ICT for Upgrading Linked Firms in Southeast Asia 8 Facts found from the Research on Knowledge Transfer through Production Networks in East Asian Economic Integration Yasushi Ueki Bangkok Research Center, Institute of Developing Economies, JETRO, Thailand Tomohiro Machikita Inter-disciplinary Studies Center, Institute of Developing Economies, JETRO, Japan UNCTAD CSTD 2011-2012 Inter-sessional Panel, 13 15 Dec. 2011, New World Hotel, Manila, Philippines
Contents 1. ERIA Research Project on Linked Firms 2. Framework 3. Findings 4. Implications
1. ERIA Research Project on Linked Firm
What is ERIA? ERIA (Economic Research Institute for ASEAN and East Asia) Proposed by Japan in the 2 nd EAS held in Sebu, Philippines, 2007 Established in 2008 in Jakarta, Indonesia.
Motivations of the Research How can ASEAN countries benefit from East Asian Economic Integration, especially by promoting trades and FDIs and strengthening production networks. Understanding industrial upgrading within production chains. How the creation of relatively good investment climates for MNCs encourage local firms to be involved in global supply chains. How firms with weak in-house R&D capabilities achieve innovations. How university-industry linkages work. How firms in ASEAN (especially semi-industrialized countries) compete or collaborate with China, India, other countries in East Asia. How to promote innovations to overcome "middle income trap
ERIA Research Project on the Linked Firms 2007: Analyses of Industrial Agglomeration, Production Networks and FDI Promotion Agglomeration (Local knowledge spillover) 2008: Development of Regional Production and Logistics Networks in East Asia 2009: Fostering Production and Science & Technology Linkages to Stimulate Innovation in ASEAN Production networks and upgrading (External sources of knowledge) 2010: How to Enhance Innovation Capability with Internal and External Sources 2011: Wiring Innovation Networks: How Networks Upgrade Innovation Capacity in East Asia Production networks and upgrading (Internal & External sources) Case studies based on interviews: automotives (2010), capital goods (2011)
ERIA Surveys of Manufacturing FY2007 FY2008 FY2009 FY2010 FY2011 Indonesia Greater Jakarta JABODETABEK JABODETABEK JABODETABEK JABODETABEK Philippines NCR CALABARZON CALABARZON CALABARZON CALABARZON Thailand Greater Bangkok Greater Bangkok Greater Bangkok Greater Bangkok Areas not affected by floods Vietnam Greater Hanoi Greater Hanoi Greater Hanoi Greater HCMC Greater Hanoi Greater HCMC Greater Hanoi Greater HCMC Myanmar x x x x Yangon Mandalay
Topics being Explored Using Survey Data 1. Investment climates & factors promoting agglomerations/knowledge spillover. 2. Detecting knowledge sources across firms, especially external sources. 3. Impacts of knowledge exchanges within and across networked firms on innovations 4. Complementarity between in-house R&D and external linkages. 5. Upgrading business performance through the adoption of ICTs 6. Effectiveness of face-to-face communications using the case of exchanging engineers between firms within a supply chain. 7. Connecting technology transfer with the spatial architecture of production networks in East Asia 1) Identify sources of technologies and South-South technology transfer through the exchange of engineers. 2) Differences in the impacts of cross-border technology transfer from China and Japan 8. Determinants of the adoption of international standards 9. Diffusion/spillovers of international standard within a global production chain. 10. Mechanisms of the formation of production networks
2. Framework
Conceptual Framework (Since 2007-) Coordination by Networking these through ICTs
Conceptual Framework (Since 2010-) Technological Upgrading (Product & Process Innovations) Absorptive Capability Internal Sources Technological Factor Managerial Org Human Resources External Sources
Technological Upgrading Process innovation Q (Product quality improved) C (Production cost decreased) D (Lead-time was reduced) Combination of them (QC, QCD) Product innovation: Introduction of new products Market (Introduction to markets new to the respondent firms) Tech (Product based on technologies new to them) Combinations of product & process innovations
Empirical Approach Basic Models: Business performance = + ICT + x + e ICT = + Link + x + e Innovation = + Link + x + e Estimation: Binary probit Ordered probit/logit Investigation of the relationship between innovative activities and knowledge source.
