Industrialization of
Developing Countries:
Analyses by Japanese Economists
Edited by

Kenichi Ohno
Takahiro Fujimoto

21st Century COE ProgramIndustrialization of
Developing Countries
Analyses by Japanese Economists

Edited by

Kenichi Ohno
Takahiro FujimotoIndustrialization of Developing Countries
Analyses by Japanese Economists—The 21st Century COE Program Joint Report—

University of Tokyo“Manufacturing Management Research Center” (MMRC)
National Graduate Institute for Policy Studies (GRIPS)“Asian Development Experience and Its Transferability”

This book is a report on presentations and discussions of thesymposium which was held on the 13th of July 2006 at GRIPS.

Copyright 蘓 2006 National Graduate Institute for Policy Studies
Manufacturing Management Research Center
National Graduate Institute for Policy Studies
7-22-1 Roppongi, Minato-ku, Tokyo 106-8677 JapanTEL:+81-3-6439-6090

FAX:+81-3-6439-6010

URL:

http://www3.grips.ac.jp/~21coe/j/index.html

Manufacturing Management Research Center
University of Tokyo
3-34-3 Hongo, Bunkyo-ku, Tokyo 113-0033 JapanTEL:+81-3-5842-5501

FAX:+81-3-5842-5536

E-mail: info@mmrc.e.u-tokyo.ac.jp
URL:

http://www.ut-mmrc.jp/e_index.html

Preface
As the Japanese economy is finally getting out of the post-bubble recession, the time has come to charter a new course for Japan’s renewed
dynamism. How should Japan identify and position itself on the global stage
in the twenty-first century, and what should it endeavor to achieve? Despite
economic recovery and some progress in domestic reforms, Japan in recent
years has not presented or followed a clear long-term vision in its external
policy, especially in its dealings with economic matters regarding technology, trade, investment and aid. There are issues that have attracted ourattention, such as the alleged threat posed by emerging China, official promotion of FTAs, global mega-completion and industrial reorganization, adeclining trend in Japanese ODA, Japan’s attempt to protect its intellectual
property rights, and the return of some Japanese overseas investments toJapan. But these events do not collectively tell us where Japan is headed. In
fact, Japan’s diplomatic relations with neighboring East Asian countries,
which should be strengthened, actually seem to have eroded recently. We
need to stop drifting and begin to draft a new grand map which can lead us
to a new voyage, beyond adjustment of interests and inertia of the past.
The mission of the National Graduate Institute for Policy Studies (GRIPS)
is to provide realistic and concrete policy analyses which can meet therequirements of our time. Our intellectual contribution is directed not only
to Japan but also to developing countries where the majority of world population live. We want to continuously innovate the methodology of researchand education. We aim to do that through building intellectual networks
which are open and can promote interaction among exceptional talents andsuperior insights. Our Twenty-first Century Center of Excellence (COE) Program, Asian Development Experience and its Transferability, is an important means to realize this goal.

Although our COE program is in the intermediate stage, we already havesome interesting results to report from intensive field works in developing
countries. We have organized this symposium to share and discuss themwith a broader circle of experts. We have invited the University of Tokyo’s
COE Program, Manufacturing Management Research Center, which studies
industrial issues in developing countries and is highly acclaimed, as ours, tobe a co-host. We anticipate, through our preliminary discussions, that our
two COE programs will have common orientation and be able to produce,by mutual learning and complementarity, a concrete vision that can guide
Japan’s globalization and its contribution to the developing world. Thisvision still remains a rough sketch today, but we would like to present it to
you before it is polished up to become a detailed blueprint.
We hope that our intellectual inputs will be a catalyst for a new round of
productive policy discussions.

July 2006
Toru Yoshimura
President, National Graduate
Institute for Policy Studies

Contents

Preface

Report 1:

Architecture-based Comparative Advantage in Japan and Asia

Takahiro Fujimoto (University of Tokyo) …………………………………1

Report 2:

Vietnam s Industrial Policy Formulation: To Become a Reliable
Partner in Integral Manufacturing

Kenichi Ohno (GRIPS) ………………………………………………………11

Report 3:

Competitive Strategy of Global Firms and Industrial Clusters:
Case Study on the Hard Disk Drive (HDD) Industry

Tomofumi Amano (Hosei University / University of Tokyo) …………27

Report 4:

Strategy for Cluster-based Industrial Development in Developing Countries

Keijiro Otsuka and Tetsushi Sonobe (GRIPS) …………………………67

Minutes of Discussion …………………………………………………………81

About the Presenters……………………………………………………………95

Architecture-based Comparative Advantage
in Japan and Asia
Takahiro Fujimoto*1. Introduction
Asia has become a global center of manufacturing during the lastquarter of the 20th century. At first, Japan was the only major exporter of manufactured goods in Asia. As the yen rapidly appreciated after the Plaza Accord
in 1985, newly industrialized economies (NIES) such as Korea, Taiwan, Hong
Kong, and Singapore emerged as exporters of relatively standardized goods.
Japanese manufacturing firms also started to shift their production facilities
mainly to ASEAN countries.
In the 1990s, China emerged as a major exporter of certain laborintensive goods. NIES also continued to expand their manufacturing bases. The
Japanese economy stumbled, but its trade surplus continued to be significant.
America made a comeback as a center of digital network goods and software.
How can we explain these dynamics of manufacturing competitiveness? The
best way to understand them is to go back to the basics of comparative advantage theory.
When there is a good fit between a nation’s characteristics and an
industry’s characteristics, the industry tends to enjoy competitive advantages inthat country. The Ricardian Theory of Comparative Advantage implied that
“good fit” translated into relatively high labor productivity vis-à-vis other countries (Ricardo, 1971). Neoclassical economists such as Heckscher, Ohlin, andSamuelson maintained that countries having a large endowment of a certain* A Professor of the University of Tokyo and the Executive Director of the Manufacturing
Management Research Center.

1

Takahiro Fujimoto

factor of production (for example, labor-rich countries) would have a better fit
with industries that heavily use that particular resource (for example, laborintensive industries), assuming that technology is identical across the countries(Hecksher, 1949; Samuelson, 1948). A recent version of competitive advantages (e.g., Porter, 1990; Cho & Moon, 2000) also follows this tradition of fit
between industry and country characteristics.
In more recent years, however, various phenomena have emerged thatexisting theoretical frameworks have difficulty explaining. These phenomena
include Japan apparently being surpassed by China, Korea, and Taiwan in sometechnology-intensive products (e.g., DRAM, CD media, DVD recorder), whichwere assumed to be Japan’s stronghold for many years.

2. Export competitiveness of Japan’s integral architecture
products
Against this background, the author holds that we need an additionalframework that focuses on a “fit between organizational capacity and architecture” — a version of the comparative advantage theory derived from our observation of manufacturing activities on the shop floor.
Specifically, this framework argues that Japanese manufacturingfirms in the early postwar era, facing high economic growth amid shortages ofwork force, materials and money, tended to engage in economically rational
long-term transactions and long-term employment. As a result, they built organizational capability that emphasized teamwork among a multi-skilled workforce, or “integrative organizational capability of manufacturing,” whichraised productivity and quality simultaneously. The Toyota Production System
is a typical example of such capability (Monden, 1993; Fujimoto, 1999).
There are two basic types of product-process architecture: (1) “integral architecture,” with complex interdependence between product functions
and product structures (such as automobiles), and (2) “modular architecture,”
in which the relationship between a product’s functional and structural elements
has a simple and clear one-to-one correspondence (such as personal computers)(Ulrich, 1995).

2

Architecture-based Comparative Advantage in Japan and Asia

Figure 1. Products Categorized by Architecture Type of
Design Information
Interdependence of part design
Integral(Match)Connection beyond individual firms

Closed(Enclosure)

ClosedIntegral
E.g. Automobiles
Motorbikes
Light and compact
electronics
Game software

Modular(Combination)
ClosedModularE.g. Mainframes
Machine tools
Lego(toy)Open
ModularOpen(Industry-widestandard)

E.g. Computers
Package software
New financial
commodities
Bicycles

It is then thought that Japan, which is a country with a large endowment of “integrative organizational capability” stemming from its long-term
employment and long-term transaction practices, tends to have a competitive
advantage in “integral architecture” products — a prediction based on our“architecture-based comparative advantage” hypothesis. In other words, Japan,
where coordination-oriented organizational capability is concentrated due to its
historical trajectory in the late 20th century, tends to export coordination-intensive
goods, or products with integral architecture.

3. Preliminary empirical results
Can this new approach to industrial competitiveness, featuring capability-architecture matching, demonstrate additional explanatory power on thereality of Japan’s industrial competitiveness? Although the research is still at an
exploratory stage, the Manufacturing Management Research Center (MMRC)
at the University of Tokyo conducted a survey analysis of selected Japanese

3

Takahiro Fujimoto

manufacturing firms in cooperation with the Ministry of Economy, Trade andIndustry (METI). The survey targeted both assembled products and processed
products, including automobiles, household appliances, electronics, and parts,
industrial machines, chemicals, iron and steel, textiles, and food and beverages(Fujimoto & Oshika, 2006).
The results revealed that our “integral architecture index,” constructed from about a dozen questions regarding architectural characteristics of eachproduct surveyed, has a statistically significant and positive correlation with theexport ratio of the product in question (export value/domestic production value)(Figure 2). The positive correlation is observed in both fabrication-assembly
goods (e.g., machinery) and processed goods (e.g., chemicals). The integral
architecture index is also positively correlated with not only the export ratio,
but also the foreign activity ratio (export plus overseas production/domestic
production), indicating that Japanese multinational firms tend to do well withintegral architecture products wherever they are produced.

Figure 2. Ratio of Export and Integral Architecture Index(assembly products: 52 samples)
100%
90%

Export Ratio

80%
70%
60%
50%
40%
30%

Regression Line

20%
10%
0%
-3.000 -2.500 -2.000 -1.500 -1.000 -0.500
Low

4

0.000

Integral Architecture Indicator

0.500

1.000
High

1.500

Architecture-based Comparative Advantage in Japan and Asia

4. Hypotheses on architectural advantages in the AsiaPacific Area
Let us turn to architecture-based comparative advantages outside
Japan. The following hypotheses are very preliminary and impressionistic, andare based mostly on ad hoc empirical and historical observations of each geographical area (Figure 3).
The basic logic is the same across regions and can be described asfollows. Each region has its own historical path. A certain type of organizational capability tends to become concentrated in a certain region as a result of an
initial capability-building process, which generates region-specific capability.
Products with a certain type of product-process architecture tend to match betterwith a certain type of organizational capability, which results in relatively highproductive performance in terms of, for example, productivity, lead time, andquality.

Figure 3. Architectural Geopolitics:
A Prediction in the Pacific Region
Integural Axis

Japan

Modular Axis

Korea
China

TaiwanUS

India?
ASEAN?

5

Takahiro Fujimoto

Hypothesis on America: America has been a country of immigrants
for the past few centuries. It has continued to attract human resources withindustrial and technical knowledge and skills. For a society that has thisdynamism, it makes sense to minimize coordination in order to make use of
newcomers’ capability as quickly as possible.
As a result, American industries have emphasized division of labor,
specialization, standardization of work, clear job demarcation, and use of themarket mechanism, while minimizing coordination efforts. Thus, the American
System of Manufacturing throughout the 19th century emphasized interchangeable parts and specialized equipment while minimizing coordination on the
shop floor (e.g., fitter). The American Mass Production System perfected thisidea in the early 20th century. In the last decades of the 20th century, America
rediscovered the power of a manufacturing system that economizes coordination cost through the Silicon Valley model of designing and producing digital
network goods.
With this social and historical background, the framework of architecture-based comparative advantage predicts that America-based firms show
comparative advantages in certain technology-intensive modular architecture
goods.
Hypothesis on China: In the late 20th century, China, under theCommunist Party regime, adopted a Soviet-style national innovation system, inwhich industrial R&D activities were highly concentrated at the central level.
Manufacturing firms in China were virtually factories without R&D functions.
The design of Chinese products also tended to lag behind that of advanced
countries. Thus, when China chose an open economy path in the 1970s, manyof its manufacturing firms, and those in southern coastal provinces in particular,
had to acquire design information for their new products by licensing foreigntechnologies or copying foreign products.
To quickly catch up on product design, many Chinese firms, bothstate-owned and private, opted to buy licensed or copied parts as generic modules and quickly started up new manufacturing businesses by mix-and-match ofsuch de facto generic components. The author calls this type of products“quasi-open architecture.” Many of the machinery industries, such as motorcy-

6

Architecture-based Comparative Advantage in Japan and Asiacles, trucks, air conditioners, TVs, and other digital consumer goods, were supplied by more than one hundred assembly makers. Copied parts themselves
were also produced by hundreds of local suppliers. These firms also tended torely on mix-and-match of standard equipment and low-wage temporary workers
from low-income regions of inland China.
As a result, by the end of the 20th century China became a major
exporter of labor-intensive modular architecture goods. Thus, through a very
different historical path, America and China became two major producers ofrelatively modular goods on the Pacific Rim. This contrasts sharply with postwar Japan, which became a major exporter of integral architecture products.
Hypothesis on Korea: The most distinctive feature of the postwar
Korean economy is a small number of large conglomerates, called chaebols(e.g., Hyundai and Samsung), which somewhat resemble prewar zaibatsu inJapan; the two terms share the same Chinese characters. Each chaebol was controlled by its founder-owner and family. Because of strong top-down control by
the founder-owners, Korean chaebols tended to have strength in quick decisionmaking and investment on capital-intensive processes.
Thus, Korean large firms had advantages in standard capital-intensive
goods, where mix-and-match of the latest production equipment resulted in competitive products, such as general-purpose steel, DRAM, and crystal liquid display.
In other words, Korean export power is highly concentrated in capital-intensive
modular architecture goods produced by large firms, many of which stem fromchaebols.
Hypothesis on Taiwan: Taiwan is another significant exporter ofmanufactured goods. The Taiwanese economy may be characterized as a “competitive small country” on a par with the Netherlands. Taiwan, because of its
complicated history in the 20th century, and because of its geographical location at the intersection of America-China-Japan-ASEAN axes, has had strong
economic links with the U.S., Japan, and mainland China. Taiwanese exportoriented firms tend to be good at making the most of their overseas linkages inbuilding their organizational capabilities.
Where the products are modular and technology-intensive (e.g., digital network goods), Taiwanese specialized producers tend to create networks
with American firms. Where the products are integral (e.g., the automobile),

7

Takahiro Fujimoto

Taiwanese firms tend to link with Japanese production networks. Thus, theirstrength resides in the versatility of quickly moving between modular and integral architectures.
Hypothesis on ASEAN countries: As far as manufacturing competitiveness is concerned, ASEAN countries (except Singapore) have not demonstrated concentration of distinctive organizational capability. Although there isa significant degree of variety among ASEAN countries, none of them has
industrial agglomeration of local firms that are technologically competitive.
ASEAN countries have long functioned as production bases of the Japanese andWestern multinational firms.
As such, ASEAN’s manufacturing firms were mostly dependent on
product designs originating from multinational firms. Certainly, it is not realistic
to foresee emergence of a cluster of ASEAN local firms with distinctive design
capability in the near future. However, some ASEAN countries, such as Thailand and Vietnam, may emerge as production bases of labor-intensive integral
architecture goods. Their potential advantage over typical Chinese factories
may be that it is easier for the former to keep multi-skilled workers with relatively low wages. Although China possesses a huge supply of low-wage singleskilled workers, the wage level tends to be high and rising for multi-skilledworkers because of the volatile nature of the Chinese labor market.
Training multi-skilled workers is thus the key for this possible path of
ASEAN countries toward strength in producing integral goods. In order for
ASEAN economies to avoid direct competition against China, which is overwhelmingly strong in labor-intensive modular products, they may find it beneficial to differentiate themselves from China by focusing on low-price, laborintensive integral architecture goods. In order to produce such products competitively, it is crucial to strengthen teams of multi-skilled workers. The mosteffective training fields for this type of work force are, obviously, factories ofJapanese firms. Thus, ASEAN firms may have a chance to become the export
center of labor-intensive integral architecture goods, but only potentially at thispoint.

8

Architecture-based Comparative Advantage in Japan and Asia

5. Implication for ODA in ASEAN Countries
Historically, Japan’s ODA to ASEAN nations has been significant interms of volume. It may need to be more strategic in the future. That is, a significant portion of Japan’s ODA to ASEAN firms may be used for the trainingof multi-skilled workers. Large scale systems and high-tech equipment may
look spectacular, but with only these it is difficult to differentiate ASEAN tocreate distinctive manufacturing competence vis-à-vis China, a giant in modular
manufacturing. The main players of such capability-building should be Japanese and ASEAN manufacturing firms, but policy makers can assist their strategic linkage.
Policy makers of both Japan and ASEAN need to share a strategic
vision and a road map regarding manufacturing competitiveness in Asia. Hightechnology and large systems are favorite items for bureaucrats, but if all countries go for such technologies, they do not necessarily provide a strategic solution for sustainable manufacturing competitiveness.
Because the Asia-Pacific region is highly competitive in manufacturing, its policy makers and industrialists need to have a keen sense of comparative advantage. The architecture-based framework of comparative advantage
may give them some additional insights. As Ricardo advocated, a country cannot be a major exporter of all goods. This principle holds true in the case of
product architectures as well.

References

Cho, D. S. & Moon, H. C. (2000). From Adam Smith to Michael Porter: Evolution ofcompetitiveness theory. Singapore: World Scientific.
Fujimoto, T. (1999). The evolution of a manufacturing system at Toyota. New York:
Oxford University Press.
Fujimoto, T., & Oshika, T. (2006). Empirical analysis of the hypothesis of architecturebased competitive advantage and international trade theory. MMRC Discussion
Paper, 71.

9Takahiro Fujimoto

Heckscher, E. (1919). The effect of foreign trade on the distribution of income.
Economisk Tidskrift, 497–512.
Monden, Y. (1993). Toyota production system (2nd ed.). Norcross, GA: Industrial Engineering and Management Press.
Porter, M. (1990). The competitive advantage of nations. New York: Free Press.
Ricardo, D. (1971). On the principles of political economy and taxation. Baltimore: Penguin.
Samuelson, P. (1948). International trade and the equalization of factor prices. Economic
Journal, 58, 165–184.
Ulrich, K. (1995). The role of product architecture in the manufacturing firm. Research
Policy, 24, 419–440.

10Vietnam’s Industrial Policy Formulation
To Become a Reliable Partner in Integral Manufacturing
Kenichi Ohno*

The Vietnam Development Forum (VDF) is a joint research project of the National
Graduate Institute for Policy Studies (GRIPS) in Tokyo and the National Economics
University (NEU) in Hanoi. It is part of the 21st Century Center of Excellence (COE)
Program of GRIPS funded by Japan’s Ministry of Education, Culture, Sports, Science andTechnology (MEXT). One of the most important objectives of VDF since its establishment
in early 2004 has been to support industrial policy innovation by Vietnam’s Ministry ofIndustry (MOI). For this purpose, VDF has organized a large number of workshops andresearch weeks, published books and research papers1, and staged VDF-MOI joint missions
to Thailand, Malaysia and Japan. VDF has also directly assisted the drafting of motorbike
and supporting industry master plans and commented on the overall, electronics, and automobile master plans of the Vietnamese government. This paper presents a broad conclusion drawn from our policy research. It was originally addressed to Vietnamese policy
makers. By re-presenting it to researchers in development and aid studies, we hope toreceive their comments and suggestions as well.

1. The need for new industrial policy
Vietnam is deeply committed to global and regional integration, andno one doubts the seriousness of this commitment. Vietnam has already taken
many steps to realize this goal, including the completion of the AFTA process,the conclusion of the bilateral trade agreement with the United States, intense
negotiation for WTO accession, and preparation for other free trade areas(FTAs). Work is also progressing in the legal area as the government doubles
its effort to create or amend a large number of laws for consistency with international practices. All this is highly commendable.
However, diplomatic and legal preparations are not enough. In order* A Professor of National Graduate Institute for Policy Studies and the Research Director of theVietnam Development Forum.
1
See particularly Ohno and Thuong, eds., (2005) and VDF (2006b).

