- U.S. firms appear to _reduce_ employment at home by allocating labor-intensive parts of their production to affiliates in developing countries. ―Among U.S. firms, production in developing countries is associated with _lower_ parent employment at home, given the level of parent output.‖ (page 18)<sup>13</sup> This could be interpreted as the U.S. multinationals are ―footloose‖, allocating the more labor-intensive parts of their output to developing countries and keeping the more capital intensive or skill intensive parts in the home or parent facilities.

Why was economic growth in Japan not sustained after the 1970s? From mid-1950s to 1973, for a variety of reasons, Japan was able to sustain rapid growth for nearly 20 years. Domestic investment accounted for 30-35 percent of Japan‘s GNP throughout the 1960s. The World Bank (1993) study on ―the East Asian Miracle‖ documents in detail the Japanese government's policy of importing technology for the development of key industries, and the provision of institutional arrangements between the government, banks and the businesses. In addition, the government _created contests_<sup>_14_</sup> that combined competition with the benefits of cooperation among firms and banks, so individual firms endeavored to choose, adapt, and then perfect imported technologies, including the world renowned ―just-in-time‖ automobile assembly lines. In our view, Japan‘s success is mainly attributable to its identification of the right target countries in both pre- and post-war periods, and selection of industries that were consistent with its comparative advantage or were CAF: textiles in the Meiji period, heavy manufacturing including automobiles in the 1960-1970s, and electronics in the 1980s-1990s.

In 1973, Japan‘s rapid growth started declining for three reasons: oil crises, decrease in investment, and the slowdown in technological progress. It is reasonable to suggest that ―Japan finally caught up with the U.S. and the Western European countries technologically in the mid1970s. Since it was harder to develop a country‘s own new technology compared to merely obtaining a license, Japan‘s growth rate then had to fall‖ (Ito 1992, p. 72). In other words, Japan‘s ―advantage of backwardness‖ had been exhausted. The Japanese economy was then constrained mainly by the speed of indigenous innovations on the global technology frontier. Japan had to relocate some of its production base to Korea; Taiwan, China; and other NIEs due to rising labor cost domestically leading to the loss of its comparative advantage in the labor intensive sectors.

# **Section 2.4: The flying geese pattern in East Asia**

It has been well documented that several generations of lead geese played significant roles in the rapid development of the East Asian economies. From 1965 to 1990, Japan emerged as the

> 13 Lipsey, Robert E., Eric D. Ramstetter and Mangus Blomstrom. "Outward FDI And Apparel Exports And Employment: Japan, The United States, And Sweden," Global Economy Journal, 2000, v1(4,Oct), Article 1. 14  Recent studies by Aghion, Dewatripont, Du, Harrison and Legros (2011) have provided a theoretical model and empirical evidence to confirm that ―targeted sectoral policies if combined with competition could be growth and welfare enhancing.‖  This is consistent with the experiences in Japan by the World Bank 1993 study.

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