APEC Study Center Consortium
Auckland, New Zealand
May 31 - June 2, 1999

 

 

The Value of the 'Asian Model' in the Aftermath of the Crisis and the Implications for APEC

 

by:
Dr Christopher Reynolds

 

 

Introduction:  The Asian Miracle

 

Prior to the Asian financial crisis of 1997-98, the economic growth of the East and South East Asian region (Asia) over the past three decades has been outstanding. With annual GDP growth for the ASEAN-5 (Indonesia, Malaysia, Thailand, the Philippines and Singapore) averaging close to 8 percent from 1985 to 1995, the IMF reports that during the past 30 years, per capita income levels increased five fold for Thailand, and four fold in Malaysia. Overall, the high performance Asian economies (HPAEs – Japan, Korea, Hong Kong, Singapore, Taiwan, China, Indonesia, Malaysia and Thailand) saw their share of world exports grow from 8% in 1965, to 18% in 1990 ( Fields, 1993:37). The World Bank, in its 1993 report, “The Making of the East Asia Miracle”, stated that from 1965 to 1990 the 23 economies of East Asia grew faster than all other regions of the world (World Bank 1993:1). This overall economic and development success, the World Bank called ‘miraculous”.

 

In answer to the question: What caused East Asia’s success?, the World Bank report suggests that East Asia’s high growth was achieved by “getting the basics right”. (Fields 1993:5) High domestic savings and the growth of human capital by way of education were seen to be the engines of growth. Indeed, the Asian success story was a unique combination of market and government-led policies. Asian governments, in general, fostered an environment in which private domestic savings and investments could grow and at the same time sought to develop primary and secondary education and thereby create a more educated workforce.  Seeking to keep taxation low, at about 17%, support for the agricultural sector and creating banking and investment systems, were also important basics to economic development, the world Bank said. Yet, getting these basics right does not in itself explain why Asia was able to achieve outstanding economic growth.

 

The growth of Asia was, essentially, a break from neo-classical approaches to economic growth through protection and intervention. As a general approach, Asian economies did not seek to nurture infant industries by import substitution or policies of domestic growth. Rather, the region broke with conventional practice and promoted, or allowed, the growth of export-orientated industrialisation by way of labour-intensive manufacturing (ELIM). Indeed, the way foreign investment and ELIM industrialisation by multinational companies (MNCs) seemingly brought about a contagion spread of economic growth across the region suggested that there is an identifiable ‘Asian’ model of economic growth.  This distinctive ‘Asian’ approach is the most probable reason why Anglo-American economic philosophy, in the form of classical and neo-classical approaches, has failed to adequately explain either the growth of Asian economies or the 1997-98 financial crisis. Indeed, rather than trying to analyse Asia by way of Anglo-American capitalism growth criteria, Asia is better understood from the point of view of the success and failure of its own strategies.

 

The Asian financial crisis, however, revealed that there were weaknesses in these strategies by exposing just how dependent Asian economies are upon foreign markets, and how vulnerable Asia had become to global financial volatility. While much of Asia’s economic growth had resulted from foreign direct investment (FDI) over several decades, in the 1990s, international enthusiasm about Asian growth rates made for substantially high foreign investments in the form of foreign indirect investments (FII) by way of loans, capital and portfolio investments. But high foreign investments created high foreign debt. With the rising costs of production due to pegged currencies to the US dollar, and declining financial returns, the foreign investment bubble broke as foreign investments were withdrawn. Deutsche Bank has estimated that some $93bil. flowed into Indonesia, Malaysia, the Philippines and Thailand in 1996, but in 1997, $105bil. flowed out. (Templeman 1998:22) The subsequent inability of banks to cope with debt repayments caused a loss of international confidence (Astbury 1998:13) and with insufficient foreign reserves to cover the public and commercial run on the banks, public confidence continued to decline and Asia’s economies slipped toward recession.

 

While wanting to argue that the Asian financial crisis was not independent of global commercial and financial activity, there is now an opportunity to question the continued relevance and value of some the ‘practices’ that were understood to be distinctively ‘Asian’ and contributed to the financial crisis.

 

This is not to say that Asian leaders in general are convinced that Western understanding and Western medicine are what’s best for Asia. Indeed, not even the financial ministers and central bankers from the seven major industrial countries at an IMF meeting as recently as the April, 1999 (AP 1999:21) can agree on a common approach to direct Asia’s future. The point needs to be made that while several Asian countries have accepted IMF programs of economic austerity in order to gain extended loans, laissez-faire capitalism has not been embraced as the necessarily right formula for Asia’s future. Understandably, there is currently an air of caution across the region.

 

The thesis of this paper is that while there is an identifiable Asian ‘way’ of doing business, the Asian model, or paradigm, must be understood not as a distinctive ‘Asian model of economic growth’ but rather a ‘business model of growth in Asia’. And further, that while models portray generalisations about values, methods and even strategies, that are often helpful, they have limited usefulness in the global context of dynamic commercial change.

 

Accordingly, this paper is structured to cover a number of issues: first, the features of Asia’s economic growth; second, the continued value of the Asian model in the context of global commerce; third, the economic dynamics that are occurring across Asia in this post-crisis period; and fourth, particular issues that APEC could continue to consider in the process of developing Asian economic and commercial strengths.

 

An Asian Business Growth Model.

 

 Although Asia is diverse in culture and history, it has many common business and political features. James Fallows Looking at the Sun, (Fallows 1994) and Chin-ning Chu’s The Asian Mind Game,(Chin-ning 1991) are among the many books on this topic.

Richard Stubbs, however, makes the point that it is no longer social culture and language which make regions unique, but their political and economic culture. Accordingly, he proposes that it is possible to identify the particular business character of E&SE Asia and speaks of Asia-Pacific capitalism. Asia is characterised by its social ethos of social obligation but also its business ethos of developing business networks. In the context of these networks, Stubbs suggests that there are shared objectives, interrelationships and even collective capitalism. (Stubbs 1998:68) Central to Asian collective capitalism is the approach to developing business opportunities by way of interaction and cooperation through networks and business relationships.

 

Business integration patterns, however, extend beyond E&SE Asia to the US and Europe as these markets are supplied with Asian goods. Indeed, it is impossible to discuss an Asian model of business growth that is divorced from Asia’s integration and dependency upon global market forces and the influence of foreign capital and foreign business strategies.

