3 - Production Networks and Industrial Policy in Less Developed Southeast Asia

Summary

INTRODUCTION

In view of their geographical proximity, as well as social and cultural affinity, the experiences of industrial development in the neighbouring Southeast Asian economies can provide invaluable lessons to the less developed economies in the region. In the more advanced Southeast Asian economies, a rapid decline in transport and communication costs and diminishing trade and investment barriers have reduced the costs of organizing production networks across borders, so that extensive production networks have been established through the activities of multinational corporations (MNCs). At the same time, local industries have enhanced their capacities by participating in such networks, and the emergence of local suppliers and local workforce with industry-specific skills have become important factors in determining the competitiveness of industries (Kuroiwa and Toh 2008).

Less developed economies in Indochina — Cambodia, Laos, and Vietnam — are northern neighbours of Thailand, Malaysia, and Singapore. At the same time, they are southern neighbours of China and other Northeast Asian economies. Such geographical proximity facilitates the movement of goods, services, natural persons, and investment across borders. Moreover, AFTA and other regional frameworks, as well as infrastructure development such as the East-West, North-South, and Southern Economic Corridors, are leading to the reconfiguration of corporate activities, so that production networks spread into the region.

This chapter focuses on the industrial policy in less developed Southeast Asia with particular reference to Indonesia and the three Indochinese countries of Cambodia, Laos, and Vietnam. In this chapter, industrial policies in Southeast Asia are first reviewed. In Southeast Asia, liberalization in trade and investment was crucial in extending production networks into less developed regions. At the same time, two constraints on industrial policy — shrinking policy space and the constraints on state capability — are examined to consider feasible and appropriate industrial policy in an era of globalization, at a time when participation in the WTO and FTAs are becoming the norm. Industries such as electronics, automotive, and clothing are expected to expand production networks. Production networks in Southeast Asia are examined with the use of input-output analysis and statistical data. Finally, industrial policies in less developed Southeast Asia are revisited with particular reference to policy measures whereby participation in production networks, as well as the formation of competitive industrial clusters, plays a crucial role in industrial development.