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.

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Takahiro Fujimoto

factor of production (for example, labor-rich countries) would have a better fitwith 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).

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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 competitiveadvantage 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

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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 Line20%
10%0%-3.000 -2.500 -2.000 -1.500 -1.000 -0.500
Low

40.000Integral Architecture Indicator

0.500

1.000High1.500

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

TaiwanUSIndia?
ASEAN?

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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 theshop 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),

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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 integralarchitecture 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.

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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. EconomicJournal, 58, 165–184.
Ulrich, K. (1995). The role of product architecture in the manufacturing firm. Research
Policy, 24, 419–440.

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