This section starts with a review of the literature on the conceptual underpinnings for the development of international business. Two key theoretical approaches emerge as useful frameworks for analysis: 1) internationalization as aa sequence of events, characteristically started by exporting and culminating in FDI; and 2) the importance of relationships in international business (networks). These two ideas have strong explanatory power in the case of Asian international business. International business as a sequence of logical steps is especially manifested in the “flying geese” pattern in Asia. Networks are also an Asian strength, notably for state-owned enterprises in Singapore.

Expansion of a firm overseas is more significant than growth within the domestic setting only, involving more complications in management, organization and control than just the dynamics of growth. Mere sales become exports; investment becomes 'foreign direct investment' (FDI); contractual arrangements among enterprises become international joint ventures, licensing or other sophisticated foreign market entry strategies. The international dimension adds a considerably cosmopolitan aspect to any business endeavor.

Internationalization includes the following general modes of market entry: exports, turnkey projects, licensing, franchising, joint ventures and wholly-owned subsidiaries. (Strategic alliances are cooperative agreements --typically licensing and joint ventures-- between potential or actual competitors.)

Internationalization patterns

There is a large and distinguished body of literature that explains the process of internationalization in terms of some logical sequence of these activities, often starting with simple exports and gradually progressing with increasing experience and commitment to FDI and/or strategic alliances. This orderly approach to explaining international business has been controversial because of its programmatic nature, restricting the theory of internationalization to a unilinear concept. There are too many exceptions to such a simple strategy. Nevertheless, proponents argue that much international business, especially in new multinationals, typically follows a progressive sequence, and it behooves theorists to understand the logic of the sequential development of internationalization.

Perhaps the most famous of these programmatic models was Raymond Vernon's International Product Life Cycle. This theory predicted that internationalization would occur as a transfer of technology across borders at appropriate stages of maturity of the product, i.e., a step-bby-step evolution of new market demand and suitable production sites overseas. In this theory, internationalization folllows a systematic, predictable sequence, starting with exports by the innovator of a new product, then following these exports by overseas production in the new markets --in first advanced and later developing countries, ending with exports from least-cost production sites back to the original innovating country. The Product Life Cycle idea of internationalization is appealing in its logic but becomes too inflexible to accommodate the complexity of modern international business. First time investors may be more incremental in their approach; but larger, more diversified multinationals use a global strategy. For example, experienced multinationals jump stages, perhaps investing immediately in least-cost countries to produce a new product innovation and export back to the home country and worldwide, while slower competitors are still in the early stages of the indicated product life cycle strategy.

Much research has in fact uncovered regularized steps iin internationalization, forr example, an early study (Johanson and Wiedersheim-Paul 1975) found that firms typically progress from no exports, to exports through independent agents, to a sales subsidiary, to a production subsidiary (FDI).

Another incremental concept of internationalization is tthat increasing knowledge and commitment over time implies that the process is cumulative and each new venture depends on the previous experience.

The fundamental concept of internationalization is contained in the eclectic theory of foreign direct investment as propounded by John Dunning, for example. “Internalization” impplies a need for ownership for purposes of control of the international operation; locational advantages determine where operations are conducted; and consideration of the firm itself recognises differences in competitive capabilities. Internationalization is tthus explained in terms of these three considerations. Internalization explains the need for FDI; location advantage is simply “comparative advantage” which is the fundamental basis for exports; and the third consideration stresses “core competence” of the international firm. One key competency of Asian firms might be their “networks”.

International networks

We now explore how internationalization can be explained in terms of relationships and interdependencies, i.e., networkss. Firms may go international to follow other firms in their national network. The degree of internationalization is a function of the firm's position in other national networks and the relative importance of these foreign networks to the firm. By this line of reasoning, the underlying motive for internationalization is tto achieve international integration.

Thus, to a greater or lesser extent, networks can take on outside, or international, constituents. If firms go international leaving important members of their network behind, there must be either a capability of building new networks or some degree of self-sufficiency. Any of these solutions imply special international competence.

The network is an industrial system comprising a value chain composed of firms producing, distributing, and using the goods and services. Networks may also include local authorities, competitors, bankers, or any other party that can enable a firm to obtain its supplies, funding, technology, or other useful commodity to do business effectively. The composition of networks can change due to the independent activities of members who may leave the network or be displaced, or gain or lose relative influence within the system, as all firms pursue their own competitive priorities. Relationships are continually set up, maintained, and broken as members looking to their own profit, market position, and long-term survival introduce new considerations.

There is division of work within the network, and these activities need to be coordinated. Coordination is achieved through joint planning and decision making (incorporating the relative influence of members) rather than through one central plan or organizational hierarchy. In the process, bonds are developed; these may be technical, planning, knowledge, social, economic, and legal. These bonds can be exemplified by, respectively, product and process adjustments, logistical co-ordination, knowledge about the counterpart, personal confidence and liking, special credit agreements, and long-term contracts (Johanson and Mattsson 1988).

Multinational networks may also be present within a firm, ie, head office control and coordination of its affiliates around the world. In fact the HQ-subsidiary relationship is the key network for most American firms, whereas Japanese keiretsu traditionally have less formal links among members. Typically in the literature, MNEs are portrayed with a headquarters that formulates overall strategy and control for the network, characterised with a head office at the 'centre' and a number of subsidiaries on the 'periphery', like a hub and spokes. Aggarwal and Ghauri (Aggarwal & Guari 1989) identify a changing relationship emerging with some of the subsidiaries functioning as centres, by virtue of having their own network of entities that operates quite outside the control of the original headquarters. This is different from the concept of regional headquarters designated by the centre because it is more independent from policies of the centre. It becomes more like a centre-centre network rather than a centre-periphery. Subsidiaries of subsidiaries may have need for close contact with the original HQ but often do not. Relationships definitely become more complex, and demands from the new subsidiaries are not always in line with policies of the HQ.

Competitive advantage of Asian business networks

A central normative assumption of Hamilton (1991) and other writers is that business networks provide Asian firms with a wide range of competitive advantages in form of social (relationship) capital based on interlocking connections (guanxi, in the Chinese context) to local or regional business partners, more or less prominent tycoons, high ranking officials and other members of local power elites, government bodies and so forth to ‘get things done’ (see Table 1).

Table 1: Competitive Advantages of Asian Business Networks

Advantages

Social capital in form of politico-economic relationships (guanxi)

Connections to business and power elites, high ranking officials etc.

Licenses, monopolies, rents

Mobilization of resources such as information

Business expansion through the exploitation of regional opportunities and connections

Access to political resources such as better intelligence about market opportunities, access to

political opinion and decision makers etc.

Reduced transaction costs, search costs for buyers etc.

Protection

(Source: The Economist 1997; Zutshi and Gibbons 1998:234; Menkhoff 1993)

Pierre Bourdieu’s (1986) “social capital” approach provides a useful theoretical basis which allows us to incorporate agency into the analysis and study of networking and entrepreneurial strategies at the micro-level. He distinguishes between social, cultural and economic capital and argues that, in pursuing individual goals, people do employ strategies based on the conversion of one kind of capital to another. Entrepreneurs try to build up and invest ‘social network capital’, ‘symbolic capital’ (based on reputation and social status) or ‘political influence’ aimed at generating economic capital. These social, symbolic and political resources can then be transformed into firm level resources in form of access to political opinion and decision makers (and their professional networks), (better) intelligence about market opportunities, licenses, monopolies, rents etc. Information asymmetries between local and foreign businessmen and the anticipated high or low transaction costs create incentives to form partnerships, which might turn into trusted networks, resulting in intensified exchanges. The proposition that those who command these resources and “assets” (Zutshi and Gibbons 1998:234) do enjoy a competitive advantage is highly plausible. However, empirical research on this hypothesis is still in its infancy.

INTRA-ASIAN INTERNATIONALIZATION

The internationalization of Asian firms had its heyday from the late 1980s; the process stalled at the onset of the Asian Financial Crisis in 1997, but the patterns soon resumed and today Asian firms are major competitors, especially within their own region. Before the 1980s, Asian firms (other than Japanese) were insignificant players in international business. A key outcome of overseas direct investment during the great era of rapid growth in Asia (approximately 1987-96) was economic development within the region itself. A study of the patterns in the regionalization phenomenon in Asia can provide insight for the prevailing circumstances and rationale.