 

In acknowledging that there is not one national group or management style that encompasses all of Asia, there are a number of macro-economic features that can be said to give Asian business growth a certain distinguishable character. While a full coverage of these features is not possible here, a summary of them will nevertheless permit some discussion of the continued relevance of the Asian ‘model’ in the context of global commerce. The four features identified here are: high levels of foreign capital investment, a dominating presence of multinational companies, an economic growth through export strategy and the emergence of economic integration across the region.

 

Features of Asian Economic Growth

 

Foreign Investment.

  

While the nature of international money flows and the speed at which money moves has changed, and changed the world economy in the process, the relationship between economic growth and investment capital has only become more apparent. Of particular significance is the steadily increasing flow of transnational money through Asia over the past 30 years. Asia’s economic growth through exports and trade has been fuelled by large foreign investments.

 

In 1967, world-wide FDI amounted to some $105bil. By 1973 this had doubled to $208bil, and more than doubled again by 1980 to $513bil., it doubled again by 1988 to $1.2tril. and then again by 1995 to $2.7tril. (Griffin 1996:21) By 1997, the world-wide stock of FDI has reached $3.5tril.( UNCTAD 1999:2) -  a 33 fold increase in 30 years. This included a rise for ASEAN countries from $25.2bil.in 1980 to $168.8bil. in 1995: Almost a 7 fold increase in ASEAN and a five fold increase for the same period across the world (Bartels 1997). In terms of FDI inflows, UNCTAD reports that developing Asian countries received an average of 44bil. per year from 1991 to 1995, with $76bil. in 1996, $84bil. in 1997, and $78bil. in 1998.

 

Of themselves, these statistics do not represent a problem. They speak of record high growth and exports for Asia and of the willingness of foreign investors to be involved in foreign markets. They also indicates the growth of capital investments, as portfolio investments, in the world economy. The OECD countries, for example, have seen a steady increase in GDP and export growth from 1985-1995 of approximately 150% while FDI outputs rose some 300% (Falconer 1997:8).

 

Yet, in attracting considerable foreign capital investments, FDI was to be far outpaced by FII. As a proportion of total capital inflows, FII for 1992-96 was approximately 80% for Thailand, 60% for Indonesia and 40% for Malaysia (Economist 1998:71). Based upon IMF figures, and with FDI at $47bil. in 1995, representing only about 30% of all foreign capital investments in Asia, it is possible that the flow of FII into SE Asia could have amounted to some $150bil. for 1995 alone.

Foreign Investment Inflows 1992-96


            Source: The Economist, January 24, 1998

 

 

The extent of the dependency upon FII, particularly by SE Asian economies, became obvious in October 1997 with the financial crisis and the difficulty Asian borrowers had with servicing their foreign debts. A brief examination of Thailand’s exposure to foreign borrowings serves to illustrate this point.

 

In 1995, Thai export growth had reach 23.6%, having averaged 21% over the previous decade. By the end of 1996, export growth was zero. Thai goods had lost competitiveness and were too expensive against rival products. This put immediate pressure on Thailand’s corporate ability to service its foreign debts. But faced with a pegged currency and, consequently, perceived low currency risk, as well the attraction of low US-dollar interest rates, external debt increased from $56.7bil. in 1995 to $70bil. by the end of 1996, with a large proportion in short-term loans. (Song 1998:38)

 

 

Capital Inflows for Thailand

 

            Billion baht

          Source: Bank of Thailand

 

 

While Thailand had a foreign debt of $90bil.which amounted to some 49% of its GDP, other ASEAN countries were equally exposed. By the end of 1996, Indonesia had accumulated foreign debt of over $110bil., or almost 50% of its GDP, while Malaysian foreign debt totaled only $38bil., or 39% of its GDP.

 

 


External Debt: 1996 

 

As a % of GDP                                             

                               Debt                

                             (US$ Billion)           % of GDP

Indonesia

113.6

49.7

Malaysia

38.3

38.8

Philippines

41.8

48.1

Thailand

89.8

48.8

 

As a % of Exports, 1996

                           Total Debt/Exprts     Debt Service/Exprts

                               End – 1996                   End-1996

Indonesia

213%

29%

Malaysia

49%

7%

Philippines

132%

15%

Thailand

130%

13%

                                    Source: ASEAN Regional Outlook 1998-99: Institute for SE Asian Studies.

 

 

Still, foreign investment is now more important than trade as a vehicle for international economic transactions as global capital flows now far exceed trade. As Peter Drucker points out: “…trade is increasingly being replaced by investment as the world economy’s economic driver. Investment used to follow trade. Now trade follows investment.” (Drucker 1990:117)  For Asia to expand its global trade has meant a parallel increase in its foreign investments. While foreign investment has been a distinctive feature of Asia’s growth, it has been part of the process of integrating Asia into the global commercial market.

 

 

Mutinational Companies

 

The significance of MNC investment and industrialisation for Asia is revealed not only in the extent of FDI and FII that has flowed into the region in the past 20 years, but also in the fact that Asian economies have been heavily dependent upon MNC trade. Indeed, the vast majority of Asian trade is in reality intrafirm trade by MNCs. Without MNCs,  Asia’s trade growth figures would be significantly reduced. While world intrafirm trade is about 35%, it is much higher across E&SE Asia. In a study of 241 firms in 1993-94 across 8 economies (Hong Kong, China, Indonesia, Malaysia, Singapore, the Philippines, Thailand and Taiwan) total intrafirm trade, imports and exports, in the electronics industry, for example, amounted to an estimated $84bil. for 1992,  or 55% of total electronics trade. For Malaysia intrafirm trade in electronics accounted for 87% of all trade and in Thailand it was 100%. (Dobson  1997:263)

 

 

Value of Intrafirm trade in the electronics industry: East Asia, 1992.

 

Economy

Intrafirm trade

Exports (US$mil.)

Intrafirm trade

Imports (US$ mil.)

Intrafirm trade Total (US$mil.)

Hong Kong

 8518.3

7918.7

16437.0

Indonesia

   511.2

1059.9

1571.1

Malaysia

 9862.7

4542.2

14404.9

Philippines

   850.5

  336.0

1186.5

Singapore

17848.1

        11030.9

28879.0

Taiwan

  8230.4

3614.7

11845.1

Thailand

  5946.3

3678.1

9624.4

Total

51767.5

        32180.5

    (55%)    82948.0

Source: Survey results from: Dobson, W. (1997) Multinationals and East Asian Integration, p. 263.

