The Dynamics of Local Learning in Global Value Chains

The transformation of East Asian economic development by globalization has gathered speed since the 1990s. The expansion of foreign direct investment (FDI), the increase in international trade, and the accelerated flow of financial and human resources across country borders have triggered rapid industrialization and economic integration.

Since the late 1980s, outsourcing and offshoring by large multinational electronics hardware manufacturers have driven the formation of global value chains (GVCs) producing a wide range of products, especially in East Asia. The rise of Taiwanese notebook personal computer (PC) manufacturers is, perhaps, the most striking example. By 2008 Taiwanese contract manufacturers accounted for approximately 92% of worldwide shipments of notebook PCs (Information Industry Yearbook 2009 Compilation Team 2009). In addition to manufacturing, they have increasingly provided product design services in their role as original design manufacturers (ODMs) for brand name PC firms such as Dell, HP (Hewlett Packard), Apple, and Toshiba.

The rise of the East Asian electronics industry has attracted a great deal of research interest (Borrus et al. 2000; Ernst and Guerrieri 1998; Ernst and Kim 2002; Sturgeon 2002; Sturgeon and Lester 2004; Sturgeon and Lee 2005; Yeung et al. 2006; Vind and Fold 2007). These studies have highlighted the key roles that lead firms from developed countries—global buyers and “flagship” transnational corporations (TNCs)—have played in fostering the export-led growth in developing East Asia. In their efforts to reduce costs and tap new markets, lead firms place orders, establish affiliates, and contract portions of production to East Asian manufacturers. In some cases, lead firms have also outsourced the product design tasks to local firms in East Asia. In the process, extensive cross-border production networks, or global value chains (GVCs) have come into being, with local firms in developing countries generally fulfilling limited, specialized, but gradually expanding roles. One of the central concerns of the existing literature is how these local firms can gain more autonomy and become involved in higher value-added activities in GVCs.

The Vietnamese motorcycle industry has experienced remarkable growth since the mid-1990s. Being a latecomer to the motorcycle industry in the Asian region, motorcycle production in Vietnam started in the mid-1990s with a very small market, heavy protection, and a nascent local supply base. The few Japanese firms with local production manufactured high-quality, expensive models that relied on imported components and were beyond the reach of ordinary Vietnamese customers. However, in less than ten years the country emerged as the world’s fourth largest market for and producer of motorcycles after China, India, and Indonesia.1 This remarkable transformation was triggered by the arrival of Chinese models that were assembled by local Vietnamese firms, often with the assistance of Chinese firms. Fierce competition between the Japanese industry leaders and local assemblers of Chinese motorcycles led to lower prices, increased local content, and rapid expansion of the market (The Motorbike Joint Working Group 2007; Fujita 2008).

This volume explores global value chain (GVC) dynamics from the perspective of local firms in developing countries. The focus is on supplier strategies, capability acquisition, and interactions with lead firms from developed countries. This chapter explores these dynamics through the case of the motorcycle industry in Indonesia.

East Asia has emerged as a major global manufacturing hub for a number of industries, not only for labor-intensive products such as consumer goods and apparel, but also for technology-intensive products such as electronics and automobiles. In technology-intensive industries, in particular, affiliates of transnational corporations (TNCs) have played a vital role in boosting the rapid export-oriented industrialization of this region. The contributions of TNCs appear in various forms: the creation of direct and indirect employment, the generation of foreign exchange, and contributions to the development of local industrial clusters and related activities. Moreover, TNCs provide local manufacturers with new opportunities to access global markets and upgrade their technological and managerial capabilities. Governments in developing countries have been motivated to formulate policies to attract TNCs’ affiliates in hope of enjoying these benefits. Such developmental strategies are particularly pertinent to the economies of Southeast Asia, which have arguably been among the most successful in leveraging economic development brought by TNCs, so much so that Hobday (2001) described the pattern of ASEAN’s economic development as “TNC-led industrialization.”

Over the past several decades regional production networks have steadily expanded and deepened in East Asia, growing alongside the trans-continental business networks that have been the focus of much of the global value chain (GVC) literature (e.g., Gereffi 1999; Schmitz 2004). Local firms in East Asia have been drawn into regional production systems in addition to, and in some cases because of, the growth of more extensive GVCs. In this view, regional production systems are nested within, and fully compatible with, the rise of trans-continental GVCs (Sturgeon et al. 2008). Indeed, Petri (2006) clearly shows the interdependence of the region’s economies growing to historic heights. Other studies suggest that East Asia is more deeply integrated through trade and investment networks than other developing areas (Ng and Yeats 1999; Kimura and Ando 2003; Lall et al. 2004).

The research collected in this volume represents years of challenging fieldwork and careful documentation on the part of the authors. Instead of making armchair assumptions about causes and outcomes of development and technological learning based on the thin gruel provided by official statistics, the authors have spent many months in the field, visiting companies, interviewing entrepreneurs, talking to government officials, collecting official and unofficial statistics, administering questionnaires, and learning about the key technologies and firms in specific industries. The richness of this approach is obvious from the preceding chapters. As in prior field-based global value chain (GVC) research, however, the richness and variety of the findings can make it difficult to reach generalizations needed to form the basis of sound strategic or policy advice.

Firm-level research is important because, in any society, firms are critical agents of learning and repositories of knowledge. Of course, actions and knowledge are, with only a few exceptions, the domain of human beings, and we need to be careful not to anthropomorphize firms or any other sort of organization. Nevertheless, corporate routines tend to be remarkably durable, even as individuals come and go. What we can say with confidence is that firm-level outcomes—employment and earning, skill development, organizational learning, innovation, value capture, and investment—drive the process of economic development.