The flying geese pattern

The "flying-geese model"³ has been used to describe the pattern of dynamic expansion of trade and FDI in the Asian region, especially during the rapid-growth years of East Asia prior to the economic crisis of 1997-8. Japan is typically pictured as leading the flight pattern, with traders and investors of the Asia-Pacific flying together in an inverted “V” towards economic development. Initial exports of new products by Japan (or other advanced countries) would be stalled by higher costs, but emerging low-cost competitors could provide new export-platforms. In this way, progress in the most advanced world economies was repeated with time lags in other Asian economies, usually spurred by FDI. FDI came to developing Asian countries largely for purposes of “outsourcing”, or offshore production for export to world markets.

The flying-geese model can characterise changing industry structure within a given country, or the international shift of a given industry from advanced to less-advanced countries. An example of the former might be the changing competitiveness in a country over time from a labor-intensive industry such as textiles to a capital-intensive industry such as chemicals. An example of the latter international sequence is the shifting of the textile industry from Japan to the Asian newly industrializing countrries (ANICs) of Hong Kong, Singapore, South Korea, and Taiwan. The “flying geese” then move on to help develop the textile industry in ASEAN countries such as Indonesia, Malaysia, and Thailand; then on to China, and finally to India, Vietnam or other emerging lower-cost competitors.

The flying-geese model of shifting comparative advantage reflects how factor endowments such as labor and capital change with economic development. FDI transfers factor endowments to host countries and necessitates industrial restructuring in the source countries, thus improving both the source’s and the host’s positions in the international division of labor.

Japan sets the pace

As early as the 1960s, Japanese FDI transferred old industries in textile production and others from Japan to factories in the Asian NICs. This in turn released resources in Japan for new industries like automotive and electronics. By the 1980s, the ANICs were relocating their textile factories to ASEAN; by the 1990s investors were flocking to China, led by overseas Chinese; and in the new millennium India and Vietnam (and still China) were among the favorite regional destinations. Thhis pattern characterised the great surge of FDI between Asian countries since the late 1980s.

By the late 1980s, Japan was investing more abroad than any other country in the world, with its FDI peaking in 1989 at $67.5 billion⁴ -- a level never attained again from 1990-2002 after the asset-price bubble burst. Japanese investors, especially from 1985 until 1995, had the advantage of the appreciating value of the Yen. The Nomura Research Institute demonstrated a strong relationship during the period 1982-93 between the Yen/US$ exchange rate, FDI from Japan to Asia, and Asian economic growth. The cause is obvious: a strong yen facilitated more FDI from Japan, which in turn boosted Asian economies. The rapid appreciation of the Yen from 1993 to 1995 further promoted this process. In 1994, Japanese investment in Asia increased by 47% from the previous year and in China reached its peak for the decade of the 1990s. That momentum carried forward to 1995 as Japanese industrialists continued to move offshore to offset the impact of a sharply rising Yen that dipped below 80 Yen/$.

Although 40% of total cumulative Japanese foreign investment between 1951 and 1993 was to the United States, Asia's share of manufacturing investment alone soared from 17% in 1988 to 33% in 1993. Because of rising wages and currency appreciation in the ANICs from the late 1980s, Japanese investment shifted towards the so-called ASEAN-4 (Malaysia, Thailand, Indonesia, Philippines); by the 1990s the shift was to China and Vietnam. The most significant acceleration was the level of investment in China, increasing from 0.6% of total Japanese FDI in 1990 to 4.7% in 1993. China was the largest single recipient in 1993 and 1994.

By the 1980s, Japanese firms were well established in ASEAN. By then, a ready base of suppliers, technological competence, and a rapidly growing consumer market enhanced the attractiveness of these markets. The ASEAN governments also began promoting industrial restructuring to more high-technology based industries. Japanese firms responded to the new capacities of their hosts by changing the strategy of FDI from simply utilizing cheap labor. Now Japanese overseas operations produced high value-added goods, not only for export to the US and Europe but also to meet the rapidly growing demand in host countries and the Asian region. The response of the firms from the ANICs was to strive to catch up with Japan to compete in the Asian marketplace.

Japanese networks

Japanese production networks may be less international, in the sense that overseas production accounted for only 7% of total Japanese output --far less than the USA’s 26% and Germany's 15%. These networks may be disadvantageous to Japanese firms in international business, to the extent that Japanese business may be less interconnected with global technological, managerial, or other developments and thus are left out of global production networks except their own. Regardless, the strength of Japanese networks may in itself be part of what is reputedly a Japanese competitive advantage in international competition. There is a perceived wisdom that the particular assets of Japanese firms in terms of managerial or technological superiority may be better retained within Japanese networks to allow Japanese operations to compete on a national basis with other national networks.

The classic instance of competitive advantage through relationships is the case of small and medium-sized supporting enterprises within a keiretsu network. Advantages were evident in long-term supplier relationships, where Japanese suppliers add value by their loyal service. However, smaall parts-makers faced extinction by remaining in Japan as their biggest customers moved offshore. They face a stark choice: remain in Japan and fight for business in a world where once-cosy relationships are fast unravelling; or follow their keiretsu leaders overseas.

Small contractors are seldom sophisticated enough to become successful global competitors. Many are family-controlled, poorly capitalized, and deependent on their own keiretsu network for customers. However, when the Yen surged from the late 1980s and big customers relocated offshore, many subcontractors had little choice but to follow. Exporting their supplies from Japan was increasingly unsatisfactory as domestic costs escalated, and big companies were being forced to drop traditional ties with small, high-cost affiliates and to buy from more competitive suppliers abroad. Parent companies all wanted cost reduction, and also diplomatic pressures had been building up since the 1970s for Japanese firms to liberalize their intercompany (keiretsu) markets. Those subcontractors who had stayed put in Japan then could hardly refuse to move out as the Yen went up even more sharply until 1995, and the deepening recession dried up opportunities within Japan. This era is sometimes referred to as the "de-industrialization", or "hollowing out" of Japan.

Hollowing out refers to the relocation of industry from the homeland to overseas bases. This has long been a concern of American labor unions (though the reality has always been debatable) who watched their domestic enterprises abandon plants in the USA in favor of overseas locales that offered cheaper wage rates. It was a concern of Japan as the strong yen and depreessed local market resulted in a major migration of Japanese industry offshore. Consequently, this undermined the viability of the lifetime employment system and in fact the entire labor relations consensus that had been in place in Japan since the 1960s.

The dislocations Japan experienced have been severe, even before the Asian Financial Crisis of 1997-8. Bankruptcies of small and medium-sized firms exceeded 1000 every month during 1993 (except January). Yet, many small suppliers stayed in Japan and survived; these were capable of upgrading their technology to higher-valued products that enabled them to continue demanding high prices. Labor-intensive or standardized productts were either dropped or moved offshore, but developing a premium niche at home was an alternative strategy. The government (MITI) approved both strategies, actively attempting to facilitate both internationalization of smaller firms as well as technological upgrading and investment in Japan.

Trading companies (sogo shosha) also contributed to structural adjustment and internationalization in Japan. They relied on the same formula that established Japan as a major international player in the post-war era, providing global marketing for joint ventures with Japanese producers. This facilitated investment in Japan and structural adjustment, as well as linkages with global markets. For example, Itochu Corp (until 1992 C Itoh & Co) increased its ventures in China tenfold from 1990-1995. "They know nothing about the Chinese situation, so we make the investment together, and whatever they manufacture, we are responsible for marketing," observed Itochu's president. A second thrust involved investment in Japan in industries for which Itochu could provide markets overseas. Not tied to any particular product, the sogo shosha is free to invest in new projects. Itochu actively invested in 'multimedia' businesses in Japan.

Next, a brief discussion of the internationalization of TTaiwanese and Southeast Asian firms will show that Japanese firms were not the only geese in flight. Also, Taiwanese and Southeast Asian firms relied extensively on networking.