11

Kenichi Ohno

for Vietnam to truly enjoy the fruits of international integration, its real sector
must also be prepared. Vietnamese firms need to be competitive enough to survive and even prosper in the new open environment where import protection
and special favors are, in principle, no longer allowed. This is the area in which
Vietnam’s preparation is the weakest.
Free-market advocates may argue that, once the economy is open andfree, the market mechanism will activate the ingenuity of the Vietnamese people and the national economy will grow and become more efficient. This argument is too naïve, as the majority of Vietnamese policy makers already know.
The fact is that the balance of power between large advanced economies andlatecomer developing countries is lopsided. Vietnamese firms cannot at present
compete squarely with Toyota, Panasonic, LG or Intel in the global market.
Instead, they must work with these multinational corporations (MNCs) toimprove their abilities and become crucial suppliers in their global value chain.
A good policy is needed to encourage and support this effort.
But what kind of policy is needed, more concretely? The days ofplanning are over. Vietnam can no longer use rigid control to maintain international isolation. The strategy of infant industry promotion, adopted by Japanand Korea in the early postwar period, is also out of the question. Under thisstrategy, domestic industries were protected and nurtured until they became sufficiently competitive. But Vietnam cannot introduce such protection because of
its commitments to WTO and various FTAs.
Even the strategy of FDI-led growth, exercised by ASEAN4 in the
1970s–90s, is no longer applicable to latecomers like Vietnam. Although
Malaysia, Thailand, Indonesia, and the Philippines vigorously absorbed FDI,
they were slow to remove their tariffs, import restrictions, and localization
requirements. In these countries, FDI promotion and industrial protection coexisted for at least a few decades. External barriers were lifted only after they
achieved significant industrial agglomeration. Vietnam, however, is asked toremove barriers now, before such agglomeration occurs.
For this reason, Vietnam’s industrial policy in the 21st century must
be new and different from those of other countries in the past. It must reflect thefact that even newcomers must open up very fast. Globalization is inevitable,
and Vietnam must position itself to become a meaningful player in the global

12Vietnam’s Industrial Policy Formulation: To Become a Reliable Partner in Integral Manufacturing

arena, making sure that its contribution to East Asia and the world will rise overtime. What kind of policy can that be? That is the key question for the Ministryof Industry (MOI) in particular and the Vietnamese government in general toconsider. That is also the question we address in this paper.

2. Weaknesses in Vietnam’s policy formulation
To design and implement industrial policy in the age of strong globalization pressure, Vietnam must overcome two methodological problems. At present, master plans are designed and drafted by a small group of officials assigned
for the task. They work very hard but cannot produce desired results because crucial information and cooperation are lacking. More concretely, the weaknesses ofVietnam’s industrial policy stem mainly from the following two missing links.
(i) The lack of cooperation with stakeholders (i.e., concerned groups) in theentire drafting and implementation process. In the case of industrial master plans, the most important stakeholder is the business community.
(ii) The lack of inter-ministerial coordination within the government in deciding concrete action plans.
These problems are unique to Vietnam; they are not observed in otherhigh-performing East Asian countries. In our missions to Thailand, Malaysia,
and Japan, no serious problems were reported in either government-businesscooperation or inter-ministerial coordination in formulating industrial policy.
The main problem caused by the lack of cooperation with stakeholders is that policy is not supported by the business community and therefore is
not implementable. This problem is particularly acute in sectors dominated byprivate and FDI firms, such as motorbikes, automobiles, and electronics, which
are not under MOI’s direct supervision. Even where state-owned enterprises(SOEs) used to play key roles, in such areas as steel and cement, the share ofprivate and FDI production is rising. The drafting process must involve all key
players, especially private and FDI firms. Without solid channels to absorb theirinformation and concerns, policy remains ineffective.
Another problem caused by the lack of stakeholder involvement is13

Kenichi Ohno

that information and analysis are neither to-the-point nor up-to-date. Even if
MOI drafters are intelligent and hard working, it is difficult for a small team togather all relevant information. This is particularly true with external information such as global industrial trends or the latest strategies of MNCs. Suchinformation should be obtained through close and continuous contact with thebusiness community. A good policy cannot be built on outdated information.
As for the lack of inter-ministerial coordination, the main result is that
supporting measures are simply mentioned without details. Measures outside
the authority of MOI, such as tariffs and tax incentives or a reform of technicalschools and universities, are especially hard to prescribe in detail, since there isno mechanism to discuss and agree on policy measures among related ministries in close consultation. At present, ministries interact only superficiallythrough commenting on mutual drafts and exchanging basic information. Thisis another reason why timely and effective policy implementation is so difficult
in Vietnam.

3. Good policy, modest results
Thailand, Malaysia, and Japan have all constructed effective channels
for stakeholder involvement and inter-ministerial coordination in industrial policy making. Thailand has set up industry-specific institutes and official committees to link the government, businesses, and experts. Malaysia has a three-layer
structure consisting of the Industrial Planning Committee, the Steering Committee, and technical resource groups, which together mobilize several hundred
people to draft an industrial master plan. In Japan, deliberation councils andindustry associations have long been the key instruments for sharing information among all stakeholders at any time. The functions of these institutions are
explained in detail in VDF (2006b).
The experiences of these countries make it clear that Vietnam is far
behind them in industrial policy formulation and that it has much to learn fromthem. It must be admitted that Vietnam’s policy making method is in the earlystage of development. It is still primitive and defective, and inherits many characteristics of the planning days which are no longer valid. Another crucial fact
is that the way to achieve good involvement and coordination is not one, and14

Vietnam’s Industrial Policy Formulation: To Become a Reliable Partner in Integral Manufacturing

Figure 1. Breaking the Glass CeilingTechnical
absorption
Agglomeration

STAGE ONE
Simplemanufacturing
under foreign
guidance

STAGE TWO
Have supporting
industries, but still
under foreign
guidance

Creativity

STAGE FOUR

STAGE THREE

Full capability ininnovation andproduct design as
global leader

Technology & management mastered,can produce
high quality goods

Japan, US, EU

Korea, Taiwan

Thailand, Malaysia
Glass ceiling for
ASEAN countries

Vietnam
Source: Ohno, 2005.

that Vietnam should design a mechanism that is most suitable for its situationand needs. This means that Vietnam must selectively import the good practicesof neighboring countries, with necessary revisions and additions, to suit its circumstances. Since institutional evolution is difficult to forecast or plan with any
precision, the adaptive process will inevitably be a long one with many trials
and errors.
However, a negative lesson from Thailand and Malaysia is also worth
attention. While industry-led growth of Thailand and Malaysia has beenremarkable by the standards of developing countries in general, it falls short of
East Asia’s high performance criteria. These two countries are still unable tobreak through the “glass ceiling” after several decades of industrialization. The
glass ceiling here refers to the difficulty in moving from the second to the third
stage in the path of industrialization that I have described on another occasion(Ohno, 2005).
A developing country in the catch-up process typically starts withsimple assembly to fulfill foreign orders (stage 1), builds industrial agglomeration and supporting industries (stage 2), graduates from foreign guidance tomaster technology and management (stage 3), and finally achieves innovative,

15

Kenichi Ohno

original design capacity (stage 4). I argue that none of the ASEAN countries
has graduated from foreign dependency despite their quantitative achievement.
They still rely heavily on foreign managers and engineers to run their factories
and maintain quality. Since core competence and value creation are not internalized, a risk is always present that industries will shift to China or elsewhere
when circumstances change.
The governments of Thailand and Malaysia are acutely aware of thisproblem and trying to remedy the situation as a matter of top national priority.
Specifically, this requires strengthening small and medium enterprises (SMEs)
and creating linkages among them, developing industrial skills, promoting supporting industries, stimulating R&D, and other efforts in human resource development. Nevertheless, local capability of Thailand and Malaysia still falls shortof the high requirements of Japanese manufacturing FDI. This is a problem thathas been recognized for a long time--at least for two decades--but remains unresolved.
At the risk of over-simplification, we may even say that Thailand andMalaysia are the countries whose governments have succeeded in offering good
policy frameworks but whose domestic businesses remain less dynamic than
expected. The gap between good policy and modest results is especially striking
when we look at the performance of Taiwan and Korea. From the situation of
war devastation and dire poverty, they emerged as leading manufacturers ofhigh-quality products in a few decades. They received foreign technical assistance at first, but the time they spent for learning was relatively short. As soon
as they mastered technology, they sent foreign advisors home. R&D, productdesign, enterprise management, and factory operation are now carried out
entirely by locals. They invest vigorously abroad to expand production networks, and have become Japan’s formidable competitors. And Taiwan and
Korea achieved all this in no more than the time it took for Thailand andMalaysia to reach their current levels.
Why did Taiwan and Korea move up so fast, while Thailand andMalaysia learned more slowly? Is the reason difference in national character, oris it the difference in policy quality? If Taiwanese and Korean people are genetically more suitable for high-quality manufacturing than Thai and Malaysian
people, the government cannot do much to change people’s DNA. But if indus-

16Vietnam’s Industrial Policy Formulation: To Become a Reliable Partner in Integral Manufacturing

trial policies adopted by Taiwan and Korea have been superior in matchingnational aspiration with needed actions, we are compelled to study much deeper
into policy design and implementation to improve the industrial policy framework and content of Vietnam2.
Vietnam at present is a country of weak policy formulation. However,Vietnamese people are frequently praised as skillful, diligent, and persistent incomparison with other peoples in the region. This points to a possibility ofgreatly upgrading the industrial capability of Vietnam once policy weaknesses
are removed.

4. Coping with China
How to cope with China, with its enormous size and rapidly expanding manufacturing capacity, has become one of the most urgent issues for countries all over the world. China has large numbers of managers, scientists, engineers and unskilled workers, ample industrial materials, a relatively high levelof technology backed by a long history of industrialization drive, and a thick
network of overseas Chinese businesses. The China challenge looms large in
the industrial policy debates of Thailand, Malaysia, and Japan. It must also be a
top issue in formulating Vietnam’s new industrial policy.
It is clearly unwise to directly compete with Chinese products in the
global market. To avoid this, a country must differentiate its products from Chinese ones and position itself as a producer complementary to China rather thancompeting with it. If this is done successfully, the country can form a production partnership with China and use Chinese low-cost inputs to its advantage.
The crucial question is how to do this concretely. The proper positioning
requires a clear understanding of the fields in which China excels and the fields
in which it does not.
Since China is a big country, it is not easy to find industrial categories

2

Two facts complicate such a study. First, the policies adopted by Taiwan and Korea were very
different in that the former promoted dynamism of SMEs while the latter featured large businessgroups (chaebols) supported by large banks. Second, the state-led industrialization strategy
adopted by Korea, in particular, is no longer available to today’s latecomer countries under thepressure of globalization.

17

Kenichi Ohnoin which it does not produce. One needs to go into the level of individual products and even different grades of the same products to find a niche. Even then,there is no guarantee that China will not produce that product next year. Many
countries want to promote “high-tech” industries to upgrade their skills andcompete with China. However, the popularity of this strategy must be evaluatedagainst the following precautions: (i) there is a significant gap between national
aspiration and actual capability; (ii) no differentiation will occur if all countries
adopt this strategy; and (iii) China is also targeting such areas.
Thus, finding a niche in terms of specific products, including “hightech” products, has certain limits. The better way to distinguish oneself is toanalyze China’s strengths and weaknesses from the viewpoint of business architecture, as explained below.

5. Integral manufacturing
We propose one concrete industrial strategy for Vietnam in order toovercome the difficulties addressed in earlier sections. The strategy is targetedat building domestic capability in assembly-type manufacturing, such as electronics and electricals, motorbikes, and automobiles, and the production of partsand components for these industries3. Although assembly-type manufacturingindustries differ from one another in some aspects, they are common in thesense that (i) they extensively use metal, plastic, and rubber parts; (ii) productquality depends heavily on the quality of these parts; (iii) they also require
labor-intensive assembly with precision; and (iv) innovation and model changes
are quick and frequent. For this reason, assembly-type manufacturing industries
can to a large extent share the same supporting industries and human resources.
That is why they should be grouped together in strategic planning.
Vietnam’s workforce is particularly suited to labor-intensive assembly with precision, (iii) above, and that is why such FDI inflows are accelerat-

318

Assembly-type manufacturing has been the driving force of economic transformation of Japan,
Taiwan, Korea, ASEAN4, and China, and it is also expected to play the same role in Vietnam.
For other industries, such as garment, footwear, food processing, software, energy, industrial
materials, construction, logistics, trade, telecom, finance, and tourism, other strategies must besought; the argument in this section is not applicable to them.

Vietnam’s Industrial Policy Formulation: To Become a Reliable Partner in Integral Manufacturing

ing in recent years. However, Vietnam must also learn and internalize the otheraspects, (i), (ii), and (iv) above, to fully take advantage of the strength of assembly-type manufacturing. If this is done successfully, assembly-type manufacturing will surely become the main pillar of Vietnam’s industrialization, providing
jobs, improving skills, and raising national income.
Even without any further policy reform, FDI will probably continue
to come to Vietnam and, given sufficient time, the country will reach theincome and industrial levels of Thailand and Malaysia today. However, as
argued above, these ASEAN neighbors remain heavily dependent on foreigntechnology and management. Despite many decades of supporting industry and
SME promotion, their human resources and local parts makers remain too weak
to break through the “glass ceiling” and reach the level of Taiwan or Korea. If
Vietnam does not have a good policy, it is also likely to stop at the level ofThailand and Malaysia today.
Another important consideration noted earlier is that Vietnam isrequired to integrate much more quickly than ASEAN4. Thailand and Malaysia
absorbed large amounts of FDI, but they were not “open” in the sense that they
kept high tariffs, localization requirement, import restrictions, and so on for along time. They used these measures for at least a few decades to develop andprotect their industrial base. Vietnam, in contrast, must open up now, before
building such an industrial base, and face global competition. Vietnam’s industrial strategy must therefore be different from and bolder than those of Thailand
and Malaysia.
Let us now propose a new manufacturing strategy for Vietnam basedon the above considerations.
(1)Vietnam should liberalize its trade and investment regimes unconditionally and more decisively than ASEAN4 did in the past, create the most freeand low-cost business environment in East Asia, and attract a large
amount of FDI without selectivity4 . This decisive openness should be thestrongest selling point in FDI marketing.

4

The only permissible reasons for rejecting FDI are environment, cultural indecency, and national security. This rule should be applied sparingly under transparent criteria.

19

Kenichi Ohno

(2)Linkage between domestic firms and foreign multinationals should be promoted as a matter of highest priority. Vietnamese firms should double
efforts to become suppliers of FDI manufacturers and foreign buyers, andimprove their capabilities. The government should support their effort.
(3)Vietnam should learn the monozukuri5 spirit of Japan’s integral manufacturing, as explained below, as quickly as possible. Vietnam should aim tobecome a reliable developing country partner in high-quality manufacturing with Japan and other developed countries producing integral products.
Professor Takahiro Fujimoto of Tokyo University and his researchteam have come up with a business architecture theory to explain the differences among the manufacturing industries of major economies such as Japan,
China, the United States, Korea, Taiwan, and ASEAN countries. This theory
has a significant implication for Vietnam’s industrial strategy. According toProf. Fujimoto, there are two basic architectural types in manufacturing: modular architecture and integral architecture. In modular architecture, the modalityof interaction among components is standardized for easy connection. For
example, desktop computers are a typical modular product in which globallycommon components from various companies are freely combined. By contrast,
in integral architecture, the complexity of interaction is happily accepted, andimprovements are achieved through numerous trials and errors. For example,
automobiles must be manufactured with integral architecture if multiple objectives such as performance, comfort, fuel efficiency, and safety are to be attained
simultaneously. Generally speaking, modular architecture is suitable for obtaining quick results at low cost while integral architecture is appropriate for the
pursuit of ever-higher quality in the long run.

5

20

Monozukuri literally means “making things” or “manufacturing.”

Vietnam’s Industrial Policy Formulation: To Become a Reliable Partner in Integral Manufacturing

Figure 2. Modular versus Integral Manufacturing
Modular manufacturing Integral manufacturingPartsinterface

Parts are common and canbe used for any model

Each product has uniqueparts, specifically designed

MeritsQuick results and flexibility

Endless pursuit of quality

Demerits

No differentiation,excess
entry, low profit, lack of R&D

Much energy and timeneeded to achieve results

Openness, quick decision
Institutional
requirements making, flexible outsourcing

Long-term relations, building
internal skills & knowledge

Performance

Time

Time

Correspondence between products and business architecture is not
fixed; it evolves dynamically with the business strategy of each firm or country,
technical progress, and consumer tastes. In addition, business architecture often
has structural layers in which, for example, modularization may proceed in final
assembly while integration may deepen in components.
Japan is a country of integral architecture, intensely interested in efficient factory operation and product integrity. By contrast, the United States
excels in modularization and is good at slicing the supply chain of a productinto appropriate elements, standardizing them, and making profits by the novelty of combination. China is also a country of modular architecture, but its comparative advantage lies in labor-intensive modular products rather than knowledge-intensive modular products as in the case of the United States. Professor
Fujimoto considers China to be a country of quasi-modularity since its manufacturing features mass production of products with copied design and technology rather than original innovation.
Since the United States and China are both modular countries withdifferent development levels, they are complementary production partners. The

21

Kenichi Ohno

Figure 3. Production Alliances Based on Business Architecture
Integral Countries

China

Potentially no
direct competition
if products arechosen properly

Japan

Modular Countries

TaiwanUSA

ASEAN(Potential)

Industrialized
Developing

Source: Professor Takahiro Fujimoto’s explanation to the joint VDF-MOI missionin Tokyo, June 2005.

former can supply technology and capital while the latter can offer cheap labor
to produce modular products. Meanwhile, Japan is a country of integral manufacturing with high technology, high wages, and an aged population looking fora developing country partner. Using cheap unskilled labor in China and
ASEAN is not enough to fully exploit the potential of integral manufacturing. If
ASEAN, the traditional destination of Japanese FDI, learns to become a manufacturing partner with long-term vision and strong aspiration for high quality,
Japan and ASEAN can form a strategic alliance in manufacturing integral products that are differentiated from Chinese products. However, this allianceremains merely a possibility because no ASEAN country has acquired the necessary skills and attitude for Japanese-style manufacturing. As noted above,
Thailand and Malaysia are currently struggling to become full-fledged manufacturing countries. They still need Japanese managers and engineers to stay,and they depend heavily on FDI parts producers.
To become a partner in integral manufacturing requires ability todesign and operate factories efficiently; maintain, adjust and repair machines;
design parts; produce precision molds and dies; educate highly skilled industrial
Meisters, and so on. These requirements are not new. But the point is that they22

Vietnam’s Industrial Policy Formulation: To Become a Reliable Partner in Integral Manufacturingmust be accomplished well with purpose and tenacity. This will enable ASEAN
to graduate from simple assembly by foreign orders to participation as indispensable players in the global manufacturing network. This will also upgrade theJapan-ASEAN economic relationship to a higher level.
Among ASEAN countries, Vietnam and Thailand are top candidates
for this feat. Vietnam should set a clear goal with appropriate action plans, andthe Japanese government and business community should actively provide technical assistance and business cooperation for this purpose.
This perspective explains why supporting industries (especially highquality plastic and metal processing industries) and human resource development (especially high-level production managers and engineers) are so crucial
for Vietnam. They are needed to significantly raise domestic manufacturing
capability and to differentiate Vietnam from China and other ASEAN countries.
Copying China’s manufacturing style or receiving Chinese technical assistanceis not desirable for Vietnam because these lead to low-price, low-quality competition yielding little profit, as well as a direct clash with Chinese products.

6. Anticipated skill shortages in Japan
Japan desperately needs a developing country partner in integral manufacturing but has found none so far. It needs such a partner because its wages
are too high and its population is aging, making it very difficult to find young
engineers and production managers in sufficient number and quality inside
Japan. The highly skilled postwar baby boomers, born 1947–49, will reachretirement age soon. Those born in 1947 will turn 60 years old in 2007 and will
begin to leave factories. This is called the “2007 problem.” Their skills must betransferred to the next generation but Japan lacks a sufficient number of successors.
According to the White Paper on Monozukuri 6, the number ofmonozukuri workers in Japanese manufacturing was 1.93 million in 2005.
6

Ministry of Economy, Trade and Industry; Ministry of Health, Labor and Welfare; and Ministryof Education, Culture, Sports, Science and Technology, White Paper on Monozukuri, 2005.
Data in the text were obtained from a survey by the Ministry of Health, Labor and Welfare on
enterprises with five or more regular employees.

