they
  acquire their technology and become integrated
  into international markets via the OEM
  sub-contract system
• Interpretation - how East Asian firms strategies
  and paths differ from 'standard' (MIT) i.e.
  leadership models of innovation
• South East Asia (e.g. Singapore, Malaysia,
  Thailand) exports and technology acquisition
  based on foreign TNC subsidiaries - not local
  firms China a mixed picture, but led by FDI
• A bottom up, firm level perspective on Asian
  Integration

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East Asian Achievements

• In 1962 Taiwan and Korea GNP per capita levels of
  the African nations - by 1986 moved up rankings
  by 47 and 55 places GDP growth 8 - 10 p.a.
  (company growth much faster)
• Today increasing/full employment, rising wages -
  low-cost assembly moved out to Malaysia,
  Indonesia, Thailand, Vietnam, Philippines, China
• My research mostly on electronics
  largest/fastest growing export industry across
  Asia - but cannot generalise to other sectors

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Theory/academic literature on Asia The State vs
Market debate

• market view - investment, interest
  rates/savings, macro-stability, 'getting prices
  right' (e.g. World Bank, Paul Krugman, Alwyn
  Young)
• vs Government policy view (Amsden for Korea Wade
  for Taiwan) - state guidance, 'governing markets'
  - 'getting prices wrong' - stress on intervention
• very little analysis of (a) technology (b) firms
  

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Defining a latecomer firm

• Refers to locally-owned firms in East Asia -
  defined by two sets of latecomer/developing
  country problems
• 1. Dislocated from international sources of
  technology, science and RD
• 2. Dislocated from demanding users, international
  markets, user-producer links, clusters, networks,
  industrial districts etc.
• 'Latecomer' firm distinct from 'follower' and
  'leader' - research question how did latecomer
  firms overcome these difficulties?

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Case of ANAM Industrial of South Korea

• Why Anam? (a) typical example of an early
  latecomer similar histories in Samsung,
  Hyundai, Tatung, ACER (b) illustrates how the
  OEM sub-contract system works
• By early 1990s, Anam was the largest chip
  packaging company in the world (40 of world
  sub-contract assembly market) - 6,000 staff,
  branches in US, Europe, Japan etc. 200customers
• began as a bicycle producer in 1956 in 1968
  first Korean firm to enter the chip (packaging)
  business - in 1970 exported US210,000 by 1991
  exported an accumulated US10bn (by 1996 - annual
  sales gtUS1.3 billion)

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Anam's Technological Development 3 Phases

• Phase 1 Assembly and Manufacturing 1968-1985
• Phase 1 A Assembly (1968 to 1980) a long period
  of 'learning the art of assembly' imported
  wafers from TI and RCA for assembly and re-export
  to US - first simple transistors by 1978
  integrated circuits
• little in-house capabilities needed US customers
  provided specs, machinery depreciated equipment
  shipped in from US on boats
• Anam (also Samsung, Hyundai) began with mature
  products and well established processes (mostly
  mechanical/assembly)

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Anam Phase 1 - Assembly and manufacturing
1968-1985

• Phase 1 B (1980 to 1985) - manufacturing process
  engineering skills - why? to increase supply and
  raise quality meet rising demand automation
• how were skills acquired? Anam's engineers worked
  closely with large US customers - in 1984
  Engineering and RD Department set up to
  centralise engineering (not really RD)
• Other firms also developed manufacturing process
  engineering skill to support exports

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Phase 2 1985 to 1988 product design

• Product design skills first, simple design for
  manufacture, incremental design improvements,
  then new product designs
• Engineering and design capabilities enabled a
  shift from customer-driven, to in-house design -
  customers provide a general outline of their
  design needs - detailed design spec tooling etc
  by Anam
• triggers customer demands - product design
  technology central to faster export growth for
  Anam TNC competing via Anams low cost
  innovative designs

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Phase 3 Post 1988 - innovation capacity
developments

• After 1988 more RD for future product designs,
  new materials etc.
• joint design for new packages and processes with
  leading US TNCs (e.g. IBM, TI, Motorola) from
  junior to equal partnerships in technology
• Innovative business model/strategy (Anam as
  worlds leading specialist in packaging - US
  firms relying on Anam for capacity and designs)
• other examples of new business models, often
  focusing on a niche technology strategy