Taiwan's firms abroad

Taiwanese industry began to rush overseas (the geese began to fly) in the late 1980s. At peak levels in the 1990s, Taiwan ranked among the top foreign investors in many Asian countries. This unprecedented outflow of capital helped to create an integrated regional economy and to turn Southeast Asian countries into economic powerhouses.

In Vietnam, Taiwanese firms were welcome since the big investors of Japan, Europe and the USA were reluctant to move into any country facing political differences with the West (until normalization of relations with the USA in 1995). Taiwanese firms are attracted to Vietnam by its cheap, hard-working labor force, large ethnic Chinese community, proximity to Taiwan and support from the Taiwan government.

Taiwanese investment is often undertaken by small or medium-sized firms, which can be quicker off the mark than larger competitors. Many Taiwanese firms were originally founded by entrepreneurs who depended upon labor-intensive, low technology operations, and such firms (usually small or medium-sized) thrive on cheap labor. As access to China improves, the number of these firms rose dramatically.

Prior to the open-door policy for foreign investment in China, Southeast Asian countries were the major FDI recipients, with their extremely attractive business environments -- pro-business governments that were very stable, low cost natural resources, relatively low wages, and increasingly affluent consumers. Another attraction in Southeast Asia was the opportunity to exploit networks among some 20 million overseas Chinese living there; many of whom had been ttrained in Taiwan.

From negligible levels of Taiwanese FDI in 1986, nearly half the total US$25 billion outflow from Taiwan during 1987-92 went to Southeast Asia, as more than 4000 companies set up operations. In Malaysia, for example, of the 400 Taiwan-originated manufacturers, 110 were in electronics, with the rest mostly involved in steel, textiles, and paper-based products. Most companies clustered in industrial parks in the northern state of Penang. With the more labor-intensive operations transferred overseas, factories back in Taiwan were meanwhile moving on to higher value-added products. These investments, however, pale in comparison with Taiwan's investment in China: at the end of 1992 a staggering 7000 companies had set up on the mainland, with total capitalization of at least US$6 billion. Taiwan continues to be one of the major investors in China (along with Hong Kong, Japan, and USA), with the largest part of its $60 billion FDI stock by 2002 being in China.

Despite the welcome China accords overseas Chinese investors "returning home", the Taiwan government in fact promotes investment almost anywhere else than China, worried that Taiwan's economic interests in China could be held hostage for purposes of political leverage. The Taiwan government still bans direct links with the mainland.

There were considerable uncertainties in US trade policy, especially prior to China's entry into the World Trade Organization (WTO). The USA is often the biggest market for Taiwan's producers of textiles for example, and in September 1996 the US slapped trade sanctions on Chinese textile exports. When Washington gets tough with Beijing, foreign investors in China often bear the brunt of the penalties.

The Taiwan government tends to promote investments (to countries other than China) with, for example, credit arrangements through the government's International Economic Cooperation Development Fund; by organizing investment seminars and business tours to the region; lobbying with foreign governments for investment guarantees, and the like. So much has been accomplished without having diplomatic relations with a single Asian nation.

Many Taiwanese investors have interests in Fujian province in China due to kinship, friendship and other ties as well as linguistic affinities (Hokkien). The extensive cross-border ties between China and Taiwan in the context of ‘Greater China’ suggest ‘good mutual guanxi’ (Herrmann-Pillath 1994; Pleister 1996; Menkhoff & Labig 1996; Tracy & Lever-Tracy 1997). Guanxi literally are social rellationships or particularistic ties. It’s existence is a central concept for understanding Chinese networking strategies in economy and society (Jacobs 1979). The development and cultivation of networks of useful personal relationships in form of connections to local or foreign businessmen, politicians or friends (who might provide support, protection or access to favors, credit or information) provide businessmen with commercial advantages over competitors, not only in unstable and potentially hostile economies but also in highly competitive and stable ones like Taiwan or Singapore. To have connections with persons who can be trusted and by whom one will be trusted is thought to be an essential precondition for business survival. According to Jacobs (1979:242), in Chinese culture a basis for a guanxi depends upon two or more persons having a commonality of shared identification. Such an identification may be ascriptive (native place or lineage) or it may rest upon shared experience:

"A person seeking allies will first turn to persons with whom he knows he has a kuan‑hsi base... The existence or non‑existence of a kuan‑hsi base, therefore, determines the existence or non‑existence of a kuan‑hsi. However, a kuan‑hsi may vary according to "closeness" or "distance" and this variation depends in turn upon a third variable, affect or kan‑ch'ing".

Ganqing or kan‑ch'ing refers to the affective or emotional component of a relationship. It can occur following social interaction or when people work together and cooperate. It is often assumed that Chinese family and kin relationships are the most common guanxi relationships because of the moral imperative that relatives should help and trust each other. The hidden costs of kinship solidarity in business such as the loss of autonomy, delayed payments and so forth and the significance of business ties to foreigners are often overlooked.

Southeast Asian multinationals

Thailand, Singapore, and other more advanced Southeast Asian countries were generally thought of as being among the most popular host countries for Taiwanese, Japanese, and other foreign multinationals, but in the 1990s these countries became increasingly important bases for their own home-grown multinationals. Because domestic wages and other costs were still competitive, many Southeast Asian countries enjoyed the best of both worlds --as host for some of the most famous globbal corporations and simultaneously home of origin for emerging Asian multinational enterprises.

Southeast Asian multinationals often originated as subsidiaries of corporations based elsewhere. For example, in 1992 the Thai subsidiary of Danish civil engineering giant Christiani & Nielsen acquired its own parent. Others are home-grown. Thailand's Shinawatra Computer & Communications was created by an entrepreneur who was fortunate enough to have an uncle as deputy minister of communications --he was awarded paging and cellular licenses which he exploited to build a major telecommunications and broadcasting giant.(He also was destined to become the country’s Prime Minister.)

Although Thai firms played a major role in the economies of their immediate neighbors, such as Burma, Cambodia, Laos, Philippines, and Vietnam, the favorite overseas destination for Thai capital exports was China. Thais of Chinese descent have been at the forefront of overseas ventures to China and elsewhere, relying famously on the guanxi form of networking. The agri-business giant Charoen Pokphand (CP Group), headed by an overseas Chinese, claimed in 1999 to be the largest single foreign investor in China.

Keppel Corporation seems to exemplify the Singapore multinational. Keppel was originally a wholly government-owned shipyard, and the government still retains a 33% stake. It has diversified aggressively since the 1970s. Like most Southeast Asian multinationals, Keppel's business is primarily regional.

Keppel and CP exemplify the networking aspect of business expansion in Southeast Asia: i.e., through connections, or guanxi among the Chinese. CP's chairman was close to the leadership in China, and it was rumored the Bangkok telephone contract resulted from inside dealing and even bribery. Keppel's connections are intra-governmental, as discussed below.

Singapore's state enterprise networks

No backwater shipyard, Keppel Corporation had an exemplary record of achievement in technology, finance, and manpower development. The leaders of Keppel are key members of the national leadership team. A characteristic of the leadership is strong evidence of a network of mutually supportive relationships, including cross-directorships. Their collusive capacity impinges on national decision-making, not just cooperation in business opportunities.

The original capitalization of Keppel is evidence of a cooperative arrangement among parties with a mutual interest in the overall national result. The Port of Singapore Authority transferred dockyard plant, machinery and equipment to Keppel on 1 September 1968. Keppel's liability was established in a "vendor's account" payable to the Ministry of Finance, for which a S$40 million 7% debenture was planned. The instrument was not issued by Keppel until 1978. Thus, Keppel's original plant was bestowed by the government in exchange for an open-dated promissory note. It is reasonable to suppose that private parties would have more difficulty in agreeing to deferred payment for a future amount at a future interest rate --especially when the future date was left open.

Keppel's first chairman from 1968‑70 was Hon Sui Sen, who was also Singapore's first Minister of Finance as well as the first chairman of the Development Bank of Singapore (DBS). All of these responsibilities meshed very effectively to the benefit of Keppel --Keppel often turned to DBS for investment banking services. (DBS was established by the government and was 49% state-owned.) DBS was lead underwriter for Keppel's original public flotation of shares in 1980 that reduced the government's ownership to 75%. DBS performed the same service for a rights issue in 1984, bonds with warrants in 1986, a revolving underwriting facility, and was Keppel's adviser on a major takeover.