 

 

In Singapore, the study of the electronics industry showed that of the 153 electronics firms, 108 of them were wholly foreign-owned and the other 45 were joint ventures. Of the wholly foreign owned companies, 48 were US, 49 were Japanese, and 20 were European. Of the 23 respondents to a question of intrafirm trade, 50% of them reported that over 90% of their exports were intrafirm sales. Chia Yue, who conducted the Singapore survey, reports that: “In 1992, foreign-equity capital accounted directly for 74% of the manufacturing sector’s exports. Wholly foreign owned firms alone accounted for 75% of direct export sales, whereas locally-owned firms contributed a mere 8%. The US-European and Japanese MNEs accounted for 77% of direct exports. (Yue 1997:40) In Thailand, the situation is similar, if not more severe, where the survey showed that in the manufacturing industry (machinery, electronics, computer machinery, auto-parts and motor cycles) “intrafirm transactions accounted for 98% of all export sales and 94% of all import purchases”. (Ramstetter 1997:126)

 

In discussing the importance of intratrade in developing business networks, Dennis Encarnation points out that 80% of Japanese exports and 50% of Japanese imports are intrafirm trade transactions. (Encarnation 1994). These figures are representative of the fact that much of E&SE Asia’s growth has essentially been Triad (US, Europe and Japan) business growth that has carried the economic development of the region.

 

 

Growth through Export

           

As Japan and then other Asian countries developed and increased their industrial capacities, there was a seemingly natural economic gravity that led capital to find new regions of low cost production. While a general shift from traditional labour-intensive production to more technology-intensive ones is evident, there is also evidence that businesses developed specialised product areas in order to meet international market demands and thereby gain competative advantage in certain areas. In the 1950s, Korea’s export expansion began with the production of human hair wigs, by the 1990s, cars and computers flood foreign markets. Similarly, Singapore and Hong Kong began with developing labour intensive manufactured products in the 1960s to more high-tech products and then the development of service industries. (United Nations 1998:4)

 

It is a common belief that the Newly Industrialising Countries (NICs)– Hong Kong, Taiwan, Korea and Singapore, and then the ‘near’NICs (NNICs) Thailand, Indonesia, Malaysia and the Philippines - appear to have developed in a pattern like “flying geese” as they tend to duplicate the industrial and technology levels of the economies that are just in front of them. A possible conclusion of this kind of proposition is that growth was regulated and propelled by the countries concerned for their domestic well-being. While not denying the role of governments to support and foster export industries, the truth is that growth was driven by external or international forces. The evidence, as suggested by various Asian analysts such Chow, Henderson and Phongpaichit, (Henderson 1998:5, Chow 1993:40, Phongpaichit 1998:3) is that as Japanese MNCs, as well as other MNCs,  moved across E&SE Asia so did their technology for industrialisation and their knowledge of and access to export markets. Naturally, domestic economies developed, but in the shadow of foreign business development for foreign markets. While there may well have been an export growth strategy, it was a foreign strategy.

 

Instead of a ‘flying geese’ theory of contagion follow the leader, it is more accurate to describe Asia’s growth as business led growth patterns brought about by multinational business’ continual search for lower production cost opportunities. This view is supported by Peter Chow in his detailed analysis of Asian trade who argues that “There is no significant evidence that exports from the four tigers have been replacing one another in the same market segments.”(Chow 1993:4)

 

Japanese manufacturer’s strategy, for example, in as much as a unified business foreign investment strategy can be identified, have tended to invest abroad to create business networks. In 1977 Japanese FDI in Asia was only $6bn. but by 1994 it had risen to $74.7bn, while US FDI in Asia was $45.7bn. (Hatch & Yamamura 1996:6) The objective was not only to create a market for Japanese technology in their host countries but also to supply goods to their own domestic markets as well as their international markets. (Hatch & Yamamura 1996:175) While Asia maintained a surplus balance of trade with Europe and the US from 1985 to 1997 - with a $54.4 bil. surplus against the US in 1993 - at the same time, the region had a trade deficit with Japan rising from $9.3bn in 1985 to $54.2bn in 1993. By 1997, as indicated below, ASEAN alone had a trade deficit with Japan of over $18bil. The development of Asian markets as a source a trade for Japan, the US and Europe, explains why there has been a high level of foreign capital investment into East and then SE Asia. Accordingly, technology has only developed in the direction and at the pace of the business sector concerned.

 

 

Asia’s Exports to the Japan and the US.

 (in US$ billions)

 

Year

Total Exports

To Japan

          $              %       Trade Bal. $

To US

      $               %         Trade Bal. $

1980

141.4

31.5

22.2

-2.3

30.4

21.4

+5.4

1985

187.1

33.3

17.8

-9.3

57.3

30.6

+28.9

1990

423.1

62.5

14.8

-22.7

97.9

23.1

+41.5

1991

483.9

68.4

14.1

-32.5

102.3

21.1

+38.5

1992

549.9

70.2

12.8

-42.1

118.2

21.5

+48.6

1993

612.8

76.9

12.5

-54.2

131.8

21.5

+54.4

Source: IMF Directions of Trade statistics: Republic of China Statistical Yearbook, 1993, and Taiwan Statistical Yearbook, 1994. “Asia” includes China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand.

 

 

The conclusion is that the ‘Asian’ model of economic development can be identified as encompassing a strategy of export led industrialisation brought on by foreign investment and foreign business management across the region. The result has been the creation of an integrated economic region and, at the same time, a region integrated and dependent upon its foreign trade partners, particularly the US, and Europe.

 

 

Regionalism:

 

While Asia’s economic growth, and decline, are linked to global commerce, it is at its core, driven by regional economic forces.  Globalism and regionalism in the Asian context have not been mutually exclusive. The growth and development of Asian economies as a consequence of global export trade have also served to create regional economic integration.

 

As Japan absorbed an increasing amount of Asian trade it had increasing structural significance for the Asian region because of the high degree of intrafirm trade that makes up the character of Japanese-Asian trade. It is no wonder, then, that movements in the value of the yen or the state of the Japanese economy effect the whole Asian region - usually.