23

Kenichi Ohno

Figure 4. Shortages and Surpluses of Monozukuri Workers in Japan
0％

20％

40％

60％

80％

100％

Designing
Plastic and other injection
Pressing
Boring(cutting)
Grinding and polishing
Textile industry skills
Welding
Painting
Production process management
Repairing and adjusting equipment
Shortage1
Shortage3 Adequate Surplus No answer
Shortage2
Note:

These are the survey results on the ten basic industrial skills with the largest
numbers of workers in 2005. Shortage 1, 2, and 3 are shortage in quantity,
shortage in quality, and shortage in both quantity and quality, respectively.
Source: Ministry of Economy, Trade and Industry; Ministry of Health, Labor andWelfare; and Ministry of Education, Culture, Sports, Science and Technology,
White Paper on Monozukuri, 2005.

When asked if the “2007 problem” (retirement of skilled workers) was a serious
concern, 30.5% of the manufacturing firms responded yes. Among them, themain reasons for their concern included the long time required for skill transfer(68.5%), lack of younger engineers with enthusiasm (64.5%), and difficulty incommunication between teacher and student due to a large age or skill gap(41.9%).
Figure 4 shows the worker shortages for the ten largest basic industrial skills in Japan. As of 2005, worker shortages are not yet severe, with only
25.6% of the respondent firms reporting skill shortages in quantity or quality(or both), 47.9% reporting adequacy, and 1.7% reporting surpluses (these numbers are averages for the ten skills). However, as time progresses, skill shortages are likely to worsen. Many firms are expected to retain skilled workers
beyond the retirement age, and although this will delay the impact of the 200724

Vietnam’s Industrial Policy Formulation: To Become a Reliable Partner in Integral Manufacturing

problem for several years, Japan will inevitably face skill shortages unless fundamental solutions are found.
I have highlighted Japan as a principal monozukuri partner for Vietnam because Japan is the only country in East Asia that has achieved a highlevel of integral manufacturing. In addition, Japan is already the most important
manufacturing investor in Vietnam. Moreover, if Vietnam masters integral
manufacturing, it can also cooperate more effectively with, for example, German automobile producers or Italian machinery companies. That is why I sincerely hope that high aspiration for assembly-type integral manufacturing will
be incorporated as one of the strategic pillars of Vietnam’s overall industrial
master plan.

References

Fujimoto, T. (2004). Japan’s monozukuri philosophy. Tokyo: Nihon Keizai Shimbunsha.
Fujimoto, T., & Shintaku, J. (2005). Architecture-based analysis of Chinese manufacturing industries. Tokyo: Toyo Keizai Shimposha.
Ohno, K., & Thuong, N. V. (Eds.). (2005). Improving industrial policy formulation.
Hanoi: The Publishing House of Political Theory.
Ohno, K. (2005). Designing a comprehensive and realistic industrial strategy. In K.
Ohno and N.V. Thuong, Improving industrial policy formulation (pp.24–26).
Hanoi: The Publishing House of Political Theory.
Vietnam Development Forum. (2006a). Supporting industries in Vietnam from the perspective of Japanese manufacturing firms. VDF Policy Note, 2.
Vietnam Development Forum. (2006b). Industrial Policy Formulation in Thailand,
Malaysia and Japan: Lessons for Vietnamese Policy Makers. (K. Ohno, Ed.).
Hanoi: The Publishing House of Social Labour.

25Competitive Strategy of Global Firms andIndustrial Clusters 1
Case Study on the Hard Disk Drive (HDD) Industry

Tomofumi Amano*

1. Introduction
This report discusses the location strategies of multinational firms andthe industrial policies of the countries that are the recipients of their investment.
For firms engaged in international business, the timing of foreign investment,
selection of locations, and maintenance and expansion of their local operations
are all important strategic matters.
Then what foreign investment strategies have been used by firms thathave succeeded in strengthening their competitive advantage? What are theunique aspects of the policies taken by recipient countries? This report will
focus upon the strategic nature of investment for global firms and the strategic
nature of investment-attracting policy for the recipient countries.
Because the determinant factors of foreign investment have been acore theme for studies on multinational firms, there is already a large literature
upon the topic. However, much of it consists of studies that identify and classify the location factors based on economic theories and empirical studies using
cross-section or pooled data. While these studies indicate the general framework of multinational firms’ location selection, it is difficult to derive fromthem the strategic implications related to individual firms’ foreign investment.
* An Associate Professor at the Faculty of Business Administration, Hosei University and a
researcher of the Manufacturing Management Research Center, University of Tokyo.
1
This report is an expansion and revision of the content of Chapter 5 of the following book for the
purpose of presentation at the GRIPS/MMRC Joint Symposium: Amano Tomofumi, Higashi Ajia
No Kokusai Bungy To Nihon Kigy : Aratana Kigy Seich He No Tenb (East Asian Linkage
and Japanese Firms: A New Perspective of Corporate Growth), Yuhikaku.

27

Tomofumi Amano

Foreign investment in a growth region is an important strategic matterfor firms. Industry-specific conditions must be taken into account to appropriately examine its strategic nature. However, to this end, the focus should beplaced on how firms recognized the industrial environment and what approaches they took; in other words, we must focus on firm-specific recognition of theenvironment, decision-making, and implementation, rather than on the generaldeterminant factors of investment.
This report takes the hard disk drive (HDD) industry and looks at how
major Japanese and U.S. firms have made investments in Asia. Over the past 20
years, the HDD industry experienced dramatic changes in technology and market conditions. For HDD manufacturers, investment in Asia during this period
was a critical issue for their survival. How did they perceive this challenge andwhat strategies did they take? This point is closely related to the first focus:
strategic nature of investment.
The second focus, strategic nature of investment-attracting policy,
will rather become clear by looking at the investment history of surviving firms.
These firms have concentrated their large-scale investment in specific areas. In
these areas where a large number of firms have gathered, collaborative relationships can be observed between local governments, local universities, local
firms, and global suppliers. Such agglomerations have served to attract investment to these areas in a sustainable manner.
These areas are called industrial clusters. In a global industry like the
HDD industry, the greatest concern for the recipient country is the risk of theclient firms leaving the country to invest in another country due to subsequent
wage increase or rivalry against newly developed countries. The challenge forthe recipient country is to consolidate investment, and one means to achieve
this could be to increase the attractiveness of the area as an industrial cluster.
In the process of East Asia’s economic development, investment fromother countries gathered in a number of areas and industrial clusters wereformed in these major areas. This enabled the recipient countries to provide
abundant and diverse resources to the multinational firms located inside theseareas. There was also intense competition among the recipient countries for
attracting investment. The point is how these countries strategically differentiated their policies from the others in forming attractive industrial clusters.

28

Competitive Strategy of Global Firms and Industrial Clusters

2. Competitive Strategy of Global Firms and Industrial
Clusters
This section explains the three basic viewpoints applied to the casestudy. They are (1) global location strategy and clustering; (2) integration of
global production networks; and (3) consolidation of foreign investment inrecipient countries.
Global Location Strategy and Clustering
During the past several decades, in which economic globalization has
made remarkable progress, firms have actively expanded the geographical baseof their operations through direct investment or strategic partnerships. Competition in Global Industries (Porter, 1986) is a representative study and an earlyattempt at systematizing international business expansion.
Porter analyzes firms’ global strategies by focusing on two concepts:
allocation and coordination. Allocation refers to the internationally distributed
allocation of the value chain, while coordination means the coordination among
the distributed bases. He defines a global strategy as “a strategy to achieve a
global competitive advantage through concentrated allocation or coordinationof distributed activities, or both” (Porter, 1986, p.35) and states that “in order tounderstand the competitive advantage of a global strategy or the cause of globalization of a firm, one must know the conditions for achieving cost reduction
or differentiation through globally concentrating the activities and/or coordinating the distributed activities” (ibid., p.36). He indicates that such conditions are:(1) proximity to markets; (2) economies of scale and experience effect; (3)effective consolidation and coordination of activities; and (4) comparativeadvantage of each country.
This framework presents the basic idea of a global strategy. In order
for a firm to achieve a global competitive advantage, both two factors are essential: the expansion of activities and building of operational foundations at theoverseas locations by seizing the internationally spread opportunities forachieving advantages and growth; and the integration of networks of the internationally spread activities under a unified philosophy and business strategy.

29

Tomofumi Amano

In addition to this, the approach of committing to local industrial clusters is vital for the foreign subsidiaries. In an industrial cluster, many firms andinstitutions are located together, forming multi-dimensional networks to create
the characteristics of the area. Inside clusters, markets of diverse humanresources and intermediate goods are also formed. Thus firms can secure thediversity, quality and quantity of their managerial resources. Moreover, as technical domains are specialized through division of labor, knowledge accumulates
more effectively and operation costs are reduced through the economy of scale.
These benefits are collectively called agglomeration economies.
David McKendrick, Richard Doner and Stephan Haggard (McKendrick, Doner, & Haggard, 2000) analyzed the agglomeration economies inthe HDD industry. They refer to areas such as Silicon Valley and the Japanesearchipelago as technology clusters; they refer to areas like the Southeast Asian
region, mainly Singapore, Thailand and Malaysia, as operation clusters.
The agglomeration economies that firms can enjoy in a technology
cluster include (1) early recognition of new technology and market opportunities; (2) creation of new technology, products and services through many startups and technology spillovers; (3) prompt problem-solving and product development; (4) access to venture capital; (5) human resource pools that are specialized and differentiated for each technical field; and (6) prompt imitation of
product innovations.
In an operation cluster firms can enjoy (1) low transportation costs;(2) shorter transportation times between the respective stages of the value
chain; (3) economies of scale in production; (4) quick production launch; (5)skillful human resource pools that are specialized for each process or function;(6) prompt imitation of innovation related to assembly, production and physicaldistribution; (7) monitoring of the quality of suppliers; and (8) low inventory
costs.
One of the purposes of a global strategy is to establish the firm’s ownbase within the local industrial cluster, in other words, to take part in creatingsuch agglomeration economies and fully enjoying the benefits they produce. In
studies on international business, the need for localization is often discussed. A
firm that expands overseas but does not localize its overseas base cannot fully
enjoy the benefits of globalization. The same applies in the context of an indus-

30

Competitive Strategy of Global Firms and Industrial Clusters

trial cluster. Spreading the value chain itself is insufficient for achieving essential advantage. The key is how deeply a firm can get involved in the industrial
cluster, and how well it can find and develop resources there. The advantages tobe gained in a cluster are sometimes highly firm-specific and relation-specific,
unlike the initially available advantages like low wage level and land resources;
these specific advantages become the firm’s core competitive advantage.
Integration of Global Production Networks
As business opportunities spread worldwide and a firm’s scope ofoperations broadens, the firm’s business management becomes more complicated. One of the important conditions for a multinational firm to smoothly carryout its global operations is to know how to integrate its decentralized and complicated management into a single direction. The purpose of integration of global production networks is to ensure that the activities that have achieved a global spread through foreign investment are not conducted in a disorganized way,
but are implemented in an integrated manner under a common vision and business strategy.
A firm that has effectively integrated its specialized functions with aneye on the changes in environmental conditions could turn the benefits into acompetitive advantage in the market through the division of labor. Furthermore,
it could enjoy large integration benefits by creating synergy between its bases.
On the other hand, a firm that is lacking integral ability could lose its operation
efficiency through international division of labor. In globalization, the logic ofintegration is in fact more important than the logic of division and spread.
In order for a firm to integrate its operations beyond national borders,
the strategic abilities, leadership, and coordinating ability of the firm’s headquarters are essential. It is the duty of the headquarters, or the top management,
to instill its business philosophy and business strategy in overseas growth markets and to make the firm’s resources complement each other. The management
requirements for integrating global production networks are (1) presentation ofvision and strategy; (2) leadership of top management and the management
team; (3) integration of organizational structure; and (4) sharing of organizational culture.

31

Tomofumi Amano

The first requirement is presentation of the vision and strategy
because in order to integrate businesses beyond national borders, vision andstrategies need to be clearly indicated as the purpose of integration. It is ideal tohave overseas employees and partners understand and share basic principles
and strategy, including the firm’s purpose of doing business and the desired
future direction, beyond cultural barriers.
However, merely indicating the vision and strategy is not enough; theleadership of the top management and the management team and integration of
the organizational structure are also important. The top management and the
management team at the headquarters should launch concrete initiatives to put
the vision and strategy into practice within the local operation bases. Also, theyshould indicate the vision’s importance to the local management team andemployees.
Furthermore, the firm needs to identify the way of sharing the responsibilities and communication between the headquarters and the local bases toimplement its vision and strategy in an organized manner. At the first stage, theheadquarters needs to take the initiative in overall matters. However, as the subsidiaries become localized, their responsibilities increase and the communication becomes two-way and multi-tiered. Finally these division and communication systems will be optimized so that the firm can fully enjoy the merits ofintegration.
The last requirement is sharing of the organizational culture. Internationalization of business can be regarded as an act of sharing the firm-specificorganizational culture among group companies while respecting the differencesin culture in each country. A firm’s organizational culture is expected to gradually permeate the overseas operation bases through its operation. This culture
becomes the code of conduct for the members of the organization. In otherwords, it becomes the corporate identity. A firm having a reasonable code of
conduct is likely to be capable of integrating its international business activities
smoothly.
Industrial Clusters and Consolidation of Foreign Investment
The country on the receiving end of investment is interested in effectively attracting multinational firms with the above-mentioned behavioral prin-32

Competitive Strategy of Global Firms and Industrial Clusters

ciples. In this case, the point of concern is the issue of mobility of investment,
namely that a firm that has been attracted under initial conditions such as low
wage levels and ideal land conditions could move to another country in light ofwage differences and investment opportunities in newly developing countries.
In order to have a multinational firm continuously invest in the initially chosen area, the recipient country needs to take the lead in developing competitive advantages that do not rely only on wage level and land resources. The
key to achieving this is forming industrial clusters.
As discussed earlier, industrial clusters involve various agglomeration economies. The recipient country must promote regional development withthese agglomeration economies in mind. For example, development of expressway systems and port improvements are indispensable for achieving low transportation costs and shorter transportation times. It is also necessary to simplify
customs procedure. In regards to forming pools of intellectual human resources
and promoting innovations, it is important to develop human resources throughcollaboration between industry, academia, and government. Another possible
measure would be to implement special taxation that meets the industrial needs.
The regional development of an industrial cluster involves bothplanned factors and emergent factors. Establishment of development zones,
development of public infrastructure, and revision of the tax system are planned
factors. These are important, but may easily be copied by others. More important factors are emergent ones such as industry-specific networks and a pool of
qualified human resources, which are accumulated through the industrial development of the recipient country. Both planned and emergent factors are criticalto provide located firms incentives to secure their investments, which contributes to the consolidation of investments for the economic growth of recipient countries.

3. Structural Changes in the HDD Industry
The above-mentioned three concepts provide the analysis frameworkfor studying the HDD industry case. From this section onward, the report will
look at this industry. This section focuses on the structural changes in the industry since the 1980s, with particular emphasis on the competition between Japan-

33

Tomofumi Amanoese and U.S. firms over investment in Asia.
Changes in the Product Architecture and Industrial Structure
Product architecture in the HDD industry was led for a long time byIBM. The firm has a long history in the data storage business, starting withtapes, moving on to floppy disks in 1970, and establishing the standard for the“Winchester” HDD in 1973. In 1989, it developed the magnetic head technology that applied the principle of magneto-resistance (MR) to the recording head,allowing recording of 1 gigabyte per square inch. Furthermore, in 1996, it succeeded in developing the giant magneto-resistive (GMR) head. In this way,
IBM has constantly led the development of cutting-edge technology in thisfield.
Dramatic changes occurred to the industrial structure from the second
half of the 1970s through the 1980s. After the HDD industry took off with theestablishment of the standard for the Winchester HDD, U.S. computer manufacturers outsourced HDD production to external firms, and U.S. and Japanesefirms with a high level of technology entered and formed the industry. As thecomputer platform changed from mainframes to minicomputers, office computers, workstations and personal computers, the HDD interfaces evolved to enable
the use of HDDs as modules. The demand structure shifted from large generalpurpose machines to small computers, and there was a transition from centralized processing using mainframes to distributed processing using small computers.
In the mainframe era of the 1970s, a computer and an HDD were connected via IBM-IF, and the physical address of the HDD was controlled by thehost computer. Later, with the rise of minicomputers, office computers, andworkstations, the interface between the computer and the HDD evolved into thestorage module drive (SMD) and subsequently into the Shugart Associates System Interface (SASI) in the second half of the 1970s.2 With the introduction of
the SASI, the host computer came to control the HDD not through physicaladdressing, but through logical block addressing. Until this point, development

2

Shugart Technology was a leading HDD manufacturer and was the predecessor of the present
Seagate Technology.

34

Competitive Strategy of Global Firms and Industrial Clustersof HDDs required close coordination with the computers due to the need forsuch addressing.
However, when the personal computer (PC) market began to take off
at the end of the 1970s, things began to change. Apple Computer, the pioneer of
the PC market, had not revealed its basic input/output system (BIOS) for its
Apple-1. However, after IBM revealed the BIOS source code for its IBM-PC
XT, the design of controllers and HDDs became more open.
In the middle of the 1980s, the small computer system interface(SCSI) was introduced as the interface connecting the computer to the HDD in
the PC field. As a result, the HDD came to be connected to an external expansion bus via a controller board, and it became possible to support various HDDs
using the BIOS parameter table. With this, the modularization of the HDD
made rapid progress. After that, in the PC field, standardization of externalinterfaces made headway with the introduction of intelligent drive electronics(IDE), achieving the complete modularization of the HDD by moving the harddisk controller that had been mounted on the PC motherboard to within thedrive. The IDE specification was later certified by the American National Standards Institute (ANSI), and is being standardized as the AT attachment (ATA).3
Because the external interfaces became standardized and it became
sufficient to comply with the rules of a specified interface, drive manufacturers
no longer had to adjust their HDD specifications according to the computer inthe design phase. They could now make the internal design of their HDDs as
they liked, which expanded the possibilities for technological innovations andcost reductions. These changes were so dramatic that they completely changed
the competition rules of the industry; they served as the background to the subsequent entry of many firms into the industry and their fierce competition indevelopment and cost.

3

BIOS is the basic program that controls a computer’s input and output. SCSI is an interface connecting the computer with peripheral equipment. It was developed based on the SASI to make it
more versatile. IDE is the interface standard jointly developed by Compaq Computers
Corporation and Western Digital Corporation. It has achieved wide distribution as the standard
interface due to its mechanical simplicity.

35

20,000
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82
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85
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97

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2.5
1.8 or smaller

Figure 1. (B) Changes in HDD Shipment
Volume by Inch
Product shipment volume (thousand units)

Figure 1. (A) Changes in HDD Shipment
Value by Inch
30,000

19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97

Product shipment volume (million U.S.dollars)

Tomofumi Amano

Source: Created based on McKendrick, Donner and Haggard [2000], p. 27.