Keppel's next two chairmen, George Bogaars and Sim Kee Boon, both moved to Keppel from their post as Head of the Civil Service, which suggests an intimate prior knowledge of important people and positions in Singapore. Many instances of opportunities for collaboration were possible, all of which demonstrate a cooperative network in the best interests of 'Singapore Inc'. For example, Bogaars was also on the board of Sembawang Shipyard, an arrangement generally seen as an illegal conflict of interest according to American standards of business practice. In Singapore, interlocking directorates among competing shipyards manifests a national system of cooperative competition.

Other Keppel board members had intra-government connections which were obviously useful. One was a director of the Port of Singapore Authority (PSA), which institution worked closely with Keppel. Another was a Post Office Savings Bank (POSB) director, whose expertise would be helpful for a joint POSB-Keppel foray into the insurance business (with the acquisition of Malayan Motor and General Underwriters in 1984).

Keppel had a close working relationship with other government enterprises, particularly PSA and Sembawang Shipyard (a major national shiprepair firm --then 74% government-owned). With PSA, Keppel had coordinated many important decisions since its initial startup agreement, including a rationalization exerrcise in the mid-1980s and a move to a new location. There were many more indications of a cooperative network in Singapore's public enterprise leadership team, apart from the obvious fact that they were colleagues in a small Civil Service Corps. Intricate networking was evident in the Keppel Group's business in China. Keppel and its subsidiary Far East Levingston (FELS) joined in a nine-member consortium of Singapore companies to operate an offshore supply base in China. The consortium was led by Intraco, the partially government-owned trading company.

Keppel, the Trade Development Board and Intraco were an effective team of enterprises whose leaders were evidently very close. Sim Kee Boon had once been Intraco's chairman. Partly through Sim's chairmanship of the Civil Aviation Authority of Singapore, the 'China connection' also overlapped with other key Singapore government interests in its airline and airport.

Concerning any advantage of state-owned enterprises in working with socialist countries such as China, a Keppel executive said that the Trade Development Board office in Beijing had a good relationship with government companies, and helped in "arranging meetings and bringing to our attention Chinese opportunities." The Chairman of the TDB was also Chairman of Intraco. That Chairman and Sim Kee Boon, who was Chairman of FELS and Keppel since 1984 (and the first Chairman of Intraco), were among the entourage accompanying Singapore's Second Deputy Prime Minister on a trip to China in May 1986.

"You have to get right to the top for things to happen", Sim observed after a business meeting in 1994 with the President of Vietnam. When the US Navy pulled out of Subic Bay in the Philippines in 1992, Sim had liaised with President Fidel Ramos about the business opportunity. In August 1992 Keppel held talks with the mayor of Subic Bay who accompanied the Philippines Foreign Minister on a trip to Singapore. The Minister described himself as his country's 'chief salesman'. Keppel acquired a stake in the project to reactivate and operate the former naval base as a shipyard. At the official inauguration in January 1995, a Singapore minister spoke of complementary linkages between the two countries.

In selecting new investment priorities, the 'insider' position of public enterprises in the Singapore system may give them a superior planning capacity. They can plan in accordance with national strategy, to which strategy the enterprises' leaders themselves may have played some contributing role. The then Prime Minister Lee Kuan Yew observed, "the general managers of these government-owned companies at present are from a tight circle of administrators who share the thinking of the policy-makers. They share the economic philosophy of the government and have a firm grasp of the rationale for various policies since they are privy to background problems so that they can interpret signals accurately, and react swiftly and flexibly."

There is ample evidence to demonstrate the existence of a network of cooperative relationships and institutions in the Singapore public enterprise system, as illustrated in the case of Keppel Corporation. A major rationalization of shipyards, opportunities in China, acquisitions of facilities, and other internal dealings within the system manifested a nation-wide team effort.

Many other instances of collaboration within the state enterprise system could be mentioned. The November 2000 merger of two major state-owned (partially) property developers DBS Land and Pidemco Land created a global player, CapitaLand, whose further partnerships (both public and private) and forays into foreign projects enhanced the competitive position of Singapore firms internationally.

CONCLUSIONNS

The dynamic economies of Asia, especially Japan and the four Asian newly industrializing countries (ANICs) are coming to grips with their status as leading economies and sources of capital and expertise. As originators of foreign direct investment (FDI) rather than simply as recipient countries, they are searching for appropriate strategies and 'core competence' to join the ranks of successful global players.

The "flying geese pattern", a popular characterization of tthe pattern of intra-Asian FDI, was quite an apt picture of how each country moved on to higher technological levels based on progress from a given stage of industrialization.&nbssp; The geese kept flying and countries kept progressing as investing countries relocated sunset industries overseas and redirected their own labor to sunrise industries. With Japan at the top level, followed by the Asian NICs, ASEAN, China and other emerging economies, FDI flowed to the location of comparative advantage. The great wave of intra-regional trade and investment of the decade 1987-96 provides the basic framework for competition up to the regional economic crisis of 1997-8 --the locational sequence, networks, and hence the key motivations and strategies that formed the basis for prevailing intra-regional business. But how do the new economic realities, and the end of the strong-yen and weak-dollar era, alter the rationale for the internationalization of Asian firms? A revamp of the flying geese model to accommodate the new Asian context is beyond the scope of this article, but obviously the main driving forces for intra-Asian business are severely shutdown.

At the end of 1998, Keppel, facing its first loss since 1985, announced radical steps to reform its operations. Measures included mergers, divestments, and unwinding cross-shareholdings that during recession had pulled down all members of the group together. Group synergy in regional operations seemed doubtful because the various units had pursued separate strategies as they spread all over Asia and the world. Some overseas operations were divested such as regional liner shipping, leisure and aviation businesses in the US, and nonperforming overseas shipyards. The downside of regional investment was clear: Sim Kee Boon noted in November 1998, “in the heady days of expansion, we were not as stringent as we should have been in our investment appraisals.”

Cross-shareholding was the basis for the once highly successful ‘convoy system’ in Japanese keiretsus, but with the decline of the Japanese economy such practices now seem discredited. In the light of Keppel’s experience, this particular practice might be considered an element of ‘Asian capitalism’ that perhaps should be abandoned. However, the broader model of ‘alliance capitalism’, which is now maligned as ‘crony capitalism’, is considered by some to be a distinctive strength of Asian business and financial systems that must be re-evaluated more positively: “There is a growing insistence in the region that Asian arrangements have strengths which have been denied in the West –and which need to be built upon to speed recovery.”

Conceptual explanations for present and future international business by Asian firms and within Asia might best be viewed as revolving around one particular notion of alliance capitalism: networking. Chinese family business, and Japanese keiretsu and sogo shosha, famously rely on networking. Some of these Asian forms of business have undergone change in their mode of operation due to restructuring. Reform is especially necessary for the keiretsu, and perhaps also for those Asian institutions that seem to have found their initial success in the very relationships that are now so denigrated as dependent on special favors, internal dealings lacking transparency to investors and creditors, and the like. Singapore business, at least, has been spared from the harsh criticism directed at much of the rest of Asia, despite the fact that Singapore overseas ventures have often been spearheaded by initiatives of political leaders and state-owned enterprise managers. Singapore state-owned firms going regional have tended to follow other firms in their national network; they have shown a capability to build new networks among other Asian politicians and enterprises (notably in China). Exceptional coordination has been achieved through systemic planning and decision making rather than a centralized plan.&nnbsp; These are all instances of achieving competitive advantage through relationships.

The existence of effective relationships does support the notion that government-linked companies in Singapore have an advantage in obtaining business overseas, particularly with other government-linked enterprises. International business was often promoted and coordinated at top governmental levels. The downside is that when operating outside of Singapore, government support may be less helpful and may even create a dependency which ill-prepares Singapore firms to compete on their own overseas.