 

For example, with Japan’s real economic growth decline to 3% in 1997 and domestic consumption decline by 5.2%. (Miller 1999) Taiwan experienced a consequential decline in exports to Japan of some 22% and to ASEAN of 26% in 1997, which severely effected its economy further as 48% of Taiwan’s exports are intra-regional. And, because of the economic integration of the region, the state of the Taiwan economy affects others. Consequently, Taiwan’s FDI investment into China in January 1999 fell by 75% from January of 1998.

 

 

Japan's external trade with EC, ASEAN  and U.S.A.

   ( in US$ millions)

 

 

 

E C

S.E Asia (85-90) /ASEAN (91-98)

U.S.A

Merchandise Total

Year

Exports

Imports

Exports

Imports

Exports

Imports

Exports

Imports

 

 

 

 

 

 

 

 

 

1985

23,769

10,603

39,681

36,166

77,680

30,973

209,151

154,960

1986

32,315

14,668

43,899

31,378

84,719

30,717

220,423

134,608

1987

44,984

21,023

63,011

45,998

99,574

37,557

273,075

178,171

1988

47,679

24,487

68,288

48,653

91,242

42,797

269,573

190,678

1989

45,871

26,989

70,555

50,681

89,372

46,251

263,755

202,082

1990

57,119

37,450

88,198

58,143

9,642,9

56,025

306,181

250,038

1991

63,626

34,200

40,541

34,170

98,393

57,409

338,203

254,692

1992

63,564

31,803

41,336

32,057

97,239

53,125

345,065

236,882

1993

56,477

30,030

49,124

33,889

104,881

55,077

359,303

239,757

1994

59,004

36,300

61,823

38,780

120,563

64,353

405,666

281,522

1995

64,135

44,502

70,324

43,249

110,124

68,763

403,565

306,567

1996

59,032

46,239

68,590

49,170

104,993

74,417

385,681

327,586

1997

61,065

41,827

64,943

46,636

109,058

70,422

392,072

315,242

                      Source:  Monthly Statistics of Japan, No. 357 & No.446

 

 

 

By 1997, Japan’s trade with ASEAN amounted to $111bil. while its trade with the EU was $103bil. and with the US was $179bil. By the 1990s, Japanese business had successfully advanced their triangular trade integration between itself, SE Asia and the US. By 1997 with exports of $109bil. to the US and a surplus of $39bil., Japan was exporting nearly $65bil. in merchandise to SE Asia with a trade surplus of some $19bil. At the same time, SE Asia was exporting some $70bil. to the US and running a trade surplus of some $9bil. (ASEAN 1999)

 

Business links and trade across the Asian region have come to dominate these economies as the proportion of trade with the US has declined. IMF figures show that intra-Asia regional trade rose from 30.9% in 1986 to reach 45% in 1994while Asian-regional trade to the US fell from 34% to 24%. At the same time, Japan’s exports to Asia grew to $186bil., or 42% of Japan’s total exports, by 1995. (IMF: Directions of Trade Statistics) While the US and the EU remain E&SE Asia’s largest export markets, the growth of intra-regional trade indicates the growth of Asia’s emerging markets as served by Asian based business.

 

ASEAN Main Trading Partners

 

Imports

Exports

Into:

From:

       From:

To:

Singapore

Japan

       Singapore

USA

Malaysia

Japan

       Malaysia

USA  (via Singapore)

Indonesia

Japan

       Indonesia

Japan

Thailand

Japan

       Thailand

USA

Philippines

Japan/US

       Philippines

USA

Source: Asian Development Bank.

 

 

 

            Foreign Investment in ASEAN, 1986-90


                                    Source: MITI Yearbook of Economic Co-operation 1992 (Tokyo)

 

 

Yet, the business, political and cultural characteristics of Asia that make it distinctive have also been cause for concern and contributed to the final crisis of 1997-98. The state business links along with policies of guided economic development were instrumental in attracting foreign development and finance. However, they were also instrumental in bringing about excessive bank borrowing that brought on the ‘lending boom’ and an over investment in the property market. Indeed, the blame for the crisis, and SE Asia’s continued vulnerability, rests with the ‘Asian way’ as much as with the uncontrollability of global markets.

 

The Continued Value of the Asian Model

 

 

It has been a unique combination of factors that have made Asian growth possible. Foreign investment, the growth of MNCs and intra-firm trade, export focused manufacturing and growth through regional networks and integration, which together form the character of the ‘Asian’ growth model.

 

In sum, by investing and locating in Asian countries, MNCs have developed export focused manufacturing as part of their production and marketing integrated systems, and this has been carried out particularly well, although not exclusively, by Japanese business. While it is possible to identify an Asian development strategy, it has been essentially an Asian business strategy that was a foreign market focused strategy. 

 

Osamu Katayama, writing on Japanese business strategies, summarises Japanese strategy  rather pointedly when he says: “Japanese-style systems of running economies, markets and companies provided them with a base from which they could polish technology imported from the West, slash costs and achieve a quality and price that few could match.” (Katayama 1996:235)

 

Much has been written on Japanese styles of management, and while these systems have proven not to be infallible, it remains to be asked whether there is an identifiable Asian business management model that has influenced or is identifiable across the region. It has been argued here that Asian business has developed as part of global business strategies, but an Asian approach to business has nevertheless been generally considered distinct from an Anglo-American approach. Certainly, the Asian approach of collective capitalism by way of business-to-business and business-to-government relationships can be seen to contrast with an Anglo-American approach of competitive capitalism.

 

But identifying a common Asian business management style is made difficult by the fact that Asia comprises a number of different business management systems which arise from a combination of cultural heritage, the nature of dominant institutions and the various processes of industrialisation that have occurred. Richard Whitley review of Asian business systems is certainly of value on this issue. He points out that the Japanese kaisha (corporation), for example, is different from the Chinese family business (CFB) approach that dominates the export industries of Hong Kong and Taiwan. And the Korean powerful ‘financial cliques’, or chaebol, with their high level of diversity and yet self sufficiency, are different again. (Whitley 1998:213f)

 

A comparison of the Japanese and Chinese systems, is illuminating. Japanese firms tend to be highly specialised in their production and rely heavily on sub-contract for related production needs. These sub-contract arrangements show the importance of the small and medium size firms to the Japanese approach but also the importance of inter-firm mutual obligation and networks. In the context of Japanese MNC expansion across E&SE Asia, it is understandable why managers have sought to develop intra-firm and business network relations. In contrast, Chinese family businesses, in as much as they have a formal management structure, tend to be quite specialised in their activities although they may invest in a variety of other businesses. While the managers in a business group tend to be all members of the one family, they are not usually structured into a strict hierarchy. The common purpose is the acquisition of family wealth and this leads to an emphasis on family ownership and control.