Miniaturization of HDDs and Changes in Competitive Conditions
During this course, HDDs also became more compact. Figure 1
shows the changes in the world’s total HDD shipment value and shipment volume by inch. The type of HDD that contributed to the growth of the industry inthe second half of the 1970s when the industry had just started was the 6.5- to
14-inch drive for mainframes. The HDD industry had originally been monopolized by IBM. However, because new computer manufacturers emerged in thefirst half of the 1970s and procured their HDDs from external suppliers, theoriginal equipment manufacturer (OEM) market for HDDs grew.
HDDs were first miniaturized from the 14-inch drive for mainframes
to the 8-inch and 6.5-inch drives targeting minicomputers and office computers.
By the first half of the 1980s, the 5.25-inch drive for desktop PCs was gaining
popularity (Figure 1 (A)). This market was cultivated by such emerging firms
as Seagate Technology, MiniScribe, and Computer Memories.
After that, the small HDD for PCs was further miniaturized from 5.25
inches to 3.5 inches, and the 3.5-inch drive achieved full-fledged diffusion in
the 1990s. In this process, the emerging manufacturers of the 5.25-inch drive
took bold growth strategies in entering the competition arena of the 3.5-inch

36

Competitive Strategy of Global Firms and Industrial Clusters

drive. Conner Peripherals was hived off from the leading 5.25-inch HDD manufacturer, Seagate. Within a few years, Seagate, Quantum, Maxtor, and Western
Digital entered the market.
The important turning point was when HDD size shifted from 5.25
inches to 3.5 inches. Comparison between the shipment value and the shipment
volume of HDDs in Figure 1 shows this fact. The changes in the HDD shipment
value by inch in Figure 1 (A) suggest that the industry followed the miniaturization trend in a sequence from 14 inches to 6.5 inches, 5.25 inches, 3.5 inches,and 2.5 inches.
The changes in HDD shipment volume by inch in Figure 1 (B) indicate an essential difference between the miniaturization up to 5.25 inches andthat from 3.5 inches onward. The miniaturization of the HDD up to 5.25 inches,though it brought changes to the market segment structure, did not change thebasic structure of the industry; the shipment volume remainined at a low level.
In the process of miniaturization from 3.5 inches onward, the HDD
manufacturers faced demand for product volume exceeding that for the 5.25inch drive. The modularization trend created an incentive for increasing the production volume and accelerating innovation, and firms could secure profits only
if they could manufacture HDDs of higher performance at lower costs. Insteadof adopting a flexible development framework to adapt to market changes,
firms had to take bold growth strategies by focusing on growing market segments such as that of the 3.5-inch drive.
Figure 2 shows the changes in the number of firms in the HDD industry. The figure clearly indicates the changes in the industrial structure caused by
the expansion of the 3.5-inch drive market. The number of firms peaked in1985 with 105 players in the industry. This was the time when the 3.5-inch
drive market was launched in the United States. A large number of firms
attempted to enter this market segment at the time, seeking potential business
opportunities.
After the peak, however, many firms withdrew from the HDD industry, and the number of firms remaining in the industry rapidly declined. Only 15
firms remained in the industry in 2000, which means 90 firms, or about 86% in
proportion to the number of firms in the industry in 1985, withdrew from theindustry over 15 years. This rapid decline indicates that unusually fierce compe-

37

Tomofumi Amano

Figure 2. Changes in the Number of Companies in the HDD Industry(No. of companies)

90
Elsewhere in the world
Japan

80
70
60
50
40
30
20
10
0
1960

1965

1970

1975

1980

1985

1990

1995

2000

Source: Created based on data from the International Disk Drive Equipment and Materials
Association (IDEM), Trend FOCUS, and an interview survey of firms.

tition characterized the small HDD market segment.
Market Performance as of 2000
To look more closely at the intensification of competition in the small
HDD market throughout the 1990s, the performance of the market is identified
based on the shipment volumes of HDD manufacturers and major component
manufacturers as of 2000 (FY1999) as well as the changes in the sales andoperating margins of major firms (see Table 1).
The small HDD market is divided into 3.5-inch ATA (drives for PCs;
sold at around 10,000 yen), 3.5-inch SCSI (drives for servers; sold at around
30,000 yen), and 2.5-inch or smaller HDD (drives for mobile computers). The
3.5-inch ATA accounts for the largest volume, commanding a 73.6% share of
the 184 million-unit HDD market. Meanwhile, the 3.5-inch SCSI commands ashare of 11.0% and the 2.5-inch HDD a share of 15.4%.
As mentioned earlier, the SCSI and the ATA are only different interms of the interface; they share the same magnetic heads and media for the
3.5-inch drives. As for price, the SCSI for servers is about three times more
expensive than the ATA for PCs. With regard to the media used, the 3.5-inch

38

Competitive Strategy of Global Firms and Industrial Clusters

Table 1. Volume of HDD Shipped Worldwide (2000)(thousand units)2.5-inchor smaller
Seagate (U.S.A.)
Quantum (U.S.A.)
Maxtor (U.S.A.)
IBM (U.S.A.)
Fujitsu (Japan)
Western Digital (U.S.A.)
Samsung (South Korea)
Toshiba (Japan)
Hitachi (Japan)
OthersTotal

11,1005,300

3.5-inch
ATA
30,10026,80025,4008,300
14,50018,20010,1007,200
4,700
28,3003.5-inch
SCSI
8,900
2,500

Total

5,100
3,200

600
2,000
135,400

20,30039,00029,30025,40024,50023,00018,20010,100
7,200
5,300
2,000
184,000

Notes:

1. The “2.5-inch or smaller drives” are all ATA. The “ATA” is for PCs and the“SCSI” is for servers.
2. Maxtor acquired Quantum’s HDD business in April 2001.
3. Hitachi acquired IBM’s HDD business in December 2002.
Source: “‘01 HDD Market Survey: Current Status and Prospects of HDD-based Digital
Home Electric Appliances” (June 2001) Japan Economic Center.

drives use aluminum and the 2.5-inch drives use glass.
By type of drive, U.S. HDD manufacturers achieve overwhelming
production volumes in the 3.5-inch ATA segment. In particular, the top HDD
manufacturer, Seagate, which boasts a tremendous production volume in thissegment, also secures a 44% share in the high-priced 3.5-inch SCSI for servers.
The firm’s strategy is to secure its share of the high-end market while pursuinga high production volume in the ATA segment in order to attain a high production scale of its in-house manufacturing components.
The firms that made both HDDs for PCs and those for servers, similar
to Seagate, included Quantum, IBM, and Fujitsu in 2000. They competed indeveloping cutting-edge component-level technology. They tended to self-manufacture some of the core components, including the head and media.
Other firms, such as Maxtor, Western Digital, and South Korea’s
Samsung, do not have the capacity for in-house development of core components, partly owing to their later entry into the industry compared to Seagate
and IBM. Therefore, they specialize in the 3.5-inch ATA for PCs.
IBM and Japanese firms including Fujitsu, Hitachi, and Toshiba havealso placed emphasis on 2.5-inch and smaller HDDs for mobile computers. This
market segment is expected to grow in the future. Hitachi’s 2002 announcement

39

Tomofumi Amano

that it would acquire IBM’s HDD business was a strategy to gain dominance inthe market of HDDs for mobile computers. Hitachi and Toshiba specialize in
HDDs for mobile computers.
In addition to the drives, the market conditions of the key HDD components at the time should be studied. Table 2 shows the major manufacturers
and the shipment volumes of the key components mounted on HDDs.
The supply markets of the major HDD components are dominated by
Japanese firms. Such HDD manufacturers as Seagate, IBM, Fujitsu, and Hitachi
Table 2. Shipment Volume of the Key HDD Components (2000)(A) Media (hard disk [HD])Komag (U.S.A.)
Fuji Electric (Japan)
Showa Denko (Japan)
IBM (U.S.A.)
Mitsubishi Chemical (Japan)
Seagate (U.S.A.)
Fujitsu (Japan)
Nippon Sheet Glass (Japan)
Hoya (Japan)
Others
Total(B) Magnetic heads
IBM (U.S.A.)
Alps Electric (Japan)
Seagate (U.S.A.)TDK (Japan)
Hitachi (Japan)
Fujitsu (Japan)
Read-Rite (U.S.A.)
OthersTotal(C) Spindle motors
Nidec (Japan)
Matsushita-Kotobuki Electronics
Industries (Japan)
Minebea (Japan)
Victor Firm of Japan (Japan)
Sankyo Seiki Manufacturing
OthersTotal(thousand units)
Aluminum
46,50039,40034,80053,90034,20034,90012,800

Glass
1,800
8,900
700

11,10025,60012,700269,200

48,100(thousand units)
102,800
101,600
118,200
154,300
19,00050,20066,100612,200(thousand units)
113,100
31,50031,10011,9008,100
2,400
198,100

Note: Samsung withdrew from the spindle motor market in 1999.
Source: “01 HDD Market Survey: Current Status and Prospects of HDD-based Digital
Home Electric Appliances” (June 2001) Japan Economic Center.

40

Competitive Strategy of Global Firms and Industrial Clusters

manufacture magnetic heads and media (hard disks [HD]) in house, but eventhese firms procure any volume that cannot be covered by their own production
capacity from these outside suppliers. In addition, because self-manufacturingof components requires development of cutting-edge technology and global
production capacities, many HDD manufacturers do not self-manufacture thecomponents. Therefore, the market for supply of the key components is enormous.
By type of component, the supply of magnetic heads is dominated by
Alps Electric and TDK. As for media, there was intense competition among
Japanese firms in the aluminum media market for 3.5-inch HDDs as of 2000.
However, because the absolute number of media required for HDDs for PCs
decreased with the improvements in the recording density, the media became
oversupplied from around 2000. After that, the industry’s structure changed
with the withdrawal of Komag and the acquisition of Showa Denko by Mitsubishi Chemical, leading to a state of oligopoly. The supply of glass media for
HDDs is dominated by Hoya and Nippon Sheet Glass. In the spindle motor
market, Nidec boasts an overwhelming share.
It could be said that U.S. HDD manufacturers are more competitive insmall HDDs, centering on 3.5-inch drives, and Japanese firms differentiatethemselves by focusing on the 2.5-inch and smaller HDD market for mobile
computers. On the other hand, Japanese firms are found to be more competitivein the key component markets. Why is there such an inconsistency in focus
between the U.S. and Japanese firms when they are both part of the HDD industry?

4. Shift Towards Asia
Competition Strategies in Growth Markets
How did the structure of U.S. HDD manufacturers taking the offensive in the 3.5-inch HDD market and Japanese firms gaining an advantage inthe key component market come about amidst the rapid expansion of the HDD
industry? To answer this question, we must look at the growth strategies ofmajor firms during this period.

41

Tomofumi Amano

Figure 3. (A) Sales of U.S. Manufacturers

9,000
8,000
7,000

MaxtorSeagateQuantum
Western Dig

6,000
5,000
4,000
3,000
2,000

40

MaxtorSeagateQuantum
Western Dig
IBM

30

Operating margin (%)

Sales (million U.S.dollars)

10,000Figure 3. (B) Operating Margins of
U.S. Manufacturers

1,000
19
1981
1983
1985
1987
1989
1991
1993
1995
1997
99

0

20
10
0

81 83 85 87 89 91 93 95 97 99
-10
-20
-30
-40

Notes: 1. Financial data is on a consolidated basis.
2. Operating margins are EBIT margins.
Source: Created based on financial data from the Development Bank of Japan.

Figure 3 shows the changes in the sales and operating margins of U.S.
HDD-specialized manufacturers. Due to the limitation in acquiring long-term
data, earnings before interest and taxes (EBIT) were used for the operating margins instead of sales profits. The EBIT are the values close to operating profits,
which are obtained by adding the interests paid to the ordinary income and subtracting the interest income from that total.
As Figure 3 (A) shows, U.S. HDD manufacturers dramaticallyincreased their sales during this period, growing robustly with focus on the
OEM market in 3.5-inch HDDs for PCs. In particular, Seagate continuously
kept its top position in the industry. Its sales doubled in 1996 due to its acquisition of Conner Peripherals. Seagate has been followed by the second largest
manufacturer, Quantum.
Compared to these two firms, Maxtor and Western Digital, which arelatecomers that only deal in drive assembly, began to show a decline or a slowdown in growth in the second half of the 1990s. The reasons are said to be thatthey failed to integrate their global operations and that they were late in placing
their new products on the market because they found quality problems at themass production stage due to not manufacturing the key components by them-42Competitive Strategy of Global Firms and Industrial Clusters

selves.
In this industry, the scale of operation has a large influence on profitability. Figure 3 (B) suggests that the industry leaders, Seagate and Quantum,
have maintained a certain level of profitability over a long term. The firm
secured high profitability by growing. Meanwhile, the operating margins of
Maxtor and Western Digital fell into the red in the second half of the 1990s andhave stayed in the red since then. Because they could not expand their scale ofoperation smoothly and because they were not market leaders, they had nochoice but to give in to PC manufacturers’ pressure to lower the prices and thus
failed to make profits.
The situation was not promising for Japanese HDD manufacturers
either during this period. In the case of general electric appliance manufacturers, the profits and losses for individual divisions cannot be identified from thepublished financial reports. However, according to some interviews, it seems tohave been difficult for them to make notable achievements in terms of profit,
because the scale of commercial production was small for 3.5-inch HDDs, andthe market for 2.5-inch or smaller HDDs was limited to laptop PCs with theproportion of domestic production also being high.

2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2

HitachiShowa Denko
Hoya
Alps Electric
Nidec

80 83 86 89 92 95 98
19 19 19 19 19 19 19

Figure 4. (B) Operating Margins of Major
Component Manufacturers
HitachiShowa Denko
Hoya
Alps Electric
Nidec

25
20
Operating margin (%)

Sales as compared to those in 1990 (%)[1990=1]

Figure 4. (A) Sales of Major Component
Manufacturers

15
10
5
0
-5

80 983 986 989 992 995 998
1 1 1 1
1 1

19

Notes: 1. Financial data are on a non-consolidated basis.
2. Data for Hitachi is shown for reference.
Source: Created based on financial data of the Development Bank of Japan.

43

Tomofumi Amano

In the meantime, how did the business performance of component
manufacturers change? Looking at the financial data of major firms in Figure 4,
in the media market, Showa Denko has seen stagnation in both sales growth andoperating margins, but Hoya has achieved an outstanding growth rate and profitability. The fact that Hoya has established a monopolistic position in the glass
media for the 2.5-inch HDD has also contributed to its high profitability.
Among the manufacturers of magnetic heads and motors, Nidec
boasts a monopolistic share in spindle motors, achieving notable sales growth.
Its operating margin has remained within the region of 7% as well. In the caseof Alps Electric, the firm had conventionally focused on magnetic heads andelectronic components for home electric appliances. Nevertheless, it formulated
a business restructuring plan in 1993 and shifted the production of electronic
components for consumer products to China; it also restructured its domestic
operations with focus on heads for HDDs. These efforts began to show resultsin 1996, and the firm’s sales and operating margin have been recovering.
As a matter of course, these data are based not on individual operations, but on the overall operations of firms, so various factors are involved intheir changes. As each firm defines its divisions differently, it is impossible toextract and compare information on the HDD-related segments alone. However,at least for the firms mentioned here, manufacturing of HDD components is avery large-scale operation and a business that contributes greatly to the firms’
sales and operating margins.
Be they manufacturers of HDDs or HDD components, firms thatassumed the market would expand, took active measures in anticipation of suchgrowth, and built an operational framework that could withstand rapid businessexpansion succeeded in increasing their market control and profitability; eventaking into account the restriction of data, this can be said about firms’ strategies amid the rapid expansion of the 3.5-inch HDD market. Many of the Japanese component manufacturers that succeeded to grow and increased their competitiveness during this period established close relationships with leading U.S.
HDD manufacturers. Firms that fell behind in achieving growth faced a decline
in profits, both in the areas of HDD and their components.

44

Competitive Strategy of Global Firms and Industrial Clusters

U.S. HDD Manufacturers’ Shift to Asia
Foreign investment in Asia played an important role in expanding operations in the growth phase that started in the 1980s. This is an aspect in whichnotable differences are observed between firms that achieved remarkable growth
and those that became stagnant. The first point is the timing of the investment.
Table 3 shows the timing of HDD manufacturers’ investment in Asia.
The industrial leader, Seagate, was also the first firm to invest in Asia. Seagate
was a venture firm founded in 1979 by an IBM engineer, Alan Shugart. Since
Shugart himself was the person who promoted the standardization of the interfaceof 3.5-inch HHD, he thought it was only a matter of time until the HDD would

Table 3. Timing of HDD Manufacturers’ Investment in East Asia
Year
Company
Place of investment
1983 Seagate Technology Singapore
Ampex
Hong Kong
Computer Memories
Singapore
TandonSingapore
TandonIndia
1984 Seagate Technology Thailand
IBM
Japan
MaxtorSingapore
Miniscribe
Singapore
Quantum (OEM to MKEI* 2) Japan
1985 Microscience International Singapore
1986 Micropolis
Singapore
TandonSouth Korea
1987 Connor Peripherals
SingaporeControl Data
Singapore
Cybernex
Singapore
Microscience International Taiwan
Priam
TaiwanSeagate Technology Thailand
1988 Unisys
Singapore
Western Digital
Singapore
1989 IBM (Saha-Union)
ThailandSeagate Technology Malaysia
Kalok
Philippines
SyQuestSingapore
NEC
Philippines

Year
Company
Place of investment
1990 Connor Peripherals
Malaysia
Microscience International China
1991 Fujitsu*1
Thailand
PrairieTek
Singapore
Xebec
Philippines
1992 Integral Peripherals
Singapore
Ministor
Singapore
1993 Connor Peripherals
China1994 DEC
Malaysia
Hewlett-Packard
Malaysia
Quantum
Malaysia
Western Digital
Malaysia
MKEI (Quantum OEM) Singapore
1995 IBM
Singapore
HitachiPhilippines
Toshiba
Philippines
Fujitsu
Philippines
1996 IIBM
ThailandSeagate Technology Thailand
Fujitsu
Vietnam1998 MKEI (Quantum OEM) Indonesia
2002 Western DigitalThailandThailand
Hitachi*3

Notes: *1.Fujitsu launched Fujitsu (Thailand) Co., Ltd. (FTC) in 1988, but shifted its HDD production to FTC in 1991.
*2. MEKI: Matsushita-Kotobuki Electronics Industries.
*3. Hitachi acquired IBM’s HDD division.
Source: Created based on McKendrick, Donner and Haggard (2000) at p. 99 and data from interviews.

45

Tomofumi Amano

become adaptable to a wide variety of applications. Therefore, he established a
production base in Singapore in 1983 and in Thailand the following year, driving
forward the mass production of the HDD, already with a full understanding of
how the modularization would affect the industry.
Seagate frequently conducted M&A in its growth process. It acquired
Grenex (a thin-film media manufacturer) in 1985 and Aeon (an aluminum substrate manufacturer) in 1986. Furthermore, it purchased HDD software manufacturers in the 1990s and acquired Conner Peripherals, which had originally hived
off from Seagate, in 1996. By procuring funds from the stock market and acquiring external resources through M&As, Seagate came to posses the largest HDD
production capacity in the industry. Much of the production capacity it established through this process is located in Southeast Asia.
The next firms to invest in East Asia were Tandon and Maxtor. Tandon
advanced into countries such as Singapore, India, and South Korea in the first halfof the 1980s. However, this expansion ended in failure and the firm was acquiredby Western Digital in 1988. Conversely, Western Digital managed to invest in
Singapore through the acquisition of Tandon. Firms including Maxtor, Conner
Peripherals, and Miniscribe also invested in Asia in and around the mid-1980s.
In the beginning, the race for foreign investment was started by U.S.
venture firms. At that time, many of them chose Singapore as the place for investment. Since the OEM market (non-captive market) for the 3.5-inch HDD for
desktop PCs was developing, backed by the rapid expansion of the PC market,
U.S. venture firms daringly attempted to invest in Asia in order to establish acompetitive advantage in the OEM market.
From the end of the 1980s, the place for investment by U.S. firms
spread from Singapore to Thailand and Malaysia. Seagate invested in Thailand in
1987, in Malaysia in 1989, and once again in Thailand in 1996. Western Digital
expanded into Malaysia in 1994, and Quantum also invested in Malaysia in thesame year.
IBM’s case is interesting. The firm had engaged in developing andmanufacturing all types of HDD, from drives for servers to 2.5-inch or smaller
drives for mobile computers. It had also conducted in-house development of key
components, including magnetic heads and media. IBM America outsourced thedevelopment and manufacturing of 3.5-inch and 2.5-inch HDDs for PCs to IBM

46

Competitive Strategy of Global Firms and Industrial Clusters

Japan in 1984. IBM Japan initially developed and manufactured HDDs in Fujisawa, Japan. However, due to the competitors’ shift to Southeast Asia and theimpact of yen appreciation, they started to outsource the manufacturing of HDDs
to Saha-Union Public Firm in Thailand in 1989. Moreover, IBM America shifted
its operations related to HDDs for servers from San Jose in the United States to
Singapore in 1995, and established a wholly owned manufacturing base in the
Prachinburi Province, Thailand, in 1996.
Quantum also expanded its operations by using contract manufacturing.
The firm was founded in 1980 and had expanded its business mainly through the
5.25-inch HDD. Quantum listed its stock in 1982 and came to command a 25%
share in the HDD market. However, in order to further expand its production
capacity, it entered into a partnership with Matsushita-Kotobuki Electronics
Industries in 1984, regarding contract production of the 3.5-inch HDD. Matsushita-Kotobuki was first manufacturing the HDD at its base in Ipponmatsu, Ehime
Prefecture, Japan but in order to evade the impact of yen appreciation, the firm
launched overseas production of HDD in Singapore in 1994.
Concentrated Investment and Geographic Advantage
U.S. manufacturers invested in Southeast Asia, centering on Singapore and gradually spreading to Malaysia and Thailand. Eventually, a mass production framework in Asia became a requisite condition for securing large-scaletransactions in the 3.5-inch HDD market. As indicated in Figure 2, the numberof firms entering the industry declined and the number of firms withdrawing
from the industry increased rapidly after this period. The overseas mass production capacity began to function as an entry barrier for surviving in the industry.
HDD manufacturers that achieved foreign investment consistently
began to increase their overseas production ratios at this time. According to a
study by McKendrick, Donner and Haggard (2000), which examined thechanges in the overseas production ratio with regard to the HDD industry, theoverseas production ratio of U.S. firms, which had only been 4% in 1983,
increased to 67% by 1990. These firms had conducted a major shift to overseas
production in the second half of the 1980s.
In contrast, the overseas production ratio of Japanese HDD manufacturers was only 2% in 1990 and 54% in 1995; they only began to make full-47

