Governing the market in a globalizing era: Developmental states, global production networks and inter-firm dynamics in East Asia

ABSTRACT

This paper focuses on the changing governance of economic development in a globalizing era in relation to the dynamics of global value chains and global production networks. Based on recent development in such East Asian economies as South Korea, Taiwan and Singapore, I examine how, since the 1990s, the embedded relation between one variant of state institutions, known as the developmental state, and national firms, well integrated into global chains and networks spanning different territories and regions, has evolved. Because of the deepening strategic coupling of these national firms with lead firms in global industries, the developmental state's attempt to govern the market and to steer industrial transformation through direct policy interventions has become increasingly difficult and problematic. Through this process of strategic coupling, national firms have been gradually disembedded from state apparatuses and re-embedded in different global production networks that are governed by competitive inter-firm dynamics. While the state in these East Asian economies has actively repositioned its role in this changing governance, it can no longer be conceived as the dominant actor in steering domestic firms and industrial transformation. The developmental trajectory of these national economies becomes equally, if not more, dependent on the successful articulation of their domestic firms in global production networks spearheaded by lead firms. In short, inter-firm dynamics in global production networks tend to trump state-led initiatives as one of the most critical conditions for economic development. This paper theorizes further this significant role of global value chains and global production networks in the changing international political economy of development.

KEYWORDS:

• Global production networks
• economic governance
• national firms
• developmental states
• East Asia
• South Korea
• Taiwan
• Singapore

ACKNOWLEDGEMENTS

This is a substantially revised version of an earlier paper presented at the DIME Workshop on ‘Globalisation and the Changing Geographies of Production and Innovation’ held in Academiegebouw, Utrecht, the Netherlands, 5–7 November 2009, and the Workshop on ‘Value Chains, Production Networks, and the Geographies of Development: Emerging Challenges and Future Agenda’ held at the National University of Singapore, 1–2 December 2011. I would like to thank Ron Boschma from the University of Utrecht for inviting me and funding my visit to the DIME Workshop in November 2009, and Jeff Nielson and Bill Pritchard, both at the University of Sydney, for co-organizing and co-funding the December 2011 workshop. Funding from the NUS Academic Research Grant (R-109-000-116-112) made this joint workshop possible. I am also very grateful to the participants in both workshops and two anonymous referees of RIPE for their constructive comments and suggestions. The generous writing residency at the Rockefeller Foundation's Bellagio Center in Italy between 7 and 29 November 2012 has allowed me to rework and finesse this paper to my satisfaction. I thank my fellow residents for their superb insights during our many meal-time discussions. I take full responsibility for all errors and/or misinterpretations in this paper.

Notes

¹Company-specific data are from the Bloomberg Businessweek online database: <http://investing.businessweek.com> (accessed 7 July 2012).

²Some recent examples are Lim (2010), Thurbon (2012) and Kim (2012) on South Korea, Hu (2012) on Taiwan, and Pereira (2008) on Singapore.

³Some receptions to this statist approach are O’Riain (2004) and Breznitz (2007). But even in these studies, the emergence of national firms in global production networks tends to be explained by the political choice of the developmental network state.

⁴There are two relatively recent and parallel schools in the field of international political economy: the global value-chain approach (Gereffi, 1994, 1999; Schmitz, 2004; Gereffi et al., 2005; Bair, 2009; Pietrobelli and Rabellotti, 2011) and the global production networks perspective (Dicken et al., 2001; Ernst and Kim, 2002; Henderson et al., 2002; Coe et al., 2004, 2008; Hess and Yeung, 2006; Yeung, 2009a, 2013). See Parrilli et al. (2013) for an integration of these two strands of the literature. For some recent empirical studies in the context of East Asian developmental states, see Bowen and Leinbach (2006), Bowen (2007), Yeung (2007, 2010) and the papers in this special issue of RIPE (e.g., Gereffi, 2013).

⁵My argument for inter-firm dynamics in governing the market does not reduce the state's role to a passive actor in the domestic economy or point to the complete dismantling of the developmental state. Instead, it places the state squarely in the evolutionary dynamics of global competition in which the active role of the state becomes less necessary and effective in industries where domestic firms have ‘grown up’ and succeeded in their participation in global production networks. Couched in these terms, the state continues to function actively in certain areas such as promoting new industries (e.g., biomedical and environmental technologies sectors) and steering the restructuring of the domestic economy (e.g., the 2008 global financial crisis). But as Wong (2011) has demonstrated clearly in his comparative study of state-led initiatives in biotechnology in all three East Asian economies, the inherent technological, economic and long-term uncertainty in such new industries as biotechnology has obliterated the viability of the state-led model in an era of science-based industries.