 

Whitley’s objective is to review the character of the “privately owned resource-controlling and allocating unit”. Of the Anglo-American business system, he suggests that the leading firm has been seen to be the large diversified corporation operating with high rates of company formation and extinction. The turbulent nature of the economy tends to encourage take-over and merger activity. The market structure tends to be organised on an arms-length basis where separate firms contract between themselves for specific supply and sales activities. Whitley points out that the financial system is a crucial element in the way Anglo-American business works, but to this would have to be added the extremely important role that the judicial and regulatory process plays in providing structure and form to commercial life in Western economies.

 

Accordingly, with growing pressure on Asian economies to become more regulatory and to improve their legal and financial infrastructure, it is understandable why some might feel like they are really being pressured to ‘Westernise’. In the aftermath of the financial crisis, and a general challenge to the status quo of ‘Asian’ business as usual, as Fred Bergsten points out, in the present environment, the ‘American’ model looks increasingly good. (Bergsten 1998: 2) At the same time, it is understandable how this issue of improving business and administrative infrastructure can be perceived as something of a threat to national identities and even national sovereignty. And, perhaps it is necessary that some demarcations are made between national interests and culture and that which is necessary for a country to adopt international business and political standards.

 

There is no reason why Asian countries cannot maintain national identities, and even systems or models of business practice while assuming the global imperatives for participation in global commerce. Issues of regulation, transparency, rule of law, trade and even capital liberalisation need to be considered and changes implemented, not because nations are being forced to do so but because it is in their best interests to do so. The crisis and the ensuing review of bank borrowings and loans revealed that banks in Indonesia, Malaysia, Thailand, the Philippines and Singapore had accumulated approximately US$73 billion in bad debts, or about 13% of those countries’ economic output. Josephine Jimeney, Senior Portfolio Manager for Montgomery Emerging Funds, estimates that Asian companies accumulated some $700bil. in debt from1992 to 1997. (Bleck 1997:33) The impact and the depth of such debt will, no doubt, continue to impact the future economic prospects of Asian countries and this needs to be addressed.

 

Yet, this issue of considering the global imperatives for economic management in a global era, raises the further issue of the future value of models at all. Understanding management models in order to identify the different approaches to business has its benefits and for some time yet to come the business cultures, and forms of capitalism across Asia will continue to influence management styles. But in the context of encroaching global commercial forces, the real and continued use of models has to be questioned.  All of the world’s models are now equally vulnerable to financial bubbles, inflation and down turns. While Japan is trying to recover from recession, E&SE Asian business, whether MNCs or CFBs, also stand bewildered in the aftermath of their financial crisis. As new styles of management emerge in response to global business and the global information society (GIS), the Japanese approach, along with the CFB approach, and maybe even the Anglo-American approach, will continue to be problematic. If for no other reason than that they operate from paradigms of past political and commercial eras. On this issue Peter Drucker has much to say in his Management in a Time of Great Change.

 

With acceptance of the thesis that management itself has become the decisive factor in business success, (Drucker 1995) the financial crisis is to be understood as essentially a crisis brought on by outmoded or inadequate management styles, or even models. Indeed, businesses and governments of all persuasions are now in search of new management styles to relate to the demands of globalisation.

 

In April, 1999, Senior Minister of Singapore, Lee Kuan Yew, called for a ‘mental revolution’ in Singapore arguing that in the global economy Singapore workers needed to find a extra edge in economic competition. He said the old ways of thinking and working would have to change. (Fernandez 1999:1)  However, it is not only the workers who need a ‘mental revolution’ but the managers of Asian businesses.

 

This mental revolution, or change in the process of management itself, starts with the realisation the global economy is not so much concerned with the management of routine as it is with the management of innovation and change. Given that in the industrial era corporate culture resisted change, it is no wonder that its structures and paradigms are not able to cope with the inherent change and the surprise of innovation in the global economy. (Buckley 1992:213) In the era of innovation and change, what is needed is a new management mentality – or paradigm.

 

The financial crisis offers an opportunity to address matters of administrative, social and financial infrastructure and capacity building. But the issue of management styles and management skills also needs attention. Industrial era management styles are changing. The organisation of staff, by way of systems of obligation and hierarchy,is under threat just as much as low labour cost export strategies and arms-length trade strategies.  

 

Yet, in suggesting that existing Asian and Anglo-American models are outmoded in the global economy, the temptation is to create a ‘more appropriate’ global model. Using models to explain and contain change and innovation is however problematic because such models need to be inherently dynamic and evolving to relate to a world of rapid change. Accordingly, the issue of finding a global approach is not one of inventing a model but identifying styles of management that can address the dynamism of the global economy.

 

Instead of using static management models, in the environment of global commerce business may be better served by use of a more dynamic approach and a management mix, or a management matrix. The global business management task, I suggest, involves the consideration of seven constituencies: flexibility, knowledge, innovation, authority, responsibility, efficiency and communication. These constituencies need to be addressed in America and Australia just as much as in Asia if business is going to be dynamic and responsive to global commerce.

 

In the past, Asian approaches to business have involved responding to foreign market opportunities and even foreign business initiatives from the position of historically learned social and organisational processes. In the post crisis era, however, this approach has to be questioned and more proactive and engaging management encouraged. Still, it is important to remember that Asian business is as much a part of Asia’s regional dynamics as well as its global dynamics, for its future will be an expression of both. 

 

 

Asia After the Crisis

 

Regional Developments.

 

At the Sixth Annual APEC Finance Minister’s Meeting in May, this year, the IMF reported that Asia’s emerging markets are experiencing gradual recovery during 1999 – although prospects differ among countries. “Activity has turned around in Korea and has stabilized in Thailand, Malaysia, the Philippines and Indonesia, and growth in these and other countries should resume this year. The recovery has been aided by financial stabilization, declining interest rates, and supportive fiscal policies, and has been reflected in sharp rebounds in stock markets.” (IMF 1999)

 

In the longer term, the IMF predicts that East Asia will see growth improvement of more than 5% in 1999 and more than 6% in 2000. In SE Asia, the growth for 1999 will still be generally negative, at 1%, but improve to more than 2.5% in 2000. The Economist’s Global Outlook shows similar predictions suggesting that Asia & Australasia growth will increase by 1.6% for 1999 and 2.93% for 2000, rising to 5% by 2003. Although high growth rates may not return to the region in the near future, there is very good reason to believe that with the continued development of the Asian economies and the growth of market opportunities high growth rates will return over the next 5 years. The developments in China suggest that this kind of expectation is not unrealistic.