Tomofumi Amano

fledged expansion into Asia from the mid-1990s. The main reason for the foreign investment was to deal with the second yen appreciation in the mid-1990s.
Despite having a competing operational domain, Japanese HDD manufacturers
were more than a decade late in engaging in foreign investment. It is doubtfulthat Japanese firms that made foreign investments with an eye on the exchange
rate fluctuations were able to act based on a consistent global strategy.
As an example of concentrated foreign investment in Southeast Asia,
the investment process of Seagate will be studied below in detail. Seagate’s
expansion into Asia began in Singapore in 1983, later spreading to Thailand
and Malaysia. Seagate had 12,000 workers in Singapore and 16,700 workers in
Thailand and Malaysia compared with 11,000 workers in the United States in
1990, and the number of workers in Asia increased to 15,000 in Singapore and57,000 in Thailand and Malaysia against 9,000 workers in the United States in
1999. The firm now has 4,000 workers in China.
Seagate’s employee makeup in Asia by region points to some interesting facts. One is that the firm has regarded Singapore as the central base in
Asia for a long time. In terms of labor cost, it would have been wiser for thefirm to downsize its base in Singapore and expand its bases in Thailand,
Malaysia, and China. However, it did not do that. Seagate positioned Singapore
as a base for supplying engineers and supervisors, which complements the U.S.
headquarters, and as the core base for the industrial cluster in Southeast Asia.
Therefore, the number of Seagate employees in Singapore never decreased
throughout the 1990s.
Among the Southeast Asian countries, Singapore has substantial preferential measures for foreign firms, including tax incentives. For example, inThailand, the Board of Investment (BOI) gives approvals for inward investment
by foreign firms, and by dividing the land area into three zones from Zone 1 toZone 3, it provides a tax allowance of 40% to 50% for firms investing in Zone 2
and Zone 3, which are far from Bangkok. Malaysia provides a tax allowance forre-investment and a tax allowance of a little over 10% for collaboration with
universities and public research institutions. The Thai government usually takes
about three to six months to approve an investment project.
Compared to neighboring countries such as Thailand and Malaysia,
the support policy of Singapore had distinctive characteristics. First of all, its

48

Competitive Strategy of Global Firms and Industrial Clusters

taxation system was highly preferable for foreign firms conducting sophisticated operations, including an R&D allowance (23.1%), an equipment purchaseallowance (61.5%), an allowance for collaboration with universities or publicresearch institutions (61.5%), a depreciation allowance (53.8%), a humanresources development allowance (46.2%), and an allowance for technicalassistance to small and medium-sized enterprises (SMEs) (69.2%). At the sametime, the time required for gaining an approval for an investment project was
three months in 80% of all cases, which was extremely short compared to othercountries. This point was very important for making large-scale investment
with a short payback period in the IT industry, which has short lifecycles. The
Singaporean government was thoroughly aware of the needs of the U.S. IT
industry.
A more important point was that Singapore provided, in addition to
the above-mentioned general incentives applicable to all industries, industryspecific incentives for the HDD industry. Singapore provided substantial preferred measures in association with a wide range of activities in the HDD industry, including (1) development of engineers and operators, (2) diffusion anddevelopment of technology, and (3) development of local vendors.
The organization that played the central role was the Magnetic Technology Centre (MTC; renamed as the Data Storage Institute [DSI] in 1996).
The MTC was established within the National University of Singapore at the
government’s initiative in 1984. Since then, it has promoted basic research
related to data storage and joint projects between industry and academia, andhas produced a large number of engineers for the HDD-related industry. It also
provided support measures for SMEs, provided them with basic knowledge andtechniques for quality control and production management, and engaged inoperator training.4
U.S. HDD manufacturers sought assistance from the Singaporean
government and the government made active efforts to support Singapore’s
HDD industry. As a result, many firms related to the HDD industry established“advanced mass production bases” equipped with a technology development
capacity and a mass production capacity in Singapore. Under a favorable envi4

According to an interview by the author with the Data Storage Institute (DSI) (2004, February).

49

Tomofumi Amanoronment, Seagate developed engineers, supervisors, and operators in Singapore,appointed them as core personnel, and spread a low-cost operation framework
throughout Southeast Asia. When launching production bases in Malaysia andThailand, the operational experience in Singapore and the human resources it
had developed there played a key role. The concentrated human resources
development at the core base and prompt transfer of knowledge to the neighboring mass production bases enabled Seagate to conduct what can be called a vertical launch of HDD mass production.
Furthermore, the firm developed local suppliers and encouraged global suppliers to establish their bases close to Seagate’s bases. The firm provided
technical guidance to local suppliers to raise their technical level. Seagate also
appointed local workers as personnel in charge of procurement and repeatedly
applied unique ideas in product design in order to be able to manufacture HDDs
using local components. For global suppliers, the firm increased the incentive
for establishing their bases nearby by increasing the production ratio in Southeast Asia and securing production volume. Since component cost accounts for alarge share of the HDD production cost, such local supplier networks are likely
to have contributed greatly to increasing the firm’s cost competitiveness.
Seagate’s efforts have been copied by other U.S. HDD manufacturers,
and have sparked successive waves of investment. Underlying the rapid
increase in the overseas production ratio in the second half of the 1980s weresuch efforts by the aforementioned pioneering firm, with subsequent firms
immediately following its example.
Hesitant Japanese General Electric Appliance Manufacturers5
The U.S. HDD manufacturers’ investment in Asia can be understoodas part of the competition to acquire production resources on a global scaleamidst the rapid expansion of the 3.5-inch HDD market. However, Japaneseelectric appliance manufacturers were not quick to respond to this trend. The
reason was closely related to their conventional business circumstances.
The HDD sections of Japanese electric appliance manufacturers wereusually established within the in-house computer divisions as sections provid5

For the efforts made by Japanese general electric appliance manufacturers, see Amano (1999).

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Competitive Strategy of Global Firms and Industrial Clusters

ing storage devices. From the end of the 1970s through the first half of the
1980s, they supplied storage devices to U.S. office computer manufacturers as
OEM suppliers and expanded their operations. Since the HDDs for office computers had close technical relevance to computers, Japanese electric appliancemanufacturers provided technical support and engaged in joint developmentwith U.S. computer manufacturers; they gained tremendous trust from leadingclient firms, including IBM. The HDD business earned the biggest profits forcomputer manufacturers at the time, and some firms gained nearly 70% of theiroverall profits from the HDD business.
One example of this success is Fujitsu. The firm jointly developed an
8-inch HDD with Memorex Products in 1979, and independently developed a
48-MB HDD in 1981. It also succeeded in developing a 10.5-inch drive andsupplied the product to the United States. Until the mid-1980s, the OEM business of HDDs for U.S. office computer manufacturers was one of the core businesses of the firm. Although the HDD business required cutting-edge technology, the unit prices for products were extremely high. Fujitsu exerted efforts todevelop HDD-related technology in-house and in affiliated firms, and wonorders from U.S. clients.
However, such success produced the opposite result in the world ofsmall HDDs. In the second half of the 1980s when U.S. HDD manufacturers
achieved rapid growth, Japanese electric appliance manufacturers faced a very
severe situation. The market for medium and large-size HDDs was eroded bythat for small HDDs, and shipment values for the HDD operations of Japaneseelectric appliance manufacturers, which had relied on medium and large-size
HDDs, dropped sharply. Moreover, yen appreciation spurred a decline in profits. In order to break through this situation, Japanese electric appliance manufacturers finally began to review their operational structure in the early 1990s,
but the process did not progress smoothly.
In the case of Fujitsu, which fared relatively well among the Japanesefirms, the firm launched Fujitsu (Thailand) Co., Ltd. (FTC) in 1988 and attempted to shift its 3.5-inch HDD operation to FTC in 1991. However, the operation
did not succeed, and Fujitsu withdrew from global production. It invested in
Thailand once again in 1994, but full-fledged mass production only started in thesecond half of the 1990s, nearly ten years later than that of U.S. firms.

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Tomofumi Amano

NEC Corporation was more passive. The firm had produced HDDs
mainly for its PC98 series computers and computers for its internal systems
divisions, as well as for the captive market in which products were sold throughits distributors and exclusive dealers. NEC expanded into the Philippines in
1989, but all products were sold to Japan and the components were supplied
from Japan; only the labor-intensive processes were outsourced to the local
Japanese subcontracting firms, and the finished products were imported into
Japan.
Overseas production was adjusted in line with exchange rate fluctuations, so the overseas production ratio changed wildly. The firm lacked the attitude to commit itself to establishing a mass production framework in Asia. As aresult, costs became high and the firm had no choice but to withdraw from thein-house manufacturing of HDDs in 1998, and from the entire HDD production
business in 2001.
Toshiba and Hitachi, at first, intentionally avoided full-scale entry
into the 3.5-inch HDD market and specialized in the 2.5-inch HDD for laptop
PCs. The two firms invested in the Philippines in 1995 and gradually increased
their overseas production ratios. However, the market of the 2.5-inch and smaller HDDs for mobile computers was smaller in absolute scale compared to thatfor the 3.5-inch HDD, and had little growth potential.6 Because they could notallocate a substantial amount of management resources to their HDD operations, the firms purposefully avoided entering into full-fledged competition with
U.S. firms.
Compared to U.S. HDD manufacturers, Japanese firms were later toexpand overseas, and their commitment to overseas production was irresolute.
Their main investment location was the Philippines, which was far from Singapore and Thailand. By looking at their mode of investment, it is doubtful thatthey promoted foreign investment with a view to forming local industrial clus-

6

In 1994, the world’s total demand for HDDs was 62.58 million units, of which 900,000 units werefor 2.5-inch and smaller HDDs, accounting for 14% of the total. In 2000, the world’s total
demand was 184.02 million units, of which 28.3 million units were for 2.5-inch and smaller
HDDs, accounting for 15% of the total. The proportion increased little, but the production volumeof the 2.5-inch HDD nearly tripled during these six years. The market is expected to grow further
in the future.

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Competitive Strategy of Global Firms and Industrial Clusters

ters and strategically expanding the scale of operations as the U.S. firms did.
They seem to have regarded the shift of production to overseas bases a temporary measure to deal with the relative personnel costs that soared in Japan due
to yen appreciation. Such differences between Japanese and U.S. firms manifested as differences in their competitive advantages in the HDD market in the
1990s when the 3.5-inch drive became the standard.
Rapidly Growing Japanese Component Manufacturers
In contrast to the struggling general electric appliance manufacturers,
Japanese component manufacturers gradually gained strength in the 1990s.
These firms paid attention to the growth of U.S. firms from an early stage andestablished business connections with them. Since U.S. firms started increasing
their production in Asia the Japanese component manufacturers have attempted
to establish their production bases near the U.S. firms’ bases.
Japanese component manufacturers started investing overseas relatively earlier than Japanese general electric appliance manufacturers. They promoted overseas production in pace with the trend of U.S. HDD manufacturers
rather than that of the Japanese HDD manufacturers.
The first Japanese firm to begin the trend of investment in Southeast
Asia was the top spindle motor manufacturer, Nidec. It is a venture firm, founded by Shigenobu Nagamori, which was hived off from TEAC Corporation in
1973. At the time, Japanese general electric appliance manufacturers tended to
produce motors in-house or at their affiliated firms, so it was relatively difficult
to expand the motor business within Japan. Therefore, the firm conductedactive sales and marketing activities in the United States.
At that time, U.S. HDD manufacturers were switching from self-manufacturing the spindle motors to procuring the motors from outside. Thus,
Nidec was able to start a deal with Seagate in 1983. HDD manufactures including Seagate concentrated their development resources in the development of thedrives and magnetic heads in order to catch up with the rapid market expansionof the 3.5-inch HDD. Nidec acquired orders for motors from most HDD manufacturers, weaving its way through this niche.

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Tomofumi Amano

Table 4. Major Component Manufacturers’ Operational Expansion Into
East Asia And Its Timing(A) Media manufacturers
Overseas bases
Domestic bases (operation)(operation; year of foundation)
Showa Denko Malaysia (aluminum substrates; 1997)

Ichihara Plant (aluminum/
glass media)

Remarks
Showa Denko and Showa Aluminum merged in March 2001.
It acquired the HD operation of
Mitsubishi Chemical in 2002.

Singapore (aluminum/glass Mizushima / Naoetsu Plants
media; 1996)(aluminum/glass media)
Malaysia (aluminum
Asahi Komag, founded in 1987,
San Jose in California
media; 1993, 1996)
was dissolved in March 2001.
(only development)
Komag closed all plants in the
United States and shifted theoperation to Malaysia.
Fuji Electric Malaysia (aluminum/glass Matsumoto / Yamanashi Plants
media; 1996)(aluminum / glass media)
Mitsubishi
Chemical
Komag(U.S.A.)

NipponPhilippines (glass blank
Yokkaichi Plant (blank
Sheet Glass sheets, substrates, media; sheets, substrates, media)
1997), Malaysia (same asabove; 1999)
Hoya

Thailand (substrates;
1990), Singapore (media;
1995)

Akishima Plant (blank
sheets)The base in Malaysia is ADP(joint venture between Kobe
Steel and Nippon Sheet Glass).
It transferred its Philippine baseto Hoya in 2004.
Hoya received Nippon Sheet
Glass’substrate base in thePhilippines by transfer in 2004.

Notes: 1. Blank sheets are aluminum sheets punched out in a doughnut shape or glass sheets
processed into a doughnut shape.
2. Substrates are blank sheets polished on the surface and cleaned. Media are substrates towhich a magnetic film has been sputtered.

(B) Magnetic head manufacturers
Overseas bases(operation; year of foundation) Domestic bases (operation)
TDK

Dongguan Plant in China Chikumagawa Plant(back-end process; 1994), (development, front-end
Philippines (back-end
process)
process; 1996)

Remarks
TDK is the top supplier of magnetic heads for HDD.

Alps Electric Wuxi Plant in China (back- Nagaoka Plant (development,
end process; 1995)
front-end process), Furukawa
Plant (back-end process)Read-Rite

54

Thailand (back-end
process; 1991, 1995)

Milpitas Plant in California(development, front-end
process)

Read-Rite established ReadRite SMI with the capital participation of Sumitomo Metal
Industries in 1991, but it wasdissolved in 2001. The firm has
continued its magnetic headoperation in Thailand andundertakes processing workfrom HGA.

Competitive Strategy of Global Firms and Industrial Clusters(C) Spindle motor manufacturers
Overseas bases(operation; year of foundation) Domestic bases (operation)
Nidec

Thailand (motor component processing andassembly; 1990)

Kyoto / Nagano Plants
Nidec invested in Thailand in(development, processing, 1990, and has established andassembly)
expanded its plants in nearby
locations including Bangkadi
and Rojana.

Matsushita- Indonesia (motor component processing andKotobukiElectronics assembly; 1998)
Industries

Ipponmatsu Plant (development, processing,assembly)

Thailand (motor component processing andassembly; 1990)

Karuizawa Plant (development, processing, assembly)

Minebea

Remarks

Source: Created based on data from interviews with firms, “Market Survey on HDD” for the relevant
years, Japan Economic Center and “Electronic Manufacturers’ Investment in East Asia,”
Electronic Economic Research Center, 1995.

In the case of Nidec, U.S. HDD manufacturers had been major clientsfrom the beginning, so the firm had seen the need to establish its production
framework in Southeast Asia from the mid-1980s. Nidec established a branch
office in Singapore in 1984 to gather information while engaging in sales andmarketing activities, and achieved investment in Thailand in 1990. The directcause for the investment was a request from Seagate, which had already started
manufacturing in Thailand, and from IBM-affiliated Saha-Union.
Later, while U.S. HDD manufacturers expanded their mass production at their overseas operation bases, Nidec established and expanded its plantsin Thailand. After Nidec advanced into Thailand, Fujitsu, IBM (Prachinburi),and Western Digital also advanced into Thailand and nearby Malaysia, so it
became even more advantageous to establish operation bases in this area. Nidec
mentioned the following points as the reasons for choosing Thailand: (1) clientsare concentrated in the area; (2) supply chains are developed, and about 70% of
the components can be procured within Thailand; (3) there is access to the
BOI’s tax exemption measures and the preferential treatment for the HDD
industry; and (4) they believe that people in Thailand are diligent and friendly.
Currently, Nidec controls the Ayutthaya, Bangkadi, Rojana, andNidec Hi-tech Motor (NHMT) (acquired from Seagate) plants in Thailand, with
about 9,000 workers. The firm has a separate production line for each client.

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Tomofumi Amano

Nidec deals with most of the HDD manufacturers, including GSM, Maxtor,
Western Digital, Hitachi Global Storage Technologies, and Fujitsu.
While Nidec conducted one of the most daring foreign investment
campaigns of Japanese HDD-related component manufacturers, manufacturersof other types of components also shifted their operations overseas one after theother in the mid-1990s. In the area of hard disk media processing, U.S.-based
Komag (1993 and 1996: Malaysia), Mitsubishi Chemical (1996: Singapore),
Fuji Electric (1996: Malaysia), and Hoya (1995: Singapore) established theirplants close to HDD manufacturers’ bases. Their overseas expansion was also
influenced by the local production activities of U.S. HDD manufacturers thatwere their major clients. Therefore, investment locations came to be concentrated in Singapore and Malaysia.7

5. Establishing Bases within Industrial Clusters and Creating Competitive Advantages
Growing Competitive Pressure and Establishment of Bases within Industrial Clusters
The HDD industry’s shift to Asia cannot be discussed only from theviewpoint of the timing of the establishment of overseas production bases. In
this industry, the significance of establishing production bases within industrial
clusters in Asia gradually increased through the 1990s. This is closely related tothe changes in competitive pressure within the industry. From the 1980s to the1990s, the competitive pressure in the industry changed and HDD manufacturers’ establishment of production bases in Southeast Asia came to take on a different meaning in terms of competition.
In the first half of the 1980s when U.S. HDD manufacturers began toconsider the establishment of bases in the Southeast Asian region, particularly
Singapore, the only roles of Southeast Asia were to accept matured products
and manufacture low added value at a low cost by providing low-cost labor andinvestment incentives.

7

Based on “Market Survey on HDD” for the relevant years (Japan Economic Center) and “Electronic
Manufacturers’ Investment in East Asia,” (Electronic Economic Research Center, 1995).

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Competitive Strategy of Global Firms and Industrial Clusters

Table 5. Changes in the Competitive Pressure in the HDD Industry andComparative Advantages of Each Country
Comparative advantages of each country
Role of Southeast
ThailandAsia in the HDD
Singapore
Malaysia
industry
Labor cost,
1980-1985 Cost
New products were Labor cost,—produced in thegeneral incentives, generalincentives,
United States andinfrastructure,proximity to
the matured
supervisors andSingaporeengineers
products were
shifted to Southeast
Asia.
Supervisors Supervisors
1986-1992 Cost, Time to Development of new Weak industrial
andcluster effects
Marketproducts wasand(human resources, engineers, engineers,
launched in theindustrial linkage), labor cost,
United States, andlabor cost,proximity to proximity towhen the processes industry-specificincentives, general Singapore
became stable,
Singaporemass production
incentives
was conducted in
Singapore. When the
products matured,
they were shiftedfrom Singapore to
Thailand or Malaysia.
GeneralStrong industrial
1993-2000 Cost, Time to The pilot run isGeneralincentives, incentives,
cluster effects
Market, Time conducted in the
weak
United States, and(specialized
to Volume,
weak
the production ishuman resources, industrial
Yield
industrial
Improvement directly launched in industrial linkage, cluster
cluster
effects,
technology
Southeast Asia.
effects,
proximity to proximity tospillover), strong
Singaporeindustry-specificSingapore
incentives, general andand
Malaysia,
incentives,
Thailand,labor costproximity tolabor cost
Thailand andMalaysia
Competitive
pressure

Note:

General incentives are general preferential measures for foreign investment and industry-specificincentives are preferential measures for investment which are specific to the HDD industry.
Source: McKendrick, Donner & Haggard (2000), p. 60.

