The Global Economy and Southeast Asia

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The Global Economy and Southeast Asia
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Global Economy

• Common to buy clothing anywhere in US which has a
  tag labeled, Made in Malaysia, Indonesia or
  Vietnam
• Simple observation reminds us that our
  consumption of goods has a strong international
  character
• Increasingly true to speak not only of national
  economies but a larger, highly inter-connected
  and interdependent- GLOBAL ECONOMY
• Before discussing basic mechanisms of
  industrialization and economic change within
  Southeast Asia, important to look at the broader
  global industrial environment within which these
  nations are forced to compete

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Setting the Stage Origins of the Global Economy

• Since 1970s world economy hit by turbulent forces
• Unemployment in western countries
• Traditional industries (iron and steel) have
  declined
• LDCs bearing huge financial debts which threaten
  drive for development
• Trading tensions have emerged between industrial
  countries and the newly industrializing countries

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Causes of These Conditions?

• Some argue that continuing OPEC escalation of oil
  prices through limited production is root cause
• Had some effect but too simple an answer
• More profound changes in world economic structure
  were underway before this
• Increasingly growing consensus that world economy
  has become more volatile, complex and tightly
  connected
• Countries affected by what is happening abroad
  and at larger geographical scale

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Internationalization of Trade and Labor

• As with Japanese autos, American computers and
  Taiwanese calculators there is an emergence of a
  new international division of labor
• Basically a change in geographical pattern of
  specialization at the global scale-constantly
  changing and very dynamic
• Example movement of textile and shoe production
  from Indonesia to China

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International Division of Labor

• Division of labor has taken on spatial
  dimensions- some areas come to specialize in
  certain types of economic activity
• At broad scale industrialized countries ---?
  manufactured goods while non-industrialized
  countries ---? raw materials
• However this simple pattern no longer exists
• Now much more complex structure involving
  fragmentation of many processes and their
  geographical relocation on a global scale

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Forces Surrounding Global System of Production

• These four factors are affecting production
  patterns
• 1. Trans-national or multi-national corporations
  (MNCs)-firms that operate in many nations
• Increasingly these firms have local production
  points and suppliers that operate across national
  boundaries providing and securing labor, capital
  and other resources from a variety of places

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Forces Surrounding Global System of Production

• 2. National governments- through their
  industrial, trade and foreign policies especially
  liberalization policies
• Liberalization refers to the way in which
  policies facilitate transactions (trade and
  sales) of a variety of products and services
• Deregulation refers to the easing of taxation,
  entry and pricing of products or services
  dictated by government policy
• Privatization refers to the ownership of former
  public sector operations and firms by private
  corporations and enterprises

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Forces Surrounding Global System of Production

• 3. Enabling Technologies- transport,
  communications, production and organizational
  improvements
• Explosion of enhanced transport and communication
  services such as air cargo, integrators offering
  definite time delivery (FedEx and UPS),
  electronic mail and electronic data interchange
  (EDI)
• Advanced inventory management such (just-in-time
  (JIT)) and new systems of distribution such as
  third party logistics (3PL)

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Forces Surrounding Global System of Production

• 4. Shifts in Market Conditions and Demand
• Economic cycles affect markets and production,
  e.g. the Asian financial crisis
• Dramatic shifts in demand affect over time
  influence type of good being produced and
  production schedules
• Application of new technology can mean product
  obsolescence
• These changes can be described in part through
  product life cycle

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What was the Asian Financial Crisis?

• Financial crisis not due to cronyism but failure
  of private sector
• Rapid investment and excessive borrowing after
  period of liberalization
• Bubble economy (prices well above those
  justified) developed in real estate and financial
  institutions
• Collapse of export growth provided trigger that
  undermined baht, produced non performing loans
  and provoked capital outflow
• Export collapse caused by increase in real wages,
  competition from China and labor intensive
  industry unable to adjust
• Devalued currency bad for high import content
  goods but good for resource based products
• Urban areas unemployment and high prices

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Product Life Cycle- growth in sales of product
follows systematic path, from initial
introduction to market through development,
growth, maturity, decline and obsolescence
Competition
Monopoly
Competitors
Innovating firm
Sales
Decline of production
First competitors
Mass production
Promotion
Idea
Research and development
Decline
Growth
Maturity
Stage 1
Stage 2
Stage 3
Stage 4
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Global Financial Centers
Hinterland
Telecommunications
Space
Time
London
Tokyo
New York
Los Angeles
Hong Kong
Singapore
Stock Market Opening Period
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Global Production Chains and Networks

• Production Chain Materials gt Procurement gt
  Transformation gt Marketing and Sales
  gtDistribution gt Service
• Definition transactionally linked sequence of
  functions where each stage adds value to the
  process of goods and services production
• Two aspects important coordination and
  regulation and geographical configuration
• Production chains may be very localized but
  increasingly are global in scale to take
  advantage of international division of labor

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KIA Auto Parts Flow

• Assembled in S Korea KIA Sorrento clear example
  of global supply chain
• Uses 30K parts from all around world
• Parts shipped from places as diverse as Wales and
  Mexicobut very risky
• War in Iraq and piracy in Malacca Straits
• Demonstrate surprising adaptability due to
  advance planning, multiple sourcing of parts and
  ability to shift routes on short notice

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KIA Auto Parts Flow

• Communicates regularly with suppliers-at least
  once a week
• Order several months in advance
• If necessary use air freight instead of sea
  freight
• Greater demand forced KIA to air freight airbags
  from Swedish company which makes them in the U.S.
• Greater expense of trans-Pacific flight better
  than slowing down production line