The Keppel case study revealed many indications of a cooperative network in Singapore amongst top managers of public enterprises and political leaders. Partly due to the obvious fact that key leaders were colleagues in a small Civil Service Corps, Singapore's government-business networks were very effective, in contrast to other countries where they may be counterproductive. Without a doubt, the country and the public-enterprise system as a whole benefited.

APPENDIX A: REGIONALIZATION¹⁵

Few multinational firms are really very global in terms of their sales and investment, nor in their ownership, management, or outlook. Rather, firms even in today's interconnected world remain most strongly influenced by their own neighborhoods. That is, multinational firms tend to be regional or only domestic in the main focus of their business strategy and management. To plan and organize a business on a global scale requires more sophistication than even the largest, most experienced multinationals from such countries as the United States have. Nor do most firms even aspire to a global scope in terms of their product attributes, advertising appeal, manpower inventory, etc. Most firms simply want to profit by exploiting markets near at hand, hiring staff from their common culture, and otherwise dealing where they have a 'core competence' associated with familiarity and proximity.

To illustrate this, take the Fortune 500 list of top multinationals in 1990. The average proportion of foreign to domestic sales is an impressive 54%. However, for that figure to be really significant it would be necessary for the domestic economy of the average firm to be well over 46% of the global economy, far too high for even the United States. In other words, even the most global firm still has a bias in favor of sales to its own home market. Similarly, assets of the Fortune 500 are even more home-market based, indicating that multinationals tend first to be exporters, and only secondarily investors overseas. Furthermore, ownership and top management tends to be dominated by home-country nationals in most multinational firms.

Of course, most students will recognize the argument above to be perverse to some extent. We generally characterize multinationals as firms which are increasing their foreign sales and investment relative to domestic, not that we necessarily expect them to disregard their own home market. Also, there are many exceptions to the above argument, notably firms like Asea Brown Boveri (ABB) which is headquartered in two countries (Sweden and Switzerland) and has 85% of its sales outside of these two countries, a firm which represents a model multinational in terms of its global strategy and global operations. Furthermore, some types of firms must be more global than others, for example resource-seeking firms such as the great oil companies of America and Europe must develop oil reserves on a worldwide basis. Finally, some management functions are more global than others; for example, finance allows global pooling of funds, netting of foreign exchange risk by balancing assets and liabilities by currency, and large firms now raise money wherever it is cheapest to do so. Management theorists have devoted volumes to describing global management functions in finance, marketing, and human resource management, especially where some consumer brands have global recognition (e.g., Coke) and utilize a single marketing campaign to save costs and exploit good ideas on a global basis.

But for the general case of the firm seeking new markets and operational cost efficiencies, there is arguably a domestic bias. Once a firm begins to expand beyond its borders, the most likely direction is to neighboring areas. Foreign direct investment tends to be regional rather than global, obviously so in Europe, but this tendency to stay close to home is even true for American and Japanese investment. Consider the world as a place without border barriers (which is becoming an increasingly realistic view of the world), and imagine where a firm located in, say, New York would do its business. The USA is a vast continental market, the biggest in the world, so out-of-state business would be the same as business in Canada in such a borderless world. Thus, trade between New York and California would be no easier than trade between New York and Canada, probably more difficult in terms of time and distance to overcome. Yet the trade with Canada is classified as international and trade with California as domestic. If we lumped domestic with regional, surely regional business becomes much more significant than global.

This is illustrated by Japan's regional economy. Japan sells and invests primarily within Japan itself, South Korea, China, and other Asian and Pacific areas (including, of course, the United States). The fact that the USA is such an important part of Japan's regional economy is not due so much to regional factors as to the fact that the US is the favorite market for many countries of the world, not just its immediate neighbors. Other ties that sometimes have more influence than regional proximity include colonial heritage or other historical or cultural affinities--e.g., the British still trade and invest heavily in India and South Africa.

As barriers to trade and investment across borders continued to fall during the last decade and a half, globalization progressed more rapidly than ever in history. Multinationals have become increasingly sophisticated as they expand their operations and sales beyond their own home market to foreign countries. To the extent that neighboring countries allowed firms headquartered elsewhere to operate under national conditions, multinational strategy graduated from a single-country approach to regional networks. To organize and plan across borders in this emerging borderless world, multinationals are best placed to do that in their own region rather than going farther afield. This makes sense for several reasons:

1. regional economies of scale in manufacturing and distribution. In many modern industries, the minimum efficient economic production levels can be attained on a regional rather than global basis. There are some exceptions to this, for example, Matsushita (see endnote ¹⁶). However, for most modern industries technology is such that efficiency can be reached at production levels that meet regional demand.

2. distance still matters. Moreso in terms of reliability and risk than in terms of transport costs, it may still matter to be close to a supplier or a market, despite the modern transportation and communication efficiencies. For example, just-in-time inventory techniques made famous by the Japanese are facilitated by proximity.

3. regional media coverage. Television and other media for marketing have transcended domestic markets, but are still pan-regional rather than global. For example, satellite television broadcasts are mostly addressed to regional viewing markets rather than global. Even the global media giants like the British or American broadcasters still are adopting a regional strategy in their advertising and programming selection.

4. challenge of selling in foreign markets. Firms are likely to be better in tune with market opportunities and customer demands and to follow through on after-sales-service if customers are nearby. Products and all other things being equal, being close to the market helps.

5. challenge of managing in foreign locales. Similarly to the previous point, cultural affinity helps not only in understanding your market but also dealing with your staff. Managing an international staff can be the most expensive and unreliable management function in human resource management. If you must hire foreign nationals, it helps if they share the same cultural heritage as the home office staff. This is more likely in your own region.

6. historical ties. It may be easier to build market share when business ties are traditional than to start from scratch further afield.

The next logical step toward globalization may well be multi-regionalization. The large multinationals typically attempt to create a competitive advantage in their home region; then further expansion outside the home region might well be organized on a regional basis. This is how American and Japanese multinationals attack the European Union market (although to an important extent major country markets within the EU still require individual focus). The most attractive of the regional markets are referred to as the Triad: the West European, North American, and Japanese regions.

APPENDIX B: A NOTE ON THE INTERNATIONALIZATION OF JAPANESE FIRMS¹⁷

Japan has been often maligned by its international trade and business partner countries. Complaints tend to allege unfair competition practices. The political economy of Japanese trade is based on a government-business relationship to develop strategic trade policy. Furthermore, non-tariff barriers only vaguely comprehended by foreigners and Japanese alike inhibit imports and inward FDI. Other criticisms sometimes surface in international business circles, such as Japanese multinationals excluding non-Japanese from top management positions.

In defense of the Japanese, much of this criticism may stem from simple misunderstanding of Japanese business culture. Also, the very fact that Japanese firms have competed so successfully in world markets perhaps created some ill will. Internationalization of Japan's firms --at least until the big surge of Japanese FDI volume from 1994 onward-- has in fact been less than generally imagined, yet it has caused disproportionate anxiety in countries affected.

Concerning trade, Japan has been the world's third largest exporter every year since 1971, behind the USA and Germany, but Japan is not exceptionally export-dependent, especially compared to Germany. In 1988, Japan accounted for 9.4% of world exports, which also represented 9.4% of its gross national product (GNP); Germany and the USA had 11.4% of world exports each, constituting 26.8% of Germany's GNP and 6.6% of the USA's GNP. The twist is that the primary destination for Japanese exports has been North America (taking in 36% in 1988) and Europe (absorbing 21%). Furthermore, Japan's top 25 exporters were in only 4 industries (constituting 52.5% of total exports). This kind of export concentration predictably has caused considerable economic friction with the USA. For example, one of the 4 industries in America --automobiles-- has been suffering severelly from Japanese competition since the 1970s.

Figures also show low Japanese dependence on FDI. Overseas employment of Japanese manufacturing firms was only 10% of their domestic employment in 1988. Japan's ratio of overseas to domestic production (4% during the 1980s) is typically less than Germany (10% non-EU) and the USA (18%). By 1995 Japanese annual FDI as a percent of gross domestic product (GDP) ranked only 13th in the world. However, during the latter half of the 1980s Japan's FDI increased very rapidly, with nearly half the total in 1988 going to the USA. Japan-bashing in America was rife!