 

There is no doubt that with China becoming more commercially integrated into the rest of E&SE Asia, the East Asia region (excluding South and Western Asia) is now one of the three main commercial regions of the world. Its overall regional trade now amounts to almost a third of all world trade. While China is undertaking radical political and economic reforms that will effect the nature of its commercial life, its integration with Hong Kong and Taiwan will add further to China’s commercial capabilities. Still, in pursuit of export led growth fuelled by MNC investment, China, like other Asian economies, will be vulnerable to foreign commercial decisions. While FDI in China for 1998 was similar to 1997 at $45bil., FDI for 1999  is expected to be about 20% less than 1997 and 40% below the government target.(Galloway 1999)

 

The contraction in MNC FDI in China, while a consequence of the 1997-98 financial crisis, also reflects MNC caution about further over investing in Asia. The enthusiasm for heavy investments in the early 1990s, has been tamed by the realisation that China’s vast population is not yet an equally large pool of unmet consumer demand. China, nevertheless, continues to move in the direction of agricultural reform, political reform and privatisation – all in an effort to stimulate economic growth by way of foreign trade.

 

This kind of government inducement for economic reform continues across Asia. The financial crisis not only reduced flows of FDI and FII across the region but revealed the need for Asian economies to reassess their economic growth infrastructure. Vietnam, for example, is seeking to speed up its privatisation of government enterprises with over 150 state firms ear-marked to go private. It is undertaking to build its first oil refinery at an estimated cost of $1.5bil.and has also opened a pilot stock market, or Stock Trading Center, in Ho Chi Minh City and hopes to have the market fully operational in a few years.(Reuters 1998-July 14:41) Still, in a country where 80% of its 76 million people live outside of the major cities, continual FDI and the development of foreign markets is extremely important to raise economic development and the annual per capita income to more than $400.

 

Singapore, as a more advanced economy, is, nevertheless, also aware of its need to address its social, commercial and bureaucratic capabilities.  Singapore’s growth has occurred because of the high participation of MNCs in the economy with over 3,500  MNCs in 1997. With an FDI inflow of over $55bil. in 1995, MNCs in Singapore (European 28.9%, Japan 23.3% and the US at 17%) have created an export trade ratio three times larger than the country’s GNP. While Singapore has historically acted as a through-port, MNC investments continue to grow mainly in electronics, light manufacturing and in the finance and banking sectors.( Singth 1997:2)

 

The Singapore Government, in dialogue with its commercial leaders, has engaged in a strategy to attract foreign investment and MNCs by providing efficient port, and until recently, low cost manufacturing and business services. While Singapore’s local firms have played a relatively minor role in the country’s overall economic growth, Singapore is seeking to improve its social and economic capabilities. Wanting to maintain its position as a regional hub, Singapore is seeking to advance its electronic commerce capabilities. This includes the restructuring of the entire education system to “prepare the young for this new world” according to Information Minister, George Yeo in August 1998. (AFP 1998b-August:3) The Singapore Government has also initiated the new Singapore Management University as a private education institution and designated a substantial area of land and buildings in its lucrative down town commercial district in an effort to boost the intellectual and business capabilities of the country.

 

While the financial crisis has introduced a recession across SE Asia as governments and banks struggled to pay off their heavy borrowings, the World Bank believes that the severe contractions in GDP and domestic demand will increase as the economy improves by way of trade growth after 2000. (JP 1998:1) Asia has been experiencing its fair share of turbulence - and even fermentation - as so much happens at once in this inter-connected commercial region. Yet, it is within Asia’s developing economies that emerging market opportunities are being created. 

 

 

 

 

 

Market Growth Trends in Asia.

In 1996, before the financial crisis, Michael Porter was rather critical of the Asian way of doing business, suggesting that in general Asian companies tend not to have strategies but remain content to just do deals. He suggests that global competitive forces are making this form of ‘competition’ less effective and that Asian companies need to become more sophisticated in their competition. Simply replicating the patterns of success in other parts of Asia may have worked in the past but, with growing competition from other production areas, it will not suffice for the future (Porter 1996:60).

 

The development of both the EU and NAFTA will have implications for Asian business. Drucker suggests that the high level of unskilled and low skilled workers in both these regions necessitates the increase of manufacturing jobs for both political and social reasons. The implication is that as labour intensive production in light manufacturing increases in places such as Slovakia, Spain, the Ukraine or Mexico, it has a direct bearing on Asian exports of these products into European and American markets. (Drucker 1995:1155)

 

With the liberalisation of China’s trade policies and advancing production opportunities, China’s exports, potentially, could be larger than all other E&SE Asian countries combined, excluding Japan, in less than a decade. This will have direct implications for other Asian economies as competition increases across Asia for Western market share. But there is a limit to how much Asian product will be absorbed by the EU and America. The implication is that, as Porter suggests, E&SE Asian business will need to recognise both the global market adjustments taking place and the changing competitive nature of global commerce and to seek new markets, along with new products and services.

 

Given E&SE Asia’s history of economic growth through merchandise exports, it is easy to mistakenly perceive Asia’s future as a continuation of merchandise trade growth. However, if growth in other regions is any indicator, the demand for increased social and commercial infrastructure in Asia will lead to the service sectors proving to be an extremely large aspect of Asia’s future markets. Demand for education and education related services, a spread of health care services, telecommunications and computer services along with finance and banking services are already indicated by FDI growth in these sectors in Asia.

 

In ASEAN, for example, MNC investment by American and European businesses has been primarily in the areas of petrochemicals, specialty chemicals, and more recently, telecommunications, while the Japanese has favoured automobile manufacturing, electronics and the production of metal products.(Bartels 1997:59) While these resource and manufacturing areas are likely to remain strong growth industries, Asia’s future growth demands that other service based industries develop. As Singapore is demonstrating, Asia’s future lies in increasing the intellectual and service capacities of the Asian economies. It also appears to be in further extending its business alliances and networks with other companies across the globe.