The situation began to change in the second half of the 1980s. U.S.
firms launched new products in the United States, commencing mass production in Singapore when the processes became stable, and shifting the production
to Thailand or Malaysia when the products matured. Meanwhile, the productlife cycles became shorter in the market, generating the need to shorten the timerequired for placing a new product on the market (Time to Market). Singapore
played the key role in shortening the Time to Market.

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Tomofumi Amano

After the mid-1990s, firms faced the need to expeditiously place newstable-quality products at low prices from the start. Therefore, while conducting
a pilot run in the home country, the firms came to directly launch mass production in Southeast Asia. Today, they even conduct pilot runs in Southeast Asia.
By 1996, firms no longer simply sought low-cost labor from theinvestment locations. They were now required to shorten the development period in the United States, and to solve the quality problems involved in theprocess, from the pilot run to the launch at their local bases in Southeast Asia,
so as to smoothly place the products on the market. In order to withstand suchcompetitive pressure, the firms needed to promote localization in Southeast
Asia and effectively exploit the various effects of industrial clusters.
The firms that responded actively to this issue were the U.S. HDD
manufacturers and the Japanese component manufacturers. U.S. HDD manufacturers made concentrated investments in Southeast Asia from an early stage andactively involved themselves in the formation of local industrial clusters. They
invited key component suppliers to these locations in order to enjoy stronger
cluster effects. As their local production increased in scale, it became more beneficial for component manufacturers to move into these locations, so Japanesecomponent manufacturers advanced into these areas.
Nidec in the earlier example was also quick at shifting its operations
to Southeast Asia. Currently, the firm not only conducts the daily operations
related to mass production, but also conducts product launches and pilot runs at
its production bases in Thailand. They say they will transfer more of their backend product development operations to Thailand in the future. It can be said thatthe firm has steadily reinforced its ties with industrial clusters under the increasing competitive pressure.
In contrast to these successful strategies, many Japanese general electric appliance manufacturers that were late in expanding overseas invested in
the Philippines, far from the major industrial cluster areas. This can either beconstrued as having prioritized low wages to industrial cluster effects or having
intentionally avoided the industrial cluster areas where U.S. manufacturers had
a firm foothold.

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Competitive Strategy of Global Firms and Industrial Clusters

Significance of Establishing Bases in Industrial Clusters in Terms of Operations
What, then, is the significance of establishing production bases insuch mass production clusters in regards to the HDD industry? First of all, there
are two significant points in regards to operations.
The first point is the ability to deal with daily production fluctuations
and quality problems. Since most HDDs are currently destined for the PC OEM
market, there are considerable production fluctuations on a daily basis. Information regarding market trends is relayed through the chain of production, to thecomponent manufacturers by way of information systems. Thus, HDD manufacturers and component manufacturers must change their production volumes
every day. Such daily adjustments of production volumes and response to quality troubles need to be conducted locally.
The second, more important point is the ability to improve yield uponlaunching a new model. Even if the key HDD components are of good quality
when shipped from the component manufacturers, this does not guarantee ahigh quality final product. The quality of the finished product can only be confirmed after combining the components in the HDD manufacturer’s final
assembly process. In particular, when launching a new model, how quickly the
manufacturer can correct the compatibility problems between the components
and improve yield greatly affect the profits of the HDD manufacturer and thecomponent manufacturers.
A case of a media manufacturer is highlighted below as a textbook
example of this point.8 This media manufacturer conducts business with its
client firms in the following manner. When an HDD manufacturer commences
initial development, the firm always has the homeland development team participate in the client firm’s development to acquire information on the product’s
specifications and process attributes. Then the firm conducts the initial processdevelopment in the homeland, gradually shifting the operations to Singapore.
The homeland staff and local staff carry out the pilot run at the overseas loca-

8

Based on an interview with Hoya’s subsidiary in Singapore (2004, February).

59

Tomofumi Amanotion in cooperation with each other. During the same period, the client firm also
shifts its pilot run and process development operations to Southeast Asia andworks on launching the production. The two firms actively exchange information during this course.
The reason for conducting the pilot run at the overseas location isthat, even if the trial products created in the product and process development
phases comply perfectly with the intended design, when they are moved to themass production phase, the percentage of good-quality products can be low dueto the peculiarities of the actual facilities and the process characteristics. Also,
even if a component manufacturer delivers good-quality components that meetthe specified specifications, defects could occur when they are assembled into a
product in the HDD manufacturer’s final stage of production, due to a bad combination or incompatibility of components. In particular, problems frequently
occur with respect to the interface between the head and the media.
The parameter adjustment in the media manufacturer’s production
process is important in solving this yield problem. Therefore, the media manufacturer in this case example has a separate production line for each client, conducts lot control, carries out 100 percent inspection in the pilot run phase, andinforms the HDD manufacturer of the results. If the HDD manufacturer
requests correction of a product’s attributes, the firm makes adjustments bychanging the parameters in the production process.
Due to the need for frequent adjustments in the mass production
phase and early achievement of economies of scale, it is highly beneficial forcomponent manufactures to locate their operations close to the HDD manufacturers’ bases.
Access to Human Resources and Technology Spillovers
It is also possible to discuss the significance of establishing production bases within industrial clusters from the viewpoint of access to humanresources and technology spillovers. This refers to the direct or indirect use of
the labor market formed within a cluster.
In the case of mass production-type products such as the HDD, themanufacturers often face the need to establish a new plant or suddenly expand
its production capacity. In such a case, it would be too late to start training

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Competitive Strategy of Global Firms and Industrial Clusters

human resources with the know-how to launch such operations. The key todetermining the production location would be the ability to promptly hire people who already have the necessary skills at that location. This point is evident
in IBM’s case.
Since its contract production to Saha-Union in Thailand in 1991, IBM
has expanded its production in Southeast Asia. It established a wholly owned
production subsidiary in Prachinburi in 1997. As of 2003, Saha-Union produced
over 12 million units of product and the Prachinburi Plant produced over 28
million units. About 7,000 employees are working in the two locations combined.
When IBM established its Prachinburi Plant, it conducted personnel
exchanges with Saha-Union, which had a long production experience. The firm
had the staff hired at the Prachinburi Plant receive training in Saha-Union, andhad engineers from Saha-Union dispatched to the Prachinburi Plant. In this caseas well, the yield upon the initial production launch was very low at about 50%,
and the firm was required to promptly solve the quality problems and smoothly
inaugurate the production. Thus, the above-mentioned personnel exchanges
were indispensable for launching production in the new plant.
Later, in the second half of the 1990s, IBM expanded the Prachinburi
Plant and hired people at the mid-career level. It is notable that two-thirds of theengineers hired at this time had been working for nearby competitors, such as
Seagate or Fujitsu, and the remaining one-third were people who had moved
from semiconductor-related firms. Sometimes, such people coming from otherfirms brought their subordinates with them.
A similar situation occurred in Singapore. IBM established a production base for HDDs for servers in Singapore in 1994. The person who supervised the launch of this production base was an engineer who had over 20 yearsof experience with IBM’s competitors, including Seagate. He took his subordinates with him when he joined IBM. A person who was assisting him stated asfollows.

61

Tomofumi Amano

When he started business in 1994, many senior staff members gathered underhim. All of us had worked with him for ten years or more. I had the experience of working
with him for another firm for ten years. We had accumulated work experience, sometimes
in the same firm, and sometimes in different firms. However, when he was going to establish IBM Singapore, we all came back to him. So we already knew each other and had
experiences at the time of establishment. This is why we could launch the business soquickly.9

This statement expresses the essence of the white-collar labor market
in Southeast Asia very well. U.S. HDD manufacturers and Japanese component
manufacturers that expanded their operations to Asia in a decisive mannerlaunched production quickly by actively hiring people who had accumulated
experience with other firms.
In recent years, many firms have also acquired such human resources
through M&A. Western Digital acquired Fujitsu’s plant in 2002 to expand production of the 3.5-inch HDD. The main reason for the acquisition was toacquire a large amount of experienced human resources along with the manufacturing equipment.
In an industrial cluster, information moves around through movementof labor, close business relationships between firms, and frequently held seminars. Best practices concerning production or distribution operations often cometo be shared within an industrial cluster through various routes. By establishinga production base in a cluster and taking root there, a firm is able to increase its
sensitivity to such information and effectively incorporate it into the firm’s
operations.
Many of the Japanese general electric appliance manufacturers thatinvested in areas far away from ASEAN’s major industrial clusters could not
enjoy such benefits at the initial phase of their production launch. The slow
speed of the mass production launch of Japanese electric appliance manufacturers is attributable in part to limited access to experienced human resources atthe locale. Due to this lack, the firms had to dispatch many engineers fromJapan, so they took a long time to develop a local framework for solving problems independently and are likely to have failed to reduce the overhead costs in
9

Based on an interview with IBM Singapore (1998, December).

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Competitive Strategy of Global Firms and Industrial Clusters

proportion to the increase in the production scale.

6. Closing Remarks
The competition between firms in the HDD industry from the 1980s
through the 1990s indicates how Japanese and U.S. firms competed fiercely
based on the premise of accelerated innovations in line with the modularizationof HDDs and a trend toward global competition. With additional involvement
Asia, investment competition took place to gain dominance in this region,
which is rich with management resources.
U.S. HDD manufacturers and Japanese component manufacturers thatmanaged to achieve high business growth through investing in East Asia
formed full-fledged industrial clusters in ASEAN countries including Thailand
and Malaysia, centered around Singapore. Their expansion into Asia and theiruse of industrial clusters were backed by long-term principles, and they gradually involved the entire region. In that sense, these firms were strategic.
Japanese HDD manufacturers, in contrast, expanded into Asia passively to deal with yen appreciation and competitive pressures from U.S. firms.
Applying no long-term principles, they did not maintain a consistent strategy.
Their investment in Asia in the initial stage was not so different from their conventional outsourcing and reduction of processing costs within Japan, highlighting the difference with the competitors that pursued full production scale andspeed. However, by the end of 1990, they also began to expand the scale ofoperation though M&A and are making efforts to form full-fledged industrial
clusters in the Philippines and China, following the example of U.S. HDD manufacturers.
In the HDD industry, the expected functions of industrial clusters
became more advanced with the increase in competitive pressures, so firms havemade efforts to enhance the functions of industrial clusters and develop humanresources. The countries on the receiving end of investment also developed industrial policies for making the industrial clusters more sophisticated. The efforts of
the Singaporean government are notable in this respect. Since the mid-1980s,
Singapore has rolled out investment-attracting policies that reflected the intentions of the investors, targeting specific industries, including the HDD industry.

63

Tomofumi Amano

The shorter time for approving investment projects and tax incentives
focusing on capital investment and R&D, which the government presented, sufficiently met the needs of the HDD industry for short payout periods and intensive development of production technology at the locale. The initiatives targeting the HDD industry, including development of engineers and operators, technical/management support for local vendors, and support for R&D and commercialization of magnetic recording technology at the National University ofSingapore, formed strong incentives for the investors in the industry to sophisticate the functions of the local area. U.S. firms and some Japanese component
manufacturers used these support measures to actively localize part of theirtechnology development and operational management function, so as to pursue
scale and speed as well as improve the quality of local management. Additionally, the engineers and supervisors that had been trained at the local bases
became indispensable when the firms expanded their business into other
ASEAN countries or China.
The case study of the HDD industry reveals that U.S. firms and someJapanese component manufacturers were able to achieve competitive advantages in this industry because they quickly selected their business practices inline with technology and market changes, and committed themselves to pursuing potential in Asia in order to achieve an advantage in that business area.
They did not merely aim to establish buffer locations to take advantage of low
wage levels, but aimed to enhance their global competitive advantage throughbuilding global production networks with bases in Asia among their core bases.
The local governments approved of such large schemes, and industrial clusters
were formed to serve both parties’ interests.
Finally, if multinational firms aim to strategically advance the functions of investment locations, and local governments develop support measuresthat match the needs of the industry, their strategies will bring extremely significant benefits to the country on the receiving end of the investment. While theestablishment of large-scale bases will naturally have the effect of creating
employment, particularly important factors are advancing the functions of thelocal bases and improving the quality of local human resources through the creation of diverse educational opportunities within the industrial cluster.

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Competitive Strategy of Global Firms and Industrial Clusters

To maintain competitive advantages, firms need to clearly indicate
their goals for advancing the functions and developing human resources at thebases of their global production network, and they need to take advantage of theexternal effects of industrial clusters. The countries on the receiving end ofinvestment also need to cooperate with firms to produce employment opportunities for the workers and to foster the development of potential leaders within
their ranks. When the firms’ global strategies and the countries’ industrial andhuman resources development policies intersect in this strategic way, businessprovides fruitful opportunities for developing high-quality human resources in
the recipient countries.

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McKendrick, D. G., Doner, R. F., & Haggard, S. (2000), From Silicon Valley to Singapore: Location and competitive advantage in the hard disk drive industry. Stanford:
Stanford University Press.
Porter, M. E. (1986). Competition in global industries. Boston: Harvard Business School
Press.
Trend FOCUS (n.d.). International disk drive equipment and materials association(IDEMA). Retrieved from the Website. http://www.trendfocus.com.

66

Strategy for Cluster-based Industrial
Development in Developing Countries
Keijiro Otsuka * and Tetsushi Sonobe *In this short article we formulate an endogenous model of cluster-based industrial development based on case studies in Japan, Taiwan, and China. In this model, the initiation phase
is followed by a quantity expansion phase through imitation and subsequently by a quality
improvement phase through innovation. We argue that such a process of industrial development is supported by the development of market transactions among assemblers, partssuppliers, and merchants, as well as the stimulation of innovation made possible by thebenefits of industrial clusters arising from a large number of enterprises and a variety ofhuman resources being concentrated in a small geographical area. Based on this understanding, we argue that if we provide training programs in management and marketing forenterprise managers in stagnant industrial clusters, which are often found in developing
countries, such clusters may be able to grow sharply; these training programs should stimulate innovation, which should encourage growth for the clusters.

1. Introduction
In order to reduce poverty and to achieve equitable and sustainable
development, we have to develop industries that provide increased employment
opportunities for the poor. Therefore, the development of labor-intensive industries ought to be a central theme of development economics and a central focus
of development policies. Yet, there has been a sheer lack of empirical studies
inquiring into the process of industrial development in developing economies;
this lack has led to the absence of strategic industrial development policies indeveloping countries. Thus, we do not know the answers to even simple andfundamental questions on industrial development, such as what types of entrepreneurs initiate new industries, what institutions support the subsequent development of such industries, and under what conditions new major innovations* A Professor of National Graduate Institute for Policy Studies and a Professorial Fellow at theFoundation for Advanced Studies on International Development.

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Keijiro Otsuka and Tetsushi Sonobe

take place. Without answering these questions, it is difficult to formulate appropriate policies to nurture new industries or to accelerate the development ofexisting industries.
This study presents an attempt to uncover the common processes ofsuccessful industrial development based on the case studies of selected industrial clusters in China, Taiwan, and Japan, as well as other case studies in Vietnam, Bangladesh, Kenya, Ethiopia, and Ghana. We focus on industrial clusters
not only because many of them are found in developing countries, but also
because industrial clusters have clear advantages, particularly in developing
countries where markets are less developed.
The organization of this article is as follows. The next section synthesizes our case studies conducted in Japan, Taiwan, and China. Section III goeson to identify the causes of the success in East Asia. In Section IV, we reexamine the conventional understanding of the advantages of industrial clusters inlight of our case studies. Finally, Section V concludes the paper by drawing
implications for strategy to develop industries.

2. A Synthesis of East Asian Studies
A review of the literature on industrialization in Japan, Taiwan, andChina as well as an examination conducted by Sonobe and Otsuka (2006a,
2006b) of township-level industrial data over time in the three East Asian countries revealed that industrial clusters have made significant contributions toindustrial development in these countries. We visited a large number of manufacturing enterprises in the major industrial clusters to identify the main features of the development process through open-ended interviews with enterprisemanagers, engineers, and public-sector administrators followed by formal questionnaire surveys of a large number of enterprises.
To gain insights into an East Asian model of cluster-based industrial
development, we decided to make a pair-wise comparison of the same or similar industries: (1) the garment clusters in Hiroshima prefecture in Japan and thatin Zhejiang province in China (Yamamura, Sonobe, & Otsuka, 2003; Sonobe,
Hu, & Otsuka, 2002); (2) the motorcycle industry in Japan and that in
Chongqing, China (Yamamura, Sonobe, & Otsuka, 2005; Sonobe, Hu, & Otsu-

68

Strategy for Cluster-Based Industrial Development in Developing Countries

ka, 2006); (3) the machine tool industry in Taichung, Taiwan, and the low-voltage electric machinery industry in Wenzhou, China (Sonobe, Kawakami, &Otsuka, 2003; Sonobe, Hu, & Otsuka, 2004); and (4) the printed circuit board
industry in northern Taiwan and that in Jiangsu province in China (Sonobe &Otsuka, 2006b).1
Despite significant differences in political regimes and stages of economic development among the three countries and in production methods andskill requirements across the selected industries, we found extremely similar
processes of industrial development across the eight cases. Thus, these processes may be termed “An East Asian Model of Cluster-Based Industrial Development.” We characterized the development processes into three distinct phases:(1) initiation, (2) quantity expansion, and (3) qualitative improvement (seeTable 1 for a summary of the endogenous model of industrial development).
Table 1. An endogenous model of industrial development
Phase

Prior experienceof managers

Education

Innovation, imitation,and productivity growthInstitutions

Initiation

Merchants /Engineers

Low

Imitate foreign technology
directly or indirectlyInternal production ofparts,components,and final products

Quantity
Expansion

Spin-offs and entry
from various fields

Mixed

Imitate imitated technology;
stagnant productivity;
declining profitability

Market transactions;division of labor;
formation of industrial
cluster

Very HighMulti-faceted innovations;exit of many enterprises;
increasing productivity

Reputation and brandnames; direct sales;
sub-contracts orvertical integration;
emergence of large
enterprises

Second generation
Quality
Improvem- of founders andent
newcomers withnew ideas

If the production method is simple but selling the products is noteasy, as in the case of the garment industry, merchants are likely to be the ones
who establish the new enterprises. They do so often in the suburbs of large
cities or villages not too far away from large cities, taking advantage of their

1

In the studies referred to above, we employed rigorous statistical techniques to test a number of
empirical hypotheses. In this article, we do not discuss the technical aspects of the statisticalanalyses. We focus here on the ideas and logic behind the rigorous statistical analyses.

69

Keijiro Otsuka and Tetsushi Sonobe

experience in commercial activities in other industries. If the production
method is complicated, engineers tend to be the new entrepreneurs. Once theysucceed in producing new products, often after long trial and error processes, aswarm of imitators appears, as envisaged by Schumpeter (1912) in his theory of
economic development.
The imitators are often spin-offs, i.e., those who have worked for thefounding enterprises and initiated own enterprises by imitating production
methods and products. Because most enterprises produce the same (or almost
the same) low-quality products using the same low-quality materials and parts,
anonymous market transactions develop; this reduces the entry barriers for new
firms. Indeed, new firms can easily procure all the required materials and partsand sell their products through merchants, and they can recruit workers withdesired skills from inside the cluster while investing in a few pieces of indispensable equipment. Low consumer income means high demand for low-quality products in the domestic markets. This is a clear advantage of initiating new
business in developing countries; the founders of new industries earn huge profits owing to the large demand for their low-quality products. This attracts entryof new enterprises.
The active entry of numerous new enterprises results in geographicalconcentration of enterprises, which attracts traders, parts-suppliers, skilledworkers, and engineers to the industrial cluster. An industrial cluster expands inthis way. Up to this point in the cluster’s development, productivity growth ismodest or could even be negative, as imitation does not improve the production
efficiency even though the quantity of production registers impressive growth.
Typically enterprises at this stage are very small and use labor-intensive production methods.
Active entry increases the supply of products to markets sharply,
thereby reducing output prices and, hence, the profitability of producing lowquality products. This triggers new competition centered on product improvement. At this stage, innovative entrepreneurs begin employing a larger numberof engineers and designers to improve their products. They often start developing long-term subcontracts with specific parts-suppliers to acquire firm-specificand high-quality parts. However, improving product quality alone does not
ensure high profits for innovative enterprises; to differentiate their new high-70Strategy for Cluster-Based Industrial Development in Developing Countries

quality products from the low-quality products produced by the majority ofother enterprises, these entrepreneurs must establish a reputation as high-quality
producers, develop their own marketing channels using their own marketing
agents, and manage their own retail shops in order to sell their products directly
to consumers and users of their products.
If they are successful, they tend to absorb those enterprises that fail toinnovate and let these enterprises to produce products with the same brandnames of the successful enterprises. Many enterprises that cannot catch up with
innovative enterprises have to exit the industry. In our observations, it is at thisstage when the production efficiency of the industry a whole visibly improves.
The size of successful enterprises grows and many of them begin to export.
Another important point is that the industrial cluster sets the stage for innovation towards quality improvement by attracting a pool of human resources useful for improving the product quality and improving the marketing efficiency of
improved products. To use the observation by Schumpeter (1912), innovation is
nothing but a new combination of the existing resources, including engineers,designers, parts-suppliers, and merchants. To realize such innovation potential,
high-quality entrepreneurial ability is found to be indispensable. In other words,
successful entrepreneurs at this stage are highly educated almost without exception, unlike founders of the industry, who are often uneducated but endowedwith skills and ambitions.
Because we failed to collect long-term data of sample enterprises inmany cases, we cannot directly trace the whole process of industrial development from the initiation to the quality improvement phases in all the case studies in East Asia. Nonetheless, all the case studies consistently provide evidencein support of the common endogenous process of industrial development
described above. Therefore, we have developed a rigorous model of theendogenous industrial development process in Sonobe and Otsuka (2006b).