3. Findings
A Fundamental Fact Innovation without R&D and Diversified External Sources Figure 1 Figure 2 Freq of the No. of Innovations Number of Innovat ion Fitted values by Status of R&D Activities across Firms 20 Non R&D Firms R&D Firm s.1 15.05 0 -.05 Fract ion 10 5 0 5 10 15 20 Num ber of Innovat ion -.1 0 5 10 15 20 25 No. of Linkages 0
Eight Facts found from Regressions 1. Local firms adopted ICT develop export markets. 2. MNCs/JVs adopted ICT improve quality and reduce cost. 3. Local firms adopted ICT don t depend on external sources. 4. MNCs/JVs adopted ICT are linked to MNCs/JVs. 5. Local firms may cooperate for product innovation with local partners off-line. 6. MNCs are wholly dependent on their R&D department for product innovations. 7. MNC customers don t provide knowledge for product innovation in the automotive related sector. 8. Face-to-face communication among engineers is one of the key channels of South-South knowledge transfer.
Fact 1 Local firms adopted ICT develop export markets Binary Probit (Marginal Effect) Dependent variables (1) (2) (3) (4) (5) (6) Export value increased Export value to developed countries increased Product quality improved Product defects were reduced Production cost decreased Lead-time was reduced Introduction of ICT 0.199*** 0.144*** 0.064 0.087 0.016 0.141* Asset size controls Y Y Y Y Y Y Country controls Y Y Y Y Y Y Observations 316 316 316 316 316 316 Pseudo R2 0.079 0.100 0.078 0.033 0.089 0.055 Notes: *** p<0.01, ** p<0.05, * p<0.1. The sample is restricted to 100% locally owned firms.
Fact 2 MNCs/JVs adopted ICT improve QC Binary Probit (Marginal Effect) (1) (2) (3) (4) (5) (6) Dependent variables Export value increased Export value to Product developed quality countries improved increased Product defects were reduced Production cost decreased Lead-time was reduced Introduction of ICT -0.044-0.033 0.120** 0.096 0.170** 0.047 Asset size controls Y Y Y Y Y Y Country controls Y Y Y Y Y Y Observations 221 221 221 221 221 221 Pseudo R2 0.178 0.136 0.075 0.041 0.110 0.050 Notes: *** p<0.01, ** p<0.05, * p<0.1. The sample is restricted to MNCs/JVs.
Fact 3 Local firms adopted ICT don t depend on external sources Binary Probit (Marginal Effect) Dependent variable: Introduction of ICT (1) (2) (3) (4) (5) Own R&D Department 0.147** JV established with local firms 0.013 JV established with MNCs 0.039 Local supplier or customer 0.014 MNC supplier or customer (0.039) Asset size control Y Y Y Y Y Country controls Y Y Y Y Y Industry controls Y Y Y Y Y Observations 316 316 316 316 316 Pseudo R2 0.256 0.242 0.243 0.242 0.243 Notes: *** p<0.01, ** p<0.05, * p<0.1.
Fact 4 MNCs/JVs adopted ICT are linked to MNCs/JVs Binary Probit (Marginal Effect) Dependent variable: Introduction of ICT (1) (2) (3) (4) (5) Own R&D Department 0.221** JV established with local firms 0.187** JV established with MNCs 0.094 Local supplier or customer 0.102 MNC supplier or customer 0.223** Asset size control Y Y Y Y Y Country controls Y Y Y Y Y Industry controls Y Y Y Y Y Observations 221 221 221 221 221 Pseudo R2 0.153 0.154 0.142 0.143 0.152 Notes: *** p<0.01, ** p<0.05, * p<0.1.