 

 

 

 

Alliance Management

 

Traditionally, MNCs foreign investment has searched for new markets, new resources or new efficiencies. But increasing attention to regional and national market characteristics and competition has led to the growth of cooperative business relationships in order to acquire new competitive or owner-specific advantages. Charles Michalet, in writing on strategic partnerships, suggests that the networking process is so strong that it will introduce dramatic changes to the regulation of the world economy. As both trade and FDI flows have come to be dominated by the flow of information and knowledge, so, too, both the market and business organisation will be dominated by the ‘contractual economy’.  He says: “The complex structure of network firms and alliances, each network firm belonging to a specific set of alliances, will structure the world economic space. Competition, if any, will shift from firms struggling directly against one another for market shares to a new type of cartel structure based on technology.” (Michalet 1991:47)  Michalet suggests that market access will depend first on the firm’s position in a network of firms, and second upon the network’s position in an alliance between networks. 

 

In parallel to the cross-border alliances, by way of partnerships and cooperative arrangements, there has also been growth in mergers and acquisitions (M&As).  Like FDI and alliance growth, M&As are a characteristic of the expansion of global commerce. FDI and strategic alliances are growing faster than any other form of international transaction. Dunning reports that world-wide cross-boarder acquisitions accounted for 65% of FDI outflows between 1986 and 1990, and 55% for 1992 and 1993. (Dunning 1997:45)  This growth has continued with 11,400 mergers announced in America in1998.

 

In the Asian context, M&As are increasingly important form of FDI.  UNCTAD reports that major foreign M&As in developing Asia more than tripled between1996 and 1998 rising from $4bil. to $13bil.(UNCTAD 1998:1) In Indonesia, Malaysia, the Philippines, South Korea and Thailand, mergers made up 57% of FDI in 1998. While there is natural concern by governments over the further loss of national control over enterprises, M&As are what business want. In 1998 Japanese firms were involved in 908 M&As, 35% more than in 1997, and more than 50% up on 1993. Yet, M&As are not restricted to small firms being taken over by larger ones. M&As are most intense in the banking, telecoms, and pharmaceutical sectors and in 1999 alone companies such as  Mitsubishi Chemical and Tokyo Tanabe (pharmaceutical), Chuo Trust and Mitsui Trust, along with Renault and Nissan, have undergone M&As. In 1998 Nippon Oil merged with Mitsubishi Oil to create Japan’s biggest oil company with 24% of the market. (Economist 1999-April 3:55) Clearly, M&As are seen as a market growth and competitive advantage strategy rather than a sign of weakness or failure. It is also to be understood as an extension of the ‘Asian’ model of doing business that suits the Anglo-American model as well.

 

 

 

 

 

 

 

Modalities used by US firms to service markets in Japan, UK and Germany

   - 1992-1993

 

 

Affiliate sales            Exports       Licensed sales

  Total
            Japan                       

All industries (US$bil.)

49.7

42.8

20.9

113.4

Per Capita (US$)

403.7

347.7

169.8

921.2

% of total

43.8

37.7

18.4

100
            UK

 

 

 

 

All industries (US$bil.)

125.3

20.8

3.2

149.3

Per Capita (US$)

2,190.5

363.6

55.9

2,610.0

% of total

83.9

13.9

2.1

100

           Germany

 

 

 

 

All industries (US$bil.)

71.7

16.8

2.7

91.2

Per Capita (US$)

1,156.6

271.0

43.5

1,471.0

% of total

78.6

18.4

3.0

100

Source: J. Dunning; US Dept of commerce (1992, 1993), Weinburg (1993)

Notes: Affiliate sales represent sales of US manufacturing affiliates (excluding exports) in the three countries.

Exports represent all exports to the three countries by all US firms (NB part of these may be included in affiliate sales)

Licensed sales represent royalties and fees paid by unaffiliated Japanese, UK or German firms to US firms multiplied by 20 (it being assumed that royalties and fees were calculated at 5% of gross sales)

 

 

 

 

Further Considerations for APEC

 

One of the most important lessons to be learnt from the Asian financial crisis is that while the global financial system can provide growth opportunities it is inherently unstable. Certainly, short term loans and currency flows and fluctuations have created a problem for Asia and in 1997-98 have been very unstable. In the context of developing domestic commercial architecture, this issue is very worrying.

 

It is for this reason that ASEAN and APEC members are cautious in promoting their agendas for trade and capital market liberalisation.  While the intention is for APEC to become an open and free trade region by 2020, and while there has been much progress with the reduction in aggregate tariff rates across APEC economies and the introduction of computerised tariff databases, the liberalisation agenda remains a concern.

Liberalisation.

 

The liberalisation agenda contains two aspects: trade liberalisation and capital market liberalisation. While trade liberalisation in itself is not seen as a bad thing and can proceed at an organised and controlled pace since merchandise trade is easily recognised and organised, capital market liberalisation is another matter.

 

To be sure, there is good reason to be apprehensive about capital market liberalisation. The flow of money across boarders and across the world is mostly unhindered and even unnoticed. Peter Drucker reports that the amount of money moving through the London Interbank market in one day is possibly greater than would be needed to finance the ‘real economy’ of international trade and investment for a year. (Drucker 1995:126)  Capital markets are huge and with the continued growth of e-commerce, financial markets will also continue to move beyond the control and domain of domestic governments.

 

In the wake of the financial crisis and the realisation of just how powerful global capital movements have become, there is now a need to make a distinction in the ASEAN and APEC agendas between trade liberalisation and capital market liberalisation. Their continual alignment may endanger the whole liberalisation agenda. Still, it is not only Asia which needs to revisit its financial management systems. In September, 1998, the Bank of International Settlements in Switzerland, called for the strengthening of  “the architecture of the world financial system, which is increasingly beyond the reach of national regulatory powers.” (AFP 1998a:42)  Capital market liberalisation is as much a problem for the world as it is for Asia and needs to be approached differently from trade liberalisation.

 

Yet, given the inevitability of global commerce, the challenge is to find the right mechanisms to lightly manage exchange rates and to institute the necessary financial management architecture to allow domestic economies to survive in the global market place. The objective of the liberalisation program has been to create efficient market economies and opportunities, and, accordingly, there is a role that ASEAN and APEC can play at a regional level in furthering this goal.

 

 

Ecotech.

 

In addition to its trade and investment liberalisation agenda, APEC is concerned about  economic and technical cooperation (Ecotech) among its members. This is probably the most extensive active area of APEC’s program, with some 10 working groups and some 268 separate projects under way (Scollay 1998:9) as of 1998.  In the context of the financial crisis, the need for improved financial and economic management systems has increased interest in Ecotech.