3. Why Is East Asia So Successful?
A critical question is why East Asian economies have developed so
successfully. Like China for the last 28 years, the Japanese economy had grown
at a rate of about 10% per year during the “miraculous growth periods” from71

Keijiro Otsuka and Tetsushi Sonobe

the late 1950s to the early 1970s. The growth rate of the Taiwanese economy
has been no less rapid than in Japan in the past and in contemporary China. Furthermore, the patterns of industrial development among the three countries are
more similar than they are dissimilar. In our view, the successful imitation andassimilation of foreign technologies, the formation of geographically dense
industrial clusters consisting of a large number of small enterprises producing
similar and related products, and the advent of multifaceted innovations leading
to a great leap forward in the industrial structures are three of the important
ingredients of the East Asian model of cluster-based industrial development.
Learning from successful experience of other countries was also likely to be the key to the success, even though it is extremely difficult to quantify
this effect. During our surveys, we repeatedly heard that Taiwanese enterprisemanagers learned a great deal from the Japanese experience. Similarly, Chinese
enterprise managers seem to have learned a number of lessons from both the
Taiwanese and Japanese experiences. While it is difficult to answer the questionof why Japan was successful in the transition from the quantity expansion to thequality improvement phases in much earlier years, it seems clear that the successful development of the Japanese industries became the model of the industrial development in other East Asian countries.
We believe that the successful development of the shoe industry in
Ethiopia was due prominently to the repeated visits of Ethiopian entrepreneurs
to Italy to learn designs, production methods, and marketing skills (Sonobe,
Akoten, & Otsuka, 2006). We were also told by producers of knitwears in therural cluster in northern Vietnam that visiting China is critically important toimprove their technology and management. The development of the huge garment cluster in Dhaka owes its remarkable success to the transfer of technology
and management know-how from Korea.
Foreign technologies were imitated in different manners among thethree countries in the postwar periods. Since the inception of modern economic
development in the late 19th century, Japan had been making every effort tocatch up with the West in industrial technologies by setting up modern government-supported plants modeled after advanced factories in the West, providing
general education and vocational training for workers and engineers, and so on(see, e.g., Otsuka et al., 1988; Hayani & Godo, 2005). Although such processes

72Strategy for Cluster-Based Industrial Development in Developing Countries

were disrupted by World War II, they resumed immediately after the war. The
cases of the garment and motorcycle industries examined by Sonobe and Otsuka (2006b) are two of the early examples of successful industrial development
based on foreign technologies in postwar Japan.
In the case of Taiwan, foreign joint ventures, foreign trading companies, and the Industrial Technology Research Institute (ITRI), a leading national
research and development center founded in 1973, played major roles in introducing new technologies from abroad starting in the 1960s. Spin-offs from thejoint ventures and those who were trained at ITRI often became the founders of
new enterprises in this country. In the case of China, state-owned enterprises(SOEs) were the main sources of human resources, industrial technologies, andmanagerial know-how for the development of collective township and village
enterprises (TVEs) and private enterprises. Thus, SOEs played the role ofmodel plants. According to Otsuka et al. (1998), SOEs were inefficient in management due to regulations but were knowledgeable about modern technologies. Moreover, SOEs had established marketing channels. Thus, the assimilation of technologies and management know-how from SOEs, as well as the useof SOEs’ marketing channels, were the major means for collective TVEs andprivate enterprises to improve the efficiency of production and management.
The three countries differed little in the process of quantity expansion, which led to the formation of industrial clusters consisting of small enterprises. Setting up industrial zones by the government is useful and common.
While marketplaces set up by the local governments played important roles in
the improvement of marketing efficiency in China, the same purpose wasachieved by the densely clustered wholesalers dealing in industrial parts in Taiwan and the active network of merchants in Japan.
The successful implementation of multifaceted innovations by highly
educated entrepreneurs in the three countries, which has led to the quality
improvement phase, seems common. According to our recent studies on industrial clusters in Sub-Saharan Africa (i.e., the shoe industry in Ethiopia by
Sonobe, Akoten and Otsuka (2006), the garment industry in Kenya by Akoten,
Sawada and Otsuka (2006), and the car-repair cum metal processing industrial
complex in Ghana and Kenya), the industrial clusters producing low-quality
products often remain in the quantity expansion stage and fail to innovate,73

Keijiro Otsuka and Tetsushi Sonobe

which, we believe, is a distinguishable feature of industrial clusters in SubSaharan Africa.2 In East Asia, the entrepreneurship of highly educated managers leads to introduction of improved production methods, initiation of theuse of brand names to strengthen their images, development of new marketing
channels, and establishment of long-term subcontract systems.
An interesting question for less industrialized countries is whether thetransition from the quantity expansion to the quality improvement phases canbe facilitated and shortened by participating in global value chains organized by
global-scale retailers or joint ventures with manufacturers in developed countries. These global-scale retailers and manufacturers provide improved production technologies, marketing channels, and new management methods to small
enterprises in developing countries. The answer is affirmative, as far as upgrading product quality is concerned. Yet it is highly questionable whether suchtechnology transfer leads to sustainable cluster-based industrial development.
Because the source of new information is foreign buyers and manufacturers, notneighboring enterprises producing similar products within the cluster, there is
no strong incentive for local enterprises to form industrial clusters. This meansthat the forces within the cluster leading to the transition to the quality improvement phase are absent in industrial development led by global buyers and foreign ventures. Furthermore, the ability to innovate may not be nurtured if local
enterprises depend entirely on the global buyers and foreign ventures. All these
considerations suggest that learning from foreign companies is most effective
when the industry is in the transition from the quantity expansion phase to thequality improvement phase; by that point, the industrial cluster can provide theopportunity to innovate further, and the innovative entrepreneurs have acquired
the experience needed to innovate (Sonobe & Otsuka, 2006b).
Although our study does not provide ample evidence supporting theabove argument that the global value chain is not a panacea, there are several
relevant observations. In the case of the motorcycle industry in China, although
the joint ventures between the SOEs and Japanese enterprises contributed to theearly part of the quantity expansion phase, their growth performance in thequality improvement phase has been mediocre (Sonobe, Hu, & Otsuka, 2006).
2

An exception is the case of the shoe industry in Ethiopia, which has been growing fairly rapidly.

74Strategy for Cluster-Based Industrial Development in Developing Countries

In the case of the printed circuit board industry in China, there is no clear evidence that local enterprises have learned much from foreign ventures: the technology level of the former is far lower than that of the latter, so direct technology transfer or learning is not yet feasible (Sonobe & Otsuka, 2006b). In all othercases we studied, it was the ingenuity and innovation of local entrepreneurs thatbrought on the transition into the quality improvement phase.
Our arguments are clearly supported by the case study of the leather
shoe cluster in Brazil conducted by Bazan and Navas-Alemán (2004), who findthat those shoe makers supplying their products not only to global buyers but
also to the domestic markets and neighboring countries surpassed those who
specialized in export to global buyers in the process of quality upgrading. Basedon this finding and the results of other case studies, Humphrey and Schmitz(2004) conclude that enterprises in developing countries cannot learn muchabout how to achieve qualitative upgrading from global buyers. Likewise, some
empirical studies point out that little benefit of positive externality comes fromforeign ventures. Thus, the opportunities of participating in global value chains
and transacting with foreign ventures can be utilized most effectively if theindustry has reached the last stage of the quantity expansion phase, where someenterprises are ready to innovate.

4. Agglomeration Economies Reconsidered
Since the seminal work of Marshall (1920), three major advantages ofindustrial clusters have been recognized conventionally: (1) information
spillovers, (2) the specialization and division of labor among enterprises, and(3) the development of skilled labor markets. While we do not have major
objections to the importance of these three advantages, our analysis suggests
room for reconsideration.
We agree that information spillovers are common and important in
the cluster. For example, in the garment clusters in both Japan and China, if a
new design introduced by an enterprise turns out to be popular, many otherenterprises copy it within a few days. But information spillovers, which areessentially imitation, are not always that simple. In our observation, less simple
imitation takes place through the spin-offs and recruitment of workers from75

Keijiro Otsuka and Tetsushi Sonobe

other enterprises, which is intensively discussed in our study on the motorcycle
industry in Chongqing. In the case of the printed circuit board enterprises in
Suzhou, a group of spin-off enterprises, whose managers used to work at thesame founding enterprises, employ the same technology to produce the same
products. Thus, information spillovers in the industrial cluster are inseparably
related to the development of skilled labor markets, wherein skilled workers
move from one enterprise to another. According to our respondents, assemblers
develop long-term contracts with parts-suppliers to reduce the risk of the partssuppliers leaking new ideas to other assemblers. If this is the case, the divisionof labor among manufacturing enterprises is also closely related to information
spillovers.
Another important aspect of the industrial cluster is that it reducestransaction costs. Transaction costs have been neglected in the literature on economic geography and spatial economics, where the role of transport costs has
been discussed extensively. Transaction costs arising from moral hazard andhold-up problems are low in the industrial cluster because rumors of suchopportunistic behaviors quickly become public knowledge by word of mouth in
the cluster. We believe that this is the major reason why the division of labor
develops in the industrial cluster. To use the observation of Hayami and Godo(2005), the community mechanism of contract enforcement, which was originally applied in rural communities, works well in the industrial cluster as well.
It is one-sided to emphasize the importance of information spillovers
as an advantage of the industrial cluster if the role of the cluster in promoting
innovation is not equally appreciated. Marshall (1920) argues that information
spillovers become a source of innovation: “if one man starts a new idea, it istaken up by others and combined with suggestions of their own; and thus it
becomes the source of further new ideas.” Based on our empirical findings, we
can add to his argument the hypothesis that the industrial cluster provides a
hotbed of innovation, as it accumulates a variety of human resources useful for
new innovation. We believe the validity of this hypothesis is worth investigating in other case studies.
To sum up, our analysis indicates that the major advantages of clusters are: (1) the development of markets, which facilitates transactions among
manufacturers, merchants and workers, and (2) the promotion of innovations by

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Strategy for Cluster-Based Industrial Development in Developing Countries

attracting useful human resources.

5. Concluding Remarks
Although effective policies to promote the development of SMEs
have been seriously sought in many developing countries, economic theories
that can guide such policy have been absent. Some economists seem to assume
that the market works so well in the industrial sector that government intervention is unnecessary. Our analysis strongly indicates that the market works fairly
well in industrial clusters because dishonest behaviors potentially arising fromimperfect information are reduced to a significant extent by the informal contract enforcement mechanisms, e.g., gossip through word of mouth. This
explains why people behave honestly in industrial clusters and why industrial
clusters are so prevalent in developing countries. It also suggests that the market tends to fail in allocating resources efficiently in the absence of industrial
clusters. In industrial clusters, marginal and small-scale enterprises (MSEs),
which provide ample employment opportunities for unskilled workers, play a
critical role, particularly in the early phases of industrial development. Thus,
there are good reasons for the government to support the formation of industrial
clusters by setting up model plants to train potential managers and workers,
industrial zones to attract MSEs producing similar and related products, andmarketplaces to facilitate transactions of parts, intermediate products, and final
products among manufacturers and merchants.
It is well-known in the economics literature that the market generally
fails in the transaction of information, particularly if the information is notpatentable or the patent protection is ineffective. This is the case for “imitative
innovation,” which is critically important for the development of industrial
clusters in low-income countries. It is obvious that because of imitation or
information spillovers, investment in innovation falls short of the social optimum. Therefore, it makes sense to support activities leading to innovation inindustrial clusters by means of providing training programs for technological,
managerial, and marketing advancement. Our analysis strongly indicates thatsuch an attempt is likely to be effective when the cluster is in transition fromthe quantity expansion to the quality improvement phases. As our analysis

77

Keijiro Otsuka and Tetsushi Sonobe

implies, technical training alone is not sufficient to stimulate the transition
because what is required is multi-faceted innovations in areas including technology, production organization, and marketing.
A number of industrial clusters have formed in low-income countries
including South Asia and Sub-Saharan Africa. In many cases, however, they failto enter the quality improvement phase and hence remain in the quantity expansion phase. A good example is the garment clusters in Nairobi, where a large
number of small workshops, consisting of three to four workers, produce lowquality products (Akoten, Sawada, & Otsuka, 2006). Another interesting case is
the shoe cluster in Addis Ababa, where a handful of educated managers areattempting multi-faceted imitative innovations by learning from the experience of
Italy (Sonobe, Akoten, & Otsuka, 2006). In all likelihood, these industrial clusters
will be able to take off if appropriate training programs are provided.
Appropriate policies to promote labor-intensive industries are badly
needed to reduce the widespread poverty in low-income countries. We believethat the appropriate policies for such industrial development must support theformation of industrial clusters and their transition from the quantity expansion
phase to the quality improvement phase.

References

Akoten, J., Sawada, Y., & Otsuka, K. (2006, July). The determinants of credit access andits impacts on micro and small enterprises: The case of garment producers in
Kenya. Economic development and cultural change, 54, 927–944.
Bazan, L., & Navas-Alemán, L. (2004). The underground revolution in the Sinos Valley:
A comparison of upgrading in global and national value chains. In H. Schmitz(Ed.), Local enterprises in the global economy: Issues of governance and upgrading(pp. 110–139) . Cheltenham, UK: Edward Elgar.
Hayami, Y., & Godo, Y. (2005). Development economics: From the poverty to thewealth of nations (3rd ed.). Oxford, UK: Oxford University Press.
Humphrey, J., & Schmitz, H. (2004). Chain governance and upgrading: Taking stock. In
H. Schmitz (Ed.), Local enterprises in the global economy: Issues of governanceand upgrading (pp. 349–381) . Cheltenham, UK: Edward Elgar.

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Marshall, A. (1920). Principles of economics. London: Macmillan.
Otsuka, K., Liu, D., & Murakami, N. (1998). Industrial reform in China: Past performance and future prospects. Oxford, UK: Clarendon Press.
Otsuka, K., Ranis, G., & Saxonhouse, G. (1988). A comparative technology choice indevelopment: The cotton textile industries in Japan and India. London, UK:
Macmillan Press.
Schumpeter, J. A. (1912). The theory of economic development. New York: Oxford University Press.
Sonobe, T., Akoten, J., & Otsuka, K. (2006, July). The development of the footwear
industry in Ethiopia: How different is it from the East Asian experience. Mimeo,
Foundations for Advanced Studies on International Development.
Sonobe, T., Hu, D., & Otsuka, K. (2002, October). Process of cluster formation in
China: A case study of a garment town. Journal of Development Studies, 39,
118–139.
Sonobe, T., Hu, D., & Otsuka, K. (2004, September). From inferior to superior products:
An inquiry into the Wenzhou model of industrial development. Journal of Comparative Economics, 32, 542–563.
Sonobe, T., Hu, D., & Otsuka, K. (forthcoming 2006, December). Industrial development in the inland region of China: A case study of the motorcycle industry. Journal of Comparative Economics.
Sonobe, T., Kawakami, M., & Otsuka, K. (2003, October). Changing roles of innovationand imitation in industrial development: The case of the machine tool industry in
Taiwan. Economic Development and Cultural Change, 52, 103–128.
Sonobe, T., & Otsuka, T. (2006a, February). The division of labor and changing industrial locations: Evidence from Taiwan. Review of Development Economics, 10,
71–86.
Sonobe, T., & Otsuka, K. (2006b). Cluster-based industrial development: An East Asianmodel. Hampshire, UK: Palgrave Macmillan.
Yamamura, E., Sonobe, T., & Otsuka, T. (2003, January). Human capital, cluster formation, and international relocation: The case of the garment industry in Japan,
1968–98. Journal of Economic Geography, 3, 37–56.
Yamamura, E., Sonobe, T., & Otsuka, K. (2005, April). Time paths in innovation, imitation, and growth: The case of the motorcycle industry in postwar Japan. Journal of
Evolutionary Economics, 15(2), 169–186.

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Minutes of Discussion
Session 1

Presentation 1—“Architecture-based Comparative Advantage
in Japan and Asia”
Prof. Takahiro Fujimoto (University ofTokyo)
Industrial design can be classified into two types: (i) modular (kumiawase) architecture, in which functions and parts have one-to-one correspondence, and (ii) integral (suriawase) architecture, in which correspondence
between functions and parts is complex. Each country has a different organizational capability derived from history. Japan is a country of integral productswith high integrating capability. The EU excels in integral products with superior capability in creative expression. The United States produces modular products supported by its creative combination capability. Korea produces capitalintensive modular products, driven by the power of concentration. China canmobilize a large amount of human resources to produce labor-intensive modular
goods. ASEAN should be producing labor-intensive integral products, but thisremains a potentiality at present. Business architecture theory can identify thestrengths and shortcomings of each economy and suggest ways to improve theirglobal positioning strategies.

Presentation 2—“Vietnam’s Industrial Policy Formulation: To
Become a Reliable Partner in Integral Manufacturing”
Prof. Kenichi Ohno (GRIPS)
The author has studied Vietnam’s policies for eleven years, and established the Vietnam Development Forum (VDF) in Hanoi in 2004. Vietnam hasa high-quality labor force, but its policies remain poor. In supporting the Ministry of Industry in drafting industrial master plans, the author urges Vietnam,81

based on Professor Fujimoto’s theory, to become a valued monozukuri partnerof Japan in order to compete with China and to break through the glass ceilingto achieve high-level industrialization. This advice is also intended to solve
Japan’s 2007 problem; highly skilled old workers will begin to retire in drovesin 2007. Thailand and Vietnam have high potential to become developing country partners of integral manufacturing. For this, industrial human resources andsupporting industries are essential. Japan has supported Vietnam in strengthening these, but more concentrated effort should be made. In addition, Vietnam
should clearly announce this as a national goal.

