Multinational corporations have had a huge impact on East Asian economies in various ways, including by generating production, fixed investment, employment, and trade.<sup>13</sup> For example, the share of the exports of multinational corporations in China’s exports increased from 29 percent in 1994 to 55 percent in 2003 (see figure 14), while the corresponding share for imports increased from 46 to 56 percent. Similarly, affiliates of Japanese multinational corporations in Asia have a strong export orientation compared to Japanese affiliates in other parts of the world; the ones in Asia exported over half of their production, compared to only 14 percent among the ones in North America. The bulk of the trade of Asian affiliates of Japanese firms occurs within Asia: over 80 percent of their exports (47 percent to Japan and 34 percent to other Asian countries) and over 95 percent of their imports (64 percent from Japan and 31 percent from other Asian countries). While most European Union and U.S. FDI in Asia (especially China) seems to be market seeking, Asian FDI is more export oriented. Japanese multinational corporations have greatly contributed to the increase in intraregional trade and triangular trade in East Asia. They have developed their own production and distribution networks in Asia by fragmenting their production processes into several subprocesses and locating the subprocesses in places where they may be conducted at the least cost. Of the exports from the head offices of Japanese multinational corporations, 74 percent are destined to the overseas affiliates, while 56 percent of the imports come from overseas affiliates. This high share of intrafirm trade indicates the closed nature of the production and distribution networks established by Japanese multinational corporations.

**Figure 14 China’s Processing Exports by Foreign Figure 15 Source Shares of FDI Inflows to East Asia** **<u>Enterprises</u>**

<!-- Start of picture text --> percent<br>60<br>Taiwan<br>55 Korea<br>50 Thailand<br>Singapore<br>45<br>Philippines<br> Japan<br>40 Hong Kong<br>Malaysia<br> Singapore<br>35 Indonesia US<br>EU<br>30 China<br>1988 1990 1992 1994 1996 1998 2000 2002<br>0 20 40 60 80 100<br>percent<br>Source: China, National Bureau of Statistics, various. Source: Compiled by World Bank staff from national data<br>sources.<br><!-- End of picture text -->

# **Production networks and technological spillover**

In China and, increasingly, Vietnam, foreign affiliates are responsible for a major, growing share of the trade, especially with Asian countries. But how much spillover actually takes place is not entirely clear.

**_Taking part in labor-intensive production may not lead to technological spillovers._** The evolution of the specialization patterns in East Asia confirms the “flying geese model” developed by Akamatsu (1961). However, changes in the global economy, together with shifts in technology and production techniques have precluded homogeneous trajectories. Japan developed a strong and indigenous base for innovation. The NIEs have remained dependent on imported technology. Southeast Asia is greatly dependent on foreign-controlled firms and exhibits a high import content in exports. China’s imports of intermediate products from Asian industrialized countries have been an important channel of technology transfer and

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