 

Still, the needs of member countries are not the same, nor are they the same as they were a decade ago. Apart from the different rates of development between the Asian Newly Industrialised Economies (NIE) and the NNIEs, the financial crisis requires a significant extension of APEC’s Ecotech activities in order to help repair the economic and social damage brought on by the crisis. Indeed, it is not surprising to see a reorganisation of priorities by APEC of its Ecotech programs and even direct assistance to those economies that have demonstrated a deficiency in institutional and technical capability.

 

The Report on APEC economic governance and capacity building by the Centre for International Economics, in Canberra, in October 1998, provides a very detailed review of the programs undertaken by organisations such as the Asian Development Bank, the World Bank, the IMF and the United Nations, to build economic governance capacities. The Report lists quite a number of areas of governance that still require attention, such as bank restructuring and business law development. But it also expresses the opinion that the diversity of APEC economies is a source of strength in developing cooperative activities, and that the crisis provides APEC with the opportunity of translating its principles into practice.

 

There is no doubt that financial management architecture and government policies need to be revisited and strengthened in order to see Asia return to its previous high levels of output. At the same time, there is a need to directly address the issue of increased technology capacity and to encourage business growth by making technological development attractive in the host country. Accordingly, there is genuine role that governments can play in capacity building. Commercial capacity, financial sector capacity and government service capacity all need development. In the area of finance sector training, in particular, three areas stand out. The need for capacity building in financial management; the need to train staff in international finance, and the need to develop not only domestic but also global financial architecture.

 

It is quite feasible to imagine that Ecotech will be considered by many of APEC’s members as the new primary consideration. Technology transfer, human resource development and knowledge management, may well become the main regional concerns and focus of, not a trade strategy, but a development strategy for the Asian region.

 

 

Conclusion.

 

In suggesting that the Asian growth model has essentially been a model of business growth in Asia, and, accordingly, involved the business acumen of international companies, it follows that cause for the financial crisis lies with international business as much as it does with Asian governance and business systems. The lack of accountability, opportunism, and insufficient regulation are accusations that can be equally made against international business as they can against Asian business and governments. Any crisis prevention strategy that is developed to strengthen Asian commercial and administrative infrastructure must consider increased accountability and oversight of foreign business as well.

 

This is not to deny the importance of US and European markets, and particularly US support, in the future developments of the region. Yet, the starting point for reconstruction stems from the realisation that as the financial crisis was a regional phenomina, it will be resolved mainly by regional efforts.

 

It is important to remember that Asia, as a region, has been undergoing a transition, or transformation, for some 30 years. It has rapidly moved from an era where social and political life was dominated by agricultural production to the information era where knowledge, communication infrastructure and global commerce influence business, political and social activity. In this context, the Asian financial crisis can be understood not as a problem caused by failure but one brought about by success. It can also be understood as another step along Asia’s path of transformation.

 

Asia will need to continue its technological development in order to participate in the emerging information era; it will not be helped by the imposition of Anglo-American growth criteria or models. Dialogue with Asia has to begin with the premise that “there are a different set of interests at work with each myth [- Western and oriental].”(Higgott 1998:61) Even within Asia, the fact that the leading economies are competing for European, Japanese and American market share, means that economic and cooperative efforts are coloured by national-business interests as opposed to regional interests. The search for an Asian identity, rather than an Asian model is not, consequently, a romantic notion or the search for a common cultural character, but very much steeped in the economic, social and political development that is taking place. The one common feature of the region, in all these areas, is that it is developing.

 

A starting point in assessing Asia’s future needs is to realise that global commerce is  affecting and changing the process of international business and government relations in the Asian region, just as it is in other regions. In the past, the development of foreign business subsidiaries was responsive to host governments offering incentives by way of tax breaks or subsidies. MNCs would then expand their overseas interests by investing further in these branch operations. Businesses have now generally abandoned this model in favour of seeking market and production efficiencies. (Coleman 1998:5) Companies now locate in places where they perceive their future to lie. They also tend to diversify their business activities across boarders in order to draw upon different production opportunities, again in an effort to be efficient and respond to emerging market opportunities.  

 

The change in the nature of global business has been spurred by technological advance in the financial and banking systems of the world and the unprecedented expansion of financial transactions. Where investment previously tended to follow trade opportunities, this is no longer the case. Investment now leads production growth and trade expansion. At the same time, the nature of international investment has changed. Money is no longer geographically constrained and governments play a much less important role in controlling international monetary flows. Further, international monetary flows are now predominately ‘private’ (Ohmae 1995b:3). Where international flows were once predominately government to government or banking institution to government, today, money flows are mainly business transactions.

 

In consequence, the role of governments and of regional bodies needs to become responsive to business in the context of dynamic global commerce. Thus, there appears something of a dichotomy as nation states find themselves participating in the movement toward global economic integration and, at the same time, towards regional economic and political integration. Ken Ohmae has suggested that nation states have become unnatural, even ‘dysfunctional’, as their role as ‘middlemen’ in international political and economic matters become obsolete. (Ohmae 1995b:5,16) But rather than the state ‘dying’ as Ohmae suggests, the role of nation-state governments is changing to become a political and economic unit within both the global and regional arena. Indeed, till now nations have not been passive in the emergence of the global and have played a role in making regionalism and globalism possible.

 

Where ASEAN has been flexible and undemanding, APEC brings a different challenge to Asia. Its agenda for liberalised trade and investment and open regionalism clearly affront bureaucratic inertia. APEC, in the first instance, brings pressure for ASEAN to accelerate its trade liberalisation programs – if not its capital markets. Second, APEC brings pressure for all of Asia to seek deeper economic integration. While APEC is grounded in open regionalism, it brings two of Asia’s largest trading partners, Japan and America, into dialogue with Asia over issues of development. Indeed, as Asian trade figures suggest, Asian countries cannot make realistic economic decisions apart from dialogue with the wider East Asian region and America.  Still, while APEC endeavours to strengthen the political and administrative infrastructure of the regional group, this can only properly be completed with an understanding that a economic region already exists across Asia.

 

It remains for APEC to consider Asian development objectives not just in the light of global commercial imperatives of what Asian must do, but also in the light of Asia’s natural and regional dynamism.


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