In the general case of international business, a firm's overseas operations are subsidiary to home office needs. Typically, foreign manufacturing affiliates were established as an export base for the domestic and worldwide markets that fulfilled specific needs of a unified global strategy for integrated production, assembly, and marketing. Especially coinciding with the emergence of the new Asian consumer market in the late 1980s, Japanese multinationals more typically have focused on the host-country market. This circumstance would of course be true of Japanese production in America, the world's favorite market. Japanese production was often initiated to overcome American barriers to Japanese imports, notably cars and other industries subject to quotas or other protection. Itami (page 35) characterized the situation as follows: "The basis pattern (cause and effect) of Japanese internationalization is exporter ==> economic friction ==> local production." Since Japanese FDI in America was generally for the American market rather than for exporting back to the headquarters company or Japanese consumers, this has done little to correct the chronic trade imbalance between Japan and the USA, especially since American overseas subsidiaries repatriated nearly half their production. Hence: continuing trade friction with the USA!

Other factors have contributed to the US-Japan economic conflict. A number of severe external shocks to Japan's economy have led to sudden spurts of Japanese overseas activity, much to their credit. The two 'oil crises' of the 1970s, which dealt a severe blow to American industry, actually had the effect of making Japan more competitive. The oil crises had a stronger impact on Japan than the USA because Japan is almost completely dependent on oil imports, unlike the USA. But the slowdown that resulted in Japan's domestic economy led to expansion of Japanese exports, to compensate for less domestic demand. Furthermore, Japanese firms felt a need to cut costs, unlike in the USA where firms often passed the increased product costs to consumers. Finally, traditionally energy-efficient Japanese products experienced a surge in demand in America, notably Japan's small, fuel-efficient autos.

Similarly, rapid appreciation of the Japanese yen after 1985 and again during 1993-95 did decrease Japan's exports but also caused a spurt in Japanese FDI. The strong yen made exports expensive but overseas assets cheap.

The classic case of Japanese competitive prowess was the machinery industry, led by shipbuilding from the 1950s-70s and automobiles from the late 1970s. The machinery industry accounted for 78% of manufacturing exports and 65% of overseas production and hiring in 1988. The fact that the machinery industry is multi-stage has tended to keep the benefits from internationalization in Japan whatever stage is transferred overseas through FDI. The automobile, for example, contains over 30,000 parts. Late stage production and assembly locations require competent systems support. Not all stages can be easily transferred overseas so many higher value-added parts are produced in Japan. Those stages done by Japanese FDI anyway have their value-added absorbed by Japanese firms. Ultimately, the final stages have higher accumulated value-added which reverts to Japan when they export the final product. The angry response overseas commonly has been to insist on 'local content' requirements to force more value-added to accrue to host markets.

Itami concluded: "The likelihood of a continuing Japanese trade surplus and the further growth of Japanese exports and overseas production clearly indicate that the problems and challenges faced by Japanese companies will continue to grow." However, recent developments are a cause for optimism. The yen finally began to lose steam in 1996, and the Japanese trade surplus with the USA has been declining since 1994. As Japanese internationalization encompasses more industries and wider target markets (especially in Asia), as Japanese multinationals improve their management systems for managing across borders and responding better to host-market friction, and as the Japanese market itself becomes more accessible, economic conflicts are abating.

APPENDIX C: SINGAPORE'S KEPPEL CORPORATION

Incorporated in 1968, Keppel Shipyard dated its origins from the building of Singapore's first drydock in 1859 at Keppel's modern location. By 1968 the dockyard was being operated within the Singapore government, the Dockyard Department of the Port of Singapore Authority. A five-year management contract was signed with the Swan Hunter Group from the United Kingdom to modernize the facilities, and develop local management to run what was then to be Keppel Shipyard on a fully commercial basis. Since 1968 Keppel has proceeded on an aggressive course of growth and diversification.

Keppel is Singapore's largest shipyard. Among the top six Keppel owns one-third of total drydock capacity and well over half the total market capitalization. Shiprepair had been Keppel's original business, but the modern enterprise is a diversified, sophisticated conglomerate, having attempted property development, engineering, even telecommunications, banking, stock brokerage, insurance, and many other businesses, as well as the gamut of marine and supporting activities.

During the 1970s Keppel's rapid expansion constituted internal growth and what textbooks term related or concentric diversification in the marine field. In the 1980s the Group engaged in unrelated or conglomerate diversification into property and finance. On 8 May 1986 Keppel Shipyard Limited changed its name to Keppel Corporation to reflect the fact that it was a conglomerate, not just a shipyard. Shiprepair and shipbuilding constituted 63% of Group revenue in 1988, declining to 21% in 1995.

International production of the Group (primarily regional) started with a shipyard in the Philippines in 1975. By 1995 Keppel's Philippines holdings had diversified into power generation, financial services, engineering services and property development, in addition to shiprepair and shipbuilding; and Keppel was Singapore's largest investor in the Philippines. Countries comprising Keppel's international portfolio in 1996 included: America, Australia, Britain, China, Hong Kong, India, Indonesia, Malaysia, Myanmar, Philippines, Thailand, Sri Lanka, United Arab Emirates and Vietnam. In UNCTAD's World Investment Report 1995, Keppel ranked 14th in terms of foreign assets held by transnational corporations from developing countries.

In the 1990s Keppel added banking to its regional activities. Banking indeed exemplifies Keppel's competitive prowess. When Keppel consolidated all financial services in 1990, Singapore's fifth major domestic bank --Keppel Bank-- arrived on the scene. With revenue growth averaging 44% from 1990-94, Keppel Bank became the Group's top earner. Opening offices in early 1996 in Vietnam, India and Labuan (East Malaysia) raised the total number of regional countries with Keppel-owned banks to nine, which placed Keppel well to coordinate investments in Asia's emerging markets.

As one of Singapore's largest companies, Keppel was at the vanguard of national development efforts and was described by the Republic's leaders as a "flagship Singapore company in our mission to create an external economy". (Business Times,24/4/94) When the Singapore government began a push in the late 1980s to create Singapore-based multinationals, property development was a major source of regional business. A Keppel subsidiary spearheaded the S$30 billion Singapore-China township development in Suzhou, the 1995 Annual Report noting: "Leaders in China and Singapore are pleased with the level of achievement in terms of physical completion and investments."

The government role in Keppel did not hamper business activities, in fact seemed to have the opposite effect, as PE entrepreneurial abilities were enhanced, rather than encumbered by bureaucracy or other predicted difficulties. Civil servants behaved much like ordinary businessmen, except they were more than that; the civil servants were Singapore's professional elite and key members of the national leadership team. The government invariably played a proactive role.

APPENDIX D: ADDITIONAL NOTES ON THE INTERNATIONALIZATION OF NORTHEAST AND SOUTHEAST ASIAN FIRMS

Taiwan

Taiwanese investment in Southeast Asia dropped dramatically after peaking in the early 1990s, as costs of doing business in these countries climbed rapidly. In Thailand for example, between 1989-92 the minimum wage increased by half to Baht 115 (US$4.60) a day. The flow of Taiwanese foreign investment then shifted to Vietnam and especially China since the 1990s. Annual FDI to China skyrocketed in 1992 and 1993, as Taiwan passed the USA and Japan to become the second-largest investor in China (after Hong Kong).

At peak levels, Taiwan ranked among the top foreign investors in many Asian countries. For example, in 1990 Taiwan passed Japan to be Malaysia's largest annual investor; it has generally been number two in Thailand after the Japanese, and number one in Vietnam.

In Vietnam, Taiwanese firms have been welcome since the big investors of Japan, Europe and the USA were reluctant to move into any country facing political differences with the West. Taiwanese firms are attracted to Vietnam by its cheap, hard-working labor force, large ethnic Chinese community, proximity to Taiwan and support from the Taiwan government. But investors complain about Vietnam's communist bureaucracy and frequently changing regulations; and costs rise because the Vietnam government's rental and wage rates sometimes exceed private rates in Hong Kong or Tokyo. "You pay workers US$100 but the government takes $60, so they don't work hard," lamented one businessman.