Fact 5 Local firms aren t linked to MNCs/JVs but may cooperate for product innovation with local partners off-line Dependent Variable: New Products based on Technologies New to the Firm Probit (Marginal effect) (1) (2) (3) (4) (5) (6) (7) (8) (9) Internal source (0/1) R&D department 0.544** Sales department 0.388* Production department 0.650*** Headquarters, affiliates 0.538** External source (0/1) Local supplier or customer 0.456** MNC supplier or customer 0.290 Local business organization 0.555*** University or R&D institute 0.869*** Variety 0.144*** Employee size control Y Y Y Y Y Y Y Y Y Country controls Y Y Y Y Y Y Y Y Y Industry controls Y Y Y Y Y Y Y Y Y Observations 370 370 370 370 370 370 370 370 370 Pseudo R2 0.102 0.090 0.106 0.094 0.094 0.082 0.098 0.116 0.119
Fact 6 MNCs are wholly dependent on their R&D department Dependent Variable: New Products based on Technologies New to the Firm Probit (Marginal effect) (1) (2) (3) (4) (5) (6) (7) (8) (9) Internal source (0/1) R&D department 0.518* Sales department 0.105 Production department 0.074 Technological agreement 0.099 External source (0/1) Local supplier or customer -0.592* MNCsupplier or customer -0.325 Local business organization -0.366 University or R&D institute -0.020 Variety -0.009 Employee size control Y Y Y Y Y Y Y Y Y Country controls Y Y Y Y Y Y Y Y Y Industry controls Y Y Y Y Y Y Y Y Y Observations 232 232 232 232 232 232 232 232 232 Pseudo R2 0.131 0.112 0.111 0.112 0.134 0.118 0.118 0.111 0.111
Fact 7 MNC customers don t provide knowledge for product innovation in the automotive related sector Probit (Marginal Effects) (1) (2) (3) New product Significant based on the improvement of existing existing products technologies New product based on new technologies Buyer or trading company 0.368*** 0.219*** 0.076 Local customer -0.038 0.039-0.063 Local supplier -0.109-0.212** 0.069 Domestic MNC/JV customer -0.095 0.042 0.004 Domestic MNC/JV supplier 0.080 0.040-0.023 Overseas MNC/JV customer -0.205** -0.183* -0.062 Overseas MNC/JV supplier 0.326*** 0.260** 0.122 Public organization -0.193-0.108-0.087 Local business organization 0.287*** 0.130 0.266* University/ Public R&D -0.092 0.125 0.093 N 277 272 271 R2 0.317 0.136 0.175 Notes: ERIA 2010 Survey. *** p<0.01, ** p<0.05, * p<0.1.
Fact 8 Face-to-face communication among engineers is one of the key channels of South-South knowledge transfer Coefficient (9) (13) (10) (15) MARKET Q_MARKET TECH Q_TECH Exchange of Engineer with Customer in PH -1.700*** -1.714*** -0.408-0.813 Customer in JP 1.143 1.223 1.252** 1.253** Supplier in PH 1.194 1.229* 0.388 0.671 Supplier in JP 0.234-0.213-0.481-0.435 Supplier in China 2.721*** 2.753*** 1.056* 1.283** R&D dummy Y Y Y Y Asset size controls Y Y Y Y Local firm dummy Y Y Y Y Industry controls Y Y Y Y Obs. (Philippines) 140 140 157 157 Pseudo R2 0.358 0.336 0.189 0.201 Notes: *** p<0.01, ** p<0.05, * p<0.1.