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Summarising the Transition of East Asian Local
Firms the OEM subcontracting system
Technological Market
Transition Transition
Learns assembly process for standard, simple
goods Learns design and product innovation
skills Designs brand new products conducts RD
Foreign TNC/buyer designs, brands and
distributes (simple goods) TNC buys,
brands and distributes TNC gains PPVA Local
firm invests in distribution, branding gains PPVA
1960s/1970s OEM 1980s ODM From 1990s OBM
OEM original equipment manufacture PPVA
Post-production value added ODM own-design and
manufacture OBM own brand manufacture
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Typical Latecomer Profile Today
Technological Market
Transition Transition
Learns assembly process for standard, simple
goods Learns design and product innovation
skills Designs brand new products conducts RD
Foreign TNC/buyer designs, brands and
distributes (simple goods) TNC buys,
brands and distributes TNC gains PPVA Local
firm invests in distribution, branding gains PPVA
1960s/1970s OEM 1980s ODM From 1990s OBM
OEM now in China etc
OEM original equipment manufacture PPVA
Post-production value added ODM own-design and
manufacture OBM own brand manufacture
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Key Dimensions of Latecomer Catch-up

• foreign channels of technology central to each
  stage of OEM (buyers, also machinery suppliers)
  enabled market and technology integration
• innovative capacity building, not just learning
  or imitation - at level of processes, products,
  and overall strategy
• innovation incremental (not radical or
  Schumpeterian), process driven - little real
  'RD' slow and gradual - 30 years to
  assimilate technology - step-by-step, beginning
  with mechanical assembly
• remaining latecomer problems weak in RD
  dependent on foreign firms (often competitors
  e.g. IBM) for technology OEM trap(Ernst)

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Innovation and Stages of Development
High
Product Innovation
Process Innovation
Rate of Innovation
Cost Stimulated
Technology stimulated
Low
Uncoordinated process Systemic Process Product
performance max Product cost min. Stage of
Development/Time RD Intensive/Low
volume Manufacturing Intensive/high volume
Basic Model Utterback and Abernathy (1975) -
Utterback and Suarez (1993) - Tushman etc
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Innovation and Stages of Development
High
Product Innovation
Process Innovation
Rate of Innovation
Cost Stimulated
Technology stimulated
Low
2000s/1990s 1980s
1970s
1960s . Asian Stages of Development
Reversing the Cycle RD Intensive/Low
volume Manufacturing Intensive/high volume
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South East Asia TNC Model

• A very different latecomer model - Singapore,
  Malaysia, Thailand, Indonesia, Philippines,
  Vietnam - TNC-based model of export and
  technology development (now China 80 of
  exports from processing zones from TNC
  subsidiaries)
• Strategy also very successful in Mid 90s,
  Singapore exported more electronics than Korea
  Malaysia more than Taiwan
• e.g. Seagate (disk drives) employs 35,000 staff
  in Thailand, RD in US regional HQ/dev. in
  Singapore high tech production in Thailand, low
  techn/assembly in China
• Various appx stages of development Singapore
  in the lead, followed by Malaysia and Thailand,
  others including China, lagging behind (ie.
  mostly basic assembly)

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TNC subsidiaries alternative model of
technology catch up
Global Corporation

• Blue sky research
• RD for new products and processes
• New product development
• New process development
• Minor product improvements
• Improvements to current equipment/processes
• Ongoing production (training, engineering)

Future (5-10 years)
Latest vintage
Changes to existing or old stock
TNC Subsidiary (eg Malaysia)
Malaysia
1975 2005 2020
Singapore
Thailand
1975 2005 2020
1975 2005 2020
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Conclusions East vs South East Asia

• In both cases (East and South East Asia), foreign
  buyers/manufacturers central to integration and
  technology transfer (either via sub-contracting,
  or FDI)
• activities shifted from cheap labour assembly of
  simple goods to high-tech products - disk drives,
  PCs, semiconductors - no leapfrogging - a hard
  slog to master basic manufacturing skills
• innovation occurring - but behind the RD
  frontier - initially manufacturing driven but
  firms still weak in RD, capital goods, new
  product design
• contextual factors similar in East and South East
  Asia stable macro-economy (mostly) -
  export-led/outward orientation, low inflation,
  high savings, predictable environment for
  business - vocational training closely related
  to industrial needs

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China

• China seems to be following a similar path -
  but with both local firm AND FDI/TNC-led growth
  in 2003 FDI accounted for more than 55 of total
  exports (up from 20 in 1992) within the
  processing zones FDI around 80 of exports most
  FDI now from Asia
• China has added advantage of (A) very large local
  market (not present in other Asian countries) (B)
  massive cheap labour/technical labour supply
  seems to be compressing the stages of catch up
• All reflected in complex web of cross regional
  investments, production/innovation and trade
  (e.g. semi finished goods/components from Taiwan
  to China for assembly capital goods from Japan,
  FDI from Taiwan to China)
• Gaulier, G., Lemoine, F. and Unal-Kesenci, D.
  (2004) Chinas Integration in Asian Production
  Networks and Its Implications, Paper Prepared
  for Conference Resolving New Global and Regional
  Imbalances in an Era of Asian Integration, Tokyo,
  17-18, June, CEPII (Centre DEtudes Prospectives
  Et DInformations Internationales, Paris,
  France).