ECONOMY: New Strategy Needed to Face Chinese Competition
By Tim Shorrock
WASHINGTON, Nov 9 — With China becoming the investment location of choice for multinational firms engaged in offshore manufacturing, the Asian economies that decades ago pioneered and boomed on export-led development must develop new strategies to compete and survive.
These survival strategies include making massive investments in new technology, focusing on the research and development and design phase of manufacturing, nurturing entrepreneurial capitalism and promoting the venture capital and legal infrastructure that helped create Silicon Valley, experts on the region believe.
To sustain high growth and meet the growing competition from China, South Korea, Taiwan, Singapore and Hong Kong "must find value creation in knowledge-based industries," said Poh-Kam Wong, professor of Business at National University of Singapore.
At the same time, the four East Asian newly industrialising economies (NIEs) or economic tigers "have to become more open to inward direct foreign investment to attract advanced knowledge-intensive industries and services", he said. Direct investment trends "will have to accelerate a lot more".
Also important, Wong said at a seminar here sponsored by the Sasakawa Peace Foundation, are changes in the "political environment" that would allow the four Asian NIEs to complete their shift from government-guided development to the hothouse capitalism typified by such American companies as Apple Computers and Cisco Systems.
The U.S. companies that emerged from Silicon Valley and other high-technology centers, he said, benefited from a combination of factors.
They included liberal listing rules for initial public offerings (IPOs) on the stock market, regulations allowing pension fund investment in venture capital, and lenient bankruptcy laws that make it easier for failing companies to start over. In addition, they depended on venture capital, lawyers and recruitment specialists for venture funds, and accountants and investment banks that underwrite IPOs.
"These are service industries that in large part do not exist in East Asia," Wong said.
A key ingredient in U.S. growth, added Scott Shane, a professor of entrepreneurship at the University of Maryland, was the relationship between start-up firms and universities. The link between them was strengthened in the 1980s, when the U.S. Congress passed new laws allowing universities the right to intellectual property they create in laboratories.
"The origin of many companies can be traced to universities," said Shane. For example, Lycos, the popular Internet search engine, was founded by people who created its search software at Carnegie-Mellon University. "What is lacking in the countries of East Asia is a system to create the technology to be spun off and used," he said.
Shane agreed with Wong that venture capital was critical in the development of new, competitive technologies, particularly changes that would allow pension funds to invest in venture companies. "Both ends of the spectrum, including university links and venture capital, are missing in these countries," he said.
The four Asian NIEs experienced rapid growth in manufacturing over the past 30 years, from a level equal to 17.3 percent of the U.S. gross domestic product in 1965 to a level of 77.2 percent in 1999, according to Wong.
Much of this growth was based in the electronics industry, which is responsible for nearly 30 percent of South Korea's manufacturing base and more than 50 percent of Singapore's.
Each of the four followed different models, with the government playing a key role throughout the region.
In South Korea, large conglomerates known as 'chaebol' invested aggressively in technology and marketed electronic products, automobiles and other exports under their own brands.
In Taiwan, small and medium-sized enterprises led the way, with the government promoting research and development and the formation of consortiums. Most products were produced under the brand names of multinationals.
Singapore relied primarily on multinational investments in high technology ventures, such as computer hard drives, and benefited from technology transfers from the foreign corporations to their subsidiaries. Hong Kong's edge came from its access to cheap labour in mainland China.
But in recent years, China, with its low-cost labour and huge internal market, has begun to take away much of the investment that used to go to the four NIEs.
In 2000, almost 80 percent of all foreign direct investment in East Asia went to China, a process that is likely to accelerate as a result of China's recent entry into the World Trade Organisation in the coming days.
The investment drain has been particularly hard on the member countries of the 10-member Association of South-east Asian Nations (ASEAN), which have seen it foreign investment drop from around 33 billion U.S. dollars in 1997 to about 14 billion dollars in 2000.
"China is really cleaning ASEAN's clock," said Ernest Bower, president of the U.S.-ASEAN Business Council, in a recent interview. The council represents the largest U.S. multinationals doing business in South- east Asia.
Indeed, an attempt to cope with China's mammoth economic size and use it as an advantage rather than a threat was behind an initiative pursued at this month's ASEAN summit to forge free-trade ties between China and ASEAN.
But much of the investment in China is coming from Asia itself, particularly Hong Kong, Taiwan and Singapore.
Many companies in Taiwan are shifting their labour-intensive operations to the mainland — a move that was behind a decision by the Taiwanese government to scrap a 50 million dollar ceiling on single-investment projects in China and simplify the review process for Chinese investments below 20 million dollars.
These developments have sparked fears in Taiwan and other NIEs of a "hollowing out" of their manufacturing base. "The big challenge is managing the relationship with mainland China," said Wong.
Shane argued that the shift to high value-added and knowledge-intensive industries will be possible only if the government gets out of the way and allows entrepreneurs to take the risks necessary to create new companies. "Governments are terrible at picking winners," he said.
But Clyde Prestowitz, president of the Washington-based Economic Strategy Institute, disagreed with that assessment. Throughout Asia and in the United States as well, he said, government has played a critical role in new industries.
"It's hard to point to a winning technology that was developed without massive government support," he said. He noted that Taiwan's semiconductor industry received favorable financing from the government, while in the United States early research in semiconductors, aviation and high-definition television came from the Pentagon and other government agencies.
Prestowitz also cautioned that the Chinese are promoting entrepreneurship and high-technology industries as well. (IPS/2001)