Company Case 1 Engineer Mobility for Int. Intra-firm Technology Transfer China plus One Strategy for Product differentiation between China and Vietnam in a Japanese electronic parts manufacturer s network. Satellite Factory Satellite Factory Haiphong, Vietnam (2010) Guangxi, China (2008) Technical assistance from China to Vietnam Hub Factory Guangdong, China
Company Case 2 Engineer Mobility for Int. Intra-firm Technology Transfer Division of labor among Myanmar, Lao PDR, Vietnam and Japan in a Japanese medical equipment manufacturer s network. Myanmar Materials from Japan to Vietnam and semi-finished products from Vietnam to Japan Intermediate goods between Vietnam and Myanmar / Laos Vietnam Japan Laos Technical assistance from Vietnam to Myanmar & Lao PDR
4. Implications
Eight Facts again 1. Local firms adopted ICT develop export markets. 2. MNCs/JVs adopted ICT improve quality and reduce cost. 3. Local firms adopted ICT don t depend on external sources. 4. MNCs/JVs adopted ICT are linked to MNCs/JVs. 5. Local firms may cooperate for product innovation with local partners off-line. 6. MNCs are wholly dependent on their R&D department for product innovations. 7. MNC customers don t provide knowledge for product innovation in the automotive related sector. 8. Face-to-face communication among engineers is one of the key channels of South-South knowledge transfer.
Summary of the Findings Diversified sources of knowledge, variety of or more advanced innovations. ICT help local firms to develop foreign markets, which will create channels for accessing knowledge. Foreign affiliates of MNCs provide knowledge to their partners according to their international divisions of labor. How to choose partners is a strategic matter for firms in Southeast Asia. MNCs are Learning Schools. ICT can probably be used by local firms to make their internal management more efficient. On-line networks for collaborations by local firms are limited. Local firms depend on off-line networks to achieve product innovations. Face-to-face communications are also key channels of international knowledge transfer. South-South knowledge transfer will work in the single East Asian market and production network. Characteristics of knowledge exchanged among countries/firms depend on capabilities and needs of origin and destination. We should consider how to make better use of ICTs in the structural change of knowledge flows.
Knowledge Transfer in the Flock of Flying Geese Advanced Technologies for Product/Process Innovation Japan Improvements in QCD ASEAN NIES China
Knowledge Transfer in Economic Integration Advanced Technologies for Product/Process Innovation Japan Advanced ASEAN NIES China Improvements in QCD CLMV
At the firm level Policy Implications to ICT4U (ICT for Upgrading) Although people in the capital regions have smart phones or lap top, local firms do not make full use of ICTs to re-organize business processes. Internal inter-department managerial practices (cross-functional team) will be crucially important for enhancing absorptive capabilities. How to convert off-line inter-firm networks into online is a real policy issue. The hindering factors should be detected and solved. Introduction of ICT during 2006-08 to reorganize business processes Whole Sample MNCs/JVs Local Firms (Obs.=537) (Obs.=221) (Obs.=316) 35% 46% 28%
Policy Implications to ICT4U (ICT for Upgrading) At the country level F2F communications are still indispensable. Facilitations of not only trades & FDS but also movements of experts encourage innovations. ICT systems should be installed to improve operations of infrastructure (soft infrastructure) such as port, airport, railways/bus networks, immigration control, etc.
Remaining Issues 1. To identify the factors prohibiting firms from moving up technological ladder and global value chains 2. To address the issue of inter-sectoral shift in resources from less productive to productive firms. 3. To provide theoretical foundation of organizing global supply chain and its implications of information spillovers. 4. Who creates jobs and emerging industries? Small vs. Large vs. Young vs. Domestic vs. MNEs 5. Empirical studies on innovations in natural resourcesbased industries and services.
References ERIA Project Reports (http://eria.org/research/index.html) (http://eria.org/research/y2008.html) (http://eria.org/research/y2009.html) (http://eria.org/research/y2010.html) ERIA Discussion Paper (http://eria.org/publications/discussion.html) Asia Pacific Tech Monitor, May-Jun 2011, Asia Pacific Center for Transfer of Technology (APCTT), UN ESCAP (http://www.techmonitor.net) BRC Research Report (http://www.ide.go.jp/english/publish/download/brc/index.html)
Thank you very much yasushi_ueki@ide-jetro.org yasushi_ueki@ide.go.jp