In the late 1980s wages in Thailand and Malaysia were one-tenth those in Taiwan. However, by the 1990s labor rates were more like 1/3 those in Taiwan. As costs in Southeast Asia increased, Taiwanese business shifted to lower cost countries in the region, especially China where labor costs were even below the earlier Southeast Asian rates. Nevertheless, China has been less able to attract the 'big ticket' investors who still are more content with the lower risks of Southeast Asia. Despite the welcome China accords overseas Chinese investors "returning home", the Taiwan government in fact promotes investment almost anywhere else than China, worried that Taiwan's economic interests in China could be held hostage for purposes of political leverage. The Taiwan government still bans direct links with the mainland.

The Taiwan government tends to promote investments (to countries other than China) with, for example, credit arrangements through the government's International Economic Cooperation Development Fund; by organizing investment seminars and business tours to the region; lobbying with foreign governments for investment guarantees, and the like. Amazingly, so much has been accomplished without having diplomatic relations with a single Asian nation.

Taiwanese industry has created hundreds of thousands of new jobs in host countries. Technology transfer is also important, but early tendencies were to move labor-intensive production processes to countries like Malaysia and Thailand. This has caused some friction with Southeast Asian governments that want more value-added within their own borders. In addition, Taiwan industry does not have a good environmental record in their own domestic operations so they are sometimes singled out as the foreign investors most likely to flout local environmental regulations.

But Taiwanese managers are generally lauded by Asian host countries for their Japanese-style efficiency. The president of Acer observed¹⁸: "Most Taiwanese investors who have gone to Europe or the US have failed, while most of those who located in Southeast Asia have succeeded."

South Korea¹⁹

Under the slogan segyehwa (meaning something akin to "think global"), the government of South Korea has been attempting a diplomatic promotion of Korean business in international markets and a domestic revolution designed to bring South Korea's political, economic, social, and cultural norms up to top global standards. The ultimate purpose is to compete better in overseas markets, to overcome high domestic costs for labor and raw materials, and inadequate transport infrastructure. (High wages are offset by imported labor from Southeast Asia and elsewhere, a widespread practice among the newly rich Asian countries.) The chaebol (eg, Daewoo, LG Group, Samsung, and Sunkyong examples to follow) have been doing well in international business, but the government now believes its smaller firms need to be upgraded to compete better with cheaper manufacturers in China and Southeast Asia.

Japan has long been South Korea's nemesis: it's trade deficit with Japan is inevitably high and rising. Japan is far ahead in international markets --eg, the share of the European Union market (though small for both countries relative to the Asian or North American markets) was 4.9% for Japan in 1994 but only 0.7% for South Korea.

In South Korea's biggest invasion of Europe to date, in July 1996 the consumer electronics conglomerate LG Group (formerly Lucky Goldstar) announced a US$2.6 billion investment in Wales that would create 6100 jobs. This represented the largest ever investment in Europe from outside the region. Britain is seen by Asia's new multinationals as the ideal gateway to the European Union.

Other major investors into Europe included a Daewoo automobile plant in Poland. Although Korean autos held less than 2% of the European market, Korean automakers have feared a protectionist backlash from Europeans who were not happy with the closed auto market in Korea.

Since normalization of relations with China in 1992, South Korean investors have been utilizing China as a base for low-end production that is no longer viable at home. In 1994 Daewoo estimated costs in China to be about 15% of those in South Korea. There is also an implicit political purpose to investment in China, as a visible Korean presence in China will demonstrate to North Korea what it could enjoy if it cultivated better economic relations with the South. Daewoo, for example, entered joint ventures with Chinese firms in telecommunications (with Daewoo responsible for worldwide marketing while the local partner sold inside China); automaking in partnership with China First Auto Works; and a large cement project. All these projects, plus an oil refinery worth $1.5 billion by Sunkyong, electronics factories for $875 million by Samsung, and others, boosted the Korean stake in China to major proportions.

South Korean business in North Korea is relatively paltry, but quite significant to the North Koreans. In November 1994 Seoul relaxed a ban on South Korean businessmen traveling to the North. Commercially-minded visitors returned impressed with the level of technological know-how in the North. However, Seoul's business community has seldom been allowed to make consistent contact, as politics invariably interferes. In Seoul, as with Taipei's attitude to China, the government is concerned that North Korea can use any South Korean economic stake for political leverage in their frequent disputes. The longstanding American embargo on exports from the North, plus the Bush administration's hardline stance against the South's "sunshine policy" toward the North also discourages potential investors.

Southeast Asian Multinationals

The agri-business giant Charoen Pokphand (CP Group) and Bangkok Bank are two examples of Thai multinationals, both headed by overseas Chinese.

CP exemplifies the tendency of Southeast Asian firms to be very large and encompass a varied portfolio of activities. Sprawling conglomerates are out of fashion in Europe and America where "downsizing" has become necessary to make each profit centre concentrate on its core activities. However, conglomerates are setting the pace in Southeast Asia. Most multinationals in Southeast Asia are management and investment companies, not tied to specific products. Their procedure --especially typical of the overseas Chinese entrepreneurs-- is to identify opportunities, recruit managers, borrow the money and then buy the technology through some form of strategic alliance.

CP does everything from building motorbikes (with Honda) and brewing beer in China, to farming prawns in Mexico, and installing phones in Bangkok. One of the first companies to move into China in the early 1980s, it is today vastly expanded there, including a US$3 billion petrochemical plant outside Shanghai. Over half its foreign business is done in China.

Another aspect of business expansion in Southeast Asia is connections, or guanxi among the Chinese. CP's chairman is close to the leadership in China, and it was rumored the Bangkok telephone contract resulted from inside dealing and even bribery. Certainly governments play a role --though it is generally quite aboveboard. The Thai Board of Investment has been urging its companies to accelerate activities in the region, and Singapore's Economic Development Board has a very sophisticated program to promote the globalization (and particularly the regionalization) of Singapore firms.

(Appendix C mentions networking in the case of Keppel Corporation, a Singapore state-owned enterprise.)

Regionalization of Singapore Firms ²⁰

The Republic of Singapore established a precedent with a carefully government-designed strategy to, first in the mid-1980s globalize, and then in the 1990s regionalize operations of its domestic enterprises. Singapore has traditionally been viewed as a host country for multinational investors rather than a source of much investment --a base for subsidiaries of the great multinational corporations (MNCs) of the advanced countries, not a headquarters for home-grown MNCs. It was in fact as a host country that Singapore achieved its success, being consistently rated by surveys as one of the choice spots of MNCs --often the top choice-- in terms of its investment climate.

Singapore initiated a major industrial restructuring with the so-called Second Industrial Revolution declared by the government in 1979. The recession in Singapore in the mid-1980s is generally credited for precipitating a new policy priority: globalization. A joint public-private sector committee produced a report in 1986, "The Singapore Economy: New Directions". In this document the need to globalize was stressed: "The more widely and keenly we can find opportunities overseas, the more secure and broad-based will be our well-being."

One mechanism which contributed to globalization was the privatization of state-owned enterprises, a major recommendation of the 1986 report. This allowed the freeing-up of resources that could be reallocated to overseas investment. State-owned enterprises, especially after increasing their capitalization through public flotation of shares, generally have been at the vanguard of the new globalization efforts. For example, in 1994 the partially state-owned Keppel Corporation was appointed by the Economic Development Board to lead the Republic of Singapore's flagship overseas operation --a turnkey project by a consortium of 20 state-owned and privately-owned firms to develop a S$30 (US$20) billion, 70 sq km township in Suzhou, China. Reassured by the active involvement of both the Chinese and Singapore governments at the highest levels, investors from USA, Japan, Hong Kong, New Zealand, South Korea and Singapore made commitments totaling US$1 billion by year-end 1994 to build their facilities in this industrial estate.

The fact that many locally-owned corporations --notably the state-owned enterprises-- were sitting on a mountain of cash facilitated the drive overseas. Singapore firms may have a financial advantage, that is, a currency advantage and cost-of-capital advantage. The local dollar has been highly favored in financial markets and appreciating in value vis-a-vis regional currencies and (until 1996) the US$; low interest rates reduce the cost of borrowing.