⁶For a critical view of the developmental state in relation to the 2008 global financial crisis and the rise of the state in economic governance, see Block (2008) and Radice (2008). Block (2008) offers an important argument that the developmental state in the US is much hidden behind Congress’ ‘competitiveness policy’ since the 1980s (cf. Krugman, Tyson, Reich). Drawing upon O’Riain (2004), he distinguishes between the ‘developmental network state’, such as the US, and the ‘developmental bureaucratic state’, such as Japan.

⁷This tendency towards presenting national firms as pawns of the developmental state is common in the early literature. See examples of Hyundai Heavy Industries and POSCO in Amsden (1989). Writing in the late 1980s, Woo (1991: 15) reflects that ‘Daewoo did not even appear until the late 1960s. The others [Hyundai and Samsung] did not grow into anything big until the 1970s; thus, the conglomerates are a very recent phenomenon.’

⁸Despite repeated attempts during the entire period of this research, I was unable to secure an interview with Hon Hai, a company well known for its secrecy and avoidance of publicity. The Wall Street Journal carried a report on Hon Hai's founder, Terry Gou, on 11 August 2007, entitled ‘The Forbidden City of Terry Gou’. The reporter, Jason Dean, was the first from Western media to conduct an interview with Gou since 2002 and the interview was granted after more than five years of requests by the WSJ. The spate of worker suicides between 2009 and 2012 has made Hon Hai even more wary of the media and academic researchers. The following case study is thus based on secondary materials (e.g., the WSJ article in 2007), company reports and its corporate websites.

⁹This size difference explains why Hon Hai was not really featured in Amsden and Chu's (2003) study of the industrial upgrading of leading Taiwanese firms.

¹⁰‘Apple Reinvents the Phone with iPhone’, 9 January 2007, Apple's press rel-ease, <http://www.apple.com/pr/library/2007/01/09Apple-Reinvents-the-Phone-with-iPhone.html> (accessed 7 November 2012).

¹¹‘Apple Introduces iPhone 5’, 12 September 2012, Apple's press release, <http://www.apple.com/pr/library/2012/09/12Apple-Introduces-iPhone-5.html> (accessed 13 November 2012).

¹²‘Apple Reports Third Quarter Results’, 24 July 2012, Apple's press release, <http://www.apple.com/pr/library/2012/09/12Apple-Introduces-iPhone-5.html> (accessed 13 November 2012).

¹³For detailed studies of such value-chain distribution of profits, see Dedrick et al. (2010) and OECD (2011). In the case of Hon Hai, while its profit margins decreased sharply from 17 per cent in 1997 to 6 per cent in 2007 and 3 per cent in 2011, the decrease in its return on shareholders’ funds was less drastic, from 35 per cent in 1997 to 29 per cent in 2007 and 17.7 per cent in 2011. In comparison, Apple's profit margins increased dramatically from -15 per cent in 1997 to 20 per cent in 2007 and 32 per cent in 2011, and its return on shareholders’ funds grew from −87 per cent in 1997 to 34 per cent in 2007 and 45 per cent in 2011 (all data from OSIRIS online database, http://www.bvdinfo.com/Products/Company-Information/International/OSIRIS.aspx accessed 12 November 2012).

¹⁴An alternative approach to this critical understanding of strategic coupling is Bair and Werner's (2011: 992) ‘disarticulations perspective’ of global value chains, where they show how disarticulations lend ‘dispossession its concrete geographical and social form, reworking the uneven geographies of capitalism’. See also MacKinnon's (2011) evolutionary analysis of strategic coupling and decoupling processes.

Additional information

Notes on contributors

Henry Wai-chung Yeung

Professor Yeung is Professor of Economic Geography at the National University of Singapore. His research interests cover broadly theories and the geography of transnational corporations, global production networks, East Asian firms, and the political economy of development in the Asia-Pacific region. Professor Yeung has published 3 single-authored monographs, 7 edited books, over 85 journal articles, and 40 book chapters. Some of his key publications include Transnational Corporations and Business Networks (Routledge, 1998), Entrepreneurship and the Internationalisation of Asian Firms (Edward Elgar, 2002), Chinese Capitalism in a Global Era (Routledge, 2004) and as co-author of Economic Geography: A Contemporary Introduction (Wiley Blackwell, 2007/2013). Professor Yeung is Editor of Environment and Planning A, Economic Geography, and Review of International Political Economy, Asia-Pacific Editor of Global Networks, Contributing Editor of International Journal of Urban and Regional Research, and Business Manager of Singapore Journal of Tropical Geography. He sits on the editorial boards of 14 other international journals in the fields of human geography, management, urban studies, area studies, and general social science, such as Asia Pacific Journal of Management, European Urban and Regional Studies, Journal of Economic Geography, Asia Pacific Viewpoint, and Eurasian Geography and Economics.