1. Business architecture theory and ASEAN’s organizational capability
Mr. Hisaaki Mitsui (International Development Center of Japan)
I have questions for Prof. Fujimoto concerning the architecture theory.
First, can ASEAN really become a partner of Japan’s integral manufacturing?
As we observe, supporting industries and industrial human resources in Thailand and Malaysia have not reached sufficiently high levels yet, even though
they have tried for several decades.
The second question is regarding the architecture of the automobile
industry. Although automobile production is classified as closed-integral, autoparts are mutually supplied among Asian countries. In addition, part suppliers
are not bound by the keiretsu system anymore and do business with more than
one assembler. Does this mean that the automobile industry has become openmodular?
Prof. Takahiro Fujimoto (University of Tokyo)
Characteristics of ASEAN countries are perhaps too diverse to generalize. And it is true that integral manufacturing in ASEAN still remains a potential. However, if we look at China, its labor force has very high mobility, justlike in the US. China has a huge supply of good single-skilled workers but few
multi-skilled workers. Compared with China, ASEAN workers tend to staylonger at one factory (subject to overall business conditions), which points tothe possibility of training many multi-skilled workers. For example, one Japan-

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Minutes of Discussion

ese company we visited in Hanoi had twenty excellent CAD operators, all ofwhom were graduates of the Hanoi University of Technology. When we visitedthe factory for the second time, the CAD operators had increased in number tofifty, and only a few of the original ones had quit. I have never heard such a low
job turnover in China.
As for the second question, business architecture should be understood in terms of design, not in terms of transactions. Liberalization of business
transactions, a situation where part suppliers produce for many assemblers
beyond the keiretsu system, is a different matter from industrial design. Even
though business transactions are open, Japanese companies still produce closedintegral products, and the design of each automobile component remains uniqueto each assembler. In transaction, few suppliers now depend on the conventional keiretsu system and deal with only one assembler. Most part suppliers have
two or three assemblers on average.
Prof. Kenichi Ohno (GRIPS)
Each country has a unique national character that cannot be explainedby logic. Job hopping also exists in Vietnam, but the degree varies from company to company. Job turnover is extremely low in some companies. Workers’
mobility can be reduced by appropriate employment policy. In China, in contrast, it is much more difficult to curb mobility because Chinese fundamentallylike to move. For this reason, I think there is a higher chance that ASEAN will
master integral manufacturing. If ASEAN countries do not take advantage of
their character and engage only in simple labor-intensive production, they canhardly compete with China, which has an inexhaustible supply of low-wagelabor.

2. Matching demand and business architecture
Prof. Junjiro Shintaku (University of Tokyo)
The architecture theory remains incomplete without incorporating thedemand side. Vietnam needs a market for integral-type products, if it wants todevelop integral manufacturing skills following the proposal of Prof. Ohno.
China has an advantage because it has a large number of domestic consumers

83

who prefer modular products. Domestic demand in Vietnam and Thailand may
be more oriented toward integral products. For example, consumers in thesecountries seem to prefer integral-type Japanese motorbikes over modular-type
Chinese motorbikes.
Prof. Takahiro Fujimoto (University of Tokyo)
Japanese firms make high-quality integral products, but they are notgood at marketing to sell these products. Consumers who prefer modular products consider Japanese products as “excessively” high-quality. However, Otaku,
a kind of user who enthusiastically welcomes high-quality and minute details, isa very important concept for integral product marketing. To enlarge the market
of integral products, there should be a mechanism to continuously reproduce
otaku consumers who prefer integral products.
Mr. Hisaaki Mitsui (International Development Center of Japan)
Could you explain more about the characteristics of markets that prefer integral products? And what factors create such a market?
Prof. Takahiro Fujimoto (University of Tokyo)
A market is likely to prefer integral products when a large number ofconsumers seek extremely high performance or delicate balance in products. In
contrast, a market tends to prefer modular products when the majority of consumers enjoy low prices and continuous changes in exterior design but do notwant high performance. However, it is hard to explain how these market features are formed. Much depends on history. For instance, modular-type Chinese
motorbikes once flooded into Vietnam but Vietnamese consumers later returned
to integral-type Japanese motorbikes. Most likely, the unique way of using
motorbikes in Vietnam has created an integral-type market over time. Many
urban Vietnamese ride motorbikes for commuting, while Chinese people consider motorbikes mostly as a means of cargo transportation in rural areas. Difference in usage naturally leads to different market features.
Even after studying many countries, it is quite difficult to find a formula for predicting market types. For example, Chinese motorbikes are very
popular in Laos, Cambodia, Bangladesh and Pakistan, but they are unpopular in84

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Thailand and India.

3. Dynamics of business architecture
Prof. Yukio Sugano (GRIPS)
I have some questions about architecture theory. First, how long do
you think Japanese industries can maintain their advantage in integral manufacturing? China and ASEAN may not have reached the Japanese level yet, but is
it not possible for Korean companies, such as POSCO (steel) and Hyundai(automobiles) to overtake Japan in integral manufacturing in the near future?
My second question is whether it is appropriate to say that the US and
EU do not have advantages in integral manufacturing. For example, they havedominated the aircraft and space industries, which are highly integral. If theyseriously concentrate resources on integral manufacturing, can they not become
even stronger than Japan in this area?
Prof. Takahiro Fujimoto (University of Tokyo)
Whether a country is modular or integral should be decided on a relative scale, and we should also remember that a country’s character can shift
over time as it accumulates new organizational capability. In the short run,however, a country’s character does not change very much. POSCO has caught
up with Japan in the production of general-purpose steel, which is modular, but
it has a long way to go in mastering high-quality steel production, which is integral. Since the 1980s, this situation has not changed. Korea, based on modularization strategy, combines the latest equipment from all over the world, but it
still cannot produce high-quality special steel such as galvanized iron sheets
used in the exterior of automobiles. This is because such products require highlevel integral skills in addition to equipment.
If concentrated national effort is made in R&D, any country can produce highly integral products. National flagship industries such as aircraft andspace industries are often promoted at any cost, with ample subsidies. That
explains why even China, a modular country, can launch space rockets, which
are highly integral. But these are exceptions. We should study more generalcases to determine the comparative advantages of each country. Then we must85

conclude, as I showed in my table, that Korea is a fairly modular country. I am
also suggesting to Korea that it should transform itself to be a more integral
country. Some Korean firms, such as Hyundai Motor Company, can now produce integral products after studying integral manufacturing for thirty years.

4. Supporting industries, industrial human resources, andbusiness architecture
Prof. Shigeru Ishikawa (Hitotsubashi University)
According to Prof. Ohno, Thailand and Malaysia are stuck below a
glass ceiling and cannot develop supporting industries or high-quality industrial
human resources. But this picture may be too pessimistic. When I visited Thailand in 1970, the domestic car market had reached about 400,000 units per year
and the spare part market had started to develop. Local staff, who had education
only through elementary school, somehow managed to produce spare parts bycopying Japanese products. However, when I visited Thailand’s Eastern
Seaboard Industrial Zone several years ago, there were some excellent parts
factories that employed engineers with university degrees. Thus, I think breaking the glass ceiling is possible if the country patiently improves the quality ofhuman resources over several decades.
Prof. Kenichi Ohno (GRIPS)
I intentionally exaggerated the weaknesses of Thailand and Malaysia
in order to encourage Vietnam. In reality, Thailand’s supporting industries havereached a certain level. However, when compared with East Asian high performers such as Korea and Taiwan, I do not feel that Thailand and Malaysia
have achieved sufficient development commensurate with the time they havespent and the effort they have made in the past few decades. It is very questionable whether Thailand’s supporting industries, without FDI help, can produce
all the core components of automobiles. After all, Thailand remains a “potential” partner of Japan’s integral manufacturing system.

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Prof. Takashi Oshika (University of Tokyo)
In the last several years, I have visited local suppliers in Thailand andIndonesia with the missions of the Association for Overseas Technical Scholarship (AOTS). We have found that Indonesian motorbike part suppliers aredeveloping rapidly. Some people argue that human resource development
should be left to private enterprises in ASEAN and that assistance by publicorganizations such as AOTS is unnecessary. Do you think that AOTS shouldplay an active role in developing industrial human resources in Vietnam?
Professor Kenichi Ohno (GRIPS)VDF also cooperates with AOTS Vietnam. Vietnam needs technicaltraining support by public organizations like AOTS. In Vietnam, the motorbike
market has reached the level of two million units per year, and its supporting
industries have begun to grow faster than those of other industries, such as automobile or electronics. However, a large number of local firms do not know how
to approach Japanese firms, why their products are rejected by Japanese companies, and what “5S” means. Under such circumstances, I think that public sector
assistance can act as a catalyst to promote supporting industries. To begin with,AOTS should make efforts to make its activities known to local firms, because
many of them still do not know of the existence of AOTS programs.
Prof. Nozomu Kawabata (Tohoku University)
Industrial human resources and supporting industries are very important, as Prof. Ohno emphasized. However, they are always needed, whether
business architecture is integral or modular. Thus, difference in business architecture will become an issue after industrial human resources and supporting
industries have developed. First, high-quality managers or engineers who canmake proper production plans are required. Multi-skill workers are also necessary, but they are needed only after managers have appreciated and begun topursue integral manufacturing.
FDI assemblers will surely come to Vietnam. Nonetheless, Vietnam
cannot fully utilize its potential for integral manufacturing as long as it does
only final assembly and continues to import all parts from Japan or other countries. In order to break through the glass ceiling, Vietnam should acquire metal87

processing technology such as welding, boring, pressing and machining.
Whether a country has such processing technology depends not only on national character but, significantly, also on history. According to Jiro Takabayashi, abusiness consultant, countries that have experienced capital goods production
are generally equipped with processing technology. In addition, processing
technology can be acquired through various activities, such as spare part production and machine maintenance.
Professor Kenichi Ohno (GRIPS):
In my opinion, difference in business architecture matters very muchin the way industrial human resources and supporting industries are developed.
In Vietnam, where technology improvements by domestic effort alone are hardly sufficient, local firms should rely heavily on relationships with foreign firms
to scale up. To establish relations with Japanese firms, local suppliers must
spend at least a few years in working with Japanese, being persistent even if
their samples are rejected repeatedly. This type of learning is unlikely to occur ifthey supply parts to modular-type assemblers. By going through such an intensive trial-and-error process, local firms will grow up to become high-quality
integral suppliers.

88Minutes of Discussion

Session 2

Presentation 3— “Competitive Strategy of Global Firms andIndustrial Clusters: Case Study on the Hard
Disk Drive (HDD) Industry”
Prof. Tomofumi Amano (Hosei University
and University of Tokyo)
Latecomer countries want to internalize the industrialization process
and attract long-lasting investments under the pressure of global competition.
Meanwhile, multinational corporations (MNCs) must maximize locational
advantages of production sites in different countries to maintain competitiveness. Both needs are satisfied if they cooperate in concentrated action to create
industrial clusters. In the hard disk industry, whose final products are modular
but whose components are integral, clusters were formed in ASEAN and havebeen difficult to shift to China; this is different to other computer’s accessory
industries. In these clusters, strategic alliance between US assemblers andJapanese part makers is observed. MNCs have promoted the growth of harddisk clusters through human resource development and linkage with local firms.
Simultaneously, the Government of Singapore, for example, introduced measures such as the country-wide bonded warehouse system and efficient investment licensing to strategically target the formation of a hard disk cluster.

Presentation 4—“Strategy for Cluster-based Industrial Development in Developing Countries”
Prof. Keijiro Otsuka and Prof. Tetsushi
Sonobe (GRIPS)
We have conducted many case studies on relatively low-tech clusters
in Asia and Africa. According to our model of endogenous industrial development, industries in developing countries follow three common phases: (i) thestart-up phase, in which foreign technology is copied, (ii) the quantitative89

expansion phase, in which copies of the copy multiply, and (iii) the qualitative
improvement phase, which achieves multi-faceted innovation. Moreover, eachphase is driven by certain required types of entrepreneurs, ability, innovationand imitation. Public policy and ODA should be mobilized to accelerate transition from one phase to another, especially from the second to the third phase.
To help developing countries to achieve multi-faceted innovation (“new combination”) that is realistic in each country, small and medium enterprises in theinformal sector should be selectively targeted and given assistance to enhancetheir ability of innovation in the areas of management, technology and distribution. In addition to conducting case studies, we are now designing support programs for this purpose.

1. Theoretical foundation of the endogenous development
theoryProf. Shigeru Ishikawa (Hitotsubashi University)
The Lewis model, the Todaro model, and the Myint model areamong the most popular models of economic growth in developing countries,and each has clear theoretical assumptions about sector division and so on.
Your endogenous development model also seems to study the mechanism ofindustrialization but its assumptions on institutions, behavioral patterns, etc.
are not clear to me. Can you explain? Am I right to understand that industrial
agglomeration is one component of the endogenous development model?
Please also explain why you are conducting empirical studies in pair-wisecomparison.
Prof. Keijiro Otsuka (GRIPS)
Empirical tools to test development theories did not exist in the 1950s
and 60s when the Lewis model and the Todaro model were formulated. We arenow empirically demonstrating the mechanism of sectoral migration associatedwith industrialization. We consider industrial clusters to be a device to activate
the market mechanism.
Our endogenous development model, featuring three phases—start-up,
quantitative expansion and qualitative improvement—was not derived from the-90

Minutes of Discussion

ory but was suggested by striking similarities found in many empirical studies.
A pair-wise comparison was conducted to show that successful industries followed very similar development patterns, as with shoes industries inShanghai and Ethiopia, despite the fact that they are in different political, institutional and historical conditions. I think we have already conducted a sufficientnumber of case studies, and we are now planning practical training courses
aimed at promoting innovations in small enterprises. We have started to discuss
the curriculum of such a training program.

2. Using aid to strengthen competitivenessProf. Yukio Sugano (GRIPS)
There is a problem in providing ODA for training programs proposed by Prof. Otsuka and Prof. Sonobe, from the viewpoint of aid operation.
General vocational training can be supported by ODA, but ODA is not generally used to help private companies to improve competitiveness, which is
required for transition from the quantitative expansion phase to the qualitative
improvement phase of industrial agglomeration. This should be done by selfeffort or cooperation among private firms.
For instance, UNDP sets up a technical assistance center to support
technical improvement in a shoes industrial cluster in the western part of New
Delhi. However, the technicians and firms in this cluster have relatively low
technical levels; we cannot find a firm that has reached a certain technicallevel, especially one that is competitive in exports. In other words, the technical assistance center does not help to improve technical levels in the cluster
but only brings about an increase in the number of new entries, which is thequantitative expansion phase. The technical level in the cluster that includes
firms who are competitive in export is still relatively low in comparison to
those in Europe, America and Japan. In order to achieve qualitative improvement, these firms need to improve not only technical level but also design,
marketing, brand-name and so on. Is it possible to use aid for these improvements? Is it adaptable to ODA?

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Mr. Tsuyoshi Kikuchi (Japan Development Service)
It should be possible to execute projects for strengthening competitiveness in the ODA framework. In fact, we are currently engaged in an ODA
project to draft a master plan for improving quality and productivity in the foodprocessing industry and the electrical and electronics industry in Tunisia.
Mr. Toshio Tsunozaki (FASID)JICA has established human resource development centers (usuallycalled the “Japan Center”) in many former socialist countries, including Vietnam. These centers offer management courses to promote the development ofsmall and medium enterprises. Several international organizations offer similar
programs for competitiveness.
Prof. Tetsushi Sonobe (GRIPS)
Our proposal is based on the idea of market failure. In many cases,industrial development stagnates without support from the government or ODA.
For example, firms have no incentive to innovate if new products are quickly
copied by many competitors and cannot make sufficient profits to justify introducing new technology. This is a kind of market failure. Some people may
claim that aid programs for micro enterprises benefit only a limited number ofentrepreneurs. However, in reality, beneficiaries will induce many other firms
to imitate their innovations, leading to industrial development in the region.
Scared by business risks, many small enterprises do not even try imitative innovations by themselves. These enterprises should be guided toward imitative
innovations, which are actually very basic technology and management knowledge from the viewpoint of developed countries.
Prof. Kenichi Ohno (GRIPS)ODA is not the only way to support industrial development. We
should also mobilize other resources, such as foreign businesses and NPOs. If
the procedure to obtain ODA funds is too slow or cumbersome, other methods
should be sought. In Vietnam, VDF, a non-ODA academic cooperation unit,
supports strategic policy formulation, while a Japanese trading company isdeveloping an industrial park database and other Japanese firms are interested

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in expediting logistic services. Appropriate actors should be selectively calledin to perform various tasks.

3. Digital technology may impede transition to qualitative
improvement phase
Prof. Takahiro Fujimoto (University of Tokyo)
The wall between the quantitative expansion phase and the qualitative
improvement phase is getting higher. The reason, ironically, is rapid progress indigital technology. In the past, copying someone’s product while retaining reasonable quality was not so easy because it required certain skills, such as design
copy and functional revival. When imitation was tantamount to reverse engineering (dismantling a product to analyze its structure for producing a copy), a decent
level of R&D was a must. At present, however, advancement in digital technology such as CAD and CAM allows anyone to easily draw copied designs. Reverse
engineering is no longer necessary. Even amateurs who cannot draw a blueprint
can manufacture copy products automatically. Worse, copies of CAD/CAM software, needed to copy products, are sold in the market, which dramatically reduces
the cost of imitation. As a result, imitation is no longer reverse engineering thatlinked to R&D but simple copy that can be done at low cost, thus, prices ofreverse engineering are set to low level. Therefore, Chinese products and the likeare put into a dilemma of focusing on copied designs instead of promotion of
innovation.

93About the Presenters(In order of presentation)
Takahiro FUJIMOTO is a Professor at the Faculty of Economics, University of Tokyo, and an Executive Director of the Manufacturing Management Research Center (21st Century COE Program). Professor Fujimoto graduated from the Department of
Economics at the University of Tokyo in 1979 and received his
Ph.D. from the Harvard Business School in 1989. He specializes
in business administration, technology management, product management, andsuppliers’ management.
He is an author of The Evolution of a Manufacturing System at Toyota (Oxford
University Press, 1999), Product Development Performance (Harvard Business
School Press, 1991, with Kim B. Clark). Professor Fujimoto is a recipient of the2001 Imperial Prize, the 2001 Japan Academy Award, and the Shingo Prizes for
Excellence in Manufacturing in 2000 and 2001, as well as many other awards.

Kenichi OHNO is a Professor of Economics at the National
Graduate Institute for Policy Studies (GRIPS), Tokyo, and a
Research Director of the Vietnam Development Forum (VDF),
Hanoi. Professor Ohno graduated from Hitotsubashi University in1981 and received his Ph.D. from the Stanford University in
1987.
He is an author and editor of several books on international and development
economics, including Development Economics of East Asia (Yuhikaku, 1997,
with Kojiro Sakurai, in Japanese), Dollar and Yen (MIT Press, 1997, with
Ronald I. McKinnon), Japanese Views on Economic Development (Routledge,
1998, with Izumi Ohno), Globalization of Developing Countries (Toyo Keizai
Shimposha, 2000, in Japanese; Suntory Prize for Social Sciences and Humanities / Osaragi Jiro Award for Critical Works in 2001), and The Economic Development of Japan: The Path Traveled by Japan as a Developing Country(GRIPS, 2006).

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Tomofumi AMANO is an Associate Professor at the Department
of Business Administration, Hosei University, Tokyo, and a
researcher of the Manufacturing Management Research Center,
Tokyo University. Professor Amano graduated from Hitotsubashi
University in 1996 and received his Ph.D. in Business Administration and Commerce from Hitorsubashi University in 2001. He
specializes in Japanese firms’ strategy on foreign investment and internationalization in the East Asian region.
He is an author of Foreign Direct Investment and the Japanese Economy(American Chamber of Commerce in Japan, 2003, with Kyoji Fukao) and three
Japanese books which brought him several awards in Japan.

Keijiro OTSUKA is a Professorial Fellow at the Foundation for
Advanced Studies on International Development (FASID), and a
Professor at the National Graduate Institute for Policy Studies(GRIPS), Tokyo. He graduated from Hokkaido University in1971 and received his Ph.D. in Economics from the University of
Chicago in 1979. He taught at Tokyo Metropolitan University
from 1980 to 2001.
He is an Associate Editor of Economic Development and Cultural Change andthe co-author of seven books including Industrial Reform in China (Clarendon
Press, 1998), and Land Tenure and Natural Resource Management (Johns Hopkins University Press, 2001).
Professor Otsuka received the Quality of Research Discovery Award from theAmerican Agricultural Economics Association in 1992, the Nikkei Outstanding
Book Publication Award from the Japan Economic Journal in 1995 and 2004,
and the Best Journal Article Award from the Agricultural Economics Society ofJapan in 1999.

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Tetsushi SONOBE is a Professorial Fellow at the Foundation for
Advanced Studies on International Development (FASID), and a
Professor at the National Graduate Institute for Policy Studies(GRIPS), Tokyo. He graduated from the University of Tokyo in
1984 and received his Ph.D. in Economics from Yale University
in 1992. He taught at Tokyo Metropolitan University from 1992
to 2003.
He is a co-author of a several articles and books including “From Inferior toSuperior Products: An Inquiry into the Wenzhou Model of Industrial Development in China” (Journal of Comparative Economics, 2004), Roots and Strategies of Industrial Development: Lessons from the East Asian Experience(Chisen Shokan, 2004, in Japanese; Nikkei Outstanding Book Publication
Award in 2004), and Market and Economic Development (Toyo Keizai Shimposha, 2006, in Japanese).

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National Graduate Institute for Policy Studies