Another element of the government-led globalization effort was tax incentives, and other government assistance to firms. For example, tax was abolished on overseas earnings, dividends and management fees. Training and financing schemes were developed, and 'country roundtables', overseas missions, and consulting services arranged. Most of these programs were devised by the Economic Development Board, the Republic's key bureau responsible for promoting and guiding both inward and outward bound investment. The EDB transformed itself from an institution oriented on attracting foreign investment into Singapore into an organization bent on helping local firms find foreign investment opportunities, supporting feasibility studies overseas, arranging external business consortia, and even helping with the implementation of acquisitions or other FDI. Key thrusts of the EDB in 1994 included the following priorities:

1. strengthening the links between external and internal businesses

2. building partnerships with regional firms

3. building partnerships with MNCs

4. adopting a 'Singapore Inc' approach to overseas investment

5. facilitating government-initiated regional development projects.

Concerning the first-listed priority, this was seen as necessary to avoid the 'hollowing out' of Singapore industry, and to maximize spinoffs, especially from acquisitions. A Singapore minister argued: "If you are going to run a company as it was run before, where are the spinoff benefits? If its just a hands-off investment, why not just invest in the stock exchange? The spinoffs must be in terms of expertise, technology, new markets, new distribution networks, new knowledge of the environment. The kinds of benefits that we want to accrue from such an investment necessitate there being some management expertise from the Singapore side."

Concerning the fourth priority, it was necessary to utilize consortia among public and private enterprises, bringing in, for example, the Port of Singapore Authority, or the institution that developed much of Singapore's land infrastructure, Jurong Town Corporation.

The fifth priority is exemplified by three major overseas initiatives of the Singapore government:

1. the Suzhou Township

2. a technology park in Bangalore, India

3. the 'growth triangle' of sub-regional integration involving Singapore, Johore in southeast Malaysia, and the Riao Islands of Indonesia nearby to Singapore.

In the context of the networking concept introduced earlier, the EDB became Singapore's main overseas networking organization. An International Direct Investment unit, set up by the EDB at the end of 1988, manifests the centrality of this purpose. The IDI keeps a database, for example of mergers and acquisition information. Global strategy conferences were organized, and matchmaking services were provided to find international partners or acquisition targets.

(Click here for a published article elaborating on Singapore's regionalization policy.)

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15. Ozawa, Terutomo (2002) “Flying Geese Style Catch Up in East Asia,” http://www-1.gsb.columbia.edu/japan/pdf/WP205.pdf, October 28

16. Pleister, Hubert (1996) “Netzwerke kleiner und mittelstaendischer Unternehmen in Taiwan,” in: Helmut Buchholt & Thomas Menkhoff (eds.), Ethnische Chinesen im Prozess der Modernisierung der asiatisch-pazifischen Region. Schriftenreihe Internationales Asienforum Vol. 8, Koeln: Weltforum Verlag.

17. Tan Chwee Huat (1995) Venturing Overseas: Singapore's External Wing, Singapore: McGraw-Hill

18. The Economist (1997) “And never the Twain shall meet,” March 29, pp.73-74.

19. Tracy, Noel & Constance Lever-Tracy (1997) “A New Alliance for Profit - China's Local Industries and the Chinese Diaspora,” in: H.J. Wald (Hrsg.), Thomas Menkhoff, Konfuzianischer Kapialismus in Ost- und Suedostasien, Bad Honnef: DSE-ZA.

20. Zutshi, R. K and P. T. Gibbons (1998) “The Internationalization Process of Singapore Government-linked Companies: A Contextual View,” Asia Pacific Journal of Management, Vol 15, Issue 2, October.

endnotes:

Discussion draws on Buckley and Ghauri (1993)

See for example, Johanson and Mattsson (1988).

The Flying Geese Model was originally devised by Kaname Akamatsu and published in a Japanese journal in 1935. The article generally credited as the original is Akamatsu (1962). For a summary of more recent regional development according to this model, see for example Kwan Chi-Hung (19966). Ozawa’s (2002) article attests that the model still has strong explanatory power for Asian regional development.

4 In contrast to the immense FDI outflows from Japan, inflows of FDI into Japan have been minute. The stock of FDI received by Japan was less than 7% of Japanese FDI abroad in the 1990s (Bayoumi & Lipworth 1997), and inward FDI has grown only modestly since then. Early explanations stressed the impenetrability of the Japanese business environment to outsiders, but the ongoing recession into 2003 has discouraged investment.

The following discussion draws on Fukushima and Kwan (1995).

International Herald Tribune, 24 April 1996, p 22.

"Follow the Leaders," Far Eastern Economic Review, 31 March 1994, pp 54-5.

"Taipei's Offshore Empire" and other stories in Far Eastern Economic Review, 18 March 1993, pp 44-50.

"South-East Asia's Octopuses," Economist, 17 July 1993, pp 61-2; "Aiming for the Sky," Asiaweek, 14 July 1993, pp 52-4; "The Long Arm of the Baht," Asiaweek, 4 August 1993, pp 44-5.

Information on Keppel Corporation is from annual reports and company interviews.

Business Times, 24/4/94.

Business Times, 12/6/87.

A press conference by Sim Kee Boon was featured in the Business Times, 6/11/98, p 1.

Robert Wade and Frank Veneroso, “The Resources Lie Within,” The Economist, 7 November 1998, 20.

¹⁵. Discussion draws on "The Non-Global Firm" in "A Survey of Multinationals: Everybody's Favourite Monsters", The Economist, March 27, 1993, pp 10-14.

¹⁶. The Matsushita company of Japan achieved global economies of scale in VCR production and served the world market from a single location in Japan. This was made possible because Matsushita was able to get its own format accepted as the world standard.

¹⁷. Discussion draws on "The Globalization of Japanese Firms," Hiroyuki Itami, in Japanese Multinationals: Strategies and Management in the Global Kaisha, Nigel Campbell and Fred Burton (editors), London; New York: Routledge, 1994, pp 31-40.

¹⁸. Acer of Taiwan, the world's fourth largest computer firm, provides a case study of Taiwanese business development. "Founded in 1976 with just $25000 in capital, Acer began by importing electronic components and publishing trade journals. In 1983 the company produced its first personal computer, a cheap clone of IBM's industry-standard machine. Built round the same microprocessor chip and running the same operating software as IBM's product, Acer's version sold like hot cakes." Unusually for an Asian company, Acer then sought to develop its own brand name, which became very successful.

Though Acer computers are a respected brand today, the company has not had all good fortune. "In 1987 it paid $6m for Counterpoint, a small American manufacturer of 'multi-user systems', medium-sized computers that several people can use at once. Overpriced and unreliable, the products failed to sell." In 1989 Acer discontinued that operation. Other such arrangements have also not fared well. A 1989 joint venture with Texas Instruments did not do well with its initial product which suffered from global oversupply, but the venture is diversifying. This venture benefitted from strong incentives by the Taiwan government which was keen to see Taiwan firms move from low-tech assembler of imported components to high-tech designer of new systems.

The company is experiencing a turnaround by 'going back to basics', reverting to the role of supplying other manufacturers. Although 'no-name' firms in Taiwan can underprice them, Acer products are in demand in the USA. Another growth market is Japan, where Taiwanese manufacturers can underprice the Japanese competition.

Acer's new directions include teaming up with Microsoft, Silicon Graphics, and NEC on new designs, and increasing subcontracting from Apple and others. Operations are being converted to modular assembly, and area where Acer is a poineer --the idea is to design computers so all major components snap together.

(Source: "Inferiority Complex," Economist 1 February 1992, 80-81; "Acer: Up from the Clones --and then some," Business Week 28 June 1993, 38.)

¹⁹. "Going Forth to Multiply" and other stories, Asian Business, June 1995, 28-37; "South Korea Plays the China Card," Business Week, 11 April 1994, 18-9.

²⁰. Discussion draws on Tan Chwee Huat (1995) Venturing Overseas: Singapore's External Wing, Singapore: McGraw-Hill.